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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission File Number 000-21463
---------
Murdock Communications Corporation
----------------------------------
(Exact Name of Issuer as Specified in Its Charter)
Iowa 42-1339746
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
701 Tama Street Marion, Iowa 52302
------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 319-447-4239
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
On June 30, 2002, there were outstanding 12,514,967 shares of the Registrant's
no par value Common Stock.
MURDOCK COMMUNICATIONS CORPORATION
FORM 10-Q
June 30, 2002
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1. Consolidated Balance Sheets (unaudited) as of June 30, 3
2002 and December 31, 2001
Consolidated Statements of Operations (unaudited) for the 5
Three Months and Six Months Ended June 30, 2002 and
2001
Consolidated Statements of Cash Flows (unaudited) for the 6
Six Months Ended June 30, 2002 and 2001
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market 14
Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
PART I FINANCIAL INFORMATION
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2002 and December 31, 2001
(Dollars in thousands)
(Unaudited)
JUNE 30, 2002 DECEMBER 31, 2001*
------------- ------------------
ASSETS
CURRENT ASSETS
Cash. . . . . . . . . . . . . . . . . . . $ 3 $ 3
Prepaid expenses and other current assets 1 11
-------------- ------------------
TOTAL CURRENT ASSETS . . . . . . . . . . . 4 14
-------------- ------------------
OTHER ASSETS
Other noncurrent assets . . . . . . . . . 1 1
-------------- ------------------
TOTAL OTHER ASSETS . . . . . . . . . . . . 1 1
-------------- ------------------
TOTAL . . . . . . . . . . . . . . . . . . . $ 5 $ 15
============== ==================
* Note: The consolidated balance sheet as of December 31, 2001 has been
derived from the audited consolidated financial statements at that date.
See accompanying notes to consolidated financial statements.
3
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONCLUDED)
June 30, 2002 and December 31, 2001
(Dollars in thousands)
(Unaudited)
JUNE 30, 2002 DECEMBER 31, 2001*
------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Notes payable, others . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,801 $ -
Notes payable with related parties. . . . . . . . . . . . . . . . . . . 11,808 8,766
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 750 614
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,150 5,036
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . 447 489
--------------- ----------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . 20,956 14,905
LONG-TERM LIABILITIES
Long-term debt with related parties . . . . . . . . . . . . . . . . . . - 4,111
Long-term debt, others. . . . . . . . . . . . . . . . . . . . . . . . . - 521
--------------- ----------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . 20,956 19,537
--------------- ----------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIENCY)
Common stock, no par or stated value: authorized - 40,000,000 shares;
issued and outstanding: 2002 and 2001 - 12,514,967 shares . . . . . . 22,287 22,287
Common stock warrants: Issued and outstanding:
2002 and 2001 - 10,875,312 . . . . . . . . . . . . . . . . . . . . . . 1,052 1,052
Treasury stock at cost: 2002 and 2001 - 250,000 shares. . . . . . . . . (94) (94)
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 134 134
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (44,330) (42,901)
--------------- ----------------
TOTAL SHAREHOLDERS' DEFICIENCY . . . . . . . . . . . . . . . (20,951) (19,522)
--------------- ----------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5 $ 15
=============== ================
* Note: The consolidated balance sheet as of December 31, 2001 has been derived from the audited
consolidated financial statements at that date.
See accompanying notes to consolidated financial statements.
