SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 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.
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(Exact Name of Registrant as Specified in Its Charter)
Nevada 88-0085608
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
575 Madison Avenue
New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (917) 339-7134
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No --
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes -- No X
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APPLICABLE ONLY TO CORPORATE ISSUERS
State number of shares outstanding of each of the issuer's classes of common
equity as of the latest practical date: As of November 8, 2004 there were
1,596,262 shares of the Issuer's Common Stock, par value $.01 per share
outstanding.
1
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
SEPTEMBER 30, 2004
PART I - FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2004 (unaudited) and June 30, 2004 3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three
months ended September 30, 2004 and 2003 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 17
Item 4. Controls and Procedures. 17
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 6. Exhibits 18
SIGNATURES 19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2004 June 30, 2004
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(Unaudited) (1)
ASSETS
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Current assets:
Cash and cash equivalents $ 1,232,747 $ 2,548,598
Accounts receivable 150,000 -
Stock subscription receivable - 600,000
Inventory 173,070 -
Other current assets 246,401 208,293
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Total current assets 1,802,218 3,356,891
Goodwill 490,000 490,000
Intangible assets,net 287,288 -
Property and equipment, net 108,887 5,130
Note receivable 300,000 300,000
Related party note receivable 1,137,368 1,120,013
Other assets 22,700 15,700
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Total assets $ 4,148,461 $ 5,287,734
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade 327,271 381,722
Accrued expenses and other current liabilities 598,803 748,603
Note payable - shareholder - 500,000
Net liabilities of discontinued operations - 130,742
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Total current liabilities 926,074 1,761,067
Other liabilities 1,025,745 1,070,570
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Total liabilities 1,951,819 2,831,637
Minority interest in subsidiary 115,772 255,517
Commitments and contingencies
Stockholders' equity:
Common stock - $.01 par value; 9,375,000 shares authorized; 1,605,093 and
1,530,093 shares issued; 1,596,262 and 1,521,262 shares outstanding as of
September 30, 2004 and June 30, 2004, respectively 16,050 15,300
Additional paid-in capital 223,313,034 222,658,012
Accumulated deficit (219,854,504) (219,079,022)
Less: 8,831 shares of common stock in treasury, at cost (1,393,710) (1,393,710)
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Total stockholders' equity 2,080,870 2,200,580
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Total liabilities and stockholders' equity $ 4,148,461 $ 5,287,734
=========== ============
(1) Derived from the Audited Consolidated Financial Statements for the year
ended June 30, 2004.
See Notes to Condensed Consolidated Financial Statements.
3
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
2004 2003
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Revenues $ 150,000 $ --
Cost of goods sold 32,454 --
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Gross Profit $ 117,546 $ --
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Operating costs and expenses:
Research and development 48,869 --
Salaries and benefits 298,782 77,516
Non cash compensation 235,886 --
Selling, general and administrative 477,695 200,411
Gain on termination of lease (70,300) --
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Total operating costs and expenses 990,932 277,927
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Loss from operations (873,386) (277,927)
Other income (expense):
Interest income (expense) and other, net 1,354 (5,289)
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Minority interests in subsidiaries 139,845 --
Loss from continuing operations
before provision for income taxes (732,187) (283,216)
Provision for income taxes 3,000 3,000
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Loss from continuing operations (735,187) (286,216)
Discontinued operations:
Gain (loss) from discontinued operations (40,295) 416,033
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Net income (loss) $ (775,482) $ 129,817
=========== ===========
Basic earnings (loss) per share:
Continuing operations $ (0.47) $ (0.26)
Discontinued operations (0.02) 0.38
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Basic earnings (loss) per share $ (0.49) $ 0.12
=========== ===========
Weighted average common shares outstanding- basic 1,568,001 1,092,367
=========== ===========
Diluted earnings (loss) per share:
Continuing operations $ (0.47) $ (0.23)
Discontinued operations (0.02) 0.33
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Diluted earnings (loss) per share $ (0.49) $ 0.10
=========== ===========
Weighted average common shares outstanding- diluted 1,568,001 1,246,263
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
4
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(unaudited)
2004 2003
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Operating activities:
Net income (loss) $ (775,482) $ 129,817
