-----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, F/DBABj/e4Fw8O5GwA1EUfel+xlPdebYtbtXhwww22ss2NIM7SKGOVZdF3aFeNxZ kpb6aDNwzxjHKTxndyGZGQ== 0001025621-04-000016.txt : 20040517 0001025621-04-000016.hdr.sgml : 20040517 20040517160043 ACCESSION NUMBER: 0001025621-04-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20040514 FILED AS OF DATE: 20040517 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: 04812432 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 march0410qtxt.txt MSGI MARCH04 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 March 31, 2004 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 0-16730 MEDIA SERVICES GROUP, INC. (Exact Name of Registrant as Specified in Its Charter) Nevada 88-0085608 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 575 Madison Avenue, 10th Floor New York, New York 10022 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (917) 339-7134 -------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ---- ---- APPLICABLE ONLY TO CORPORATE ISSUERS State number of shares outstanding of each of the issuer's classes of common equity as of the latest practical date: As of May 14, 2004 there were 1,296,262 shares of the Issuer's Common Stock, par value $.01 per share outstanding. 1 MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES TABLE OF CONTENTS FORM 10-Q REPORT MARCH 31, 2004 Page ---- PART I - FINANCIAL INFORMATION Item 1 Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2004 (unaudited) and June 30, 2003 3 Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2004 and 2003 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2004 and 2003 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6-9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 11-15 Item 3 Quantitative and Qualitative Disclosure About Market Risk 16 Item 4 Controls and Procedures 16 PART II - OTHER INFORMATION Item 1 Legal Proceedings 17 Item 4 Submission of Matters to a Vote of Security Holders 17 Item 6 Exhibits and Reports on Form 8-K 17 Signatures 18 2 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2004 June 30, 2003 ----------------- -------------- (unaudited) (1) ASSETS Current assets: Cash and cash equivalents $ 1,445,063 $ 660,742 Other current assets 623,508 451,548 Current assets of discontinued operations -- 2,396,062 ------------- ------------- Total current assets 2,068,571 3,508,352 Related party note receivable 1,102,374 1,050,309 Other assets 12,000 12,000 Assets of discontinued operations -- 3,076,859 ------------- ------------- Total assets $ 3,182,945 $ 7,647,520 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable-trade $ 449,007 $ 288,631 Accrued expenses and other current liabilities 592,129 1,365,751 Current portion of long-term obligations 1,008 201,062 Current liabilites of discontinued operations -- 940,338 ------------- ------------- Total current liabilities 1,042,144 2,795,782 Other liabilities 1,100,548 1,463,132 ------------- ------------- Total liabilities 2,142,692 4,258,914 ------------- ------------- Minority interest in preferred stock of discontinued subsidiary -- 280,946 Stockholders' equity: Common stock - $.01 par value; 9,375,000 shares authorized; 1,101,198 shares issued and 1,092,367 shares outstanding as of March 31, 2004 and June 30, 2003 11,011 11,011 Additional paid-in-capital 220,539,182 220,258,236 Accumulated deficit (218,116,230) (215,767,877) Less: 8,831 shares of common stock in treasury, at cost (1,393,710) (1,393,710) ------------- ------------- Total stockholders' equity 1,040,253 3,107,660 ------------- ------------- Total liabilities and stockholders' equity $ 3,182,945 $ 7,647,520 ============= =============
(1) Derived from the Audited Financial Statements for the year ended June 30, 2003. See Notes to Condensed Consolidated Financial Statements. 3 MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2004 AND 2003 (unaudited)
Three Months Ended Nine Months Ended March 31, March 31, ------------------------- -------------------------- 2004 2003 2004 2003 ----------- ----------- ----------- ------------ Revenues $ -- $ -- $ -- $ -- ----------- ----------- ----------- ------------ Operating costs and expenses: Salaries and benefits 91,808 221,900 262,707 629,034 Selling, general and administrative 261,366 252,849 873,566 805,184 Gain on termination of lease -- -- -- (3,905,387) ----------- ----------- ----------- ------------ Total operating costs and expenses 353,174 474,749 1,136,273 (2,471,169) ----------- ----------- ----------- ------------ Income (loss) from operations (353,174) (474,749) (1,136,273) 2,471,169 Settlement of lawsuit -- -- -- 965,486 Interest income (expense) and other, net 17,405 16,638 32,574 44,481 ----------- ----------- ----------- ------------ Income (loss) from continuing operations before provision for income taxes (335,769) (458,111) (1,103,699) 3,481,136 Provision for income taxes (23,229) (11,384) (29,229) (42,194) ----------- ----------- ----------- ------------ Income (loss) from continuing operations (358,998) (469,495) (1,132,928) 3,438,942 Discontinued operations: Gain (loss) from discontinued operations (1,209,577) 135,782 (234,409) (862,436) (Loss) gain from disposal of discontinued operations (981,016) (69,309) (981,016) (185,944) ----------- ----------- ----------- ------------ Gain (loss) from discontinued operations (2,190,593) 66,473 (1,215,425) (1,048,380) ----------- ----------- ----------- ------------ Cumulative effect of change in accounting principle -- -- -- (5,075,000) ----------- ----------- ----------- ------------ Net loss (2,549,591) (403,022) (2,348,353) (2,684,438) Gain on redemption of preferred stock -- 13,970,813 280,946 13,970,813 ------------ ---------- ----------- ----------- Net income (loss) attributable to common shareholders $(2,549,591) $13,567,791 $ (2,067,407) $ 11,286,375 =========== =========== ============ ============= Basic earnings (loss) per share Continuing operations $ (0.33) $ 12.43 $ (1.04) $ 17.97 Discontinued operations (2.00) 0.06 (.85) (1.08) Cumulative effect of change in accounting principles -- -- -- (5.24) ----------- ----------- ----------- ------------ Basic earnings (loss) per share $ (2.33) $ 12.49 $ (1.89) $ 11.65 =========== =========== =========== ============ Weighted average common shares outstanding 1,092,367 1,086,323 1,092,367 968,631 =========== =========== =========== ============ Diluted earnings (loss) per share: Continuing operations $ (0.33) $ 10.98 $ (1.04) $ 15.38 Discontinued operations (2.00) 0.05 (.85) (0.93) Cumulative effect of change in accounting principle -- -- -- (4.48) ----------- ----------- ----------- ------------ Diluted earnings (loss) per share $ (2.33) $ 11.03 $ (1.89) $ 9.97 =========== =========== =========== ============ Weighted average common shares outstanding 1,092,367 1,229,807 1,092,367 1,131,613 =========== =========== =========== ============
See Notes to Condensed Consolidated Financial Statements. 4 MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND 2003 (unaudited)
2004 2003 ----------- ------------ Operating activities: Net loss $(2,348,353) $ (2,684,438) Loss from discontinued operations 1,215,425 1,048,380 Cumulative effect of change in accounting principle -- 5,075,000 ----------- ------------ Income (loss) from continuing operations (1,132,928) 3,438,942 Adjustments to reconcile loss to net cash used in operating activities: Gain on termination of lease -- (3,905,387) Accrued interest on related party note receivable (52,065) (54,420) Changes in assets and liabilities: Other current assets (171,960) (660,449) Other assets -- 313,629 Accounts payable - trade 160,376 (512,120) Accrued expenses and other liabilities (288,100) (3,016,554) ----------- ------------ Net cash used in operating activities (1,484,677) (4,396,359) ----------- ------------ Investing activities: Proceeds from sale of discontinued operations, net of fees 2,834,388 8,546,182 Decrease in restricted cash -- 4,945,874 ----------- ------------ Net cash provided by investing activities 2,834,388 13,492,056 ----------- ------------ Financing activities: Redemption of preferred stock -- (6,021,840) Expenditures from private placement of preferred stock -- (29,756) Net (repayments on) proceeds from credit facilities -- (1,158,417) Repayments of long-term debt (200,054) (4,763,487) ----------- ------------ Net cash used in financing activities (200,054) (11,973,500) ----------- ------------ Net cash used in discontinued operations (365,336) (191,080) ----------- ------------ Net increase in cash and cash equivalents 784,321 (3,068,883) Cash and cash equivalents at beginning of period 660,742 3,802,218 ----------- ------------ Cash and cash equivalents at end of period $ 1,445,063 $ 733,335 =========== ============
See Notes to Condensed Consolidated Financial Statements 5 MEDIA SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Media Services Group, Inc. and Subsidiaries ("MSGI" or the "Company"). These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company's Form 10-K for the year ended June 30, 2003 and the historical consolidated financial statements and related notes included therein. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary to present fairly the condensed consolidated financial position, results of operations and cash flows of the Company. Certain information and footnote disclosure normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. Operating results for the three and nine-month periods ended March 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2004. The Company has limited capital resources and has incurred significant historical losses and negative cash flows from operations. As explained in Note 5, the Company recently sold off substantially all the assets relating to its telemarketing and telesales, direct list sales and database services and website development and design business held by certain of its wholly owned subsidiaries. In addition, the Company has instituted cost reduction measures, including the reduction of workforce. The Company intends to invest the proceeds from the recent sale of assets into new ventures And operations. Failure of any of the acquired ventures and operations to generate such sufficient future cash flow could have a material adverse effect on the Company's ability to continue as a going concern and to achieve its business objectives. The accompanying financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result should the Company be unable to continue as a going concern. Effective December 29, 2003, the Company changed its legal name from MKTG Services, Inc. to Media Services Group, Inc. 2. EARNINGS PER SHARE Common share equivalents included in weighted average shares outstanding- diluted for the three and nine months ending March 31, 2004 is as follows:
Three Nine Months Months --------- --------- Weighted average common shares outstanding- basic 1,092,367 1,092,367 Common stock equivalents for options and warrants 245,417 233,727 --------- --------- Weighted average common shares outstanding- diluted 1,337,784 1,326,094 ========= =========