4
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended and Six Months Ended June 30, 2002 and 2001
(Dollars in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
--------------- --------------- --------------- ---------------
REVENUES. . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 1 $ - $ 22
COSTS OF SALES. . . . . . . . . . . . . . . . . . . . . . . . - - - (1)
--------------- --------------- --------------- ---------------
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . . . . - 1 - 23
--------------- --------------- --------------- ---------------
OPERATING EXPENSES
Selling, general and administrative expenses . . . . . . . 173 209 317 414
Depreciation and amortization expense. . . . . . . . . . . - 1 - 3
--------------- --------------- --------------- ---------------
TOTAL OPERATING EXPENSES . . . . . . . . . . . . . . . 173 210 317 417
--------------- --------------- --------------- ---------------
LOSS FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . . (173) (209) (317) (394)
--------------- --------------- --------------- ---------------
NON-OPERATING INCOME (EXPENSE)
Interest expense, net. . . . . . . . . . . . . . . . . . . (561) (573) (1,114) (1,143)
Other income . . . . . . . . . . . . . . . . . . . . . . . 1 6 2 28
--------------- --------------- --------------- ---------------
TOTAL NON-OPERATING INCOME (EXPENSE). . . . . . . . . (560) (567) (1,112) (1,115)
--------------- --------------- --------------- ---------------
LOSS BEFORE INCOME TAX EXPENSE. . . . . . . . . . . . . . . . (733) (776) (1,429) (1,509)
Income tax expense/(benefit) . . . . . . . . . . . . . . . - - - -
--------------- --------------- --------------- ---------------
LOSS FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . (733) (776) (1,429) (1,509)
--------------- --------------- --------------- ---------------
DISCONTINUED OPERATIONS
Loss from operations . . . . . . . . . . . . . . . . . . . - (82) - (181)
Loss on disposition. . . . . . . . . . . . . . . . . . . . - - - -
--------------- --------------- --------------- ---------------
TOTAL DISCONTINUED OPERATIONS . . . . . . . . . . . . - (82) - (181)
--------------- --------------- --------------- ---------------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (733) $ (858) $ (1,429) $ (1,690)
=============== =============== =============== ===============
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Loss from continuing operations. . . . . . . . . . . . . . $ (0.06) $ (0.06) $ (0.12) $ (0.12)
Loss from discontinued operations. . . . . . . . . . . . . - (0.01) - (0.02)
--------------- --------------- --------------- ---------------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . $ (0.06) $ (0.07) $ (0.12) $ (0.14)
=============== =============== =============== ===============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING. 12,264,967 12,264,967 12,264,967 12,264,967
=============== =============== =============== ===============
See accompanying notes to consolidated financial statements.
5
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2002 and 2001
(Dollars in thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,429) $(1,690)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH FLOWS FROM
OPERATING ACTIVITIES OF CONTINUING OPERATIONS:
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . - 181
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . - 61
Changes in operating assets and liabilities:
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 10 18
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 94
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,072 1,035
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES OF
CONTINUING OPERATIONS. . . . . . . . . . . . . . . . . (211) (301)
NET CASH FLOWS FROM DISCONTINUED OPERATIONS. . . . . . . . - 98
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES . . . . . . . . (211) (203)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations, primarily to a related party . . . - -
Borrowings on notes payable . . . . . . . . . . . . . . . . . . . . . . . 211 68
-------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES . . . . . . . . . 211 68
-------- --------
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . . . . . . . - (135)
CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . 3 167
-------- --------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3 $ 32
======== ========
See accompanying notes to consolidated financial statements.
6
MURDOCK COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
1. SIGNIFICANT ACCOUNTING POLICIES
---------------------------------
BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been
prepared by Murdock Communications Corporation (the "Company") in accordance
with accounting principles generally accepted in the United States of America
for interim financial reporting and the regulations of the Securities and
Exchange Commission for quarterly reporting. Accordingly, they do not include
all information and footnotes required by generally accepted accounting
principles for complete financial information. The foregoing unaudited interim
consolidated financial statements reflect all adjustments which, in the opinion
of management, are necessary to reflect a fair presentation of the financial
position, the results of the operations and cash flows of the Company and its
subsidiaries for the interim periods presented. All adjustments, in the opinion
of management, are of a normal and recurring nature. Operating results for the
six months ended June 30, 2002 are not necessarily indicative of the results
that may be expected for the full year ending December 31, 2002. For further
information, refer to the financial statements and footnotes thereto for the
year ended December 31, 2001, included in the Company's Annual Report on Form
10-K (Commission File # 000-21463) as filed with the Securities and Exchange
Commission on April 17, 2002. The accompanying statements of operations for 2001
have been reclassified for the disposition of the Priority International
Communications ("PIC") subsidiary (see Note 3) so that the results for the
subsidiary's operations are classified as discontinued operations for all
periods presented. The statements of cash flows and related notes to the
consolidated financial statements have also been reclassified to conform to the
discontinued operations presentation.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has an accumulated
deficit of $44.3 million, and current liabilities exceed current assets by $21.0
million at June 30, 2002. The Company also is past due in the payment of
approximately $13.5 million of principal and accrued interest as of June 30,
2002. The Company was also past due with its trade vendors in the amount of
approximately $846,595 at June 30, 2002.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis and to obtain additional financing and
refinancing as may be required. Management's plans to accomplish these
objectives include, but are not limited to, the following:
- - The Company intends to continue to negotiate with its creditors to
restructure indebtedness and obtain financing to fund operations. The
Company believes that possible sources of funds will primarily consist of
advances from MCC Investment Company, LLC ("MCCIC"), a company owned by
Berthel Fisher & Company, Inc. ("Berthel") and another significant
shareholder of the Company, and Polar Molecular Corporation ("Polar") (see
the next bullet point below). If the Company is unsuccessful in this
strategy, the Company may not be able to continue operating as a going
concern.
