AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 2004
REGISTRATION STATEMENT NO. 333-_____
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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MEDIA SCIENCES INTERNATIONAL, INC.
(Name of small business issuer in its charter)
Delaware 5045 87-0475073
-------- ---- ----------
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification
or organization) Code Number) Number)
40 Boroline Road
Allendale, New Jersey 07401
201-236-9311
(Address and telephone number of principal executive offices)
Michael W. Levin
Chief Executive Officer and President
Media Sciences International, Inc.
40 Boroline Road
Allendale, New Jersey 07401
201-236-9311
(Name, address, and telephone number of agent for service)
Copies of communications to:
Dan Brecher, Esq.
Law Offices of Dan Brecher
99 Park Avenue, 16th Floor
New York New York 10016
(212) 286-0747
Approximate date of commencement of proposed sale to the public: From time to
time on or after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
---------------------- ------------ ---------------- ------------------ ----------------
Title of each class of Proposed Maximum Proposed Maximum Amount of
securities to be Amount to be Offering Price Aggregate Offering Registration Fee
registered Registered Per Share (1) Price (1) (1)
---------------------- ------------ ---------------- ------------------ ----------------
Common stock, par 1,250,000 $1.80 $2,250,000 $285.08
value $.001
---------------------- ------------ ---------------- ------------------ ----------------
Common stock, par 200,000 $1.80 $ 360,000 $ 45.61
value $.001,
underlying options
---------------------- ------------ ---------------- ------------------ ----------------
Total 1,450,000 $2,610,000 $330.69
---------------------- ------------ ---------------- ------------------ ----------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act. The proposed maximum offering
price per share is based upon the average of the high and low prices for a share
of common stock of the registrant, as reported on the American Stock Exchange on
July 20, 2004.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDER MAY NOT SELL THESE SECURITIES UNTIL THIS REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 30, 2004
PRELIMINARY PROSPECTUS
MEDIA SCIENCES INTERNATIONAL, INC.
1,450,000 SHARES OF COMMON STOCK
This prospectus relates only to the resale of 1,450,000 shares of common stock
of Media Sciences International, Inc., a Delaware corporation, of which:
o 1,250,000 shares sold to two persons in two private securities transactions
with us; and o 200,000 shares underlie stock options held by two persons to
purchase shares of our common stock.
The shares are being offered for sale from time to time by four selling
stockholders. The selling stockholders will receive all of the proceeds from any
sales of the common stock. We will not receive any of the proceeds, except for
the exercise price of the stock options.
The selling stockholders may sell the shares of common stock at various times
and in various types of transactions, including sales in the open market, sales
in negotiated transactions and sales by a combination of these methods. Shares
may be sold at the market price of the common stock at the time of a sale, at
prices relating to the market price over a period of time, or at prices
negotiated with the buyers of shares.
The selling stockholders will pay all brokerage fees and commissions and similar
sale-related expenses. We are paying expenses relating to the registration of
the shares with the Securities and Exchange Commission.
Our common stock is listed on the American Stock Exchange under the symbol
"GFX". On July 20, 2004, the last reported sale price for a share of our common
stock on the American Stock Exchange was $1.75.
See "Risk Factors" beginning on page 4 for a discussion of certain factors that
should be considered by prospective investors.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated [________ __], 2004
TABLE OF CONTENTS
Prospectus Summary 3
Risk Factors 4
Use Of Proceeds 7
Management's Discussion And Analysis Of Financial Conditions 8
And Results Of Operations
About the Company 15
Management 21
Certain Relationships And Related Transaction 28
Stock Ownership 30
Selling Stockholders 34
Plan Of Distribution 35
Description of Our Securities 36
Market for Common Equity and Related Stockholder Matters 38
Legal Matters 39
Experts 39
Indemnification 39
Where You Can Find More Information 40
Index To Financial Statements 40
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. You
should read the entire prospectus carefully before making a decision to invest
in our common stock.
OUR BUSINESS
We are a manufacturer of supplies for digital workgroup color printers. We
manufacture and distribute printer supplies, including solid ink sticks and
toner cartridges for use in Tektronix, Xerox, QMS-Minolta, Epson, Ricoh and
other color printers. While we primarily sell our supplies through a
international distribution channel, we also sell supplies directly to certain
end users through our INKlusive program and to those with whom we have a
historical relationship.
We are a Delaware corporation. Our principal corporate office is located at 40
Boroline Road, Allendale, New Jersey 07401. Our telephone number is
201-236-9311. Our web site address is www.mediasciences.com.
THE OFFERING
Total shares outstanding 9,932,210 shares of common stock
Total shares to be outstanding 10,132,210 shares of common stock
after the offering
Common stock offered for resale 1,450,000 shares of common stock, of which:
to the public
o 1,250,000 shares were issued to two
persons in separate private transactions;
and
o 200,000 shares underlie stock options
held by two persons to purchase shares
of our common stock.
Price per share of common stock Market price at the time of resale
to the public
Proceeds from offering We will not receive any of the proceeds
from the sale of the shares of common
stock offered by the selling
stockholders. However, we may receive
proceeds from the exercise of stock
options, which will be used for working
capital.
Trading Symbol for common stock GFX
RISK FACTORS
You should carefully consider the risks described below before making an
investment. Although the factors identified below are important factors, those
are not the only ones facing us. If any of the following risks occurs, our
actual results could differ significantly, and the trading price of our common
stock could decline, and you may lose all or part of your investment. You should
also keep these risk factors in mind when you read forward-looking statements.
We have identified all of the material risks which we believe may affect our
business and the principal ways in which we anticipate that they may affect our
business or financial condition.
WE EXPECT OUR EXPENSES TO INCREASE IN 2005, SO WE MAY NOT BE PROFITABLE OR
GENERATE CASH FROM OPERATIONS IN THE FUTURE.
We expect our expenses to increase as we continue to transition our business
from a printer reseller to a printer ink supply manufacturer and distributor. We
may incur operating losses and net losses for the near term as we incur
additional costs associated with the growth of our Media Sciences subsidiary,
entry into new markets, and the expansion of our administrative, operational,
marketing and sales organizations. For the one year period ended June 30, 2003,
we generated net income of $245,391, or $0.07 per common share. For the three
month period ended March 31, 2004, we earned $128,051, or $0.01 per share, basic
and diluted, as compared to earnings of $36,298, or $0.01 per share basic and
diluted for the corresponding three month period ended March 31, 2003. For the
nine month period ended March 31, 2004, we incurred a loss of $1,414,544 after
preferred stock dividends, or $(0.27) per share, basic and diluted, as compared
to earnings of $212,032 after preferred stock dividends, or $0.06 per share,
basic and diluted, for the corresponding nine month period ended March 31, 2003.
We do not know how much capital we will need to develop these services and
products. We cannot assure you that our revenues will increase as a result of
our increased spending. If revenues grow more slowly than we anticipate, or if
operating expenses exceed our expectations, we may not continue to be
profitable.
IF WE DEFAULT ON OUR OBLIGATIONS UNDER A CREDIT LINE WITH A LENDING BANK, THE
BANK COULD FORECLOSE ON MOST OF OUR ASSETS.
