10-K 1 doc1.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [x] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2002. [ ] 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 registrant 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) (Zip Code) Registrant's telephone number, including area code: 319-447-4239 ------------ Securities registered pursuant to Section 12(b) of the Exchange Act: Name of each exchange on Title of each class which registered NA NA ---------- -------- Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, No Par Value ---------------------------------- (Title of class) Redeemable Common Stock Purchase Warrants ----------------------------------------- (Title of class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the this Form 10-K. [ X ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2): Yes No X --- --- The aggregate market value of the common stock held by nonaffiliates of the registrant as of June 28, 2002 (the last business day of the registrant's most recently completed second quarter) was $669,389. Shares of common stock held by any executive officer or director of the registrant and any person who beneficially owns 10% or more of the outstanding common stock have been excluded from this computation because such persons may be deemed to be affiliates. This determination of affiliate status is not a conclusive determination for other purposes. On March 1, 2003, there were outstanding 12,304,967 shares of the registrant's no par value common stock. DOCUMENTS INCORPORATED BY REFERENCE None. 2 PART I ITEM 1. BUSINESS GENERAL Murdock Communications Corporation ("MCC" or the "Company") previously operated as a holding company with the Company's principal assets as of December 31, 2000 being the Priority International Communications, Inc. ("PIC") business segment and its investment in Actel Integrated Communications, Inc. ("Actel"). PIC was largely a reseller of call processing services. Actel, based in Mobile, Alabama, was a facilities-based competitive local exchange carrier of advanced voice and data communications services to small and medium sized enterprises. Actel offered advanced end-user services in the Southeastern United States. Actel filed for bankruptcy under Chapter 11 on April 11, 2001. As a result, the Company recorded an impairment charge of $1.6 million in 2000, due to the uncertainty of ultimate recovery of its investment in Actel. On September 14, 2001, Actel's case was converted to a case under Chapter 7. 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 MCC Investment Company, LLC ("MCCIC"), a company owned by Berthel Fisher & Company, Inc. ("Berthel") and another significant shareholder of the Company to repay $196,000 of outstanding debt. Wayne Wright, a director, executive officer and shareholder of the Company, is the father of the owner of Dartwood, LLC. The disposition was recorded in the third quarter of 2001 and resulted in a gain of approximately $1.3 million for the Company. 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 explore potential merger transactions. For information regarding the Company's proposed merger transaction with Polar Molecular Corporation ("Polar"), see "Recent Developments - Merger Agreement with Polar." 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 operating as a going concern. See "- Recent Developments" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" below. MCC was incorporated as an Iowa corporation in 1989. 3 RECENT DEVELOPMENTS MCC'S PAST DUE DEBT. As of December 31, 2002, the Company was past due in the payment of approximately $14.6 million of principal and accrued interest payments. The Company was also past due with its trade vendors in the payment of approximately $1.1 million as of December 31, 2002. If the Company is unable to raise the necessary funds to repay its past due debt or to arrange for extensions or conversions of such debt, its creditors may sue the Company to demand payment of the amounts past due. Any action by the Company's creditors to demand repayment of past due indebtedness is likely to prevent the Company from continuing as a going concern. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's past due debt at December 31, 2002 includes approximately $12.7 million of notes and accrued interest which are believed to have been 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 Republic Credit Corporation I ("Republic"). In March 2001, the Company received a demand letter from Republic for approximately $575,000 of principal plus accrued interest on the notes, and on July 5, 2001 Republic 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. A settlement was reached on June 20, 2002 with Republic to settle approximately $11.2 million of principal and accrued interest related to the notes as of December 31, 2002 for $500,000. The terms of the settlement required $15,000 to be paid to Republic upon signing of the agreement and the remaining $485,000 is due upon consummation of the Company's pending merger transaction with Polar, discussed below. The settlement initially provided that if the merger transaction with Polar was not completed for any reason on or before December 31, 2002, the agreement with Republic would be terminated except that Republic would retain the $15,000 paid by the Company. During November 2002, the Company entered into the first extension agreement with Republic. Under the terms of the first extension agreement the Company could request up to three additional one-month extensions of the original settlement deadline of December 31, 2002. Each one-month extension would be granted to the Company provided that the Company pay $10,000 prior to the first day of the month of any such extension to Republic. The Company made an extension payment of $10,000 for January 2003. During January 2003, the Company entered into the second extension agreement. Under the terms of the second extension agreement, the Company may request one additional one-month extension to April 30, 2003. Additionally, under the terms of the second extension agreement, the Company postponed payment of the February extension fee in exchange for an extension fee of $25,000 which was due prior to March 1, 2003 for the February and March extension fees. The Company was unable to make the $25,000 payment and has received notification from Republic that the Company has defaulted on the agreement. Republic is in the process of reviewing its options and remedies under this agreement. If the Company is not able to reach a new extension agreement with Republic on terms acceptable to the Company, or if Republic takes action to demand payment of the past-due debt, the Company likely would not be 4 able to continue operating as a going concern or to complete its pending merger transaction with Polar. Until such time as the Company satisfies all of the conditions of the settlement agreement (if extended or otherwise amended), the notes and related interest will remain on the books of the Company and interest will continue to be accrued. Buckeye Retirement Co., L.L.C. ("Buckeye") acquired loans and related collateral from the FDIC and on September 1, 2002 agreed to accept payment of $100,000 in cash and 475,000 shares of the Company's no par value common stock (the "Common Stock") in full satisfaction of all principal and interest due under these notes which totaled $964,452 as of December 31, 2002. The shares to be received by Buckeye included 225,000 shares to be issued by the Company, 100,000 shares to be transferred by Guy O. Murdock, 75,000 shares to be transferred by Larry A. Cahill and 75,000 shares to be transferred by Wayne Wright. The terms of the settlement required $25,000 to be paid to Buckeye upon signing the agreement and $75,000 and the shares would be due upon consummation of the Company's pending merger transaction with Polar. The terms of the settlement provided that if the merger transaction with Polar was not completed for any reason on or before March 31, 2003, the agreement with Buckeye would be terminated except that Buckeye would retain the $25,000 paid by the Company. As the merger transaction with Polar was not completed by March 31, 2003, the settlement agreement with Buckeye has terminated. If the Company is not able to reach an agreement with Buckeye to extend the expiration date of the settlement on terms acceptable to the Company, or if Buckeye takes action to demand payment of the past-due debt, the Company likely would not be able to continue operating as a going concern or to complete its pending merger transaction with Polar. Until such time as the Company satisfies all of the conditions of the settlement agreement (if extended or otherwise amended), the notes and related interest will remain on the books of the Company and interest will continue to be accrued. MCC continues to engage in discussions with its other creditors to restructure indebtedness. The obligation of Polar to complete the merger is subject to the condition that at the effective time of the merger MCC's liabilities will not exceed its assets, each as determined in accordance with generally accepted accounting principles, consistent with past practice. Any loans extended by Polar to MCC or MCC Merger Sub Corporation ("MCC Merger Sub") and liabilities for professional fees incurred directly related to the merger will be excluded from the amount of liabilities for purposes of this net worth test and MCC will also be entitled to a credit against its liabilities for purposes of the net worth test equal to any portion of certain amounts Polar is required to loan to MCC that MCC does not receive or chooses not to accept. As of December 31, 2002, MCC's liabilities exceeded its assets by approximately $21.9 million, excluding loans from Polar and professional fees directly related to the merger. As of December 31, 2002, MCC had reached agreements with the holders of MCC debt or other obligations in the aggregate amount of approximately $21.0 million for the satisfaction of such obligations in exchange for the issuance by MCC of an aggregate of 4,571,307 shares of Common Stock and the payment by MCC of an aggregate of $570,000, contingent on the closing of the merger. However, as of March 7, 2003 the Company is in default on terms of one of these settlement 5 agreements for $11.2 million requiring a cash payment of $485,000 and as of March 31, 2003, another settlement agreement for $964,452 requiring a cash payment of $75,000 and the transfer of 475,000 shares of Common Stock had expired. To satisfy the net worth test by closing, MCC must reach additional agreements with its creditors to forgive or convert into equity a sufficient amount of liabilities to cause MCC's liabilities not to exceed its assets as of the closing of the merger. Any conversions of liabilities to equity will dilute the outstanding Common Stock held by current MCC shareholders. MCC also must raise sufficient funds to make all of the payments that may be required under the agreements with MCC's creditors, and there can be no assurance that such funds will be available from Polar or otherwise. If MCC is not able to satisfy the net worth test, Polar will have the right to terminate the merger agreement. If the merger is not completed for any reason, MCC will continue to be subject to a significant amount of past-due debt and other liabilities, including the costs related to the proposed merger, without any source of operating cash flow to satisfy its liabilities. MCC also would not be able to continue to borrow from Polar, which has been MCC's principal source of cash since the beginning of 2002. Most of the agreements that MCC has reached with creditors to forgive debt or convert debt to equity are contingent on the completion of the merger with Polar. MCC can make no assurance that it would be able to identify another merger transaction or to reach new agreements with its creditors if the merger is not completed, and in such event MCC would not be able to continue as a going concern. Based on agreements reached by MCC with its creditors as of December 31, 2002, MCC expects that approximately $570,000 will be needed at or shortly after the closing of the merger to make required payments to MCC's creditors. MCC must reach extension or new settlement agreements with Republic and Buckeye and MCC also has other outstanding debt which MCC is attempting to restructure before the closing of the merger, and any agreements that MCC may reach with these creditors may require additional payments at or shortly after the closing of the merger. 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 concerning these matters are described in Note 1 to the consolidated financial statements. MERGER AGREEMENT WITH POLAR. On December 19, 2001, Polar and the Company entered into an Agreement and Plan of Merger (as amended, the "Merger Agreement"). Under the terms of the Merger Agreement, the outstanding shares of Polar's common stock will be converted into the number of shares of Common Stock equal to 80% of the outstanding shares of the Common Stock as of the effectiveness of the merger and MCC shareholders will retain a 20% ownership. The outstanding warrants and options of MCC will remain outstanding after the 6 completion of the merger and the outstanding warrants and options of Polar will be converted into warrants and options to purchase the Common Stock based on the exchange ratio in the merger. Polar develops and markets fuel additives. Polar's primary product, DurAlt(R)FC, is a patented fuel additive that has been proven effective at reducing combustion chamber deposits and reducing octane requirement increase in combustion engines. Polar had a stockholders' deficit of $4.2 million (unaudited) at September 30, 2002 and revenues for its fiscal year ended March 31, 2002 were $162,000 (unaudited). The proposed merger is subject to a number of significant conditions, including approval by the stockholders of the parties, approval of the reincorporation of MCC in the state of Delaware by MCC's stockholders, filings with Securities and Exchange Commission, the conversion of the Company's indebtedness into equity, a limit of 1,000 shares on the number of shares of MCC or Polar common stock that exercise dissenters' or appraisal rights with respect to the reincorporation or merger, and other closing conditions. 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. EMPLOYEES As of December 31, 2002, MCC had one employee. The Company's employee is not subject to a collective bargaining agreement. MCC's sole employee will receive a severance payment of $3,115 in connection with the termination of her employment upon the closing of the proposed merger with Polar. MCC also granted this employee stock options for 10,000 shares of Common Stock at an exercise price of $0.40, contingent upon the closing of the proposed merger. ITEM 2. PROPERTIES The Company's corporate office is located in Marion, Iowa. The Company leases this office on a month to month basis. ITEM 3. LEGAL PROCEEDINGS On January 17, 2001, Republic filed lawsuits in the U.S. District Court, Southern District of Iowa, against each of John Rance, Robert M. Upshaw and Stephen Rance and other individuals to collect on certain promissory notes held by Republic Credit. On November 23, 2001, the three individuals previously named, one of which was a former officer and director of the Company, filed a third party complaint against the Company, several former officers and directors of the Company and several related parties. These lawsuits allege that the named individuals and entities devised a scheme to defraud the three plaintiffs 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 7 Commercial Code. Unspecified damages sought by the 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 plaintiffs was a former director of the Company, that the D&O policy will not provide coverage for the claims by that plaintiff. The Company believes that its D&O policy will provide coverage, up to the policy limit, in this lawsuit related to the other two plaintiffs. In November 2002, MCC entered into a settlement agreement providing for the issuance by MCC of 517,000 shares of Common Stock to the three plaintiffs and one other individual who did not file suit. The effectiveness of the settlement is contingent on the closing of the proposed merger with Polar. No loss, if any, has been recorded in the consolidated financial statements with respect to these matters. As of December 31, 2002 the Company had been notified by several state taxing authorities that approximately $46,000 of past due taxes and penalties is allegedly owed. Some of the states have assigned the alleged amounts due to collection agencies or filed tax warrants. Management believes that it has meritorious defenses against these amounts. 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 2001 and 2000. 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. The FDIC has notified the Company that it believes an additional $770,000 is outstanding representing various notes payable. Also, in July 2001, the Company was notified that Peoples Bank had obtained a judgment 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 also asserted that he is entitled to $500,000 allegedly outstanding under a note payable. Management believes that the Company received no funds with respect to these notes and that it has other defenses. The amount of past due debt as of December 31, 2002 does not include these amounts. No assurance can be given as to the ultimate outcome of these matters. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2002. 8 PART II PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS HISTORICAL TRADING INFORMATION AND DIVIDEND POLICY The Common Stock trades on the Over the Counter Bulletin Board under the symbol "MURC" and the Company's Redeemable Common Stock Purchase Warrants ("Warrants") trade on the Over the Counter Bulletin Board under the symbol "MURCW." The following table sets forth the high and low bid quotations for the Common Stock and Warrants as reported on the Over the Counter Bulletin Board. Such transactions reflect interdealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

