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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
MSGI SECURITY SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 88-0085608
------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
575 Madison Avenue
New York, New York 10022
------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (917) 339-7134
--------------
Media Services Group, Inc.
-----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes __ No X_
----- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
State number of shares outstanding of each of the issuer's classes of common
equity as of the latest practical date: As of February 10, 2005 there were
1,865,939 shares of the Issuer's Common Stock, par value $.01 per share
outstanding.
1
MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
DECEMBER 31, 2004
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 2004 (unaudited) and June 30, 2004 3
Condensed Consolidated Statements of Operations for the
three and six months ended December 31, 2004 and 2003
(unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the six months ended December 31, 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.
-----------------------------
MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2004 June 30, 2004
----------------- -------------
(Unaudited) (1)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 4,755,759 $ 2,548,598
Accounts receivable 150,000 -
Stock subscription receivable - 600,000
Inventory 243,769 -
Other current assets 197,289 208,293
--------- ----------
Total current assets 5,346,817 3,356,891
Investment 1,751,319 -
Goodwill 490,000 490,000
Intangible assets, net 287,288 -
Property and equipment, net 139,806 5,130
Note receivable 300,000 300,000
Related party note receivable 1,154,723 1,120,013
Other assets 22,700 15,700
------- -------
Total assets $ 9,492,653 $ 5,287,734
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade 436,846 381,722
Accrued expenses and other current liabilities 542,383 748,603
Note payable - shareholder - 500,000
Net liabilities of discontinued operations - 130,742
--------- ---------
Total current liabilities 979,229 1,761,067
Other liabilities 980,273 1,070,570
------- ---------
Total liabilities 1,959,502 2,831,637
Minority interest in subsidiary - 255,517
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock - $.01 par value; 18,750 shares authorized;
9,375 shares of Series F issued and outstanding (liquidation
Preference $3,000.00) 94 -
Common stock - $.01 par value; 9,375,000 shares authorized; 1,874,770 and
1,530,093 shares issued; 1,865,939 and 1,521,262 shares outstanding as
of December 31, 2004 and June 30, 2004, respectively 18,747 15,300
Additional paid-in capital 229,811,334 222,658,012
Accumulated deficit (220,903,314) (219,079,022)
Less: 8,831 shares of common stock in treasury, at cost (1,393,710) (1,393,710)
----------- -----------
Total stockholders' equity 7,533,151 2,200,580
---------- ----------
Total liabilities and stockholders' equity $ 9,492,653 $ 5,287,734
=========== ============
3
(1) Derived from the Audited Consolidated Financial Statements for the year
ended June 30, 2004.
See Notes to Condensed Consolidated Financial Statements.
MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED
DECEMBER 31, 2004 AND 2003
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
----------------- --------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues $ -- $ -- $ 150,000 $ --
Cost of goods sold -- -- 32,454 --
----------- ----------- ----------- -----------
Gross Profit -- -- 117,546 --
----------- ----------- ----------- -----------
Operating costs and expenses:
Research and development 26,315 -- 75,184 --
Salaries and benefits 457,475 93,383 756,257 170,899
Non cash compensation -- -- 235,886 --
Selling, general and administrative 642,457 411,789 1,115,410 612,200
Depreciation and amortization 16,180 -- 20,922 --
Gain on termination of lease -- -- (70,300) --
----------- ----------- ----------- -----------
Total operating costs and expenses 1,142,427 505,172 2,133,359 783,099
----------- ----------- ----------- -----------
Loss from operations (1,142,427) (505,172) (2,015,813) (783,099)
Other income (expense):
Interest income (expense) and other, net 10,754 20,458 12,108 15,169
Minority interests in subsidiaries 115,672 -- 255,517 --