We have a $3,000,000 revolving line of credit with a financial institution. We
can borrow up to $3,000,000 under a revolving line of credit, subject to
availability of collateral. Borrowings bear interest at 1.75% over the lender's
base rate, are payable on demand and are collateralized by all of our assets. As
of March 31, 2004, $2,247,606 was outstanding under this line. This line expires
on October 31, 2006. If we are unable to repay our outstanding indebtedness
under the credit line, the bank could foreclose on all of our assets. If we do
not have sufficient cash flow to repay the credit line indebtedness or if we
cannot refinance the obligation, we will not be able to implement our business
plan, which would have a material adverse affect on our future viability. We may
not be able to repay our outstanding indebtedness under the credit line.
Substantially all of our assets are subject to security interests held by the
bank. Unless the security interests are released, assets will not be available
to us to secure future indebtedness, which may adversely affect our ability to
borrow in the future.
OUR BUSINESS MODEL HAS CHANGED FROM PREVIOUS YEARS, AND WE MAY MAKE POOR
BUSINESS DECISIONS AS WE TRY TO GROW OUR BUSINESS.
We have transitioned our primary business focus from that of a computer graphics
reseller to a manufacturer and supplier of color printer consumables, and we may
not be able to successfully grow this business or compete in the printer
consumable market. We may encounter difficulties in growing this business
division by making unwise capital expenditures or by engaging in other
unproductive activities if we make poor business decisions, because most of our
senior management have worked for us when we were primarily a computer graphics
reseller, and those management personnel did not have prior business experience
in the manufacture and sales of color printer consumables.
WE MAY ENCOUNTER MANUFACTURING PROBLEMS AND INCUR COSTS ASSOCIATED WITH
REMEDYING THE PROBLEMS, WHICH WOULD REDUCE OUR PROFIT MARGINS AND GENERATE LESS
INTEREST IN OUR PRODUCTS.
We may encounter problems in the manufacture of our products that would reduce
our profit margins or increase operating costs and lead to less interest in our
products. Because we provide warranties to our customers, we may incur costs
with remedying the problem. Although we maintain quality control over our
products in the manufacturing process, we may not become aware of any problems
until after the products are sold.
WE ARE AT A COMPETITIVE DISADVANTAGE BECAUSE WE OPERATE IN A MARKET THAT IS
DOMINATED BY COMPANIES THAT ARE THE ORIGINAL MANUFACTURERS OF PRINTERS FOR WHICH
WE SUPPLY PRODUCTS, AND WE MAY BE SLOWER TO RESPOND TO TECHNICAL CHANGES.
As a third party supplier of color printer consumables, we are at a competitive
disadvantage in product innovation. The market is dominated by companies that
are the original manufacturers of printers, like Xerox, and so we may be slower
to respond to technical changes. Instead, we will have to compete by providing
innovative service offerings, but the dominant companies in the market may be
quick to counter any competitive service offerings that we provide. For example,
approximately 90 days after we announced our No-Cap Color free color printer
program, the predecessor to our current INKlusive program, Tektronix announced
its own free color printer program. The Tektronix program has continued since
Xerox acquired the color printer division from Tektronix in 2000.
IF WE ARE NOT ABLE TO OBTAIN PATENTS ON OR OTHERWISE PRESERVE AND PROTECT OUR
PROPRIETARY TECHNOLOGIES, OUR BUSINESS MAY SUFFER DUE TO COMPETITION.
If we cannot obtain patent or other protection for our proprietary technologies,
our ability to compete in our markets could be impaired due to competition
resulting from others using similar technologies. We have applied for, and will
apply for, certain patents covering some of our products. Some of our products
use proprietary technology that is not covered by a patent or similar
protection, and in many cases, cannot be protected. We cannot be certain that:
o any patents will be issued on our applications;
o any patents that we will own will protect our business against
competitors that develop similar technologies or products;
o our patents will be held valid if they are challenged or subjected to
reexamination or reissue;
o others will not claim rights to our patented or other proprietary
technologies; or
o others will not develop technologies which are similar to, or can
compete with, our unpatented proprietary technologies.
CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT BY OR AGAINST US COULD SERIOUSLY
HARM OUR BUSINESS AS COMPETITORS USE SIMILAR TECHNOLOGIES AS OURS AND COMPETE
AGAINST US, OR AS AFFECT OUR ABILITY TO USE CERTAIN TECHNOLOGIES.
Claims of intellectual property infringement by us could seriously harm our
business as competitors use similar technologies, or, in instances of claims
against us, we may be unable to use certain technologies. From time to time, we
may be forced to respond to or prosecute intellectual property infringement
claims to defend or protect our rights or a customer's rights. These claims,
regardless of merit, may consume valuable management time, result in costly
litigation or cause product shipment delays. Any of these factors could
seriously harm our business and operating results. We may have to enter into
royalty or licensing agreements with third parties who claim infringement. These
royalty or licensing agreements, if available, may be costly to us. If we are
unable to enter into royalty or licensing agreements with satisfactory terms,
our business could suffer as we may not be able to utilize certain technologies,
if deemed infringing upon a third party's rights. In instances where we believe
we may be infringing the patent rights of others, or that someone may be
infringing our patents rights, we have asked our patent counsel to evaluate the
validity of the patents in question, as well as the potentially infringing
conduct; however, our counsel's conclusision are not binding upon third parties
or upon the courts if we become involved in a dispute.
OUR COMMON STOCK DOES NOT TRADE ACTIVELY AND MAY BE SUBJECT TO GREAT PRICE VOLATILITY AS MORE SHARES OF COMMON STOCK BECOME FREELY TRADABLE. Because there has been a very limited market for our common stock, it may be difficult to sell our common stock in the open market. Because of our new services which may generate substantial revenues and increased dilution caused by our private placement and incentive based options granted to our employees, we expect to encounter substantially more activity in trading in our common stock and expect the market price of our common stock to be highly volatile in the future. WE HAVE AUTHORIZED A CLASS OF PREFERRED STOCK WHICH MAY ALTER THE RIGHTS OF COMMON STOCK HOLDERS BY GIVING PREFERRED STOCK HOLDERS GREATER DIVIDEND RIGHTS, LIQUIDATION RIGHTS AND VOTING RIGHTS THAN OUR COMMON STOCKHOLDERS HAVE. The Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock. Our amended Certificate of Incorporation authorizes a class of 5,000,000 shares of preferred stock with such designation, rights and preferences as may be determined from time to time by the Board of Directors. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the company. We filed a certificate of designation for a series of 1,000,000 shares of series A preferred stock, of which none are presently outstanding. We may issue more shares of preferred stock in the future which may have different designations, rights and preferences than the series A preferred stock.
USE OF PROCEEDS
All shares of common stock sold pursuant to this prospectus will be sold by the
selling stockholders. We will not receive any of the proceeds from the sale of
shares of common stock. However, we will receive the sale price of the common
stock we sell to the selling stockholder upon exercise of stock options held by
the selling stockholders. We would receive an aggregate of $212,000 if the
selling stockholders exercise their 200,000 stock options, at exercise price of
$1.06 per share. We expect to use the proceeds received from the exercise of the
stock options, if any, for general working capital purposes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This prospectus contains forward-looking information. Generally, the words
"anticipates," "expects," "believes," "intends," "could," "may," and similar
expressions identify forward looking statements. Forward-looking statements
involve risks and uncertainties, including those described under "Risk Factors"
in this prospectus. We caution you that while we believe any forward-looking
statement are reasonable and made in good faith, expectations almost always vary
from actual results, and the differences between our expectations and actual
results may be significant.