(Gain)/loss from discontinued operations 40,295 (416,033)
Loss from continuing operations (735,187) (286,216)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation 4,742 --
Non cash compensation 235,886 --
Gain from termination of lease (70,300) --
Minority interest in subsidiary (139,745) --
Changes in assets and liabilities:
Accounts receivable (150,000) --
Inventory (173,070) --
Other current assets (89,510) 36,422
Other assets (7,000) --
Accounts payable - trade (54,451) (69,034)
Accrued expenses and other liabilities (164,620) (244,165)
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Net cash used in operating activities (1,343,255) (562,993)
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Investing activities:
Purchases of property and equipment (108,499) --
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Net cash used in investing activities (108,499) --
Financing activities:
Expenditures from private placement of common shares (16,000) --
Proceeds from issuance of common stock 800,000 --
Increase in related party note receivable (17,355) (17,355)
Repayment of related party note payable (500,000) --
Repayments of long-term debt -- (99,597)
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Net cash provided by (used in) financing activities 266,645 (116,952)
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Net cash from/(used in) discontinued operations (130,742) 143,266
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Net decrease in cash and cash equivalents (1,315,851) (536,679)
Cash and cash equivalents at beginning of period 2,548,598 660,742
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Cash and cash equivalents at end of period $ 1,232,747 $ 124,063
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See Notes to Condensed Consolidated Financial Statements.
5
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements include
the accounts of Media Services Group, Inc. and its Subsidiaries, Future
Developments America, Inc ("FDA") and Innalogic, LLC ("Innalogic") (in
combination "MSGI" or the "Company"). These condensed consolidated financial
statements are unaudited and should be read in conjunction with the Company's
Form 10-K, as amended, for the fiscal year ended June 30, 2004 and the
historical consolidated financial statements and related notes included therein.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments, consisting of only normal
recurring accruals, necessary to present fairly the condensed consolidated
financial position, results of operations and cash flows of the Company. Certain
information and footnote disclosure normally included in financial statements
prepared in conformity with generally accepted accounting principles have been
condensed or omitted pursuant to the Securities and Exchange Commission's rules
and regulations. Operating results for the three-month period ended September
30, 2004 are not necessarily indicative of the results that may be expected for
the fiscal year ending June 30, 2005. Certain reclassifications have been made
in the fiscal 2004 financial statements to conform to the fiscal 2005
presentation.
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 and funds available from its remaining operations should be
adequate to finance its operations and capital expenditure requirements for the
next twelve months. As explained in Note 6, the Company recently sold off
substantially all the assets relating to its telemarketing and teleservices
operations held by certain of its wholly owned subsidiary, MKTG Teleservices,
Inc. As explained in Notes 4 and 13, the Company has recently engaged in the
private placement sale of shares of both Common Stock and Series F Convertible
Preferred Stock which have raised significant working capital. The Company has
also most recently acquired holdings in two operating entities, FDA and
Innalogic, both of which are forecasted to result in earnings in future periods.
In addition, the Company has instituted cost reduction measures, including the
reduction of workforce and corporate overhead. The Company believes, based on
expected performance as well as the reduced corporate overhead, that its
recently acquired operations should generate sufficient future cash flow to fund
operations. Failure of the new operations 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.
2. SUMMARY OF SIGNIFICANT POLICIES
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. Revenues will be
reported for the operations of Future Developments America, Inc. and for
Innalogic, LLC 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.
6
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 expensed in the period incurred. Such expense was $48,869
for the quarter ended September 30, 2004. There was no such expense in the same
quarter in the previous year.
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.
There are no recent accounting pronouncements that would have an effect on the
Company in this quarter ended September 30, 2004.
3. EARNINGS PER SHARE
Common share equivalents included in weighted average shares outstanding-
diluted for the quarters ending September 30, 2004 and 2003:
2004 2003
Weighted average common shares outstanding - basic 1,568,001 1,092,367
Common stock equivalents for options and warrants - 153,896
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Weighted average common shares outstanding- diluted 1,568,001 1,246,263
========= =========
There is no effective dilution from stock equivalents for options and/or
warrants in the current quarter, as they are anti-dilutive as a result of net
losses for the quarter ended September 30, 2004.