At December 31, 2002, there were approximately 140 holders of record of Common Stock. The Company has not paid any cash dividends on the Common Stock in the last three years. Certain of the Company's current financing agreements contain restrictions on the payment of dividends. The Company does not anticipate paying any cash dividends in the foreseeable future. 9 RECENT SALES OF UNREGISTERED SECURITIES During 2002, the Company issued warrants to purchase a total of 14,166 shares of Common Stock to Murdock Communications Corporation Investment Company ("MCCIC"), a company owned 50% by Berthel and 50% by another significant shareholder of the Company, in connection with advances obtained from MCCIC. The warrants were issued at exercise prices ranging from $0.08 per share to $0.17 per share with five year terms. The warrants were issued in private placements exempt from the registration requirements of the Securities Act of 1933, amended (the "Act"), pursuant to Section 4(2) of the Act. ITEM 6. SELECTED FINANCIAL DATA The following sets forth selected consolidated financial data in respect of the Company's continuing operations. The selected financial information set forth in the table below is not necessarily indicative of the results of future operations of the Company and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements, related notes and independent auditors' report, contained herein. The statement of operations data for the five years ended December 31, 2002 and the related balance sheet data have been derived from the audited consolidated financial statements of the Company. These financial statements were prepared on a going concern basis. 10

(a) Includes: a $990,000 charge for the write-down of the Company's investment in the AcNet entities; a $1.6 million charge for impairment of investment in Actel and a gain of $7.0 million recorded in connection with a Debt Restructuring Plan (See Notes 4 and 6 to the consolidated financial statements). (b) Includes: a $3.7 million charge for the write-down of the Company's investment in the AcNet entities. (c) Includes a gain of $453,000 relating to the termination of the Company's agreement with AT&T. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Previously the Company had three reportable segments. The Company sold its PIC segment in July 2001 and its Incomex segment in June 2000. The other reportable segment (MTS) had investments in the AcNet entities, which were written off in 1999 and 2000, and Actel preferred stock and operated a telecommunications services business whose primary asset was sold in 2000. Actel filed for bankruptcy under Chapter 11 on April 11, 2001. As a result, the Company recorded an impairment charge of $1.6 million in 2000, due to the uncertainty of ultimate recovery of its investment in Actel. On September 14, 2001, Actel's case was converted to a case under Chapter 7. The accompanying statements of operations have been reclassified so that the results for the two segments sold in 2000 and 2001 are classified as discontinued operations for all periods presented. As of the date of this report, the Company has a large amount of past due debt and has also experienced significant cash flow difficulties. The Company has an agreement with Polar for a proposed merger transaction. If this transaction is not successful, the Company may not be able to continue operating as a going concern. See "- Liquidity and Capital Resources" below. 12

COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND 2001 SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Consolidated selling, general and administrative expense decreased $33,000 to $709,000 for the year ended December 31, 2002 from $742,000 for the year ended December 31, 2001. The decrease is primarily related to lower rents and consulting fees. DEPRECIATION AND AMORTIZATION EXPENSE - Consolidated depreciation and amortization expense declined $6,000 to $0 for the year ended December 31, 2002. The decline is due to all assets being fully depreciated at December 31, 2001. INTEREST EXPENSE - Consolidated interest expense, including amortization of debt discount, declined $69,000 to $2,235,000 for the year ended December 31, 2002 from $2,304,000 in 2001. The decrease is due to the reduction of debt associated with the sale of PIC. OTHER INCOME (EXPENSE) - Consolidated other income (expense) increased $6,000 to $3,000 income for the year ended December 31, 2002 from a $3,000 expense for the year ended December 31, 2001. The increase is due to funds from workers compensation insurance received in 2002. 13 COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Consolidated selling, general and administrative expense increased $167,000 to $742,000 for the year ended December 31, 2001 from $575,000 for the year ended December 31, 2000. The increase is primarily related to employee severance. DEPRECIATION AND AMORTIZATION EXPENSE- Consolidated depreciation and amortization expense declined $30,000, to $6,000 for the year ended December 31, 2001 from $36,000 for year ended December 31, 2000. The decline is due to impairments recorded in 1999 and 2000. All assets are fully depreciated at December 31, 2001. INTEREST EXPENSE - Consolidated interest expense, including amortization of debt discount, declined $1,127,000 to $2,304,000 for the year ended December 31, 2001 from $3,431,000 in 2000. The decline is due to the reduction of debt associated with the sale of the two business segments and the Debt Restructuring Plan. OTHER INCOME (EXPENSE) - Consolidated other income (expense) declined $7.0 million to a $3,000 expense for the year ended December 31, 2001 from a $7,001,000 income for the year ended December 31, 2000. The decrease was primarily due to a pre-tax gain of $7.0 million recorded in connection with the Debt Restructuring Plan completed in the second quarter of 2000 (see Note 6 to Notes to Financial Statements). DISCONTINUED OPERATIONS PIC - 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, executive officer and shareholder of the Company is the father of the owner of Dartwood, LLC. The disposition was recorded in the third quarter of 2001 and resulted in a gain of approximately $1.3 million for the Company. INCOMEX - Effective June 30, 2000 the Company sold all the shares of Incomex, Inc., a wholly owned subsidiary, to three of the former shareholders of Incomex, for (a) transfer to the Company by the purchasers of 250,000 shares of the Company's Common Stock originally issued by the Company pursuant to the Company's acquisition of Incomex, (b) cancellation and forgiveness of all amounts outstanding under promissory notes in the aggregate principal amount of $684,919, and related accrued interest, originally issued by the Company to the shareholders of Incomex, and (c) the cancellation of all employment compensation and employment contracts between the Company and the purchasers. The parties also executed mutual releases relating to liabilities between the Company and Incomex and claims that the Company may have against the former shareholders of Incomex. Incomex is primarily engaged in the business of providing billing and collections services to the hospitality industry from Mexico to the United States. As a result of the sale of Incomex described above, the Company recorded a loss on disposition of $332,000 in the second quarter of 2000. 14 LIQUIDITY AND CAPITAL RESOURCES At December 31, 2002, MCC's current liabilities of $22.5 million exceeded current assets of $8,000, resulting in a working capital deficit of $22.5 million. During the year ended December 31, 2002, MCC used $404,000 in cash for operating activities of continuing operations. The Company's principal source of cash during 2002 were loans from Polar. During 2002, the Company received loans in the aggregate amount of $394,787 from Polar. The Company also received advances in the aggregate amount of $7,083 from MCCIC. The Company issued warrants to purchase a total of 14,166 shares of Common Stock to MCCIC in connection with these advances. The warrants were issued at exercise prices ranging from $0.08 per share to $0.17 per share with five year terms. MCCIC has no commitment to make any future advances to the Company. The Company must raise sufficient funds to make payments that may be required under agreements with the Company's creditors. The Company also must fund its current operations which average $50,000 per month and expenses associated with completing the proposed merger with Polar. MCC's only future source of cash is expected to come from Polar. MCC has no operating activities and no source of operating cash flow. If MCC is unsuccessful in continuing to obtain financing from Polar, MCC may not be able to continue as a going concern. The Company's debt totaled $13.8 million as of December 31, 2002, compared with $13.4 million as of December 31, 2001. As of December 31, 2002, the Company was past due in the payment of approximately $14.6 million of principal and accrued interest payments. The Company was also past due with its trade vendors in the payment of approximately $1.1 million as of December 31, 2002. If the Company is unable to raise the necessary funds to repay its past due debt or to arrange for extensions or conversions of such debt, its creditors may sue the Company to demand payment of the amounts past due. Any action by the Company's creditors to demand repayment of past due indebtedness is likely to prevent the Company from continuing as a going concern. The Company's past due debt at December 31, 2002 includes approximately $12.7 million of notes and accrued interest which are believed to have been pledged by the holders of the notes to a bank as collateral for loans made by the bank to such holders. The 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 Republic. In March 2001, the Company received a demand letter from Republic for approximately $575,000 of principal plus accrued interest on the notes, and on July 5, 2001 Republic 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. A settlement was reached on June 20, 2002 with Republic to settle approximately $11.2 million of principal and accrued interest related to the notes as of December 31, 2002 for $500,000. The terms of the settlement required $15,000 to be paid to Republic upon signing of the agreement and the remaining $485,000 is due upon consummation of the Company's pending merger transaction with Polar. The settlement initially provided that if the merger transaction with Polar was not completed for any reason on or before 15 December 31, 2002, the agreement with Republic would be terminated except that Republic would retain the $15,000 paid by the Company. During November 2002, the Company entered into the first extension agreement with Republic. Under the terms of the first extension agreement the Company could request up to three additional one-month extensions of the original settlement deadline of December 31, 2002. Each one-month extension would be granted to the Company provided that the Company pay $10,000 prior to the first day of the month of any such extension to Republic. The Company made an extension payment of $10,000 for January 2003. During January 2003, the Company entered into the second extension agreement. Under the terms of the second extension agreement, the Company may request one additional one-month extension to April 30, 2003. Additionally, under the terms of the second extension agreement, the Company postponed payment of the February extension fee in exchange for an extension fee of $25,000 which was due prior to March 1, 2003 for the February and March extension fees. The Company was unable to make the $25,000 payment and has received notification from Republic that the Company has defaulted on the agreement. Republic is in the process of reviewing its options and remedies under this agreement. If the Company is not able to reach a new extension agreement with Republic on terms acceptable to the Company, or if Republic takes action to demand payment of the past-due debt, the Company likely would not be able to continue operating as a going concern or to complete its pending merger transaction with Polar. Until such time as the Company satisfies all of the conditions of the settlement agreement (as it may be extended or otherwise amended), the notes and related interest will remain on the books of the Company and interest will continue to be accrued. Buckeye acquired loans and related collateral from the FDIC and on September 1, 2002 agreed to accept payment of $100,000 in cash and 475,000 shares of Common Stock in full satisfaction of all principal and interest due under these notes which totaled $964,452 as of December 31, 2002. The shares to be received by Buckeye included 225,000 shares to be issued by the Company, 100,000 shares to be transferred by Guy O. Murdock, 75,000 shares to be transferred by Larry A. Cahill and 75,000 shares to be transferred by Wayne Wright. The terms of the settlement required $25,000 to be paid to Buckeye upon signing the agreement and $75,000 and the shares would be due upon consummation of the Company's pending merger transaction with Polar. The terms of the settlement provided that if the merger transaction with Polar was not completed for any reason on or before March 31, 2003, the agreement with Buckeye would be terminated except that Buckeye would retain the $25,000 paid by the Company. As the merger transaction with Polar was not completed by March 31, 2003, the settlement agreement with Buckeye has terminated. If the Company is not able to reach an agreement with Buckeye to extend the expiration date of the settlement on terms acceptable to the Company, or if Buckeye takes action to demand payment of the past-due debt, the Company likely would not be able to continue operating as a going concern or to complete its pending merger transaction with Polar. Until such time as the Company satisfies all of the conditions of the settlement agreement (if extended or otherwise amended), the notes and related interest will remain on the books of the Company and interest will continue to be accrued. 16 MCC continues to engage in discussions with its other creditors to restructure indebtedness. The obligation of Polar to complete the merger is subject to the condition that at the effective time of the merger MCC's liabilities will not exceed its assets, each as determined in accordance with generally accepted accounting principles, consistent with past practice. Any loans extended by Polar to MCC or MCC Merger Sub and liabilities for professional fees incurred directly related to the merger will be excluded from the amount of liabilities for purposes of this net worth test and MCC will also be entitled to a credit against its liabilities for purposes of the net worth test equal to any portion of certain amounts Polar is required to loan to MCC that MCC does not receive or chooses not to accept. As of December 31, 2002, MCC's liabilities exceeded its assets by approximately $21.9 million, excluding loans from Polar and professional fees directly related to the merger. As of December 31, 2002, MCC had reached agreements with the holders of MCC debt or other obligations in the aggregate amount of approximately $21.0 million for the satisfaction of such obligations in exchange for the issuance by MCC of an aggregate of 4,571,307 shares of Common Stock and the payment by MCC of an aggregate of $570,000, contingent on the closing of the merger. However, as of March 7, 2003 the Company is in default on terms of one of these settlement agreements for $11.2 million requiring a cash payment of $485,000 and as of March 31, 2003, another settlement agreement for $964,452 requiring a cash payment of $75,000 and the transfer of 475,000 shares of Common Stock had expired. To satisfy the net worth test by closing, MCC must reach additional agreements with its creditors to forgive or convert into equity a sufficient amount of liabilities to cause MCC's liabilities not to exceed its assets as of the closing of the merger. Any conversions of liabilities to equity will dilute the outstanding Common Stock held by current MCC shareholders. MCC also must raise sufficient funds to make all of the payments that may be required under the agreements with MCC's creditors, and there can be no assurance that such funds will be available from Polar or otherwise. If MCC is not able to satisfy the net worth test, Polar will have the right to terminate the merger agreement. If the merger is not completed for any reason, MCC will continue to be subject to a significant amount of past-due debt and other liabilities, including the costs related to the proposed merger, without any source of operating cash flow to satisfy its liabilities. MCC also would not be able to continue to borrow from Polar, which has been MCC's principal source of cash since the beginning of 2002. Most of the agreements that MCC has reached with creditors to forgive debt or convert debt to equity are contingent on the completion of the merger with Polar. MCC can make no assurance that it would be able to identify another merger transaction or to reach new agreements with its creditors if the merger is not completed, and in such event MCC would not be able to continue as a going concern. Based on agreements reached by MCC with its creditors as of December 31, 2002, MCC expects that approximately $570,000 will be needed at or shortly after the closing of the merger to make required payments to MCC's creditors. MCC must reach extension or new settlement agreements with Republic and Buckeye and MCC also has other outstanding debt which MCC is attempting to restructure before the closing of the merger, and any agreements that MCC may reach with these creditors may require additional payments at or shortly after the closing of the merger. 17 CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported expenses during the reporting period. Management bases its estimates on historical experience and on various other assumptions and information that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from estimates under different assumptions or conditions. Management believes that there are not any particular accounting policies that are more significant than others that are used in the preparation of the consolidated financial statements as the Company does not currently have any continuing operations. Accounting policies are further disclosed in Note 1 to the consolidated financial statements. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 145. This statement, among other things, significantly limits the situations whereby the extinguishments of debt is treated as an extraordinary item in the statement of operations. This statement requires reclassification of all prior period extraordinary items related to debt extinguishments. The provisions of this statement are effective for fiscal years beginning after May 15, 2002. 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 adequate 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; 18 - the Company's ability to restructure its past due debt; - risks relating to Polar's business operations; - the Company's ability to continue as a going concern if it cannot restructure its past due debt or complete the pending merger transaction with Polar; - the outcome of pending 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 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. ITEM 7A. 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 was at a fixed interest rate at December 31, 2002 and 2001 and, therefore, the Company is not impacted by changes in interest rates related to the debt. The interest rates range from 10% to 18%. The Company had outstanding fixed rate long-term debt obligations with carrying values of $0 million and $4.6 million at December 31, 2002 and 2001, respectively. The fair value of this debt was zero at December 31, 2002 and 2001. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company, notes thereto and related financial statement schedule are filed under this item beginning on page F-1 of this report. 19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following sets forth certain information with respect to the directors and executive officers of the Company as of December 31, 2002.

20 SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16 (a) of the Exchange Act requires the Company's directors and executive officers and persons who own more than 10% of a registered class of the Company's equity securities, to file with the SEC initial reports of beneficial ownership and reports of changes in beneficial ownership of the Company's equity securities. The rules promulgated by the SEC under Section 16(a) of the Exchange Act require those persons to furnish the Company with copies of all reports filed with the SEC pursuant to Section 16(a). Based solely upon a review of such forms actually furnished to the Company and written representations of certain of the Company's directors and executive officers, all directors, executive officers and 10% shareholders have filed with the SEC on a timely basis all reports required to be filed under Section 16(a) of the Exchange Act during 2002. ITEM 11. EXECUTIVE COMPENSATION. CASH AND OTHER COMPENSATION. The table which follows sets forth certain information concerning compensation paid to, earned by or awarded to Eugene I. Davis, the Company's Chairman of the Board and Chief Executive Officer and Wayne Wright, the Company's Principal Accounting Officer. Mr. Davis and Mr. Wright are referred to in this report as the "named executive officers."

21 OPTIONS GRANTED DURING 2002. There were no stock options granted to the named executive officers of the Company during the year ended December 31, 2002. FISCAL YEAR-END OPTION VALUES. There were no unexercised options held by the named executive officers at December 31, 2002. CONSULTING AGREEMENTS On January 10, 2000, the Company entered into a letter agreement with Pirinate, an entity controlled by Eugene I. Davis, for the personal services of Mr. Davis as the Company's Interim Chairman of the Board and Interim Chief Executive Officer. Pirinate received $15,000 a month, plus out-of-pocket expenses, for these services. The initial term of this agreement was three months. Thereafter, either party could terminate this agreement, with or without cause, effective upon sixty days prior written notice. The parties agreed in May 2000 that Mr. Davis would serve as Chairman of the Board and Chief Executive Officer of the Company. Effective July 1, 2001 this agreement was modified to provide for a payment of $10,000 a month through September 30, 2001 at which time the agreement terminated. Mr. Davis resigned on October 9, 2001 as Chief Executive Officer and remained on the Board of Directors. The Company entered into an agreement dated August 1, 2002, as amended, with Pirinate, whereby Pirinate agreed to provide the services of Eugene I. Davis to serve as Chairman of the Board and Chief Executive Officer effective August 1, 2002. Under the agreement, the Company issued 40,000 shares of Common Stock to Pirinate in satisfaction of unpaid fees for Mr. Davis' past services and the Company agreed to pay Pirinate $3,000 per month during the term of Mr. Davis' services. The Company also agreed to pay contingent compensation of 4,000 shares of Common Stock per month, contingent upon the closing of the proposed merger with Polar. COMPENSATION OF DIRECTORS The Company pays Mr. Kirkpatrick a monthly retainer equal to the greater of (a) $1,000 or (b) $1,000 for each meeting of the Board of Directors attended. In addition, in January 2000 the Company issued options to Mr. Kirkpatrick to purchase up to 20,000 shares of Common Stock, 10,000 of which were fully vested at the time of issuance and 10,000 of which vested on January 1, 2001, with an exercise price of $2.25 per share. Through its letter agreement with Pirinate, Pirinate receives compensation for making Mr. Davis available to serve as MCC's Chairman of the Board and Chief Executive Officers as described under "Consulting Agreements" above. Mr. Wright accrues compensation at the rate of $4,000 per month for serving as Principal Accounting Officer. Mr. Kirkpatrick and Mr. Wright have agreed to convert all accrued compensation into shares of Common Stock at the time of the proposed merger with Polar at a rate of $3.03 per share for compensation accrued before August 1, 2002 and at a rate of $1.00 per share for compensation accrued on of after August 1, 2002. As of December 31, 2002, $48,000 of compensation was accrued with respect to Mr. Wright and $22,000 of compensation was accrued with respect to Mr. Kirkpatrick. Mr. Murdock does not receive any compensation for serving on MCC's board of directors. 22 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. SECURITY OWNERSHIP The following table sets forth information as of December 31, 2002 regarding the beneficial ownership of shares of Common Stock by (a) each person who is known to the Company to be the beneficial owner of more that 5% of the Common Stock, (b) each director, director nominee and named executive officer (as defined above) and (c) all directors and executive officers as a group. Beneficial ownership of Common Stock has been determined for this purpose in accordance with Rules 13d-3 and 13d-5 of the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the "Exchange Act"), which provide, among other things, that a person is deemed to be the beneficial owner of Common Stock if such person, directly or indirectly, has or shares voting power or investment power with respect to the Common Stock or has the right to acquire such ownership within sixty days after December 31, 2002. 23

25 EQUITY COMPENSATION PLAN INFORMATION The following table summarizes share information, as of December 31, 2002, for the Company's equity compensation plans, including the Company's 1993 Stock Option Plan and the Company's 1997 Stock Option Plan. The 1993 Stock Option Plan was approved by the Company's shareholders, and the 1997 Stock Option Plan was not approved by the Company's shareholders.

