-----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, Sxjix1mDsPO8DTBVOXCVQIQdR18X3buXQ5yHDkvsAEnr0RW5f/Q/cjlZJ157DOPz NZFcmOl9USLDZbB8bxcpdw== 0000014280-04-000095.txt : 20041115 0000014280-04-000095.hdr.sgml : 20041115 20041115172240 ACCESSION NUMBER: 0000014280-04-000095 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041115 DATE AS OF CHANGE: 20041115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDIA SERVICE GROUP 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: 041146915 BUSINESS ADDRESS: STREET 1: 575 MADISON AVENUE STREET 2: 10TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 917-339-7134 MAIL ADDRESS: STREET 1: 575 MADISON AVENUE STREET 2: 10TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: MKTG SERVICES INC DATE OF NAME CHANGE: 20020403 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 10-Q 1 form10qsept04txt.txt SEPT'04 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______to_______ Commission file number 0-16730 MEDIA SERVICES GROUP, INC. -------------------------- (Exact Name of Registrant as Specified in Its Charter) Nevada 88-0085608 ------ ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 575 Madison Avenue New York, New York 10022 ------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (917) 339-7134 -------------- ----------------------------------------------------- (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 November 8, 2004 there were 1,596,262 shares of the Issuer's Common Stock, par value $.01 per share outstanding. 1 MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES TABLE OF CONTENTS FORM 10-Q REPORT SEPTEMBER 30, 2004
PART I - FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2004 (unaudited) and June 30, 2004 3 Condensed Consolidated Statements of Operations for the three months ended September 30, 2004 and 2003 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2004 and 2003 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 12-16 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 17 Item 4. Controls and Procedures. 17 PART II- OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities and Use of Proceeds 18 Item 6. Exhibits 18 SIGNATURES 19
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PART I - FINANCIAL INFORMATION Item 1. Financial Statements. MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2004 June 30, 2004 ------------------ ------------- (Unaudited) (1) ASSETS - ------ Current assets: Cash and cash equivalents $ 1,232,747 $ 2,548,598 Accounts receivable 150,000 - Stock subscription receivable - 600,000 Inventory 173,070 - Other current assets 246,401 208,293 ----------- ------------ Total current assets 1,802,218 3,356,891 Goodwill 490,000 490,000 Intangible assets,net 287,288 - Property and equipment, net 108,887 5,130 Note receivable 300,000 300,000 Related party note receivable 1,137,368 1,120,013 Other assets 22,700 15,700 ----------- ------------ Total assets $ 4,148,461 $ 5,287,734 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable-trade 327,271 381,722 Accrued expenses and other current liabilities 598,803 748,603 Note payable - shareholder - 500,000 Net liabilities of discontinued operations - 130,742 --------- --------- Total current liabilities 926,074 1,761,067 Other liabilities 1,025,745 1,070,570 --------- --------- Total liabilities 1,951,819 2,831,637 Minority interest in subsidiary 115,772 255,517 Commitments and contingencies Stockholders' equity: Common stock - $.01 par value; 9,375,000 shares authorized; 1,605,093 and 1,530,093 shares issued; 1,596,262 and 1,521,262 shares outstanding as of September 30, 2004 and June 30, 2004, respectively 16,050 15,300 Additional paid-in capital 223,313,034 222,658,012 Accumulated deficit (219,854,504) (219,079,022) Less: 8,831 shares of common stock in treasury, at cost (1,393,710) (1,393,710) ----------- ------------ Total stockholders' equity 2,080,870 2,200,580 ----------- ------------ Total liabilities and stockholders' equity $ 4,148,461 $ 5,287,734 =========== ============
(1) Derived from the Audited Consolidated Financial Statements for the year ended June 30, 2004. See Notes to Condensed Consolidated Financial Statements. 3 MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (Unaudited)
2004 2003 ---- ---- Revenues $ 150,000 $ -- Cost of goods sold 32,454 -- ----------- ----------- Gross Profit $ 117,546 $ -- ----------- ----------- Operating costs and expenses: Research and development 48,869 -- Salaries and benefits 298,782 77,516 Non cash compensation 235,886 -- Selling, general and administrative 477,695 200,411 Gain on termination of lease (70,300) -- ----------- ----------- Total operating costs and expenses 990,932 277,927 ----------- ----------- Loss from operations (873,386) (277,927) Other income (expense): Interest income (expense) and other, net 1,354 (5,289) ----------- ----------- Minority interests in subsidiaries 139,845 -- Loss from continuing operations before provision for income taxes (732,187) (283,216) Provision for income taxes 3,000 3,000 ----------- ----------- Loss from continuing operations (735,187) (286,216) Discontinued operations: Gain (loss) from discontinued operations (40,295) 416,033 ----------- ----------- Net income (loss) $ (775,482) $ 129,817 =========== =========== Basic earnings (loss) per share: Continuing operations $ (0.47) $ (0.26) Discontinued operations (0.02) 0.38 ------------ ----------- Basic earnings (loss) per share $ (0.49) $ 0.12 =========== =========== Weighted average common shares outstanding- basic 1,568,001 1,092,367 =========== =========== Diluted earnings (loss) per share: Continuing operations $ (0.47) $ (0.23) Discontinued operations (0.02) 0.33 ------------ ----------- Diluted earnings (loss) per share $ (0.49) $ 0.10 =========== =========== Weighted average common shares outstanding- diluted 1,568,001 1,246,263 =========== ===========