----------- ----------- ----------- -----------
Loss from continuing operations
before provision for income taxes (1,016,001) (484,714) (1,748,188) (767,930)
Provision for income taxes 3,000 3,000 6,000 6,000
----------- ----------- ----------- -----------
Loss from continuing operations (1,019,001) (487,714) (1,754,188) (773,930)
Discontinued operations:
Gain (loss) from discontinued operations (29,809) 559,134 (70,104) 975,168
----------- ----------- ----------- -----------
Net income (loss) (1,048,810) 71,420 (1,824,292) 201,238
----------- ----------- ----------- -----------
Gain on redemption of preferred stock of
discontinued subsidiary -- 280,946 -- 280,946
----------- ----------- ----------- -----------
Net income (loss) attributable to
common stockholders $(1,048,810) $ 352,366 $ (1,824,292) $ 482,184
=========== =========== =========== ===========
Basic earnings (loss) per share:
Continuing operations $ (0.63) $ (0.45) $ (1.11) $ (0.71)
Discontinued operations (0.02) 0.77 (0.04) 1.15
----------- ----------- ----------- -----------
Basic earnings (loss) per share $ (0.65) $ 0.32 $ (1.15) $ 0.44
=========== =========== =========== ===========
Weighted average common shares outstanding- basic 1,617,199 1,092,367 1,592,600 1,092,367
=========== =========== =========== ===========
Diluted earnings (loss) per share:
Continuing operations $ (0.63) $ (0.37) $ (1.11) $ (0.60)
Discontinued operations (0.02) 0.64 (0.04) 0.98
----------- ----------- ----------- -----------
Diluted earnings (loss) per share $ (0.65) $ 0.27 $ (1.15) $ 0.38
=========== =========== =========== ===========
Weighted average common shares outstanding- diluted 1,617,199 1,300,827 1,592,600 1,289,269
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements
4
MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003
(unaudited)
2004 2003
----------- -----------
Operating activities:
Net income (loss) $(1,824,292) $ 201,238
(Gain)/loss from discontinued operations 70,104 (975,168)
----------- -----------
Loss from continuing operations (1,754,188) (773,930)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation 20,922 --
Non cash compensation 235,886 --
Gain from termination of lease (70,300) --
Minority interest in subsidiary (255,517) --
Changes in assets and liabilities:
Accounts receivable (150,000) --
Inventory (243,769) --
Other current assets (40,398) 94,813
Other assets (7,000) --
Accounts payable - trade 55,124 (56,479)
Accrued expenses and other liabilities (226,217) (1,091,789)
----------- -----------
Net cash used in operating activities (2,435,457) (1,827,385)
----------- -----------
Investing activities:
Purchase of investment (1,751,319) --
Purchases of property and equipment (155,598) --
----------- -----------
Net cash used in investing activities (1,906,917) --
Financing activities:
Proceeds from issuance of preferred shares, net of issuance costs 2,746,819 --
Proceeds from issuance of common stock, net of issuance costs 3,818,272 --
Proceeds from exercise of stock options 720,000 --
Increase in related party note receivable (34,710) (34,711)
Repayment of related party note payable (500,000) --
Repayments of long-term debt -- (150,093)
----------- -----------
Net cash provided by (used in) financing activities 6,750,381 (184,804)
----------- -----------
Net cash from (used in) discontinued operations (200,846) 1,384,854
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,207,161 (627,335)
Cash and cash equivalents at beginning of period 2,548,598 660,742
----------- -----------
Cash and cash equivalents at end of period $ 4,755,759 $ 33,407
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
MSGI SECURITY SOLUTIONS, 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 MSGI Security Solutions, Inc. (formerly known as 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 six-month
period ended December 31, 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.
On February 7, 2005, the Company held its Annual Meeting for the fiscal year
ended June 30, 2004. At this meeting, shareholders approved, by proxy vote, the
change of name for the Company to MSGI Security Solutions, Inc. The name change
became effective on February 9, 2005.
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 (51%) and
Innalogic (51%), both of which are forecasted to result in revenues 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.
