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 March 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
MEDIA SERVICES GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 88-0085608
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
575 Madison Avenue, 10th Floor
New York, New York 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (917) 339-7134
--------------------------------------------------------------------
(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 May 14, 2004 there were 1,296,262 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
MARCH 31, 2004
Page
----
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of March 31,
2004 (unaudited) and June 30, 2003 3
Condensed Consolidated Statements of Operations for the
three and nine months ended March 31, 2004 and 2003
(unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended March 31, 2004 and 2003 (unaudited) 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6-9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
Item 3 Quantitative and Qualitative Disclosure About Market Risk 16
Item 4 Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 18
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2004 June 30, 2003
----------------- --------------
(unaudited) (1)
ASSETS
Current assets:
Cash and cash equivalents $ 1,445,063 $ 660,742
Other current assets 623,508 451,548
Current assets of discontinued operations -- 2,396,062
------------- -------------
Total current assets 2,068,571 3,508,352
Related party note receivable 1,102,374 1,050,309
Other assets 12,000 12,000
Assets of discontinued operations -- 3,076,859
------------- -------------
Total assets $ 3,182,945 $ 7,647,520
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade $ 449,007 $ 288,631
Accrued expenses and other current liabilities 592,129 1,365,751
Current portion of long-term obligations 1,008 201,062
Current liabilites of discontinued operations -- 940,338
------------- -------------
Total current liabilities 1,042,144 2,795,782
Other liabilities 1,100,548 1,463,132
------------- -------------
Total liabilities 2,142,692 4,258,914
------------- -------------
Minority interest in preferred stock of discontinued subsidiary -- 280,946
Stockholders' equity:
Common stock - $.01 par value; 9,375,000 shares authorized; 1,101,198 shares
issued and 1,092,367 shares outstanding as
of March 31, 2004 and June 30, 2003 11,011 11,011
Additional paid-in-capital 220,539,182 220,258,236
Accumulated deficit (218,116,230) (215,767,877)
Less: 8,831 shares of common stock in treasury, at cost (1,393,710) (1,393,710)
------------- -------------
Total stockholders' equity 1,040,253 3,107,660
------------- -------------
Total liabilities and stockholders' equity $ 3,182,945 $ 7,647,520
============= =============
(1) Derived from the Audited Financial Statements for the year ended June 30,
2003.
See Notes to Condensed Consolidated Financial Statements.
3
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2004 AND 2003
(unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- ------------
Revenues $ -- $ -- $ -- $ --
----------- ----------- ----------- ------------
Operating costs and expenses:
Salaries and benefits 91,808 221,900 262,707 629,034
Selling, general and administrative 261,366 252,849 873,566 805,184
Gain on termination of lease -- -- -- (3,905,387)
----------- ----------- ----------- ------------
Total operating costs and expenses 353,174 474,749 1,136,273 (2,471,169)
----------- ----------- ----------- ------------
Income (loss) from operations (353,174) (474,749) (1,136,273) 2,471,169
Settlement of lawsuit -- -- -- 965,486
Interest income (expense) and other, net 17,405 16,638 32,574 44,481
----------- ----------- ----------- ------------
Income (loss) from continuing operations before
provision for income taxes (335,769) (458,111) (1,103,699) 3,481,136
Provision for income taxes (23,229) (11,384) (29,229) (42,194)
----------- ----------- ----------- ------------
Income (loss) from continuing operations (358,998) (469,495) (1,132,928) 3,438,942
Discontinued operations:
Gain (loss) from discontinued operations (1,209,577) 135,782 (234,409) (862,436)
(Loss) gain from disposal of discontinued
operations (981,016) (69,309) (981,016) (185,944)
----------- ----------- ----------- ------------
Gain (loss) from discontinued operations (2,190,593) 66,473 (1,215,425) (1,048,380)
----------- ----------- ----------- ------------
Cumulative effect of change in accounting principle -- -- -- (5,075,000)
----------- ----------- ----------- ------------
Net loss (2,549,591) (403,022) (2,348,353) (2,684,438)
Gain on redemption of preferred stock -- 13,970,813 280,946 13,970,813
------------ ---------- ----------- -----------
Net income (loss) attributable to
common shareholders $(2,549,591) $13,567,791 $ (2,067,407) $ 11,286,375
=========== =========== ============ =============
Basic earnings (loss) per share
Continuing operations $ (0.33) $ 12.43 $ (1.04) $ 17.97
Discontinued operations (2.00) 0.06 (.85) (1.08)
Cumulative effect of change in
accounting principles -- -- -- (5.24)
----------- ----------- ----------- ------------
Basic earnings (loss) per share $ (2.33) $ 12.49 $ (1.89) $ 11.65
=========== =========== =========== ============
Weighted average common shares outstanding 1,092,367 1,086,323 1,092,367 968,631
=========== =========== =========== ============
Diluted earnings (loss) per share:
Continuing operations $ (0.33) $ 10.98 $ (1.04) $ 15.38
Discontinued operations (2.00) 0.05 (.85) (0.93)
Cumulative effect of change in
accounting principle -- -- -- (4.48)
----------- ----------- ----------- ------------
Diluted earnings (loss) per share $ (2.33) $ 11.03 $ (1.89) $ 9.97
=========== =========== =========== ============
Weighted average common shares outstanding 1,092,367 1,229,807 1,092,367 1,131,613
=========== =========== =========== ============
See Notes to Condensed Consolidated Financial Statements.