The Company adopted the 1997 Stock Option Plan in 1997. During 1998, the Company amended the 1997 Stock Option Plan to increase the number of shares authorized to 1,727,471. The 1997 Stock Option Plan is administered by the Compensation Committee or the Board of Directors which determines to whom the options will be granted. The 1997 Stock Option Plan provides for the grant of incentive stock options (as defined in Section 422 of the Internal Revenue Code) or nonqualified stock options to executives or other key employees of the Company. The exercise price of the stock options granted under the 1997 Stock Option Plan is established by the Compensation Committee or the Board of Directors, but the exercise price may not be less than the fair market value of the common stock on the date of the grant for incentive stock options. Each option shall be for a term not to exceed ten years after the date of grant for non-employee directors and five years for certain shareholders. Options cannot be exercised until the vesting period, if any, specified by the Compensation Committee or the Board of Directors has expired. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. From 1991 to 1998, the Company obtained lease and other financing services from Berthel and its subsidiaries and their affiliated leasing partnerships. These financing arrangements have been converted into promissory notes that accrue interest at the rate of 12% per year. As of December 31, 2002, the Company owed Berthel a total of approximately $4.1 million of principal and accrued interest under these notes. Berthel has agreed that at the time of the proposed merger with Polar, all principal and interest under these notes as of June 30, 2002 will convert to Common Stock at the rate of $3.03 per share, and any interest accrued after June 30, 2002 will be forgiven. Berthel is the beneficial owner of approximately 45.9% of the Common Stock as of December 31, 2002. 26 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 interest 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. The members of the creditors committee agreed to forebear from taking actions to collect past due debt owed by the Company in the absence of the unanimous approval of the creditors committee. As of December 31, 2002, the Company and Berthel are the only parties to the Standstill Agreement and Berthel is the only member of the creditors committee. In December 1999, the Company entered into a financial advisory agreement with Berthel Fisher & Company Financial Services, Inc. ("Berthel Financial Services"), an investment banking affiliate of Berthel. Under this agreement, Berthel Financial Services agreed to provide investment banking services and advice regarding the identification and investigation of strategic alternatives available to the Company. This agreement, which was in effect until July 1, 2001, required MCC to pay Berthel Financial Services a nonrefundable $30,000 retainer and a retainer fee of $15,000 per month. On July 1, 2001, the Company entered into a new financial advisory agreement with Berthel Financial Services, which requires the Company to pay Berthel Financial Services a retainer fee of $20,000 per month. Retainer fees under the July 1, 2001 agreement have been accruing on a monthly basis. As of December 31, 2002, MCC owed Berthel Financial Services a total of approximately $442,111 for accrued fees and expenses under these agreements. The Company has also subleased office space from Berthel Fisher & Company Management Corp. ("Berthel Management"), an affiliate of Berthel, since October 2001 on a month-to-month basis. The Company owes Berthel Management approximately $7,500 in rental payments as of December 31, 2002. Berthel Financial Services and Berthel Management have agreed that upon completion of the proposed merger with Polar, they will convert all amounts due to them by the Company into a total of 840,000 shares of Common Stock. As of December 31, 2002, the Company owed a total of approximately $730,303 to MCCIC, a company owned by Berthel and Larry A. Cahill. These borrowings accrue interest at the rate of 12% per year. MCCIC has agreed that at the time of the proposed merger with Polar, it will convert $526,669 of the outstanding debt into shares of Common Stock at a rate of $2.00 per share. MCCIC has agreed to convert all other debt, including accrued interest, into shares of Common Stock at the rate of $1.00 per share at the time of the proposed merger. Mr. Cahill beneficially owns approximately 44.6% of the Common Stock outstanding as of December 31, 2002. During 2002, the Company issued warrants to purchase a total of 14,166 shares of Common Stock to MCCIC in connection with advances obtained from MCCIC. The warrants were issued at exercise prices ranging from $0.08 per share to $0.17 per share with five year terms. 27 The Company has issued certain promissory notes to Larry A. Cahill and Guy O. Murdock, a member of MCC's board of directors. Mr. Cahill and Mr. Murdock have agreed that upon completion of the proposed merger, they will convert all principal and accrued interest as of June 30, 2002 into shares of Common Stock at the rate of $3.03 per share and will forgive all interest accrued after June 30, 2002. As of December 31, 2002, the Company owed approximately $1.6 million to Mr. Cahill and approximately $217,019 to Mr. Murdock. These borrowings accrue interest at the rate of 12% and 18%, respectively, per year. On January 10, 2000, the Company entered into a letter agreement with Pirinate, an entity controlled by Eugene I. Davis, for the personal services of Mr. Davis as the Company's Interim Chairman of the Board and Interim Chief Executive Officer. Pirinate received $15,000 a month, plus out-of-pocket expenses, for these services. The initial term of this agreement was three months. Thereafter, either party could terminate this agreement, with or without cause, effective upon sixty days prior written notice. The parties agreed in May 2000 that Mr. Davis would serve as Chairman of the Board and Chief Executive Officer of the Company. Effective July 1, 2001 this agreement was modified to provide for a payment of $10,000 a month through September 30, 2001 at which time the agreement terminated. Mr. Davis resigned on October 9, 2001 as Chief Executive Officer and remained on the Board of Directors. The Company entered into an agreement dated August 1, 2002, as amended, with Pirinate, whereby Pirinate agreed to provide the services of Eugene I. Davis to serve as Chairman of the Board and Chief Executive Officer effective August 1, 2002. Under the original agreement, the Company issued 40,000 shares of Common Stock to Pirinate in satisfaction of unpaid fees for Mr. Davis' past services and the Company agreed to pay Pirinate $3,000 per month during the term of Mr. Davis' services. The Company also agreed to pay contingent compensation of 4,000 shares of Common Stock per month, contingent upon the closing of the proposed merger with Polar. Wayne Wright, MCC's Principal Accounting Officer and member of the Company's board of directors, accrues compensation at the rate of $4,000 per month and David Kirkpatrick, a member of the Company's board of directors, accrues compensation monthly at the rate equal to the greater of (a) $1,000 per month or (b) $1,000 for each meeting of the board of directors attended during such month. Mr. Kirkpatrick and Mr. Wright have agreed to convert all accrued compensation into shares of Common Stock at the time of the proposed merger at a rate of $3.03 per share for compensation accrued before August 1, 2002 and at a rate of $1.00 per share for compensation accrued on of after August 1, 2002. As of December 31, 2002, $48,000 of compensation was accrued with respect to Mr. Wright and $22,000 of compensation was accrued with respect to Mr. Kirkpatrick. 28 ITEM 14. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive Officer and Principal Accounting Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d -14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company required to be included in the Company's periodic filings under the Exchange Act. (b) Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect such controls. There were no significant deficiencies or material weaknesses noted in our most recent evaluation and, therefore, there were no corrective actions taken with respect thereto. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: 1. Financial Statements- See Index to Financial Statements on page F-1 of this Report. 2. Financial Statement Schedules - See Index to Financial Statements on page F-1 of this Report. All other schedules are omitted since they are not required, are inapplicable, or the required information is included in the financial statements or notes thereto. 3. Exhibits: 2.1 Agreement and Plan of Merger, dated as of December 19, 2001, among Murdock Communications Corporation, MCC Merger Sub Corporation and Polar Molecular Corporation. (11) 2.2 Agreement regarding Effectiveness, dated as of December 19, 2001, among Murdock Communications Corporation, MCC Merger Sub Corporation and Polar Molecular Corporation. (11) 29 2.3 First Amendment to Agreement and Plan of Merger, dated as of August 1, 2002, among Murdock Communications Corporation, MCC Merger Sub Corporation and Polar Molecular Corporation. (11) 2.4 Second Amendment to Agreement and Plan of Merger, dated as of November 26, 2002, among Murdock Communications Corporation, MCC Merger Sub Corporation and Polar Molecular Corporation. (11) 2.5 Third Amendment to Agreement and Plan of Merger dated as of January 30, 2003, among Murdock Communications Corporation, MCC Merger Sub Corporation and Polar Molecular Corporation. (11) 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 Third Amendment to Restated Articles of Incorporation of Murdock Communications Corporation. (11) 3.5 Amended and Restated By-Laws of the Company. (3) 4.1 Form of Common Stock Purchase Warrant Agreement between the Company and Firstar Trust Company. (1) 4.2 Form of Redeemable Warrant. (1) 4.3 First Amendment to Common Stock Purchase Warrant Agreement, dated as of September 30, 1999, between the Company and Firstar Trust Company. (8) 4.4 Second Amendment to Common Stock Purchase Warrant Agreement, dated as of April 14, 2000, between the Company and Firstar Bank, N.A. (11) 4.5 Third Amendment to Common Stock Purchase Warrant Agreement, dated as of October 9, 2000, between the Company and Firstar Bank, N.A. (11) 4.6 Fourth Amendment to Common Stock Purchase Warrant Agreement, dated as of October __, 2001, between Murdock Communications Corporation and Firstar Bank, N.A. (11) 30 4.7 Fifth Amendment to Common Stock Purchase Warrant Agreement and Joinder Agreement, dated as of October 18, 2002, between Murdock Communications Corporation and Computershare Trust Company, Inc. (11) 10.1 Murdock Communications Corporation 1993 Stock Option Plan. (1) (5) 10.2 Murdock Communications Corporation 1997 Stock Option Plan, as amended. (4) (5) 10.3 Employment Agreement, dated as of November 16, 1998, by and between the Company and Paul C. Tunink. (4) (5) 10.4 Note and Warrant Purchase Agreement, dated as of June 21, 1999, by and among the Company, Priority International Communications, Inc., Incomex, Inc., MCC Acquisition Corp., and New Valley Corporation. (6) 10.5 Stock Purchase Warrant dated June 21, 1999 from the Company to New Valley Corporation. (6) 10.6 Registration Rights Agreement, dated as of June 21, 1999, between the Company and New Valley Corporation. (6) 10.7 Amendment to Investment Agreement, dated as of June 21, 1999, among ACTEL Integrated Communications, Inc., the Company, John Beck and Richard Courtney. (7) 10.8 Letter Agreement dated December 22, 1999, between Murdock Communications Corporation and Berthel Fisher & Company Financial Services, Inc. (11) 10.9 Letter Agreement dated July 1, 2001, between Murdock Communications Corporation and Berthel Fisher & Company Financial Services, Inc. (11) 10.10 Letter Agreement dated November 4, 2002 between Murdock Communications Corporation and Berthel Fisher & Company Financial Services, Inc. (11) 10.11 Waiver and First Amendment to Note and Warrant Purchase Agreement, dated as of December 17, 1999, among the Company, Priority International Communications, Inc., ATN Communications, Inc., Incomex, Inc., MCC Acquisition Corp. and New Valley Corporation. (8) 10.12 Stockholders Agreement, dated as of April __, 2000, among Actel Integrated Communications, Inc., the Company and the other stockholders of Actel Integrated Communications, Inc. (9) 31 10.13 First Amendment to Stockholders Agreement and Consent to Permitted Transferees, dated as of June 13, 2000, among Actel Integrated Communications, Inc., the Company and the other stockholders of Actel Integrated Communications, Inc. (9) 10.14 Form of Convertible Note of the Company due December 31, 2002 (9) 10.15 Purchase Agreement, dated as of June 23, 2000, among the Company, MCC Acquisition Corp., John Rance, Michael Upshaw, Fernando Ficachi and the other former shareholders of Incomex, Inc. (10) 10.16 Addendum to Employment Agreement for Paul C. Tunink (12)(5) 10.17 Stock Purchase Agreement, dated as of July 31, 2001, among Murdock Communications Corporation, MCC Acquisition Corporation, Priority International Communications, Inc. and Dartwood, LLC. (13) 10.18 Compromise, Settlement and Mutual Release Agreement, dated as of June 20, 2002, among Republic Credit Corporation I, Murdock Communications Corporation and Silent Woman, L.L.C. (14) 10.19 Compromise, Settlement and Mutual Release Agreement, dated as of August 1, 2002, between Murdock Communications Corporation and Buckeye Retirement Co., L.L.C. (15) 10.20 Compensation Agreement, dated August 1, 2002, between Murdock Communications Corporation and Pirinate Consulting Group, L.L.C. (15) 10.21 First Amendment to Compensation Agreement between Murdock and Pirinate Consulting Group, L.L.C., dated January 3, 2003. (11) 10.22 Amendment, Modification and Extension Agreement, dated as of November 16, 2002, among Republic Credit Corporation I, Murdock Communications Corporation and Silent Woman, L.L.C. (11) 10.23 Second Amendment, Modification and Extension Agreement, dated January 28, 2003, among Republic Credit Corporation I, Murdock Communications Corporation and Silent Woman, L.L.C. (11) 10.24 Letter Agreement between Murdock and Dave Kirkpatrick for conversion of service fees to equity, dated January 27, 2003. (11) 10.25 Letter Agreement between Murdock and Wayne Wright for conversion of service fees to equity, dated January 27, 2003. (11) 32 10.26 Letter Agreement between Murdock and Berthel Fischer & Company for settlement of outstanding fees, dated January 9, 2003. (11) 10.27 Letter Agreement between Murdock and MCC Investment Company re outstanding debt, dated January 3, 2003. (11) 10.28 Mutual Settlement and Release Agreement, dated November 7, 2002, among John S. Rance, Steven E. Rance, Robert M. Upshaw, Fernando Ficachi and Berthel Fisher & Company, Thomas J. Berthel, Ronald O. Brendergen, Eugene I. Davis, Thomas E. Chaplin, Guy O. Murdock, Steven J. Ehlert and Murdock Communications Corporation and any and all of its current and former directors, officers, agents and employees. (11) 21 Subsidiaries. (11) 24 Power of Attorney (included as part of the signature page hereof). 99.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, or adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification by Principal Financial Officer pursuant to 18 U.S.C. Section 1350, or adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 33 (1) Filed as an exhibit to the Company's Registration Statement on Form SB-2 (File No. 333--5422C) and incorporated herein by reference. (2) Filed as an exhibit to the Company's Quarterly 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 Quarterly Report on Form 10-QSB for the quarter ended March 31, 1997 (File No. 000-21463) and incorporated herein by reference. (4) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998 (File No. 000-21463) and incorporated herein by reference. (5) Management contract or compensatory plan or arrangement. (6) Filed as exhibit to the Company's registration statement on Form SB-2 (File No. 333-78399) and incorporated herein by reference. (7) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999 (File No. 000-21463) and incorporated herein by reference. (8) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999 (File No. 000-21463) and incorporated herein by reference. (9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 000-21463) and incorporated herein by reference. (10) Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 000-21463) filed with the Securities and Exchange Commission on August 30, 2000 and incorporated herein by reference. (11) Filed as an exhibit to the Company's Registration Statement on Form S-4 (File No. 333-103167) filed with the Securities and Exchange Commission on February 13, 2003 and incorporated herein by reference. (12) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 000-21463) and incorporated herein by reference. 34 (13) Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 000-21463) filed with the Securities and Exchange Commission on July 31, 2001 and incorporated herein by reference. (14) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (File No. 000-21463) and incorporated herein by reference. (15) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (File No. 000-21463) and incorporated herein by reference. (b) Reports on Form 8-K. No reports on Form 8-K were filed in the fourth quarter of 2002. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MURDOCK COMMUNICATIONS CORPORATION By /s/Eugene Davis --------------------------------- Eugene Davis Chief Executive Officer Date: April 15, 2003 POWER OF ATTORNEY Each person whose signature appears below hereby appoints Wayne Wright, his true and lawful attorney-in-fact, with power to act with or without the other and with full power of substitution and resubstitution, in any and all capacities, to sign any or all amendments to the Form 10-K and file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Eugene Davis ------------------- Director and Chief Executive April 15, 2003 Eugene Davis Officer (Principal Executive Officer) /s/ Guy O. Murdock ------------------- Director April 15, 2003 Guy O. Murdock /s/ Wayne Wright ------------------- Director and Principal Accounting April 15, 2003 Wayne Wright Officer (Principal Financial and Accounting Officer) 36 CERTIFICATIONS I, Eugene I. Davis, Chief Executive Officer of Murdock Communications Corporation, certify that: 1. I have reviewed this annual report on Form 10-K of Murdock Communications Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 37 (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 15, 2003 /s/ Eugene I. Davis ------------------------------- Eugene I. Davis Chief Executive Officer (Principal Executive Officer) 38 I, Wayne Wright, Principal Accounting Officer of Murdock Communications Corporation, certify that: 1. I have reviewed this annual report on Form 10-K of Murdock Communications Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 39 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 15, 2003 /s/ Wayne Wright ------------------------------- Wayne Wright Principal Accounting Officer (Principal Financial Officer) 40 MURDOCK COMMUNICATIONS CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE ------------------------------------------------------------- PAGE ---- INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . . . . F-2 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations . . . . . . . . . . . . . . F-4 Consolidated Statements of Shareholders' Equity (Deficiency) . . F-6 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . F-8 Notes to Consolidated Financial Statements . . . . . . . . . . . F-11 SCHEDULE - Valuation and Qualifying Accounts . . . . . . . . . . . F-31 F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Murdock Communications Corporation Cedar Rapids, Iowa We have audited the accompanying consolidated balance sheets of Murdock Communications Corporation and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity (deficiency) and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Murdock Communications Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's recurring losses, negative working capital, and shareholders' deficiency raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ DELOITTE & TOUCHE LLP Cedar Rapids, Iowa March 7, 2003 F-2

