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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d)
OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2004
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 incorporation or organization) (I.R.S. Employer Identification No.)
575 Madison Avenue
New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (917) 339-7150
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: --------------
Common Stock, par value $.01 per share
(Title of class)
Indicate be 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 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 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
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As of October 1, 2004, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $14,211,419. As of October 1,
2004, there were 1,596,262 shares of the Registrant's common stock outstanding.
Documents incorporated by reference: Portions of the Company's definitive proxy
statement expected to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 have been incorporated by reference into Part III of this
report.
1
PART I
Special Note Regarding Forward-Looking Statements
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Some of the statements contained in this Annual Report on Form 10-K 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 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.
Item 1. Business
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General
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Media Services Group, Inc. ("The Company or MSGI") is a proprietary solutions
provider developing a global combination of innovative emerging businesses that
leverage information and technology. MSGI is principally focused on the homeland
security,safety and surveillance industries. The corporate headquarters is
located in New York, with regional offices in Washington, DC, and Calgary,
British Columbia, Canada.
The Company's Strategy
- ----------------------
MSGI typically acquires controlling interests in early-stage, early growth
technology and software development businesses. These emerging firms are led by
entrepreneurs and management teams that have leading products, but lack the
business relationships and financing that MSGI can offer. The Company will seek
to acquire a 51% controlling interest in a target company for a combination of
cash and securities. The cash component is not paid to the founding principals;
it must be reinvested in the company on a monthly basis by our corporate finance
staff. The target company must agree to a ratchet provision by which our stake
increases up to another 25% for failure to reach first years expectations. Upon
successful execution of the first year's goals, senior management may be granted
options in MSGI in accordance with the existing plan. Sixty days after the
completion of the first year's operations, MSGI may, at its option, acquire the
remaining interest at an agreed-upon valuation. The Company also retains a right
of first refusal in the event that any of the minority parties in our companies
receives an unsolicited offer for their interests in the business.
Background
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The Company was originally incorporated in Nevada in 1919.
During the past nine years years, the Company had acquired or formed several
direct marketing and related companies. Due in part to decreased market demands
and limited capital resources, the Company disposed or ceased operations of all
such companies. In April and August of 2004, the Company acquired majority
interests in the Future Developments America, Inc. and Innalogic, LLC businesses
that are focused in the homeland security and surveillance sectors.
Date Name of Company Acquired Service Performed
- ---- ------------------------ -----------------
May 1995 Stephen Dunn & Associates, Inc. Provides telemarketing and
telefundraising, specializing in the arts, educational
and other institutional tax exempt
organizations.
2
October 1996 Metro Direct, Inc. Develops and markets a variety of
database marketing and direct marketing products.
(sold as part of the December 2002 sale of the direct
market business)
July 1997 Pegasus Internet, Inc. Provides a full suite of Internet services including
content development and planning, marketing
strategy, on-line ticketing system development, technical
site hosting, graphic design, multimedia production
and electronic commerce.(these operations were
either terminated or moved to other operating ivisions)
December 1997 Media Marketplace, Inc. Specializes in providing list
Media Marketplace Media Division, Inc. management, list brokerage and media planning and buying
services. (sold as part of the December 2002 sale of the
direct market business)
May 1998 Formed Metro Fulfillment, Inc. Performed services such as on-line commerce, real-time
database management inbound/outbound customer service,
custom packaging, assembling, product warehousing,
shipping, payment processing and retail distribution.
(sold in March and September of 1999)
January 1999 Stevens-Knox & Associates, Inc. Specializes in providing list
Stevens-Knox List Brokerage, Inc. management, list brokerage and
Stevens-Knox International, Inc. database management services. (sold as part of
the December 2002 sale of the direct market business)
May 1999 CMG Direct Corporation Specializes in database services. (part of this business
became WiredEmpire, the balance was sold as part of the
December 2002 sale of the direct marketing business)
October 1999 Acquired 87% of Cambridge Intelligence
Agency and formed WiredEmpire, Inc. A licensor of email marketing tools.
March 2000 Grizzard Advertising, Inc. Specialized in strategic planning,
creative services, database
management, print-production,
mailing and Internet marketing.
March 2000 The Coolidge Company Specializes in list management
and list brokerage services. (sold in July 2001)
3
September 2000 Begin plan to discontinued the operation of WiredEmpire, Inc. (completed in January 2001).
April 2004 Acquired 51% of Future Developments Provider of technology-based products and
America, Inc. services specializing in application-specific and
custom-tailored restricted-access intelligence
products, systems and proprietary solutions.
August 2004 Acquired 51% of Innalogic, LLC Designs and deploys content-rich software products
for a wide range of wireless mobile devices.
Capital Stock and Certain Financing Transactions
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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
years ended June 30, 2003 and 2002 have been reclassified into a one-line
presentation and is included in Loss from Discontinued Operations and Net Cash
Used by Discontinued Operations.
In connection with the sale of the Northeast Operations, the Company recognized
a loss on disposal of discontinued operations of approximately $.2 million in
the year ended June 30, 2003. 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. There
was no tax impact on this loss.
In March 2004, the Company completed its sale of substantially all the assets
relating to its telemarketing and telesales services business held by its wholly
owned subsidiary MKTG Teleservices, Inc. to SD&A Teleservices, Inc. (SD&A) a
wholly owned subsidiary of the Robert W. Woodruff Arts Center, Inc. for
approximately $2.5 million in cash and a note receivable for $300,000, plus
the assumption of certain related liabilities, subject to a final working
capital adjustment. As such, the operations and cash flows of the telemarketing
and telefunding business 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 periods ended June 30, 2004,
2003 and 2002 have been reclassified into a one-line presentation and is
included in loss from discontinued operations and net cash used by discontinued
operations.
In connection with the sale of the operations of MKTG Teleservices, Inc., the
Company recognized a loss on the disposal of discontinued operations of
approximately $1.0 million in the year ended June 30, 2004. 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 and a tax impact of approximately $35,000.
In December 2002, the Company negotiated a termination of a lease for an
abandoned lease property. The agreement required an up front payment of $.3
million 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 and the
Company was released from all other obligations under the lease. The gain on
lease termination represents a change in estimate representing the difference
between the Company's present value of its future obligations and the entire
obligation that remained on the books under the original lease obligation. The
remaining obligation has been recorded in accrued expenses and other current
liabilities and other liabilities.
On January 22, 2003, the Board of Directors approved an eight-for-one reverse
split of the common stock. Par value of the common stock remains $.01 per share
and the number of authorized shares of common stock is reduced to 9,375,000. The
stock split was effective January 27, 2003. All stock prices, per share and
share amounts have been retroactively restated to reflect the reverse split and
are reflected in this document.
In January 2003, the Company redeemed the outstanding shares of the preferred
stock for a cash payment of approximately $6.0 million and the issuance of
181,302 shares of common stock valued at approximately $.2 million. The carrying
value of the preferred stock was approximately $20.2 million which included a
beneficial conversion feature of approximately $10.3 million. The transaction
resulted in a gain on redemption of approximately $14.0 million and is reflected
in net income attributable to common stockholders for the year ended June 30,
2003.
In January 2003, the Company entered into an agreement and settled the
outstanding amount owed to the former Grizzard shareholders in connection with a
holdback agreement. The Company paid approximately $4.6 million and utilized its
restricted cash. Approximately $.3 million of restricted cash became available
for general corporate use.
4
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 Company
securities. The case was filed in the name of Mark Levy v. General Electric
Capital Corporation, in the United States District Court for the Southern
District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002,
a settlement was reached among the parties. The settlement provided for a $1.3
million payment to be made to the Company by GECC and for GECC to reimburse the
Company for the reasonable cost of mailing a notice to stockholders up to
$30,000. On April 29, 2002, the court approved the settlement for approximately
$1.3 million, 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 approximately $965,000 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 year ending June 30,
2003.
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
sought attorney's fees and punitive damages of approximately $1,650,000, which
equaled their investment in WiredEmpire's preferred stock. 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 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.
At March 31, 2004, the Company retired all outstanding balances on its line of
credit facility. The Company subsequently terminated its relationship with the
credit provider.
During the year ended June 2004, the Company entered into definitive agreements
withcertain strategic European investors for a private placement of an aggregate
of 250,000 shares of common stock to be sold at a price of $8.00 per share for
gross proceeds of approximately $2,000,000. The Company also agreed to issue to
the investors, and third party affiliates, warrants to purchase an additional
150,000 shares of common stock at a price of $12.00 per share under a three-year
5
term. As of June 30, 2004, $1.8 million was closed with $1.2 million funded and
$0.6 million recorded as a stock subscription receivable. The payment for the
stock subscription receivable was received in July. Subsequent to the year ended
June 30, 2004, the remaining $0.2 million was funded.
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 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 4, 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.
Industry
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Overview.
The primary industries in which our companies operate are homeland security and
public safety. Homeland security and public safety are not purely separate areas
but rather law enforcement, fire departments, civil defense organizations and
medical response teams are a crucial segment of any crisis situation, and work
together with multiple government agencies to manage and resolve the emergency
situation. The Company believes its products and services work throughout the
chain of threat prevention, detection, dissuasion, management and resolution to
expedite the collection and dissemination of data in a secure fashion to field
agents and decision-makers.
Industry Growth.
The primary industries in which our companies operate are homeland security and
public safety. The market for homeland security and safety technologies has been
rapidly growing since the terrorist attacks occurred in the eastern United
States in September 2001.
The "critical infrastructure" of the United States that could be subject to
attack or a non-terrorist crisis (fire, earthquake, flooding) is absolutely
enormous. According to the Environmental Protection Agency ("EPA") and the U.S.
General Accounting Office ("GAO"), there are more than 120 chemical plants
within the United States that could each potentially expose more than one
million people if an attack on the facility caused chemicals to be released, and
there are more than 66,000 chemical plants nationwide. There are more than 5,800
hospitals, 2,800 power plants, 5,000 public airports, 300 coastal and inland
ports, 104 commercial nuclear power plants, 600 natural gas processing
facilities, 153 oil refineries, 7,500 bulk petrochemical terminals, 80,000 dams,
3,000 government-owned facilities and sites, and 460 "key asset" skyscrapers in
the country, along with more than 250,000 sites owned by firms that are
considered part of the "defense industrial base".
The U.S. Department of Homeland Security (the "DHS") has identified multiple end
users of surveillance collection and data transmission technologies, including
state and local governments, border and transportation security (for border
entry points, transportation hubs, and shipping facilities), critical
infrastructure protection, various military agencies and the U.S. Coast Guard,
and the United States Secret Service.
6
All of this surveillance and interoperability improvement activity is expected
to come at a significant cost. The DHS has estimated that reaching an
accelerated goal of communications interoperability will require a major
investment of several billion dollars over the next decade. There are several
funding resources at all levels to assist in the development and acquisition of
interoperable communications technologies, but the federal government is the
primary source. There are multiple federal grant programs, including the
Homeland Security grants, Urban Area Security Initiative, the Office for
Community Oriented Policing Services ("COPS") within the Department of Justice
("DOJ"), FEMA interoperable communications grants, Assistance to Firefighters
grants, DOJ Local Law Enforcement Block Grants, and National Urban Search and
Rescue Grants. The COPS program alone was authorized by Congress to administer
the Interoperable Communications Technology Program beginning in 2003. More than
$66 million in grants have been awarded by COPS to first responders for
communications equipment, training and technical assistance. The fiscal year
2005 budget for DHS has allocated approximately $3.6 billion in grants for
first-responders, $37 million in additional funds to help build out the Homeland
Security Operations Center (the nerve center for homeland security information
and incident management across the United States) and FEMA incident-management
capabilities, and $3.6 billion to the Office for Domestic Preparedness.
Approximately $474 million has been earmarked for the "Intelligence and Warning"
segment of the National Strategy Mission Area for Homeland Security, which
aggregates all non-military spending across the entire federal budget for that
segment, $8.8 billion has been earmarked for the "Emergency Preparedness and
Response" segment, and $3.4 billion has been allocated for "Defending Against
Catastrophic Threats". Roughly $16.6 billion is reserved for security,
enforcement, and investigational activity by the Bureau of Customs and Border
Protection, Transportation Security Administration, the Coast Guard and the
Secret Service. More than $5.5 billion in federal grants for first-responders
from previous fiscal years remains available for distribution. The Urban Area
Security Initiative Grants, given out by DHS to large local municipalities for
security equipment, training and assistance, have been proposed to rise from
$727 million in fiscal year 2004 to $1.45 billion in fiscal year 2005.
Beyond interoperability of communications between agencies, our products also
offer significant advancements for surveillance and data collection and
dissemination within law enforcement and fire department agencies for civilian
crimes, fires and other incidents. For law enforcement, because of the many
factors that arise in situations involving police and private citizens,
surveillance technology that transmits information to field officers,
commanders, and to a repository has significant advantages over relying on
eyewitness surveillance. We believe that recording of video and audio can be
very valuable for investigations and prosecution.
A RAND Corporation survey of law enforcement agencies in the United States in
2000 found a significant proportion of the respondents lacked even the most
basic surveillance technologies. Approximately 59% of local departments and 33%
of state police departments did not use fixed-site video surveillance, while
only 3% of local departments and 7% of state departments reported widespread use
of this technology. Some of the larger cities, such as New York City and
Baltimore, have quite comprehensive fixed video surveillance in highly
trafficked public areas, such as Times Square and Central Park. Almost 70% of
local departments and 27% of state police departments did not use any sort of
mobile video surveillance cameras, which would be used in a stakeout, hostage or
other field incident. The primary reason cited for not acquiring this equipment
was cost. Law enforcement agencies are widely expected to improve the quality of
their surveillance data collection and dissemination technologies over the
coming years. Even before the 2001 attacks, a 1998 study by the Rocky Mountain
Region of the National Law Enforcement and Corrections Technology Center
estimated that the use of digital communications systems would nearly double,
rising to 25% of all police departments in the country by 2007.
We also are actively marketing our surveillance and data communications products
and services into various agencies and sectors of the United States military and
intelligence services. In an article by Professor Peter Raven-Hansen of the
George Washington Law School in the U.S. State Department's journal U.S. Foreign
Policy Agenda, the author notes that the first step in bringing terrorists to
justice is surveillance of potential attackers and prime targets. The U.S.
Supreme Court has ruled that collection of "security intelligence" for use in a
terrorism investigation is different than collection of evidence of a regular
crime, partly because it is needed to prevent terrorism. Congress has enacted
laws permitting independent judges to authorize surveillance for the purpose of
collecting foreign intelligence in the United States on a lesser showing of
probable cause than for a regular crime. The agency need only show that there is
probable cause to believe that the target of the surveillance is a foreign agent
or an international terrorist. It is estimated that there are at least 28
7
different groups as "designated foreign terrorist organizations" that actively
threaten the national security of the United States, with another 13 other
identified as "structured terrorist groups" that are not considered to threat
the security of US nationals or the national security of the United States.
Services
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The Company owns 51% of Future Developments America, Inc. ("FDA"), which
provides technology-based products and services to law enforcement
agencies throughout North America. FDA's executive team specializes in
developing application-specific and custom-tailored restricted-access
intelligence products, systems and proprietary solutions. The services offered
by FDA are described below.
FDA specializes in the design and manufacture of security-oriented electronics
equipment, as well as unique covert housings that address crucial investigative
requirements unmet by conventional methods and tools. Every FDA-designed product
is based on unique client requirements and is field-tested and evaluated by the
firm's technology partners - federal, state and local law enforcement-security
field agents, and investigative personnel - who provide detailed user input and
feedback. Components in FDA's surveillance equipment line may be used as
stand-alone products or in conjunction with mainstream manufacturers' closed
circuit television components ("CCTV").
FDA sells a broad variety of off-the-shelf and custom surveillance equipment,
including antennas, audio "bugs", body cameras, covert and overt color and
black-and-white cameras, night vision fixed surveillance cameras, power
supplies, recording devices and related supplies. The firm sells off-the-shelf
CCTV equipment from a broad range of high quality manufacturers and has chosen
not to commit to "exclusivity" with any specific product manufacturer. In this
way, although FDA is still able to offer competitive pricing, they are also free
to make suggestions to clients who request such information on equipment best
suited for their specific application without being limited by exclusivity
parameters.
To help clients further meet the ongoing challenges of investigation and
observation, FDA retains a wide range of high-end surveillance systems and
equipment available for rent, including the latest in many of our custom covert
cameras (for authorized agencies and organizations only). This often enables
agencies, organizations and businesses to obtain equipment using operating
budgets, and reduces the time lag between the need for the equipment and
implementation. Renting is often optimal for short-term crisis situations,
special events or seasonal needs, short-term system supplementation, or for
evaluation of a system prior to purchase. The firm also offers lease or
lease-to-purchase options for its systems.
FDA technicians work to ensure compatibility and smooth integration of new
equipment with existing security operations such as CCTV monitoring and motion
detection, alarm and card access controls, and communications systems. The firm
provides customer training, as well as customer-designed check-lists for ease in
trouble shooting. Our Calgary, Canada, office has on location design and
manufacture facilities to accommodate requirements which cannot be met by
standard equipment.