4
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND 2003
(unaudited)
2004 2003
----------- ------------
Operating activities:
Net loss $(2,348,353) $ (2,684,438)
Loss from discontinued operations 1,215,425 1,048,380
Cumulative effect of change in accounting principle -- 5,075,000
----------- ------------
Income (loss) from continuing operations (1,132,928) 3,438,942
Adjustments to reconcile loss to net cash used in
operating activities:
Gain on termination of lease -- (3,905,387)
Accrued interest on related party
note receivable (52,065) (54,420)
Changes in assets and liabilities:
Other current assets (171,960) (660,449)
Other assets -- 313,629
Accounts payable - trade 160,376 (512,120)
Accrued expenses and other liabilities (288,100) (3,016,554)
----------- ------------
Net cash used in operating activities (1,484,677) (4,396,359)
----------- ------------
Investing activities:
Proceeds from sale of discontinued operations, net of fees 2,834,388 8,546,182
Decrease in restricted cash -- 4,945,874
----------- ------------
Net cash provided by investing activities 2,834,388 13,492,056
----------- ------------
Financing activities:
Redemption of preferred stock -- (6,021,840)
Expenditures from private placement of preferred stock -- (29,756)
Net (repayments on) proceeds from credit facilities -- (1,158,417)
Repayments of long-term debt (200,054) (4,763,487)
----------- ------------
Net cash used in financing activities (200,054) (11,973,500)
----------- ------------
Net cash used in discontinued operations (365,336) (191,080)
----------- ------------
Net increase in cash and cash equivalents 784,321 (3,068,883)
Cash and cash equivalents at beginning of period 660,742 3,802,218
----------- ------------
Cash and cash equivalents at end of period $ 1,445,063 $ 733,335
=========== ============
See Notes to Condensed Consolidated Financial Statements
5
MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements include
the accounts of Media Services Group, Inc. and Subsidiaries ("MSGI" or the
"Company"). These condensed consolidated financial statements are unaudited and
should be read in conjunction with the Company's Form 10-K for the year ended
June 30, 2003 and the historical consolidated financial statements and related
notes included therein. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements include all adjustments, consisting
of only normal recurring accruals, necessary to present fairly the condensed
consolidated financial position, results of operations and cash flows of the
Company. Certain information and footnote disclosure normally included in
financial statements prepared in conformity with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations. Operating results for the three and
nine-month periods ended March 31, 2004 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 2004.
The Company has limited capital resources and has incurred significant
historical losses and negative cash flows from operations. As explained in Note
5, the Company recently sold off substantially all the assets relating to its
telemarketing and telesales, direct list sales and database services and website
development and design business held by certain of its wholly owned
subsidiaries. In addition, the Company has instituted cost reduction measures,
including the reduction of workforce. The Company intends to invest the proceeds
from the recent sale of assets into new ventures And operations. Failure of any
of the acquired ventures and 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.
Effective December 29, 2003, the Company changed its legal name from MKTG
Services, Inc. to Media Services Group, Inc.
2. EARNINGS PER SHARE
Common share equivalents included in weighted average shares outstanding-
diluted for the three and nine months ending March 31, 2004 is as follows:
Three Nine
Months Months
--------- ---------
Weighted average common shares outstanding- basic 1,092,367 1,092,367
Common stock equivalents for options and warrants 245,417 233,727
--------- ---------
Weighted average common shares outstanding- diluted 1,337,784 1,326,094
========= =========
6
3. STOCK BASED COMPENSATION
The accompanying financial position and results of operations for the Company
have been prepared in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"). Under APB No. 25, generally, no
compensation expense is recognized in the financial statements in connection
with the awarding of stock option grants to employees provided that, as of the
grant date, the number of shares and the exercise price of the award are fixed
and the fair value of the Company's stock, as of the grant date, is equal to or
less than the amount an employee must pay to acquire the stock.