4. EQUITY TRANSACTIONS
During the year ended June 2004, the Company entered into definitive agreements
with certain 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 $2.0 million. 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 term. As of June 30, 2004, $1.8 million of the total $2.0 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 2004. The final subscription of $0.2 million was closed and
funded in July 2004.
7
5. 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:
Three months ended September 30,
2004 2003
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Net income (loss) available to common
stockholders as reported $ (775,482) $ 129,817
Stock based-compensation recorded -- --
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Subtotal (775,482) 129,817
Stock-based compensation recorded under
SFAS 123 29,495 --
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Pro forma net income (loss) available
to common stockholders $ (804,977) $ 129,817
=========== ===========
Earnings (loss) per share:
Basic earnings (loss) per share - as reported $ (0.49) $ 0.12
=========== ===========
Basic earnings (loss) per share - pro forma $ (0.51) $ 0.12
=========== ===========
Diluted earnings (loss) per share - as reported $ (0.49) $ 0.10
=========== ===========
Diluted earning (loss) per share - pro forma $ (0.51) $ 0.10
=========== ===========
The Company has granted 1,250 options to employees during the three months ended
September 30, 2004. These options were granted at an exercise price equal to the
market price on date of grant, do not begin to vest until July 2005 and vest
ratably over a three year period. No options were granted during the period
ended September 30, 2003. The fair value of each stock option is estimated on
the date of grant using the Black-Scholes option-pricing model. Pro forma
compensation cost for stock options under SFAS No. 123 is recognized over the
service period. Previously recognized pro forma compensation cost is not to be
reversed if a vested employee option expires unexercised. The Company stops
recognizing pro forma compensation cost when an option is fully vested. The
following assumptions were used for grants for the period ended September 30,
2004:
September 30 ,2004
Risk -free interest rate 4.00%
Expected option life Vesting life + four years
Dividend yield None
Volatility 158%
8
6. 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., 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. 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.
Accordingly, the statement of operations and cash flows for the period ended
September 30, 2003 related to the above mentioned operations has been
reclassified into a one-line presentation and is included in loss from
discontinued operations and net cash used by discontinued operations. Loss from
discontinued operations of approximately $40,000 during the quarter ended
September 30, 2004 are the result of trailing legal fees associated with certain
legal settlements pertaining to the discontinued operation (see Note 11).
7. ACQUISITIONS
On August 18, 2004, the Company completed an acquisition of a 51% membership
interest in Innalogic, LLC, 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
Innalogic. These shares were subsequently distributed to the founding members of
Innalogic and were recorded as non-cash compensation in the amount of $235,886
in the period ended September 30, 2004. The Company also issued 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.
9
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets totaling $287,288 were acquired during the period ended
September 30, 2004 in connection with the acquisition of Innalogic. The Company
is awaiting the results of the formal valuation of Innalogic in order to
specifically identify the intangible assets and determine the related lives. As
such, no amortization expense has been recorded during the period ended
September 30, 2004. The Company estimates that the effect of not recording
amortization during this period does not have a material effect on the financial
results for the period ended September 30, 2004.
9. GAIN ON TERMINATION OF LEASE
In July 2004, the Company successfully negotiated an early termination of a
lease for a certain abandoned property. The agreement resulted in a gain on
early termination of approximately $70,000 in the quarter ended September 30,
2004.
10. RELATED PARTY TRANSACTIONS
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.
11. CONTINGENCIES AND LITIGATION
In May 2003, an action was filed in the State of California against a former
subsidiary, MKTG Teleservices, Inc., by a former employee (Case No. BC 303297).
The action alleged wrongful termination and harassment by a certain member of
the former subsidiary's management. The action was settled in July 2004 and
stipulations of dismissal with prejudice have been or will shortly be filed. A
settlement payment in the amount of $35,000 by the Company has been recorded in
the current quarter and is realized in gain / (loss) from discontinued
operations. All legal fees pertaining to the matter have been realized in gain /
(loss) from discontinued operations.
