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U.S. Securities and Exchange
Commission Washington,
D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Commission File Number 0-21989
Medialink Worldwide Incorporated
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1481284
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
708 Third Avenue, New York, New York 10017
------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 682-8300
(Registrant's telephone number,
including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business on November 14, 2003:
Common Stock - 5,981,449
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets as of September 30,
2003 (unaudited) and December 31, 2002 3
Unaudited Condensed Consolidated Statements of Operations
for the nine months ended September 30, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of Operations
for the three months ended September 30, 2003 and 2002 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2003 and 2002 6
Notes to Unaudited Condensed Consolidated Financial Statements 7 - 14
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15 - 22
ITEM 3. Qualitative and Quantitative Disclosure about Market Risk 23
ITEM 4. Controls and Procedures 23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 24
ITEM 2. Changes in Securities and Use of Proceeds 24
ITEM 3. Defaults Upon Senior Securities 24
ITEM 4. Submission of Matters to a Vote of Security Holders 24
ITEM 5. Other Information 24
ITEM 6. Exhibits and Reports on Form 8-K 24
SIGNATURES
CERTIFICATIONS
PART I. FINANCIAL INFORMATION
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2003 and December 31, 2002
September 30, December 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 4,386,795 $ 6,389,650
Accounts receivable, net 6,537,263 6,571,226
Prepaid and refundable income taxes 1,290,657 2,269,804
Prepaid expenses and other current assets 3,061,834 2,101,334
Deferred tax assets 199,000 199,000
------------ ------------
Total current assets 15,475,549 17,531,014
------------ ------------
Property and equipment, net 5,969,851 5,889,840
Goodwill, net 13,234,051 12,854,121
Customer list and other intangibles, net 79,514 139,512
Investment in joint venture 412,411 681,604
Deferred tax assets 1,405,000 1,655,000
Other assets 1,316,074 1,892,243
------------ ------------
Total assets $ 37,892,450 $ 40,643,334
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 45,291
Borrowings on credit facilities 5,500,000 6,536,665
Accounts payable 1,628,347 2,203,436
Accrued expenses and other current liabilities 5,362,033 4,654,194
------------ ------------
Total current liabilities 12,490,380 13,439,586
Other liabilities 392,000 --
------------ ------------
Total liabilities 12,882,380 13,439,586
Stockholders' Equity:
Common stock; $.01 par value. Authorized 15,000,000 shares; issued 6,038,573
shares in 2003 and 5,947,036 shares in 2002 60,385 59,470
Additional paid-in capital 25,043,125 24,768,762
Retained earnings 585,607 2,930,754
Accumulated other comprehensive loss (479,113) (355,304)
------------ ------------
25,210,004 27,403,682
------------ ------------
Less common stock in treasury (at cost, 57,124 shares) (199,934) (199,934)
------------ ------------
Total stockholders' equity 25,010,070 27,203,748
------------ ------------
Total liabilities and stockholders' equity $ 37,892,450 $ 40,643,334
============ ============
See notes to unaudited condensed consolidated finncial statements
3
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2003 and 2002
2003 2002
------------ -------------
Revenues $ 32,975,242 $ 35,236,586
Direct costs 10,621,035 12,111,948
------------ -------------
Gross Profit 22,354,207 23,124,638
Operating Expenses:
Selling, general and administrative expenses 22,155,355 21,811,947
Depreciation and amortization 1,807,241 2,072,923
Loss from joint venture 269,193 275,000
Restructuring charge - operating lease 592,000 --
Advisory charges -- 1,300,000
------------ -------------
Operating loss (2,469,582) (2,335,232)
Interest expense, net (225,565) (146,020)
------------ -------------
Loss before income taxes (2,695,147) (2,481,252)
Income tax benefit (350,000) (547,980)
------------ -------------
Net loss $ (2,345,147) $ (1,933,272)
============ =============
Basic and diluted loss per share $ (0.39) $ (0.33)
============ =============
See notes to unaudited condensed consolidated finncial statements
4
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2003 and 2002
2003 2002
------------ -------------
Revenues $ 10,321,087 $ 11,376,322
Direct costs 3,236,339 3,662,882
------------ -------------
Gross Profit 7,084,748 7,713,440
Operating Expenses:
Selling, general and administrative expenses 6,925,329 7,115,562
Depreciation and amortization 632,497 448,119
Loss from joint venture 82,229 100,000
Restructuring charge - operating lease 592,000 --
Advisory charges -- 1,300,000
------------ -------------
Operating loss (1,147,307) (1,250,241)
Interest expense, net (71,884) (71,679)
------------ -------------
Loss before income taxes (1,219,191) (1,321,920)
Income tax benefit (150,000) (330,000)
------------ -------------
Net loss $ (1,069,191) $ (991,920)