6 3. STOCK BASED COMPENSATION The accompanying financial position and results of operations for the Company have been prepared in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Under APB No. 25, generally, no compensation expense is recognized in the financial statements in connection with the awarding of stock option grants to employees provided that, as of the grant date, the number of shares and the exercise price of the award are fixed and the fair value of the Company's stock, as of the grant date, is equal to or less than the amount an employee must pay to acquire the stock. The Company has elected the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Stock based awards to non-employees are accounted for under the provisions of SFAS 123. Had the Company determined compensation cost based on the fair value methodology of SFAS 123 at the grant date for its stock options, the Company's loss and earnings per share from continuing operations would have been adjusted to the pro forma amounts indicated below:
Three months ended March 31, Nine months ended March 31, 2004 2003 2004 2003 ---- ---- ---- ---- Net income (loss) available to common stockholders as reported $(2,549,591) $13,567,791 $(2,067,407) $11,286,375 Stock based-compensation recorded - - - - -------- ------------ --------- ------------ Subtotal (2,549,591) 13,567,791 (2,067,407) 11,286,375 Stock-based compensation recorded under SFAS 123 (4,823) (182,151) (4,823) (910,753) -------- ------------ --------- ------------ Pro forma net income (loss) available to common stockholders $(2,554,414) $13,385,640 $(2,072,230) $10,375,622 ======== ============ ========= ============= Earnings (loss) per share: Basic earnings (loss) per share - as reported $(2.33) $12.49 $(1.89) $11.65 ====== ====== ====== ======== Basic earnings (loss) per share - pro forma $(2.34) $12.32 $(1.90) $10.71 ====== ====== ====== ======== Diluted earnings (loss) per share - as reported $(2.33) $11.03 $(1.89) $9.97 ====== ====== ====== ======== Diluted earning (loss) per share - pro forma $(2.34) $10.88 $(1.90) $9.17 ====== ====== ====== ========
On March 24, 2004, the Company granted 225,000 stock options to members of management of the Company. These options were granted at an exercise price equal to the market price on date of grant, do not begin to vest until September 2004 and vest ratably over a three year period. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. Pro forma compensation costs for stock options under SFAS No. 123 is recognized over the service period. Previously recognized pro forma compensation cost is not to be reversed if a vested employee option expires unexercised. The Company stops recognizing pro forma compensation cost when an option expires. 7 4. DEBT At March 31, 2004, the Company retired all outstanding balances on its line of credit facility. The Company subsequently terminated its relationship with the credit provider. 5. DISCONTINUED OPERATIONS In March 2004, the Company completed its sale of substantially all the assets relating to its telemarketing and telesales services business held by its wholly owned subsidiary MKTG Teleservices, Inc. to SD&A Teleservices, Inc. (SD&A) a wholly owned subsidiary of the Robert W. Woodruff Arts Center, Inc. for approximately $3.3 million in cash plus the assumption of certain related liabilities, subject to a final working capital adjustment. As such, the operations and cash flows of the telemarketing and telefunding business have been eliminated from ongoing operations and the Company no longer has continuing involvement in the operations. In December 2002, the Company completed its sale of substantially all the assets relating to its direct list sales and database services and website development and design business held by certain of its wholly owned subsidiaries (the "Northeast Operations") to Automation Research, Inc. ("ARI"), a wholly owned subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash plus the assumption of all directly related liabilities. As such, the operations and cash flows of the Northeast Operations have been eliminated from ongoing operations and the Company no longer has continuing involvement in the operations. Accordingly, the statement of operations and cash flows for the period ended March 31, 2003 have been reclassified into a one-line presentation and is included in loss from discontinued operations and net cash used by discontinued operations. 6. GOODWILL AND OTHER INTANGIBLE ASSETS As a result of the adoption of SFAS No. 142, the Company discontinued the amortization of goodwill effective July 1, 2002. The Company recognized an impairment charge of approximately $5.1 million in connection with the adoption of SFAS No. 142. The impairment charge has been booked by the Company in accordance with SFAS 142 transition provisions as a cumulative effect of change in accounting principle for the period ended September 30, 2003. In connection with the sale of the Northeast Operations and the telemarketing and telesales operations, the company had no remaining operations as of March 31, 2004 and all related goodwill was written off as part of the sales. The company has sold off all remaining intangible assets as a result of the sale of the telemarketing and telefunding business. There are no remaining intangible assets subject to amortization as of March 31, 2004. 