On October 21, 2004, the Company announced that it has received a letter of
deficiency and request for review from the Nasdaq Stock Market regarding its
reported stockholders' equity of $2,200,580 reported on its Annual Report on
Form 10-K for the year ended June 30, 2004. Nasdaq Marketplace Rule 4310
(C)(2)(b) requires that the Company have a minimum of $2.5 million in
stockholders equity or $35.0 million in market value of listed securities or
$0.5 million of net income from continuing operations. In November 2004, the
Company provided a plan to the Nasdaq Stock Market indicating how it expected to
correct the approximately $300,000 deficiency. The Company subsequently
corrected the deficiency through the private placement of Series F Convertible
Preferred Stock raising initial gross proceeds of approximately $3.0 million
(see Note 12). The Company is in compliance with the stockholders' equity
requirement, based upon the private placement transaction. As of the date of
this filing, the Company has an estimated $5.0 million in stockholders' equity.
Nasdaq will continue to monitor the Company's ongoing compliance with regard to
stockholders' equity. If at the time of the next scheduled periodic report the
Company does not evidence compliance, it may be subject to notification of
delisting.
As of September 30, 2004, there are no other material legal actions known to
management that are pending to which the Company is a party.
10
12. SUBSEQUENT EVENTS
In October 2004, the Company engaged in an offer for a private placement of an
aggregate of 18,750 shares of Series F Convertible Preferred Stock to be sold at
a price of $320.00 per share for gross proceeds of approximately $6,000,000.
Each share of Series F Convertible Preferred Stock will be convertible at any
time at the option of the holder into 24.61538 shares of Common Stock.
Purchasers of the Series F Convertible Preferred Stock will also be granted five
year warrants to purchase the number of shares of Common Stock equal to 0.50
multiplied by the number of Series F Convertible Preferred Stock purchased
multiplied by the 24.61538 conversion rate, at an exercise price equal to 25%
above the conversion price of the Series F Convertible Preferred Stock. The
Company will pay an annual dividend of 6% on the Preferred Stock, payable in
shares of the Company's common stock. There are no reset provisions or
anti-dilution provisions associated with this Series F Convertible Preferred
Stock.In November 2004, the Company entered into and closed on definitive
agreements with certain strategic investors for placement of 9,375 shares of the
Series F Convertible Preferred Stock for gross proceeds of approximately $3
million. On an as converted basis, this equates to approximately 230,769 shares
of Common Stock at a conversion price of $13.00 per share. In connection with
the issuance of the preferred stock, warrants will be issued to purchase 115,385
shares of Common stock at an exercise price of $16.25 per share.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Special Note Regarding Forward-Looking Statements
- -------------------------------------------------
Some of the statements contained in this Report on Form 10-Q discuss our plans
and strategies for our business or state other forward-looking statements, as
this term is defined in the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company, or industry results to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; industry capacity; direct marketing
and other industry trends; demographic changes; competition; the loss of any
significant customers; changes in business strategy or development plans;
availability and successful integration of acquisition candidates; availability,
terms and deployment of capital; advances in technology; retention of clients
not under long-term contract; quality of management; business abilities and
judgment of personnel; availability of qualified personnel; changes in, or the
failure to comply with, government regulations; and technology,
telecommunication and postal costs.
Introduction
- ------------
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity/cash flows of the Company
for the three-month periods ended September 30, 2004 and 2003. This should be
read in conjunction with the financial statements, and notes thereto, included
in this Report on Form 10-Q and the Company's financial statements and notes
thereto, included in the Company's Annual Report on Form 10-K, as amended, for
the year ended June 30, 2004.
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 the Securities
and Exchange Commission's Staff Accounting Bulletin No. 104, ("SAB 104"), which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements.
Revenues will be reported for the operations of Future Developments America,
Inc. and for Innalogic, LLC 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.
FDA recognized no revenues during the period ended September 30, 2004.
Revenues derived from the operations of Innalogic, from the sale of equipment
and the provision of supporting services if requested by the customer, are
realized upon shipment or delivery of the product and/or upon the services being
provided and completed.