6
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.
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 $75,184
for the period ended December 31, 2004. There was no such expense in the same
period 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.
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:
7
Three months ended December 31, Six months ended December 31,
2004 2003 2004 2003
------------ ----------- --------------- -----------
Net income (loss) available to common
stockholders as reported $ (1,048,810) $ 352,367 $ (1,824,290) $ 482,184
Stock based-compensation recorded -- -- -- --
------------ ----------- --------------- -----------
Subtotal (1,048,810) 352,367 (1,824,290) 482,184
Stock-based compensation recorded under
SFAS 123 29,654 -- 59,149 --
------------ ----------- --------------- -----------
Pro forma net income (loss) available
to common stockholders $ (1,078,464) $ 352,367 $ ( 1,883,439) $ 482,184
============ =========== =============== ===========
Earnings (loss) per share:
Basic earnings (loss) per share - as reported $ (0.65) $ 0.32 $ (1.15) $ 0.44
============ =========== =============== ===========
Basic earnings (loss) per share - pro forma $ (0.67) $ 0.32 $ (1.18) $ 0.44
============ =========== =============== ===========
Diluted earnings (loss) per share - as reported $ (0.65) $ 0.27 $ (1.15) $ 0.38
============ =========== =============== ===========
Diluted earning (loss) per share - pro forma $ (0.67) $ 0.27 $ (1.18) $ 0.38
============ =========== =============== ===========
The Company has granted 1,250 options to employees during the six months ended
December 31, 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 December 31, 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 December 31,
2004, based on the date of grants:
December 31 ,2004
Risk -free interest rate 4.00%
Expected option life Vesting life + four years
Dividend yield None
Volatility 158%
Recent Accounting Pronouncements:
SFAS 123(R): Share-Based Payment
In December 2004, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123 Revised 2004, "Share-Based Payment". This Statement requires
that the cost resulting from all share-based payment transactions are recognized
in the financial statements of the Company. That cost will be measured based on
the fair market value of the equity or liability instruments issued. SFAS 123(R)
is effective as of the first interim or annual reporting that ends after June
15, 2005. This Statement will be effective for the Company's Annual report for
the period ended June 30, 2005. Management believes it will have an impact due
to the Company's use of options as employee incentives, but has not yet
determined the impact."
FASB 151: Inventory Costs
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 151, which revised ARB No. 43, relating to inventory costs. This
revision is to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material or "spoilage". This
statement requires that these items be recognized as a current period charge
regardless of whether
8
they meet the criterion specified in ARB 43. In addition, this Statement
requires the allocation of fixed production overheads to the costs of conversion
be based on normal capacity of the production facilities. This Statement is
effective for the fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after the date of issuance of this Statement. Management believes that
this Statement will have no impact on the financial statements of the Company
once adopted.
3. EARNINGS PER SHARE
Common share equivalents included in weighted average shares outstanding-
diluted for the quarters ending December 31, 2004 and 2003:
2004 2003
Three Months Six Months Three Months Six Months
Weighted average common shares outstanding - basic 1,617,199 1,592,600 1,092,367 1,092,367
Common stock equivalents for options and warrants -- -- 208,460 196,902
--------- --------- ---------
Weighted average common shares outstanding- diluted 1,617,199 1,592,600 1,300,827 1,289,269
========= ========= ========= =========
Stock options and warrants in the amount of 471,652 shares and preferred stock
convertible into 230,769 shares of common stock were not included in the
computation of diluted earnings per share, as they are anti-dilutive as a result
of net losses for the quarter ended December 31, 2004.