7
- - The Company has an agreement with an unrelated third party to use the
Company's public shell as a reverse merger vehicle. On December 19, 2001
the Company and Polar entered into an Agreement and Plan of Merger
providing for the merger of a wholly owned subsidiary of the Company with
and into Polar. The proposed merger is subject to a number of significant
closing conditions, including, among others, approval by the stockholders
of the parties, filings with the Securities and Exchange Commission, the
conversion of the Company's indebtedness into equity, and the obtaining of
debt or equity financing by Polar. If this transaction is unsuccessful, the
Company may not be able to continue operating as a going concern.
- - The Company retains an investment banker (Berthel) to assist the Company
regarding the identification and investigation of strategic alternatives
available to the Company.
2. NOTES PAYABLE AND LONG-TERM DEBT
------------------------------------
The Company's past due debt at June 30, 2002 includes approximately $12.0
million of notes payable and accrued interest to insiders which are believed to
be pledged by the holders of the notes to a bank as collateral for loans made by
the bank to such holders. The Federal Deposit Insurance Corporation ("FDIC")
liquidated this bank during 2000. The Company was notified in December 2000
that the FDIC sold substantially all the loans and related collateral to a
financial institution. In March 2001, the Company received a demand letter from
this financial institution for approximately $575,000 of principal plus accrued
interest related to some of the notes held by the financial institution, and on
July 5, 2001, the financial institution obtained a default judgement against the
Company for $781,252 plus interest at the rate of 18% per year from and after
February 6, 2001 related to those notes. A settlement was reached on June 20,
2002 with this financial institution to settle approximately $10.2 million of
principal and accrued interest related to the notes as of June 30, 2002 for
$500,000. The terms of the settlement required $15,000 to be paid to the
financial institution upon signing of the agreement and the remaining $485,000
is due upon consummation of the Company's pending merger transaction with Polar.
If the merger transaction with Polar is not completed for any reason on or
before December 31, 2002, the agreement with the financial institution will be
terminated except that the financial institution will retain the $15,000 paid by
the Company. Until such time as the merger is consummated the notes and related
interest will remain on the books of the Company and interest will continue to
be accrued.
During the six months ended June 30, 2002, the Company borrowed $7,083 from
MCCIC. The total principal amount owed to MCCIC at June 30, 2002 is $577,316. As
of June 30, 2002 $387,596 in principal was past due along with $96,335 in
accrued interest. The borrowings currently bear interest at 12%.
During the second quarter of 2002, the Company borrowed $79,516 from Polar with
a total of $204,516 borrowed during the first six months of 2002. The borrowings
are one-year notes bearing interest at 10%.
All long-term debt obligations in the amount of $4.6 million changed in the
second quarter of 2002 to current debt.
3. DISCONTINUED OPERATIONS
------------------------
Effective July 31, 2001, the Company sold all the shares of PIC to Dartwood, LLC
for a total purchase price of $196,000, comprised of $100,000 cash and a
non-interest bearing promissory note of $96,000 payable in 24 monthly
installments of $4,000. The Company assigned the cash payment of $100,000 and
the promissory note to MCCIC to repay $196,000 of outstanding debt. Wayne
Wright, a Director and significant shareholder of the Company, is related to the
owner of Dartwood, LLC. PIC was primarily engaged in the business of reselling
call processing services to aggregators of operator service traffic and to a
limited number of payphone operators.