As well as serving as a prime contractor, FDA may sub-contract to other major
contractors. In accord with contractor preference, we can sub-contract under our
own name or ghost-contract (work anonymously under our contractor umbrella). The
FDA team's reputation for skill and integrity will enable us to successfully
sub-contract our services to other video security equipment providers to enable
them to offer value-added or enhanced services. Their long-standing
relationships with our partners, contractors and alliances, developed during 19
years of industry experience, are a further testimony to our reputation.
On September 23, 2004, we announced the market introduction of a new product
that represents the latest advancement in deploying digital wireless technology
for intelligence collection, surveillance and security: a one-of-a-kind Digital
Video & Audio Transmitter. The product is a two-component, digital, encrypted,
spread spectrum video and audio transmitter receiver set that was produced by
FDA.
8
The transmitter/receiver has a multitude of applications to many areas of
Federal, State and local law enforcement, and to numerous agencies within the
U.S. Department of Homeland Security. The Digital Video & Audio Transmitter
receiver is comprised of a desktop or vehicle dash-mounted receiver powered by
either a small AC adapter or automotive power source, and a small digital
transmitter. This advanced surveillance technology, which can also be body-worn,
allows security personnel to monitor operations discreetly, with hands-free
operation and with minimal chance of enemy detection. The product incorporates a
software "boot loader" option, which will allow customers to download and
install classified technological enhancements into the device, as well as design
their own applications and user options with FDA's technical support. The actual
transmitter is small. Consequently, for the first time, investigators will be
able to use a device that broadcasts on law enforcement frequencies completely
digitally, thus making the possibility of interception virtually impossible.
FDA also delivers advisory services focused on the selection, design and
deployment of technology-based surveillance networks and systems. FDA
consultants work closely with client representatives to deliver solutions
related to all aspects of security - from architecture and engineering to system
enhancements, upgrades and expansion. FDA helps clients devise solutions that
meet their functional requirements, while maintaining a constant focus on
maximizing efficiency and minimizing costs. FDA functions as a primary
consulting contractor, or it can serve as a sub-contractor as part of a broader
consulting engagement team (with a level of visibility - or anonymity - as
required by the client). FDA also provides broad-based technology and systems
integration expertise. The firm works with clients to replace, update or enhance
their existing electronic surveillance systems - while addressing compatibility
issues and integrating new equipment with existing security systems and
installations. FDA engineers are conversant with current and emerging trends
that impact the near-term utility and long-term effectiveness of surveillance
equipment and systems.
Client Base
- -----------
The Company's potential clients include private and public-sector organizations
focused on homeland security, law enforcement, and military and intelligence
operations that support anti-terrorism and national security interests. The
firm's clients will come from a broad range of sectors and industries, and
include law enforcement agencies, federal/state/regional agencies and
institutions, judicial organizations, oil/gas businesses, commercial properties,
banking and financial institutions, hotels, casinos, retail, warehousing and
transportation entities, recreational facilities and parks, environmental
agencies, industrial firms, loss prevention/investigation agencies, disaster
site surveillance firms, bodyguard services, property management, building
contractors and construction companies.
Competition
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There are several companies now deploying wireless video technologies and covert
surveillance tools. Only a handful, however, are doing so with wireless product
offerings aimed exclusively at the homeland security and public safety markets.
Indeed, it is difficult to identify direct competitors to the Company in terms
of the Company's core competencies and basic market positioning. The competitors
that come closest to mirroring the Company's business model are Gans & Pugh
Associates, Inc., a developer of wireless systems that employ traditional radio
frequency technologies; Verint Systems, Inc., a provider of analytic
software-based solutions for video security which competes against the Company
in one of its service areas - assessing network-based security relative to
Internet and data transmissions from multiple communications networks; and
Vistascape, a provider of a security data management solution that integrates
the monitoring and management of security hardware and software products. The
Company believes its combination of product development, proprietary Open Media
Delivery Platform rich-media delivery system, R&D service capabilities, advanced
encryption technologies, and focus on the homeland security and public safety
markets are significant competitive advantages over these listed companies.
9
Facilities
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The Company leases all of its real property. Facilities for its headquarters are
in New York City and its sales and service offices are located in Washington, DC
and Calgary, Canada. The Company believes that its remaining facilities are in
good condition and are adequate for its current needs through fiscal 2005. The
Company believes such space is readily available at commercially reasonable
rates and terms. The Company also believes that its technological resources are
all adequate for its needs through fiscal 2005.
Intellectual Property Rights
- ----------------------------
The Company relies upon its trade secret protection program and non-disclosure
safeguards to protect its proprietary computer technologies, software
applications and systems know-how. In the ordinary course of business, the
Company enters into license agreements and contracts which specify terms and
conditions prohibiting unauthorized reproduction or usage of the Company's
proprietary technologies and software applications. In addition, the Company
generally enters into confidentiality agreements with its employees, clients,
potential clients and suppliers with access to sensitive information and limits
the access to and distribution of its software documentation and other
proprietary information. No assurance can be given that steps taken by the
Company will be adequate to deter misuse or misappropriation of its proprietary
rights or trade secret know-how. The Company believes that there is rapid
technological change in its business and, as a result, legal protections
generally afforded through patent protection for its products are less
significant than the knowledge, experience and know-how of its employees, the
frequency of product enhancements and the timeliness and quality of customer
support in the usage of such products.
Employees
- ---------
At June 30, 2004, the Company employed approximately 10 persons, of whom 8 were
employed on a full-time basis.
Item 2. Properties
- -------------------
The Company and certain subsidiaries lease facilities for office space
summarized as follows and in Note 14 of Notes to the Company's consolidated
financial statements included in this Form 10-K. Our executive offices are
located in New York, NY. We lease approximately 1,500 square feet which is
equipped to fully meet the needs of our headquarters office. The currently lease
runs through June 2005 with a monthly rent of $6,000. Our majority owned
subsidiary, Future Developments America, Inc., currently leases approximately
1,000 square feet of office space in Washington, DC. This space represents the
sales facilities for FDA. The current lease runs through June 2005 with a
monthly rent of $3,500. The engineering and production capabilities for FDA are
outsourced to their affiliate, Future Developments, Ltd located in Calgary,
Alberta, Canada.
Location Square Feet
-------- -----------
New York, New York 1,500
Washington, D.C. 1,000
In addition, the Company is currently leasing approximately 29,400 square feet
in New York, which is not being currently utilized. Accordingly, the Company
has provided for the future estimated cost of this lease.
As of June 30, 2004, the Company is also leasing approximately 7,500 square
feet in Massachusetts, which is not being currently utilized. On July 12, 2004,
subsequent to the year ending June 30, 2004, the company executed an early
termination of the lease. A gain on the early termination will be realized in
earnings (loss) from discontinued operations during the quarter ending
September 30, 2004.
Item 3. Legal Proceedings
- --------------------------
10
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 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, the action was settled,
and stipulations of dismissal with prejudice have been or will shortly be filed.
In June 2002, the Company entered into a tolling agreement with various
claimants who acquired WiredEmpire Preferred Series A stock in a private
placement. The agreement states that the passage of time from June 15, 2002
through August 31, 2002 shall not be counted toward the limit as set out by any
applicable statute of limitations. In addition, the claimants agreed that none
of them would initiate or file a legal action against Mr. Barbera, MKTG or
WiredEmpire prior to the termination of the agreement. The claimants invested
approximately $1,200,000 in WiredEmpire's preferred stock. In January 2003, a
lawsuit was filed in Alabama, Circuit Court for Jefferson County by certain
plaintiffs involved in the Agreement. The action was filed against J. Jeremy
Barbera, Chairman of the Board and Chief Executive Officer of MKTG, MKTG and
WiredEmpire, Inc. The plaintiffs' complaint alleges among other things
violations of state securities laws and breach of fiduciary duty. This lawsuit
was settled during fiscal year 2003 and was fully covered by the Company's
insurance.
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 MKTG
securities. The case was filed in the name of Mark Levy v. General Electric
Capital Corporation, in the United States District Court for the Southern
District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002,
a settlement was reached among the parties. The settlement provided for a
$1,250,000 payment to be made to MKTG by GECC and for GECC to reimburse MKTG for
the reasonable cost of mailing a notice to stockholders up to $30,000. 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.
In addition to the above, certain other legal actions in the normal course of
business are pending to which the Company is a party. The Company does not
expect that the ultimate resolution of any other pending legal matters will have
a material effect on the financial condition, results of operations or cash
flows of the Company.
11
Item 4. Submission of matters to a vote of security holders
- ------------------------------------------------------------
None
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The common stock of the Company trades on the NASDAQ Small Cap Market under the
symbol "MSGI." Prior to December 29, 2003, the Company traded under the symbol
"MKTG". Prior to July 30, 2001, the Company traded under the symbol "MSGI." The
following table reflects the high and low sales prices for the Company's common
stock for the fiscal quarters indicated, as furnished by the NASDAQ:
Low High
Fiscal 2004 --- ----
Fourth Quarter $ 3.60 $ 14.75
Third Quarter 2.87 5.48
Second Quarter 1.30 8.97
First Quarter 1.23 1.83
Fiscal 2003
Fourth Quarter $ 1.30 $ 2.35
Third Quarter .12 1.98
Second Quarter .10 .32
First Quarter .13 .75
On January 22, 2003, the Board of Directors approved an eight-for-one reverse
split of the common stock. The stock split was effective January 27, 2003. Par
value of the common stock remained $.01 per share and the number of authorized
shares of common stock was reduced to 9,375,000 shares. The effect of the stock
split has been reflected in the balance sheets and in all share and per share
data in the accompanying condensed consolidated financial statements and Notes
to Financial Statements. Stockholders' equity accounts have been retroactively
adjusted to reflect the reclassification of an amount equal to the par value of
the decrease in issued common shares from common stock account to
paid-in-capital.
In January 2003, the Company redeemed the outstanding shares of certain
preferred stock for a cash payment of approximately $6.0 million and the
issuance of 181,302 shares of common stock valued at approximately $.2 million.
The carrying value of the preferred stock was approximately $20.2 million which
included a beneficial conversion feature of approximately $10.3 million. The
transaction resulted in a gain on redemption of approximately $14.0 million and
is reflected in net income attributable to common stockholders for the
period ended June 30, 2003.
As of June 30, 2004, there were approximately 1,019 registered holders of record
of the Company's common stock.
In June 2002, the Company received notification from The Nasdaq Stock Market
("Nasdaq") that the Company's common stock has closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4).
In October 2002, the Company received another notification from Nasdaq that
based on its June 30, 2002 filing the Company does not meet compliance with
Marketplace Rule 4310(c)(2)(B). Such rule requires the Company to have a minimum
of $2.0 million in net tangible assets or $2.5 million in stockholders' equity
or a market value of listed securities of $35.0 million or $.5 million of net
income from continuing operations for the most recently completed fiscal year or
two of the three most recently completed fiscal years. In December 2002, the
Company received notification from Nasdaq indicating that the Company was
subject to delisting. The Company responded to Nasdaq with
12
its plan and showed how it would achieve compliance with Marketplace Rule
4310(c)(2)(B) by achieving minimum stockholders' equity of $2.5 million. In
addition, in January 2003, the Company affected an eight-for-one reverse stock
split. (See Note 2). In February 2003, the Company received notification from
Nasdaq that the Company's was not in compliance with the Nasdaq's market value
of publicly held shares requirements, as set forth in Nasdaq Marketplace Rule
4310(c)(07). The Company believes that its subsequent issuance of common shares
for the redemption of its preferred stock has brought the Company back into
compliance with the minimum public float requirement. The Company appealed the
Staff's decision to delist the Company to a Nasdaq Listing Qualification Panel.
The hearing was held on February 13, 2003. On March 5, 2003, a Nasdaq Listing
Qualifications Panel determined to continue the listing of the Company's
securities on the Nasdaq SmallCap Market on the condition, among other things,
that the Company make a public filing with the Securities and Exchange
Commission and Nasdaq evidencing shareholders' equity of at least $2.5 million
and further that the Company file its quarterly report on Form 10-Q for the
March 31, 2003 quarter on or before May 15, 2003. On March 13, 2003, the Company
filed an unaudited balance sheet as of January 31, 2003 evidencing shareholders'
equity of at least $2.5 million. On May 22, 2003, the Company received
notification from Nasdaq that the Company satisfactorily demonstrated compliance
and, accordingly, the Nasdaq Listing Qualifications Panel determined to continue
the listing of the Company's securities on The Nasdaq SmallCap Market and to
close the hearing file.
The Company has not paid any cash dividends on any of its capital stock in at
least the last five years. The Company intends to retain future earnings, if
any, to finance the growth and development of its business and, therefore, does
not anticipate paying any cash dividends in the foreseeable future.
Item 6. Selected Financial Data
- -------------------------------
The selected historical consolidated financial data for the Company presented
below as of and for the five fiscal years ended June 30, 2003 have been derived
from the Company's audited consolidated financial statements. This financial
information should be read in conjunction with management's discussion and
analysis (Item 7) and the notes to the Company's consolidated financial
statements (Item 14).
Historical
Years ended June 30,
--- --------------------
(In thousands, except per share data)
2000(1) 2001 2002(11) 2003(12) 2004(13)
------- ---- ------- -------- --------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues (11) $ 62,488 $ - $ - $ - $ -
Amortization and depreciation $ 6,028 $ - $ 41 $ - $ -
Income (loss) from operations $(11,292) $ (6,189) $(11,059)(8) $ 2,072 (14) $ (1,958)
Income (loss) from continuing operations $(41,130) (2) $(14,339) (4) $(11,075) $ 2,977 $ (1,710)
(Loss) gain from discontinued operations $(34,543) (3) $ 1,252 (5) $(54,711)(9) $ (517) (15) $ (1,224)
Net income (loss) $ (75,673) $(65,839) $(66,096) $ (2,615) (16) $ (2,934)
Net income (loss) available to common
stockholders $ (75,673) $(66,492)(6) $(65,683) (10) $ 11,356 (17) $ (2,653) (18)
Income (loss) per diluted share (21) :
Continuing operations $ ( 74.24) $ ( 21.82) $ ( 14.89) $ 14.78) $ (1.26)
Discontinued operations ( 62.35) ( 57.03) ( 71.58) (.458 (1.03)
Cumulative effect of change in accounting - ( 21.15) - (4.43) -
----------- --------- --------- -------- --------
$ (136.59) $ (100.00) $ (86.47) $ 9.90 $ (2.29)
13
Weighted average common shares
Outstanding-diluted 554 665 764 1,147 1,158
OTHER DATA:
Net cash used in operating activities: $ (11,357) $( 1,764) $ (1,764) $ (13,086) $ (2,726)
Net cash (used in) provided by investing
activities: $ (60,116) $ (133) $ (133) $ 72,894 $ 13,447
Net cash provided by (used in) financing
activities: $ 78,904 $ (3,704) $ (3,704) $ (6,081) $(12,955)
Net cash (used in) provided by discontinued
operations (812) $ (1,789) $ (1,789) $ (50,118) $ (988)
Historical
As of June 30,
--------------
(In thousands)
CONSOLIDATED BALANCE SHEETS DATA: 2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
Cash and cash equivalents $ 8,763 $ 175 $ 3,802 $ 661 $ 2,549
Working capital (deficit) $ (735) $ (7,280) $ (1,363) $ (732) $ 1,596
$ 48,184 $ -- $ -- $ -- $ 490
Total intangible assets
Total assets $ 245,610 $ 98,041 $ 47,596 $ 7,648 $ 5,288
Total long term debt, net of current portion $ 4,014 $ 4,784 $ 176 $ -- $ --
Total stockholders' equity $ 127,864 $ 68,778 $ 1,390 $ 3,108 $ 2,201
(1) On March 31, 2000, the Company acquired all of the outstanding common
shares of The Coolidge Company. On March 22, 2000 the Company acquired all
of the outstanding common shares of Grizzard Advertising, Inc. Effective
October 1, 1999, the Company acquired 87% of the outstanding common shares
of The Cambridge Intelligence Agency. The results of operations for these
acquisitions are included in the consolidated statements of operations from
the date of the respective acquisition. The results for the year ended June
30, 2000 have not been restated to reflect discontinued operations.
(2) Loss from continuing operations includes a charge for $27,216 for
write-downs of certain Internet investments.
(3) On September 21, 2000, the Company's Board of Directors approved a plan to
discontinue the operation of WiredEmpire, which at the time
included the assets of Pegasus Internet, Inc. The Company shut down
operations, which was completed by the end of January 2001. The estimated
losses associated with WiredEmpire are $34,543 and are reported as
discontinued operations. All prior period results have been classified as
discontinued operations.
(4) Loss from operations includes a write-down of Internet investments of
$7,578 and expenses associated with settlement of litigation of $1,298.
(5) In January 2001, the company sold certain assets of WiredEmpire for a gain
of $1,252.
(6) Net loss available to common stockholders includes a cumulative effect of a
change in accounting of $14,064 in connection with the adoption of EITF
00-27.
(7) Pursuant to the Securities and Exchange Commission's Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101") the Company has reviewed its accounting policies for the
recognition of revenue. SAB 101 was required to be implemented in fourth
quarter 2001. SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company's policies for revenue recognition are consistent with the views
expressed within SAB 101. See Note 2, "Significant Accounting Policies,"
for a description of the Company's policies for revenue recognition. The
adoption of SAB 101 did not have a material effect on the Company's
consolidated financial position, cash flows, or results of operations.