============ =============
Basic and diluted loss per share $ (0.18) $ (0.17)
============ =============
See notes to unaudited condensed consolidated finncial statements
5
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2003 and 2002
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,345,147) $(1,933,272)
------------ ------------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,807,241 2,072,923
Deferred income taxes 250,000 120,000
Equity loss from joint venture 269,193 275,000
Restructuring charge 592,000
Changes in assets and liabilities
Accounts receivable (89,846) (800,271)
Other assets 57,169 (260,109)
Prepaid expenses and other current assets (960,500) 263,069
Accounts payable and accrued expenses 169,326 2,601,042
Prepaid and refundable taxes 979,147 (703,000)
------------ ------------
Net cash provided by operating activities 728,583 1,635,382
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for earn out payments on acquisitions (341,231) (225,000)
Cash paid for investment in joint venture -- (250,000)
Purchases of property and equipment (1,308,252) (779,561)
------------ ------------
Net cash used in investing activities (1,649,483) (1,254,561)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock in connection
with the exercise of stock options -- 914
Repayments of long term debt (45,291) (41,313)
Borrowings on line of credit - bank 211,930 203,257
Payments on line of credit - bank (1,248,594) --
------------ ------------
Net cash (used in) provided by financing activities (1,081,955) 162,858
------------ ------------
Net (decrease) increase in cash and cash equivalents (2,002,855) 543,679
Cash and cash equivalents at the beginning of period 6,389,650 4,680,075
------------ ------------
Cash and cash equivalents at end of period $4,386,795 $5,223,754
============ ============
Supplemental disclosure of non-cash activities:
Common stock issued in connection with acquisitions $ 275,277 $ 358,400
=========== ============
Treasury stock transaction $ -- $ 199,934
=========== ============
See notes to unaudited condensed consolidated finncial statements
6
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of presentation
The condensed consolidated financial statements included herein have been
prepared by Medialink Worldwide Incorporated and Subsidiaries (collectively, the
"Company" or "Medialink"), without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Company's Form 10-K filing for the year ended December 31, 2002.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) which
are, in the opinion of management, necessary to state fairly the results for the
nine and three months ended September 30, 2003. The results for the nine and
three months ended September 30, 2003 are not necessarily indicative of the
results expected for the full fiscal year.
(2) Loss per Share
Basic loss per common share is computed using net loss applicable to common
stock and the weighted average number of shares outstanding. Diluted loss per
common share is computed using the weighted average number of shares outstanding
adjusted for the incremental shares attributed to outstanding options to
purchase common stock. For the nine month periods ended September 30, 2003 and
2002, the Company had common stock equivalents of 52,667 and 62,861,
respectively, related to stock options that were not included in the computation
of loss per common share because they were antidilutive. For the three month
periods ended September 30, 2003 and 2002, the Company had common stock
equivalents of 95,905 and 86,096, respectively, related to stock options that
were not included in the computation of loss per common share because they were
antidilutive. The weighted average number of shares for the nine and three
months ended September 30, 2003 and 2002 are as follows:
Weighted Average Shares Outstanding
- -----------------------------------
For the nine months ended September 30,
----------------------------------------
2003 2002
--------- ---------
Basic and diluted 5,964,504 5,917,609
========= =========
For the three months ended September 30,
----------------------------------------
2003 2002
--------- ---------
Basic and diluted 5,981,449 5,897,962
========= =========
7
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(3) Comprehensive Loss
The components of comprehensive loss consist of the following:
For the nine months ended September 30,
---------------------------------------
2003 2002
------------- ---------------
Net loss $(2,345,147) $(1,933,272)
Other comprehensive loss:
Foreign currency translation
adjustments (123,809) (69,927)
------------- ---------------
Comprehensive loss $(2,468,956) $(2,003,199)
============= ===============
For the three months ended September 30,
----------------------------------------
2003 2002
============= =============
Net loss $(1,069,191) $(991,920)
Other comprehensive loss:
Foreign currency translation
adjustments (163,800) (18,581)
------------- -------------
Comprehensive loss $(1,232,991) $(1,010,501)
============= =============
Accumulated other comprehensive loss at September 30, 2003 and December 31, 2002
consists of foreign currency translation adjustments.