8
Summary operating results of the discontinued operations for PIC are as follows
(amounts expressed in thousands):
Three Six
Months Ended Months Ended
June 30, 2001 June 30, 2001
------------- --------------
Revenues. . . . . . . . . . . . . $ 897 $ 2,138
Expenses. . . . . . . . . . . . . 979 2,319
-------------- ---------------
Loss from discontinued operations $ (82) $ (181)
================ ===============
4. COMMITMENTS AND CONTINGENCIES
-------------------------------
At June 30, 2002 the Company's only operating lease is a month-to-month lease of
office space with a related party in the amount of $500 per month.
In December 1999, Berthel entered into a Standstill Agreement with the Company.
Under the Standstill Agreement, Berthel indicated its intention to form a
creditors committee to represent the interests of Berthel and other creditors of
the Company. The Company agreed to provide the creditors committee with access
to information regarding the Company and its business and to advise the
creditors committee in advance regarding certain significant corporate
developments. The creditors committee may also demand that the Company take
certain actions with respect to the Company's assets and business. As of June
30, 2002, the Company and Berthel are the only parties to the Standstill
Agreement and Berthel is the only member of the creditors committee.
The Company has guaranteed a facility lease between Actel Integrated
Communications, Inc. ("Actel") and a third party. The lease expires in
September 2009 and total remaining noncancellable lease payments were $765,000
at December 31, 2000. Actel was current on its lease payments as of December
31, 2000. However, on April 11, 2001 Actel filed for Chapter 11 bankruptcy
protection and on September 14, 2001 Actel's bankruptcy case was converted to a
case under Chapter 7. The Company has not received any notification from the
bankruptcy trustee or the third party regarding the guarantee as of June 30,
2002. No loss, if any, has been recorded in the consolidated financial
statements with respect to this matter.
The Company was notified by the FDIC of discrepancies between the amount of the
Company's notes payable pledged as collateral by a note holder and the amount of
notes payable recorded by the Company. The FDIC originally indicated to the
Company that an additional $1,125,000 is outstanding representing various notes
with a significant shareholder and creditor. The FDIC notified the Company on
May 10, 2000, that the discrepancies total only $770,000. Also, in July 2001,
the Company was notified that Peoples Bank had obtained a judgement against a
Company director and shareholder in the amount of $350,000, and that the
collateral was a Company promissory note in the principal amount of $350,000.
Another party has asserted that he is entitled to $500,000 allegedly outstanding
under a note payable. Management believes that no funds were received by the
Company with respect to these notes and that it has other defenses. No
assurance can be given that the Company's defenses are valid or that the Company
will not be liable for any part or all of the amounts allegedly due under these
notes. No loss, if any, has been recorded in the consolidated financial
statements with respect to these matters.
9
On November 23, 2001 three individuals, one of whom was a former officer and
director of the Company and who along with another of the individuals purchased
Incomex from the Company, filed suit against the Company, several former
officers and directors of the Company, and several related parties. These
lawsuits allege that the Company and certain of the individuals devised a scheme
to defraud the three third-party plaintiffs, inducing them to personally borrow
funds from a financial institution, invest the proceeds in the Company as a note
payable with the promise of stock options and repayment of the notes, and give
the financial institution a security interest in the notes under the Uniform
Commercial Code. Unspecified damages sought by the third-party plaintiffs
include actual, punitive, and treble damages and court costs and attorney costs.
The Company's Director and Officer ("D&O") insurance carrier has notified the
Company that because one of the third-party plaintiffs was a former director of
the Company the D&O policy will not provide coverage for Director defendants
sued by that third-party plaintiff under the "insured vs. insured" policy
exclusion. The Company believes that its D&O policy may provide coverage for the
actions brought by the other two third-party plaintiffs. Management believes
that it has meritorious defenses against these claims and the Company intends to
vigorously defend itself. The parties have not yet commenced discovery in this
case and on April 23, 2002, the Company filed a motion to dismiss the claims
against it. No loss, if any, has been recorded in the consolidated financial
statements with respect to these matters.