12
Goodwill and Intangible Assets:
Under Statement of Financial Accounting Standards ("SFAS"), No. 142, "Goodwill
and Other Intangible Assets", goodwill is no longer amortized. The Company
performs an annual impairment test to determine if there is any impairment of
goodwill. The current goodwill of $490,000 resulted from the Company's
acquisition of FDA during in April 2004. The Company has not yet performed an
annual impairment test related to this amount since the acquisition was recent.
Intangible assets of approximately $287,000 were acquired during the period
ended September 30, 2004 in connection with the acquisition of Innalogic. The
Company is awaiting the results of the formal valuation of Innalogic in order to
specifically identify the intangible assets and determine the related lives. As
such, no amortization expense has been recorded during the period ended
September 30, 2004.
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 impairment when the sum of undiscounted
future cash flows (without interest charges) is less than the carrying amount of
such assets. The measurement for such impairment loss is based on the fair value
of the asset.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. The most significant estimates and assumptions made in the
preparation of the consolidated financial statements relate to the carrying
amount and amortization of intangible assets, deferred tax valuation allowance,
abandoned lease reserves and the allowance for doubtful accounts. Actual results
could differ from those estimates.
Recent Accounting Pronouncements:
There were no new accounting pronouncements during the period that would have an
effect on the Company.
Contingencies and Litigation: On October 21, 2004, the Company announced that it
has received a letter of deficiency and request for review from the Nasdaq Stock
Market regarding its reported stockholders' equity of $2,200,580 reported on its
Annual Report on Form 10-K for the year ended June 30, 2004. Nasdaq Marketplace
Rule 4310 (C)(2)(b) requires that the Company have a minimum of $2.5 million in
stockholders equity or $35.0 million in market value of listed securities or
$0.5 million of net income from continuing operations. In November 2004, the
Company provided a plan to the Nasdaq Stock Market indicating how it expected to
correct the approximately $300,000 deficiency. The Company subsequently
corrected the deficiency through the private placement of Series F Convertible
Preferred Stock raising initial gross proceeds of approximately $3.0 million
(see Note 12). The Company is in compliance with the stockholders' equity
requirement, based upon the private placement transaction. As of the date of
this filing, the Company has an estimated $5.0 million in stockholders' equity.
Nasdaq will continue to monitor the Company's ongoing compliance with regard to
stockholders' equity. If at the time of the next scheduled periodic report the
Company does not evidence compliance, it may be subject to notification of
delisting.
Significant Events:
To facilitate an analysis of MSGI operating results, certain significant events
should be considered.
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, to SD&A Teleservices, Inc., 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. 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. Accordingly, the
statement of operations and cash flows for the period ended September 30, 2003
have been reclassified into a one-line presentation and is included in loss from
discontinued operations and net cash used by discontinued operations.
13
In April 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, 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.
In August 2004, the Company completed an acquisition of a 51% membership
interest in Innalogic, LLC, for an aggregate capital contribution of $1,000,000.
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
Innalogic. These shares were subsequently distributed to the founding members of
Innalogic. In addition, the Company may issue, at its discretion, 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 also issued 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.
Results of Operations for the Three Months Ended September 30, 2004, Compared to
- --------------------------------------------------------------------------------
the Three Months Ended September 30, 2003.
- ------------------------------------------
The Company had revenue of approximately $0.1 million for the three months ended
September 30, 2004 (the "Current Period") compared to no revenue during the
three months ended September 30, 2003 (the "Prior Period"). Revenue increased
due to the fact that the Company has undertaken new operations and revenue from
all previously owned and operated businesses have been divested and are no
longer reported as current operations.
The Company had research and development costs of approximately $49,000 in the
Current Period with no comparable expense in the Prior Period. The research and
development costs related to the new operating subsidiaries which did not exist
in the Prior Period.
Salaries and benefits of approximately $0.3 million in the Current Period
increased by approximately $0.2 million or 200% over salaries and benefits of
approximately $0.1 million in the Prior Period. Salaries and benefits increased
due to the addition of the two new operating subsidiaries offset by reductions
in corporate salaries and benefits costs.
Non cash compensation expenses of approximately $0.2 million in the Current
Period are the result of the fair market value of common shares issued to the
founding members of Innalogic by MSGI as part of the acquisition of a 51%
membership in Innalogic.