The following discussion and analysis should be read in conjunction with the
information set forth in the audited financial statements for the year ended
June 30, 2003.
RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2004 AND 2003
SALES. Our consolidated sales for the three months ended March 31, 2004 as
compared to the same period in 2003, increased approximately 33% to $4,874,606
from $3,665,763. The net increase in sales resulted from an increase in Media
Sciences supply sales of approximately 52% offset by a decrease in Cadapult
sales of approximately 10%. Our consolidated sales for the nine months ended
March 31, 2004 as compared to the same period in 2003, increased approximately
15% to $12,907,606 from $11,178,469. The net increase in sales resulted from an
increase in Media Sciences supply sales of approximately 25% offset by a
decrease in Cadapult sales of approximately 22%. The shift in sales from
Cadapult to Media Sciences is to be expected as we focus on the higher margin
growth opportunity in Media Sciences' supplies.
COST OF GOODS. Our cost of goods for the three months ended March 31, 2004 was
$2,686,363 as compared to $1,817,197 for the same period in 2003, or
approximately 55% and 50% of sales respectively. Our cost of goods for the nine
months ended March 31, 2004 was $6,718,687 as compared to $5,600,041 for the
same period in 2003, or approximately 52% and 50% of sales, respectively. Cost
of goods for the period ending March 31, 2004 increased due to a shift in
product sales mix in our toner line.
SELLING, GENERAL AND ADMINISTRATIVE. For the three months ended March 31, 2004,
compared to the same period in 2003, our selling, general and administrative
expenses increased to $1,817,619 from $1,356,297, thus each remaining at 37% of
sales. For the nine months ended March 31, 2004 as compared to the same period
in 2003, our selling, general and administrative expenses increased to
$4,606,442 from $3,890,148, or slightly up to 36% of sales from 35% of sales. We
have increased our product development and marketing expenditures to increase
the pace of product introduction and market penetration. During the three months
ended March 31, 2004, we introduced seven new product lines. We expect to
introduce up to four more new product lines over the next nine months.
Consequently we will continue to make marketing and product development
expenditures to support these new product introductions.
DEPRECIATION AND AMORTIZATION. For the three months ended March 31, 2004 as
compared to the same period in 2003, our depreciation expense decreased slightly
to $180,663 from $201,636. Amortization expense was $2,292 and $3,153 for the
two periods, respectively. For the nine months ended March 31, 2004 as compared
to the same period in 2003, our depreciation expense remained unchanged at just
over $595,000. Amortization of intangibles for the nine months ended March 31,
2004 and 2003 was $6,926 and $12,985, respectively.
INTEREST EXPENSE. For the three months ended March 31, 2004 as compared to the
same period in 2003, our interest expense decreased to $95,298 from $101,043.
For the nine months ended March 31, 2004 as compared to the same period in 2003
our interest expense decreased to $296,506 from $341,736. The decrease in
interest expense can be attributed to the repayment of certain notes and the
expiration of certain capital leases.
INCOME TAXES. For the three months ended March 31, 2004, we recorded a current income tax expense of $19,214 and a deferred income tax expense of $66,152 as compared to a current income tax expense of $30,781 and a deferred income tax expense of $100,855 in 2003. For the nine months ended March 31, 2004, we recorded a current income tax credit of $25,797 and a deferred income tax expense of $463,587 as compared to a current income tax expense of $104,648 and a deferred income tax expense of $354,433 in 2003. For all periods, we recorded the current income tax expense because of New Jersey's two-year suspension of the use of net operating loss carry-forwards. For all periods presented, our effective tax rate was approximately 40%. DIVIDENDS. For the three months ended March 31, 2004, we incurred no dividend charges or expenses. For the nine months ended March 31, 2004 we incurred a preferred stock dividend charge of $2,071,230 including the $1,913,824 non-cash preferred stock dividend and induced conversion charge, as described more fully in Note 5 to the Condensed Consolidated Financial Statements. NET INCOME (LOSS) APPLICABLE TO COMMON STOCK. For the three month period ended March 31, 2004, we earned $128,051 or $0.01 per share, basic and diluted, as compared to earnings of $36,298 or $0.01 per share basic and diluted for the corresponding three month period ended March 31, 2003. For the nine month period ended March 31, 2004, we incurred a loss of $1,414,544 after preferred stock dividends or $(0.27) per share basic and diluted, as compared to earnings of $212,032 after preferred stock dividends or $0.06 per share basic and diluted for the corresponding nine month period ended March 31, 2003. The loss for the nine months ended March 31, 2004 is due to the non-cash dividend and induced conversion charge as described more fully in Note 5 to the Condensed Consolidated Financial Statements. RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2003 SALES. Sales for the year ended June 30, 2003, compared to the year period ended June 30, 2002, increased approximately 5% to $14,597,862 from $13,844,318. Media Sciences sales increased approximately 16% to $9,599,263 from $8,300,027. COST OF SALES. Cost of sales for the year ended June 30, 2003 were $7,175,113, or approximately 49% of sales, as compared to $7,240,840, or approximately 52% of sales, for the year period ended June 30, 2002. The reduction in cost of sales as a percentage of sales reflects the continued increase in Media Sciences business relative to the Cadapult business. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses for the year ended June 30, 2003 decreased to $5,255,743, or 36% of sales, from $6,282,040, or 45% of sales, for the year ended June 30, 2002. For the year ended June 30, 2003, our selling general and administrative costs included approximately $1.35 million of expenses related to the recall of our solid ink in January 2002 and the related warranty expenses as compared to approximately $3 million, net of $1 million insurance benefit for the prior year. In addition, for the year ended June 30, 2002, we recorded a net reduction in our selling, general and administrative costs of approximately $600,000 due to the settlement of a legal malpractice suit. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the year ended June 30, 2003 increased to $790,512, including $532,403 included in cost of sales, from $736,097 for the year ended June 30, 2002 of which $447,313 was included in cost of sales. INTEREST EXPENSE. Interest expense for the year ended June 30, 2003 increased to $448,623 from $409,857 incurred for the year ended June 30, 2002. The increase in interest was due to increased borrowings and the interest component of payments on capital leases and the supplier agreement. INCOME TAXES. For the year ended June 30, 2003, we recorded a current income tax expense of $132,573 and a deferred income tax expense of $452,685 as compared to a current income tax expense of $4,330 and a deferred income tax benefit of $152,000 for the year ended June 30, 2002. We recorded the current income tax expense because of New Jersey's two-year suspension of the use of net operating loss carry forwards.