8
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(4) Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, this Statement clarifies under what circumstances a
contract with an initial net investment meets the characteristics of a
derivative. It also clarifies when a derivative contains a financing component
that warrants special reporting in the statement of cash flows. SFAS No. 149 is
generally effective for contracts entered into or modified after June 30, 2003
and did not have an impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify certain financial instruments as a liability
(or as an asset in some circumstances). SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 did not have an impact on the Company's
financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. A variable interest entity is a corporation,
partnership, trust, or any other legal structures used for business purposes
that either (a) does not have equity investors with voting rights or (b) has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. A variable interest entity often holds
financial assets, including loans or receivables, real estate or other property.
A variable interest entity may be essentially passive or it may engage in
research and development or other activities on behalf of another company. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after
December 15, 2003. Certain of the disclosure requirements apply to all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company has evaluated the impact of FIN 46
and does not believe that it has any investment in variable interest entities.
9
(5) Investments and Acquisitions
On April 8, 2002 TTX Limited ("Teletrax"), a subsidiary of the Company, entered
into a Technology License Agreement with Koninklijke Philips Electronics N.V.
("Philips"), for the use of Philips' WaterCast technology. Medialink, which owns
76% of Teletrax, has agreed to advance to Teletrax, in the form of a loan, up to
a total of $1.761 million. Through September 30, 2003, Medialink has fulfilled
this commitment. The Company has made additional loans to Teletrax in excess of
its contractual commitment and may, at its option, make additional loans in the
future. The minority shareholder of Teletrax has no future funding obligations
and, accordingly, the Company has recorded 100% of the loss from this
subsidiary.
On August 1, 1999 the Company entered into a joint venture with Business Wire to
form Business Wire/Medialink, LLC ("Newstream") for the purpose of providing its
clients with distribution of their news to multimedia Internet news sites. The
Company, which has a 50% interest in the joint venture, accounts for its
interest in Newstream under the equity method, as it does not have a controlling
interest in the entity. Although no future funding contractual obligations
exist, the Company, along with its joint venture partner, intends to continue to
fund and operate the joint venture for at least the next twelve months.
For the nine month period ended September 30, 2003 and 2002 the Company recorded
goodwill related to earn-out payments on acquisitions of $380,000 and $375,000,
respectively. At September 30, 2003 the Company had no future commitments on any
of its acquisitions that would result in additional goodwill to be recorded.
(6) Line of Credit
The Company has a line of credit facility (the "Credit Facility") for borrowings
of up to $7.50 million expiring April 1, 2004. Loans under the Credit Facility
bear interest at the 30-Day LIBOR Rate plus 2.25% through 3.25%, per annum, as
defined in the Credit Facility.
Covenants under the line of credit agreement require the Company to meet certain
financial ratios, including minimum tangible net worth and minimum earnings
before interest, taxes, depreciation, amortization and other charges, and
certain spending limits related to capital expenditures and Teletrax, as defined
in the agreement. Management believes the Company is currently in compliance
with the covenants under the line of credit agreement.
Substantially all of the assets of the Company are pledged as collateral under
the Credit Facility.
10
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(7) Intangible Assets
Intangible assets consist of the following:
September 30, 2003 December 31, 2002
-------------------------------- ----------------------------------
(in thousands) (in thousands)
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount Amortization Net Amount Amortization Net
------------ -------- ------------ ----- --------- ------------- -----
Customer List 5 years $4,000 $(4,000) $ - $4,000 $(4,000) $ -
Non-competes 4-7.5 years 500 (420) 80 500 (360) 140
-------- ------------ ----- --------- ------------- -----
Total $4,500 $(4,420) $80 $4,500 $(4,360) $140
======== ============ ===== ========= ============= =====
Aggregate amortization expense for the nine months ended September 30, 2003 and
2002 was $60,000 and $470,196, respectively.