The Company has elected the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). Stock based awards to
non-employees are accounted for under the provisions of SFAS 123.
Had the Company determined compensation cost based on the fair value methodology
of SFAS 123 at the grant date for its stock options, the Company's loss and
earnings per share from continuing operations would have been adjusted to the
pro forma amounts indicated below:
Three months ended March 31, Nine months ended March 31,
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) available to common
stockholders as reported $(2,549,591) $13,567,791 $(2,067,407) $11,286,375
Stock based-compensation recorded - - - -
-------- ------------ --------- ------------
Subtotal (2,549,591) 13,567,791 (2,067,407) 11,286,375
Stock-based compensation recorded under
SFAS 123 (4,823) (182,151) (4,823) (910,753)
-------- ------------ --------- ------------
Pro forma net income (loss) available
to common stockholders $(2,554,414) $13,385,640 $(2,072,230) $10,375,622
======== ============ ========= =============
Earnings (loss) per share:
Basic earnings (loss) per share - as reported $(2.33) $12.49 $(1.89) $11.65
====== ====== ====== ========
Basic earnings (loss) per share - pro forma $(2.34) $12.32 $(1.90) $10.71
====== ====== ====== ========
Diluted earnings (loss) per share - as reported $(2.33) $11.03 $(1.89) $9.97
====== ====== ====== ========
Diluted earning (loss) per share - pro forma $(2.34) $10.88 $(1.90) $9.17
====== ====== ====== ========
On March 24, 2004, the Company granted 225,000 stock options to members of
management of the Company. These options were granted at an exercise price equal
to the market price on date of grant, do not begin to vest until September 2004
and vest ratably over a three year period.
The fair value of each stock option is estimated on the date of grant using the
Black-Scholes option pricing model. Pro forma compensation costs for stock
options under SFAS No. 123 is recognized over the service period. Previously
recognized pro forma compensation cost is not to be reversed if a vested
employee option expires unexercised. The Company stops recognizing pro forma
compensation cost when an option expires.
7
4. DEBT
At March 31, 2004, the Company retired all outstanding balances on its line of
credit facility. The Company subsequently terminated its relationship with the
credit provider.
5. DISCONTINUED OPERATIONS
In March 2004, the Company completed its sale of substantially all the assets
relating to its telemarketing and telesales services business held by its wholly
owned subsidiary MKTG Teleservices, Inc. to SD&A Teleservices, Inc. (SD&A) a
wholly owned subsidiary of the Robert W. Woodruff Arts Center, Inc. for
approximately $3.3 million in cash plus the assumption of certain related
liabilities, subject to a final working capital adjustment. As such, the
operations and cash flows of the telemarketing and telefunding business have
been eliminated from ongoing operations and the Company no longer has continuing
involvement in the operations.
In December 2002, the Company completed its sale of substantially all the assets
relating to its direct list sales and database services and website development
and design business held by certain of its wholly owned subsidiaries (the
"Northeast Operations") to Automation Research, Inc. ("ARI"), a wholly owned
subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash plus
the assumption of all directly related liabilities. As such, the operations and
cash flows of the Northeast Operations have been eliminated from ongoing
operations and the Company no longer has continuing involvement in the
operations.
Accordingly, the statement of operations and cash flows for the period ended
March 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.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
As a result of the adoption of SFAS No. 142, the Company discontinued the
amortization of goodwill effective July 1, 2002.
The Company recognized an impairment charge of approximately $5.1 million in
connection with the adoption of SFAS No. 142. The impairment charge has been
booked by the Company in accordance with SFAS 142 transition provisions as a
cumulative effect of change in accounting principle for the period ended
September 30, 2003.
In connection with the sale of the Northeast Operations
and the telemarketing and telesales operations, the company had no remaining
operations as of March 31, 2004 and all related goodwill was written off as part
of the sales.
The company has sold off all remaining intangible assets as a result of the sale
of the telemarketing and telefunding business. There are no remaining intangible
assets subject to amortization as of March 31, 2004.