See Notes to Condensed Consolidated Financial Statements. 4 MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (unaudited)
2004 2003 ---- ---- Operating activities: Net income (loss) $ (775,482) $ 129,817 (Gain)/loss from discontinued operations 40,295 (416,033) Loss from continuing operations (735,187) (286,216) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation 4,742 -- Non cash compensation 235,886 -- Gain from termination of lease (70,300) -- Minority interest in subsidiary (139,745) -- Changes in assets and liabilities: Accounts receivable (150,000) -- Inventory (173,070) -- Other current assets (89,510) 36,422 Other assets (7,000) -- Accounts payable - trade (54,451) (69,034) Accrued expenses and other liabilities (164,620) (244,165) ----------- ----------- Net cash used in operating activities (1,343,255) (562,993) ----------- ----------- Investing activities: Purchases of property and equipment (108,499) -- ----------- ----------- Net cash used in investing activities (108,499) -- Financing activities: Expenditures from private placement of common shares (16,000) -- Proceeds from issuance of common stock 800,000 -- Increase in related party note receivable (17,355) (17,355) Repayment of related party note payable (500,000) -- Repayments of long-term debt -- (99,597) ----------- ----------- Net cash provided by (used in) financing activities 266,645 (116,952) ----------- ----------- Net cash from/(used in) discontinued operations (130,742) 143,266 ----------- ----------- Net decrease in cash and cash equivalents (1,315,851) (536,679) Cash and cash equivalents at beginning of period 2,548,598 660,742 ----------- ----------- Cash and cash equivalents at end of period $ 1,232,747 $ 124,063 =========== ===========
See Notes to Condensed Consolidated Financial Statements. 5 MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Media Services Group, Inc. and its Subsidiaries, Future Developments America, Inc ("FDA") and Innalogic, LLC ("Innalogic") (in combination "MSGI" or the "Company"). These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company's Form 10-K, as amended, for the fiscal year ended June 30, 2004 and the historical consolidated financial statements and related notes included therein. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary to present fairly the condensed consolidated financial position, results of operations and cash flows of the Company. Certain information and footnote disclosure normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. Operating results for the three-month period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2005. Certain reclassifications have been made in the fiscal 2004 financial statements to conform to the fiscal 2005 presentation. Liquidity: The Company has limited capital resources and has incurred significant historical losses and negative cash flows from operations. The Company believes that funds on hand and funds available from its remaining operations should be adequate to finance its operations and capital expenditure requirements for the next twelve months. As explained in Note 6, the Company recently sold off substantially all the assets relating to its telemarketing and teleservices operations held by certain of its wholly owned subsidiary, MKTG Teleservices, Inc. As explained in Notes 4 and 13, the Company has recently engaged in the private placement sale of shares of both Common Stock and Series F Convertible Preferred Stock which have raised significant working capital. The Company has also most recently acquired holdings in two operating entities, FDA and Innalogic, both of which are forecasted to result in earnings in future periods. In addition, the Company has instituted cost reduction measures, including the reduction of workforce and corporate overhead. The Company believes, based on expected performance as well as the reduced corporate overhead, that its recently acquired operations should generate sufficient future cash flow to fund operations. Failure of the new operations to generate such sufficient future cash flow could have a material adverse effect on the Company's ability to continue as a going concern and to achieve its business objectives. The accompanying financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result should the Company be unable to continue as a going concern. 2. SUMMARY OF SIGNIFICANT POLICIES Revenue Recognition: The Company accounts for revenue recognition in accordance with Staff Accounting Bulletin No. 104, ("SAB 104"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. Revenues will be reported for the operations of Future Developments America, Inc. and for Innalogic, LLC upon the completion of a transaction that meets the following criteria of SAB 104 when (1) persuasive evidence of an arrangement exists; (2) delivery of our services has occurred; (3) our price to our customer is fixed or determinable; and (4) collectibility of the sales price is reasonably assured. 