Estimated future amortization expense is as follows:
For the three months ending December 31, 2003 $20,000
For the year ended December 31, 2004 60,000
-------
Total estimated amortization $80,000
=======
11
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(8) Stock Based Compensation
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure" ("SFAS 148"). SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation as originally provided by SFAS No. 123,
"Accounting for Stock-Based Compensation". Additionally, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosure in both the
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The transitional requirements of SFAS 148 are effective for all financial
statements for fiscal years ending after December 15, 2002. The Company adopted
the disclosure portion of this statement at December 31, 2002. The Financial
Accounting Standards Board recently indicated that it will require stock-based
employee compensation to be recorded as a charge to earnings beginning in 2004.
The Company will continue to monitor its progress on the issuance of this
standard as well as evaluate its position with respect to current guidance.
12
If the Company had elected to recognize compensation cost at the grant date,
based on the fair value of the options granted, in 2003 and 2002, as prescribed
by SFAS 123, the Company's net loss and loss per share for the periods presented
would approximate the pro forma amounts as indicated below:
For the nine months ended September 30,
---------------------------------------
2003 2002
---------------- ---------------
Net loss - as reported $(2,345,147) $ (1,933,272)
Deduct: total stock-based
employee compensation expense
determined under the fair
value method, net of related tax
effects (198,647) (254,836)
---------------- ---------------
Net loss - pro forma $(2,543,794) $(2,188,108)
================ ===============
Basic and diluted EPS - as reported $ (.39) $ (.33)
Basic and diluted EPS - pro forma $ (.43) $ (.37)
For the three months ended September 30,
---------------------------------------
2003 2002
---------------- ---------------
Net loss - as reported $(1,069,191) $ (991,920)
Deduct: total stock-based
employee compensation expense
determined under the fair
value method, net of related tax
effects (58,342) (80,210)
---------------- ---------------
Net loss - pro forma $(1,127,533) $ (1,072,130)
================ ===============
Basic and diluted EPS - as reported $ (.18) $ (.17)
Basic and diluted EPS - pro forma $ (.19) $ (.18)
The fair value of each grant is estimated using the Black-Scholes Options
Pricing Model with the following assumptions: dividend yield of 0% for all
grants; expected volatility of 10% in 2002; and risk-free interest rate of 4.25%
in 2002. There were no options granted during the nine months ended September
30, 2003.
13
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(9) Reclassifications
For comparability, certain 2002 amounts have been reclassified, where
appropriate, to conform to the financial statement presentation used in 2003.
(10) Restructuring Charge - Operating Lease
In September 2003 the Company entered into an agreement to sublease excess
office space in its Norwalk, CT location. The sublease resulted in a $592,000
restructuring charge to operations in the 3rd quarter of 2003 calculated as
follows:
Present value of current lease obligation $1,010,000
Present value of sublet rental income (519,000)
Cost incurred in connection with agreement 101,000
----------
Net restructuring charge $ 592,000
==========
Both the existing lease and sublease expire in February 2008.
14
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Nine months ended September 30, 2003 compared to nine months ended September 30,
2002
Revenues for the nine months ended September 30, 2003 ("2003") were $32.98
million as compared to $35.24 million for the nine months ended September 30,
2002 ("2002"), a decrease of $2.26 million, or 6%. Revenue from the Company's
Media Communications Services decreased by $2.04 million, or 7%, and the
Company's Research Communication Services revenue decreased by $403,000, or 6%.
Additionally, revenue from Teletrax, the Company's 76% owned subsidiary, was
$412,000 in 2003, an increase of $184,000, or 81%, as compared to 2002. During
2003, the Company experienced a decrease in demand from clients for its Media
Communications Services products as a result of the events leading up to the war
in Iraq and the commencement of military action. Events which dominate news
broadcasts, such as the war in Iraq, can cause the Company's clients to delay
the use of, or in some cases not use the Company's services, due to concern that
the impact of their projects would be adversely affected by the focus of the
media on such news events. Additionally, during 2003 the Company was negatively
affected by the continuing adverse economic conditions, particularly in the
public relations sector.