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F-9 MURDOCK COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (CONCLUDED) ---------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF 2002 NONCASH INVESTING AND FINANCING ACTIVITIES: The Company issued 40,000 shares of common stock in exchange for the extinguishment of an accrued expense. SUPPLEMENTAL DISCLOSURES OF 2001 NONCASH INVESTING AND FINANCING ACTIVITIES: In connection with the sale of the Priority International Communications, Inc. subsidiary, the Company received a note receivable for $96,000 and assigned it to MCC Investment Company, LLC to repay outstanding debt and accrued interest. During the year the Company issued 179,600 common stock warrants and recorded a $45,000 increase to common stock warrants and deferred financing costs which costs were recorded as interest expense due to the past due status of the underlying debt. SUPPLEMENTAL DISCLOSURES OF 2000 NONCASH INVESTING AND FINANCING ACTIVITIES: The Company recorded an increase to the carrying value of the Company's 8% Series A Convertible Preferred Stock and a charge to accumulated deficit of $23,000 representing the current period accretion to its conversion price of $1,891,000. These shares were converted into 1,683,880 shares of common stock. During the year, common stock warrants were exercised by individuals, increasing common stock by $35,000 (18,941 shares) in a cashless exercise through the exchange of debt. The Company issued stock dividends of $102,000 representing 236,129 shares of common stock recorded as an increase to common stock and an increase in accumulated deficit. The Company recorded $94,000 representing treasury stock received in the cashless sale of the Incomex subsidiary, representing 250,000 shares of common stock, and the net assets of the Company decreased by $1,648,000 related to the sale. During the year the Company issued 5,199,121 common stock warrants and recorded a $472,000 increase to common stock warrants and deferred financing costs. The Company transferred 1,063,584 shares of Actel Integrated Communications, Inc. Preferred Stock, reducing the cost basis of the investment by $729,910, and $4,600,000 of new notes payable were issued in connection with the transaction in exchange for the cancellation of approximately $9,200,000 of outstanding indebtedness related to the Debt Refinancing Plan. In December of 2000, the Company cancelled warrants with a recorded value of $99,000. See notes to consolidated financial statements. F-10 MURDOCK COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 --------------------------------------------------- 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS - Murdock Communications Corporation (individually, or collectively with its wholly-owned subsidiaries discussed below, referred to herein as the "Company") had been engaged in recent years in the business of providing operator services and call processing to North American payphones, hotels and institutions, database profit management services and telecommunications billing and collection services for the hospitality industry and outsourced operator services for the telecommunications industry. The Company operated its business under three business units prior to the sales discussed below. At December 31, 2002 and 2001 the Company had no operating activities and no reportable segments. The Company continues to exist as a public shell for use as a reverse merger vehicle. MTS - Murdock Technology Services ("MTS") was created in 1998 to meet the needs of the hospitality telecommunications management market by providing database profit management services and other value added telecommunication services. The division's main product, the MCC Telemanager (TM), was a proprietary software and hardware product, created to help manage telecommunication installations and services in the hospitality market. In February 2000, the Company entered into a Rental Agreement with Telemanager.net providing for the lease of MCC Telemanager (TM) technology by Telemanager.net in exchange for monthly rental payments to the Company. On December 20, 2000, the Company sold all the primary assets which were subject to the Rental Agreement to Telemanager.net. Telemanger.net is owned by former executives of the Company. Incomex - On February 13, 1998, the Company purchased Incomex, Inc. ("Incomex"), the Company's second business unit. Incomex was primarily engaged in the business of providing billing and collection services to the hospitality industry from Mexico to the United States. The Company sold 100% of the stock of Incomex to three of the former shareholders of Incomex with an effective closing date of June 30, 2000 (see Note 3). PIC - On October 31, 1997, the Company purchased Priority International Communications, Inc. ("PIC"). PIC was primarily engaged in the business of providing long-distance telecommunications services to patrons of hotels, public and private payphone owners and aggregators of operator service traffic with which PIC had contracts to provide such services. Services included, but were not limited to, credit card billing services, live operator services, automated collection and messaging delivery services, voice mail services and telecommunications consulting. Also, on October 31, 1997, the Company purchased PIC Resources Corp. ("PIC-R"). PIC-R, operating through its wholly-owned subsidiary ATN Communications, Incorporated ("ATN") was merged into PIC in January 1999. ATN was primarily engaged in the business of providing carrier services for long-distance telecommunications companies throughout the United States. ATN handled incoming operator assisted calls with their operators on location. Unless otherwise indicated, references in this report to "PIC" include the historical operations of ATN. Effective July 31, 2001 the Company sold 100% of the stock of PIC to a third party who is related to a director, executive officer and shareholder of the Company (see Note 3). F-11 BASIS OF 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 $45.8 million and current liabilities exceed current assets by $22.5 million at December 31, 2002. The Company also is past due in the payment of approximately $14.6 million in principal and accrued interest payable. If the creditors who hold the past due debt seek to enforce their payment rights, the Company would not be able to repay the debt. These factors, among others, indicate that the Company may be unable to continue as a going concern for a reasonable period of time. Management's plans are discussed below. 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 Polar Molecular Corporation ("Polar"). If the Company is unsuccessful in this strategy, the Company may not be able to continue operating as a going concern. - The Company has an agreement with Polar 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 (see Note 2). The merger is subject to a number of significant closing conditions, including, among others, approval by the shareholders of the parties, that shareholders owning no more than 1,000 shares of the Company's or Polar's common stock shall have exercised dissenters' or appraisal rights with respect to the merger, the conversion of substantially all of the Company's indebtedness into equity, and completion of the merger by May 15, 2003. If the merger is not completed for any reason, the Company will continue to be subject to a significant amount of past due debt and other liabilities, including the costs related to the proposed merger, without any source of operating cash flow to satisfy its liabilities. The Company also would not be able to continue to borrow from Polar, which has been the Company's principal source of cash since the beginning of 2002. The Company can make no assurance that it would be able to identify another merger transaction if the merger is not completed, and in such event, the Company would not be able to continue as a going concern. - The Company retains an investment banker, Berthel Fisher & Company Financial Services, Inc. ("Berthel"), to assist the Company regarding the identification and investigation of strategic alternatives available to the Company. Berthel, including entities related to Berthel, is a significant shareholder of the Company. DISCONTINUED OPERATIONS - The accompanying statements of operations have been reclassified for the dispositions of the Incomex subsidiary (see Note 3) and the PIC subsidiary (see Note 3) so that the results for each 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. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements included the accounts of the Company and the accounts of its wholly-owned subsidiaries, PIC and Incomex (prior to their sale). Significant intercompany accounts and transactions have been eliminated in consolidation. F-12 USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. REVENUE RECOGNITION - Revenue was recognized as calls were placed and processed. Revenue recognized on the sale of hardware occurred at the time of delivery and revenues for other services was recognized at the time the services were rendered. FURNITURE AND EQUIPMENT - Furniture and equipment were stated at cost. For financial reporting purposes, depreciation and amortization were computed on these assets using the straight-line method over their estimated useful lives of five years. For income tax purposes, accelerated methods were used. Furniture and equipment were fully depreciated and written off in 2001. INTANGIBLE ASSETS - Intangible assets relate to deferred financing and lease and loan restructuring costs. Financing and lease and loan restructuring costs incurred were deferred and were amortized over the new or restructured lease and loan agreement terms using the effective interest method. All amounts were fully amortized at December 31, 2001. IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviewed long-lived assets for impairment whenever events or changes in circumstances indicated the carrying amount of these assets may not be recoverable. See Note 3 for impairments recorded in 2000. INVESTMENTS - The Company owned convertible preferred stock of Actel Integrated Communications, Inc. ("Actel") which was not readily marketable. This investment was accounted for at cost. This investment experienced a decline in value that was other than temporary in 2000 due to Actel filing for bankruptcy in April 2001. The Company recorded an impairment loss of $1.6 million in 2000 which was equal to the stock's cost basis at December 31, 2000. INCOME TAXES - Deferred income taxes are provided for the tax consequences in future years of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts, based on enacted tax laws and tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable for the year and the change during the period in deferred tax assets and liabilities. ACCRETION ON PREFERRED STOCK - Up to September 30, 2000, the date of conversion, the Company accreted the carrying value of the 8% Series A Convertible Preferred Stock (net of offering costs incurred) to the conversion price by the effective interest method. CUMULATIVE DIVIDENDS ON PREFERRED STOCK - Up to September 30, 2000, the date of conversion, cumulative dividends on the Company's 8% Series A Convertible Preferred Stock were recorded as a charge to accumulated deficit as the dividends were earned by the holders and an accrued liability was recorded. STOCK-BASED COMPENSATION - At December 31, 2002 the Company has two stock-based employee compensation plans which are more fully described in Note 8. As permitted by Statement of Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company measures compensation using the intrinsic value based method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but is required to make pro forma disclosures in the footnotes to the financial statements as if the measurement provisions of SFAS 123 and SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure - an Amendment of SFAS 123" had been adopted. Under the intrinsic value method, compensation is measured as the difference between the market value of the stock on the grant date, less the amount required to be paid for the stock. The difference, if any, is charged to expense over the vesting period of the options. No compensation expense was F-13 recorded in connection with the grant of options for the years ended December 31, 2002, 2001 and 2000, respectively, as all options granted under the plans had an exercise price greater than or equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.