4. EQUITY TRANSACTIONS
On November 10, 2004, the Company entered into a private placement agreement
with certain strategic investors in which the Company sold an aggregate of 9,375
shares of Series F Convertible Preferred Stock, par value $.01 ("Series F
Preferred Stock") and warrants to acquire 115,382 shares of common stock for
gross proceeds of $3 million. The preferred stock is convertible in shares of
common stock, at any time at the option of the holder, at a conversion rate of
$13.00 per share. The holders of Series F Preferred Stock are entitled to
receive cumulative dividends at the rate of six percent (6%) payable in
additional shares of common stock of the Company, based on the average closing
price per share of the Company's common stock for the ten (10) consecutive
trading days prior to the payment of any dividend. There are no reset provisions
or anti-dilution provisions associated with this Series F Convertible Preferred
Stock. In the event of liquidation, holders of this stock are entitled to
receive the stated value plus the amount of any accrued and unpaid dividends at
that date. Preferred stockholders are entitled to common stockholder voting
rights in an amount equal to the common stock equivalent of the preferred shares
as if converted. The warrants are exercisable for a period of five years at an
exercise price of $16.25 per share. Placement fees and expenses associated with
the issuance of the Series F Preferred Stock were approximately $253,200. In
addition, the Company issued warrants to placement agents to acquire 13,846
shares of common stock, at an exercise price of $13.00, exercisable for a period
of five years.
On December 30, 2004 the Company entered into a private placement offering to
certain strategic investors for the sale of 209,677 shares of the Company's
common stock at a price of $15.50 per share for gross proceeds of $3.25 million.
In connection with the offering, the Company issued warrants to purchase 104,843
shares of common stock at an exercise price per share of $16.50, exercisable for
a five-year period. The investors have "piggyback" registration rights with
respect to the shares of common stock and the common stock issuable upon the
exercise of the warrants. Placement fees and expenses associated with this
offering were approximately $215,700. In addition, the Company issued warrants
to placement agents to acquire 12,581 shares of common stock, at an exercise
price of $15.50, exercisable for a period of five years.
9
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.
5. INVESTMENTS
On December 1, 2004, the Company entered into a Subscription Agreement with
Excelsa S.p.A. ("Excelsa"), a corporation organized under the laws of the
Republic of Italy, to acquire 66,632 shares of common stock of Excelsa, par
value of 1.0 Euro per share, representing 4.5% of the issued and outstanding
shares of common stock of Excelsa on a fully diluted basis. MSGI acquired the
Common Stock for an aggregate purchase price of $1,751,319, including
approximately $84,000 of acquisition costs. This investment is accounted for
under the cost method.
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
December 31, 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 $70,000 during the periodended December
31, 2004 are the result of trailing legal fees associated with certain legal
settlements pertaining to the discontinued operation (see Note 10).
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.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
In connection with the acquisition of Innalogic (Note 7), intangible assets
totaling $287,288 were acquired. The Company is awaiting the results of a 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 December 31, 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 periods ended December 31,
2004.
10
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 period ended December 31,
2004.
10. 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 filed. A settlement payment
in the amount of $35,000 by the Company has been recorded in the quarter ended
September 30, 2004 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 $3.0 million (see
Note 4). The Company is in compliance with the stockholders' equity requirement,
based upon the private placement transaction. Nasdaq will continue to monitor
the Company's ongoing compliance with regard to stockholders' equity.
As of December 31, 2004, there are no other material legal actions known to
management that are pending to which the Company is a party.
11. SUBSEQUENT EVENTS
On January 3, 2005, the Company entered into an additional Subscription
Agreement with Excelsa S.p.A. ("Excelsa"), a corporation organized under the
laws of the Republic of Italy, to acquire an additional 135,381 shares of common
stock of Excelsa, par value of 1.0 Euro per share, for a purchase price of
approximately $2.0 million dollars, representing 8.4% of the issued and
outstanding shares of common stock of Excelsa on a fully diluted basis. The
shares acquired, in the aggregate with the original shares acquired in December
2004 (Note 5), represent 12.5% of the issued and outstanding shares of Common
Stock of Excelsa on a fully diluted basis. Excelsa has represented to the
Company that it will not solicit, initiate, consider, encourage or accept any
other proposals or offers from any person relating to any acquisition or
purchase of all or any portion of the capital stock or assets of Excelsa or any
of its subsidiaries nor will it enter into any merger, consolidation, business
combination, recapitalization, reorganization or other extraordinary business
transaction involving or related to Excelsa or any of its subsidiaries for the
period from the date of execution of the subscription agreement through December
31, 2005.
