SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-16730
MEDIA SERVICES GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 88-0085608
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
333 Seventh Avenue, 20th Floor
New York, New York 10001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 362-2012
MKTG Services, Inc.
--------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
State number of shares outstanding of each of the issuer's classes of common
equity as of the latest practical date:
As of February 10, 2003 there were 1,092,367 shares of the Issuer's Common
Stock, par value $.01 per share outstanding.
1
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
DECEMBER 31, 2003
Page
----
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of December 31,
2003 (unaudited) and June 30, 2003 3
Condensed Consolidated Statements of Operations for the
three and six months ended December 31, 2003 and 2002
(unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
six months ended December 31, 2003 and 2002 (unaudited) 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6-9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
Item 3 Quantitative and Qualitative Disclosure About Market Risk 16
Item 4 Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 18
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2003 June 30, 2003
----------------- --------------
(unaudited) (1)
ASSETS
Current assets:
Cash and cash equivalents $ 576,428 $ 1,216,642
Accounts receivable, net of allowance
for doubtful accounts of $25,000 and
$120,000, respectively 1,316,613 1,816,546
Other current assets 386,804 475,164
------------- -------------
Total current assets 2,279,845 3,508,352
Goodwill, net 2,277,220 2,277,220
Intangible assets, net 10,000 20,000
Property and equipment, net 677,846 747,530
Related party note receivable 1,085,020 1,050,309
Other assets 37,238 44,109
------------- -------------
Total assets $ 6,367,169 $ 7,647,520
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowing $ 331,414 $ 261,385
Accounts payable-trade 360,077 456,266
Accrued expenses and other current liabilities 873,063 1,877,069
Current portion of long-term obligations 50,969 201,062
------------- -------------
Total current liabilities 1,615,523 2,795,782
Other liabilities 1,161,802 1,463,132
------------- -------------
Total liabilities 2,777,325 4,258,914
------------- -------------
Minority interest in preferred stock of discontinued subsidiary -- 280,946
Stockholders' equity:
Common stock - $.01 par value; 9,375,000 shares authorized; 1,101,198 shares
issued and 1,092,367 shares outstanding as
of December 31, 2003 and June 30, 2003 11,011 11,011
Additional paid-in-capital 220,539,182 220,258,236
Accumulated deficit (215,566,639) (215,767,877)
Less: 8,831 shares of common stock in treasury, at cost (1,393,710) (1,393,710)
------------- -------------
Total stockholders' equity 3,589,844 3,107,660
------------- -------------
Total liabilities and stockholders' equity $ 6,367,169 $ 7,647,520
============= =============
(1) Derived from the Audited Financial Statements for the year ended June 30,
2003.
See Notes to Condensed Consolidated Financial Statements.
3
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- ------------
Revenues $ 2,563,635 $ 3,159,321 $ 6,361,211 $ 7,663,406
----------- ----------- ----------- ------------
Operating costs and expenses:
Salaries and benefits 2,398,165 3,010,512 5,538,116 6,920,284
Direct costs 161,521 134,150 330,009 361,588
Selling, general and administrative 645,226 502,291 1,009,236 921,936
Depreciation and amortization 56,180 56,180 112,360 112,018
Gain on termination of lease -- (3,905,387) -- (3,905,387)
----------- ----------- ----------- ------------
Total operating costs and expenses 3,261,092 (202,254) 6,989,721 4,410,439
----------- ----------- ----------- ------------
Income (loss) from operations (697,457) 3,361,575 (628,510) 3,252,967
Settlement of lawsuit -- -- -- 965,486
Interest income (expense) and other, net 11,018 10,737 (12,358) (17,352)
----------- ----------- ----------- ------------
Income (loss) from continuing operations before
provision for income taxes (686,439) 3,372,312 (640,868) 4,201,101
Provision for income taxes (3,000) (20,100) (6,000) (30,879)
----------- ----------- ----------- ------------
Income (loss) from continuing operations (689,439) 3,352,212 (646,868) 4,170,222
Discontinued operations:
Gain (loss) from discontinued operations 760,860 (599,699) 848,106 (1,260,003)
(Loss) gain from disposal of discontinued
operations -- (116,635) -- (116,635)
----------- ----------- ----------- ------------
Gain (loss) from discontinued operations 760,860 (716,334) 848,106 (1,376,638)
----------- ----------- ----------- ------------
Cumulative effect of change in accounting principle -- -- -- (5,075,000)
----------- ----------- ----------- ------------
Net income (loss) 71,421 2,635,878 201,238 (2,281,416)
Gain on redemption of preferred stock of
discontinued subsidiary 280,946 -- 280,946 --
------------ ---------- ----------- -----------
Net income (loss) attributable to
common shareholders $ 352,367 $ 2,635,878 $ 482,184 $ (2,281,416)
=========== =========== ============ =============
Basic earnings (loss) per share
Continuing operations $ (0.63) $ 3.72 $ (0.59) $ 4.81
Discontinued operations 0.95 (.80) 1.03 (1.59)
Cumulative effect of change in accounting
principle -- -- -- (5.85)
----------- ----------- ----------- ------------
Basic earnings (loss) per share $ 0.32 $ 2.92 $ 0.44 $ (2.63)
=========== =========== =========== ============
Weighted average common shares outstanding 1,092,367 901,987 1,092,367 866,644
=========== =========== =========== ============
Diluted earnings (loss) per share:
Continuing operations $ (0.53) $ 1.27 $ ( 0.50) $ 1.58
Discontinued operations 0.80 (.27) 0.88 (.52)
Cumulative effect of change in accounting
principle -- -- -- (1.92)
----------- ----------- ----------- ------------
Diluted earnings (loss) per share $ 0.27 $ 1.00 $ 0.38 $ (.86)
=========== =========== =========== ============
Weighted average common shares outstanding 1,300,827 2,637,343 1,289,269 2,637,028
=========== =========== =========== ============
See Notes to Condensed Consolidated Financial Statements.