The weighted average fair values at date of grant for options granted during 2000 were estimated to be $45,000. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: ten year expected life; stock volatility of 221% in 2000; risk-free interest rate of 5.2% in 2000; and no dividends during the expected term. No options were granted during 2002 or 2001 and the pro forma amounts reflect options vesting during the year. NET LOSS PER COMMON SHARE - Basic net loss per common share has been computed using the weighted average number of shares of common stock outstanding during the year. The warrants outstanding are anti-dilutive and are, therefore, excluded from the computation of loss per share. In the future, the warrants may become dilutive. Potential common shares excluded from the per share computation because they were antidilutive are as follows:

The exercise prices on all outstanding options and warrants exceed the market price of the Company's common stock at December 31, 2002, 2001 and 2000, except as noted above. RECLASSIFICATIONS - Certain amounts in the 2001 and 2000 consolidated financial statements have been reclassified to conform with the 2002 presentation. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS - In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Accounting Standard No. 145 ("SFAS 145"), Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement, among other things, significantly limits the situations whereby the extinguishment of debt is treated as an extraordinary item in the statement of operations. This statement requires reclassification of all prior period extraordinary items related to debt extinguishments. The provisions of this statement are effective for fiscal years beginning after May 15, 2002. F-14 2. PROPOSED MERGER WITH POLAR On December 19, 2001 the Company and Polar entered into an Agreement and Plan of Merger (as amended, the "Agreement"). Under the terms of the Agreement, the outstanding shares of Polar's common stock will be converted into the number of shares of the Company's no par value common stock (the "Common Stock") equal to 80% of the outstanding shares of the Common Stock as of the effectiveness of the merger and the Company's shareholders will retain a 20% ownership. The outstanding warrants and options of the Company will remain outstanding after the completion of the merger and the outstanding warrants and options of Polar will be converted into warrants and options to purchase Common Stock based on the exchange ratio in the merger. Polar develops and markets fuel additives. Polar's primary product, DurAlt(R)FC, is a patented fuel additive that has been proven effective at reducing combustion chamber deposits and reducing octane requirement increase in combustion engines. Polar had a stockholders' deficit of $4.2 million (unaudited) at September 30, 2002 and revenues for its fiscal year ended March 31, 2002 were $162,000 (unaudited). One of the conditions to completing the merger is that the Company must cause its creditors to forgive and/or convert into equity sufficient liabilities such that the Company's liabilities, excluding loans from Polar and professional fees directly related to the merger, do not exceed its assets at the time of the merger. As of December 31, 2002, the Company's liabilities exceeded its assets by approximately $21.9 million, excluding loans from Polar and professional fees directly related to the merger. As of December 31, 2002, the Company has reached agreements with the holders of the Company's debt or other obligations in the aggregate amount of approximately $21.0 million for the satisfaction of such liabilities in exchange for approximately 4,570,000 shares of the Company's common stock and the payment by the Company of approximately $570,000 in cash. However, as of March 7, 2003 the Company is in default on the terms of one of these settlement agreements for $11.2 million requiring a cash payment of $485,000. Also see Note 16. All of the agreements are contingent on the closing of the merger and/or the cash payment. To satisfy the above mentioned closing condition, the Company must reach additional agreements with its creditors. Any conversions of liabilities to equity will dilute the outstanding common stock held by the current shareholders. The Company also must raise sufficient funds to make all of the payments that may be required under the agreements with the Company's creditors, and there can be no assurance that such funds will be available from Polar or otherwise. If the Company is not able to satisfy the net worth test, Polar will have the right to terminate the merger agreement. The Company filed an S-4 Registration Statement with the Securities and Exchange Commission in February 2003 in connection with the proposed merger. 3. DISCONTINUED OPERATIONS Effective June 30, 2000 the Company sold all the shares of Incomex to three of the former shareholders of Incomex for (a) the transfer to the Company by the purchasers of 250,000 shares of the Company's common stock originally issued by the Company pursuant to the Company's acquisition of Incomex, (b) cancellation and forgiveness of all amounts outstanding under promissory notes in the aggregate principal amount of $684,919, and related accrued interest, originally issued by the Company to the shareholders of Incomex, and (c) the cancellation of all employment compensation and employment contracts between the Company and the purchasers. The parties also executed mutual releases relating to liabilities between the Company and Incomex and claims that the Company may have against the former shareholders of Incomex. F-15 Summary operating results of the discontinued operations of Incomex are as follows for the year ended December 31, 2000 (amounts expressed in thousands):

The loss from discontinued operations includes goodwill and fixed asset impairment charges of approximately $4.3 million for 2000. 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 noninterest bearing promissory note of $96,000 payable in 24 monthly installments of $4,000. A director, executive officer and significant shareholder of the Company is related to the owner of Dartwood, LLC. Summary operating results of the discontinued operations for PIC are as follows for the years ended December 31, 2001 and 2000 (amounts expressed in thousands):

The loss from discontinued operations includes charges (credits) related to the following items for the year ended December 31, 2000 (amounts expressed in thousands):