8 7. CONTINGENCIES AND LITIGATION In December 2001, an action was filed by a number of purchasers of preferred stock of WiredEmpire, Inc., a discontinued subsidiary, in the Alabama State Court (Circuit Court of Jefferson County, Alabama, 10 Judicial Circuit of Alabama, Birmingham Division), against J. Jeremy Barbera, Chairman of the Board and Chief Executive Officer of MSGI, MSGI and WiredEmpire, Inc. The plaintiffs' complaint alleges, among other things, violation of sections 8-6-19(a)(2) and 8-6-19(c) of the Alabama Securities Act and various other provisions of Alabama state law and common law, arising from the plaintiffs' acquisition of WiredEmpire Preferred Series A stock in a private placement. The plaintiffs invested approximately $1,650,000 in WiredEmpire's preferred stock and they were seeking that amount, attorney's fees and punitive damages. On February 8, 2002, the defendants filed a petition to remove the action to federal court on the grounds of diversity of citizenship. In December 2003, action was settled, and stipulations of dismissal with prejudice have been or will shortly be filed. In December 2000, an action was filed by Red Mountain, LLP in the United States Court for the Northern District of Alabama, Southern Division against J. Jeremy Barbera, Chairman of the Board and Chief Executive Officer of Media Services Group, Inc., and WiredEmpire, Inc. Red Mountains' complaint alleges, among other things, violations of Section 12(2) of the Securities Act of 1933, Section 10(b) of the Securities Act of 1934 and Rule 10(b)(5) promulgated thereunder, and various provisions of Alabama state law and common law, arising from Red Mountain's acquisition of WiredEmpire Preferred Series A stock in a private placement. Red Mountain invested $225,000 in WiredEmpire's preferred stock and it seeks that amount, attorney's fees and punitive damages. In December 2003,the action was settled, and stipulations of dismissal with prejudice have been or will shortly be filed. As a result of the settlement of the two actions, the Company reversed reserves of approximately $760,860 that had been accrued in connection with such lawsuits for the period ended December 31, 2003. In 1999 a lawsuit under Section 16(b) of the Securities Exchange Act of 1934 was commenced against General Electric Capital Corporation ("GECC") by Mark Levy, derivatively on behalf of the Company, to recover short swing profits allegedly obtained by GECC in connection with the purchase and sale of MSGI securities. On April 29, 2002, the court approved the settlement for $1,250,000, net of attorney fees plus reimbursement of mailing costs. In July 2002, the court ruling became final and the Company received and recorded the net settlement payment of $965,486 plus reimbursement of mailing costs. The net settlement has been recorded as a gain from settlement of lawsuit and is included in the statement of operations for the nine months ended March 31, 2003. 8. PREFERRED STOCK In connection with the settlement of the lawsuits (see Note 7) against Wired Empire, Inc., a discontinued subsidiary, 32,000 of the remaining 48,000 shares of Wired Empire preferred stock have been returned to MSGI and cancelled. 9. SUBSEQUENT EVENTS On April 10, 2004, Media Services Group, Inc. (the "Company") completed its purchase of 51% of the outstanding shares of the common stock of Future Developments America, Inc. ("FDA"), for an aggregate purchase price of $1.0 million, pursuant to a definitive agreement entered into as of April 10, 2004. Further subject to the terms and conditions of the Stock Purchase Agreement, the Company may obtain up to an additional 25% beneficial ownership of FDA, if certain pre-tax income targets are not met by certain target dates as set forth in the Stock Purchase Agreement. The purchase price is to be paid out of the proceeds of the Company's recent disposition of its telemarketing and telefunding business and was determined through arms-length negotiations between FDA and the Company. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Special Note Regarding Forward-Looking Statements - ------------------------------------------------- Some of the statements contained in this Report on Form 10-Q discuss our plans and strategies for our business or state other forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Media Services Group, Inc. ("MSGI" or the "Company"), or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; industry capacity; industry trends; demographic changes; competition; the loss of any significant customers; changes in business strategy or development plans; availability and successful integration of acquisition candidates; availability, terms and deployment of capital; advances in technology; retention of clients not under long-term contract; quality of management; business abilities and judgment of personnel; availability of qualified personnel; changes in, or the failure to comply with, government regulations; and technology, telecommunication and postal costs. Introduction - ------------ This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flows of the Company for the three-month and nine-month periods ended March 31, 2004 and 2003. This should be read in conjunction with the financial statements, and notes thereto, included in this Report on Form 10-Q and the Company's financial statements and notes thereto, included in the Company's Annual Report on Form 10-K for the year ended June 30, 2003. Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. The following is a brief description of the more significant accounting policies and methods used by the Company. Revenue Recognition: Revenues derived from on-site telemarketing and telefundraising are generally based on hourly billing rates and a mutually agreed percentage of amounts received by the Company's client from a campaign. These services are performed on-site at the clients' location. These revenues are earned and recognized when the cash is received by the respective client. Revenues derived from off-site telemarketing and telefundraising are generally based on a mutually agreed amount per telephone contact with a potential donor without regard to amounts raised for the client. These services are performed at the Company's calling center. These revenues are earned and recognized when the services are performed. As of March 31, 2004, there were no revenue generating operations remaining within Media Services Group, Inc. as a result of the sale of substantially all of the assets related to its telemarketing and telesales business held by its wholly owned subsidiary, MKTG Teleservices, Inc. 10 Goodwill: Under Statement of Financial Accounting Standards ("SFAS"), No. 142, "Goodwill and Other Intangible Assets", goodwill is no longer amortized. The Company recognized an impairment charge of approximately $5.1 million in connection with the adoption of SFAS No. 142. The impairment charge has been booked by the Company in accordance with SFAS 142 transition provisions as a cumulative effect of change in accounting principle for the period ended March 31, 2003. In connection with the sale of the Northeast Operations and the telemarketing and telefunding business, the are no remaining reporting units. The company has written off all remaining goodwill balances as part of the sale. Long-Lived Assets: In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, the Company will recognize an impairment when the sum of undiscounted future cash flows (without interest charges) is less than the carrying amount of such assets. The measurement for such impairment loss is based on the fair value of the asset. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates and assumptions made in the preparation of the consolidated financial statements relate to the carrying amount and amortization of intangible assets, deferred tax valuation allowance, abandoned lease reserves and the allowance for doubtful accounts. Actual results could differ from those estimates. Recent Accounting Pronouncements: There were no new accounting pronouncements during the period that would have an effect on the Company. Significant Events: To facilitate an analysis of MSGI operating results, certain significant events should be considered. In March 2004, the Company completed its sale of substantially all the assets relating to its telemarketing and telesales services business held by its wholly owned subsidiary MKTG Teleservices, Inc. to SD&A Teleservices, Inc. (SD&A) a wholly owned subsidiary of the Robert W. Woodruff Arts Center, Inc. for approximately $3.3 million in cash plus the assumption of certain related liabilities, subject to a final working capital adjustment. As such, the operations and cash flows of the telemarketing and telefunding business have been eliminated from ongoing operations and the Company no longer has continuing involvement in the operations. Accordingly, the statement of operations and cash flows for the period ended March 31, 2003 have been reclassified into a one-line presentation and is included in loss from discontinued operations and net cash used by discontinued operations. 11 In December 2002, the Company completed its sale of substantially all the assets relating to its direct list sales and database services and website development and design business held by certain of its wholly owned subsidiaries (the "Northeast Operations") to Automation Research, Inc. ("ARI"), a wholly owned subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash plus the assumption of all directly related liabilities. As such, the operations and cash flows of the Northeast Operations have been eliminated from ongoing operations and the Company no longer has continuing involvement in the operations. Accordingly, the statement of operations and cash flows for the period ended March 31, 2003 has been reclassified into a one-line presentation and is included in Loss from Discontinued Operations and Net Cash Used by Discontinued Operations. Results of Operations for the Three Months Ended March 31, 2004, Compared to - -------------------------------------------------------------------------------- the Three Months Ended March 31, 2003. - ------------------------------------------ There are currently no reportable revenues for the company as a result of the sale of the Northeast Operations and the telemarketing and telefunding business. All revenues reported in prior periods have been reclassified into a one-line presentation and is included in loss from discontinued operations and net cash used by discontinued operations. Revenue of the discontinued operations was approximately $3.2 million the quarter ended March 31, 2004 ("Current Quarter") compared to approximately $3.5 million for the quarter ended March 31, 2003 ("Prior Quarter"). Salaries and benefits of approximately $92,000 in the Current Quarter decreased by approximately $131,000 or 59% over salaries and benefits of approximately $223,000 in the Prior Quarter. Salaries and benefits decreased due to a reduction in corporate headcount, as well as a reduction in certain executive compensation. Selling, general and administrative expenses of approximately $262,000 in the Current Quarter increased by approximately $9,000 or 4% over comparable expenses of $253,000 in the Prior Quarter. The increase is due primarily to an increase in travel related expenses, offset by reductions in other expenses such as legal fees, accounting fees, regulatory filing fees and supplies. Net interest income of approximately $17,000 in the Current Quarter is in line with the net interest income of approximately $17,000 in the Prior Quarter. The net provision for income taxes of approximately $23,000 in the Current Quarter increased by approximately $12,000 over the provision of approximately $11,000 in the Prior Quarter. The Company records provisions for state and local taxes incurred on taxable income or equity at the operating subsidiary level, which cannot be offset by losses incurred at the parent company level or other operating subsidiaries. The Company has recognized a full valuation allowance against the deferred tax assets because it is more likely than not that sufficient taxable income will not be generated during the carry forward period to utilize the deferred tax assets. As a result of the above, a loss from continuing operations of approximately $359,000 in the Current Quarter decreased by approximately $112,000 over comparable loss from continuing operations of $471,000 in the Prior Quarter. 