Although net income was not materially affected, the adoption did have an
impact on the amount of revenue recorded as the revenue associated with the
Company's list sales and services product line are now required to be shown
net of certain costs. The Company believes this presentation is consistent
with the guidance in Emerging Issues Task Force ("EITF") 99-19, "Reporting
Revenue Gross as a Principal Versus Net as an Agent." All prior periods
presented have been restated.
(8) Loss from operations includes an impairment write-down of goodwill of
$6,500 and a write-down of abandoned leased property of $6,400.
(9) Net loss includes an extraordinary item of $4,859 for a loss on early
extinguishments of debt.
14
(10) Net loss available to common stockholders includes a deemed dividend in the
amount of $413 in connection with the redemption of preferred stock.
(11) Effective July 31, 2001, the Company sold Grizzard Communications Group,
Inc. The results of operations for Grizzard are no longer included in the
Company's results from the date of sale. Amounts have been reclassified to
discontinued operations.
(12) In December 2002, the Company completed the sale of substantially all of
the assets related 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. for
approximately $10.4 million in cash plus the assumption of all directly
related liabilities. The results of the operations are no longer included
in the company's results from the date of sale. Amounts have been
reclassified to discontinued operations.
(13) In March 2004, the Company completed the sale of substantially all of the
assets relating to its telemarketing and teleservices business held by its
wholly owned subsidiary, MKTG Teleservices, Inc., ("MKTG Teleservices") to
SD&A Teleservices, Inc. ("SDA"), a wholly owned subsidiary of the Robert W.
Woodruff Arts Center, Inc. for approximately $2.5 million in cash and a
note receivable for $0.3 million plus the assumption of certain directly
related liabilities, subject to a final working capital adjustment. The
results of the operations are no longer included in the company's results
from the date of sale. Amounts have been reclassified to discontinued
operations.
(14) Income from operations includes a gain on termination of lease of $3.9
million.
(15) In December 2002, the Company sold certain assets of the Northeast
Operations for a loss of $0.2 million
(16) Net loss includes a gain from settlement of lawsuit of $1.0 million and a
loss from a cumulative effect of change in accounting of $5.1 million.
(17) Net gain / (loss) available to common shareholders contains a gain (deemed
dividend) on redemption of preferred stock of $13.9 million.
(18) Net income available to common shareholders includes a gain on redemption
of preferred stock of a discontinued operation of $0.3 million
(19) On January 22, 2003, the Board of Directors approved an eight-for-one
reverse split of the common stock. Par value of the common stock remains
$.01 per share and the number of authorized shares of common stock is
reduced to 9,375,000. The stock split was effective January 27, 2003. All
stock prices, per share and share amounts have been retroactively restated
to reflect the reverse split and are reflected in this document.
The following is a summary of the quarterly operations for the years ended June
30, 2003 and 2004.
Historical
Quarter ended June 30,
(In thousands, except per share data)
(unaudited)
9/30/2002(6) 12/31/2002(6) 3/31/2003(6) 6/30/2003(6)
------------- ------------- ------------ ------------
Revenues (1) $ - $ - $ - $ -
Loss from operations $ (515) $ 3,462 (3) $ (475) $ (400)
Net income (loss) $(5,317)(4) $ 2,636 $ (799) $ (494)
Net income (loss) available to common stockholders $(5,317) $ 2,636 $ 13,567 (5) $ (494)
Basic and diluted loss per share (5):
Continuing operations $ 1.73 $ 9.37 $ 100.40 $ 11.92
Discontinued operations (1.25) (1.37) (.48) (5.68)
Cumulative effect of change in accounting (15.36) - - (20.08)
---------------------------------------------------------------------
Basic and diluted loss per share $(14.88) $ 8.00 $ 99.92 $ (13.84)
=====================================================================
15
Historical
Quarter ended June 30,
(In thousands, except per share data)
(unaudited)
9/30/2003(7) 12/31/2003(7) 3/31/2004(7) 6/30/2004 (7)
------------ ------------ ------------ -------------
Revenues (1) $ - $ - $ - $ -
Loss from operations $ (278) $ (505) $ (353) $ (822)
Net income (loss) $ 130 $ 71 $ (2,549) $ (586)
Net income (loss) available to common stockholders $ 130 $ 352 $ (2,549) $ (586)
Basic and diluted loss per share (5):
Continuing operations $ (0.23) $ (0.24) $ (0.33) $ (1.26)
Discontinued operations 0.33 0.56 (2.00) (1.03)
Cumulative effect of change in accounting - - - -
------------------------------------------------------
Basic and diluted loss per share $ 0.10 $ 0.32 $ (2.33) $ (2.29)
========================================================
(1) Prior periods presented have been restated in accordance with SAB
104. See Note 2, "Significant Accounting Policies," of the
Company's consolidated financial statements included in this Form
10-K.
(2) On January 22, 2003, the Board of Directors approved an
eight-for-one reverse split of the common stock. Par value of the
common stock remains $.01 per share and the number of authorized
shares of common stock is reduced to 9,375,000. The stock split
was effective January 27, 2003. All stock prices, per share and
share amounts have been retroactively restated to reflect the
reverse split and are reflected in this
(3) Includes a gain on termination of lease of $3.9 million.
(4) Includes a gain on settlement of lawsuit of $1.0 million and a
loss from cumulative effect of change in accounting principle of
$5.1 million.
(5) Includes a gain (deemed dividend) on redemption of preferred
stock of $13.9 million.
(6) In December 2002, the Company completed the sale of substantially
all of the asets related to its direct list sales and database
services and website development and design business held be
certain of its wholly owned subsidiaries (the "Northeast
Operations") to Automation Research, Inc. for approximately $10.4
million in cash plus the assumption of all directly related
liabilities. The results of the operations are no longer included
on the Company's results from the date of sale. Amounts have been
reclassified to discontinued operations.
(7) In March 2004, the Company completed the sale of substantially
all of the assets relating to its telemarketing and teleservices
business held by its wholly owned subsidiary, MKTG Teleservices,
Inc., ("MKTG Teleservices') to SD&A Teleservices, Inc. ('SDA'), a
wholly owned subsidiary of the Robert W. Woodruff Arts Center,
Inc. for approximately $2.5 million in cash and a note reveiable
for $0.3 million plus the assumption of certain directly related
liabilities, subject to a final working capital adjustment. The
results of the operations are no longer included on the Company's
results from the date of sale. Amounts have been reclassified to
discontinued operations.
Item 7. Management's Discussion and Analysis
- ----------------------------------------------
Overview
- --------
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity/cash flows of the Company
for the twelve-month period ended June 30, 2004. This should be read in
conjunction with the financial statements, and notes thereto, included in this
Form 10-K.
In as much as the Company's first acquisition in it's new business operations
was in April 2004, the operating results reported in this Form 10-K are
indicative of primarly only the remaining non-revenue generating corporate
operations. The revenues and ernings which may be generated by newly aquired
business operations will be realized in subsequent reporting periods
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:
The Company accounts for revenue recognition in accordance with Staff Accounting
Bulletin No. 104, ("SAB 104"), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements, and Emerging
Issues Task Force ("EITF") Issue No. 99-19 "Reporting Revenue Gross as a
Principal vs. Net as an Agent" which provides guidance on the recognition of
revenue gross as a principal versus net as an agent.
Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements," ("SAB 101") the
Company has reviewed its accounting policies for the recognition of revenue. SAB
101 was implemented in fourth quarter 2001. SAB 101 provides guidance on
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company's policies for revenue recognition are
consistent with the views expressed within SAB 101. The adoption of SAB 101, did
not have
16
a material effect on the Company's consolidated financial position, cash flows,
or results of operations. Although net income was not materially affected, the
adoption did have an impact on the amount of revenue recorded as the revenue
associated with the Company's list sales and services product line are now
required to be shown net of certain costs. The Company believes this
presentation is consistent with the guidance in Emerging Issues Task Force
("EITF") 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent."
All prior periods presented have been restated.
As of June 30, 2004, there were no revenue generating operations remaining
within Media Services Group, Inc. as a result of the sale of substantially all
of the assets related to its telemarketing and telesales business held by its
wholly owned subsidiary, MKTG Teleservices, Inc. Future Developments America,
Inc., the sole subsidiary of MSGI as of June 30, 2004, is a new and emerging
business and, as such, has generated no revenues as of June 30, 2004. Revenues
will be generated by and reported for the operations of FDA in subsequent
reporting periods.
Goodwill and Intangible Assets:
Effective July 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS"), No. 142, "Goodwill and Other Intangible Assets". Under SFAS
142, the Company ceased amortization of goodwill and tests its goodwill on an
annual basis using a two-step fair value based test.
The first step of the goodwill impairment test, used to identify potential
impairment, compares the fair value of a reporting unit with its carrying
amount, including goodwill. If the carrying amount of the reporting unit exceeds
its fair value, the second step of the goodwill impairment test must be
performed to measure the amount of the impairment loss, if any. The Company
completed the transition requirements under SFAS No. 142. The Company determined
that it had three reporting units. Reporting unit 1 represents operations of
list sales and services and database marketing. Reporting unit 2 represents the
operations of telemarketing. Reporting unit 3 represents the operations of web
site development and design. The company recognized and impairment charge of
approximately $5.1 million in connection with the adoption of SFAS No. 142 for
reporting units 1 and 3. The impairment charge has been booked by the Company in
accordance with SFAS No. 142 transition provisions as a cumulative effect of a
change in accounting principle for the year ended June 30, 2003. In connection
with the sale of the Northeast Operations (See Note 4), the only remaining
reporting unit consists of telemarketing. The remaining Goodwill relating to the
Northeast Operations of approximately $8.1 million was included in loss from
discontinued operations for the year ended June 30, 2003. At June 30, 2002,
approximately $13.2 million of goodwill was included in net liabilities of
discontinued operations. AS of June 30, 2004, goodwill in the amount of $0.5
million appears on the consolidated balance sheet relative to the purchase
of 51% of Future Developments America, Inc.
Prior to the adoption of SFAS 142 on July 1, 2002, the Company amortized
goodwill over its estimated useful life and evaluated goodwill for impairment in
conjunction with its other long-lived assets.
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.
To facilitate an analysis of MSGI operating results, certain significant events
should be considered.
17
In March 2000, the Company completed a private placement of 3,200,000 shares of
Convertible Preferred Stock of its WiredEmpire subsidiary for proceeds of
approximately $18.7 million, net of placement fees and expenses of $1.3 million.
On September 21, 2000, the Company's Board of Directors approved a plan to
discontinue the operation of WiredEmpire. The Company shut down the operations
by the end of January 2001. In the fiscal year ended June 30, 2000, the Company
recorded losses associated with WiredEmpire of approximately $34.5 million.
These losses included approximately $19.5 million in losses from operations
through the measurement date and approximately $15.0 million of loss on disposal
which included approximately $2.0 million in losses from operations from the
measurement date through the estimated date of disposal. It also included
provisions for vested compensation expense of $2.0 million, write down of assets
to net realizable value of $8.8 million, lease termination costs of $1.9
million, employee severance and benefits of $1.8 million and other contractual
commitments of $.5 million. As of June 30, 2002, approximately $1.7 million
remains accrued representing payments expected to be made related to legal and
lease obligations.
On June 13, 2001, the Board of Directors and management of the Company approved
a formal plan to sell Grizzard. In July 2001, the Company completed its sale of
all the outstanding capital stock of its Grizzard subsidiary to Omnicom Group,
Inc. The purchase price of the transaction was $89.8 million payable in cash,
net of a working capital adjustment. As a result of the sale agreement, the
Company fully paid the term loan of $35.5 million and $12.0 million line of
credit. The Company recorded an extraordinary loss of approximately $4.9 million
in the year ended June 30, 2002 as a result of the early extinguishment of debt.
At June 30, 2001, the assets and liabilities of Grizzard were classified as net
assets held for sale in the amount of $80.9 million. In the year ended June 30,
2001, the Company recognized a loss on assets held for sale in the amount of
$36.7 million representing a write-down of the amount of assets held for sale to
net realizable value. Grizzard's revenues included in the Company's statement of
operations for the fiscal years ended June 30, 2002, 2001 and 2000 were $2.8
million, $82.8 million and $19.6 million, respectively. Grizzard's net loss
included in the Company's statement of operations for the fiscal years ended
June 30, 2002, 2001 and 2000 were $8.5 million, $41.0 million and $3.8 million,
respectively.
In December 2002, the Company completed the sale of substantially all of 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. The Company recognized
a loss on disposal of discontinued operations of approximately $.2 million in
the year ended June 30, 2003. 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 plus
any additional expenses incurred.
In March 2004, the Company completed the sale of substantially all of the assets
relating to its telemarketing and teleservices business held by its wholly owned
subsidiary, MKTG Teleservices, Inc., ("MKTG Teleservices") to SD&A Teleservices,
Inc. ("SDA"), a wholly owned subsidiary of the Robert W. Woodruff Arts Center,
Inc. for approximately $2.5 million in cash and a note receivable for $0.3
million plus the assumption of certain directly related liabilities. The Company
recognized a loss on disposal of discontinued operations of approximately $1.0
million in the year ended June 30, 2004. 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 plus any additional expenses incurred.
On April 10, 2004, the Company completed its purchase of 51% of the outstanding
shares of the common stock of FDA for an aggregate purchase price of $1.0
million, pursuant to a definitive agreement entered into as of April 10, 2004.
Further subject to the terms and conditions of the Stock Purchase Agreement,
18
the Company may obtain up to an additional 25% beneficial ownership of FDA,
if certain pre-tax income targets are not met by certain target dates as set
forth in the Stock Purchase Agreement.
Results of Operations Fiscal 2004 Compared to Fiscal 2003
- ---------------------------------------------------------
As of the year ended June 30, 2004 (the "Current Period"), there were no revenue
generating operations remaining within Media Services Group, Inc. as a result of
the sale of substantially all of the assets related to its telemarketing and
telesales business held by its wholly owned subsidiary, MKTG Teleservices, Inc.
Future Developments America, Inc., the sole subsidiary of MSGI as of June 30,
2004, is a new and emerging business and, as such, has generated no revenues as
of June 30, 2004. Revenues are expected be generated by and reported for the
operations of Future Developments America, Inc. in subsequent reporting periods.
All revenues generated by previously owned subsidiaries during the fiscal year
ended June 30, 2003, (the "Prior Period"), have been reclassified to a single
line presentation of Gain or Loss from Discontinued Operations on the
Consolidated Statement of Operations.
Salaries and benefits of approximately $410,000 in the Current Period decreased
by approximately $333,000 or 45% over salaries and benefits of approximately
$743,000 in the Prior Period. Salaries and benefits decreased due to decreased
headcount in certain areas of the Company. In connection with a reduction in the
workforce during the Prior Period, corporate head count was reduced from seven
to three. In February 2003, certain compensation arrangements were modified. The
Chief Executive Officer voluntarily forgave part of his base compensation to
effect a reduction of approximately 30% to $350,000. The Chief Accounting
Officer also forgave part of her base compensation to effect a reduction of
approximately 30% and $125,000 per year and in addition, due to medical reasons
resigned as Chief Accounting Officer of the Company in March 2003. The Chief
Executive Officer assumed the duties as the Chief Accounting Officer until such
a replacement was elected in December 2003.
Selling, general and administrative expenses of approximately $1.4 million in
the Current Period increased by approximately $0.3 million or 27% over
comparable expenses of $1.1 million in the Prior Period. Of the increase,
approximately $0.1 million is attributable to increases in travel expenses
incurred as a result of the requirements of the Company's recent merger and
acquisition activities. The remainder of the increase is due primarily to
increases in consulting and investor relations related expenses.
Consulting fees on options grants of approximately $0.4 million in the Current
Period The fair value of options, valued using the Black-Scholes method,
resulted from the issuing of 60,000 options to a third party for consulting
fees, which were vested immediately. There were no such expenses in the Prior
Period.
Gain on termination of lease of approximately $3.9 million in the Prior Period
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
approximately $.3 million 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 the 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.
During the Prior Period, 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 Company
securities. The case was filed in the name of Mark Levy v. General Electric
Capital Corporation, in the United States District Court for the Southern
District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002,
a settlement was reached among the parties. The settlement provided for a $1.3
million payment to be made to the Company by GECC and for GECC to reimburse the
Company for the reasonable cost of mailing a notice to stockholders up to
$30,000. On April 29, 2002, the court approved the settlement for approximately
$1.3 million, 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 approximately $965,000 plus reimbursement of mailing
costs.
19
Net interest income of approximately $23,000 in the Current Period
increased by approximately $36,000 over net interest expense of approximately
$13,000 in the Prior Period. Net interest income increased primarily due to the
the increase in average cash.
The net provision for income taxes of approximately $10,000 in the Current
Period decreased by approximately $38,000 over net provision for income taxes of
approximately $48,000 from the Prior Period. In addition, 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, loss from continuing operations item of $2.1 million
in the Current Period decreased by $5.1 million over comparable income of $3.0
in the Prior Period.
The loss from discontinued operations in the Current Period and the Prior Period
are the results of loss incurred during the respective periods from MKTG
Teleservices, Inc. and the Northeast Operations which have been sold.
In connection with the sale of MKTG Teleservices, Inc., the Company realized a
loss on disposal of discontinued operations of approximately $1.0 million in the
year ended June 30, 2004. The loss primarily results from 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.