4
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(unaudited)
2003 2002
----------- ------------
Operating activities:
Net income (loss) $ 201,238 $ (2,281,416)
(Gain)loss from discontinued operations (848,106) 1,376,638
Cumulative effect of change in accounting principle -- 5,075,000
----------- ------------
Income (loss) from continuing operations (646,868) 4,170,222
Adjustments to reconcile loss to net cash used in
operating activities:
Gain on termination of lease -- (3,905,387)
Depreciation 102,360 102,018
Amortization 10,000 10,000
Bad debt expense 12,000 --
Accrued interest on related party
note receivable (34,711) --
Changes in assets and liabilities:
Accounts receivable 487,933 1,692,409
Other current assets 88,360 266,101
Other assets 6,871 313,289
Accounts payable - trade (96,189) (509,162)
Accrued expenses and other liabilities (457,230) (2,792,363)
----------- ------------
Net cash used in operating activities (527,474) (652,873)
----------- ------------
Investing activities:
Proceeds from sale of discontinued operations, net of fees -- 8,546,182
Purchases of property and equipment (32,676) (16,631)
----------- ------------
Net cash provided by investing activities (32,676) 8,529,551
----------- ------------
Financing activities:
Expenditures from private placement of preferred stock -- (29,786)
Net (repayments on) proceeds from credit facilities 70,029 (2,111,983)
Repayment of related party note payable (150,093) --
Repayments of long-term debt -- (118,567)
----------- ------------
Net cash used in financing activities (80,064) (2,260,336)
----------- ------------
Net cash used in discontinued operations -- (1,383,941)
----------- ------------
Net increase in cash and cash equivalents (640,214) 4,232,401
Cash and cash equivalents at beginning of period 1,216,642 4,438,166
----------- ------------
Cash and cash equivalents at end of period $ 576,428 $ 8,670,567
=========== ============
See Notes to Condensed Consolidated Financial Statements
5
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements include
the accounts of Media Services Group, Inc. and Subsidiaries ("MSGI" or the
"Company"). These condensed consolidated financial statements are unaudited and
should be read in conjunction with the Company's Form 10-K for the year ended
June 30, 2003 and the historical consolidated financial statements and related
notes included therein. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements include all adjustments, consisting
of only normal recurring accruals, necessary to present fairly the condensed
consolidated financial position, results of operations and cash flows of the
Company. Certain information and footnote disclosure normally included in
financial statements prepared in conformity with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations. Operating results for the three and
six-month periods ended December 31, 2003 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 2004.
The Company has limited capital resources and has incurred significant
historical losses and negative cash flows from operations. The Company believes
that funds on hand, funds available from its remaining operations and its unused
lines of credit should be adequate to finance its operations and capital
expenditure requirements and enable the Company to meet interest and debt
obligations for the next twelve months. As explained in Note 5, the Company
recently sold off substantially all the assets relating to its direct list sales
and database services and website development and design business held by
certain of its wholly owned subsidiaries. In addition, the Company has
instituted cost reduction measures, including the reduction of workforce. The
Company believes, based on past performance as well as the reduced corporate
overhead, that its remaining operations should generate sufficient future cash
flow to fund operations. Failure of the remaining operation to generate such
sufficient future cash flow could have a material adverse effect on the
Company's ability to continue as a going concern and to achieve its business
objectives. The accompanying financial statements do not include any adjustments
relating to the recoverability of the carrying amount of recorded assets or the
amount of liabilities that might result should the Company be unable to continue
as a going concern.