6 Research and Development Costs: The Company recognizes research and development costs associated with product development in its Future Developments America, Inc subsidiary. All research and development costs are expensed in the period incurred. Such expense was $48,869 for the quarter ended September 30, 2004. There was no such expense in the same quarter in the previous year. Income Taxes: The Company recognizes deferred taxes for differences between the financial statement and tax bases of assets and liabilities at currently enacted statutory tax rates and laws for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates and assumptions made in the preparation of the consolidated financial statements relate to the carrying amount of goodwill, deferred tax valuation allowance and abandoned lease reserves. Actual results could differ from those estimates. There are no recent accounting pronouncements that would have an effect on the Company in this quarter ended September 30, 2004. 3. EARNINGS PER SHARE Common share equivalents included in weighted average shares outstanding- diluted for the quarters ending September 30, 2004 and 2003: 2004 2003 Weighted average common shares outstanding - basic 1,568,001 1,092,367 Common stock equivalents for options and warrants - 153,896 --------- --------- Weighted average common shares outstanding- diluted 1,568,001 1,246,263 ========= ========= There is no effective dilution from stock equivalents for options and/or warrants in the current quarter, as they are anti-dilutive as a result of net losses for the quarter ended September 30, 2004. 4. EQUITY TRANSACTIONS During the year ended June 2004, the Company entered into definitive agreements with certain strategic European investors for a private placement of an aggregate of 250,000 shares of common stock to be sold at a price of $8.00 per share for gross proceeds of approximately $2.0 million. The Company also agreed to issue to the investors, and third party affiliates, warrants to purchase an additional 150,000 shares of common stock at a price of $12.00 per share under a three-year term. As of June 30, 2004, $1.8 million of the total $2.0 million was closed with $1.2 million funded and $0.6 million recorded as a stock subscription receivable. The payment for the stock subscription receivable was received in July 2004. The final subscription of $0.2 million was closed and funded in July 2004. 7 5. STOCK BASED COMPENSATION The accompanying financial position and results of operations for the Company have been prepared in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Under APB No. 25, generally, no compensation expense is recognized in the financial statements in connection with the awarding of stock option grants to employees provided that, as of the grant date, the number of shares and the exercise price of the award are fixed and the fair value of the Company's stock, as of the grant date, is equal to or less than the amount an employee must pay to acquire the stock. The Company has elected the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Stock based awards to non-employees are accounted for under the provisions of SFAS 123. In accordance with FASB Statement No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure", the effect on net income and earnings per share if the company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock Based Compensation", to stock-based employee compensation is as follows: Three months ended September 30, 2004 2003 ---- ---- Net income (loss) available to common stockholders as reported $ (775,482) $ 129,817 Stock based-compensation recorded -- -- ----------- ----------- Subtotal (775,482) 129,817 Stock-based compensation recorded under SFAS 123 29,495 -- ----------- ----------- Pro forma net income (loss) available to common stockholders $ (804,977) $ 129,817 =========== =========== Earnings (loss) per share: Basic earnings (loss) per share - as reported $ (0.49) $ 0.12 =========== =========== Basic earnings (loss) per share - pro forma $ (0.51) $ 0.12 =========== =========== Diluted earnings (loss) per share - as reported $ (0.49) $ 0.10 =========== =========== Diluted earning (loss) per share - pro forma $ (0.51) $ 0.10 =========== =========== The Company has granted 1,250 options to employees during the three months ended September 30, 2004. These options were granted at an exercise price equal to the market price on date of grant, do not begin to vest until July 2005 and vest ratably over a three year period. No options were granted during the period ended September 30, 2003. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model. Pro forma compensation cost for stock options under SFAS No. 123 is recognized over the service period. Previously recognized pro forma compensation cost is not to be reversed if a vested employee option expires unexercised. The Company stops recognizing pro forma compensation cost when an option is fully vested. The following assumptions were used for grants for the period ended September 30, 2004: September 30 ,2004 Risk -free interest rate 4.00% Expected option life Vesting life + four years Dividend yield None Volatility 158% 8 6. DISCONTINUED OPERATIONS In March 2004, the Company completed the sale of substantially all of the assets relating to its telemarketing and teleservices business held by its wholly owned subsidiary, MKTG Teleservices, Inc., ("MKTG Teleservices") to SD&A Teleservices, Inc., a wholly owned subsidiary of the Robert W. Woodruff Arts Center, Inc. for approximately $2.5 million in cash and a note receivable for $0.3 million plus the assumption of certain directly related liabilities. As such, the operations and cash flows of MKTG Teleservices have been eliminated from ongoing operations and the Company no longer has continuing involvement in the operations. Accordingly, the statement of operations and cash flows for the period ended September 30, 2003 related to the above mentioned operations has been reclassified into a one-line presentation and is included in loss from discontinued operations and net cash used by discontinued operations. Loss from discontinued operations of approximately $40,000 during the quarter ended September 30, 2004 are the result of trailing legal fees associated with certain legal settlements pertaining to the discontinued operation (see Note 11). 