DIVIDENDS. For the year ended June 30, 2003, we accrued $586,059 of stock dividends to our preferred shareholders and paid $43,556 in stock dividends through a common stock issuance at $0.95 per share. In June 2002, our Board of Directors voted to offer preferred shareholders the option to receive payment-in-kind for the dividend periods ending June 30, 2002 and September 30, 2002 in order to conserve cash flow, through a common stock issuance at $0.95 per share, the fair market value of our common stock on that date. Fourteen shareholders elected to receive their dividend payments through the payment-in-kind, totaling $87,112 and consisting of 91,694 shares of common stock for the two periods ending June 30, 2002 and September 30, 2002. NET INCOME (LOSS). For the year ended June 30, 2003 we earned $245,391, or $0.07 per share basic and diluted, as compared to the year ended June 30, 2002, where we incurred a loss applicable to common shareholders of $859,048, or $0.25 per share. The conversion of the Series A convertible preferred stock has been excluded from the computation of diluted earnings per share for the years ended June 30, 2003 and 2002, as the conversion would be anti-dilutive after adding back preferred stock dividends to net income. LIQUIDITY AND CAPITAL RESOURCES We experienced positive cash flow for the nine months ended March 31, 2004. Cash flows from operating activities were $548,933 primarily due to net income of $656,686, a non cash charge of $595,066 for depreciation and amortization, $463,587 for deferred income taxes and an increase in accounts payable of $637,403 offset by increases in accounts receivable of $458,820, in inventories of $696,868 and in prepaid expenses and other current assets of $92,150 and a decrease in accrued supplier expenses, income taxes payable, deferred revenue and other accrued expenses and current liabilities of $600,151. Our inventory levels are increasing due to the increase in products in our product line, growing sales and the long lead time from Asian suppliers. We experienced positive cash flow of $24,287 for the one year period ended June 30, 2003. Cash flows from operating activities resulted in positive cash flows of $314,365 resulting primarily from net income of $875,016, non-cash charges of $790,511 for depreciation and amortization and $452,685 for deferred income taxes, offset by a decrease in accounts payable of $971,533 and an increase in accounts receivable of $702,010. The cash we used in investing activities for the nine months ended March 31, 2004 included the purchase of equipment in the amount of $165,441. The cash we used in investing activities for the one year ended June 30, 2003 included the purchase of equipment in the amount of $296,296 and the purchase of intangibles associated with the acquisition of ultraHue in December 1999 in the amount of $94,608. Cash used in financing activities for the nine months ended March 31, 2004 included net debt payments of $148,046, payments of accrued dividends of $152,375 and payment of expenses associated with the issuance of common stock of $37,485. Cash generated by financing activities for the one year ended June 30, 2003 included advances from officers, investors and short-term bank debt in the amount of $275,705 offset primarily by payments on long-term debt of $155,256. Prior to August 8, 2003, we had an agreement with a lender under which we were able to borrow up to $4 million, under a revolving line of credit, subject to availability of collateral. As of June 30, 2003, $1,779,862 was outstanding under this line. We were in compliance with all covenants as of June 30, 2003. On August 8, 2003, we entered into a new agreement with a new lender under which we can borrow up to $3 million under a revolving line of credit, subject to availability of collateral. Borrowings bear interest at 1.75% over the lender's base rate, are payable on demand and are collateralized by all assets of our company. This line expires on October 31, 2006. As of March 31, 2004, $2,247,606 was outstanding under this line. Between August 2000 and September 2003, the Company borrowed an aggregate of $450,000 from its President. The funds were used for general corporate purposes. The debt is structured through two notes payable. The first note, in the amount of $255,000, bears an interest rate of 10% per annum and is payable in monthly installments of interest only through May 2004. The second note, in the amount of $195,000, bears an interest rate of 20% per annum and is payable in monthly installments of interest only through May 2005. There is no representation or assurance made that Mr. Levin will make any further loans to us. In January 2004, our President, Michael W. Levin, voluntarily reduced the interest rate on one of his two loans to us to 10%. Both of these loans now carry a 10% interest rate.
In December 2000, the note payable to ultraHue came due and was satisfied with a cash payment of $760,000 and a demand note in the amount of $400,000 bearing an interest rate of 13% per annum. Through June 2003, we repaid $150,000 of this note. In January 2004, we paid the balance in the amount of $250,000 on the 13% note due to UltraHue. On June 5, 2001, we issued a $400,000 promissory note and warrants to purchase up to 200,000 shares of our common stock at $1.00 per share to Consonance Services Group. The note matured on June 5, 2003 and bore a simple interest at the rate of 12% per year. The note was secured by a security agreement which covered all corporate assets. Two members of this investor group were persons who bear the following relationships with Media Sciences or with our officers and directors: Paul Baker is a director of Media Sciences and Mitchell Baker is the son of Paul Baker. On June 5, 2003, we repaid the $400,000 note due to the Consonance Services Group, through the issuance of eight, $50,000 promissory notes, due on June 5, 2005 and carrying a 20% interest rate, to the eight individuals comprising the Consonance Group. These notes are unsecured. In July 2004, three warrant holders exercised a total of 75,000 warrants for proceeds to the Company of $75,000. On June 14, 2002, we issued short-term promissory notes aggregating $175,000 and warrants to purchase up to 87,500 shares of our common stock exercisable for five years at $1.00 per share to seven note holders: Paul Levin, Frank and Edna Blanco, Nathan D. Watters, Adam H. Watters, Mitchell Baker, Esther Baker, and Harold and Marsha Kugelman. The notes matured in December 2002 and bore simple interest at the rate of 12% per year. In December 2002, we repaid the $175,000 borrowed in June through cash principal payments of $75,000 and through the issuance of new, one-year notes aggregating $100,000 and bearing simple interest of 20%, payable quarterly. The note holders were persons who bear the following relationships with Media Sciences or with our officers and directors: Paul Levin is the father of Michael W. Levin, President and Chairman of Media Sciences; Frank and Edna Blanco are the parents of Frances Blanco, Vice President and a director of Media Sciences; Mitchell Baker is the son of Paul Baker, a director of Media Sciences; and Esther Baker is the wife of Paul Baker. Three of the four new note holders are persons who bear the following relationships with Media Sciences or with our officers and directors: Paul Levin is the father of Michael W. Levin, President and Chairman of Media Sciences; Frank and Edna Blanco are the parents of Frances Blanco, Vice President and a director of Media Sciences; and Mitchell Baker is the son of Paul Baker, a director of Media Sciences. The terms of the loans from the Company's officers, directors, and others having relationships with our officers and directors were determined by the Board of Directors in light of the Company's financial condition, the terms of previous borrowings from such persons, and the terms on which short-term loans were available from public resources. The terms of these loans were deemed fair to the Company and viewed as arm's length transactions. There are no ongoing contractual or other commitments with any of these persons resulting from these transactions, and there is no representation or assurances made that any of these persons will make any further loans to us. CAPITAL EXPENDITURES We anticipate committing to additional color product development programs. Costs of these programs during the next twelve months are estimated to be up to $1,200,000. INFLATION We have historically offset any inflation in operating costs by a combination of increased productivity and price increases, where appropriate. We do not expect inflation to have a significant impact on our business in the future.