Effective December 29, 2003, the Company changed its legal name from MKTG
Services, Inc. to Media Services Group, Inc.
2. EARNINGS PER SHARE
Common share equivalents included in weighted average shares outstanding-
diluted for the three and six months ending December 31, 2003 is as follows:
Three Six
Months Months
--------- ---------
Weighted average common shares outstanding- basic 1,092,367 1,092,367
Common stock equivalents for options and warrants 208,460 196,902
--------- ---------
Weighted average common shares outstanding- diluted 1,300,827 1,289,269
========= =========
6
3. STOCK BASED COMPENSATION
The accompanying financial position and results of operations for the Company
have been prepared in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"). Under APB No. 25, generally, no
compensation expense is recognized in the financial statements in connection
with the awarding of stock option grants to employees provided that, as of the
grant date, the number of shares and the exercise price of the award are fixed
and the fair value of the Company's stock, as of the grant date, is equal to or
less than the amount an employee must pay to acquire the stock.
The Company has elected the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). Stock based awards to
non-employees are accounted for under the provisions of SFAS 123.
Had the Company determined compensation cost based on the fair value methodology
of SFAS 123 at the grant date for its stock options, the Company's loss and
earnings per share from continuing operations would have been adjusted to the
pro forma amounts indicated below:
Three months ended December 31, Six months ended December 31,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) available to common
stockholders as reported $ 352,367 $ 2,635,878 $ 482,184 $ (2,281,416)
Stock based-compensation recorded - - - -
-------- ------------ --------- ------------
Subtotal 352,367 2,635,878 482,184 (2,281,416)
Stock-based compensation recorded under
SFAS 123 - 364,301 - 728,603
-------- ------------ --------- ------------
Pro forma net income (loss) available
to common stockholders $ 352,367 $ 2,271,577 $ 482,184 $ (3,010,019)
======== ============ ========= =============
Earnings (loss) per share:
Basic earnings (loss) per share - as reported $ 0.32 $ 2.92 $ 0.44 $ (2.63)
====== ====== ====== ========
Basic earnings (loss) per share - pro forma $ 0.32 $ 2.52 $ 0.44 $ (3.47)
====== ====== ====== ========
Diluted earnings (loss) per share - as reported $ 0.27 $ 1.00 $ 0.38 $ (0.86)
====== ====== ====== ========
Diluted earning (loss) per share - pro forma $ 0.27 $ 0.86 $ 0.38 $ (1.14)
====== ====== ====== ========
Pro forma net loss reflects only options granted in fiscal 1996 through 2003.
The Company has not granted options during the six months ended December 31,
2003 and the year ended June 30, 2003. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net loss amounts presented above because compensation cost is
reflected over the options' maximum vesting period of seven years and
compensation cost for options granted prior to July 1, 1995, has not been
considered. The fair value of each stock option is estimated on the date of
grant using the Black-Scholes option pricing model. Pro forma compensation costs
for stock options under SFAS No. 123 is recognized over the service period.
Previously recognized pro forma compensation cost is not to be reversed if a
vested employee option expires unexercised. The Company stops recognizing pro
forma compensation cost when an option expires.
7
4. DEBT
At December 31, 2003, the Company had approximately $0.3 million outstanding on
its line of credit facility. The Company had approximately $1.0 million
available on its line of credit as of December 31, 2003. As of December 31,
2003, the Company was in compliance with its line of credit covenants.
5. DISCONTINUED OPERATIONS
In December 2002, the Company completed its sale of substantially all the assets
relating to its direct list sales and database services and website development
and design business held by certain of its wholly owned subsidiaries (the
"Northeast Operations") to Automation Research, Inc. ("ARI"), a wholly owned
subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash plus
the assumption of all directly related liabilities. As such, the operations and
cash flows of the Northeast Operations have been eliminated from ongoing
operations and the Company no longer has continuing involvement in the
operations. Accordingly, the statement of operations and cash flows for the
period ended December 31, 2002 have been reclassified into a one-line
presentation and is included in loss from discontinued operations and net cash
used by discontinued operations.
During the three months ended December 31, 2003, the Company reversed reserves
of approximately $760,860 that had been accrued in connection with the lawsuits
against Wired Empire, Inc., a discontinued subsidiary. The lawsuits have been
settled (See Note 7.)
6. GOODWILL AND OTHER INTANGIBLE ASSETS
As a result of the adoption of SFAS No. 142, the Company discontinued the
amortization of goodwill effective July 1, 2002. Identifiable intangible assets
are amortized under the straight-line method over the period of expected benefit
of five years.