12 The loss from discontinued operations of approximately $2.2 million in the Current Quarter is the result of the sale of the telemarketing and telefunding business. The gain from discontinued operations of approximately $68,000 in the Prior Quarter is the result of the reclassification of prior period results of the operations of the telemarketing and telefunding business. In connection with the sale of the telemarketing and telefunding business, the Company incurred a loss on disposal of discontinued operations of approximately $1.0 million in the three months ended March 31, 2004. The loss represents the difference in the net book value of assets and liabilities as of the date of the sale as compared to the net consideration received after settlement of purchase price adjustments. In the Prior Period the Company recognized a gain on redemption of preferred stock of approximately $14.0 million and is reflected in net income attributable to common stockholders. The gain is a result of the difference between the consideration paid for redemption of the preferred stock of approximately $6.0 million cash and the issuance of 181,302 shares of common stock valued at approximately $.2 million and the carrying value of the preferred stock which was approximately $20.2 million which included a beneficial conversion feature of approximately $10.3 million. As a result of the above, net losses of approximately $2.5 million in the Current Quarter increased by approximately $16.1 million over comparable net income of approximately $13.6 million in the Prior Quarter. Results of Operations for the Nine Months Ended March 31, 2004, Compared to - -------------------------------------------------------------------------------- the Nine Months Ended March 31, 2003. - ------------------------------------------ There are currently no reportable revenues for the company as a result of the sale of the Northeast Operations and the telemarketing and telefunding business. All revenues reported in prior periods have been reclassified into a one-line presentation and is included in loss from discontinued operations and net cash used by discontinued operations. Revenue included in discontinued operations was approximately $9.5 million for the period ended March 31, 2004 ("Current Period")compared to approximately $11.2 million in the period ended March 31, 2003 ("Prior Period"). Salaries and benefits of approximately $263,000 in the Current Period decreased by approximately $366,000 or 58% over salaries and benefits of approximately $629,000 in the Prior Period. Salaries and benefits decreased due to a reduction in corporate headcount, as well as a reduction in certain executive compensation. Selling, general and administrative expenses of approximately $874,000 in the Current Period increased by approximately $69,000 or 9% over comparable expenses of $805,000 in the Prior Period. The increase is due primarily to an increases in travel related expenses, consulting fees and investor relations expenses, offset by reductions in other expenses such as legal fees, insurances and other miscellaneous expenses. 13 During the Prior Period ending March 31, 2003, the Company recognized a gain on a settlement of a lawsuit. In 1999, a lawsuit under Section 16(b) of the Securities Exchange Act of 1934 was commenced against General Electric Capital Corporation ("GECC") by Mark Levy, derivatively on behalf of the Company, to recover short swing profits allegedly obtained by GECC in connection with the purchase and sale of MSGI securities. On April 29, 2002, the court approved the settlement for $1,250,000, net of attorney fees plus reimbursement of mailing costs. In July 2002, the court ruling became final and the Company received and recorded the net settlement payment of $965,486 plus reimbursement of mailing costs. Net interest income of approximately $33,000 in the Current Period decreased by approximately $11,000 or 25% over net interest income of approximately $44,000 in the Prior Period. The decrease is due primarily to the reduction in interest income earned on cash balances and short term investment vehicles. The net provision for income taxes of approximately $29,000 in the Current Period decreased by approximately $13,000 over the provision of approximately $42,000 in the Prior Period. The Company records provisions for state and local taxes incurred on taxable income or equity at the operating subsidiary level, which cannot be offset by losses incurred at the parent company level or other operating subsidiaries. The Company has recognized a full valuation allowance against the deferred tax assets because it is more likely than not that sufficient taxable income will not be generated during the carry forward period to utilize the deferred tax assets. As a result of the above, loss from continuing operations of approximately $1.1 million in the Current Period decreased by approximately $4.5 million over comparable income from continuing operations of $3.4 million in the Prior Period. The loss from discontinued operations of approximately $1.2 million