11
In February 2005, the Company, through its Innalogic subsidiary, completed the
second portion of a sale to the United States Department of Homeland Security
(the "DHS"), in the amount of approximately $341,000. The remaining
requisitioned systems were completed and shipped on February 11, 2005 and have
been invoiced in full.
On February 7, 2005, the Company held its Annual Meeting of shareholders. At
this meeting, a vote was successfully passed approving an amendment to the
Company's Restated and Amended Articles of Incorporation which authorized the
proposed name change to MSGI Security Solutions, Inc.
On February 8, 2004, the Company announced that its Board of Directors approved
a motion to forward split the common shares of the Company on a two-for-one
basis. Each share of the Company's common stock will receive one additional
share of common stock on the effective date. The effective date of the forward
split is expected to be determined upon approval from Nasdaq.
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 costs.
Introduction
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity/cash flows of the Company
for the three-month and six-month periods ended December 31, 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
12
our customer is fixed or determinable; and (4) collectibility of the sales price
is reasonably assured.
FDA recognized no revenues during the period ended December 31, 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.
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 December 31, 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 December
31, 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 in the United States of America 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:
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 151, which revised ARB No. 43, relating to inventory costs. This
revision is to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material or "spoilage". This
statement requires that these items be recognized as a current period charge
regardless of whether they meet the criterion specified in ARB 43. In addition,
this Statement requires the allocation of fixed production overheads to the
costs of conversion be based on normal capacity of the production facilities.
This Statement is effective for the fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal
years beginning after the date of issuance of this Statement. Management
believes that this Statement will have no impact on the financial statements of
the Company once adopted.
In December 2004, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123 Revised 2004, "Share-Based Payment". This Statement requires
that the cost resulting from all share-
13
based payment transactions are recognized in the financial statements of the
Company. That cost will be measured based on the fair market value of the equity
or liability instruments issued. SFAS 123(R) is effective as of the first
interim or annual reporting that ends after June 15, 2005. This Statement will
be effective for the Company's Annual report for the period ended June 30, 2005.
The Company is currently evaluating this pronouncement regarding the potential
impact on the Company's results of operations.
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 4). The Company is in compliance with the stockholders' equity
requirement, based upon the private placement transaction. Nasdaq will continue
to monitor the Company's ongoing compliance with regard to stockholders' equity.
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 December 31, 2003
have been reclassified into a one-line presentation and is included in loss from
discontinued operations and net cash used by discontinued operations.
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.
14
Results of Operations for the Three Months Ended December 31, 2004, Compared to
- -------------------------------------------------------------------------------
the Three Months Ended December 31, 2003.
- -----------------------------------------
The Company reported no revenue for the three months ended December 31, 2004
(the "Current Period") compared to no revenue during the three months ended
December 31, 2003 (the "Prior Period"). Revenue is currently limited 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 $26,000 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 $0.5 million in the Current Period
increased by approximately $0.4 million or 400% 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.
Selling, general and administrative expenses of approximately $0.6 million in
the Current Period increased by approximately $0.2 million or 50% over
comparable expenses of $0.4 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 office related expenses.
Depreciation and amortization expenses of approximately $16,000 in the Current
Period increased over comparable expenses totaling $0 in the Prior Period. The
increase in expenses is due primarily to the fact that the Company has
undertaken new operations and new fixed assets have been obtained. Comparable
expenses from all previously owned and operated businesses have been divested
and are no longer reported as current operations.