In December 1999, ATN received notice from the Universal Service Administrative Company ("USAC") that Universal Service Fund ("USF") fees were due. A carrier of interstate/intrastate calls is required to pay a USF fee based on a percentage of total call revenue. The USF fee is applicable to all calls carried after January 1, 1997. The notice was the first time that management became aware of any liability to this agency. It was management's belief that these USF fees had been charged to the end-user and remitted to USAC by its prior billing and collection firm. The prior billing and collection firm's position was that they had collected the USF fees and remitted them to ATN. As ATN is legally responsible for USF fees, in December 1999 it recorded an estimated liability of $1.7 million. During the first two months of 2001, ATN received credit memos from USAC which reflected a balance due to USAC of $806,000. Accordingly, ATN recorded a $894,000 credit for USF fees in the fourth quarter of 2000 based on the new information from USAC. The Company reached a settlement agreement with the prior billing and collection firm on January 25, 2001, which released the firm from any claims that ATN may have related to USF fees. Any liability related to USF fees was transferred to the purchaser of PIC. F-16 4. INVESTMENTS During 1998, the Company reached an agreement to invest in Actel. Actel, based in Mobile, Alabama, was a facilities-based competitive local exchange carrier of advanced voice and data communications services to small and medium sized enterprises. As of June 21, 1999 the Company had invested $3.0 million in Actel. Effective June 21, 1999, the Company and Actel entered into an agreement to amend the terms of the original investment agreement with respect to the Company's investment in Actel. This agreement amended certain provisions of the investment agreement including limiting the Company's investment in Actel to $3.0 million. During the third quarter of 1999, the $3.0 million investment was converted into 4,371,428 shares of Actel's Series A Convertible Preferred Stock as allowed by the investment agreement. Each share of Series A Convertible Preferred Stock accrued a cumulative 10% dividend per annum through March 10, 2002 and was convertible into 3 shares of Actel's common stock at any time at the option of the Company, subject to certain restrictions. The share and conversion information have been retroactively restated for a stock split of the Series A Convertible Preferred Stock and common stock by Actel during 2000. During the second quarter of 2000, the Company undertook a Debt Restructuring Plan which resulted in the Company selling or exchanging 2,213,198 shares of Actel Series A Convertible Preferred Stock in private placements. Following these transactions, the Company held 2,158,230 shares of Actel Series A Convertible Preferred Stock. During late 2000, Actel began experiencing cash flow difficulties and on April 11, 2001, Actel filed for bankruptcy protection under Chapter 11. On September 14, 2001 the bankruptcy proceeding was converted to Chapter 7. The Company recorded an impairment charge of approximately $1.6 million in 2000, due to the uncertainty of ultimate recovery of the investment. During 1998, the Company reached an initial lending/investment agreement with AcNet S.A. de C.V. of Mexico ("AcNet Mexico"). The initial agreement was revised in June 1999, whereby the Company entered into two agreements providing the Company with separate options to acquire (i) Intercarrier Transport Corporation ("ITC"), the holder of approximately 99% of the outstanding shares of AcNet Mexico, and (ii) AcNet USA, Inc. ("AcNet USA"), an affiliate of AcNet Mexico, for an aggregate of 2,325,000 shares of the Company's common stock, $200,000 in closing costs and an additional $550,000 to pay off certain debt and accounts payable. The option with ITC expired on August 31, 2001 and the option with AcNet USA expired on December 31, 1999. As of December 31, 2000, the Company had loaned $3.7 million to the AcNet entities, recorded $264,000 of interest and incurred $729,000 of costs either related to the acquisition or paid on behalf of the AcNet entities. In light of the Company's liquidity issues and other issues involving the AcNet entities, the Company did not pursue the options to acquire the AcNet entities. As a result and due to cash flow difficulties being experienced by the AcNet entities, the Company recorded asset write-downs of $3,703,000 in 1999 and $990,000 in the second quarter of 2000 due to the write-off of costs associated with the proposed acquisition and the uncertainty of ultimate recovery of the investment. The Company commenced legal action against the AcNet entities in April 2000 to collect its advances and interest. On March 29, 2001, AcNet USA filed for bankruptcy protection and the Company has been informed that AcNet Mexico is in receivership. On May 31, 2001, the AcNet entities filed a motion with the Iowa state court seeking permission to untimely file a counter-claim against the Company, and asked for damages against the Company of approximately $20 million plus punitive damages. The AcNet entities alleged the Company breached an oral agreement, committed fraudulent misrepresentation, and the AcNet entities also filed counts for common counts, action for account stated, and negligent misrepresentation. On September 6, 2001, the Company entered into a Compromise Settlement Agreement and Full and Final Release with the AcNet entities. Under the terms of the Agreement, the AcNet entities paid a nominal consideration to the Company and both parties exchanged releases on all claims against the other party. F-17 5. NOTES PAYABLE Notes payable as of December 31, 2002 and 2001, consisted of the following:

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F-19 On June 17, 1999, the Company completed a bridge financing in the amount of $2.0 million with New Valley Corporation ("New Valley"). Pursuant to the bridge financing, the Company issued a note in the principal amount of $2.0 million (the "Note"). This principal and all unpaid accrued interest at 12% per annum were due July 21, 1999. The Company was past due on this note effective July 21, 1999. Warrants to purchase 250,000 shares of the Company's common stock were issued in connection with the Note at an exercise price of $3.50 per share and may be exercised at anytime through June 21, 2009. Because the Company did not repay the Note on or prior to September 21, 1999, the warrants may be exercised to purchase a total of 500,000 shares of the Company's common stock. On December 17, 1999, the Company amended the terms of the agreement with New Valley. The amendment reset the interest rate to 12% since inception (14% upon default) and the note was due in 5 monthly payments of $200,000 beginning January 17, 2000 with a final payment of $1.0 million on June 17, 2000. Waivers of any prior violations were included as part of the amendment. The Note was convertible into shares of common stock of the Company at the option of New Valley at any time up to the maturity date. The number of shares in the conversion was to be obtained by dividing the principal amount of the Note converted by the conversion price of $3.00. The January, February and March 2000 payments under the Note were paid on behalf of the Company by MCCIC, a company owned by Berthel and another significant shareholder of the Company. On April 6, 2000, the entire interest of New Valley in this loan was purchased by MCCIC. The terms of the note and warrant purchase agreement with MCCIC, bearing interest at 12%, was amended on June 22, 2000 with payment of all remaining principal and interest due on June 21, 2001. During 2000, the Company also entered into a Revolving Promissory Note with MCCIC, bearing interest at 12% with payment of all remaining principal and all accrued interest due on June 21, 2001. The Company reached a Compromise Settlement Agreement and Mutual Release with the FDIC on October 19, 2000 to pay $300,000 in settlement of two notes payable with a financial institution with combined principal of $900,000. As a result, the Company recorded a $722,000 extraordinary gain on extinguishment of debt, including interest, in the fourth quarter of 2000 when the settlement was paid. 6. DEBT RESTRUCTURING PLAN During the second quarter of 2000, the Company undertook a plan ("the Debt Restructuring Plan") designed to restructure a significant portion of the Company's principal amount of debt and accrued interest under the Company's past due debt. In connection with the Debt Restructuring Plan, the Company recorded a pre-tax gain of approximately $7.0 million as a result of the sale of shares of Actel's Series A Convertible Preferred Stock for cash and cancellation of debt as discussed below. The Debt Restructuring Plan consisted of (i) a private offering (the "Actel Share Offering") by the Company of shares of Series A Convertible Preferred Stock (the "Actel Shares") of Actel for cash, and (ii) a private offering (the "Unit Offering") by the Company to certain holders of outstanding indebtedness of the Company of units consisting of Actel Shares and convertible notes of the Company (the "Convertible Notes"). During the second quarter of 2000, the Company sold 1,149,614 Actel Shares for gross proceeds of $4.9 million in the Actel Share Offering, resulting in a gain of approximately $3.7 million. Proceeds were partially used to (i) reduce a total of $2.2 million of the amounts owed to MCCIC under the Company's bridge loan originally obtained from New Valley and the Company's Revolving Promissory Note from MCCIC, (ii) reduce $1.0 million of past due notes and lease payables to Berthel, (iii) pay placement fees and other offering expenses of $444,000, and (iv) pay $479,000 to certain note holders upon conversion in the Unit Offering in partial payment of amounts owed to such note holders. The remaining proceeds were used for general working capital. F-20 During the second quarter of 2000, the Company transferred 1,063,584 Actel Shares and issued Convertible Notes in an aggregate principal amount of $4.6 million in the Unit Offering in exchange for the cancellation of outstanding indebtedness in the amount of $9.2 million, resulting in a gain of approximately $3.3 million. The Convertible Notes accrue interest at the rate of 12% annually, with principal and accrued interest due on May 29, 2003, and are convertible into shares of the Company's no par value common stock at a conversion price of $3.03 per share (330 shares for each $1,000 due under the Convertible Notes). The Convertible Notes are uncollateralized obligations of the Company. 7. COMMON STOCK WARRANTS A summary of common stock warrant activity during the years ended December 31, 2002, 2001 and 2000 is as follows:

The weighted average remaining life of the warrants was 1.9, 2.3 and 3.1 years at December 31, 2002, 2001 and 2000, respectively. F-21 Warrants outstanding and exercisable at December 31, 2002 were as follows:

On March 22, 2001, the Company extended the expiration date of 1,939,228 warrants from March 31, 2001 to March 31, 2002. On March 21, 2002 these warrants were extended to March 31, 2003. Subsequently, on March 5, 2003 these warrants were extended to March 31, 2004. 8. STOCK OPTION PLANS The Company adopted the 1993 Stock Option Plan (the "1993 Plan") whereby options may be granted to employees to purchase up to an aggregate of 272,529 shares of the Company's common stock. The 1993 Plan is administered by the Board of Directors, which determines to whom options will be granted. The 1993 Plan provides for the grant of incentive stock options (as defined in Section 422 of the Internal Revenue Code) to employees of the Company. The exercise price of stock options granted under the 1993 Plan is established by the Compensation Committee or the Board of Directors, but the exercise price may not be less than the fair market value of the common stock on the date of grant of each option. Each option shall be for a term not to exceed ten years after the date of grant, and a participant's right to exercise an option vests at the rate of twenty percent on the date of grant and each anniversary date until the option is fully vested. F-22 A summary of stock option activity under the 1993 Plan during the years ended December 31, 2002, 2001 and 2000, is summarized as follows:

At December 31, 2002, 253,029 shares were available for future grants. The Company has reserved 253,029 shares of common stock in connection with the 1993 Plan. The Company has adopted the 1997 Stock Option Plan (the "1997 Stock Option Plan"). During 1998, the Company amended the 1997 Stock Option Plan to increase the number of shares authorized to 1,727,471. The 1997 Stock Option Plan is also administered by the Compensation Committee or the Board of Directors which determines to whom the options will be granted. The 1997 Stock Option Plan provides for the grant of incentive stock options (as defined in Section 422 of the Internal Revenue Code) or nonqualified stock options to executives or other key employees of the Company. The exercise price of the stock options granted under the 1997 Stock Option Plan is established by the Compensation Committee or the Board of Directors, but the exercise price may not be less than the fair market value of the common stock on the date of the grant of each option for incentive stock options. Each option shall be for a term not to exceed ten years after the date of grant for non-employee directors and five years for certain shareholders. Options cannot be exercised until the vesting period, if any, specified by the Compensation Committee or the Board of Directors has expired. F-23 A summary of stock option activity under the 1997 Stock Option Plan for the years ended December 31, 2002, 2001 and 2000, is as follows:

At December 31, 2002, 1,707,471 shares were available for future grants and the remaining life of the options outstanding was eight years. The Company has reserved 1,727,471 shares of common stock in connection with the 1997 Stock Option Plan. 9. INCOME TAXES The provision for (benefit from) income taxes consisted of the following for the years ended December 31, 2002, 2001 and 2000 (dollars in thousands): 2002 2001 2000 Continuing operations - Current, state $ - $ - $ (9) ======== ======== =========== F-24 The provision for (benefit from) income taxes from continuing operations for the years ended December 31, 2002, 2001 and 2000 is less than the amounts computed by applying the statutory federal income tax rate of 35% to the income (loss) before income taxes from continuing operations due to the following items (dollars in thousands):

At December 31, 2002 the Company has net operating loss carryforwards for federal income tax purposes of approximately $40 million to use to offset future taxable income. These net operating losses will expire between 2008 and 2022. Certain restrictions under the Tax Reform Act of 1986, caused by a change in ownership resulting from sales of common stock, limit the annual utilization of net operating loss carryforwards. The initial public offering of the Company's common stock during 1996 resulted in such a change in ownership. The Company estimates that the post-change taxable income that may be offset with the pre-change net operating loss carryforward of approximately $4.5 million will be limited annually to approximately $600,000. Significant components of the Company's deferred tax assets and liabilities as of December 31, 2002 and 2001 are as follows (dollars in thousands):

A valuation allowance for the entire balance of deferred tax assets has been recorded because management believes it is more likely than not that such assets will not be realized due to the Company's history of operating losses. F-25 10. COMMITMENTS AND CONTINGENCIES At December 31, 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. Rent expense under operating leases for the years ended December 31, 2002, 2001 and 2000 was $6,000, $20,000 and $95,000, respectively. The Company guaranteed a facility lease between Actel and a third party. The lease expires in June 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 which was subsequently converted to Chapter 7. The Company has not received any notification from the bankruptcy trustee or the third party regarding the guarantee during 2001 or 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 notified the Company on May 10, 2000, that the discrepancies total $770,000. Also, in July 2001, the Company was notified that Peoples Bank had obtained a judgment 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. On November 23, 2001 three individuals, one of which was a former officer and director of the Company, filed suit against the Company, several former officers and directors of the Company and several related parties. These lawsuits allege that the named individuals and entities devised a scheme to defraud the three plaintiffs 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 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 plaintiffs was a former director of the Company, that the D&O policy will not provide coverage for the claims by that plaintiff. The Company believes that its D&O policy will provide coverage, up to the policy limit, in this lawsuit related to the other two plaintiffs. In November 2002, the Company entered into a settlement agreement providing for the issuance by the Company of 517,000 shares of the Company's common stock to the three plaintiffs and one other individual who did not file suit. The effectiveness of the settlement is contingent on the closing of the proposed merger with Polar. No loss, if any, has been recorded in the consolidated financial statements with respect to these matters. As of December 31, 2002 the Company had been notified by several state taxing authorities that approximately $46,000 of past due taxes and penalties is allegedly owed. Some of the states have assigned the alleged amounts due to collection agencies or filed tax warrants. Management believes that it has meritorious defenses against these amounts. No assurance can be given that the Company's defenses are valid or that the Company will not be liable for any part of these amounts. No loss, if any, has been recorded in the consolidated financial statements with respect to these matters. As of December 31, 2002 the Company had been notified by several vendors that approximately $45,600 is owed. Management believes that it has meritorious defenses against these amounts. No loss, if any, has been recorded in the consolidated financial statements with respect to these matters. F-26 The Company has divested certain of its businesses during 2001 and 2000. 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. On November 16, 1998 the Company entered into an Employment Agreement with Paul C. Tunink, Chief Financial Officer. The Employment Agreement had a term through November 30, 1999 and renewed automatically from year to year thereafter, unless terminated by either party, and provided for a base salary of not less than $128,000. The Employment Agreement contained a provision restricting competition with the Company for a period of one year following termination of employment. Mr. Tunink's Employment Agreement provided that if his employment was terminated by the Company for any reason other than cause, Mr. Tunink would be entitled to receive severance at an annual rate of $128,000 for one year and continuation of health insurance coverage for one year. During the fourth quarter of 2001, Mr. Tunink's employment was terminated in an effort to control costs. As of December 31, 2001, the Company recorded a payable of approximately $146,000 related to this severance agreement. 11. RELATED PARTY TRANSACTIONS The Company conducts a significant amount of business with Berthel and other affiliated entities. Berthel provided lease and other financing services, including investment banking, to the Company. Other affiliated entities provided financing, consulting and miscellaneous services to the Company. See Note 5 for the disclosure of the various related party financing agreements. 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. The creditors committee agreed to forbear from taking actions to collect past due debt owed by the Company in the absence of the unanimous approval of the creditors committee. As of December 31, 2002, the Company and Berthel are the only parties to the Standstill Agreement and Berthel is the only member of the creditors committee. In January 2000, the Company retained Berthel to assist the Company regarding the identification and investigation of strategic alternatives that might be available to the Company. Various fees were paid to Berthel under the Placement Agreement including a monthly retainer and placement fees. The Company paid Berthel total fees of $536,000 during 2000. This agreement was revised on July 1, 2001 for a period of 12 months with annual renewal options. The agreement allows for a monthly retainer fee of $20,000 and other success fees defined in the agreement based on the strategic event that occurs. The expenses related to the previous agreement and the revised agreement for 2002 and 2001 were $248,131 and $218,980, respectively. As of December 31, 2002 the Company owes Berthel $442,111 under both agreements. The Company has subleased office space from Berthel Fisher & Company Management Corp., an affiliate of Berthel, since October 2001 on a month-to-month basis. The expense related to this sublease agreement for 2002 and 2001 was $6,000 and $1,500, respectively. The Company owes Berthel Fisher & Company Management Corp. approximately $7,500 in rental payments as of December 31, 2002. F-27 On July 1, 1994, the Company entered into an agreement with a minority shareholder to provide telecommunication services to hotels owned and managed by Larken, Inc., a company 50% owned by the minority shareholder. Revenues of $0, $0 and $109,000 were generated from such agreement for the years ended December 31, 2002, 2001 and 2000, respectively. The agreement provided for a fixed payment of $30,000 per month in commissions to be paid to the minority shareholder. This agreement was terminated in June 2000. In January 2000, the Company entered into a letter agreement with Pirinate Consulting Group, LLC ("Pirinate"), an entity controlled by Eugene I. Davis, for the personal services of Mr. Davis as the Company's Interim Chairman of the Board and Interim Chief Executive Officer. Pirinate received $15,000 a month plus out-of-pocket expenses for these services. In May 2000 Mr. Davis became the Chairman of the Board and Chief Executive Officer of the Company. Mr. Davis resigned on October 9, 2001 as Chief Executive Officer and remained on the Board of Directors. The Company entered into an agreement dated August 1, 2002, as amended, with Pirinate, whereby Pirinate agreed to provide the services of Eugene I. Davis to serve as Chairman of the Board and Chief Executive Officer effective August 1, 2002. Under the agreement, the Company issued 40,000 shares of the Company's common stock to Pirinate in satisfaction of unpaid fees for Mr. Davis' past services and the Company agreed to pay Pirinate $3,000 per month during the term of Mr. Davis' services. The Company also agreed to contingent compensation of 4,000 shares of the Company's common stock per month, contingent upon the closing of the proposed merger with Polar. On December 24, 2000, the Company signed a consulting services letter agreement with Prentice Services LTD ("Prentice"), an entity controlled by Wayne Wright, a member of the Company's Board of Directors and a significant shareholder. The agreement provided that Mr. Wright would serve as President of PIC and would provide consulting services to PIC, as directed by the Company's Chief Executive Officer. Prentice received $15,000 a month, plus out-of-pocket expenses, for these services. Also, at the sole discretion of the Company's Board of Directors, Prentice would receive additional success fees and bonuses. The Company paid $105,000 and $15,000 under this agreement in 2001 and 2000, respectively. During 2002, Mr. Wright served as the Company's Interim Principal Accounting Officer and received compensation of $4,000 per month. A summary of transactions with related parties for the years ended December 31, 2002, 2001 and 2000 is as follows (dollars in thousands):

Certain parties were considered related parties in 2000 but not in 2001 or 2002 due to the disposition of assets. F-28 12. PROFIT SHARING PLAN The Company had a profit sharing plan under Section 401(k) of the Internal Revenue Code. Employees were eligible to participate in the plan after completing three months of service. There were no contributions required and no discretionary contributions made to the plan for the year ended December 31, 2000. Effective November 15, 2000, the Company terminated the plan due to low participation and high administrative expenses. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value amounts disclosed below are based on estimates prepared by the Company utilizing valuation methods appropriate in the circumstances. The carrying amount for financial instruments included among cash, receivables, notes payable, and other short-term payables approximates their fair value because of the short maturity of those instruments. The estimated fair value of other significant financial instruments are based principally on discounted future cash flows at rates commensurate with the credit and interest rate risk involved and the timing of when the instruments were entered into. The estimated fair values of the Company's other significant financial instruments at December 31, 2002 and 2001 are as follows (dollars in thousands):

14. SUBSEQUENT EVENT During the period from January 1, 2003 through March 7, 2003, the Company borrowed $44,753 from Polar. The notes are payable on January 16, 2004 and February 4, 2004 and bear interest at 10%. F-29 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 2002 and 2001 (dollars in thousands except per share data). These quarterly results have been reclassified from those previously reported in form 10-Q's filed with the Securities and Exchange Commission to reflect the results of operations for PIC, that was sold effective July 31, 2001, as discontinued operations for all periods presented.

The third quarter of 2001 includes a $1,314,000 gain on the sale of PIC in net income. The fourth quarter of 2001 includes a $146,000 severance accrual in loss from continuing operations (see Note 10). Per share information is calculated for each quarterly and annual period using average outstanding shares for the period. Therefore, the sum of the quarterly per share amounts will not necessarily equal the annual per share amounts presented. 16. SUBSEQUENT EVENT (UNAUDITED) On March 31, 2003, a settlement agreement that the Company had entered into with a financial institution in which the financial institution agreed to accept payment of $100,000 in cash and 475,000 shares of the Company's common stock in full satisfaction of all principal and interest due of approximately $964,000 as of December 31, 2002, expired. * * * * * F-30

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MURDOCK COMMUNICATIONS CORP 10-K