8
7. CONTINGENCIES AND LITIGATION
In December 2001, an action was filed by a number of purchasers of preferred
stock of WiredEmpire, Inc., a discontinued subsidiary, in the Alabama State
Court (Circuit Court of Jefferson County, Alabama, 10 Judicial Circuit of
Alabama, Birmingham Division), against J. Jeremy Barbera, Chairman of the Board
and Chief Executive Officer of MSGI, MSGI and WiredEmpire, Inc. The plaintiffs'
complaint alleges, among other things, violation of sections 8-6-19(a)(2) and
8-6-19(c) of the Alabama Securities Act and various other provisions of Alabama
state law and common law, arising from the plaintiffs' acquisition of
WiredEmpire Preferred Series A stock in a private placement. The plaintiffs
invested approximately $1,650,000 in WiredEmpire's preferred stock and they were
seeking that amount, attorney's fees and punitive damages. On February 8, 2002,
the defendants filed a petition to remove the action to federal court on the
grounds of diversity of citizenship. In December 2003, action was settled, and
stipulations of dismissal with prejudice have been or will shortly be filed.
In December 2000, an action was filed by Red Mountain, LLP in the United States
Court for the Northern District of Alabama, Southern Division against J. Jeremy
Barbera, Chairman of the Board and Chief Executive Officer of Media Services
Group, Inc., and WiredEmpire, Inc. Red Mountains' complaint alleges, among other
things, violations of Section 12(2) of the Securities Act of 1933, Section 10(b)
of the Securities Act of 1934 and Rule 10(b)(5) promulgated thereunder, and
various provisions of Alabama state law and common law, arising from Red
Mountain's acquisition of WiredEmpire Preferred Series A stock in a private
placement. Red Mountain invested $225,000 in WiredEmpire's preferred stock and
it seeks that amount, attorney's fees and punitive damages. In December 2003,the
action was settled, and stipulations of dismissal with prejudice have been or
will shortly be filed. As a result of the settlement of the two actions, the
Company reversed reserves of approximately $760,860 that had been accrued in
connection with such lawsuits for the period ended December 31, 2003.
In 1999 a lawsuit under Section 16(b) of the Securities Exchange Act of 1934 was
commenced against General Electric Capital Corporation ("GECC") by Mark Levy,
derivatively on behalf of the Company, to recover short swing profits allegedly
obtained by GECC in connection with the purchase and sale of MSGI securities. On
April 29, 2002, the court approved the settlement for $1,250,000, net of
attorney fees plus reimbursement of mailing costs. In July 2002, the court
ruling became final and the Company received and recorded the net settlement
payment of $965,486 plus reimbursement of mailing costs. The net settlement has
been recorded as a gain from settlement of lawsuit and is included in the
statement of operations for the nine months ended March 31, 2003.
8. PREFERRED STOCK
In connection with the settlement of the lawsuits (see Note 7) against Wired
Empire, Inc., a discontinued subsidiary, 32,000 of the remaining 48,000 shares
of Wired Empire preferred stock have been returned to MSGI and cancelled.
9. SUBSEQUENT EVENTS
On April 10, 2004, Media Services Group, Inc. (the "Company") completed its
purchase of 51% of the outstanding shares of the common stock of Future
Developments America, Inc. ("FDA"), for an aggregate purchase price of $1.0
million, pursuant to a definitive agreement entered into as of April 10, 2004.
Further subject to the terms and conditions of the Stock Purchase Agreement, the
Company may obtain up to an additional 25% beneficial ownership of FDA, if
certain pre-tax income targets are not met by certain target dates as set forth
in the Stock Purchase Agreement. The purchase price is to be paid out of the
proceeds of the Company's recent disposition of its telemarketing and
telefunding business and was determined through arms-length negotiations between
FDA and the Company.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Special Note Regarding Forward-Looking Statements
- -------------------------------------------------
Some of the statements contained in this Report on Form 10-Q discuss our plans
and strategies for our business or state other forward-looking statements, as
this term is defined in the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of Media Services Group, Inc. ("MSGI" or the "Company"), or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; industry capacity; industry trends; demographic changes;
competition; the loss of any significant customers; changes in business strategy
or development plans; availability and successful integration of acquisition
candidates; availability, terms and deployment of capital; advances in
technology; retention of clients not under long-term contract; quality of
management; business abilities and judgment of personnel; availability of
qualified personnel; changes in, or the failure to comply with, government
regulations; and technology, telecommunication and postal costs.
Introduction
- ------------
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity/cash flows of the Company
for the three-month and nine-month periods ended March 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 for the year
ended June 30, 2003.
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The following is a brief description of the more
significant accounting policies and methods used by the Company.