SEASONALITY We anticipate that our cash flow from operations will be slightly better in the fall and winter months than in the spring and summer months due to the sales cycles associated with our Cadapult Graphic Systems subsidiary business. In the event that we are unable to generate sufficient cash flows from operations, we may be required to utilize other cash reserves, if any, or seek additional equity or debt financing to meet operating expenses, and there can be no assurance that there will be any other cash reserves or that additional financing will be available or, if available, on reasonable terms. CRITICAL ACCOUNTING POLICIES USE OF ESTIMATES The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or method of its application, is generally accepted, management selects the principle or method that is appropriate in the Company's specific circumstances. Application of the accounting principles requires the Company's management to make estimates about the future resolution of existing uncertainties and that affect the reported amounts of assets, liabilities, revenues, expenses which in the normal course of business are subsequently adjusted to actual results. Actual results could differ from such estimates. In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the consolidated financial statements giving due regard to materiality. REVENUE RECOGNITION, ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS Revenue is recognized at the point of shipment for goods sold, and ratably through the duration of service contracts. Deferred Revenue consists principally of billings on service contracts prior to rendering related services. The Company markets its products to an international network of dealers and distributors. Credit is extended after a credit review by management which is based on a customer's ability to perform its obligations. Such reviews are regularly updated. The allowance for doubtful accounts is based upon agings of customer balances and specific account reviews by management. Media Sciences International, Inc. has no concentrations of credit risks and generally does not require collateral or other security from its customers. Accounts receivable are presented net of a reserve for doubtful accounts of $35,000 at June 30, 2003 and 2002, which represented 1.9% and 2.7%, respectively, of gross trade receivables. INVENTORIES AND INVENTORY RESERVES Inventories are stated at the lower of cost or market, with costs being determined on a first-in, first-out method. Work-in-process and finished goods include material costs, labor costs and manufacturing overhead. The Company evaluates its inventories periodically to identify excess, slow-moving and obsolete inventories and assess reserve adequacy. At June 30, 2003 and 2002, no reserve was deemed necessary. GOODWILL AND IMPAIRMENT The excess of the purchase consideration over the fair value of the net assets of acquired businesses is considered to be goodwill and, until June 30, 2001, was being amortized over 15 years using the straight-line method.
The Company reviews goodwill when events or changes in circumstances indicate
that the carrying amount of goodwill may not be recoverable. We also review
goodwill as required by SFAS No. 142, "Goodwill and Other Intangible Assets",
which requires that goodwill be tested annually using a two-step process. The
first is to identify any potential impairment by comparing the carrying value of
reporting units to their fair value. If a potential impairment is identified,
the second step is to compare the implied fair value of goodwill with its
carrying amount to measure the impairment loss. Reporting unit fair value is
estimated using the income approach, which assumes that the value of a reporting
unit can be computed as the present value of the assumed future returns of an
enterprise discounted at a rate of return that reflects the riskiness of an
investment. A significant increase in the rate at which the assumed future
returns are discounted could result in an unexpected impairment charge to
goodwill, which could have a negative impact on our operating results.
At June 30, 2003 and 2002, net goodwill amounted to $4,986,030 and $4,891,421,
respectively, with accumulated amortization amounting to $521,962 for both
years. The goodwill resulted from the acquisition of substantially all of the
assets of UltraHue, Inc. We have completed all transitional and annual
impairment tests necessary to date and concluded that our goodwill is not
impaired.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for stock options and awards. Accordingly, no compensation costs for
stock options is included in operating results since all awards were made at
exercise prices at or above their fair value on the dates of grants.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock- Based
Compensation - Transition and Disclosure, amending FASB Statement No. 123,
Accounting for Stock Based Compensation." This statement amends SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock- based employee
compensation. It also amends the disclosure provisions of SFAS No. 123 to
require prominent disclosure about the effects on operating results of an
entity's accounting policy decisions with respect to stock-based employee
compensation. SFAS No. 148 also amends APB 28, "Interim Financial Reporting" to
require disclosure about those effects in interim financial information. We
adopted the disclosure provisions for the year ended June 30, 2003.
The following table illustrates the effect on results of operations for the year
ended June 30, 2003 if the Company had applied the fair value recognition
provisions of SFAS No. 123.
Fiscal Year Ended
June 30,
2003 2002
-------- ---------
Net income (loss), as reported $245,391 $(859,048)
Stock-based employee compensation expense under
fair value method, net of related tax effects $(64,599) $ (21,633)
-------- ---------
Pro forma net income (loss) $180,792 $(880,681)
======== =========
Income/(Loss) per share:
Basic, as reported $0.07 $(0.25)
===== ======
Basic, pro forma $0.05 $(0.25)
===== ======
Diluted per share, as reported $0.07 $ --
===== ======
Diluted per share, pro forma $0.05 $ --
===== ======
The following table illustrates the effect on results of operations for the
three and nine months ended March 31, 2004 if the Company had applied the fair
value recognition provisions of SFAS No. 123.:
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
-------- -------- ----------- --------
Net income as reported $128,051 $193,704 $ 656,686 $684,251
Less preferred stock dividends -- 157,406 2,071,230 472,219
-------- -------- ----------- --------
Income (loss) applicable to common shareholders $128,051 $ 36,298 $(1,414,544) $212,032
Stock-based employee compensation expense
under fair value method, net of related
tax effects (13,204) (7,201) (30,387) (15,313)
-------- --------- ------------ --------
Pro forma net income (loss) $114,847 $ 29,097 $(1,444,931) $196,719
======== ========= ============ ========
Income (loss) per share:
Basic and diluted, as reported $0.01 $0.01 $(0.27) $0.06
===== ===== ======= =====
Basic and diluted, pro forma $0.01 $0.01 $(0.28) $0.06
===== ===== ======= =====
ABOUT THE COMPANY
OUR ORGANIZATION HISTORY
We are a Delaware corporation named Media Sciences International, Inc. Our web
site address is www.mediasciences.com.
We originally incorporated under the laws of the State of Utah on August 11,
1983 under the name Communitra Energy, Inc. On July 16, 1985, we amended our
articles of incorporation to change our name to Seafoods Plus, Ltd. We did not
engage in any substantive business activity from approximately 1988 to June 18,
1998.
On June 18, 1998, we acquired Cadapult Graphic Systems Inc., a privately-held
New Jersey corporation formed on May 1, 1987 engaged in the business of
providing of computer graphics systems, peripherals, supplies and services to
visual communicators and graphics professionals, in a transaction viewed as a
reverse acquisition.
On August 14, 1998, we reincorporated under the laws of the State of Delaware as
Cadapult Graphic Systems, Inc. On August 11, 1999, we formed Media Sciences,
Inc., as a wholly-owned New Jersey subsidiary, for the manufacture and
distribution of digital color printer supplies.
In December 1999, Media Sciences, Inc. acquired the assets of ultraHue, Inc., a
New Mexico corporation, a manufacturer of workgroup color printer supplies.
On April 19, 2002, we amended our certificate of incorporation to change our
corporate name to Media Sciences International, Inc.
On April 26, 2002, we formed Cadapult Graphic Systems, Inc., as a wholly-owned
New Jersey subsidiary, for selling supplies directly to certain end users.
We are presently organized with two operating subsidiaries: Media Sciences, Inc.
and Cadapult Graphic Systems, Inc. Media Sciences International, Inc., as a
parent corporation, does not engage in substantive independent business
operations. We conduct substantially all of our operations through our
subsidiaries.