Other income of approximately $11,000 in the Current Period decreased by
approximately $9,000 or 45% from other income of approximately $20,000 in the
Prior Period. The decrease is due primarily to a reduction in interest earned on
cash balances and equivalents.
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.
The minority interests in subsidiaries of approximately $116,000 in the Current
Period represent the minority holdings in FDA, which losses are limited to their
equity investment. There were no such minority interests to report in the Prior
Period.
As a result of the above, loss from continuing operations of approximately $1.0
million in the Current Period increased by approximately $0.5 million over
comparable loss from continuing operations of $0.5 million in the Prior
Period.
The loss from discontinued operations of approximately $30,000 in the Current
Period is the result of trailing consulting expenses and legal expenses related
to the settlement of certain legal matters
15
pertaining to a discontinued operation (see Notes 6 and 10). The gain from
discontinued operations of approximately $559,000 in the Prior Period resulted
from the telemarketing operations, which were sold in March 2004.
As a result of the above, net loss of approximately $1.1 million in the Current
Period increased by approximately $1.2 million over comparable net income of
approximately $0.1 million in the Prior Period.
Results of Operations for the Six Months Ended December 31, 2004, Compared to
- -----------------------------------------------------------------------------
the Six Months Ended December 31, 2003.
- ---------------------------------------
The Company had revenue of approximately $0.1 million for the six months ended
December 31, 2004 (the "Current Period") compared to no revenue during the six
months ended December 31, 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 reported cost of goods sold of approximately $32,000 in the Current
Period in with no comparable expense in the Prior Period.
The Company had research and development costs of approximately $75,000 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 $0.8 million in the Current Period
increased by approximately $0.6 million or 300% over salaries and benefits of
approximately $0.2 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 $1.1 million in
the Current Period increased by approximately $0.5 million or 83% over
comparable expenses of $0.6 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 office related expenses.
Depreciation and amortization expenses of approximately $21,000 in the Current
Period increased over comparable expenses totaling $0 in the Prior Period. The
increase in expenses is due primarily to the fact that the Company has
undertaken new operations and new fixed assets have been obtained. Comparable
expenses from all previously owned and operated businesses have been divested
and are no longer reported as current operations.
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.
The net provision for income taxes of $6,000 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
16
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.
The minority interests in subsidiaries of approximately $0.3 million in the
Current Period represents the minority holdings in FDA, which losses are limited
to their equity investment. There were no such minority interests to report in
the Prior Period.
As a result of the above, loss from continuing operations of approximately $1.8
million in the Current Period increased by approximately $1.0 million over
comparable loss from continuing operations of $0.8 million in the Prior Period.
The loss from discontinued operations of approximately $70,000 in the Current
Period is the result of trailing consulting expenses and legal expenses related
to the settlement of certain legal matters pertaining to a discontinued
operation (see Notes 6 and 10). The gain from discontinued operations of
approximately $1.0 million 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 $1.8 million in the Current
Period increased by approximately $2.0 million over comparable net income of
approximately $0.2 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 December
31, 2004 are as follows:
Minimum Rent Expense
2005 195,210
2006 256,200
2007 240,000
2008 240,000
2009 240,000
Thereafter 260,000
----------
$ 1,431,410
The Company has accrued for approximately $1.2 million of the approximately $1.4
million in liabilities for minimum rental expenses as a result of an abandoned
lease property.
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.
17
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 December 31, 2004, the
Company had cash and cash equivalents of approximately $4.8 million and a
working capital of approximately $4.4 million.
The Company recognized a net loss of approximately $1.8 million in the Current
Period. Cash used in operating activities was approximately $2.4 million. Cash
used in operating activities principally resulted from increases in accounts
receivable and inventory as well as decreases in accrued liabilities offset by
increases in accounts payable and other liabilities. Cash used in operating
activities in the Prior Period was $1.8 million.