Revenue Recognition:
Revenues derived from on-site telemarketing and telefundraising are generally
based on hourly billing rates and a mutually agreed percentage of amounts
received by the Company's client from a campaign. These services are performed
on-site at the clients' location. These revenues are earned and recognized when
the cash is received by the respective client. Revenues derived from off-site
telemarketing and telefundraising are generally based on a mutually agreed
amount per telephone contact with a potential donor without regard to amounts
raised for the client. These services are performed at the Company's calling
center. These revenues are earned and recognized when the services are
performed.
As of March 31, 2004, there were no revenue generating operations remaining
within Media Services Group, Inc. as a result of the sale of substantially all
of the assets related to its telemarketing and telesales business held by its
wholly owned subsidiary, MKTG Teleservices, Inc.
10
Goodwill:
Under Statement of Financial Accounting Standards ("SFAS"), No. 142, "Goodwill
and Other Intangible Assets", goodwill is no longer amortized. The Company
recognized an impairment charge of approximately $5.1 million in connection with
the adoption of SFAS No. 142. The impairment charge has been booked by the
Company in accordance with SFAS 142 transition provisions as a cumulative effect
of change in accounting principle for the period ended March 31, 2003. In
connection with the sale of the Northeast Operations and the telemarketing and
telefunding business, the are no remaining reporting units. The company has
written off all remaining goodwill balances as part of the sale.
Long-Lived Assets:
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company reviews for impairment of long-lived assets and
certain identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
general, the Company will recognize an impairment when the sum of undiscounted
future cash flows (without interest charges) is less than the carrying amount of
such assets. The measurement for such impairment loss is based on the fair value
of the asset.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. The most significant estimates and assumptions made in the
preparation of the consolidated financial statements relate to the carrying
amount and amortization of intangible assets, deferred tax valuation allowance,
abandoned lease reserves and the allowance for doubtful accounts. Actual results
could differ from those estimates.
Recent Accounting Pronouncements:
There were no new accounting pronouncements during the period that would have an
effect on the Company.
Significant Events:
To facilitate an analysis of MSGI operating results, certain significant events
should be considered.
In March 2004, the Company completed its sale of substantially all the assets
relating to its telemarketing and telesales services business held by its wholly
owned subsidiary MKTG Teleservices, Inc. to SD&A Teleservices, Inc. (SD&A) a
wholly owned subsidiary of the Robert W. Woodruff Arts Center, Inc. for
approximately $3.3 million in cash plus the assumption of certain related
liabilities, subject to a final working capital adjustment. As such, the
operations and cash flows of the telemarketing and telefunding business have
been eliminated from ongoing operations and the Company no longer has continuing
involvement in the operations. Accordingly, the statement of operations and cash
flows for the period ended March 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.
11
In December 2002, the Company completed its sale of substantially all the assets
relating to its direct list sales and database services and website development
and design business held by certain of its wholly owned subsidiaries (the
"Northeast Operations") to Automation Research, Inc. ("ARI"), a wholly owned
subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash plus
the assumption of all directly related liabilities. As such, the operations and
cash flows of the Northeast Operations have been eliminated from ongoing
operations and the Company no longer has continuing involvement in the
operations. Accordingly, the statement of operations and cash flows for the
period ended March 31, 2003 has been reclassified into a one-line presentation
and is included in Loss from Discontinued Operations and Net Cash Used by
Discontinued Operations.
Results of Operations for the Three Months Ended March 31, 2004, Compared to
- --------------------------------------------------------------------------------
the Three Months Ended March 31, 2003.
- ------------------------------------------
There are currently no reportable revenues for the company as a result of the
sale of the Northeast Operations and the telemarketing and telefunding business.
All revenues reported in prior periods have been reclassified into a one-line
presentation and is included in loss from discontinued operations and net cash
used by discontinued operations. Revenue of the discontinued operations was
approximately $3.2 million the quarter ended March 31, 2004 ("Current Quarter")
compared to approximately $3.5 million for the quarter ended March 31, 2003
("Prior Quarter").
Salaries and benefits of approximately $92,000 in the Current Quarter decreased
by approximately $131,000 or 59% over salaries and benefits of approximately
$223,000 in the Prior Quarter. Salaries and benefits decreased due to a
reduction in corporate headcount, as well as a reduction in certain executive
compensation.