As of July 28, 2004, we had 9,932,210 shares of common stock issued and
outstanding, and no preferred shares outstanding.
We have not been subject to bankruptcy, receivership or any similar proceedings.
OUR BUSINESS
We are a manufacturer of supplies for digital workgroup color printers.
Our wholly-owned subsidiary, Media Sciences, Inc., manufactures and distributes
color printer supplies, including solid ink sticks and color toner cartridges
for use in Xerox and other color printers. Media Sciences distributes these
products internationally through a network of dealers and distributors. We
intend to grow this business through an expansion of our product line, expansion
of our distribution channels and through demand creation marketing programs.
Our wholly-owned subsidiary, Cadapult Graphic Systems, Inc., sells supplies
directly to certain end users through our INKlusive color printer program and to
those with whom we have a historical relationship.
OPERATING STRATEGY
We have a strategic objective of becoming the leading independent manufacturer
of supplies for digital color business printers. We intend to achieve this
objective through an expansion of our product line, through brand development,
an expansion of our distribution network and through marketing programs.
The opportunity to sell Media Sciences supplies exists in the installed base of
workgroup, or business, color printers. The installed base are those color
printers used by organizations of all sizes. Almost all of these organizations
are using the printer manufacturers' supplies such as Tektronix, Xerox or QMS.
We believe that as color printers become more commonplace in the office
environment, a subset of these users will seek alternative supplies to the
printer manufacturers' brand, primarily as a way to reduce the cost of ownership
of their color printers. If we look at the color market as being analogous to
the monochrome printer and supply market, we believe an opportunity exists for
alternate supply manufacturers to achieve a 20-25% market share in the
aggregate. Our objective is to be the leader within this market space by
providing high quality, less expensive color printer supplies through the same
distribution channels used for selling the printer manufacturers' supplies.
In addition to penetrating the installed base, we intend to create a significant
new set of color printer users who are contractually committed to our supplies.
We are striving to achieve this objective through our sales programs such as our
INKlusive color printer program. We believe this program provides a unique
opportunity for organizations that are not currently using color printers to
migrate to color without the cost and technology risk of buying a printer
outright.
PRINCIPAL PRODUCTS AND SERVICES AND PROGRAMS
PRODUCTS
SOLID INK STICKS. We manufacture and distribute solid ink sticks for use in the
Xerox/Tektronix Phaser 340, 350, 360, 840, 850, 860, 8200 and Phaser 8400 color
printers. Our ink is sold under the Media Sciences brand, and under the `house'
brands of several of our customers. We offer flexible, custom packaging to meet
the needs of those distribution partners. Our solid ink is typically sold to
organizations at prices that are 20% to 50% less than those of the
Xerox/Tektronix brand.
TONER CARTRIDGES. We manufacture toner cartridges for use in Tektronix, Xerox,
QMS-Minolta, Epson, and Ricoh color pinters. We offer two lines of toner
cartridges: Premium Color Toner Cartridges and our Clearcase line of toner
cartridges. As with our ink, our toner cartridges are sold under the Media
Sciences brand and under the house brands of our distributors. We plan to expand
our toner cartridges offerings both within the above lines of color printers and
to other color printer manufacturers as well.
o Premium Color Toner Cartridges -- Our Premium Color Toner Cartridge
line of toner cartridges include toner cartridges for Xerox/Tektronix
Phaser 1235, 2135, 7300 and 6200 color printers, QMS-Minolta 3100 and
Epson C4000 color printers. These are new cartridges offered at a
discount to those of Xerox.
o Clearcase -- Our Clearcase line of toner cartridges are for use in
Xerox/Tektronix Phaser 560, 740, 750, 780, 790 and 7700 color
printers, QMS Magicolor 330 and Ricoh 3800 color printers. These are
newly manufactured toner cartridges, featuring a unique clear case,
allowing the user to see the colored toner within the cartridges.
These cartridges are offered at a discount of up to 30% to the prices
of the printer manufacturer.
SALES PROGRAMS INKlusive. Our INKlusive color printer program, and its variations, provide a customer with a workgroup color printer, on-site service, and a box of ink for a fixed charge per month at a substantial discount. The program requires a 24 month commitment, and upon successful completion of the program, the printer is the customer's to keep at no additional charge. The INKlusive program is targeted at small businesses, education, non-profits and real estate agents and brokers. The program is advanced by our channel partners who receive a commission for each unit placed, and are encouraged to sell additional Media Sciences supplies to the customer. Media Sciences offers this program in conjunction with a financing company. Media Sciences does not own or otherwise finance the cost of the printer. No-Cap Color. Our No-Cap Color program provides a customer with one or more workgroup color printers, at no charge, in return for a monthly or bi-monthly commitment to purchase certain Media Sciences supplies from us. We offer several printers under this program, including two business printers, one solid ink, one laser, and one graphic arts printer. These printers have retail values of up to $6,000 and include service throughout the duration of the program. We target the broad corporate market with this program, as well as certain vertical markets. The printer remains the property of Media Sciences or its assignees at all times. Our No-Cap Color program offers benefits to both the end user and Media Sciences. The end-user benefits by obtaining a color printer without a capital investment and without service costs. End user costs are limited to the purchase of supplies that they would need to purchase anyway. We benefit by creating new customers with an obligation to purchase our supplies, thereby creating a high-margin reoccurring revenue stream. Printers for our No-Cap Color program are purchased outright and/or leased to us by third party leasing companies. We have discontinued new unit placements under the No-Cap program in favor of INKlusive program placements. We expect to continue to generate revenues from the existing No-Cap printer base for at least one year. MARKETING AND SALES PLANS We intend to increase our marketing and sales efforts. The goal of these efforts is to increase revenues through increased market awareness of our products and sales programs. We are expanding our Media Sciences distribution channels through outside sales efforts and direct mail. We intend to strengthen these channels through performance based sales incentive programs. We plan to build end-user awareness and demand for our supplies through advertising and marketing campaigns. We are marketing our INKlusive program through our channel partners, web advertising and affiliates and through direct mail promotions. INDUSTRY AND MARKET OVERVIEW The office environment has been dominated by monochrome (black and white) printers and color monitors. Over the past several years, color printers have been introduced to the office environment for mission critical applications where color is a must. Today, however, with the ever-increasing quality, print speed and lower costs of acquisition and ownership, these printers are being placed and used more frequently in the office. U.S. placements of these workgroup color printers are expected to increase from 486,000 in 2000 to 5,767,000 in 2005 or at a compound annual growth rate of 64%, according to year 2002 market research by Cap Ventures. We believe the worldwide market for color printers is twice this size and will grow at approximately the same rate. Output in pages from 2000-2005 is expected to change from 292 billion pages in 2000 to 445 billion pages in 2005, but in 2000 color output accounted for approximately 4% of these total pages. It is forecasted that by 2005 it will grow to 8%, according to year 2002 market research by Cap Ventures. As more printers are used and more color pages are produced, organizations large and small will need to manage the on-going and increasing supplies expense for their color printers.