7. ACQUISITIONS On August 18, 2004, the Company completed an acquisition of a 51% membership interest in Innalogic, LLC, for an aggregate capital contribution of $1,000,000, pursuant to definitive agreements entered into as of August 18, 2004. Further subject to the terms and conditions of an Investment Agreement, the Company issued an aggregate of 25,000 unregistered shares of its common stock to Innalogic. These shares were subsequently distributed to the founding members of Innalogic and were recorded as non-cash compensation in the amount of $235,886 in the period ended September 30, 2004. The Company also issued 25,000 unregistered shares of common stock to certain advisors as compensation for services rendered in connection with the completion of this transaction. As set forth in Innalogic's Amended and Restated Limited Liability Company Agreement, the Company may obtain up to an additional 25% membership interest in Innalogic, if certain pre-tax income targets are not met by certain target dates. 9 8. GOODWILL AND OTHER INTANGIBLE ASSETS Intangible assets totaling $287,288 were acquired during the period ended September 30, 2004 in connection with the acquisition of Innalogic. The Company is awaiting the results of the formal valuation of Innalogic in order to specifically identify the intangible assets and determine the related lives. As such, no amortization expense has been recorded during the period ended September 30, 2004. The Company estimates that the effect of not recording amortization during this period does not have a material effect on the financial results for the period ended September 30, 2004. 9. GAIN ON TERMINATION OF LEASE In July 2004, the Company successfully negotiated an early termination of a lease for a certain abandoned property. The agreement resulted in a gain on early termination of approximately $70,000 in the quarter ended September 30, 2004. 10. RELATED PARTY TRANSACTIONS In June 2004, an officer provided $500,000 of working capital to the Company under a short-term arrangement. The funds were repaid to the officer during July 2004. 11. CONTINGENCIES AND LITIGATION In May 2003, an action was filed in the State of California against a former subsidiary, MKTG Teleservices, Inc., by a former employee (Case No. BC 303297). The action alleged wrongful termination and harassment by a certain member of the former subsidiary's management. The action was settled in July 2004 and stipulations of dismissal with prejudice have been or will shortly be filed. A settlement payment in the amount of $35,000 by the Company has been recorded in the current quarter and is realized in gain / (loss) from discontinued operations. All legal fees pertaining to the matter have been realized in gain / (loss) from discontinued operations. On October 21, 2004, the Company announced that it has received a letter of deficiency and request for review from the Nasdaq Stock Market regarding its reported stockholders' equity of $2,200,580 reported on its Annual Report on Form 10-K for the year ended June 30, 2004. Nasdaq Marketplace Rule 4310 (C)(2)(b) requires that the Company have a minimum of $2.5 million in stockholders equity or $35.0 million in market value of listed securities or $0.5 million of net income from continuing operations. In November 2004, the Company provided a plan to the Nasdaq Stock Market indicating how it expected to correct the approximately $300,000 deficiency. The Company subsequently corrected the deficiency through the private placement of Series F Convertible Preferred Stock raising initial gross proceeds of approximately $3.0 million (see Note 12). The Company is in compliance with the stockholders' equity requirement, based upon the private placement transaction. As of the date of this filing, the Company has an estimated $5.0 million in stockholders' equity. Nasdaq will continue to monitor the Company's ongoing compliance with regard to stockholders' equity. If at the time of the next scheduled periodic report the Company does not evidence compliance, it may be subject to notification of delisting. As of September 30, 2004, there are no other material legal actions known to management that are pending to which the Company is a party. 