In connection with the sale of the Northeast Operations, the Company realized a
loss on disposal of discontinued operations of approximately $.2 million in the
year ended June 30, 2003. The loss primarily results from 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.
As of December 31, 2002, the Company completed the transition requirements under
SFAS No. 142. There is no impairment for its telemarketing unit. The Company
recognized an impairment charge of approximately $5.1 million in connection with
the adoption of SFAS No. 142 for its list sales and database marketing and
website development and design business. The impairment charge has been booked
by the Company in accordance with SFAS 142 transition provisions as a cumulative
effect of change in accounting for the year ended June 30, 2003.
As a result of the above, net loss of approximately $3.3 million in the Current
Period increased by approximately $0.7 million over comparable net loss of $2.6
million in the Prior Period.
In the Prior Period the Company recognized a gain on redemption of preferred
stock of approximately $14.0 million and is reflected in net income/(loss)
attributable to common stockholders. The gain is a result of the difference
between the consideration paid for redemption of a cash payment of approximately
$6.0 million and the issuance of 181,302 shares of common stock valued at
approximately $.2 million and the carrying value of the preferred stock which
was approximately $20.2 million which included a beneficial conversion feature
of approximately $10.3 million
Results of Operations Fiscal 2003 Compared to Fiscal 2002
- ---------------------------------------------------------
Salaries and benefits of approximately $0.7 million in the Current Period
decreased by approximately $1.3 million or 65% over salaries and benefits of
approximately $2.0 million in the Prior Period. Salaries and benefits decreased
due to decreased headcount in several areas of the corporate offices. The
Company had been actively consolidating its offices and infrastructure. Certain
functions in the corporate offices were scaled back or eliminated due to the
sale of a significant portion of the company's business during the Current
Period. In connection with a reduction in the workforce, corporate head count
was reduced from seven to three. In February 2003, certain compensation
arrangements were modified.
20
Selling, general and administrative expenses of approximately $1.1 million in
the Current Period decreased by approximately $1.5 million or 58% over
comparable expenses of $2.6 million in the Prior Period. Of the decrease,
approximately $0.5 million is attributable to reductions in professional fees
such as legal and accounting services. The remaining reductions occurred in
areas such as marketing, travel and entertainment and office expenses due to the
consolidation of certain office spaces and the reduction of head count
In the Prior Period, the Company realized an expense of approximately $6.4
million as a result of booking reserves for the cost of certain abandoned
property.
Gain on termination of lease of approximately $3.9 million in the Current Period
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
approximately $.3 million 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 the 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.
During the Current Period, 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 Company
securities. The case was filed in the name of Mark Levy v. General Electric
Capital Corporation, in the United States District Court for the Southern
District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002,
a settlement was reached among the parties. The settlement provided for a $1.3
million payment to be made to the Company by GECC and for GECC to reimburse the
Company for the reasonable cost of mailing a notice to stockholders up to
$30,000. On April 29, 2002, the court approved the settlement for approximately
$1.3 million, 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 approximately $965,000 plus reimbursement of mailing
costs.
Net interest expense of approximately $13,000 in the Current Period decreased by
approximately $0.2 million over net interest income of approximately $0.2
million in the Prior Period. Net interest income decreased primarily due to the
decrease in interest rates coupled with the decrease in average cash.
The net provision for income taxes of approximately $47,000 in the Current
Period increased by approximately $147,000 over the net credit for income taxes
of approximately $100,000 from the Prior Period. In addition, 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, income from continuing operations of $3.0 million in
the Current Period increased by $14.0 million over comparable loss of $11.0 in
the Prior Period.
The loss from discontinued operations in the Current Period and the Prior Period
are the results of loss incurred during the respective periods from Grizzard,
the Northeast Operations and MKTG Teleservices, Inc. which have been sold. The
Company recorded a loss of approximately $4.9 million for the nine months ended
March 31, 2002 as a result of the early extinguishment of debt which is included
in the loss from discontinued operations and was previously classified as an
extraordinary item.
In connection with the sale of the Northeast Operations, the Company realized a
loss on disposal of discontinued operations of approximately $.2 million in the
year ended June 30, 2003. The loss primarily results from the difference
21
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.
For the year ended June 30, 2002, the Company recognized a gain on sale of
Grizzard in the amount of approximately $1.8 million which is included in the
statement of operations in Gain From Disposal of Discontinued Operations. The
gain 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.
As of December 31, 2002, the Company completed the transition requirements under
SFAS No. 142. There is no impairment for its telemarketing unit. The Company
recognized an impairment charge of approximately $5.1 million in connection with
the adoption of SFAS No. 142 for its list sales and database marketing and
website development and design business. The impairment charge has been booked
by the Company in accordance with SFAS 142 transition provisions as a cumulative
effect of change in accounting for the year ended June 30, 2003.
As a result of the above, net loss of approximately $2.6 million in the Current
Period decreased by approximately $63.1 million over comparable net loss of
$65.7 million in the Prior Period.
In the Current Period the Company recognized a gain on redemption of preferred
stock of approximately $14.0 million and is reflected in net income(loss)
attributable to common stockholders. The gain is a result of the difference
between the consideration paid for redemption of a cash payment of approximately
$6.0 million and the issuance of 181,302 shares of common stock valued at
approximately $.2 million and the carrying value of the preferred stock which
was approximately $20.2 million which included a beneficial conversion feature
of approximately $10.3 million
Capital Resources and Liquidity
- -------------------------------
Financial Reporting Release No. 61, which was recently 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.
Critical Accounting Policies:
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States ("GAAP"). The
preparation of consolidated financial statements in accordance 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 from those
estimates. The Company believes that the estimates, judgments and assumptions
upon which the Company relies are reasonable based upon information available to
us at the time that these estimates, judgments and assumptions are made. To the
extent there are material differences between these estimates, judgments or
assumptions and actual results, our financial statements will be affected. The
significant accounting policies that the Company believes are the most critical
to aid in fully understanding and evaluating our reported financial results
include the following:
o Revenue Recognition
o Allowances for Doubtful Accounts and Sales Returns
o Goodwill and Intangible Assets
o Accounting for Income Taxes
In many cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP and does not require management's judgment in its
application. There are also areas in which management's judgment in selecting
among available alternatives would not produce a materially different result.
Our senior management has reviewed the Company's critical accounting policies
and related disclosures with our Audit Committee. See Notes to Consolidated
Financial Statements, which contain additional information regarding our
accounting policies and other disclosures required by GAAP.
22
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, as of June
30, 2004 are as follows:
Rent Expense Less: Sublease Net Rent Expense
----------- ------------- ----------------
2005 $ 497,000 $ (45,300) $ 451,700
2006 240,000 -- 240,000
2007 240,000 -- 240,000
2008 240,000 -- 240,000
2009 240,000 -- 240,000
Thereafter 280,000 -- 280,000
----------- ----------- ----------
$ 1,737,000 $ (45,300) $1,691,700
=========== =========== ==========
Debt:
In March 2004, in connection with the sale of the MKTG Teleservices, Inc.
operations, the Company repaid approximately $0.2 million balance of one credit
facility and terminated the relationship with the credit provider. The Company
no longer has any debt related to credit facilities on its balance sheet as of
June 30, 2004.
In June 2004, the company entered into a note payable to an officer in the
amount of $0.5 million. The note was paid in July 2004.
Preferred Stock:
On February 24, 2000 the Company sold an aggregate of 30,000 shares of Series E
Convertible Preferred Stock, par value $.01 ("Series E Preferred Stock"), and
warrants to acquire 30,648 shares of common stock for proceeds of approximately
$29.5 million, net of approximately $0.5 million of placement fees and expenses.
The preferred stock was convertible into cash or shares of common stock on
February 18, 2004 at the option of the Company. The preferred stock provided for
liquidation preference under certain circumstances and accordingly had been
classified in the mezzanine section of the balance sheet. The preferred stock
had no dividend requirements.
After adjustment for the reverse stock split, the Series E Preferred Stock was
convertible at any time at $1,174.70 per share, subject to reset on August 18,
2000 if the market price of the Company's common stock was lower and subject to
certain anti-dilution adjustments. On August 18, 2000, the conversion price was
reset to $587.52 per share, the market price on that date as adjusted for the
reverse stock split. As a result of the issuance of a certain warrant, certain
antidilultive provisions of the Company's Series E preferred stock were
triggered. The conversion price of such shares was reset to a fixed price of
$18.768 based on an amount equal to the average closing bid price of the
Company's common stock for ten consecutive trading days beginning on the first
trading day of the exercise period of the aforementioned warrant. No further
adjustments were made to the conversion price other than for stock splits, stock
dividends or other organic changes. The warrant was exercisable for a period of
two years at an exercise price of $1,370.448, subject to certain anti-dilution
adjustments. The fair value of the warrant of $15,936,103, as determined by the
Black Scholes option pricing model, was recorded as additional paid in capital
and a corresponding decrease to preferred stock . The warrant expired in
February 2002.
On February 19, 2002, the Company entered into standstill agreements, as
amended, with the Series E preferred shareholders in order for the Company to
continue to discuss with multiple parties regarding the possibility of either
restructuring or refinancing the remainder of the preferred stock. The Company's
commitments as a result of the standstill agreements included a partial
redemption of 5,000 of the Series E preferred shares for $5.0 million, thereby
reducing the number of Series E preferred shares to 23,201 at June 30, 2002. The
value of the preferred stock
23
was initially recorded at a discount allocating a portion of the proceeds to a
warrant. The redemption of such preferred shares for $5.0 million, less the
carrying value of the preferred shares, including the beneficial conversion
feature previously recorded to equity on the balance sheet, resulted in a deemed
dividend of $0.4 million which was recorded to additional paid-in and included
in the calculation of net loss attributable to common stockholders for the year
ended June 30, 2002.
In February 2002, the Company recognized a loss on the redemption of preferred
stock of approximately $.4 million reflected in net loss attributable to common
stockholders. The loss is the result of the difference between the consideration
paid for redemption of the preferred stock for $5.0 million cash and the
carrying value of the preferred stock of $4.6 million which included a
beneficial conversion feature of approximately $2.4 million.
The preferred shareholders converted 1,799 shares of preferred stock to 112,983
shares of common stock for the year ended June 30, 2002.
On October 2, 2002, the common stockholders ratified the issuance of the Series
E preferred stock and approved the stockholders right to convert such preferred
stock to common stock beyond the previous 19.99% limitation. Subsequently, the
preferred shareholders converted 149 shares of Series E preferred into 79,767
shares of common stock.
In January 2003, the Company redeemed the outstanding shares of the preferred
stock for a cash payment of approximately $6.0 million and the issuance of
181,302 shares of common stock valued at approximately $.2 million. The carrying
value of the preferred stock was approximately $20.2 million which included a
beneficial conversion feature of approximately $10.3 million. The transaction
resulted in a gain on redemption of approximately $14.0 million and is reflected
in net income attributable to common stockholders for the year ended June 30,
2003.
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 June 30, 2004, the Company
had cash and cash equivalents of $2.5 million and short-term notes receivable of
$0.6 million.
The Company realized a loss from continuing operations of $2.1 million in the
Current Period. Cash used in operating activities from continuing operations was
approximately $2.6 million. Net cash used in operating activities principally
resulted from the income from continuing operations in addition to reduction in
accrued liabilities offset by an increase trade accounts payable in the Current
Period. The Company realized income from continuing operations of $2.9 million
in the Prior Period. Cash used in operating activities from continuing
operations was approximately $4.4 million. Net cash used in operating activities
principally resulted from the income from continuing operations offset by a
decrease in trade accounts payable, a decrease in accrued expenses and other
liabilities and other non-cash items in the Prior Period.
In the Current Period, net cash of $2.5 million was provided by investing
activities consisting of net proceeds from the sale of the MKTG Teleservices,
Inc. operations, net of fees, offset by an increase in purchases of property and
equipment. In the Prior Period, net cash of $13.5 million was provided from
investing activities consisting primarily of $78.6 million from proceeds from
the sale of the Northeast operations as well as a decrease in restricted cash.
In the Current Period, net cash of $1.4 million was provided by financing
activities. Net cash provided by financing activites consisted primarily of
proceeds from the sale of common stock and proceeds from a related party note
payable offset by repayments of long term debt. In the Prior Period, net cash of
$12.1 million was used in financing activities. Net cash used in financing
activities consisted of $4.8 million repayments of debt and capital leases,
redemption of a portion of preferred stock of $6.0 million and repayment of
proceeds from credit facilities of $1.2 million.
In the Current Period net cash of $0.6 million was provided by discontinued
operations. In the prior period, net cash of $0.1 million was used by
discontinued operations.
24
In February 2001, the Company entered into a strategic partnership agreement
(the "Agreement") with Paris based Firstream. Firstream paid the Company $3.0
million and in April 2001 received 1.5 million restricted shares of common
stock, plus a two-year warrant for 400,000 shares priced at $3.00 per share. The
warrant was exercisable over a two year period. The warrant was valued at $.9
million as determined by the Black-Scholes option pricing model and was recorded
to equity. In accordance with the Agreement, the Company recorded proceeds of
$1.8 million; net of fees and expenses, as equity and $1.0 million was
designated as deferred revenue to provide for new initiatives. As part of the
strategic partnership, the Company was to launch several new Firstream products
and services in the areas of wireless communications, online music and consumer
marketing programs for early adopters of new products. The remaining balance was
$.8 million at June 30, 2002. In July 2002, the Company received a letter from
Firstream canceling the strategic partnership agreement and requesting payment
of the remaining $.8 million, which had been categorized as a liability at June
30, 2002. The Company settled with Firstream during fiscal year 2003 for
approximately $.2 million and the remaining liability was sold as part of the
Northeast operations sale. There was no remaining liability as of June 30, 2003.
In December 2002, the Company completed the sale of substantially all of 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
years ending June 30, 2003, 2002 and 2001 have been reclassed into a one-line
presentation and is included in Loss from Discontinued Operations and Net Cash
Used by Discontinued Operations. In addition, the assets and liabilities of the
Northeast Operations have been segregated and presented in Net Assets of
Discontinued Operations and Net Liabilities of Discontinued Operations as of
June 30, 2002.
In connection with the sale of the Northeast Operations, the Company recognized
a loss on disposal of discontinued operations of approximately $.2 million in
the year ended June 30, 2003. 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 plus
any additional expenses incurred. There was no tax impact on this loss.
On July 31, 2001, the Company completed the sale of all the outstanding capital
stock of its Grizzard subsidiary to Omnicom Group, Inc. As a result of the sale
agreement, the Company repaid a term loan of $35.5 million and a $12.0 million
line of credit. The Company recorded a loss of approximately $4.9 million for
the year ended June 30, 2002 as a result of the early extinguishment of debt
which is included in the loss from discontinued operations. For the year ended
June 30, 2002, the Company recognized a gain on sale of Grizzard in the amount
of approximately $1.8 million which is included in the statement of operations
in Gain from Disposal of Discontinued Operations. The gain 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. The statement of operations and cash flows for the years
ended June 30, 2002 and 2001 have been reclassified into a one-line presentation
and is included in Loss from Discontinued Operations and Net Cash Used by
Discontinued Operations.
In January 2001, the Company sold certain assets of WiredEmpire for $1.3
million, consisting of $1.0 million in cash and $.3 million held in escrow,
which was paid in May 2001. This transaction resulted in a gain on sale of
assets of $1.3 million which is included in the statement of operations in Gain
from disposal of discontinued operations. The statement of operations and cash
flows for the year ended June 30, 2001 have been reclassified into a one-line
presentation and is included in Loss from Discontinued Operations and Net Cash
Used by Discontinued Operations.
On September 21, 2000, the Company's Board of Directors approved a plan to
discontinue the operation of its WiredEmpire subsidiary. The Company shut down
the operations by the end of January 2001. The estimated losses associated with
WiredEmpire were approximately $34.5 million. These losses for WiredEmpire
included
25
approximately $19.5 million in losses from operations through the measurement
date and approximately $15.0 million of loss on disposal.
In September 2000 the Company offered to exchange the WiredEmpire preferred
shares for MSGI common shares. During the fiscal year end June 30, 2001, the
Company exchanged 41,042 shares of unregistered MSGI common stock for
WiredEmpire preferred stock. The exchange resulted in a gain of $13,410,273,
which was recorded through equity and is included in net loss attributable to
common stockholders and earnings per share - discontinued operations for the
year ended June 30, 2001. As of June 30, 2003, 48,000 shares of WiredEmpire
preferred stock have not been exchanged and this is reported as minority
interest in preferred stock of discontinued subsidiary as $280,946 at June 30,
2003. The shares were subsequently returned to MSGI and forfeited during the
fiscal period ended June 30, 2004. This is reported as a gain on the redemption
of preferred stock of a discontinued subsidiary as of June 30, 2004.