Direct costs decreased by $1.49 million, or 12%, from $12.11 million in 2002 to
$10.62 million in 2003. The Company's gross profit percentage was 68% and 66% in
2003 and 2002, respectively. The increase in the gross profit percentage was due
to a favorable product mix and the result of adjustments the Company made over
the last several quarters to its direct cost structure, including renegotiating
vendor rates and improving the efficiency of its operating processes. Although
the Company experienced a decrease in revenue of $2.26 million, as a result of
the Company's improved margins, the decrease in gross profit was $770,000.
Selling, general and administrative expenses ("S, G & A") increased by $343,000,
or less than 2%, from $21.81 million in 2002 to $22.16 million in 2003. The
increase in S, G & A includes increases in payroll and payroll-related costs
("Payroll") of approximately $434,000. The increase in Payroll is substantially
the result of termination costs during 2003 ($430,000) and the increase of
Payroll related to Teletrax, the Company's subsidiary, formed in April 2002,
($591,000), net of savings of $587,000 from the Company's remaining operations.
Additionally, Teletrax had increases in other S, G & A expenses of approximately
$529,000 in 2003 as compared to 2002. Offsetting the increases in S, G & A
expenses relating to Teletrax, the Company otherwise reduced its S, G & A by
approximately $619,000 in 2003 as compared to 2002, including, but not limited
to savings in advertising and marketing, travel and entertainment, and office
costs.
Depreciation and amortization expense decreased by $266,000, or 13%, from $2.07
million in 2002 to $1.81 million in 2003. In 2002 a customer list, acquired in
conjunction with the acquisition of The Corporate TV Group, Inc,. was fully
amortized. As a result, there was a decrease in amortization of $367,000.
Additionally, depreciation and amortization increased approximately $107,000 due
to current year fixed asset additions, substantially related to the roll out of
Teletrax.
15
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
In September 2003 the Company entered into an agreement to sublease excess
office space in its Norwalk, CT location. The sublease resulted in a $592,000
restructuring charge to operations in the 3rd quarter of 2003.
In August 2001 the Company received an unsolicited takeover bid by United
Business Media plc to purchase all of its issued and outstanding common shares.
In connection with this unsolicited offer the Company incurred legal and
financial advisory expenses of approximately $1.30 million during 2002. The
unsolicited offer is no longer active and the Company does not anticipate
incurring any additional costs.
As a result of the foregoing, the Company had an operating loss of $2.47 million
in 2003 as compared to an operating loss of $2.34 in 2002. The operating loss in
2003 and 2002 included operating losses of $1.91 million and $460,000,
respectively, from the Company's 76% owned subsidiary, Teletrax. The minority
shareholder of Teletrax has no future funding obligations and, accordingly, the
Company has recorded 100% of the loss from this subsidiary.
Income tax benefit was calculated using Medialink's effective tax rates of 41%
in both 2003 and 2002. In both 2003 and 2002 the Company was also subject to
minimum state and local taxes and taxes on capital. Additionally, as a result of
the limited historical results of Teletrax, and management's limited ability to
project Teletrax's future results, the Company has recorded increases in its
valuation allowance of $485,000 and $181,000 in 2003 and 2002, respectively,
related to the foreign deferred tax asset generated by Teletrax's losses.
The Company had a net loss of $2.35 million in 2003 as compared to a net loss of
$1.93 million in 2002. In 2003 the Company had a loss per share of $0.39
compared to a loss per share of $0.33 in 2002.
16
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Three months ended September 30, 2003 compared to three months ended September
30, 2002
Revenues for the quarter ended September 30, 2003 (the "2003 Quarter") were
$10.32 million as compared to $11.38 million for the quarter ended September 30,
2002 (the "2002 Quarter"), a decrease of $1.06 million, or 9%. Revenue from the
Company's Media Communications Services decreased by $1.04 million, or 12%, and
the Company's Research Communication Services revenue decreased by $51,000, or
2%. During the 2003 Quarter, the Company was negatively affected by the
continuing adverse economic condition, particularly in the public relations
sector.
Direct costs decreased by $427,000, or 12%, from $3.66 million in the 2002
Quarter to $3.24 million in the 2003 Quarter. The Company's gross profit
percentage was 69% and 68% in the 2003 and 2002 Quarters, respectively. The
increase in the gross profit percentage was due to a favorable product mix and
the result of adjustments the Company made over the last several quarters to its
direct cost structure, including renegotiating vendor rates and improving the
efficiency of its operating processes.