10 12. SUBSEQUENT EVENTS In October 2004, the Company engaged in an offer for a private placement of an aggregate of 18,750 shares of Series F Convertible Preferred Stock to be sold at a price of $320.00 per share for gross proceeds of approximately $6,000,000. Each share of Series F Convertible Preferred Stock will be convertible at any time at the option of the holder into 24.61538 shares of Common Stock. Purchasers of the Series F Convertible Preferred Stock will also be granted five year warrants to purchase the number of shares of Common Stock equal to 0.50 multiplied by the number of Series F Convertible Preferred Stock purchased multiplied by the 24.61538 conversion rate, at an exercise price equal to 25% above the conversion price of the Series F Convertible Preferred Stock. The Company will pay an annual dividend of 6% on the Preferred Stock, payable in shares of the Company's common stock. There are no reset provisions or anti-dilution provisions associated with this Series F Convertible Preferred Stock.In November 2004, the Company entered into and closed on definitive agreements with certain strategic investors for placement of 9,375 shares of the Series F Convertible Preferred Stock for gross proceeds of approximately $3 million. On an as converted basis, this equates to approximately 230,769 shares of Common Stock at a conversion price of $13.00 per share. In connection with the issuance of the preferred stock, warrants will be issued to purchase 115,385 shares of Common stock at an exercise price of $16.25 per share. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Special Note Regarding Forward-Looking Statements - ------------------------------------------------- Some of the statements contained in this Report on Form 10-Q discuss our plans and strategies for our business or state other forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; industry capacity; direct marketing and other industry trends; demographic changes; competition; the loss of any significant customers; changes in business strategy or development plans; availability and successful integration of acquisition candidates; availability, terms and deployment of capital; advances in technology; retention of clients not under long-term contract; quality of management; business abilities and judgment of personnel; availability of qualified personnel; changes in, or the failure to comply with, government regulations; and technology, telecommunication and postal costs. Introduction - ------------ This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flows of the Company for the three-month periods ended September 30, 2004 and 2003. This should be read in conjunction with the financial statements, and notes thereto, included in this Report on Form 10-Q and the Company's financial statements and notes thereto, included in the Company's Annual Report on Form 10-K, as amended, for the year ended June 30, 2004. Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. The following is a brief description of the more significant accounting policies and methods used by the Company. Revenue Recognition: The Company accounts for revenue recognition in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin No. 104, ("SAB 104"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. Revenues will be reported for the operations of Future Developments America, Inc. and for Innalogic, LLC upon the completion of a transaction that meets the following criteria of SAB 104 when (1) persuasive evidence of an arrangement exists; (2) delivery of our services has occurred; (3) our price to our customer is fixed or determinable; and (4) collectibility of the sales price is reasonably assured. FDA recognized no revenues during the period ended September 30, 2004. Revenues derived from the operations of Innalogic, from the sale of equipment and the provision of supporting services if requested by the customer, are realized upon shipment or delivery of the product and/or upon the services being provided and completed. 12 Goodwill and Intangible Assets: Under Statement of Financial Accounting Standards ("SFAS"), No. 142, "Goodwill and Other Intangible Assets", goodwill is no longer amortized. The Company performs an annual impairment test to determine if there is any impairment of goodwill. The current goodwill of $490,000 resulted from the Company's acquisition of FDA during in April 2004. The Company has not yet performed an annual impairment test related to this amount since the acquisition was recent. Intangible assets of approximately $287,000 were acquired during the period ended September 30, 2004 in connection with the acquisition of Innalogic. The Company is awaiting the results of the formal valuation of Innalogic in order to specifically identify the intangible assets and determine the related lives. As such, no amortization expense has been recorded during the period ended September 30, 2004. Long-Lived Assets: In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, the Company will recognize impairment when the sum of undiscounted future cash flows (without interest charges) is less than the carrying amount of such assets. The measurement for such impairment loss is based on the fair value of the asset. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates and assumptions made in the preparation of the consolidated financial statements relate to the carrying amount and amortization of intangible assets, deferred tax valuation allowance, abandoned lease reserves and the allowance for doubtful accounts. Actual results could differ from those estimates. Recent Accounting Pronouncements: There were no new accounting pronouncements during the period that would have an effect on the Company. Contingencies and Litigation: On October 21, 2004, the Company announced that it has received a letter of deficiency and request for review from the Nasdaq Stock Market regarding its reported stockholders' equity of $2,200,580 reported on its Annual Report on Form 10-K for the year ended June 30, 2004. Nasdaq Marketplace Rule 4310 (C)(2)(b) requires that the Company have a minimum of $2.5 million in stockholders equity or $35.0 million in market value of listed securities or $0.5 million of net income from continuing operations. In November 2004, the Company provided a plan