-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OmyoP4JTG9w0WuDzB/tTbspNzLKcSp4rUk6Sw58qvc7WpOMGgV7tXUhF2tHPByH2 rdnY68c7vd76NWlRm7t4cQ== 0000014280-04-000011.txt : 20040217 0000014280-04-000011.hdr.sgml : 20040216 20040217165153 ACCESSION NUMBER: 0000014280-04-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20040215 FILED AS OF DATE: 20040217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MKTG SERVICES INC CENTRAL INDEX KEY: 0000014280 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 880085608 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01768 FILM NUMBER: 04609633 BUSINESS ADDRESS: STREET 1: 333 SEVENTH AVENUE STREET 2: 20TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 917-339-7200 MAIL ADDRESS: STREET 1: 333 SEVENTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10001 FORMER COMPANY: FORMER CONFORMED NAME: MARKETING SERVICES GROUP INC DATE OF NAME CHANGE: 19970707 FORMER COMPANY: FORMER CONFORMED NAME: ALL-COMM MEDIA CORP DATE OF NAME CHANGE: 19950823 FORMER COMPANY: FORMER CONFORMED NAME: SPORTS TECH INC DATE OF NAME CHANGE: 19920703 10-Q 1 dec10qtxt.txt DEC2003 QTR SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2003 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) 333 Seventh Avenue, 20th Floor New York, New York 10001 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 362-2012 MKTG Services, Inc. -------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ---- ---- APPLICABLE ONLY TO CORPORATE ISSUERS State number of shares outstanding of each of the issuer's classes of common equity as of the latest practical date: As of February 10, 2003 there were 1,092,367 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 DECEMBER 31, 2003 Page ---- PART I - FINANCIAL INFORMATION Item 1 Financial Statements Condensed Consolidated Balance Sheets as of December 31, 2003 (unaudited) and June 30, 2003 3 Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2003 and 2002 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2003 and 2002 (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 10-15 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
December 31, 2003 June 30, 2003 ----------------- -------------- (unaudited) (1) ASSETS Current assets: Cash and cash equivalents $ 576,428 $ 1,216,642 Accounts receivable, net of allowance for doubtful accounts of $25,000 and $120,000, respectively 1,316,613 1,816,546 Other current assets 386,804 475,164 ------------- ------------- Total current assets 2,279,845 3,508,352 Goodwill, net 2,277,220 2,277,220 Intangible assets, net 10,000 20,000 Property and equipment, net 677,846 747,530 Related party note receivable 1,085,020 1,050,309 Other assets 37,238 44,109 ------------- ------------- Total assets $ 6,367,169 $ 7,647,520 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowing $ 331,414 $ 261,385 Accounts payable-trade 360,077 456,266 Accrued expenses and other current liabilities 873,063 1,877,069 Current portion of long-term obligations 50,969 201,062 ------------- ------------- Total current liabilities 1,615,523 2,795,782 Other liabilities 1,161,802 1,463,132 ------------- ------------- Total liabilities 2,777,325 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 December 31, 2003 and June 30, 2003 11,011 11,011 Additional paid-in-capital 220,539,182 220,258,236 Accumulated deficit (215,566,639) (215,767,877) Less: 8,831 shares of common stock in treasury, at cost (1,393,710) (1,393,710) ------------- ------------- Total stockholders' equity 3,589,844 3,107,660 ------------- ------------- Total liabilities and stockholders' equity $ 6,367,169 $ 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 SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002 (unaudited)
Three Months Ended Six Months Ended December 31, December 31, ------------------------- -------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ------------ Revenues $ 2,563,635 $ 3,159,321 $ 6,361,211 $ 7,663,406 ----------- ----------- ----------- ------------ Operating costs and expenses: Salaries and benefits 2,398,165 3,010,512 5,538,116 6,920,284 Direct costs 161,521 134,150 330,009 361,588 Selling, general and administrative 645,226 502,291 1,009,236 921,936 Depreciation and amortization 56,180 56,180 112,360 112,018 Gain on termination of lease -- (3,905,387) -- (3,905,387) ----------- ----------- ----------- ------------ Total operating costs and expenses 3,261,092 (202,254) 6,989,721 4,410,439 ----------- ----------- ----------- ------------ Income (loss) from operations (697,457) 3,361,575 (628,510) 3,252,967 Settlement of lawsuit -- -- -- 965,486 Interest income (expense) and other, net 11,018 10,737 (12,358) (17,352) ----------- ----------- ----------- ------------ Income (loss) from continuing operations before provision for income taxes (686,439) 3,372,312 (640,868) 4,201,101 Provision for income taxes (3,000) (20,100) (6,000) (30,879) ----------- ----------- ----------- ------------ Income (loss) from continuing operations (689,439) 3,352,212 (646,868) 4,170,222 Discontinued operations: Gain (loss) from discontinued operations 760,860 (599,699) 848,106 (1,260,003) (Loss) gain from disposal of discontinued operations -- (116,635) -- (116,635) ----------- ----------- ----------- ------------ Gain (loss) from discontinued operations 760,860 (716,334) 848,106 (1,376,638) ----------- ----------- ----------- ------------ Cumulative effect of change in accounting principle -- -- -- (5,075,000) ----------- ----------- ----------- ------------ Net income (loss) 71,421 2,635,878 201,238 (2,281,416) Gain on redemption of preferred stock of discontinued subsidiary 280,946 -- 280,946 -- ------------ ---------- ----------- ----------- Net income (loss) attributable to common shareholders $ 352,367 $ 2,635,878 $ 482,184 $ (2,281,416) =========== =========== ============ ============= Basic earnings (loss) per share Continuing operations $ (0.63) $ 3.72 $ (0.59) $ 4.81 Discontinued operations 0.95 (.80) 1.03 (1.59) Cumulative effect of change in accounting principle -- -- -- (5.85) ----------- ----------- ----------- ------------ Basic earnings (loss) per share $ 0.32 $ 2.92 $ 0.44 $ (2.63) =========== =========== =========== ============ Weighted average common shares outstanding 1,092,367 901,987 1,092,367 866,644 =========== =========== =========== ============ Diluted earnings (loss) per share: Continuing operations $ (0.53) $ 1.27 $ ( 0.50) $ 1.58 Discontinued operations 0.80 (.27) 0.88 (.52) Cumulative effect of change in accounting principle -- -- -- (1.92) ----------- ----------- ----------- ------------ Diluted earnings (loss) per share $ 0.27 $ 1.00 $ 0.38 $ (.86) =========== =========== =========== ============ Weighted average common shares outstanding 1,300,827 2,637,343 1,289,269 2,637,028 =========== =========== =========== ============
See Notes to Condensed Consolidated Financial Statements. 4 MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002 (unaudited)
2003 2002 ----------- ------------ Operating activities: Net income (loss) $ 201,238 $ (2,281,416) (Gain)loss from discontinued operations (848,106) 1,376,638 Cumulative effect of change in accounting principle -- 5,075,000 ----------- ------------ Income (loss) from continuing operations (646,868) 4,170,222 Adjustments to reconcile loss to net cash used in operating activities: Gain on termination of lease -- (3,905,387) Depreciation 102,360 102,018 Amortization 10,000 10,000 Bad debt expense 12,000 -- Accrued interest on related party note receivable (34,711) -- Changes in assets and liabilities: Accounts receivable 487,933 1,692,409 Other current assets 88,360 266,101 Other assets 6,871 313,289 Accounts payable - trade (96,189) (509,162) Accrued expenses and other liabilities (457,230) (2,792,363) ----------- ------------ Net cash used in operating activities (527,474) (652,873) ----------- ------------ Investing activities: Proceeds from sale of discontinued operations, net of fees -- 8,546,182 Purchases of property and equipment (32,676) (16,631) ----------- ------------ Net cash provided by investing activities (32,676) 8,529,551 ----------- ------------ Financing activities: Expenditures from private placement of preferred stock -- (29,786) Net (repayments on) proceeds from credit facilities 70,029 (2,111,983) Repayment of related party note payable (150,093) -- Repayments of long-term debt -- (118,567) ----------- ------------ Net cash used in financing activities (80,064) (2,260,336) ----------- ------------ Net cash used in discontinued operations -- (1,383,941) ----------- ------------ Net increase in cash and cash equivalents (640,214) 4,232,401 Cash and cash equivalents at beginning of period 1,216,642 4,438,166 ----------- ------------ Cash and cash equivalents at end of period $ 576,428 $ 8,670,567 =========== ============
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 six-month periods ended December 31, 2003 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. The Company believes that funds on hand, funds available from its remaining operations and its unused lines of credit should be adequate to finance its operations and capital expenditure requirements and enable the Company to meet interest and debt obligations for the next twelve months. As explained in Note 5, the Company recently sold off substantially all the assets relating to its direct list sales and database services and website development and design business held by certain of its wholly owned subsidiaries. In addition, the Company has instituted cost reduction measures, including the reduction of workforce. The Company believes, based on past performance as well as the reduced corporate overhead, that its remaining operations should generate sufficient future cash flow to fund operations. Failure of the remaining operation to generate such sufficient future cash flow could have a material adverse effect on the Company's ability to continue as a going concern and to achieve its business objectives. The accompanying financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result should the Company be unable to continue as a going concern. 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 six months ending December 31, 2003 is as follows:
Three Six Months Months --------- --------- Weighted average common shares outstanding- basic 1,092,367 1,092,367 Common stock equivalents for options and warrants 208,460 196,902 --------- --------- Weighted average common shares outstanding- diluted 1,300,827 1,289,269 ========= =========
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 December 31, Six months ended December 31, 2003 2002 2003 2002 ---- ---- ---- ---- Net income (loss) available to common stockholders as reported $ 352,367 $ 2,635,878 $ 482,184 $ (2,281,416) Stock based-compensation recorded - - - - -------- ------------ --------- ------------ Subtotal 352,367 2,635,878 482,184 (2,281,416) Stock-based compensation recorded under SFAS 123 - 364,301 - 728,603 -------- ------------ --------- ------------ Pro forma net income (loss) available to common stockholders $ 352,367 $ 2,271,577 $ 482,184 $ (3,010,019) ======== ============ ========= ============= Earnings (loss) per share: Basic earnings (loss) per share - as reported $ 0.32 $ 2.92 $ 0.44 $ (2.63) ====== ====== ====== ======== Basic earnings (loss) per share - pro forma $ 0.32 $ 2.52 $ 0.44 $ (3.47) ====== ====== ====== ======== Diluted earnings (loss) per share - as reported $ 0.27 $ 1.00 $ 0.38 $ (0.86) ====== ====== ====== ======== Diluted earning (loss) per share - pro forma $ 0.27 $ 0.86 $ 0.38 $ (1.14) ====== ====== ====== ========
Pro forma net loss reflects only options granted in fiscal 1996 through 2003. The Company has not granted options during the six months ended December 31, 2003 and the year ended June 30, 2003. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' maximum vesting period of seven years and compensation cost for options granted prior to July 1, 1995, has not been considered. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. 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 December 31, 2003, the Company had approximately $0.3 million outstanding on its line of credit facility. The Company had approximately $1.0 million available on its line of credit as of December 31, 2003. As of December 31, 2003, the Company was in compliance with its line of credit covenants. 5. DISCONTINUED 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 December 31, 2002 have been reclassified into a one-line presentation and is included in loss from discontinued operations and net cash used by discontinued operations. During the three months ended December 31, 2003, the Company reversed reserves of approximately $760,860 that had been accrued in connection with the lawsuits against Wired Empire, Inc., a discontinued subsidiary. The lawsuits have been settled (See Note 7.) 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. Identifiable intangible assets are amortized under the straight-line method over the period of expected benefit of five years. 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, the only remaining reporting unit consists of telemarketing. The Company completed its annual impairment test prescribed by SFAS 142 and concluded that no impairment of goodwill existed as of July 1, 2003. The following table sets forth the components of the intangible assets subject to amortization as of December 31, 2003 and June 30, 2003:
December 31, 2003 June 30, 2003 ------------------------------------ ------------------------------------- Gross Gross carrying Accumulated carrying Accumulated Useful life amount amortization Net amount amortization Net ----------- -------- ------------ ------- -------- ------------ -------- Capitalized software 5 years $100,000 $90,000 $10,000 $100,000 $80,000 $20,000