The Company recognized an impairment charge of approximately $5.1 million in
connection with the adoption of SFAS No. 142. The impairment charge has been
booked by the Company in accordance with SFAS 142 transition provisions as a
cumulative effect of change in accounting principle for the period ended
September 30, 2003. In connection with the sale of the Northeast Operations, the
only remaining reporting unit consists of telemarketing. The Company completed
its annual impairment test prescribed by SFAS 142 and concluded that no
impairment of goodwill existed as of July 1, 2003.
The following table sets forth the components of the intangible assets subject
to amortization as of December 31, 2003 and June 30, 2003:
December 31, 2003 June 30, 2003
------------------------------------ -------------------------------------
Gross Gross
carrying Accumulated carrying Accumulated
Useful life amount amortization Net amount amortization Net
----------- -------- ------------ ------- -------- ------------ --------
Capitalized software 5 years $100,000 $90,000 $10,000 $100,000 $80,000 $20,000
Amortization expense for the six months ended December 30, 2003 and 2002 was
$10,000, respectively.
Estimated amortization expense by fiscal year as of June 30, is as follows:
2004 $20,000
=======
8
7. CONTINGENCIES AND LITIGATION
In December 2001, an action was filed by a number of purchasers of preferred
stock of WiredEmpire, Inc., a discontinued subsidiary, in the Alabama State
Court (Circuit Court of Jefferson County, Alabama, 10 Judicial Circuit of
Alabama, Birmingham Division), against J. Jeremy Barbera, Chairman of the Board
and Chief Executive Officer of MSGI, MSGI and WiredEmpire, Inc. The plaintiffs'
complaint alleges, among other things, violation of sections 8-6-19(a)(2) and
8-6-19(c) of the Alabama Securities Act and various other provisions of Alabama
state law and common law, arising from the plaintiffs' acquisition of
WiredEmpire Preferred Series A stock in a private placement. The plaintiffs
invested approximately $1,650,000 in WiredEmpire's preferred stock and they were
seeking that amount, attorney's fees and punitive damages. On February 8, 2002,
the defendants filed a petition to remove the action to federal court on the
grounds of diversity of citizenship. In December 2003, action was settled, and
stipulations of dismissal with prejudice have been or will shortly be filed.
In December 2000, an action was filed by Red Mountain, LLP in the United States
Court for the Northern District of Alabama, Southern Division against J. Jeremy
Barbera, Chairman of the Board and Chief Executive Officer of Media Services
Group, Inc., and WiredEmpire, Inc. Red Mountains' complaint alleges, among other
things, violations of Section 12(2) of the Securities Act of 1933, Section 10(b)
of the Securities Act of 1934 and Rule 10(b)(5) promulgated thereunder, and
various provisions of Alabama state law and common law, arising from Red
Mountain's acquisition of WiredEmpire Preferred Series A stock in a private
placement. Red Mountain invested $225,000 in WiredEmpire's preferred stock and
it seeks that amount, attorney's fees and punitive damages. In December 2003,the
action was settled, and stipulations of dismissal with prejudice have been or
will shortly be filed. As a result of the settlement of the two actions, the
Company reversed reserves of approximately $760,860 that had been accrued in
connection with such lawsuits for the period ended December 31, 2003.
In 1999 a lawsuit under Section 16(b) of the Securities Exchange Act of 1934 was
commenced against General Electric Capital Corporation ("GECC") by Mark Levy,
derivatively on behalf of the Company, to recover short swing profits allegedly
obtained by GECC in connection with the purchase and sale of MSGI securities. On
April 29, 2002, the court approved the settlement for $1,250,000, net of
attorney fees plus reimbursement of mailing costs. In July 2002, the court
ruling became final and the Company received and recorded the net settlement
payment of $965,486 plus reimbursement of mailing costs. The net settlement has
been recorded as a gain from settlement of lawsuit and is included in the
statement of operations for the six months ended December 31, 2002.
8. PREFERRED STOCK
In connection with the settlement of the lawsuits (see Note 7) against Wired
Empire, Inc., a discontinued subsidiary, 32,000 of the remaining 48,000 shares
of Wired Empire preferred stock have been returned to MSGI and cancelled.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Special Note Regarding Forward-Looking Statements
- -------------------------------------------------
Some of the statements contained in this Report on Form 10-Q discuss our plans
and strategies for our business or state other forward-looking statements, as
this term is defined in the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of Media Services Group, Inc. ("MSGI" or the "Company"), or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; industry capacity; direct marketing and other industry trends;
demographic changes; competition; the loss of any significant customers; changes
in business strategy or development plans; availability and successful
integration of acquisition candidates; availability, terms and deployment of
capital; advances in technology; retention of clients not under long-term
contract; quality of management; business abilities and judgment of personnel;
availability of qualified personnel; changes in, or the failure to comply with,
government regulations; and technology, telecommunication and postal costs.