As of December 31, 2001 the Company had been notified by several state taxing
authorities that approximately $45,000 of past due taxes and penalties is owed.
Management believes that it has meritorious defenses against these claims. No
assurance can be given that the Company's defenses are valid or that the Company
will not be liable for any part of the amounts. No loss, if any, has been
recorded in the consolidated financial statements with respect to these matters.
The Company has divested certain of its businesses during 2000 and 2001. As a
result of such divestitures, there may be lawsuits, claims or proceedings
instituted or asserted against the Company related to the period that the
businesses were owned by the Company. No loss, if any, has been recorded in the
consolidated financial statements with respect to these matters.
5. SUBSEQUENT EVENTS
------------------
An additional total amount of $74,000 has been borrowed from Polar after June
30, 2002 through August 15, 2002. These borrowings are at 10% interest and are
due in one year.
Effective August 1, 2002 an agreement between the Company and Pirinate
Consulting Group, L.L.C. ("Pirinate"), was signed whereby Pirinate would provide
the services of Eugene Davis to the Company to serve as Chairman of the Board
and Chief Executive Officer of the Company. Mr. Davis has served as a Director
of the Company since January 2000 and he also was Chairman of the Board and
Chief Executive Officer of the Company from January 2000 to September 2001.
Under this agreement, the Company issued 40,000 shares of common stock to
Pirinate for unpaid past compensation for Mr. Davis' services and, during the
term of Mr. Davis' services, the Company will pay Pirinate $3,000 per month. An
additional $2,000 per month and 2,000 shares of common stock per month will
accrue during the term of Mr. Davis' services and will be received by Pirinate
if the Company's pending merger with Polar is completed. Under certain
circumstances, Pirinate may accept shares of common stock in lieu of the $2,000
per month accrued fee at the rate of $1.00 per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the Company's financial condition, results of
operations and capital resources. The discussion and analysis should be read in
conjunction with the Company's unaudited consolidated financial statements and
notes thereto included elsewhere within this report.
10
RESULTS OF OPERATIONS
- -----------------------
The Company continues to exist as a public shell for use as a reverse merger
vehicle with no operating activities.
The Company believes that possible sources of funds for the remainder of 2002
will primarily consist of advances from MCCIC and Polar. The Company also
continues to engage in discussions with creditors to restructure indebtedness.
No assurance can be given that the Company will be able to obtain adequate funds
for the remainder of 2002 or beyond. If the Company is unable to restructure
its past due debt or to obtain adequate funds for its operational needs, or if
the holders of the Company's past due debt seek to enforce their rights, the
Company would not be able to continue operating as a going concern or to
complete the pending transaction with Polar.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2002 AND 2001
- ----------------------------------------------------------------
REVENUES AND COST OF SALES - The Company no longer has any revenue producing
activity as it sold its remaining operating entity during the third quarter of
2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Selling, general and
administrative expense decreased $36,000 to $173,000 for the three months ended
June 30, 2002 from $209,000 for the three months ended June 30, 2001. The
decline in selling, general and administrative expense is primarily related to
lower compensation expense and lower legal and other professional fees.
INTEREST EXPENSE - Interest expense, including amortization of debt discount,
decreased $12,000 to $561,000 for the three months ended June 30, 2002, from
$573,000 for the three months ended June 30, 2001. The decline is due to the
reduction of debt associated with the sale of the PIC business.
OTHER INCOME - Other income decreased $5,000 to $1,000 for the three months
ended June 30, 2002 from $6,000 for the three months ended June 30, 2001. The
decline is due to the cessation of operating activities.
INCOME FROM OPERATIONS OF DISCONTINUED OPERATIONS - Effective July 31, 2001 the
Company sold all the shares of PIC to Dartwood, LLC for a total purchase price
of $196,000, comprised of $100,000 cash and a non-interest bearing promissory
note of $96,000 payable in 24 monthly installments of $4,000. The Company
assigned the cash payment of $100,000 and the promissory note to MCCIC to repay
$196,000 of outstanding debt. Wayne Wright, a Director and significant
shareholder of the Company, is related to the owner of Dartwood, LLC. PIC was
primarily engaged in the business of reselling call processing services to
aggregators of operator service traffic and to a limited number of payphone
operators.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2002 AND 2001
- --------------------------------------------------------------
REVENUES AND COST OF SALES - The Company no longer has any revenue producing
activity as it sold its remaining operating entity during the third quarter of
2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Selling, general and
administrative expense decreased $97,000 to $317,000 for the six months ended
June 30, 2002 from $414,000 for the six months ended June 30, 2001. The decline
in selling, general and administrative expense is primarily related to lower
compensation expense and lower legal and other professional fees.