Amortization expense for the six months ended December 30, 2003 and 2002 was $10,000, respectively. Estimated amortization expense by fiscal year as of June 30, is as follows: 2004 $20,000 ======= 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 six months ended December 31, 2002. 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 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; direct marketing and other industry trends; demographic changes; competition; the loss of any significant customers; changes in business strategy or development plans; availability and successful integration of acquisition candidates; availability, terms and deployment of capital; advances in technology; retention of clients not under long-term contract; quality of management; business abilities and judgment of personnel; availability of qualified personnel; changes in, or the failure to comply with, government regulations; and technology, telecommunication and postal costs. Introduction - ------------ This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flows of the Company for the three-month and six-month periods ended December 31, 2003 and 2002. 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. 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 September 30, 2002. In connection with the sale of the Northeast Operations, the only remaining reporting unit consists of telemarketing. The Company completed its annual impairment test prescribed by SFAS 142 and concluded that no impairment of goodwill existed as of July 1, 2003. 10 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. To facilitate an analysis of MSGI operating results, certain significant events should be considered. 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 December 31, 2002 has been reclassified into a one-line presentation and is included in Loss from Discontinued Operations and Net Cash Used by Discontinued Operations. The Company's business tends to be seasonal. Telemarketing services have higher revenues and profits occurring in the fourth fiscal quarter, followed by the first fiscal quarter. This is due to subscription renewal campaigns for its performing arts clients, which generally begin in the springtime and continue during the summer months. Results of Operations for the Three Months Ended December 31, 2003, Compared to - -------------------------------------------------------------------------------- the Three Months Ended December 31, 2002. - ------------------------------------------ Revenues of approximately $2.6 million for the three months ended December 31, 2003 (the "Current Quarter") decreased by $0.6 million or 19% over revenues of $3.2 million during the three months ended September 30, 2002 (the "Prior Quarter"). Revenue decreased primarily due to decreased client billings in the onsite telemarketing services. 11 Salaries and benefits of approximately $2.4 million in the Current Quarter decreased by approximately $0.6 million or 20% over salaries and benefits of approximately $3.0 million in the Prior Quarter. Salaries and benefits decreased due to a reduction in onsite telemarketing and corporate headcount, as well as a reduction in certain executive compensation. Direct costs of approximately $161,000 increased by approximately $27,000 or 20% over direct costs of approximately $134,000 in the Prior Quarter. The increase is due primarily to an increase in Los Angeles call center sales expenses as well as and increase related to rent for a client campaign office. Selling, general and administrative expenses of approximately $645,000 in the Current Quarter increased by approximately $143,000 or 28% over comparable expenses of $502,000 in the Prior Quarter. The increase is due primarily to increases in corporate travel expenses as well as increases in expenses related to public company compliance. Depreciation and amortization expenses of approximately $56,000 in the Current Quarter are in line with depreciation and amortization expenses in the Prior Quarter. Gain on termination of lease of approximately $3.9 million in the Prior Quarter was a result of the Company successfully negotiating a termination of a lease for an abandoned lease property. The agreement required an up front payment of $300,000 and the Company is obligated to pay approximately $60,000 per month until the landlord has completed certain leasehold improvements for a new tenant and then Company is obligated to pay $20,000 per month until August 2010. The gain on lease termination represents a change in estimate representing the difference between the Company's present value of its new future obligations and the entire obligation that remained on the books under the original lease obligation as a result of the abandonment. The remaining obligation has been recorded in accrued expenses and other current liabilities and other liabilities. Net interest income of approximately $11,000 in the Current Quarter remained consistant with net interest income of approximately $11,000 in the Prior Quarter. The net provision for income taxes of approximately $3,000 in the Current Quarter decreased by approximately $17,000 over the provision of approximately $20,000 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 $700,000 in the Current Quarter decreased by approximately $4.1 million over comparable income from continuing operations of $3.4 million in the Prior Quarter. The gain from discontinued operations of approximately $761,000 in the Current Quarter is the result of a reduction in certain loss reserves expensed in prior periods. The loss from discontinued operations of approximately $600,000 in the Prior Quarter are the result of losses incurred from the Northeast Operations which have been sold. In connection with the sale of the Northeast Operations, the Company incurred a loss on disposal of discontinued operations of approximately $100,000 in the three months ended December 31, 2002. 