Introduction
- ------------
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity/cash flows of the Company
for the three-month and six-month periods ended December 31, 2003 and 2002. This
should be read in conjunction with the financial statements, and notes thereto,
included in this Report on Form 10-Q and the Company's financial statements and
notes thereto, included in the Company's Annual Report on Form 10-K for the year
ended June 30, 2003.
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The following is a brief description of the more
significant accounting policies and methods used by the Company.
Revenue Recognition:
Revenues derived from on-site telemarketing and telefundraising are generally
based on hourly billing rates and a mutually agreed percentage of amounts
received by the Company's client from a campaign. These services are performed
on-site at the clients' location. These revenues are earned and recognized when
the cash is received by the respective client. Revenues derived from off-site
telemarketing and telefundraising are generally based on a mutually agreed
amount per telephone contact with a potential donor without regard to amounts
raised for the client. These services are performed at the Company's calling
center. These revenues are earned and recognized when the services are
performed.
Goodwill:
Under Statement of Financial Accounting Standards ("SFAS"), No. 142, "Goodwill
and Other Intangible Assets", goodwill is no longer amortized. The Company
recognized an impairment charge of approximately $5.1 million in connection with
the adoption of SFAS No. 142. The impairment charge has been booked by the
Company in accordance with SFAS 142 transition provisions as a cumulative effect
of change in accounting principle for the period ended September 30, 2002. In
connection with the sale of the Northeast Operations, the only remaining
reporting unit consists of telemarketing. The Company completed its annual
impairment test prescribed by SFAS 142 and concluded that no impairment of
goodwill existed as of July 1, 2003.
10
Long-Lived Assets:
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company reviews for impairment of long-lived assets and
certain identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
general, the Company will recognize an impairment when the sum of undiscounted
future cash flows (without interest charges) is less than the carrying amount of
such assets. The measurement for such impairment loss is based on the fair value
of the asset.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. The most significant estimates and assumptions made in the
preparation of the consolidated financial statements relate to the carrying
amount and amortization of intangible assets, deferred tax valuation allowance,
abandoned lease reserves and the allowance for doubtful accounts. Actual results
could differ from those estimates.
Recent Accounting Pronouncements:
There were no new accounting pronouncements during the period that would have an
effect on the Company.
To facilitate an analysis of MSGI operating results, certain significant events
should be considered.
In December 2002, the Company completed its sale of substantially all the assets
relating to its direct list sales and database services and website development
and design business held by certain of its wholly owned subsidiaries (the
"Northeast Operations") to Automation Research, Inc. ("ARI"), a wholly owned
subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash plus
the assumption of all directly related liabilities. As such, the operations and
cash flows of the Northeast Operations have been eliminated from ongoing
operations and the Company no longer has continuing involvement in the
operations. Accordingly, the statement of operations and cash flows for the
period ended December 31, 2002 has been reclassified into a one-line
presentation and is included in Loss from Discontinued Operations and Net Cash
Used by Discontinued Operations.
The Company's business tends to be seasonal. Telemarketing services have higher
revenues and profits occurring in the fourth fiscal quarter, followed by the
first fiscal quarter. This is due to subscription renewal campaigns for its
performing arts clients, which generally begin in the springtime and continue
during the summer months.
Results of Operations for the Three Months Ended December 31, 2003, Compared to
- --------------------------------------------------------------------------------
the Three Months Ended December 31, 2002.
- ------------------------------------------
Revenues of approximately $2.6 million for the three months ended December 31,
2003 (the "Current Quarter") decreased by $0.6 million or 19% over revenues of
$3.2 million during the three months ended September 30, 2002 (the "Prior
Quarter"). Revenue decreased primarily due to decreased client billings in the
onsite telemarketing services.
11
Salaries and benefits of approximately $2.4 million in the Current Quarter
decreased by approximately $0.6 million or 20% over salaries and benefits of
approximately $3.0 million in the Prior Quarter. Salaries and benefits decreased
due to a reduction in onsite telemarketing and corporate headcount, as well as a
reduction in certain executive compensation.
Direct costs of approximately $161,000 increased by approximately $27,000 or 20%
over direct costs of approximately $134,000 in the Prior Quarter. The increase
is due primarily to an increase in Los Angeles call center sales expenses as
well as and increase related to rent for a client campaign office.
Selling, general and administrative expenses of approximately $645,000 in the
Current Quarter increased by approximately $143,000 or 28% over comparable
expenses of $502,000 in the Prior Quarter. The increase is due primarily to
increases in corporate travel expenses as well as increases in expenses related
to public company compliance.
Depreciation and amortization expenses of approximately $56,000 in the Current
Quarter are in line with depreciation and amortization expenses in the Prior
Quarter.