to the Nasdaq Stock Market indicating how it expected to correct the approximately $300,000 deficiency. The Company subsequently corrected the deficiency through the private placement of Series F Convertible Preferred Stock raising initial gross proceeds of approximately $3.0 million (see Note 12). The Company is in compliance with the stockholders' equity requirement, based upon the private placement transaction. As of the date of this filing, the Company has an estimated $5.0 million in stockholders' equity. Nasdaq will continue to monitor the Company's ongoing compliance with regard to stockholders' equity. If at the time of the next scheduled periodic report the Company does not evidence compliance, it may be subject to notification of delisting. Significant Events: To facilitate an analysis of MSGI operating results, certain significant events should be considered. In March 2004, the Company completed the sale of substantially all of the assets relating to its telemarketing and teleservices business held by its wholly owned subsidiary, MKTG Teleservices, to SD&A Teleservices, Inc., a wholly owned subsidiary of the Robert W. Woodruff Arts Center, Inc. for approximately $2.5 million in cash and a note receivable for $0.3 million plus the assumption of certain directly related liabilities. As such, the operations and cash flows of MKTG Teleservices have been eliminated from ongoing operations and the Company no longer has continuing involvement in the operations. Accordingly, the statement of operations and cash flows for the period ended September 30, 2003 have been reclassified into a one-line presentation and is included in loss from discontinued operations and net cash used by discontinued operations. 13 In April 2004, the Company completed its purchase of 51% of the outstanding shares of the common stock of FDA for an aggregate purchase price of $1.0 million, pursuant to a definitive agreement entered into as of April 10, 2004. Further subject to the terms and conditions of the Stock Purchase Agreement, the Company may obtain up to an additional 25% beneficial ownership of FDA, if certain pre-tax income targets are not met by certain target dates as set forth in the Stock Purchase Agreement. In August 2004, the Company completed an acquisition of a 51% membership interest in Innalogic, LLC, for an aggregate capital contribution of $1,000,000. Further subject to the terms and conditions of an Investment Agreement, the Company issued an aggregate of 25,000 unregistered shares of its common stock to Innalogic. These shares were subsequently distributed to the founding members of Innalogic. In addition, the Company may issue, at its discretion, an aggregate of 50,000 options to purchase shares of common stock to the founding members of Innalogic, if certain pre-tax income targets are exceeded. The options will have an exercise price equal to the fair market value of the Company's common stock at the time of the grant of the options. The Company also issued 25,000 unregistered shares of common stock to certain advisors as compensation for services rendered in connection with the completion of this transaction. As set forth in Innalogic's Amended and Restated Limited Liability Company Agreement, the Company may obtain up to an additional 25% membership interest in Innalogic, if certain pre-tax income targets are not met by certain target dates. Results of Operations for the Three Months Ended September 30, 2004, Compared to - -------------------------------------------------------------------------------- the Three Months Ended September 30, 2003. - ------------------------------------------ The Company had revenue of approximately $0.1 million for the three months ended September 30, 2004 (the "Current Period") compared to no revenue during the three months ended September 30, 2003 (the "Prior Period"). Revenue increased due to the fact that the Company has undertaken new operations and revenue from all previously owned and operated businesses have been divested and are no longer reported as current operations. The Company had research and development costs of approximately $49,000 in the Current Period with no comparable expense in the Prior Period. The research and development costs related to the new operating subsidiaries which did not exist in the Prior Period. Salaries and benefits of approximately $0.3 million in the Current Period increased by approximately $0.2 million or 200% over salaries and benefits of approximately $0.1 million in the Prior Period. Salaries and benefits increased due to the addition of the two new operating subsidiaries offset by reductions in corporate salaries and benefits costs. Non cash compensation expenses of approximately $0.2 million in the Current Period are the result of the fair market value of common shares issued to the founding members of Innalogic by MSGI as part of the acquisition of a 51% membership in Innalogic. Selling, general and administrative expenses of approximately $0.5 million in the Current Period increased by approximately $0.3 million or 150% over comparable expenses of $0.2 million in the Prior Period. The increase is due primarily to the addition of selling general and administrative costs associated with the two new operating subsidiaries as well as by increases in various corporate professional fees, offset by reductions in corporate insurance costs and corporate salaries and benefits. The gain from termination of a lease of approximately $70,000 in the Current Period is the result of the early termination of the lease for an abandoned property. A final settlement payment of approximately $175,000 was paid in order to terminate the lease early against accrued costs of approximately $245,000. 