11
INTEREST EXPENSE - Interest expense, including amortization of debt discount,
decreased $29,000 to $1,114,000 for the six months ended June 30, 2002, from
$1,143,000 for the six months ended June 30, 2001. The decline is due to the
reduction of debt associated with the sale of the PIC business.
OTHER INCOME - Other income decreased $26,000 to $2,000 for the six months ended
June 30, 2002 from $28,000 for the six months ended June 30, 2001. The decline
is due to the cessation of operating activities.
INCOME FROM OPERATIONS OF DISCONTINUED OPERATIONS - Effective July 31, 2001 the
Company sold all the shares of PIC to Dartwood, LLC for a total purchase price
of $196,000, comprised of $100,000 cash and a non-interest bearing promissory
note of $96,000 payable in 24 monthly installments of $4,000. The Company
assigned the cash payment of $100,000 and the promissory note to MCCIC to repay
$196,000 of outstanding debt. Wayne Wright, a Director and significant
shareholder of the Company, is related to the owner of Dartwood, LLC. PIC was
primarily engaged in the business of reselling call processing services to
aggregators of operator service traffic and to a limited number of payphone
operators.
The accompanying statements of operations for 2001 have been reclassified so
that the results for PIC's operations are classified as discontinued operations.
The statements of cash flows and related notes to the consolidated financial
statements have also been reclassified to conform to the discontinued operations
presentation.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
At June 30, 2002, the Company's current liabilities of $21.0 million exceeded
current assets of $4,000 resulting in a working capital deficit of $21.0
million. During the six months ended June 30, 2002, the Company used $211,000 in
cash for operating activities. The Company received proceeds from new debt
financing of $211,599 ($7,083 from MCCIC and $204,516 from Polar). The Company's
only future source of cash is expected to come from these entities. If the
Company is unsuccessful in continuing to obtain financing from these two
entities, the Company would likely not be able to continue as a going concern.
The Company's debt totaled $13.6 million as of June 30, 2002 compared with $13.4
million at December 31, 2001. As of June 30, 2002, the Company was past due in
the payment of approximately $13.5 million in principal and accrued interest
payments. The Company was also past due with its trade vendors in the payment
of approximately $846,595 as of June 30, 2002.
The Company's past due debt at June 30, 2002 includes approximately $12.0
million of notes and accrued interest to insiders which are believed to be
pledged by the holders of the notes to a bank as collateral for loans made by
the bank to such holders. This bank was liquidated by the FDIC during 2000. The
Company was notified in December 2000 that the FDIC sold substantially all the
loans and related collateral to a financial institution. In March 2001, the
Company received a demand letter from this financial institution for
approximately $575,000 of principal plus accrued interest on certain notes it
held, and on July 5, 2001, the financial institution obtained a default judgment
against the Company for $781,252 plus interest at the rate of 18% per year from
and after February 6, 2001 related to those notes. On June 20, 2002 a settlement
was reached with this financial institution to settle $10.2 million of principal
and accrued interest related to the notes as of June 30, 2002 for $500,000. The
terms of the settlement required $15,000 to be paid to the financial institution
upon signing of the agreement and the remaining $485,000 is due upon
consummation of the Company's pending merger transaction with Polar. If the
merger transaction with Polar is not completed for any reason on or before
December 31, 2002, the agreement with the financial institution will be
terminated except that the financial institution will retain the $15,000 paid by
the Company. Until such time as the merger is consummated the notes and related
interest will remain on the books of the Company and interest will continue to
be accrued.