Selling, general and administrative expenses of approximately $262,000 in the
Current Quarter increased by approximately $9,000 or 4% over comparable expenses
of $253,000 in the Prior Quarter. The increase is due primarily to an increase
in travel related expenses, offset by reductions in other expenses such as legal
fees, accounting fees, regulatory filing fees and supplies.
Net interest income of approximately $17,000 in the Current Quarter is in line
with the net interest income of approximately $17,000 in the Prior Quarter.
The net provision for income taxes of approximately $23,000 in the Current
Quarter increased by approximately $12,000 over the provision of approximately
$11,000 in the Prior Quarter. The Company records provisions for state and local
taxes incurred on taxable income or equity at the operating subsidiary level,
which cannot be offset by losses incurred at the parent company level or other
operating subsidiaries. The Company has recognized a full valuation allowance
against the deferred tax assets because it is more likely than not that
sufficient taxable income will not be generated during the carry forward period
to utilize the deferred tax assets.
As a result of the above, a loss from continuing operations of approximately
$359,000 in the Current Quarter decreased by approximately $112,000 over
comparable loss from continuing operations of $471,000 in the Prior Quarter.
12
The loss from discontinued operations of approximately $2.2 million in the
Current Quarter is the result of the sale of the telemarketing and telefunding
business. The gain from discontinued operations of approximately $68,000 in the
Prior Quarter is the result of the reclassification of prior period results of
the operations of the telemarketing and telefunding business.
In connection with the sale of the telemarketing and telefunding business, the
Company incurred a loss on disposal of discontinued operations of approximately
$1.0 million in the three months ended March 31, 2004. The loss represents the
difference in the net book value of assets and liabilities as of the date of the
sale as compared to the net consideration received after settlement of purchase
price adjustments.
In the Prior Period the Company recognized a gain on redemption of preferred
stock of approximately $14.0 million and is reflected in net income attributable
to common stockholders. The gain is a result of the difference between the
consideration paid for redemption of the preferred stock of approximately $6.0
million cash and the issuance of 181,302 shares of common stock valued at
approximately $.2 million and the carrying value of the preferred stock which
was approximately $20.2 million which included a beneficial conversion feature
of approximately $10.3 million.
As a result of the above, net losses of approximately $2.5 million in the
Current Quarter increased by approximately $16.1 million over comparable net
income of approximately $13.6 million in the Prior Quarter.
Results of Operations for the Nine Months Ended March 31, 2004, Compared to
- --------------------------------------------------------------------------------
the Nine Months Ended March 31, 2003.
- ------------------------------------------
There are currently no reportable revenues for the company as a result of the
sale of the Northeast Operations and the telemarketing and telefunding business.
All revenues reported in prior periods have been reclassified into a one-line
presentation and is included in loss from discontinued operations and net cash
used by discontinued operations. Revenue included in discontinued operations was
approximately $9.5 million for the period ended March 31, 2004 ("Current
Period")compared to approximately $11.2 million in the period ended March 31,
2003 ("Prior Period").
Salaries and benefits of approximately $263,000 in the Current Period decreased
by approximately $366,000 or 58% over salaries and benefits of approximately
$629,000 in the Prior Period. Salaries and benefits decreased due to a reduction
in corporate headcount, as well as a reduction in certain executive
compensation.
Selling, general and administrative expenses of approximately $874,000 in the
Current Period increased by approximately $69,000 or 9% over comparable expenses
of $805,000 in the Prior Period. The increase is due primarily to an increases
in travel related expenses, consulting fees and investor relations expenses,
offset by reductions in other expenses such as legal fees, insurances and other
miscellaneous expenses.
13
During the Prior Period ending March 31, 2003, the Company recognized a gain on
a settlement of a lawsuit. In 1999, a lawsuit under Section 16(b) of the
Securities Exchange Act of 1934 was commenced against General Electric Capital
Corporation ("GECC") by Mark Levy, derivatively on behalf of the Company, to
recover short swing profits allegedly obtained by GECC in connection with the
purchase and sale of MSGI securities. On April 29, 2002, the court approved the
settlement for $1,250,000, net of attorney fees plus reimbursement of mailing
costs. In July 2002, the court ruling became final and the Company received and
recorded the net settlement payment of $965,486 plus reimbursement of mailing
costs.
Net interest income of approximately $33,000 in the Current Period decreased by
approximately $11,000 or 25% over net interest income of approximately $44,000
in the Prior Period. The decrease is due primarily to the reduction in interest
income earned on cash balances and short term investment vehicles.