Digital color printers create an ongoing requirement for service and supplies. The reoccurring business of supply purchases often exceeds the original costs of the device over its lifetime. Today, in the color workgroup printer environment, supplies for these printers are manufactured and distributed by the printer manufacturers. There exists little competition to these sources of supplies. As the adoption of color printing technology continues, we expect the demand for alternative supplies to grow dramatically. In the monochrome printer market, year 2000 market research by Lyra Research Inc. estimates that third party supply manufacturers will provide approximately 22-27% of the supplies consumed from 2000-2003. We believe that a similar opportunity exists in the color market. DISTRIBUTION METHODS OF THE PRODUCTS AND SERVICES Media Sciences, Inc. sells through an international network of channel partners. Our products are sold under the Media Sciences brand, the house brands of some of our distribution partners and in generic, or non-branded boxes. Our distribution can also be profiled by the markets they serve, including office supply wholesalers, remanufacturers, technology resellers, catalog and web resellers, and those who sell to the government. Our products are available in North and South America, Europe, South Africa, and Australia. Cadapult Graphic Systems, Inc. sells supplies directly to certain end users through our No-Cap Color program and to those with whom we have a historical relationship. These direct sales are conducted through telephone and Internet sales efforts. COMPETITION We primarily compete with the original manufacturer of the printers for which we provide supplies, including Xerox, which sells printers under the Tektronix and Xerox brands, QMS-Minolta, Epson and Ricoh. Other than the original equipment manufacturers, we are not aware of any other significant competitor that provides solid ink or toner for use in these printers. PRINCIPAL SUPPLIERS Purchases in fiscal year ended June 30, 2004 from three vendors amounted to approximately 45% of cost of goods sold, with no one vendor accounting for more than 18% of cost of goods sold. Purchases in the fiscal year ended June 30, 2003 from one vendor amounted to 11% of cost of goods sold. We purchase certain important raw materials from a sole source or a limited number of suppliers. Management believes that other suppliers could qualify to provide similar raw materials on comparable terms. The time required to locate and qualify other suppliers, however, could cause a delay in manufacturing that could be disruptive to our Company. DEPENDENCE ON MAJOR CUSTOMERS Sales to one customer represented approximately 7% of our revenues in our fiscal year ended June 30, 2004. Sales to that same customer represented 11% of our revenues in our fiscal year ended June 30, 2003. INTELLECTUAL PROPERTY We regard our trademarks, trade secrets, and proprietary technology and similar intellectual property as critical to our success, and rely on trademark, copyright and patent law, trade secret protection and confidentiality and other agreements with our employees, customers, partners and others to protect our proprietary rights. We have registered certain trademarks in the United States and have applied for the registration of other trademarks in the United States. We have applied for certain patents in the United States.
NEED FOR GOVERNMENT APPROVAL
Not applicable.
GOVERNMENT REGULATION
Not applicable.
RESEARCH AND DEVELOPMENT
Not applicable.
COMPLIANCE WITH ENVIRONMENTAL LAWS
Not applicable.
EMPLOYEES
We currently have 38 full-time employees, including seven management level
employees and one part time employee.
OFFICE FACILITIES
We maintain our executive offices at Allendale, New Jersey, pursuant to a lease
expiring on May 31, 2011. We occupy approximately 15,400 square feet, including
warehousing and manufacturing facilities at our executive offices in Allendale,
New Jersey.
We also maintain a sales office in Redmond, Washington.
Our offices are adequately covered by insurance for claims arising out of such
occupancies.
Our present facilities have been suitable for our operations and needs through
June 30, 2004. We believe that we may need new or additional facilities in the
future to accommodate our current and projected growth. We are evaluating
proposals for new or additional facilities.
-------------------- ----------- ----------- ------------------ ---------------
Approximate Approximate Lease
Location Square Feet Annual Rent Use Expiration Date
-------------------- ----------- ----------- ------------------ ---------------
40 Boroline Road 15,400 $184,800 Executive Offices, May 31, 2011
Allendale, NJ 07401 Warehouse, and
Manufacturing
Facility
201 MJL Center 1,500 $28,200 Sales month to month
16398 NE 85th Street lease
Redmond, WA 98052
-------------------- ----------- ----------- ------------------ ---------------
LEGAL PROCEEDINGS
As at June 30, 2004, we are not a party to any material pending legal
proceeding, other than ordinary routine litigation incidental to our business.
CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE (a) FORMER INDEPENDENT ACCOUNTANT Wiss & Company LLP audited our financial statements for our fiscal year ended June 30, 2003. Wiss & Company has been our principal independent accountant since about June 1998. In 2003, Wiss & Company informed us that Wiss & Company decided to discontinue to provide audit services to publicly-held companies registered with the United States Securities and Exchange Commission and to exit the practice area. We requested Wiss & Company to stand for re-election as our principal independent accountant and to continue to perform audit services for us in connection with our 2004 fiscal quarters until we had the opportunity to select and obtain new independent accountants in connection with our June 30, 2004 fiscal year end, and Wiss & Company agreed to do so. On February 10, 2004, we engaged J.H. Cohn LLP as our principal independent registered public accounting firm, and the services of Wiss & Company as our principal independent accountant were concluded. The change in accountants was necessitated by the decision of Wiss & Company to exit the SEC practice area. Wiss & Company's report on our financial statements for the past two years did not contain an adverse opinion or disclaimer of opinion, and were not modified as to uncertainty, audit scope, or accounting principles. There were no disagreements with Wiss & Company, whether or not resolved, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Wiss & Company's satisfaction, would have caused it to make reference to the subject matter of the disagreement in connection with its report. (b) NEW INDEPENDENT ACCOUNTANT On February 10, 2004, we engaged J.H. Cohn LLP as our principal independent registered public accounting firm. As described above, the change in accountants was necessitated by the decision of Wiss & Company to exit the SEC practice area. Our Board of Directors, and our Audit Committee, approved the selection of J.H. Cohn LLP as our principal independent registered public accounting firm. We did not previously consult with J.H. Cohn LLP regarding the application of accounting principles to a specific completed or contemplated transaction, or the type of audit opinion that might be rendered on our financial statements, and no written or oral advice was provided that was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The persons listed in the table below are our present directors and executive
officers.
---------------- --- ------------------------------------------------------------
Name Age Position
---------------- --- ------------------------------------------------------------
Michael W. Levin 39 Chief Executive Officer, President and Chairman of the Board
Frances Blanco 43 Vice President Marketing and Investor Relations, Treasurer,
and Director
Duncan Huyler 43 Vice President Operations and Technical Services
Duncan Yates 34 Vice President Sales
Denise Hawkins 35 Vice President, Controller and Secretary
Paul C. Baker 67 Director
Edwin Ruzinsky 71 Director
Donald Gunn 52 Director and Vice President of Engineering
Henry Royer 72 Director
Alan Bazaar 34 Director
---------------- --- ------------------------------------------------------------
Our directors are elected annually to serve for one year and hold office until
the next annual meeting of the shareholders and until their successors are
elected and qualified. Our Board of Directors may increase the size of the Board
of Directors. Any director who fills a position created by the Board of
Directors serves until the next annual meeting of the shareholders. Our officers
are elected by the Board of Directors at the first meeting after each annual
meeting of our shareholders, and hold office until their death, resignation or
removal from office.