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At June 30, 2002, the Company has no operating activities and no reportable
segments. The Company's current strategic direction is to continue to negotiate
with its creditors to restructure indebtedness and to use the Company's public
shell as a merger vehicle. On December 19, 2001, the Company entered into an
Agreement and Plan of Merger with Polar. The proposed merger is subject to a
number of significant closing conditions, including, among others, approval by
the stockholders of the parties, filings with the Securities and Exchange
Commission, the conversion of the Company's indebtedness into equity, and the
obtaining of debt or equity financing by Polar. Because there are significant
conditions remaining to be satisfied with respect to the proposed merger, no
assurance can be given that the proposed merger will be consummated or, if
consummated, that the terms of the proposed merger will be as presently
contemplated. If the Company is unable to restructure its past-due debt, or if
the holders of the Company's past-due debt seek to enforce their rights, the
Company would not be able to complete the proposed merger with Polar or to
continue as a going concern. See "Forward-Looking Statements" below.
FORWARD-LOOKING STATEMENTS
This report contains statements, including statements of management's belief or
expectation, which may be forward-looking within the meaning of applicable
securities laws. Such statements are subject to known and unknown risks and
uncertainties that could cause actual future results and developments to differ
materially from those currently projected. Such risks and uncertainties
include, among others, the following:
- - the Company's access to funds to meet the Company's financial needs and to
repay its past-due debt, and the Company's ability to continue as a going
concern if it is unable to access adequate financing;
- - the possibility that the Company's creditors may take legal action for the
repayment of past-due indebtedness and the ability of the Company to
continue as a going concern if any such action is taken;
- - the Company's ability to complete the proposed merger transaction with
Polar and the terms of such transaction if completed;
- - the Company's ability to restructure its past-due debt;
- - the outcome of pending or threatened litigation;
- - the risk that the Company's analyses of these risks could be incorrect
and/or the strategies developed to address them could be unsuccessful; and
- - various other factors discussed in this Quarterly Report on Form 10-Q and
the Company's annual report on Form 10-K.
The Company will not update the forward-looking information to reflect actual
results or changes in the factors affecting the forward-looking information.
The forward-looking information referred to above includes any matters preceded
by the words "anticipates," "believes," "intends," "plans," "expects" and
similar expressions as they relate to the Company and include, but are not
limited to:
- - expectations regarding the Company's financial condition and liquidity, as
well as future cash flows; and
- - expectations regarding alternatives to restructure the Company's business
and reduce its overall debt.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any foreign currency exchange risk or commodity price
risk. All of the Company's debt, including its past-due debt with carrying
value at June 30, 2002 of $13.6 million, was at a fixed interest rate at June
30, 2002 and December 31, 2001, therefore, the Company is not impacted by
changes in interest rates related to the debt. The interest rates range from
10% to 18%.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
As of June 30, 2002, the Company was past due in payment of approximately $13.5
million of principal and accrued interest. The Company was also past due with
its trade vendors in the payment of approximately $846,595 as of June 30, 2002.
For additional information, see the notes to the consolidated financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders of the Company during the
second quarter of 2002.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
3.1 Restated Articles of Incorporation of the Company (1)
3.2 First Amendment to Restated Articles of Incorporation of the
Company (2)
3.3 Second Amendment to Restated Articles of Incorporation of the
Company (2)
3.4 Amended and Restated By-Laws of the Company (3)
10.1 Compromise, Settlement and Mutual Release Agreement, dated as of
June 20, 2002, among Republic Credit Corporation I, the Company
and Silent Woman, L.L.C.
(1) Filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 333-05422C) and incorporated herein
by reference.
(2) Filed as an exhibit to the Company's report on Form 10-QSB
for the quarter ended September 30, 1997 (File No.
000-21463) and incorporated herein by reference.
(3) Filed as an exhibit to the Company's report on Form 10-QSB
for the quarter ended March 31, 1997 (File No. 000-21463)
and incorporated herein by reference.
(b) Reports on Form 8-K: None in the second quarter of 2002.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
MURDOCK COMMUNICATIONS CORPORATION
Date: August 19, 2002 By /s/ Eugene Davis
----------------------------
Eugene Davis
Chief Executive Officer
Date: August 19, 2002 By /s/ Wayne Wright
----------------------------
Wayne Wright
Principal Accounting Officer
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