S, G & A decreased by $190,000, or 3%, from $7.12 million in the 2002 Quarter to
$6.93 million in the 2003 Quarter. The decrease in S, G & A includes a decrease
in Payroll of approximately $234,000. The decrease in Payroll is the result of
savings from the Company's core business of approximately $371,000, net of an
increase in Payroll of $137,000 related to Teletrax. Additionally, Teletrax had
increases in other S, G & A expenses of approximately $49,000 in the 2003
Quarter as compared to the 2002 Quarter. Offsetting the increases in S, G & A
expenses relating to Teletrax, the Company otherwise reduced its S, G & A by
approximately $6,000 in the 2003 Quarter as compared to the 2002 Quarter.
Depreciation and amortization expense increased by $184,000, or 41%, from
$448,000 in the 2002 Quarter to $632,000 in the 2003 Quarter. The increase was
due to fixed asset additions during the current year, substantially related to
the rollout of Teletrax.
As a result of the foregoing, and including the previously discussed
restructuring charge of $592,000 in the 2003 Quarter and $1.30 million of
advisory charges in 2002, the Company had an operating loss of $1.15 million in
the 2003 Quarter as compared to an operating loss of $1.25 million in the 2002
Quarter. The operating loss in the 2003 and 2002 Quarters included operating
losses of $562,000 and $237,000, respectively, from Teletrax. The minority
shareholder of Teletrax has no future funding obligations and, accordingly, the
Company has recorded 100% of the loss from this subsidiary.
17
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Income tax benefit was calculated using Medialink's effective tax rates of 41%
in both the 2003 and 2002 Quarters. In both Quarters the Company was also
subject to minimum state and local taxes and taxes on capital. Additionally, as
a result of the limited historical results of Teletrax, and management's limited
ability to project Teletrax's future results, the Company has recorded increases
in its valuation allowance of $195,000 and $94,000 in the 2003 Quarter and the
2002 Quarter, respectively, related to the foreign deferred tax asset generated
by Teletrax's losses.
The Company had a net loss of $1.07 million in the 2003 Quarter as compared to a
net loss of $992,000 in the 2002 Quarter. In the 2003 Quarter the Company had a
loss per share of $0.18 compared to a loss per share of $0.17 in the 2002
Quarter.
LIQUIDITY AND CAPITAL RESOURCES
Medialink has financed its operations primarily through cash generated from
operations and its line of credit facility. Net cash provided by operating
activities amounted to $729,000 for the nine month period ended September 30,
2003, while net cash provided by operating activities for the comparable period
in 2002 was $1.64 million. The change was the result of the changes in operating
assets and liabilities. Capital expenditures which are primarily incurred to
support the Company's sales and operations and the continuing roll-out of the
Teletrax network were $1.31 million in 2003 compared to $780,000 in 2002. Cash
flows related to earn out payments on the Company's various acquisitions
amounted to $341,000 and $225,000 in 2003 and 2002, respectively. As of
September 30, 2003 the Company has no potential earn-out payments on its
acquisitions.
In June 2003 the Company incurred termination costs of approximately $430,000.
Through September 30, 2003, $153,000 was paid. The Company anticipates that the
balance will be paid over the next quarter.
18
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
As of September 30, 2003 Medialink had $4.39 million in cash and cash
equivalents as compared to $6.39 million as of December 31, 2002. In addition,
the Company had a balance due under its line of credit facility of $5.50 million
and $6.54 million at September 30, 2003 and December 31, 2002, respectively. The
decrease in cash and cash equivalents of $2.00 million includes purchases of
fixed assets of $1.31 million, cash earn-out payments on acquisitions of
$341,000 and pay downs, net of borrowings on its line of credit facility
aggregating $1.04 million.
The Company believes that it has sufficient capital resources, including cash
flow from operations and availability under its line of credit facility to fund
its net cash needs for at least the next twelve months.
RISK FACTORS
The following "Risk Factors" discussed in our Form 10-K for the fiscal year
ended December 31, 2002, are among the factors that could cause actual results
to differ materially from the forward-looking statements:
Major News Events
Events which dominate news broadcasts, such as the events of September 11, 2001,
and the war in Iraq, may cause the Company's clients to delay the use of, or not
use, the Company's services for a particular project as such clients may
determine that their messages may not receive adequate attention in light of the
coverage of other new events. Such circumstances could have a material adverse
effect on the Company's business, operating results and financial condition.