Summary of Recent Accounting Pronouncements
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No. 104,
"Revenue Recognition" ("SAB No. 104"), which codifies, revises and rescinds
certain sections of SAB No. 101, "Revenue Recognition", in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material effect on our consolidated results of operations,
consolidated financial position or consolidated cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"), which addresses consolidation by
business enterprises of variable interest entities ("VIEs"). FIN No.46 is
applicable immediately for VIEs created after January 31, 2003 and are effective
for reporting periods ending after December 15, 2003, for VIEs created prior to
February 1, 2003. In December 2003, the FASB published a revision to FIN 46
("FIN 46R") to clarify some of the provisions of the interpretation and to defer
the effective date of implementation for certain entities. Under the guidance of
FIN 46R, public companies that have interests in VIE's that are commonly
referred to as special purpose entities are required to apply the provisions of
FIN 46R for periods ending after December 15, 2003. A public company that does
not have any interests in special purpose entities but does have a variable
interest in a VIE created before February 1, 2003, must apply the provisions of
FIN 46R by the end of the first interim or annual reporting period ending after
March 14, 2004. The Company adopted FIN 46 and FIN 46R during the year ended
June 30, 2004. The adoption of FIN 46 had no impact on the financial condition
or results of operations since the Company does not have investments in VIE's.
In April 2004, the Emerging Issues Task Force issued Statement No. 03-06 ("EITF
03-06"), "Participating Securities and the Two-Class Method Under FASB Statement
No. 128, Earnings Per Share." EITF 03-06 addresses a number of questions
regarding the computation of earnings per share by companies that have issued
securities other than common stock that contractually entitle the holder to
participate in dividends and earnings of the company when, and if, it declares
dividends on its common stock. The issue also provides further guidance in
applying the two-class method of calculating earnings per share, clarifying what
constitutes a participating security and how to apply the two-class method of
computing earnings per share once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. EITF 03-06 is effective for fiscal periods beginning after March 31,
2004. The Company does not expect the adoption of this statement to have a
material impact on its financial position or results of operations.
In June 2004, the Emerging Issues Task Force ("EITF") issued EITF No. 03-01,
"The Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments" ("EITF 03-01"). EITF 03-01 includes new guidance for evaluating and
recording impairment losses on debt and equity investments, as well as new
disclosure requirements for investments that are deemed to be temporarily
impaired. The accounting guidance of EITF 03-01 is effective for reporting
periods beginning after June 15, 2004, while the disclosure requirements for
debt and equity securities accounted for under SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, are effective for annual periods
ending after December 15, 2003. Adoption of EITF 03-01 will not have a material
impact on the Company's consolidated financial position or results of
operations.
26
Item 7 (a). Quantative and Qualitative Disclosure about Market Risk
- --------------------------------------------------------------------
MSGI believes that it does not have any material exposure to market risk
associated with interest rate risk, foreign currency exchange rate risk,
commodity price risk, equity price risk, or other market risks.
Item 8 - Financial Statements and Supplementary Data
- ----------------------------------------------------
The Consolidated Financial Statements required by this Item 8 are set forth as
indicated in the index following Item 14(a)(1).
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
None.
Item 9 (a) - Controls and Procedures
- ------------------------------------
Quarterly Evaluation of the Company's Disclosure Controls and Internal Controls.
As of the end of the period covered by this Annual Report on Form 10-K, the
Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" ("Disclosure Controls"), and its "internal
controls and procedures for financial reporting" ("Internal Controls"). This
evaluation (the "Controls Evaluation") was done under the supervision and with
the participation of our chief executive officer ("CEO") and principal financial
officer. Rules adopted by the Securities and Exchange Commission ("SEC") require
that in this section of the Annual Report we present the conclusions of the CEO
and the principal financial officer about the effectiveness of our Disclosure
Controls and Internal Controls based on and as of the date of the Controls
Evaluation.
Disclosure Controls and Internal Controls. As provided in Rule 13a-14 of the
General Rules and Regulations under the Securities and Exchange Act of 1934, as
amended, Disclosure Controls are defined as meaning controls and procedures that
are designed with the objective of insuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), is recorded, processed, designed and reported
within the time periods specified by the SEC's rules and forms. Disclosure
Controls include, within the definition under the Exchange Act, and without
limitation, controls and procedures to insure that information required to be
disclosed by us in our reports is accumulated and communicated to our
management, including our CEO and principal financial officer, as appropriate to
allow timely decisions regarding disclosure. Internal Controls are procedures
which are designed with the objective of providing reasonable assurance that (1)
our transactions are properly authorized; (2) our assets are safeguarded against
unauthorized or improper use; and (3) our transactions are properly recorded and
reported, all to permit the preparation of our financial statements in
conformity with generally accepted accounting principles.
Scope of the Controls Evaluation. The evaluation made by our CEO and principal
financial officer of our Disclosure Controls and our Internal Controls included
a review of the controls' objectives and design, the controls' implementation by
the Company and the effect of the controls on the information generated for use
in this Annual Report. In the course of the Controls Evaluation, we sought to
identify data errors, control problems or acts of fraud and to confirm that
appropriate corrective action, including process improvements, were being
undertaken. This type of evaluation will be done on a quarterly basis so that
the conclusions concerning controls effectiveness can be reported in our
Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. The overall goals
of these various evaluation activities are to monitor our Disclosure Controls
and our Internal Controls and to make modifications as necessary; our intent in
this regard is that the Disclosure Controls and the Internal Controls will be
maintained as dynamic systems that change (including with improvements and
corrections) as conditions warrant.
27
Among other matters, we sought in our evaluation to determine whether there were
any "significant deficiencies" or "material weaknesses" in the Company's
Internal Controls, or whether the Company had identified any acts of fraud
involving personnel who have a significant role in the Company's Internal
Controls. In the professional auditing literature, "significant deficiencies"
are referred to as "reportable conditions"; these are control issues that could
have a significant adverse effect on the ability to record, process, summarize
and report financial data in the financial statements. A "material weakness" is
defined in the auditing literature as a particularly serious reportable
condition where the internal control does not reduce to a relatively low level
the risk that misstatements caused by error or fraud may occur in amounts that
would be material in relation to the financial statements and not be detected
within a timely period by employees in the normal course of performing their
assigned functions. We also sought to deal with other controls matters in the
Controls Evaluation, and in each case if a problem was identified, we considered
what revision, improvement and/or correction to make in accord with our on-going
procedures.
In accord with SEC requirements, our CEO and principal financial officer each
have confirmed that, during the most recent fiscal quarter and since the date of
the Controls Evaluation to the date of this Annual Report, there have been no
significant changes in Internal Controls or in other factors that have
materially affected, or are reasonably likely to materially affect, the
Company's Internal Controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
On October 13, 2004, our independent registered accounting firm Amper,
Politziner & Mattia, P.C. ("AP&M"), informed us and our Audit Committee of the
Board of Directors that in connection with their review of our financial results
for the fiscal year ended June 30, 2004, AP&M had discovered a condition which
they deemed to be a material weakness in our internal controls (as defined by
standards established by the Public Company Accounting Oversight Board). AP&M
noted a lack of sufficient resources and an insufficient level of monitoring and
oversight, which may restrict the Company's ability to gather, analyze and
report information relative to the financial statement assertions in a timely
manner, including insufficient documentation and review of selection and
application of generally accepted accounting principles to significant
non-routine transactions. In addition, the limited size of the accounting
department makes it impracticable to achieve an optimum separation of duties,
especially with the Company's continued growth and the increased demands of
public reporting information. The impact of the above condition was relevant to
the current period only and did not affect the results of this period or any
prior periods.
Conclusions. Based upon the Controls Evaluation, our CEO and principal financial
officer have each concluded that, our Disclosure Controls are effective to
ensure that material information relating to the Company and its consolidated
subsidiaries is made known to management, including the CEO and principal
financial officer, particularly during the period when our periodic reports are
being prepared, and that our Internal Controls are effective to provide
reasonable assurance that our financial statements are fairly presented in
conformity with generally accepted accounting principles.
PART III
The information required by this Part III (items 10, 11, 12, 13 and 14) is
hereby incorporated by reference from the Company's definitive proxy statement
which is expected to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 not later than 120 days after the end of the fiscal year
covered by this report.
Part IV
Item 15 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a)(1) Financial statements - see "Index to Financial Statements" on page 28.
(2) Financial statement schedules - see "Index to Financial Statements"
on page 28.
(3) Exhibits:
28
3.1 Amended and Restated Articles of Incorporation (c)
3.2 Certificate of Amendment to the Amended and Restated Articles of
Incorporation of the Company (b)
3.3 Certificate of Amendment to the Articles of Incorporation for change
of name to All-Comm Media Corporation (f)
3.4 By-Laws (a)
3.5 Certificate of Amendment of Articles of Incorporation for increase
in number of authorized shares to 36,300,000 total (i)
3.6 Certificate of Amendment of Articles of Incorporation for change of name
to Marketing Services Group, Inc. (k)
3.7 Certificate of Amendment of Articles of Incorporation for increase in
number of authorized shares to 75,150,000 total (n)
3.8 The Amended Certificate of Designation, Preferences and Relative,
Participating and Optional and Other Special Rights of Preferred Stock
and Qualifications, Limitations and Restrictions Thereof for the
Series D Convertible Preferred Stock (l)
3.9 Certificate of Designation, Preferences, and Rights of Series E
Convertible Preferred Stock of Marketing Services Group, Inc. (q)
3.10 Certificate of Amendment to Certificate of Designation, Preferences,
and Rights of Series E Convertible Preferred Stock of
Marketing Services Group, Inc. (r)
3.11 Certificate of Amendment of Articles of Incorporation for change of name
to MKTG Services, Inc. (a)
10.1 1991 Stock Option Plan (d)
10.2 Security Agreement between Milberg Factors, Inc. and Metro Services
Group, Inc. (j)
10.3 Security Agreement between Milberg Factors, Inc. and Stephen Dunn &
Associates, Inc. (k)
10.4 J. Jeremy Barbera Employment Agreement (t)
10.5 Rudy Howard Employment Agreement (t)
10.6 Stephen Killeen Employment Agreement (t)
10.7 Form of Private Placement Agreement (j)
10.8 Purchase agreement dated as of December 24, 1997, by and between the
Company and GE Capital (l)
10.9 Stockholders Agreement by and among the Company, GE Capital and
certain existing stockholders of the Company, dated as of December 24,
1997 (l)
10.10 Registration Rights Agreement by and among the Company and GE
Capital, dated as of December 24, 1997 (l)
10.11 Warrant, dated as of December 24, 1997,
to purchase shares of Common Stock of the Company (l)
10.12 First Amendment to
Preferred Stock Purchase Agreement Between General Electric Capital
Corporation and Marketing Services Group, Inc. (o)
10.13 Promissory note (o)
10.14 Warrant Agreement (o)
10.15 Second Amendment (p)
10.16 Warrant Agreement between Marketing Services Group, Inc. and Marshall
Capital Management, Inc. (q)
10.17 Warrant Agreement between Marketing Services Group, Inc. and RCG
International Investors, LDC. (q)
10.18 Registration Rights Agreement by and Among The Company, RCG International
Investors, LDC and Marshall Capital Management, Inc. (q)
10.19 Securities Purchase Agreement by and Among The Company, RCG International
Investors, LDC and Marshall Capital Management, Inc. (q)
10.20 Credit Agreement Among Grizzard Communications, Inc. and Paribas (s)
10.21 Firstream Letter Agreement (b)
29
10.22 Steven Killeen Termination Agreement (b)
10.23 Standstill Agreement between MKTG Services, Inc. and Castle Creek
Technology Partners LLC (u)
10.24 Standstill Agreement between MKTG Services, Inc. and RCG International
Investors, LDS (u)
10.25 Letter Amendment to Standstill Agreement between MKTG Services, Inc. and
Castle Creek Technology Partners LLC(v)
10.26 Letter Amendment Standstill Agreement between MKTG Services, Inc. and RCG
International Investors, LDS(v)
21 List of Company's subsidiaries (a)
22 Consent of Amper, Politziner & Mattia (a)
23 Consent of PricewaterhouseCoopers LLP (a)
24 Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002(a)
(a) Included herein in the Company's Report on Form 10K- for the fiscal
year ended June 30, 2004
(b) Incorporated by reference to the Company's Report on Form 10K- for the
fiscal year ended June 30, 2001
(c) Incorporated by reference from the Company's Registration Statement on
Form S-4, Registration Statement No. 33-45192
(d) Incorporated by reference to the Company's Registration Statement on
Form S-8, Registration Statement 333-30839
(e) Incorporated herein by reference to the Company's Report on Form 8-K
dated April 25, 1995
(f) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended June 30, 1995
(g) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended March 31, 1996
(h) Incorporated by reference to the Company's Report on Form 8-K dated June
7, 1996
(i) Incorporated by reference to the Company's Report on Form 10-K dated
June 30, 1996
(j) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended March 31, 1997
(k) Incorporated by reference to the Company's Report on Form 10-KSB for the
fiscal year ended June 30, 1997
(l) Incorporated by reference to the Company's Report on Form 8-K dated
January 13, 1998
(m) Incorporated by reference from the Company's Registration Statement on
Form S-4, Registration Statement No. 33-85233.
(n) Incorporated by reference to the Company's Report on Form 10-KSB dated
June 30, 1998
(o) Incorporated by reference to the Company's Report on Form 8-K dated May
13, 1999
30
(p) Incorporated by reference to the Company's Report on Form 8-K dated
August 30, 1999
(q) Incorporated by reference to the Company's Report on Form 8-K dated
February 29, 2000
(r) Incorporated by reference to the Company's Report on Form 8-K/A dated
March 23, 2000
(s) Incorporated by reference to the Company's Report on Form 10-Q dated May
16, 2000
(t) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended June 30, 2000
(u) Incorporated by reference to the Company's Report on Form 8-K dated
February 19, 2002
(v) Incorporated by reference to the Company's Report on Form 8-K dated July
30, 2002
(b) Reports on Form 8-K. None
31
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.
MEDIA SERVICES GROUP, INC.
(Registrant)
By: /s/ J. Jeremy Barbera
---------------------
J. Jeremy Barbera
Chairman of the Board and
Chief Executive Officer
By: /s/ Richard J. Mitchell III
---------------------
Richard J. Mitchell III
Chief Accounting Officer
and Principle Financial Officer
Date: October 13, 2004
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.
Signature Title Date
- ------------------------------ ------------------------------------------- --------------------
/s/ J. Jeremy Barbera
- ------------------------------- Chairman of the Board and Chief Executive October 13, 2003
J. Jeremy Barbera Officer (Principal Executive Officer)
/s/ John T. Gerlach Director October 13, 2003
- -------------------------------
John T. Gerlach
/s/ Seymour Jones Director October 13, 2003
- -------------------------------
Seymour Jones
/s/ David Stoller Director October 13, 2003
- -------------------------------
David Stoller
32
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
[Items 14]
(1)FINANCIAL STATEMENTS: Page
--------------------- ----
Report of Independent Registered Public Accounting Firm 34-35
Consolidated Balance Sheets as of June 30, 2004 and
June 30, 2003 36
Consolidated Statements of Operations
Years Ended June 30, 2004, 2003 and 2002 37-38
Consolidated Statement of Stockholders' Equity
Years Ended June 30, 2004, 2003 and 2002 39
Consolidated Statements of Cash Flows
Years Ended June 30, 2004, 2003and 2002 40
Notes to Consolidated Financial Statements 41-57
Schedules other than those listed above are omitted because they are not
required or are not applicable or the information is shown in the audited
financial statements or related notes.
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
DRAFT
Board of Directors and Stockholders
Media Services Group, Inc.
We have audited the accompanying consolidated balance sheets of Media Services
Group, Inc. and Subsidiaries (formerly MKTG Services, Inc.) as of June 30, 2004
and 2003, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the fiscal years ended June 30, 2004 and 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Media Services Group, Inc. and
Subsidiaries as of June 30, 2004 and 2003, and the results of its operations and
its cash flows for the fiscal years ended June 30, 2004 and 2003, in conformity
with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and negative cash flows from operations, in addition to certain contingencies
that may require significant resources, all of which raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 1 to the consolidated financial statements, during the year
ended June 30, 2003 the Company changed its method of accounting for goodwill in
accordance with the adoption of SFAS 142 "Goodwill and other intangible assets."
/s/ Amper, Politziner & Mattia P.C.
October 12, 2004
Edison, New Jersey
34
Report of Independent Registered Public Accounting Firm
The Board of Directors
Media Services Group, Inc.
In our opinion, the consolidated statements of operations, of cash flows and of
changes in stockholders' equity for the year ended June 30, 2002, presents
fairly, in all material respects, the results of operations and cash flows of
Media Services Group, Inc. and its Subsidiaries (formerly MKTG Services, Inc.)
for the year ended June 30, 2002, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in paragraph 2 of Note 2
to the financial statements, the Company has limited capital resources and has
incurred significant recurring losses and negative cash flows from operations,
in addition to certain contingencies that may require significant resources, all
of which raise substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty. Management's plan with respect to
this matter is set forth as discussed in Note 2.