14 The net provision for income taxes of $3,000 in the Current Period remained consistent with the Prior Period. The Company records provisions for state and local taxes incurred on taxable income or equity at the operating subsidiary level, which cannot be offset by losses incurred at the parent company level or other operating subsidiaries. The Company has recognized a full valuation allowance against the deferred tax assets because it is more likely than not that sufficient taxable income will not be generated during the carry forward period to utilize the deferred tax assets. As a result of the above, loss from continuing operations of approximately $0.7 million in the Current Period increased by approximately $0.4 million over comparable loss from continuing operations of $0.3 million in the Prior Period. The minority interests in subsidiaries of approximately $0.1 million in the Current Period represents the minority holdings in FDA. There were no such minority interests to report in the Prior Period. The loss from discontinued operations of $40,294 in the Current Period is the result of a settlement and legal expenses related to the settlement of certain legal matters pertaining to a discontinued operation (see Note 6). The gain from discontinued operations of approximately $416,000 in the Prior Period resulted from the telemarketing operations, which were sold in March 2004, as well as from reductions in certain loss reserves expensed in previous periods. As a result of the above, net loss of approximately $0.8 million in the Current Period increased by approximately $0.9 million over comparable net income of approximately $0.1 million in the Prior Period. Capital Resources and Liquidity Financial Reporting Release No. 61, which was released by the SEC, requires all companies to include a discussion to address, among other things, liquidity, off-balance sheet arrangements, contractual obligations and commercial commitments. The Company currently does not maintain any off-balance sheet arrangements. Leases: The Company leases various office space and equipment under non-cancelable long-term leases. The Company incurs all costs of insurance, maintenance and utilities. Future minimum rental commitments under all non-cancelable leases as of September 30, 2004 are as follows: Minimum Rent Expense 2005 306,400 2006 263,800 2007 240,000 2008 240,000 2009 240,000 Thereafter 260,000 ---------- $ 1,550,200 15 Debt: As a result of the sale of the operations of MKTG Teleservices in March 2004, the company no longer retains any short term borrowing facilities. The balance due at the closing of the sale transaction was paid in full at closing and the relationship with the credit provider was terminated. Liquidity: Historically, the Company has funded its operations, capital expenditures and acquisitions primarily through cash flows from operations, private placements of equity transactions, and its credit facilities. At September 30, 2004, the Company had cash and cash equivalents of $1.2 million and a working capital of $0.9 million. The Company recognized a net loss of approximately $0.8 million in the Current Period. Cash used in operating activities was approximately $1.3 million. Cash used in operating activities principally resulted from increases in accounts receivable, inventory as well as decreases in accounts payable and accrued liabilities. Cash used in operating activities in the Prior Period was $0.6 million. Cash provided by operating activities principally consists of a decrease in accrued liabilities. In the Current Period, net cash of $0.1 million was used in investing activities consisting of purchases of property and equipment. In the Prior Period, no cash was used in or provided by investing activities. In the Current Period, net cash of $0.3 million was provided by financing activities. Net cash provided by financing activities consisted primarily of proceeds from the issuance of Common Stock of $0.8 million offset by a repayment of a related party note payable of $0.5 million. In the Prior Period, net cash of $0.1 million was used in financing activities consisting of repayments of long-term debt and an increase in a related party receivable. In the Current Period net cash of $0.1 million was used in discontinued operations, while approximately $0.1 million was provided by discontinued operations in the Prior Period. While the Company has realized significant losses in past periods, it has most recently raised significant working capital through the unregistered sale of Common Stock and of Series F Convertible Preferred Stock (see Notes 4 and 12). In addition, the Company's subsidiary, Innalogic, has begun to realize revenue during the quarter ended September 30, 2004. The Company expects that both FDA and Innalogic will realize positive earnings during the current fiscal year. 