Susceptibility to General Economic Conditions
The Company's revenues are affected by its clients' marketing communications
spending and advertising budgets. The Company's revenues and results of
operations may be subject to fluctuations based upon general economic conditions
in the geographic locations where it offers its services or distributes its
material. If there were to be continued economic downturn or a continued
recession in these geographic locations, the Company expects that business
enterprises, including its clients and potential clients, could substantially
and immediately reduce their marketing and communications budgets. In the event
of such an economic climate, there would be a material adverse effect on the
Company's business, operating results, financial condition and ability to
refinance its existing line of credit agreement.
Competition
The markets for the Company's services are highly competitive. The principal
competitive factors affecting the Company are effectiveness, reliability, price,
technological sophistication and timeliness. Numerous specialty companies
compete with the Company in each of its service lines although no single company
competes across all service lines. Some of the Company's competitors or
potential competitors have longer operating histories, longer client
relationships and significantly
19
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
greater financial, management, technological, sales, marketing and other
resources than the Company. In addition, clients could perform internally all or
certain of the services provided by the Company rather than outsourcing such
services. The Company could face competition from companies in related
communications markets which could offer services that are similar or superior
to those offered by the Company. In addition, national and regional
telecommunications providers could enter the market with materially lower
electronic delivery costs, and radio and television networks could also begin
transmitting business communications separate from their news programming. The
Company's ability to maintain and attract clients depends to a significant
degree on the quality of services provided and its reputation among its clients
and potential clients as compared to that of its competitors. There can be no
assurance that the Company will not face increased competition in the future or
that such competition will not have a material adverse effect on the Company's
business, operating results and financial condition.
New Services
The Company must develop new services to remain competitive, maintain or grow
market share and to operate in new markets. There can be no assurance that the
Company will be successful in developing new services, or that those new
services will meet customer needs. As a result of the expenses incurred in
developing new services and the potential inability of the Company to market
these services successfully, the Company's operating results may be negatively
affected.
Provisions of Our Charter Documents May Have Anti-takeover Effects that Could
Prevent a Change in Control Even if the Change in Control Would be Beneficial to
our Stockholders Provisions of our amended and restated certificate of
incorporation, by-laws and Delaware law could make it more difficult for a third
party to acquire us, even if doing so would be beneficial to our stockholders.
Line of Credit
The Company has a balance due under its line of credit of $5.50 million with a
due date of April 1, 2004, subject to annual renewal thereafter with the
lender's consent. Covenants under the line of credit agreement require the
Company to meet certain financial ratios, including minimum tangible net worth
and minimum earnings before interest, taxes, depreciation, amortization and
other charges, and certain spending limits related to capital expenditures and
Teletrax, as defined in the agreement. While management believes the Company is
currently in compliance with the covenants under the line of credit agreement,
there can be no assurance that the Company will continue to be in compliance in
the future. In such event, the Company may be required to raise additional funds
in order to repay the outstanding balance under the line of credit and there can
be no assurance that, if required, the Company would be able to raise such funds
on favorable terms, if at all.
Capital Requirements
One or more of our businesses could require, or benefit from, additional
investment beyond our current capability. Such additional funding could be
raised by the Company, or one or more of its business units separately, and
could have the effect of diluting shareholders' interests.
20
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Other Risk Factors
Other risk factors include our recent history of losses, our ability to achieve
or maintain profitability, effectiveness of our cost reduction programs, our
ability to develop new services and market acceptance of such services, such as
Teletrax, our ability to develop new products and services that keep pace with
technology, our ability to develop and maintain successful relationships with
critical vendors, and the potential negative effects of our international
operations on the Company. In addition, future acquisitions or divestitures and
the absence of long term contracts with customers and vendors may adversely
effect our operations and have an adverse effect on pricing, revenues, gross
margins and our customer base.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as significant to our business operations
and the understanding of our results of operations. The impact and any
associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion of the application of these and
other accounting policies, see Note 1 in the Notes to the Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31, 2002.