/s/ PRICEWATERHOUSECOOPERS LLC
New York, New York
September 26, 2002, except for the reclassification and presentation of the
discontinued operations of the Northeast Operations and Grizzard, Inc., as
discussed in Note 4, as to which the date is October 14, 2003 and for the
reclassification and presentation of the discontinued operations of MKTG
Teleservices, Inc., as discussed in Note 4, as to which the date is October 13,
2004
35
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2004 AND 2003
ASSETS 2004 2003
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 2,548,598 $ 660,742
Stock subscription receivable 600,000 -
Net assets of discontinued operations - 5,472,921
Other current assets 208,293 451,548
----------- ----------
Total current assets 3,356,891 6,585,211
Property and equipment, net 5,130 -
Goodwill 490,000 -
Note receivable 300,000 -
Related party note receivable 1,120,013 1,050,309
Other assets 15,700 12,000
----------- --------
Total assets $ 5,287,734 $7,647,520
============= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable-trade 381,722 $ 288,631
Accrued expenses and other current liabilities 748,603 1,364,547
Note payable - shareholder 500,000 -
Net liabilities of discontinued operations 130,742 941,543
Current portion of long-term obligations - 201,062
----------- ----------
Total current liabilities 1,761,067 2,795,783
Other liabilities 1,070,570 1,463,131
----------- ---------
Total liabilities 2,831,637 4,258,914
----------- ---------
Minority interest in preferred stock of discontinued subsidiary - 280,946
Minority interest in subsidiary 255,517 -
Stockholders' equity:
Common stock - $.01 par value; 9,375,000 authorized; 1,530,093 and 1,108,198
shares issued; 1,521,262 and 1,092,367 shares outstanding
as of June 30, 2004 and 2003, respectively 15,300 11,011
Additional paid-in capital 222,658,012 220,258,236
Accumulated deficit (219,079,022) (215,767,877)
Less: 8,831 shares of common stock in treasury, at cost (1,393,710) (1,393,710)
-------------- ------------
Total stockholders' equity 2,200,580 3,107,660
------------- -----------
Total liabilities and stockholders' equity $ 5,287,734 $ 7,647,520
============= ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
36
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2004, 2003, AND 2002
2004 2003 2002
----------- ------------ ------------
Revenues $ -- $ -- $ --
----------- ------------ ------------
Operating costs and expenses:
Research and Development 167,940 -- --
Salaries and benefits 409,919 743,359 1,971,818
Selling, general and administrative 1,379,824 1,090,292 2,645,680
Consulting expense on option grants 377,363 -- --
Reserve for rent on abandoned property -- -- 6,400,000
Gain on termination of lease -- (3,905,387) --
Depreciation and amortization -- -- 41,092
----------- ------------ ------------
Total operating costs and expenses 2,335,046 (2,071,736) 11,058,590
----------- ------------ ------------
Income (loss) from operations (2,335,046) 2,071,736 (11,058,590)
----------- ------------ ------------
Other income (expense):
Gain (loss) on legal settlement -- 965,486 (246,000)
Interest income (expense) and other, net 22,925 (12,930) 229,463
----------- ------------ ------------
22,925 952,556 (16,537)
Minority interest in subsidiary 234,483 -- --
Income (loss) from continuing operations
before provision for income taxes (2,077,638) 3,024,292 (11,075,127)
Provision for income taxes 9,780 47,589 (102,877)
----------- ------------ ------------
Income (loss) from continuing operations (2,087,418) 2,976,703 (10,972,250)
Discontinued operations:
Loss from discontinued operations (211,613) (296,138) (56,583,717)
Gain (loss) from disposal of discontinued operations (1,012,114) (220,396) 1,872,830
----------- ------------ ------------
Loss from discontinued operations (1,223,727) (516,534) (54,710,887)
----------- ------------ ------------
Cumulative effect of change in accounting principle -- (5,075,000) --
----------- ------------ ------------
Net loss (3,311,145) (2,614,831) (65,683,137)
----------- ------------ ------------
Gain (deemed dividend) on redemption of preferred stock -- 13,970,813 (412,634)
Gain on redemption of preferred stock of discontinued
subsidiary 280,946 -- --
----------- ------------ ------------
Net income (loss) attributable to common stockholders $(3,030,199) $ 11,355,982 $(66,095,771)
=========== ============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
37
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
FOR THE YEARS ENDED JUNE 30, 2004, 2003, AND 2002
2004 2003 2002
------------- ------------- -----------
Basic earnings (loss) per share:
Continuing operations $ (1.56) $ 17.34 $ (14.89)
Discontinued operations (1.06) (0.53) (71.58)
Cumulative effect of change in accounting principle -- (5.19) --
------------- ------------- -----------
Basic earnings (loss) per share $ (2.62) $ 11.62 $ (86.47)
============= ============= ===========
Diluted earnings (loss) per share:
Continuing operations $ (1.56) $ 14.78 $ (14.89)
Discontinued operations (1.06) (0.45) (71.58)
Cumulative effect of change in accounting principle -- (4.43) --
------------- ------------- -----------
Diluted earnings (loss) per share $ (2.62) $ 9.90 $ (86.47)
============= ============= ===========
Weighted average common shares outstanding - basic 1,157,892 977,086 764,360
============= ============= ===========
Weighted average common shares outstanding - diluted 1,157,892 1,146,943 764,360
============= ============= ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
38
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2004, 2003, AND 2002
Additional
Common Stock Paid-in Deferred Accumulated Treasury Stock
------------------ -----------------
Shares Amount Capital Compensation Deficit Shares Amount Totals
--------------------------------------------------------------------------------------------
Balance June 30, 2001 711,407 $7,114 $231,605,312 - $(161,440,722) (8,831) $(1,393,710) $68,777,994
=============================================================================================
Shares issued upon conversion of
Series E Preferred Stock 112,983 1,130 756,667 757,797
Issuance of common stock for
settlement of earn-out
provision 15,739 157 299,843 300,000
Redemption of Series E Preferred
Stock (2,762,634) (2,762,634)
Net and comprehensive loss (65,683,137) (65,683,137)
--------------------------------------------------------------------------------------------
Balance June 30, 2002 840,129 $8,401 $229,899,188 - $(227,123,859) (8,831) $(1,393,710) $1,390,020
=============================================================================================
Shares issued upon conversion
of Series E Preferred Stock 79,767 798 502,555 503,353
Redemption of Series E
Preferred Stock 181,302 1,812 (10,143,507) 13,970,813 3,829,118
Net and comprehensive
loss (2,614,831) (2,614,831)
----------------------------------------------------------------------------------------------
Balance June 30, 2003 1,101,198 $ 11,011 $220,258,236 - $(215,767,877) (8,831) (1,393,710) $3,107,660
==============================================================================================
Cancellation of minority interest
in preferred stock of
discontinued subsidiary 280,946 280,946
Shares issued upon cashless exercise
of warrants 203,895 2,039 (2,039) -
Shares issued in connection with
private placement of common
stock, net of stock issuance
costs of $84,000 225,000 2,250 1,713,750 1,716,000
Options issued in connection
with consulting fees 377,363 377,363
Adjustment of fees associated
with redemption of Series E
Preferred Stock 29,756 29,756
Net and comprehensive loss (3,311,145) (3,311,145)
----------------------------------------------------------------------------------------------
Balance June 30, 2004 1,530,093 $ 15,300 $222,658,012 - $(219,079,022) (8,831) (1,393,710) $2,200,580
==============================================================================================
The accompanying notes are an integral part of these Consolidated Financial
Statements.
39
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2004, 2003, AND 2002
2004 2003 2002
----------- ------------ ------------
OPERATING ACTIVITIES:
Net loss $(3,311,145) $ (2,614,831) $(65,683,137)
Loss from discontinued operations 1,223,727 516,534 54,710,887
Cumulative effect of change in accounting principle -- 5,075,000 --
----------- ------------ ------------
Income (loss) from continuing operations (2,087,418) 2,976,703 (10,972,250)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Gain on termination of lease -- (3,905,387) --
Depreciation -- -- 41,092
Minority interest in subsidiary (234,483) -- --
Consulting expense on option grants 377,363 -- --
Changes in assets and liabilities:
Other current assets 243,255 (53,121) (236,390)
Other assets (3,700) 311,629 (22,054)
Trade accounts payable 93,091 (458,777) (1,050,017)
Accrued expenses and other liabilities (1,008,505) (3,280,359) 4,806,288
----------- ------------ ------------
Net cash used in operating activities (2,620,397) (4,409,312) (7,433,331)
----------- ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (5,130) -- --
Decrease (increase) in restricted cash -- 4,945,874 (4,945,874)
Proceeds from sale of Grizzard -- -- 78,609,258
Proceeds from sale of Northeast Operations, net of fees -- 8,546,182 --
Proceeds from sale of Teleservices, net of fees 2,524,058 -- --
----------- ------------ ------------
Net cash provided by investing activities 2,518,928 13,492,056 73,663,384
----------- ------------ ------------
FINANCING ACTIVITIES:
Redemption of preferred stock -- (6,021,840) (5,000,000)
Expenditures from private placement of preferred shares 29,785 (29,753) (44,971)
Expenditures from private placement of common shares (84,000) -- --
Proceeds from issuance of common stock, net 1,199,971 -- --
Increase in related party note receivable (69,704) (71,775) (1,000,000)
Net (repayments on) proceeds from credit facilities -- (1,158,417) 462,329
Proceeds from related party note payable 500,000 -- --
Repayment of related party notes payable -- -- (400,000)
Repayments of long-term debt (201,062) (4,812,595) (44,385)
----------- ------------ ------------
Net cash provided by/(used in) financing activities 1,374,990 (12,094,380) (6,027,027)
------------ ------------
Net cash from /(used in) discontinued operations 614,335 (129,840) (56,575,714)
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,887,856 (3,141,476) 3,627,312
Cash and cash equivalents at beginning of year 660,742 3,802,218 174,906
----------- ------------ ------------
Cash and cash equivalents at end of year $ 2,548,598 $ 660,742 $ 3,802,218
=========== ============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
40
MKTG SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY OVERVIEW AND PRINCIPLES OF CONSOLIDATION:
Media Services Group, Inc. ("MSGI" or the "Company") is a proprietary solutions
provider developing a global combination of innovative emerging businesses that
leverage information and technology. MSGI is principally focused on the homeland
security and surveillance industry and the media sector. Substantially all of
the Company's business activity will be conducted with customers located within
the United States.
The consolidated financial statements include the accounts of MSGI and its
majority owned subsidiaries. All material intercompany accounts and transactions
have been eliminated in consolidation. Subsidiaries acquired during the year are
recorded from the date of the respective acquisition. Subsidiaries sold during
the year are presented as discontinued operations (See Note 4).
Effective December 29, 2003, the Company changed its legal name from MKTG
Services, Inc. to Media Services Group, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Liquidity:
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 combined with funds that will be available from its
operations should be adequate to finance its operations and capital expenditure
requirements and enable the Company to meet its financial obligations for the
next twelve months. As explained in Note 4, the Company recently sold off
substantially all the assets relating to its telemarketing and teleservices
business held by a certain wholly owned subsidiary. In addition, the Company has
instituted cost reduction measures, including the reduction of workforce and
corporate overhead. Failure of the new 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.
During the past reported fiscal period ended June 30, 2002, the Company had
limited capital resources and had incurred significant recurring losses and
negative cash flows from operations. In addition, certain contingencies may have
required significant resources. The Company may have been required to redeem the
Series E preferred stock (see Note 15) and repay its outstanding lines of credit
depending on future events (see Note 9). The Company did not believe its cash on
hand along with existing sources of cash were sufficient to fund its cash needs
over the upcoming twelve months under the then current capital structure. In
order to address this situation, the Company had discussions with multiple
parties regarding the possibility of either restructuring or refinancing the
remainder of the Series E preferred stock. The Company also reviewed options,
which included replacing the existing Preferred Stockholders with an alternative
strategic investor or selling certain assets to gain funds to attempt to
repurchase the Series E preferred stock at a discount. The Company also needed
to raise additional equity financing or obtain other sources of liquidity
(including debt or other resources). The Company had instituted cost reduction
measures, including the reduction of workforce. In addition, the Company
reviewed its then present operations with the view towards further reducing its
cost structure and workforce and to find alternative means of increasing
revenue. There was no assurance that the Company would be successful in
restructuring its preferred stock or obtaining additional financing.
Additionally, there could be no assurances that the Company's cost reduction
efforts would be successful or that the Company would achieve a level of revenue
that would allow it to return to profitability. In the event the Company was
unable to raise needed financing and achieve profitability, operations would
need to be scaled back or discontinued.
41
These circumstances raised substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements for the
period ended June 30, 2002 do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might have resulted should the Company have been unable to
continue as a going concern.
Cash and Cash Equivalents:
The Company considers investments with an original maturity of three months or
less to be cash equivalents.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the respective assets. Estimated useful lives are as follows:
Furniture and fixtures.................2 to 7 years
Computer equipment and software.................3 to 5 years
Leasehold improvements are amortized, using the straight-line method, over the
shorter of the estimated useful life of the asset or the term of the lease.
The cost of additions and betterments are capitalized, and repairs and
maintenance are expensed as incurred. The cost and related accumulated
depreciation and amortization of property and equipment sold or retired are
removed from the accounts and resulting gains or losses are recognized in
current operations.
Goodwill:
Effective July 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS"), No. 142, "Goodwill and Other Intangible Assets". Under SFAS
142, the Company ceased amortization of goodwill and tests its goodwill on an
annual basis using a two-step fair value based test.
The company recognized and 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 No. 142 transition provisions as a
cumulative effect of a change in accounting principle for the year ended June
30, 2003. In connection with the sale of the telemarketing and teleservices
business (See Note 4), the remaining goodwill relating to the telemarketing and
teleservices business of approximately $2.3 million was included in loss from
discontinued operations for the year ended June 30, 2004.
Prior to the adoption of SFAS 142 on July 1, 2002, the Company amortized
goodwill over its estimated useful life and evaluated goodwill for impairment in
conjunction with its other long-lived assets.
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.
Revenue Recognition:
The Company accounts for revenue recognition in accordance with Staff Accounting
Bulletin No. 104, ("SAB 104"), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements.
42
As of June 30, 2004, there were no revenue generating operations remaining
within Media Services Group, Inc. as a result of the sale of substantially all
of the assets related to its telemarketing and telesales business held by its
wholly owned subsidiary, MKTG Teleservices, Inc. Future Developments America,
Inc., the sole subsidiary of MSGI, is a new and emerging business and, as such,
has generated no revenues for the period ended June 30, 2004. Revenues will be
reported for the operations of Future Developments America, Inc. upon the
completion of a transaction that meets the following criteria of SAB 104 when
(1) persuasive evidence of an arrangement exists; (2) delivery of our services
has occurred; (3) our price to our customer is fixed or determinable; and (4)
collectibility of the sales price is reasonably assured.
Research and Development Costs:
The Company recognizes research and development costs associated with product
development in its Future Developments America, Inc subsidiary. All research and
development costs are expenses in the period incurred. Such expense was $167,940
for the year ended June 30, 2004. There was no such expense in previous years.
Income Taxes:
The Company recognizes deferred taxes for differences between the financial
statement and tax bases of assets and liabilities at currently enacted statutory
tax rates and laws for the years in which the differences are expected to
reverse. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
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. The most significant estimates and assumptions made
in the preparation of the consolidated financial statements relate to the
carrying amount of goodwill, deferred tax valuation allowance and abandoned
lease reserves. Actual results could differ from those estimates.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of temporary cash investments. A significant
portion of cash balances is maintained with one financial institution and may,
at time, exceed federally insurable amounts.
Earnings (Loss) Per Share:
On January 22, 2003, the Board of Directors approved an eight-for-one reverse
split of the common stock. The stock split was effective January 27, 2003. Par
value of the common stock remained $.01 per share and the number of authorized
shares of common stock was reduced to 9,375,000 shares. The effect of the stock
split has been reflected in the balance sheets and statements of stockholders'
equity and in all share and per share data in the accompanying consolidated
financial statements and Notes to Financial Statements. Stockholders' equity
accounts have been retroactively adjusted to reflect the reclassification of an
amount equal to the par value of the decrease in issued common shares from
common stock account to paid-in-capital.
In accordance with SFAS No. 128, "Earnings Per Share," basic earnings per share
is calculated based on the weighted average number of shares of common stock
outstanding during the reporting period. Diluted earnings per share gives effect
to all potentially dilutive common shares that were outstanding during the
reporting period. Stock options and warrants with exercise prices below average
market price in the amount of 63,750, 22,776 and 222,292 shares for the years
ended June 30, 2004, 2003 and 2002, respectively, were not included in the
computation of diluted earnings per
43
share as they are anti-dilutive. In addition, stock options and warrants with
exercise prices above average market price in the amount of 205,000 for the year
ended June 30, 2004 were not included in the computation of diluted earnings per
share as they are anti-dilutive as a result of net losses during the periods
presented.
Convertible preferred stock in the amount of 1,584,661 shares for the year ended
June 30, 2002 were not included in the computation of diluted earnings per share
as they were anti-dilutive as a result of net losses during the periods
presented.
Employee 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.
In accordance with FASB Statement No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure", the effect on net income and
earnings per share if the company had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock Based
Compensation", to stock-based employee compensation is as follows:
Years ended June 30,
------------------------------------------------
2004 2003 2002
-------------- ------------ --------------
Net income (loss) available to common
stockholders as reported $ (3,030,199) $ 11,355,982 $ (66,095,771)
Stock based-compensation recorded -- --
-------------- ------------ --------------
Subtotal (3,030,199) 11,355,982 (66,095,771)
Stock-based compensation recorded under
SFAS 123 28,167 910,753 4,721,019
-------------- ------------ --------------
Proforma net income (loss) available
to common stockholders $(3,058,366) $ 10,445,229 $ (70,816,790)
============== ============ ==============
Earnings (loss) per share:
Basic earnings (loss) per share - as reported $ (2.62) $ 11.62 $ (86.47)
============== ============ ==============
Basic earnings (loss) per share - pro forma $ (2.64) $ 10.69 $ (92.65)
============== ============ ==============
Diluted earnings (loss) per share - as reported $ (2.62) $ 9.90 $ (86.47)
============== ============ ==============
Diluted earning (loss) per share - pro forma $ (2.64) $ 9.11 $ (92.65)
============== ============ ==============
Pro forma net loss reflects only options granted in fiscal 1996 through 2004.