The net provision for income taxes of approximately $29,000 in the Current
Period decreased by approximately $13,000 over the provision of approximately
$42,000 in the Prior Period. The Company records provisions for state and local
taxes incurred on taxable income or equity at the operating subsidiary level,
which cannot be offset by losses incurred at the parent company level or other
operating subsidiaries. The Company has recognized a full valuation allowance
against the deferred tax assets because it is more likely than not that
sufficient taxable income will not be generated during the carry forward period
to utilize the deferred tax assets.
As a result of the above, loss from continuing operations of approximately $1.1
million in the Current Period decreased by approximately $4.5 million over
comparable income from continuing operations of $3.4 million in the Prior
Period.
The loss from discontinued operations of approximately $1.2 million in the
Current Period is the result of the sale of the telemarketing and telefunding
business. The loss from discontinued operations of approximately $1.0 million in
the Prior Period resulted from the sale of the Northeast Operations during the
fiscal year 2003.
The loss from cumulative effect of change in accounting principle of
approximately $5.1 million in the Prior Period was the result of the adoption of
SFAS 142 relating to Goodwill.
In the Current Period the company realized a gain on redemption of preferred
stock Of approximately $281,000. In connection with the settlement of the
lawsuits (see Note 7) against WiredEmpire, Inc., a discontinued subsidiary, the
remaining preferred shares of Wired Empire preferred stock have been cancelled.
In the Prior Period the Company recognized a gain on redemption of preferred
stock of approximately $14.0 million and is reflected in net income attributable
to common stockholders. The gain is a result of the difference between the
consideration paid for redemption of the preferred stock of approximately $6.0
million cash and the issuance of 181,302 shares of common stock valued at
approximately $.2 million and the carrying value of the preferred stock which
was approximately $20.2 million which included a beneficial conversion feature
of approximately $10.3 million.
As a result of the above, the net loss of approximately $2.1 million in the
Current Period increased by approximately $13.4 million over comparable net
income of approximately $11.3 million in the Prior Period.
14
Capital Resources and Liquidity
- -------------------------------
Financial Reporting Release No. 61, which was released by the SEC, requires all
companies to include a discussion to address, among other things, liquidity,
off-balance sheet arrangements, contractual obligations and commercial
commitments. The Company currently does not maintain any off-balance sheet
arrangements.
Leases: The Company leases various office space and equipment under
non-cancelable long-term leases. The Company incurs all costs of insurance,
maintenance and utilities.
Future minimum rental commitments under all non-cancelable leases, net of
non-cancelable subleases, as of March 31, 2004 are as follows:
Rent Expense Less: Sublease Income Net Rent Expense
----------- -------------------- ----------------
2004 $ 210,000 $ (20,000) $ 190,000
2005 428,000 (45,000) 383,000
2006 240,000 - 240,000
2007 240,000 - 240,000
2008 240,000 - 240,000
Thereafter 520,000 - 520,000
------------ ---------- -----------
$ 1,878,00 $ (65,00) $ 1,813,000
=========== =========== ===========
Debt:
At March 31, 2004, the Company retired all outstanding balances on its line of
credit facility. The Company subsequently terminated its relationship with the
credit provider.
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 March 31, 2004, the Company
had cash and cash equivalents of $1.4 million and a working capital of $1.0
million.
The Company recognized a net loss of approximately $2.3 million in the Current
Period. Cash used by operating activities from operations was approximately $1.5
million. Net cash used by operating activities principally resulted from the net
loss from continuing operations of approximately $359,00 combined with the
decrease in accrued expenses and increases in other assets offset by increases
in accounts payable. Cash used by operating activities in the Prior Period was
approximately $4.4 million.
In the Current Period, net cash of approximately $2.8 million came from
investing activities consisting of the sale of the telemarketing and telefunding
business. In the Prior Period, net cash of approximately $13.4 million came from
investing activities consisting of proceeds from the sale of discontinued
operations of approximately $8.5 million combined with a reduction in restricted
cash of approximately $4.9 million.
15
In the Current Period, net cash of approximately $200,000 was used in financing
activities. Net cash used in financing activities consisted of repayments of
notes payable. In the Prior Period, net cash of approximately $12.0 million was
used in financing activities consisting of repayments of long-term debt and
credit facilities of $6.0 million and a redemption of preferred stock of $6.0
million.
In the Current Period net cash of approximately $365,000 was used in
discontinued Operations. In the Prior Period net cash of approximately $191,000
was provided by discontinued Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is subject to market risks in the ordinary course of its business,
primarily risks associated with interest rate fluctuations. Historically,
fluctuations in interest rates have not had a significant impact on the
Company's operating results. At March 31, 2004, the Company had no variable rate
indebtedness outstanding.