Revenue Recognition
Revenue earned from the distribution and monitoring of video news releases and
the distribution of printed news releases is recognized in the period that the
release is distributed. Fees earned for webcasts, satellite media tours and
other live events and the production of video news releases and still
photographs are recognized in the period that the services are performed. Fees
earned from research services are recognized using the percentage of completion
method. Invoices to clients are generated in accordance with the terms of the
applicable contract, which may not be directly related to the performance of
services. Unbilled receivables are subsequently invoiced based upon the
achievement of specific events as defined by each agreement including
deliverables, timetables and incurring of certain costs. Unbilled receivables
are classified as a current asset. Advanced billings to clients in excess of
revenue earned are recorded as deferred revenues and are classified as a current
liability.
Allowance for Doubtful Accounts
Management must make estimates of the uncollectibility of the Company's accounts
receivable. Management specifically analyzes accounts receivable, historical bad
debt, customer concentrations, customer creditworthiness and current trends when
evaluating the adequacy of the allowance for doubtful accounts.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price and related costs over the
value assigned to the net tangible and intangible assets of businesses acquired.
Effective January 1, 2002, we adopted the provisions of Financial Accounting
Standards Board (FASB) Statement of Financial Accounting
21
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which required
us to cease amortizing goodwill and to assess goodwill for impairment at least
annually in the absence of an indicator of possible impairment and immediately
upon an indicator of possible impairment. The annual impairment testing required
by SFAS No. 142 will also require the Company to use its judgment and could
require the Company to reduce the carrying value of its goodwill and other
intangible assets in future periods.
Other intangible assets, including customer lists and covenants not to compete,
are being amortized on a straight-line basis over the term of the agreement or
the estimated future period of benefit, which ranges from 3 to 7 1/2 years.
Long-lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and for operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. We
considered all of the available evidence to arrive at our position on the net
deferred tax assets; however, should circumstances change causing us to alter
our judgment in this regard, there may be an impact on future operating results.
22
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
Item 3. Qualitative and Quantitative Disclosure about Market Risk
Debt
The Company has a line of credit agreement which exposes the Company to the risk
of earnings or cash flow loss due to changes in market interest rates. At
September 30, 2003, $5.50 million was outstanding on the line of credit which
has a maturity date of April 2004. The interest rate is based upon the 30-day
LIBOR rate plus 2.25% through 3.25%, per annum, as defined in the agreement. All
other Company debt is fixed-rate and, therefore, does not expose the Company to
the risk of earning or cash flow loss due to changes in market interest rate.
Foreign Operations
In the normal course of business, through its UK operations, the Company is
exposed to the effect of foreign exchange rate fluctuations on the United States
dollar value of its foreign subsidiaries' results of operations and financial
condition. At September 30, 2003, the Company's primary foreign currency market
exposure was the British pound.
Market Risk
Our accounts receivables are subject, in the normal course of business, to
collection risks. We regularly assess these risks and have established policies
and business practices to protect against the adverse effects of collection
risks. As a result we do not anticipate any material losses in this area.
Item 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our chief executive officer,
principal accounting officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on this evaluation, our chief executive officer, principal
accounting officer and principal financial officer concluded that our disclosure
controls and procedures, as of the date of the evaluation, are effective in
timely alerting them to material information required to be included in our
periodic SEC reports. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.
In addition, we reviewed our internal controls, and there have been no
significant changes in those controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
23
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
From time to time, the Company becomes involved in various legal
matters that the Company considers to be in the ordinary course of
business. While the Company is not presently able to determine the
potential liability, if any, related to any such matters, the Company
believes that none of such matters, individually or in the aggregate,
will have a material adverse effect on its financial position.
ITEM 2. Changes in Securities and Use of Proceeds.
None
ITEM 3. Defaults Upon Senior Securities.
None
ITEM 4. Submission of Matters to a Vote of Security Holders.
None
ITEM 5. Other Information.
None
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
31. Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32. Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)Report on Form 8-K:
Report on Form 8-K dated July 29, 2003 regarding earnings
for the second quarter ended June 30, 2003.
24
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDIALINK WORLDWIDE INCORPORATED
By: /s/ Laurence Moskowitz
------------------------
Laurence Moskowitz,
Chairman of the Board, Chief Executive Officer
and President
By: /s/ J. Graeme McWhirter
------------------------
J. Graeme McWhirter
Executive Vice President, Assistant Secretary,
Chief Financial Officer and Director
Dated: November 14, 2003