Gain on termination of lease of approximately $3.9 million in the Prior Quarter
was a result of the Company successfully negotiating a termination of a lease
for an abandoned lease property. The agreement required an up front payment of
$300,000 and the Company is obligated to pay approximately $60,000 per month
until the landlord has completed certain leasehold improvements for a new tenant
and then Company is obligated to pay $20,000 per month until August 2010. The
gain on lease termination represents a change in estimate representing the
difference between the Company's present value of its new future obligations and
the entire obligation that remained on the books under the original lease
obligation as a result of the abandonment. The remaining obligation has been
recorded in accrued expenses and other current liabilities and other
liabilities.
Net interest income of approximately $11,000 in the Current Quarter remained
consistant with net interest income of approximately $11,000 in the Prior
Quarter.
The net provision for income taxes of approximately $3,000 in the Current
Quarter decreased by approximately $17,000 over the provision of approximately
$20,000 in the Prior Quarter. The Company records provisions for state and local
taxes incurred on taxable income or equity at the operating subsidiary level,
which cannot be offset by losses incurred at the parent company level or other
operating subsidiaries. The Company has recognized a full valuation allowance
against the deferred tax assets because it is more likely than not that
sufficient taxable income will not be generated during the carry forward period
to utilize the deferred tax assets.
As a result of the above, a loss from continuing operations of approximately
$700,000 in the Current Quarter decreased by approximately $4.1 million over
comparable income from continuing operations of $3.4 million in the Prior
Quarter.
The gain from discontinued operations of approximately $761,000 in the Current
Quarter is the result of a reduction in certain loss reserves expensed in prior
periods. The loss from discontinued operations of approximately $600,000 in the
Prior Quarter are the result of losses incurred from the Northeast Operations
which have been sold.
In connection with the sale of the Northeast Operations, the Company incurred a
loss on disposal of discontinued operations of approximately $100,000 in the
three months ended December 31, 2002. The loss represents the difference in the
net book value of assets and liabilities as of the date of the sale as compared
to the net consideration received after settlement of purchase price
adjustments.
12
As a result of the above, net income of approximately $71,000 in the Current
Quarter decreased by approximately $2.6 million over comparable net income of
approximately $2.6 million in the Prior Quarter.
Results of Operations for the Six Months Ended December 31, 2003, Compared to
- --------------------------------------------------------------------------------
the Six Months Ended December 31, 2002.
- ------------------------------------------
Revenues of approximately $6.4 million for the six months ended December 31,
2003 (the "Current Period") decreased by $1.3 million or 17% over revenues of
$7.7 million during the six months ended December 31, 2002 (the "Prior Period").
Revenue decreased primarily due to decreased client billings in the onsite
telemarketing services.
Salaries and benefits of approximately $5.5 million in the Current Period
decreased by approximately $1.4 million or 20% over salaries and benefits of
approximately $6.9 million in the Prior Period. Salaries and benefits decreased
due to a reduction in onsite telemarketing and corporate headcount, as well as a
reduction in certain executive compensation.
Direct costs of approximately $330,000 decreased by approximately $32,000 or 9%
over direct costs of approximately $362,000 in the Prior Period. The decrease is
due primarily to reductions in Los Angeles call center sales expenses, telephone
expenses and postage costs, offset by an increase in costs related to rent for a
client campaign office.
Selling, general and administrative expenses of approximately $1.0 million in
the Current Period increased by approximately $0.1 million or 11% over
comparable expenses of $0.9 million in the Prior Period. The increase is due
primarily to increases in corporate travel expenses.
Depreciation and amortization expenses of approximately $112,000 in the Current
Period are in line with depreciation and amortization expenses in the Prior
Period.
During the Prior Period ending December 31, 2002, the Company recognized a gain
on a settlement of a lawsuit. In 1999, a lawsuit under Section 16(b) of the
Securities Exchange Act of 1934 was commenced against General Electric Capital
Corporation ("GECC") by Mark Levy, derivatively on behalf of the Company, to
recover short swing profits allegedly obtained by GECC in connection with the
purchase and sale of MSGI securities. On April 29, 2002, the court approved the
settlement for $1,250,000, net of attorney fees plus reimbursement of mailing
costs. In July 2002, the court ruling became final and the Company received and
recorded the net settlement payment of $965,486 plus reimbursement of mailing
costs.
Net interest expense of approximately $12,000 in the Current Period decreased by
approximately $5,000 or 29% over net interest expense of approximately $17,000
in the Prior Period. The decrease is due primarily to the reduction in interest
expense incurred in Los Angeles resulting from reduced borrowings on the line of
credit.