In the Current Period, net cash of $1.9 million was used in investing activities
consisting of an investment in a subsidiary which was booked on a cost basis and
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 $6.8 million was provided by financing
activities. Net cash provided by financing activities consisted primarily of net
proceeds from the issuance of Common Stock of $3.8 million, net proceeds from
the issuance of Preferred Shares of approximately $2.7 million and proceeds from
the exercise of stock options of approximately $0.7 million offset by the
repayment of a related party note payable of $0.5 million. In the Prior Period,
net cash of $0.2 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 approximately $0.2 million was used by
discontinued operations, while approximately $1.3 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, the sale of Series F Convertible Preferred Stock (Note 4) and the
exercise of certain stock options. In addition, the Company's subsidiary,
Innalogic, has begun to realize revenue during the period ended December 31,
2004. The Company expects that both FDA and Innalogic will realize positive
earnings during the current fiscal year.
In February, 2005 the Company, through its Innalogic subsidiary, completed the
second portion of a sale to the United States Department of Homeland Security
(the "DHS"), in the amount of approximately $341,000. The remaining
requisitioned systems were completed and shipped on February 11, 2005 and have
been invoiced in full. This revenue will be realized in the quarter ended March
31, 2005 and completes the order that was partially shipped in the quarter ended
September 30, 2004.
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
18
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 December 31, 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 period ended December
31, 2004 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
19
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 filed. A settlement payment
in the amount of $35,000 by the Company has been recorded in the quarter ended
September 30, 2004 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.
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 were issued to purchase 115,385 shares of
Common stock at an exercise price of $16.25 per share. 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. The holders of Series F Preferred
Stock are entitled to receive cumulative dividends at the rate of six percent
(6%) payable in additional shares of common stock of the Company, based on the
average closing price per share of the Company's common stock for the ten (10)
consecutive trading days prior to the payment of any dividend. There are no
reset provisions or anti-dilution provisions associated with this Series F
Convertible Preferred Stock. In the event of liquidation, holders of this stock
are entitled to receive the stated value plus the amount of any accrued and
unpaid dividends at that date. Preferred stockholders are entitled to common
stockholder voting rights in an amount equal to the common stock equivalent of
the preferred shares as if converted. As compensation for their services as
placement agents in the offering, the placement agents received cash fees of
$180,000 plus five-year warrants substantially identical to those received by
the investors to purchase approximately 13,845 shares of Common Stock at an
exercise price per share equal to $13.00.
On December 30, 2004 the Company conducted a closing on the sale to certain
strategic investors for the purchase of 209,677 shares of the Company's Common
Stock at $15.50 per share generating gross proceeds of $3.25 million. In
connection with the offering, five-year warrants were issued to the
20
investors to purchase 104,839 shares of Common Stock at an exercise price per
share of $16.50. The investors have "piggyback" registration rights with respect
to the shares of Common Stock and the Common Stock issuable upon the exercise of
the warrants. As compensation for their services as placement agents in the
offering, the placement agents received cash fees of $195,000 plus five-year
warrants substantially identical to those received by the investors to purchase
approximately 12,581 shares of Common Stock at an exercise price per share equal
to $15.50.
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.
21
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.
MSGI SECURITY SOLUTIONS, INC.
(Registrant)
Date: February 14, 2005 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)
22
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 MSGI Security
Solutions, 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 all
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: February 14, 2005 By: /s/ J. Jeremy Barbera
------------------------------------------
J. Jeremy Barbera
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
23
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 MSGI Security
Solutions, 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 all
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: February 14, 2005 By: /s/ Richard J. Mitchell III
-----------------------------------
Richard J. Mitchell III
Chief Accounting Officer
(Principal Financial Officer)
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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 MSGI Security Solutions, Inc. (the
"Company") on Form 10-Q for the period ended December 31, 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.
Dated: February 14, 2005 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.
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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 MSGI Security Solutions, Inc. (the
"Company") on Form 10-Q for the period ended December 31, 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: February 14, 2005 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.
26