Selling, general and administrative expenses of approximately $0.5 million in
the Current Period increased by approximately $0.3 million or 150% over
comparable expenses of $0.2 million in the Prior Period. The increase is due
primarily to the addition of selling general and administrative costs associated
with the two new operating subsidiaries as well as by increases in various
corporate professional fees, offset by reductions in corporate insurance costs
and corporate salaries and benefits.
The gain from termination of a lease of approximately $70,000 in the Current
Period is the result of the early termination of the lease for an abandoned
property. A final settlement payment of approximately $175,000 was paid in order
to terminate the lease early against accrued costs of approximately $245,000.
14
The net provision for income taxes of $3,000 in the Current Period remained
consistent with the Prior Period. The Company records provisions for state and
local taxes incurred on taxable income or equity at the operating subsidiary
level, which cannot be offset by losses incurred at the parent company level or
other operating subsidiaries. The Company has recognized a full valuation
allowance against the deferred tax assets because it is more likely than not
that sufficient taxable income will not be generated during the carry forward
period to utilize the deferred tax assets.
As a result of the above, loss from continuing operations of approximately $0.7
million in the Current Period increased by approximately $0.4 million over
comparable loss from continuing operations of $0.3 million in the Prior Period.
The minority interests in subsidiaries of approximately $0.1 million in the
Current Period represents the minority holdings in FDA. There were no such
minority interests to report in the Prior Period.
The loss from discontinued operations of $40,294 in the Current Period is the
result of a settlement and legal expenses related to the settlement of certain
legal matters pertaining to a discontinued operation (see Note 6). The gain from
discontinued operations of approximately $416,000 in the Prior Period resulted
from the telemarketing operations, which were sold in March 2004, as well as
from reductions in certain loss reserves expensed in previous periods.
As a result of the above, net loss of approximately $0.8 million in the Current
Period increased by approximately $0.9 million over comparable net income of
approximately $0.1 million in the Prior Period.
Capital Resources and Liquidity
Financial Reporting Release No. 61, which was released by the SEC, requires all
companies to include a discussion to address, among other things, liquidity,
off-balance sheet arrangements, contractual obligations and commercial
commitments. The Company currently does not maintain any off-balance sheet
arrangements.
Leases: The Company leases various office space and equipment under
non-cancelable long-term leases. The Company incurs all costs of insurance,
maintenance and utilities.
Future minimum rental commitments under all non-cancelable leases as of
September 30, 2004 are as follows:
Minimum Rent Expense
2005 306,400
2006 263,800
2007 240,000
2008 240,000
2009 240,000
Thereafter 260,000
----------
$ 1,550,200
15
Debt: As a result of the sale of the operations of MKTG Teleservices in March
2004, 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.
Liquidity:
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 September 30, 2004, the
Company had cash and cash equivalents of $1.2 million and a working capital of
$0.9 million.
The Company recognized a net loss of approximately $0.8 million in the Current
Period. Cash used in operating activities was approximately $1.3 million. Cash
used in operating activities principally resulted from increases in accounts
receivable, inventory as well as decreases in accounts payable and accrued
liabilities. Cash used in operating activities in the Prior Period was $0.6
million. Cash provided by operating activities principally consists of a
decrease in accrued liabilities.
In the Current Period, net cash of $0.1 million was used in investing activities
consisting of purchases of property and equipment. In the Prior Period, no cash
was used in or provided by investing activities.
In the Current Period, net cash of $0.3 million was provided by financing
activities. Net cash provided by financing activities consisted primarily of
proceeds from the issuance of Common Stock of $0.8 million offset by a repayment
of a related party note payable of $0.5 million. In the Prior Period, net cash
of $0.1 million was used in financing activities consisting of repayments of
long-term debt and an increase in a related party receivable.
In the Current Period net cash of $0.1 million was used in discontinued
operations, while approximately $0.1 million was provided by discontinued
operations in the Prior Period.
While the Company has realized significant losses in past periods, it has most
recently raised significant working capital through the unregistered sale of
Common Stock and of Series F Convertible Preferred Stock (see Notes 4 and 12).