The net provision for income taxes of approximately $6,000 in the Current Period
decreased by approximately $25,000 over the provision of approximately $31,000
in the Prior Period. The Company records provisions for state and local taxes
incurred on taxable income or equity at the operating subsidiary level, which
cannot be offset by losses incurred at the parent company level or other
operating subsidiaries. The Company has recognized a full valuation allowance
against the deferred tax assets because it is more likely than not that
sufficient taxable income will not be generated during the carry forward period
to utilize the deferred tax assets.
13
As a result of the above, loss from continuing operations of approximately
$647,000 in the Current Period decreased by approximately $4.8 over comparable
income from continuing operations of $4.2 million in the Prior Period.
The gain from discontinued operations of approximately $848,000 in the Current
Period is the result of a reduction in certain loss reserves expensed in prior
periods. The loss from discontinued operations of approximately $1.4 million in
the Prior Period resulted from the sale of the Northeast Operations during the
fiscal year 2003.
The loss from cumulative effect of change in accounting principle of
approximately $5.1 million in the Prior Period was the result of the adoption of
SFAS 142 relating to Goodwill.
As a result of the above, net income of approximately $201,000 in the Current
Period increased by approximately $2.5 million over comparable net loss of
approximately $2.3 million in the Prior Period.
Capital Resources and Liquidity
- -------------------------------
Financial Reporting Release No. 61, which was released by the SEC, requires all
companies to include a discussion to address, among other things, liquidity,
off-balance sheet arrangements, contractual obligations and commercial
commitments. The Company currently does not maintain any off-balance sheet
arrangements.
Leases: The Company leases various office space and equipment under
non-cancelable long-term leases. The Company incurs all costs of insurance,
maintenance and utilities.
Future minimum rental commitments under all non-cancelable leases, net of
non-cancelable subleases, as of December 31, 2003 are as follows:
Rent Expense Less: Sublease Income Net Rent Expense
----------- -------------------- ----------------
2004 $ 445,800 $ (39,600) $ 406,200
2005 640,800 (45,300) 595,500
2006 439,700 - 439,700
2007 439,680 - 439,680
2008 323,200 - 323,200
Thereafter 520,000 - 520,000
------------ ---------- -----------
$ 2,809,180 $ (84,900) $ 2,724,280
=========== =========== ===========
Debt: The Company has a renewable two-year credit facility with a lender for a
line of credit with a maximum availability of $2,000,000, collateralized by
accounts receivable and other certain tangible assets of the Company. Borrowings
are limited to the lesser of the maximum availability or 80% of eligible
receivables. Interest is payable monthly at the Chase Manhattan prime rate plus
1 1/2%, but no less than 6%, with a minimum annual interest requirement of
$50,000. The facility requires an annual fee of 1% of the maximum available line
and has tangible net worth and working capital covenants. As of December 31,
2003, there was an aggregate of approximately $1.0 million available under this
line of credit.
At December 31, 2003, the Company had approximately $331,000 outstanding on its
line of credit. As of December 31, 2003, the Company is in compliance with
certain working capital and net worth covenants of its credit agreement.
14
Historically, the Company has funded its operations, capital expenditures and
acquisitions primarily through cash flows from operations, private placements of
equity transactions, and its credit facilities. At December 31, 2003, the
Company had cash and cash equivalents of $0.6 million and a working capital of
$0.7 million.
The Company recognized net income of approximately $201,000 in the Current
Period. Cash used by operating activities from operations was approximately
$493,000. Net cash used by operating activities principally resulted from the
decrease in accounts receivable and other assets offset by decreases in accrued
expenses and accounts payable. Cash used by operating activities in the Prior
Period was approximately $653,000.
In the Current Period, net cash of $32,676 was used in investing activities
consisting of purchases of property and equipment. In the Prior Period, net cash
of approximately $8.5 million came from investing activities consisting of
proceeds from the sale of discontinued operations of $8,546,182 offset by a use
of cash of $16,631 for purchases of property and equipment.
In the Current Period, net cash of $114,775 was used in financing activities.
Net cash used in financing activities consisted of $150,093 repayments of debt,
$70,029 of proceeds from credit facilities and $34,711 for an increase in a
related party receivable. In the Prior Period, net cash of $2,260,336 was used
in financing activities consisting of repayments of long-term debt and credit
facilities of $2,230,550 and an expenditure from private placement of preferred
stock of $$29,786.
In the Prior Period net cash of $1.4 million was used in discontinued
operations, while there were no discontinued operations in the Current Period.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is subject to market risks in the ordinary course of its business,
primarily risks associated with interest rate fluctuations. Historically,
fluctuations in interest rates have not had a significant impact on the
Company's operating results. At December 31, 2003, the Company had approximately
$331,000 in variable rate indebtedness outstanding.