in the Current Period is the result of the sale of the telemarketing and telefunding business. The loss from discontinued operations of approximately $1.0 million in the Prior Period resulted from the sale of the Northeast Operations during the fiscal year 2003. The loss from cumulative effect of change in accounting principle of approximately $5.1 million in the Prior Period was the result of the adoption of SFAS 142 relating to Goodwill. In the Current Period the company realized a gain on redemption of preferred stock Of approximately $281,000. In connection with the settlement of the lawsuits (see Note 7) against WiredEmpire, Inc., a discontinued subsidiary, the remaining preferred shares of Wired Empire preferred stock have been cancelled. In the Prior Period the Company recognized a gain on redemption of preferred stock of approximately $14.0 million and is reflected in net income attributable to common stockholders. The gain is a result of the difference between the consideration paid for redemption of the preferred stock of approximately $6.0 million cash and the issuance of 181,302 shares of common stock valued at approximately $.2 million and the carrying value of the preferred stock which was approximately $20.2 million which included a beneficial conversion feature of approximately $10.3 million. As a result of the above, the net loss of approximately $2.1 million in the Current Period increased by approximately $13.4 million over comparable net income of approximately $11.3 million in the Prior Period. 14 Capital Resources and Liquidity - ------------------------------- Financial Reporting Release No. 61, which was released by the SEC, requires all companies to include a discussion to address, among other things, liquidity, off-balance sheet arrangements, contractual obligations and commercial commitments. The Company currently does not maintain any off-balance sheet arrangements. Leases: The Company leases various office space and equipment under non-cancelable long-term leases. The Company incurs all costs of insurance, maintenance and utilities. Future minimum rental commitments under all non-cancelable leases, net of non-cancelable subleases, as of March 31, 2004 are as follows: Rent Expense Less: Sublease Income Net Rent Expense ----------- -------------------- ---------------- 2004 $ 210,000 $ (20,000) $ 190,000 2005 428,000 (45,000) 383,000 2006 240,000 - 240,000 2007 240,000 - 240,000 2008 240,000 - 240,000 Thereafter 520,000 - 520,000 ------------ ---------- ----------- $ 1,878,00 $ (65,00) $ 1,813,000 =========== =========== =========== Debt: At March 31, 2004, the Company retired all outstanding balances on its line of credit facility. The Company subsequently terminated its relationship with the credit provider. Liquidity: Historically, the Company has funded its operations, capital expenditures and acquisitions primarily through cash flows from operations, private placements of equity transactions, and its credit facilities. At March 31, 2004, the Company had cash and cash equivalents of $1.4 million and a working capital of $1.0 million. The Company recognized a net loss of approximately $2.3 million in the Current Period. Cash used by operating activities from operations was approximately $1.5 million. Net cash used by operating activities principally resulted from the net loss from continuing operations of approximately $359,00 combined with the decrease in accrued expenses and increases in other assets offset by increases in accounts payable. Cash used by operating activities in the Prior Period was approximately $4.4 million. In the Current Period, net cash of approximately $2.8 million came from investing activities consisting of the sale of the telemarketing and telefunding business. In the Prior Period, net cash of approximately $13.4 million came from investing activities consisting of proceeds from the sale of discontinued operations of approximately $8.5 million combined with a reduction in restricted cash of approximately $4.9 million. 15 In the Current Period, net cash of approximately $200,000 was used in financing activities. Net cash used in financing activities consisted of repayments of notes payable. In the Prior Period, net cash of approximately $12.0 million was used in financing activities consisting of repayments of long-term debt and credit facilities of $6.0 million and a redemption of preferred stock of $6.0 million. In the Current Period net cash of approximately $365,000 was used in discontinued Operations. In the Prior Period net cash of approximately $191,000 was provided by discontinued Operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company is subject to market risks in the ordinary course of its business, primarily risks associated with interest rate fluctuations. Historically, fluctuations in interest rates have not had a significant impact on the Company's operating results. At March 31, 2004, the Company had no variable rate indebtedness outstanding. Item 4. Controls and Procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including Jeremy Barbera, the Company's Chairman, Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the Registrant's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934. Based on that evaluation, Mr. Barbera has concluded that the Company's disclosure controls and procedures as of March 31, 2004 were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission's rules and forms. There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 16 PART II- OTHER INFORMATION Item 1. Legal Proceedings. Two actions brought by purchasers of the preferred stock of WiredEmpire, Inc. against the Company, J. Jeremy Barbera, the