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company believes that it does not have any material exposure to market risk associated with interest rate risk, foreign currency exchange rate risk, commodity price risk, equity price risk, or other market risks. Item 4. Controls and Procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including Jeremy Barbera, the Company's Chairman and Chief Executive Officer and Richard J. Mitchell III, the Company's Chief Accounting Officer, of the effectiveness of the Registrant's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934. Based on that evaluation, Mr. Barbera and Mr. Mitchell have concluded that the Company's disclosure controls and procedures as of September 30, 2004 were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission's rules and forms. There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 17 PART II- OTHER INFORMATION Item 1. Legal Proceedings. In May 2003, an action was filed in the State of California against a former subsidiary, MKTG Teleservices, Inc., by a former employee (Case No. BC 303297). The action alleged wrongful termination and harassment by a certain member of the former subsidiary's management. The action was settled in July 2004 and stipulations of dismissal with prejudice have been or will shortly be filed. A settlement payment in the amount of $35,000 by the Company has been recorded in the current quarter and is realized in gain / (loss) from discontinued operations. All legal fees pertaining to the matter have been realized in gain / (loss) from discontinued operations. Item 2. Changes in Securities and Use of Proceeds. In April 2004, the Company commenced a private placement offering (the "Stock Agreement") with certain strategic European investors to sell 250,000 unregistered shares of its common stock at a price of $8.00 per share. As of June 30, 2004, the Company had sold 225,000 shares. As of June 30, 2004, the Company had received gross proceeds of $1.2 million and has recorded a stock subscription receivable of $600,000 for stock subscriptions prior to June 30, 2004 for which payment was received in July 2004. Costs of $60,000 incurred relating to the placement have been offset against the proceeds and are reflected as a direct reduction of equity. The remaining 25,000 shares offered were sold in July 2004 for gross proceeds of $200,000. Subject to the terms of the Stock Agreement entered into during the fiscal year ended June 2004, the Company committed to issue warrants for the purchase of up to 150,000 shares of the Company's common stock at a price of $12.00 per share. As of June 30, 2004, the Company had issued warrants for the purchase of 135,000 of the 150,000 shares offered. The remaining 25,000 warrants were issued in July 2004. Item 6. Exhibits (a) Exhibits 31.1 Rule 13a-14(a)/15d-14(a) Certification. 31.2 Rule 13a-14(a)/15d-14(a) Certification. 32.1 Section 1350 Certification. 32.2 Section 1350 Certification. - -------------------------------------------------- 18 SIGNATURES Pursuant to the requirements of the Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEDIA SERVICES GROUP, INC. (Registrant) Date: November 15, 2004 By: /s/ J. Jeremy Barbera ----------------------------- J. Jeremy Barbera Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By: /s/ Richard J. Mitchell III ----------------------------- Richard J. Mitchell III Chief Accounting Officer (Principal Financial Officer) 19 Exhibit 31.1 CERTIFICATION I, J. Jeremy Barbera, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 302 of the Sarbanes-Oxley Act of 2002, that: (1) I have reviewed this quarterly report on Form 10-Q of Media Services Group, Inc.; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in al material respects the financial condition, results of operations and cash flows of registrant as of, and for, the periods presented in this quarterly report; and (4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Intentionally omitted. (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 15, 2004 By: /s/ J. Jeremy Barbera ----------------------------- J. Jeremy Barbera Chairman of the Board and Chief Executive Officer (Principal Executive Officer) 20 Exhibit 31.2 CERTIFICATION I, Richard J. Mitchell III, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 302 of the Sarbanes-Oxley Act of 2002, that: (1) I have reviewed this quarterly report on Form 10-Q of Media Services Group, Inc.; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in al material respects the financial condition, results of operations and cash flows of registrant as of, and for, the periods presented in this quarterly report; and (4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Intentionally omitted. (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 15, 2004 By: /s/ Richard J. Mitchell III ---------------------------- Richard J. Mitchell III Chief Accounting Officer (Principal Financial Officer) 21 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U. S. C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Media Services Group, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, J. Jeremy Barbera, as Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934: and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 15, 2004 By: /s/ J. Jeremy Barbera ----------------------------- J. Jeremy Barbera Chairman of the Board and Chief Executive Officer (Principal Executive Officer) This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 22 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U. S. C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Media Services Group, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard J. Mitchell III, as Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934: and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 15, 2004 By: /s/ Richard J. Mitchell III --------------------------- Richard J. Mitchell III Chief Accounting Officer (Principal Financial Officer) This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 23 -----END PRIVACY-ENHANCED MESSAGE-----