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. The following
assumptions were used for grants for fiscal years ended June 30, 2004, 2003 and
2002 as follows:
44
2004 2002
Risk -free interest rate 4.00% 5.9% to 6.2 %
Expected option life Vesting life + four years Vesting life + two years
Dividend yield None None
Volatility 160% 103%
Comprehensive Income:
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") establishes
standards for the reporting and display of comprehensive income and its
components. The Company has no items of other comprehensive income in any period
presented.
Summary of Recent Accounting Pronouncements:
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No. 104,
"Revenue Recognition" ("SAB No. 104"), which codifies, revises and rescinds
certain sections of SAB No. 101, "Revenue Recognition", in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material effect on our consolidated results of operations,
consolidated financial position or consolidated cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"), which addresses consolidation by
business enterprises of variable interest entities ("VIEs"). FIN No.46 is
applicable immediately for VIEs created after January 31, 2003 and are effective
for reporting periods ending after December 15, 2003, for VIEs created prior to
February 1, 2003. In December 2003, the FASB published a revision to FIN 46
("FIN 46R") to clarify some of the provisions of the interpretation and to defer
the effective date of implementation for certain entities. Under the guidance of
FIN 46R, public companies that have interests in VIE's that are commonly
referred to as special purpose entities are required to apply the provisions of
FIN 46R for periods ending after December 15, 2003. A public company that does
not have any interests in special purpose entities but does have a variable
interest in a VIE created before February 1, 2003, must apply the provisions of
FIN 46R by the end of the first interim or annual reporting period ending after
March 14, 2004. The Company adopted FIN 46 and FIN 46R during the year ended
June 30, 2004. The adoption of FIN 46 had no impact on the financial condition
or results of operations since the Company does not have investments in VIE's.
In April 2004, the Emerging Issues Task Force issued Statement No. 03-06 ("EITF
03-06"), "Participating Securities and the Two-Class Method Under FASB Statement
No. 128, Earnings Per Share." EITF 03-06 addresses a number of questions
regarding the computation of earnings per share by companies that have issued
securities other than common stock that contractually entitle the holder to
participate in dividends and earnings of the company when, and if, it declares
dividends on its common stock. The issue also provides further guidance in
applying the two-class method of calculating earnings per share, clarifying what
constitutes a participating security and how to apply the two-class method of
computing earnings per share once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. EITF 03-06 is effective for fiscal periods beginning after March 31,
2004. The Company does not expect the adoption of this statement to have a
material impact on its financial position or results of operations.
45
In June 2004, the Emerging Issues Task Force ("EITF") issued EITF No. 03-01,
"The Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments" ("EITF 03-01"). EITF 03-01 includes new guidance for evaluating and
recording impairment losses on debt and equity investments, as well as new
disclosure requirements for investments that are deemed to be temporarily
impaired. The accounting guidance of EITF 03-01 is effective for reporting
periods beginning after June 15, 2004, while the disclosure requirements for
debt and equity securities accounted for under SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, are effective for annual periods
ending after December 15, 2003. Adoption of EITF 03-01 will not have a material
impact on the Company's consolidated financial position or results of
operations.
Fair Value of Financial Instruments:
The carrying amounts of the Company's financial instruments, including cash,
notes receivable, accounts payable, accrued liabilities and notes payable,
approximate fair value because of their short maturities. The carrying amount
of the Company's long-term debt approximates the fair value of such instruments
based upon management's best estimate of interest rates that would be available
to the Company for similar debt obligations at June 30, 2004 and 2003.
Reclassifications:
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year's presentation.
3. ACQUISITIONS
On April 10, 2004, Media Services Group, Inc. (the "Company") completed its
purchase of 51% of the outstanding shares of the common stock of Future
Developments America, Inc. ("FDA"), for an aggregate purchase price of
$1.0 million, pursuant to a definitive agreement entered into as of April 10,
2004. As of June 30, 2004, the Company has funded approximately $266,000 of
the purchase price. Further subject to the terms and conditions of the Stock
Purchase Agreement, the Company may obtain up to an additional 25% beneficial
ownership of FDA, if certain pre-tax income targets are not met by certain
target dates as set forth in the Stock Purchase Agreement. The minority
interest in the consolidated balance sheet consists of the remaining ownership
interests not owned by the Company.
4. DISCONTINUED OPERATIONS
In March 2004, the Company completed the sale of substantially all of the assets
relating to its telemarketing and teleservices business held by its wholly owned
subsidiary, MKTG Teleservices, Inc., ("MKTG Teleservices") to SD&A Teleservices,
Inc. ("SDA"), a wholly owned subsidiary of the Robert W. Woodruff Arts Center,
Inc. for approximately $2.5 million in cash and a note receivable for $0.3
million (See Note 8) plus the assumption of certain directly related
liabilities. As such, the operations and cash flows of MKTG Teleservices have
been eliminated from ongoing operations and the Company no longer has continuing
involvement in the operations.
In connection with the sale of MKTG Teleservices, the Company recognized a loss
on disposal of discontinued operations of approximately $1.0 million in the year
ended June 30, 2004. 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 plus any
additional expenses incurred and a tax impact of approximately $35,000.
In December 2002, the Company completed the sale of substantially all of 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.
In connection with the sale of the Northeast Operations, the Company recognized
a loss on disposal of discontinued operations of approximately $.2 million in
the year ended June 30, 2003. 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 plus
any additional expenses incurred. There was no tax impact on this loss.
46
On July 31, 2001, the Company completed the sale of all the outstanding capital
stock of its Grizzard subsidiary to Omnicom Group, Inc. The purchase price of
the transaction was $89.8 in cash, net of a working capital adjustment. As a
result of the sale agreement, the Company repaid a term loan of $35.5 million
and a $12.0 million line of credit. The Company recorded a loss of approximately
$4.9 million for the year ended June 30, 2002 as a result of the early
extinguishment of debt which is included in the loss from discontinued
operations. For the year ended June 30, 2002, the Company recognized a gain on
sale of Grizzard in the amount of approximately $1.8 million, which is included
in the statement of operations in Gain from Disposal of Discontinued Operations.
The gain 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.
Accordingly, the statement of operations and cash flows for the periods ended
June 30, 2004, 2003 and 2002 have been reclassified into a one-line presentation
and the operations of the above subsidiaries are included in loss from
discontinued operations and net cash used by discontinued operations. In
addition, the assets and liabilities of MKTG Teleservices have been segregated
and presented in Net Assets of Discontinued Operations and Net Liabilities of
Discontinued Operations as of June 30, 2003.
In September 2000, the Company offered to exchange the preferred shares of its
subsidiary WiredEmpire for MKTG common shares. As of June 30, 2003, 48,000
shares of WiredEmpire preferred stock had not been exchanged and this is
reported as minority interest in preferred stock of discontinued subsidiary as
$280,946 for the year ended June 30, 2003. These shares were returned as part of
a legal settlement reached during the fiscal year ended June 30, 2004 and, as a
result, are no longer reported as outstanding on the balance sheet as of June
30, 2004.
Revenue recognized for the years ended June 30, 2004, 2003 and 2002 relating to
the discontinued operations, which is included in Loss from Discontinued
Operations, was approximately $ 9.5 million, $ 23.4 million and $38.9 million,
respectively. In connection with the disposal of the discontinued operations,
the Company no longer provides services for the list sales and services,
database marketing, website development design, marketing communication services
and telemarketing and teleservices product lines.
The net liabilites of discontinued operations at June 30, 2004 for $130,742
consisted of the final adjustment payable on the sale of the telemarketing
and teleservices division. The major components of net assets of discontinued
operations and net liabilities of discontinued operations at June 30, 2003
were as follows:
Assets: Liabilities:
Cash $ 555,900 Accounts payable $167,636
Accounts receivable, net 1,816,546 Accrued liabilities 512,522
Other current assets 23,616 Line of Credit 261,385
---------
Property, plant & equipment, net 747,530 Total liabilities $941,543
Intangible assets, net 2,297,220
Other assets 32,109
-----------
Total assets $5,472,921
5. OTHER CURRENT ASSETS
Other current assets as of June 30, 2004 and 2003 consist of the following:
2004 2003
-------- --------
Prepaid legal $135,008 $130,951
Prepaid insurance 27,813 191,294
Other 45,472 129,303
-------- --------
Total 208,293 $451,548
======== ========
47
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at June 30, 2004 consists of $5,130 of office
furniture and equipment. There is no depreciation expense in 2004. All remaining
items have been reclassified as part of discontinued operations.
7. 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. During fiscal year 2003, the Company recharacterized acquired
workforce of approximately $51,000, which is no longer defined as an intangible
asset under SFAS No. 141. In addition, the Company recharacterized
non-contractual customer relationships of approximately $.8 million, which do
not meet the separability criterion under SFAS No. 141.
During 2003, the Company recognized an impairment charge of approximately $5.1
million in connection with the adoption of SFAS No. 142 relating to the list
sales and services and database marketing and web site development and design
reporting units. 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 year ended June 30, 2003. In 2002, the Company
recorded a goodwill impairment charge of $35.9 million. $29.4 million has been
reclassified to discontinued operations relating to 2002.
In 2003, the Company sold the Northeast Operations (See Note 4) and in 2004, the
Company sold the telemarketing operations and wrote off the goodwill related to
these reporting units in the respective years. During 2004, the Company acquired
a new reporting unit representing the security and surveillance segment, as part
of the acquisiton of FDA (See Note 3).
The following table sets forth the components of goodwill, net as of June 30,
2004 and 2003:
2004 2003
----------- ------------
Goodwill, beginning balance $ 2,277,220 $ 15,517,725
Impairment losses -- (5,075,000)
Sale of reporting unit (2,277,220) (8,165,505)
Acquisition of reporting unit 490,000 --
----------- ------------
Goodwill, ending balance $ 490,000 $ 2,277,220
=========== ============
As a result of the sale of MKTG Teleservices in March 2004, there are no
intangible assets subject to amortization as of June 30, 2004. The prior
reported balance as of June 30, 2003 is included in Assets of Discontinued
Operations. (See Note 2 and 4.)
The following table provides a reconciliation of net income (loss) available for
stockholders for exclusion of goodwill amortization:
For the years ended June 30,
2004 2003 2002
Reported net income (loss) attributable
to Common stockholders $ (3,030,199) $ 11,355,982 $ (66,095,771)
Add: Goodwill amortization -- -- 175,210
--------------------------------------------------
Adjusted net income (loss)attributable
to Common stockholders $ (3,030,199) $ 11,355,982 $ (65,920,561)
==================================================
48
Basic earnings (loss) per share:
Reported net income (loss) attributable
to Common stockholders $ (2.62) $ 11.62 $ (86.47)
Add: Goodwill amortization -- -- .23
--------------------------------------------------
Adjusted net income (loss) attributable
to Common stockholders $ (2.62) $ 11.62 $ (86.24)
==================================================
Diluted earnings (loss) per share:
Reported net income (loss) attributable
to Common stockholders $ (2.62) $ 9.90 $ (86.47)
Add: Goodwill amortization -- -- .23
--------------------------------------------------
Adjusted net income (loss) attributable
to Common stockholders $ (2.62) $ 9.90 $ (86.24)
==================================================
8. NOTE RECEIVABLE
On March 31, 2004, the Company received a Holdback Promissory Note (the "Note)
from SD&A Teleservices, Inc. as called for in the terms of the Asset Purchase
Agreement, dated March 31, 2004, for the sale of the MKTG Teleservices, Inc.
operations (See Note 4). This note is in the principle amount of $300,000,
together with accrued interest at the rate of two percent (2%) per annum.
Payment of the principle balance shall be made in one lump sum on September 30,
2005. Interest is to be paid semi-annually on the unpaid principle amount.
9. SHORT TERM BORROWINGS:
As a result of the sale of MKTG Teleservices, Inc., the company no longer
retains any short term borrowing facilities. The balance due at the closing of
the sale transaction was paid in full at closing and the relationship with the
credit provider was terminated.
10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses as of June 30, 2004 and 2003 consist of the following:
2004 2003
-------- ----------
Salaries and benefits $ 86,348 $ 24,897
Abandoned lease reserves 419,670 441,468
Accrued Legal 83,085 764,292
Accrued audit 82,942 116,321
Other 76,558 17,569
-------- ----------
Total $748,603 $1,364,547
======== ==========
11. OTHER LIABILITIES
49
Other liabilities as of June 30, 2004 and 2003 consist of the following:
2004 2003
---------- ----------
Abandoned lease reserves $1,070,570 $1,463,131
========== ==========
12. RELATED PARTY TRANSACTIONS:
On December 31, 2001, the Company advanced $1,000,000 pursuant to a promissory
note receivable agreement with an officer due and payable to the Company at
maturity, October 15, 2006. The Company recorded the note receivable at a
discount of approximately $57,955 to reflect the incremental borrowing rate of
the officer and is being amortized as interest income over the term of the note
using the straight-line method. The note receivable is collateralized by current
and future holdings of MSGI common stock owned by the officer and bears interest
at prime. Interest is due and payable yearly on October 15th. The Company
recognized interest income of $69,704, $56,075 and $36,488 for the years ended
June 30, 2004, 2003 and 2002. As of June 30, 2004, the interest due on October
15, 2003 of approximately $105,475 is in arrears. The note will be forgiven in
the event of a change in control.
In June 2004, an officer provided $500,000 of working capital to the Company
under a short-term arrangement. The funds were repaid to the officer during July
2004.
A former member of the Board of Directors is a partner in a law firm which
provides legal services for which the Company incurred expenses aggregating
approximately $252,999, $476,806, and $921,901 for the years ended June 30,
2004, 2003 and 2002, respectively.
13. LONG TERM OBLIGATIONS:
In connection with an acquisition, the Company incurred promissory notes payable
to a former shareholder, payable monthly at 5.59% interest per year through
January 2004. The balance of $201,062 at June 30, 2003 was repaid in full during
2004.
14. COMMITMENTS AND CONTINGENCIES: Operating Leases:
The Company leases various office space 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 June 30, 2004 are as follows:
Rent Expense Less: Sublease Net Rent Expense
2005 $ 497,000 $ (45,300) $ 451,700
2006 240,000 -- 240,000
2007 240,000 -- 240,000
2008 240,000 -- 240,000
2009 240,000 -- 240,000
Thereafter 280,000 -- 280,000
----------- ----------- ----------
$ 1,737,000 $ (45,300) $1,691,700
Rent expense was approximately $72,000, $62,000 and $710,000 for fiscal years
ended June 30, 2004, 2003 and 2002, respectively.
50
In fiscal year 2002, the Company incurred an estimated loss in connection with
the abandonment of certain leased office space of $ 6,400,000, which is recorded
in accrued expenses and other current liabilities and other liabilities. (see
Notes 10 and 11).
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, the action was settled,
and stipulations of dismissal with prejudice have been 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
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 June 30, 2004.
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 MKTG 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 year ended June 30, 2003.
In addition to the above, certain other legal actions may occur in the normal
course of business to which the Company may become a party. The Company does not
expect that the ultimate resolution of the above matters and other pending legal
matters will have a material effect on the financial condition, results of
operations or cash flows of the Company.
15. PREFERRED STOCK:
On February 24, 2000 the Company entered into a private placement in which the
Company sold an aggregate of 3,750 shares of Series E Convertible Preferred
Stock, par value $.01 ("Series E Preferred Stock"), and warrants to acquire
30,648 shares of common stock for proceeds of approximately $29.5 million, net
of approximately $520,000 of placement fees and expenses. The preferred stock
was convertible into cash or shares of common stock on February 18, 2004 at the
option of the Company.
After adjustment for the reverse stock split, the Series E Preferred Stock was
convertible at any time at $1,174.70 per share. On August 18, 2000, the
conversion price was reset to $587.52 per share, the market price on that date
as adjusted
51
for the reverse stock split. As a result of the issuance of a certain warrant,
certain antidilultive provisions of the Company's Series E preferred stock were
triggered. The conversion price of such shares was reset to a fixed price of
$18.768 based on an amount equal to the average closing bid price of the
Company's common stock for ten consecutive trading days beginning on the first
trading day of the exercise period of the aforementioned warrant. The warrant
was exercisable for a period of two years at an exercise price of $1,370.448.
The fair value of the warrant of $15,936,103, as determined by the Black Scholes
option pricing model, was recorded as additional paid in capital and a
corresponding decrease to preferred stock in 2000. The warrant expired in
February 2002.