Company's Chairman of the Board and Chief Executive Officer, and WiredEmpire, Inc. alleging violations of federal and Alabama state securities laws have been resolved. These actions, Red Mountain, LLP v. Barbera et al., Case No. CV-00-B3068-S, and Weeks et al. v. Barbera et al., Case No. CV-01-7633, were pending in the United States District Court for the Northern District of Alabama. Each of these has been settled, and stipulations of dismissal with prejudice have been or will shortly be filed. Item 4. Submission of Matters to a Vote of Securities Holders On February 25, 2004 an annual meeting of the shareholders of Media Services Group, Inc. Occurred for the years ended June 30, 2002 and 2003 and a vote was held regarding the proposed elections of Mr. Seymour Jones as a Class II Director and of Mr. J Jeremy Barbera as a Class III Director. Quorum was reached and the proposals were passed by successful vote. Total votes submitted for proposal 1 numbered 627,241 with 444,186 in favor and 183,055 opposed. Total votes submitted for proposal 2 numbered 627,241 with 440,414 in favor and 186,828 opposed. On December 24, 2003 a special meeting of the shareholders of Media Services Group, Inc. occurred and a vote by proxy was held regarding the proposed change of name from MKTG Services, Inc. to Media Services Group, Inc. and approval of the related amendment to the Articles of Incorporation. Quorum was reached and the proposal was passed by successful vote. Total votes submitted numbered 1,013,776 with 1,008,008 in favor, 2,930 opposed and 2,838 abstaining. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 31.1 Certification By The Chief Executive Officer Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002 31.2 Certification.(a) By The Chief Accounting Officer Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002 32.1 Certification of The Chief Executive Officer Pursuant to 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of The Chief Accounting Officer Pursuant to 18. U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K ------------------- 1. On or about August 12, 2003, the Company filed a current report on form 8-K regarding a change in the Company's certifying accountants. 2. On or about September 24, 2003, the Company filed an amended current report on form 8-K/A regarding an addition to the exhibits filed with the current report on form 8-K dated August 12, 2003. 17 SIGNATURES Pursuant to the requirements of the Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEDIA SERVICES GROUP, INC. (Registrant) Date: May 17, 2004 /s/ J. Jeremy Barbera --------------------- J. Jeremy Barbera Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: May 17, 2004 /s/ Richard J. Mitchell III --------------------------- Richard J. Mitchell III Chief Accounting Officer (Principal Financial Officer) 18 Exhibit 31.1 CERTIFICATION I, J. Jeremy Barbera, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.302 of the Sarbanes-Oxley Act of 2002, that: (1) I have reviewed this quarterly report on Form 10-Q of Media Services Group, Inc.; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in al material respects the financial condition, results of operations and cash flows of registrant as of, and for, the periods presented in this quarterly report; and (4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Intentionally omitted. (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and 19 (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 17, 2004 /s/ J. Jeremy Barbera --------------------- J. Jeremy Barbera Chairman of the Board and Chief Executive Officer (Principal Executive Officer) 20 Exhibit 31.2 CERTIFICATION I, Richard J. Mitchell III , certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.302 of the Sarbanes-Oxley Act of 2002, that: (1) I have reviewed this quarterly report on Form 10-Q of Media Services Group, Inc.; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in al material respects the financial condition, results of operations and cash flows of registrant as of, and for, the periods presented in this quarterly report; and (4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Intentionally omitted. (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): 21 (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 17, 2004 /s/ Richard J. Mitchell III -------------------------- Richard J. Mitchell III Chief Accounting Officer (Principal Financial Officer) 22 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U. S. C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Media Services Group, Inc. (the "Company") on Form 10-Q for the period ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, J. Jeremy Barbera, as Chairman of the Board and Chief Executive Officer, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934: and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 17, 2004 /s/ J. Jeremy Barbera --------------------- J. Jeremy Barbera Chairman of the Board and Chief Executive Officer (Principal Executive Officer) This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 23 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U. S. C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Media Services Group, Inc. (the "Company") on Form 10-Q for the period ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard J. Mitchell III, as Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934: and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 17, 2004 /s/ Richard J. Mitchell III --------------------------- Richard J. Mitchell III Chief Accounting Officer (Principal Financial Officer) This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 24 -----END PRIVACY-ENHANCED MESSAGE-----