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. 12 As a result of the above, net income of approximately $71,000 in the Current Quarter decreased by approximately $2.6 million over comparable net income of approximately $2.6 million in the Prior Quarter. Results of Operations for the Six Months Ended December 31, 2003, Compared to - -------------------------------------------------------------------------------- the Six Months Ended December 31, 2002. - ------------------------------------------ Revenues of approximately $6.4 million for the six months ended December 31, 2003 (the "Current Period") decreased by $1.3 million or 17% over revenues of $7.7 million during the six months ended December 31, 2002 (the "Prior Period"). Revenue decreased primarily due to decreased client billings in the onsite telemarketing services. Salaries and benefits of approximately $5.5 million in the Current Period decreased by approximately $1.4 million or 20% over salaries and benefits of approximately $6.9 million in the Prior Period. Salaries and benefits decreased due to a reduction in onsite telemarketing and corporate headcount, as well as a reduction in certain executive compensation. Direct costs of approximately $330,000 decreased by approximately $32,000 or 9% over direct costs of approximately $362,000 in the Prior Period. The decrease is due primarily to reductions in Los Angeles call center sales expenses, telephone expenses and postage costs, offset by an increase in costs related to rent for a client campaign office. Selling, general and administrative expenses of approximately $1.0 million in the Current Period increased by approximately $0.1 million or 11% over comparable expenses of $0.9 million in the Prior Period. The increase is due primarily to increases in corporate travel expenses. Depreciation and amortization expenses of approximately $112,000 in the Current Period are in line with depreciation and amortization expenses in the Prior Period. During the Prior Period ending December 31, 2002, 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 expense of approximately $12,000 in the Current Period decreased by approximately $5,000 or 29% over net interest expense of approximately $17,000 in the Prior Period. The decrease is due primarily to the reduction in interest expense incurred in Los Angeles resulting from reduced borrowings on the line of credit. The net provision for income taxes of approximately $6,000 in the Current Period decreased by approximately $25,000 over the provision of approximately $31,000 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. 13 As a result of the above, loss from continuing operations of approximately $647,000 in the Current Period decreased by approximately $4.8 over comparable income from continuing operations of $4.2 million in the Prior Period. The gain from discontinued operations of approximately $848,000 in the Current Period is the result of a reduction in certain loss reserves expensed in prior periods. The loss from discontinued operations of approximately $1.4 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. As a result of the above, net income of approximately $201,000 in the Current Period increased by approximately $2.5 million over comparable net loss of approximately $2.3 million in the Prior Period. Capital Resources and Liquidity - ------------------------------- Financial Reporting Release No. 61, which was released by the SEC, requires all companies to include a discussion to address, among other things, liquidity, off-balance sheet arrangements, contractual obligations and commercial commitments. The Company currently does not maintain any off-balance sheet arrangements. Leases: The Company leases various office space and equipment under non-cancelable long-term leases. The Company incurs all costs of insurance, maintenance and utilities. Future minimum rental commitments under all non-cancelable leases, net of non-cancelable subleases, as of December 31, 2003 are as follows: Rent Expense Less: Sublease Income Net Rent Expense ----------- -------------------- ---------------- 2004 $ 445,800 $ (39,600) $ 406,200 2005 640,800 (45,300) 595,500 2006 439,700 - 439,700 2007 439,680 - 439,680 2008 323,200 - 323,200 Thereafter 520,000 - 520,000 ------------ ---------- ----------- $ 2,809,180 $ (84,900) $ 2,724,280 =========== =========== =========== Debt: The Company has a renewable two-year credit facility with a lender for a line of credit with a maximum availability of $2,000,000, collateralized by accounts receivable and other certain tangible assets of the Company. Borrowings are limited to the lesser of the maximum availability or 80% of eligible receivables. Interest is payable monthly at the Chase Manhattan prime rate plus 1 1/2%, but no less than 6%, with a minimum annual interest requirement of $50,000. The facility requires an annual fee of 1% of the maximum available line and has tangible net worth and working capital covenants. As of December 31, 2003, there was an aggregate of approximately $1.0 million available under this line of credit. At December 31, 2003, the Company had approximately $331,000 outstanding on its line of credit. As of December 31, 2003, the Company is in compliance with certain working capital and net worth covenants of its credit agreement. 14 Historically, the Company has funded its operations, capital expenditures and acquisitions primarily through cash flows from operations, private placements of equity transactions, and its credit facilities. At December 31, 2003, the Company had cash and cash equivalents of $0.6 million and a working capital of $0.7 million. The Company recognized net income of approximately $201,000 in the Current Period. Cash used by operating activities from operations was approximately $493,000. Net cash used by operating activities principally resulted from the decrease in accounts receivable and other assets offset by decreases in accrued expenses and accounts payable. Cash used by operating activities in the Prior Period was approximately $653,000. In the Current Period, net cash of $32,676 was used in investing activities consisting of purchases of property and equipment. In the Prior Period, net cash of approximately $8.5 million came from investing activities consisting of proceeds from the sale of discontinued operations of $8,546,182 offset by a use of cash of $16,631 for purchases of property and equipment. In the Current Period, net cash of $114,775 was used in financing activities. Net cash used in financing activities consisted of $150,093 repayments of debt, $70,029 of proceeds from credit facilities and $34,711 for an increase in a related party receivable. In the Prior Period, net cash of $2,260,336 was used in financing activities consisting of repayments of long-term debt and credit facilities of $2,230,550 and an expenditure from private placement of preferred stock of $$29,786. In the Prior Period net cash of $1.4 million was used in discontinued operations, while there were no discontinued operations in the Current Period. 15 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 December 31, 2003, the Company had approximately $331,000 in 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 December 31, 2003 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 December 31, 2003 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 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. 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: February 12, 2004 /s/ J. Jeremy Barbera --------------------- J. Jeremy Barbera Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: February 12, 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 (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: February 12, 2004 /s/ J. Jeremy Barbera --------------------- J. Jeremy Barbera Chairman of the Board and Chief Executive Officer (Principal Executive Officer) 19 Exhibit 31.2 CERTIFICATION I, Richard J. Mitchell III , certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.302 of the Sarbanes-Oxley Act of 2002, that: (1) I have reviewed this quarterly report on Form 10-Q of Media Services Group, Inc.; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in al material respects the financial condition, results of operations and cash flows of registrant as of, and for, the periods presented in this quarterly report; and (4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Intentionally omitted. (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 12, 2004 /s/ Richard J. Mitchell III --------------------- Richard J. Mitchell III Chief Accounting Officer (Principal Financial Officer) 20 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 December 31, 2003 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: February 12, 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. 21 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 December 31, 2003 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: February 12, 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. 22 -----END PRIVACY-ENHANCED MESSAGE-----