Item 4. Controls and Procedures.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including Jeremy Barbera, the
Company's Chairman, Chief Executive Officer and Interim Chief Financial Officer,
of the effectiveness of the Registrant's disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of
1934. Based on that evaluation, Mr. Barbera has concluded that the Company's
disclosure controls and procedures as of December 31, 2003 were effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission's rules and forms.
There were no changes in the Company's internal control over financial reporting
that occurred during the quarter ended December 31, 2003 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
16
PART II- OTHER INFORMATION
Item 1. Legal Proceedings.
Two actions brought by purchasers of the preferred stock of WiredEmpire, Inc.
against the Company, J. Jeremy Barbera, the Company's Chairman of the Board and
Chief Executive Officer, and WiredEmpire, Inc. alleging violations of federal
and Alabama state securities laws have been resolved. These actions, Red
Mountain, LLP v. Barbera et al., Case No. CV-00-B3068-S, and Weeks et al. v.
Barbera et al., Case No. CV-01-7633, were pending in the United States District
Court for the Northern District of Alabama. Each of these has been settled, and
stipulations of dismissal with prejudice have been or will shortly be filed.
Item 4. Submission of Matters to a Vote of Securities Holders
On December 24, 2003 a special meeting of the shareholders of Media Services
Group, Inc. occurred and a vote by proxy was held regarding the proposed change
of name from MKTG Services, Inc. to Media Services Group, Inc. and approval of
the related amendment to the Articles of Incorporation. Quorum was reached and
the proposal was passed by successful vote.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31.1 Certification By The Chief Executive Officer Pursuant To
Section 302 Of The Sarbanes-Oxley Act Of 2002
31.2 Certification.(a) By The Chief Accounting Officer Pursuant To
Section 302 Of The Sarbanes-Oxley Act Of 2002
32.1 Certification of The Chief Executive Officer Pursuant to 18
U.S.C. 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of The Chief Accounting Officer Pursuant to
18. U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
-------------------
1. On or about August 12, 2003, the Company filed a current report on form 8-K
regarding a change in the Company's certifying accountants.
2. On or about September 24, 2003, the Company filed an amended current report
on form 8-K/A regarding an addition to the exhibits filed with the current
report on form 8-K dated August 12, 2003.
17
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
MEDIA SERVICES GROUP, INC.
(Registrant)
Date: February 12, 2004 /s/ J. Jeremy Barbera
---------------------
J. Jeremy Barbera
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date: February 12, 2004 /s/ Richard J. Mitchell III
---------------------------
Richard J. Mitchell III
Chief Accounting Officer
(Principal Financial Officer)
18
Exhibit 31.1
CERTIFICATION
I, J. Jeremy Barbera, certify, pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to ss.302 of the Sarbanes-Oxley Act of 2002, that:
(1) I have reviewed this quarterly report on Form 10-Q of Media
Services Group, Inc.;
(2) Based on my knowledge, this quarterly 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
quarterly report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in al
material respects the financial condition, results of operations and cash flows
of registrant as of, and for, the periods presented in this quarterly report;
and
(4) The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, 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 quarterly report is being prepared;
(b) Intentionally omitted.
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial data; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 12, 2004 /s/ J. Jeremy Barbera
---------------------
J. Jeremy Barbera
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
19
Exhibit 31.2
CERTIFICATION
I, Richard J. Mitchell III , certify, pursuant to 18 U.S.C. ss.1350, as
adopted pursuant to ss.302 of the Sarbanes-Oxley Act of 2002, that:
(1) I have reviewed this quarterly report on Form 10-Q of Media
Services Group, Inc.;
(2) Based on my knowledge, this quarterly 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
quarterly report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in al
material respects the financial condition, results of operations and cash flows
of registrant as of, and for, the periods presented in this quarterly report;
and
(4) The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, 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 quarterly report is being prepared;
(b) Intentionally omitted.
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial data; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 12, 2004 /s/ Richard J. Mitchell III
---------------------
Richard J. Mitchell III
Chief Accounting Officer
(Principal Financial Officer)
20
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Media Services Group, Inc. (the
"Company") on Form 10-Q for the period ended December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, J.
Jeremy Barbera, as Chairman of the Board and Chief Executive Officer, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934: and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: February 12, 2004 /s/ J. Jeremy Barbera
---------------------
J. Jeremy Barbera
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
This certification accompanies this Quarterly Report on Form 10-Q pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by such Act, be deemed filed by the registrant for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
21
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Media Services Group, Inc. (the
"Company") on Form 10-Q for the period ended December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Richard
J. Mitchell III, as Chief Accounting Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act
of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934: and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: February 12, 2004 /s/ Richard J. Mitchell III
---------------------
Richard J. Mitchell III
Chief Accounting Officer
(Principal Financial Officer)
This certification accompanies this Quarterly Report on Form 10-Q pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by such Act, be deemed filed by the registrant for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
22