In addition, the Company's subsidiary, Innalogic, has begun to realize revenue
during the quarter ended September 30, 2004. The Company expects that both FDA
and Innalogic will realize positive earnings during the current fiscal year.
16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company 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 4. Controls and Procedures.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including Jeremy Barbera, the
Company's Chairman and Chief Executive Officer and Richard J. Mitchell III, the
Company's Chief Accounting Officer, of the effectiveness of the Registrant's
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities and Exchange Act of 1934. Based on that evaluation, Mr.
Barbera and Mr. Mitchell have concluded that the Company's disclosure controls
and procedures as of September 30, 2004 were effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission's rules and forms.
There were no changes in the Company's internal control over financial reporting
that occurred during the quarter ended September 30, 2004 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
17
PART II- OTHER INFORMATION
Item 1. Legal Proceedings.
In May 2003, an action was filed in the State of California against a former
subsidiary, MKTG Teleservices, Inc., by a former employee (Case No. BC 303297).
The action alleged wrongful termination and harassment by a certain member of
the former subsidiary's management. The action was settled in July 2004 and
stipulations of dismissal with prejudice have been or will shortly be filed. A
settlement payment in the amount of $35,000 by the Company has been recorded in
the current quarter and is realized in gain / (loss) from discontinued
operations. All legal fees pertaining to the matter have been realized in gain /
(loss) from discontinued operations.
Item 2. Changes in Securities and Use of Proceeds.
In April 2004, the Company commenced a private placement offering (the "Stock
Agreement") with certain strategic European investors to sell 250,000
unregistered 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 had 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 during the fiscal year
ended June 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 had issued warrants for the purchase of 135,000
of the 150,000 shares offered. The remaining 25,000 warrants were issued in July
2004.
Item 6. Exhibits
(a) Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification.
31.2 Rule 13a-14(a)/15d-14(a) Certification.
32.1 Section 1350 Certification.
32.2 Section 1350 Certification.
- --------------------------------------------------
18
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
MEDIA SERVICES GROUP, INC.
(Registrant)
Date: November 15, 2004 By: /s/ J. Jeremy Barbera
-----------------------------
J. Jeremy Barbera
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Richard J. Mitchell III
-----------------------------
Richard J. Mitchell III
Chief Accounting Officer
(Principal Financial Officer)
19
Exhibit 31.1
CERTIFICATION
I, J. Jeremy Barbera, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to ss. 302 of the Sarbanes-Oxley Act of 2002, that:
(1) I have reviewed this quarterly report on Form 10-Q of Media
Services Group, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in al
material respects the financial condition, results of operations and cash flows
of registrant as of, and for, the periods presented in this quarterly report;
and
(4) The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
(b) Intentionally omitted.
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial data; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 15, 2004 By: /s/ J. Jeremy Barbera
-----------------------------
J. Jeremy Barbera
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
20
Exhibit 31.2
CERTIFICATION
I, Richard J. Mitchell III, certify, pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to ss. 302 of the Sarbanes-Oxley Act of 2002,
that:
(1) I have reviewed this quarterly report on Form 10-Q of Media
Services Group, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in al
material respects the financial condition, results of operations and cash flows
of registrant as of, and for, the periods presented in this quarterly report;
and
(4) The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
(b) Intentionally omitted.
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial data; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: November 15, 2004 By: /s/ Richard J. Mitchell III
----------------------------
Richard J. Mitchell III
Chief Accounting Officer
(Principal Financial Officer)
21
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Media Services Group, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I, J.
Jeremy Barbera, as Chairman of the Board and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906
of the Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934: and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Date: November 15, 2004 By: /s/ J. Jeremy Barbera
-----------------------------
J. Jeremy Barbera
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
This certification accompanies this Quarterly Report on Form 10-Q pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by such Act, be deemed filed by the registrant for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
22
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Media Services Group, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Richard J. Mitchell III, as Chief Accounting Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934: and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Dated: November 15, 2004 By: /s/ Richard J. Mitchell III
---------------------------
Richard J. Mitchell III
Chief Accounting Officer
(Principal Financial Officer)
This certification accompanies this Quarterly Report on Form 10-Q pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by such Act, be deemed filed by the registrant for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
23