Item 4. Controls and Procedures.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including Jeremy Barbera, the
Company's Chairman, Chief Executive Officer and Interim Chief Financial Officer,
of the effectiveness of the Registrant's disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of
1934. Based on that evaluation, Mr. Barbera has concluded that the Company's
disclosure controls and procedures as of March 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 quarter ended March 31, 2004 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
16
PART II- OTHER INFORMATION
Item 1. Legal Proceedings.
Two actions brought by purchasers of the preferred stock of WiredEmpire, Inc.
against the Company, J. Jeremy Barbera, the Company's Chairman of the Board and
Chief Executive Officer, and WiredEmpire, Inc. alleging violations of federal
and Alabama state securities laws have been resolved. These actions, Red
Mountain, LLP v. Barbera et al., Case No. CV-00-B3068-S, and Weeks et al. v.
Barbera et al., Case No. CV-01-7633, were pending in the United States District
Court for the Northern District of Alabama. Each of these has been settled, and
stipulations of dismissal with prejudice have been or will shortly be filed.
Item 4. Submission of Matters to a Vote of Securities Holders
On February 25, 2004 an annual meeting of the shareholders of Media Services
Group, Inc. Occurred for the years ended June 30, 2002 and 2003 and a vote was
held regarding the proposed elections of Mr. Seymour Jones as a Class II
Director and of Mr. J Jeremy Barbera as a Class III Director. Quorum was reached
and the proposals were passed by successful vote. Total votes submitted for
proposal 1 numbered 627,241 with 444,186 in favor and 183,055 opposed. Total
votes submitted for proposal 2 numbered 627,241 with 440,414 in favor and
186,828 opposed.
On December 24, 2003 a special meeting of the shareholders of Media Services
Group, Inc. occurred and a vote by proxy was held regarding the proposed change
of name from MKTG Services, Inc. to Media Services Group, Inc. and approval of
the related amendment to the Articles of Incorporation. Quorum was reached and
the proposal was passed by successful vote. Total votes submitted numbered
1,013,776 with 1,008,008 in favor, 2,930 opposed and 2,838 abstaining.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31.1 Certification By The Chief Executive Officer Pursuant To
Section 302 Of The Sarbanes-Oxley Act Of 2002
31.2 Certification.(a) By The Chief Accounting Officer Pursuant To
Section 302 Of The Sarbanes-Oxley Act Of 2002
32.1 Certification of The Chief Executive Officer Pursuant to 18
U.S.C. 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of The Chief Accounting Officer Pursuant to
18. U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
-------------------
1. On or about August 12, 2003, the Company filed a current report on form 8-K
regarding a change in the Company's certifying accountants.
2. On or about September 24, 2003, the Company filed an amended current report
on form 8-K/A regarding an addition to the exhibits filed with the current
report on form 8-K dated August 12, 2003.
17
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
MEDIA SERVICES GROUP, INC.
(Registrant)
Date: May 17, 2004 /s/ J. Jeremy Barbera
---------------------
J. Jeremy Barbera
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date: May 17, 2004 /s/ Richard J. Mitchell III
---------------------------
Richard J. Mitchell III
Chief Accounting Officer
(Principal Financial Officer)
18
Exhibit 31.1
CERTIFICATION
I, J. Jeremy Barbera, certify, pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to ss.302 of the Sarbanes-Oxley Act of 2002, that:
(1) I have reviewed this quarterly report on Form 10-Q of Media
Services Group, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in al
material respects the financial condition, results of operations and cash flows
of registrant as of, and for, the periods presented in this quarterly report;
and
(4) The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
(b) Intentionally omitted.
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial data; and
19
(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: May 17, 2004 /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):
21
(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: May 17, 2004 /s/ Richard J. Mitchell III
--------------------------
Richard J. Mitchell III
Chief Accounting Officer
(Principal Financial Officer)
22
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 March 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, 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: May 17, 2004 /s/ J. Jeremy Barbera
---------------------
J. Jeremy Barbera
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
This certification accompanies this Quarterly Report on Form 10-Q pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by such Act, be deemed filed by the registrant for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
23
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 March 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.
Date: May 17, 2004 /s/ Richard J. Mitchell III
---------------------------
Richard J. Mitchell III
Chief Accounting Officer
(Principal Financial Officer)
This certification accompanies this Quarterly Report on Form 10-Q pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by such Act, be deemed filed by the registrant for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
24