On February 19, 2002, the Company entered into standstill agreements, as
amended, with the Series E preferred shareholders in order for the Company to
continue to discuss with multiple parties regarding the possibility of either
restructuring or refinancing the remainder of the preferred stock. The Company's
commitments as a result of the standstill agreements included a partial
redemption of 625 of the Series E preferred shares for $5,000,000, thereby
reducing the number of Series E preferred shares to 2,900 at June 30, 2002. The
value of the preferred stock was initially recorded at a discount allocating a
portion of the proceeds to a warrant. The redemption of such preferred shares
for $5,000,000, less the carrying value of the preferred shares, including the
beneficial conversion feature previously recorded to equity on the balance
sheet, resulted in a deemed dividend of $412,634 which was recorded to
additional paid-in and included in the calculation of net loss attributable to
common stockholders for the year ended June 30, 2002. The Company recognized a
loss on the redemption of preferred stock of approximately $.4 million reflected
in net loss attributable to common stockholders. The loss is the result of the
difference between the consideration paid for redemption of the preferred stock
for $5.0 million cash and the carrying value of the preferred stock of $4.6
million which included a beneficial conversion feature of approximately $2.4
million.
The preferred shareholders converted 225 shares of preferred stock to 112,983
shares of common stock for the year ended June 30, 2002. On October 2, 2002, the
common stockholders ratified the issuance of the Series E preferred stock and
approved the stockholders right to convert such preferred stock to common stock
beyond the previous 19.99% limitation. Subsequently, the preferred shareholders
converted 149 shares of Series E preferred into 79,767 shares of common stock.
In January 2003, the Company redeemed the remaining outstanding shares of the
preferred stock for a cash payment of approximately $6.0 million and the
issuance of 181,302 shares of common stock valued at approximately $.2 million.
The carrying value of the preferred stock was approximately $20.2 million, which
included a beneficial conversion feature of approximately $10.3 million. The
transaction resulted in a gain on redemption of approximately $14.0 million and
is reflected in net income attributable to common stockholders for the year
ended June 30, 2003.
16. COMMON STOCK, STOCK OPTIONS, AND WARRANTS: Common Stock:
In May 2004, the Company commenced a private placement offering (the "stock
agreement") to sell 250,000 shares of its common stock at a price of $8.00 per
share. As of June 30, 2004, the Company had sold 225,000 shares . As of June 30,
2004, the Company has received gross proceeds of $1.2 million and has recorded a
stock subscription receivable of $600,000 for stock subscriptions prior to June
30, 2004 for which payment was received in July 2004. Costs of $60,000 incurred
relating to the placement have been offset against the proceeds and are
reflected as a direct reduction of equity. The remaining 25,000 shares offered
were sold in July 2004 for gross proceeds of $200,000.
Subject to the terms of the Stock Agreement entered into in May 2004, the
Company committed to issue warrants for the purchase of up to 150,000 shares of
the Company's common stock at a price of $12.00 per share. As of June 30, 2004,
the Company has issued warrants for the purchase of 135,000 of the 150,000
shares offered.
In April 2004, the Company issued 203,895 shares of its common stock to General
Electric Capital Corporation ("GECC") pursuant to the exercise of a warrant to
purchase common stock of MSGI (the "Warrant") issued to GECC in December 1997.
The Warrant authorized a purchase of 10,670,000 shares of common stock. The
number of shares of common stock subject to the original Warrant were adjusted
from 10,670,000 to 222,292 in order to reflect the effect
52
of two reverse stock splits. GECC elected to exercise the purchase under the
terms of a cashless transaction as in accordance with Section 2 of the Warrant.
GECC forfeited and returned the right to purchase 18,397 shares of common stock
under the terms of Section 2 of the Warrant.
In February 2001, the Company entered into a strategic partnership agreement
(the "Agreement") with Paris based Firstream. Firstream paid the Company $3.0
million and in April 2001 received 31,250 restricted shares of common stock,
plus a two-year warrant for 8,333 shares priced at $144.00 per share. The
warrants were exercisable over a two year period. The warrants were valued at
$.9 million as determined by the Black-Scholes option pricing model and were
recorded to equity. In accordance with the Agreement, the Company recorded
proceeds of $1.8 million; net of fees and expenses, to equity and $1.0 million
was designated as deferred revenue to provide for new initiatives. The remaining
balance was $.8 million as of June 30, 2002. In July 2002, the Company received
a letter from Firstream canceling the Strategic Partnership Agreement and
requesting payment of the remaining $.8 million, which has been categorized as a
liability at June 30, 2002. The Company settled with Firstream during fiscal
year 2003 for approximately $.2 million and the remaining liability was sold as
part of the Northeast operations sale. There was no remaining liability at June
30, 2003.
In the settlement of the earn-out provision of the purchase agreement of Stevens
Knox and Associates, Inc. in February 2002, the Company issued 15,739 of
unregistered MKTG common shares valued at $300,000.
Stock Options:
The Company maintains a qualified stock option plan (the "1999 Plan") for the
issuance of up to 62,500 shares of common stock under qualified and
non-qualified stock options. The plan is administered by the compensation
committee of the Board of Directors which has the authority to determine which
officers and key employees of the Company will be granted options, the option
price and vesting of the options. In no event shall an option expire more than
ten years after the date of grant. As of June 30, 2004, the Board of Directors
has agreed to issue 161,250 options beyond the number available in the 1999
plan, subject to approval of an increase to the plan by a future vote of
shareholders in December 2004
The non-qualified stock option plan (the 1991 Plan) has expired and therefore
there are no options available to grant under this plan. The following
summarizes the stock option transactions under the 1991 Plan for the three years
ended June 30, 2004:
Number Option Price
of Shares Per Share
-------- ------------
Outstanding at July 1, 2001 23,225
=======
Granted -
Exercised -
Cancelled (2,989) $73.92 to $726.00
--------
Outstanding at June 30, 2002 20,266
========
Granted -
Exercised -
Cancelled (7,570) $213.00 to $558.00
--------
Outstanding at June 30, 2003 12,696
========
Granted -
Exercised -
Cancelled (12,696) $213.00 to $558.00
--------
Outstanding at June 30, 2004 -
======== -
The following summarizes the stock option transactions under the 1999 Plan for
the three years ended June 30, 2004:
Number Option Price
of Shares Per Share
-------- ------------
Outstanding at July 1, 2001 53,916
=======
Granted -
Exercised -
Cancelled (19,785) $73.92 to $726.00
--------
Outstanding at June 30, 2002 34,131
========
Granted -
Exercised -
Cancelled (27,770) $213.00 to $558.00
--------
Outstanding at June 30, 2003 6,361
========
Granted 53,750 $2.99
Exercised -
Cancelled (6,361) $213.00 to $558.00
--------
Outstanding at June 30, 2004 53,750
========
53
In addition to the 1991 and 1999 Plans, the Company has option agreements with
current directors of the Company and certain third parties. The following
summarizes transactions for the three years ended June 30, 2004:
Number Option Price
of Shares Per Share
-------- ------------
Outstanding at July 1, 2001 41,358
======
Granted -
Exercised -
Cancelled (4,688) $213.00
-------
Outstanding at June 30, 2002 36,670
======
Granted -
Exercised -
Cancelled (33,336) $248.16
--------
Outstanding at June 30, 2003 3,334
=====
Granted 80,000 $2.99 to $12.00
Exercised -
Cancelled (3,334) $248.16
-------
Outstanding at June 30, 2004 80,000
======
As of June 30, 2004, 72,500 are exercisable. The weighted average exercise
price of all outstanding options is $7.43 and the weighted average remaining
contractual life is 9.1 years. At June 30, 2004, no further options were
available for grant.
During the year ended June 30, 2004, the Company issued 60,000 options to a
third party for consulting fees, which were vested immediately. The fair
value of the options, valued using the Black-Scholes method, in the amount
of $377,363 have been recorded as an expense in 2004.
As of June 30, 2004, the Company has 135,000 warrants outstanding to purchase
shares of common stock at a price of $12.00. No outstanding warrants are
currently exercisable.
17. INCOME TAXES: As of June 30,
--------------
2004 2003
------------ ------------
Deferred tax assets:
Net operating loss carryforwards:
Continuing operations $ 82,330,753 $ 60,394,005
Abandoned lease reserves 563,871 675,587
Compensation on option grants 897,029 897,029
Amortization of intangibles -- 200,077
Accrued settlement costs -- 346,048
Other 77,806 309,756
------------ ------------
Total deferred tax assets 83,869,460 62,822,502
Valuation allowance (83,869,460) (62,822,502)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
The difference between the Company's U.S. federal statutory rate of 35%, as well
as its state and local rate net of federal benefit of 5%, when compared to the
effective rate is principally comprised of the valuation allowance and other
permanent disallowable items.
54
The Company has a U.S. federal net operating loss carry forward of approximately
$237,000,000 available, which expires from 2011 through 2022. Of these net
operating loss carry forwards approximately $61,400,000 is the result of
deductions related to the exercise of non-qualified stock options. The
realization of these net operating loss carry forwards would result in a credit
to equity. These loss carry forwards are subject to annual limitations. The
Company has recognized a full valuation allowance against deferred tax assets
because it is more likely than not that sufficient taxable income will not be
generated during the carry forward period available under the tax law to utilize
the deferred tax assets.
18. GAIN ON TERMINATION OF LEASE
In December 2002, the Company terminated a lease for abandoned property. The
lease termination agreement required an up front payment of $.3 million and the
Company is obligated to pay approximately $60,000 per month until the landlord
has completed certain leasehold improvements for a new tenant, which was
completed as of July 2003, and then the Company is obligated to pay $20,000 per
month until August 2010. The Company was released from all other obligations
under the lease. The gain on lease termination represents a change in estimate
representing the difference between the Company's present value of its future
obligations and the entire obligation that remained on the books under the
original lease obligation. The remaining obligation has been recorded in accrued
expenses and other current liabilities and other liabilities.
19. EMPLOYEE RETIREMENT SAVINGS 401(k) PLANS:
The Company sponsors a tax deferred retirement savings plan ("401(k) plan")
which permits eligible employees to contribute varying percentages of their
compensation up to the annual limit allowed by the Internal Revenue Service.
The Company currently matches the 50% of the first $3,000 of employee
contribution up to a maximum of $1,500 per employee. Matching contributions
charged to expense were approximately $1,500, $7,200 and $12,200, for the fiscal
years ended June 30, 2004, 2003 and 2002, respectively.
The 401(k) plan also provided for discretionary Company contributions. There
were no discretionary contributions in fiscal years 2004, 2003 or 2002.
20. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the year ended June 30, 2004:
o The Company issued 203,895 common shares in relation to the exercise of
warrants held by General Electric Capital Corporation during the year ended
June 30, 2004.
o The Company issued 75,000 common shares in connection with a stock
subscription receivable of $600,000.
o In connection with the sale of the teleservices division, the Company has a
note receivable of $300,000.
o In connection with a lawsuit settlement, the Company cancelled shares of
preferred stock of a discontinued subsidiary in the amount of $280,946.
For the year ended June 30, 2003:
o The preferred shareholders converted 149 shares of preferred Series E stock
to 79,767 shares of common stock during the year ended June 30, 2003.
o In connection with the redemption of the preferred Series E stock, the
preferred shareholders converted 2,751 shares of preferred Series E stock
to 181,302 shares of common stock during the year ended June 30, 2003. In
addition, the Company recognized a gain on redemption of preferred stock of
$13,970,813.
For the year ended June 30, 2002:
55
o The Company issued 15,739 of unregistered MKTG common shares in February
2002 valued at $300,000 in settlement of an earn-out provision for the
acquisition of Stevens Knox and Associates, Inc. entered into in the
previous fiscal year.
o The preferred shareholders converted 225 shares of preferred stock to
112,983 shares of common stock during the year ended June 30, 2002.
Supplemental disclosures of cash flow data:
- -------------------------------------------
2004 2003 2002
-------- -------- ----------
Cash paid during the year for:
Interest $156,769 $234,164 $ 588,683
Income tax paid $ 17,995 $ 8,119 $ 67,824
21. SEGMENT INFORMATION:
In accordance with SFAS No. 131, 'Disclosures about Segments of an Enterprise
and Related Information' segment information is being reported consistent with
the Company's method of internal reporting. In accordance with SFAS No. 131,
operating segments are defined as components of an enterprise for which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Company believes it has one reporting segment. The Company has
one product and services line (security technologies), as a result of the sale
of its MKTG Teleservices, Inc. and Northeast Operations, which are classified as
Discontinued Operations. The security technologies product and services line is
a new and emerging business and, as such, has no current or historical revenue
earnings to report.
20. SUBSEQUENT EVENTS:
In July 2004, the company successfully negotiated an early termination to the
lease for a certain abandoned property (see Note 17). The agreement resulted in
a gain on early termination of approximately $70,600, which will be realized in
the first quarter of fiscal year 2005.
On August 18, 2004, Media Services Group, Inc. (the "Company") completed an
acquisition of a 51% membership interest in Innalogic, LLC ("Innalogic"), for an
aggregate capital contribution of $1,000,000, pursuant to definitive agreements
entered into as of August 18, 2004. Further subject to the terms and conditions
of an Investment Agreement, the Company issued an aggregate of 25,000
unregistered shares of its common stock to the founding members of Innalogic. In
addition, the Company may issue an aggregate of 50,000 options to purchase
shares of common stock to the founding members of Innalogic, if certain pre-tax
income targets are exceeded. The options will have an exercise price equal to
the fair market value of the Company's common stock at the time of the grant of
the options. The Company shall also issue 25,000 unregistered shares of common
stock to certain advisors as compensation for services rendered in connection
with the completion of this transaction. As set forth in Innalogic's Amended and
Restated Limited Liability Company Agreement, the Company may obtain up to an
additional 25% membership interest in Innalogic, if certain pre-tax income
targets are not met by certain target dates.
56
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
State of
Incorporation
-------------
Alliance Media Corporation Delaware
MKTG Services - New York, Inc. New York
MKTG TeleServices, Inc. California
MKTG Services - Philly, Inc. New York
MKTG Services - Boston, Inc. Delaware
Pegasus Internet, Inc. New York
WireEmpire, Inc. Delaware
Future Developments America, Inc. Delaware
57
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-3 (No. 333-33174, No. 333-34822 and No. 333-89973) and
Forms S-8 (No. 333-94603 and No. 333-82541) of Media Services Group, Inc. and
Subsidiaries (formerly MKTG Services, Inc.), of our report dated September 26,
2002, except for the reclassification and presentation of the discontinued
operations of the Northeast Operations and Grizzard, Inc., as discussed in Note
4, as to which the date is October 14, 2003 and for the reclassification and
presentation of the discontinued operations of MKTG Teleservices, Inc., as
discussed in Note 4, as to which the date is October 13, 2004, relating to the
consolidated financial statements and financial statement schedule which appears
in this Annual Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLC
New York, New York
October 13, 2004
58
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements on
Forms S-3 (No. 333-33174, No. 333-34822 and No. 333-89973) and Forms S-8
(No.333-94603 and No. 333-82541) of Media Services Group, Inc. and Subsidiaries
(formerly MKTG Services, Inc.), of our report dated October 11, 2004 relating to
the consolidated financial statements as of June 30, 2004 and 2003 and for the
two fiscal years then ended, which is included in this Form 10-K Filing.
/s/ Amper, Politziner & Mattia P.C.
October 13, 2004
Edison, New Jersey
59
Exhibit 31.1
CERTIFICATION
I, J. Jeremy Barbera, certify that:
(1) I have reviewed this annual report on Form 10-K of Media Services
Group, Inc.;
(2) Based on my knowledge, this 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 report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Registrant as of, and for, the periods presented in this report;
(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 we 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 report is being prepared;
(b) [Paragraph omitted in accordance with SEC transition
instructions];
(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 officer(s) 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
functions):
(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 information;
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.
Dated: October 13, 2004
By: /s/ J. Jeremy Barbera
-------------------------
J. Jeremy Barbera
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
60
Exhibit 31.2
CERTIFICATION
I, Richard J. Mitchell III, certify that:
(1) I have reviewed this annual report on Form 10-K of Media Services
Group, Inc.;
(2) Based on my knowledge, this 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 report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Registrant as of, and for, the periods presented in this report;
(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 we 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 report is being prepared;
(b) [Paragraph omitted in accordance with SEC transition
instructions];
(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 officer(s) 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
functions):
(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 information;
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.
Dated: October 13, 2004
By: /s/ Richard J. Mitchell III
-------------------------
Richard J. Mitchell
Chief Accounting Officer
(Principal Financial Officer)
61
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 Annual Report of Media Services Group, Inc. (the
"Company") on Form 10-K for the year ended June 30, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, J.
Jeremy Barbera, Chairman of the Board and Chief Executive 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 result of operations of the Company.
Dated: October 13, 2004
By: /s/ J. Jeremy Barbera
-------------------------
J. Jeremy Barbera
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
This certification accompanies this Report on Form 10-K 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 Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form with the electronic version of this written statement
required by Section 906, has been provided to the Company and will be retained
by the Company and furnished to the Securities and Exchange Commission or its
staff upon request.
62
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 Annual Report of Media Services Group, Inc. (the
"Company") on Form 10-K for the year ended June 30, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Richard
J. Mitchell III, 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 result of operations of the Company.
Dated: October 13, 2004
By: /s/ Richard J. Mitchell III
-------------------------
Richard J. Mitchell III
Chief Accounting Officer
(Principal Financial Officer)
This certification accompanies this Report on Form 10-K 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 Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form with the electronic version of this written statement
required by Section 906, has been provided to the Company and will be retained
by the Company and furnished to the Securities and Exchange Commission or its
staff upon request.
63