MANAGEMENT PROFILES
MICHAEL W. LEVIN, CHIEF EXECUTIVE OFFICER, PRESIDENT AND CHAIRMAN OF THE BOARD:
Michael W. Levin has served as our Chief Executive Officer, President and
Chairman of the Board since June 18, 1998. Mr. Levin serves on the compensation
committee. Before June 1998, he had served as President, Treasurer, Secretary
and Chairman of Media Sciences' predecessor, Cadapult Graphic Systems Inc.
("CGSI") since 1987, when he founded CGSI while attending Lehigh University. He
is responsible for a senior management team as well as merger and acquisition
activity and corporate finance. In 2002, Mr. Levin was recognized in Business
News New Jersey's annual "40 under 40" issue, which profiles the state's
outstanding business leaders under the age of 40. He also was selected as the
honorary annual fundraising chairman for the Children's Cancer Research Fund of
New York Medical College in 1999. In 1987, Mr. Levin graduated summa cum laude
from Lehigh University, receiving a Bachelor of Science Degree in Mechanical
Engineering.
FRANCES BLANCO, VICE PRESIDENT OF MARKETING AND INVESTOR RELATIONS, TREASURER,
AND DIRECTOR:
Frances Blanco has served as our Vice President of Marketing and Investor
Relations, Treasurer, and a Director since June 18, 1998. She also served as
Secretary from June 18, 1998 through June 30, 2004. From 1993 to June 18, 1998,
she served as Vice President of Marketing and Investor Relations, Treasurer,
Secretary and a director of CGSI. Blanco manages all aspects of marketing,
including brand identity, demand creation and vendor relationships for us as
well as investor relations. From 1984 through 1989, Blanco was a Reseller
Account Manager at Lotus, where she designed and implemented tactical channel
programs. From August 1989 through June 1993, Blanco served as a Business
Development Manager at Tektronix, Inc., where she was responsible for the
development of color printing standards in strategic customers. She earned a
Bachelor of Science degree in Marketing from Bentley College in 1982 and a
Masters of Business Administration degree from Boston College in 1985.
DUNCAN HUYLER, VICE PRESIDENT OF OPERATIONS AND TECHNICAL SERVICES: Duncan Huyler has served as our Vice President of Operations and Technical Services since June 18, 1998. From 1993 to June 18, 1998, he served as Vice President of Technical Services for CGSI. Huyler manages all technical and customer service aspects for us, as well as operational management including IT, telecommunications, purchasing and internal controls. From May 1983 through October 1987, Huyler served as an officer in the U.S. Army. From September 1988 through August 1993, Huyler worked for The May Department Stores Company and Lord & Taylor, where his positions included Senior Financial Analyst and Director of Systems. Huyler graduated from Cornell University in 1983 with a Bachelor of Science degree in Business and earned a Masters of Business Administration from the University of Louisville in 1987. DUNCAN YATES, VICE PRESIDENT OF SALES: Duncan Yates has served as Vice President of Sales since July 2000. Prior to July 2000, Yates served as the Regional Sales Manager for Cadapult Graphic Systems, which he joined in 1993. Yates manages all aspects of direct sales for Media Sciences' value added reseller business, including achieving quarterly revenue and gross profit targets, developing sales plans and strategies, hiring and training sales staff, and implementing vertical market pilot programs. Yates is also responsible for technology reseller development. Yates is a 1992 graduate of Western Maryland College with a Bachelor of Science degree in Political Science. DENISE HAWKINS, VICE PRESIDENT, CONTROLLER AND SECRETARY: Denise Hawkins has served as Vice President for Media Sciences since February 12, 2003, and as Secretary since July 1, 2004. Ms. Hawkins manages the accounting aspects of the business while working closely with the President and senior management team. She is a Certified Public Accountant and a Certified Management Accountant. She began her employment with the company in July of 2001 as the Controller. Ms. Hawkins graduated from the State University of New York-The College at New Paltz with a Bachelor of Science degree in Accountancy in 1990 and graduated from Marist College in 1998 with a Masters in Business Administration in Finance. Prior to her position at Media Sciences, Ms. Hawkins was the controller for NFK Excavating and Construction, Inc.(2000-2001), Horizon Medical Group, PC (1998-2000) and VAC Service Corp.(1992-1998). She is currently serving as the Treasurer for the Board of Helping Hands Christian Pre-School. Ms Hawkins is affiliated with the New Jersey State Society of Certified Public Accountants, the Institute of Management Accountants and the Society for Human Resource Management. PAUL C. BAKER, DIRECTOR: Paul C. Baker has served as a Director since June 18, 1998. Mr. Baker is the chairman of the Compensation committee and also serves on the audit committee. From 1986 to 2000 he was President of Sherwood Partners, Inc., a venture capital and management consulting company, which he founded, that focused on developing companies with high growth potential. From 2000 to present, he has been General Partner of PCB Associates, LLC which performs similar services. Prior to 1986, Baker held various management positions during 25 years of employment with American Cyanamid Co., including President of Cyanamid's Shulton, Inc. subsidiary from 1977 to 1979 and Group Vice President of Cyanamid from 1979 to1984. Baker graduated from Lehigh University in 1959 and 1960 with degrees in Engineering and Liberal Arts and received his MBA degree from Fairleigh Dickinson University in 1963.
EDWIN RUZINSKY, DIRECTOR: Mr. Ruzinsky has served as a Director since August 27, 1999 and is the chairman of the Audit committee. He is a Certified Public Accountant and a Certified Management Consultant. Prior to his retirement on June 1, 1996 as a Partner in Deloitte Consulting LLC, a wholly-owned subsidiary of Deloitte & Touche LLP, he served for many years as the firm's National Director-Media Industry Services. He previously served Times Mirror Company as Vice President of Finance & Administration/Book Publishing Group and Parent's Magazine Enterprises, Inc. as Chief Accounting Officer. Mr.Ruzinsky continues serving as a member of the Pace University/Dyson School of Liberal Arts & Sciences/Master of Science in Publishing Advisory Board. He is currently a member of the Boards of Dowden Health Media, Inc., a provider of specialized publications and customized communication products for healthcare professionals and consumers, and of Gentis, Inc., engaged in the research and development of therapeutic products for the repair and regeneration of human tissues (such as cartilage tissue and intervertebral disc tissue) through the use of scaffolds that beneficially affect progenitor and other cells at the site of repair or regeneration. DONALD GUNN, VICE PRESIDENT OF ENGINEERING AND DIRECTOR: Donald Gunn has served as a Director since December 23, 1999. Since December 13, 1999, he has served as Vice President of Media Sciences, Inc. Gunn manages product development and strategic major account relationships for Media Sciences. He founded ultraHue, Inc., a manufacturer of ink and toner products for computer printers in March 1996. He served as President and Chief Executive Officer of ultraHue until we acquired ultraHue on December 13, 1999. From June 1997 to November 1998, he served as the Western Sales Manager for Invention Machine Corporation, a Boston based provider of software designed to aid engineers in the development of engineering solutions. From August 1995 to May 1997, he worked as Regional Manager for the Pacific Northwest for 3D Systems, located in Valencia, California, a company that produces stereo lithography machines. From October 1987 to August 1995, he worked for the Color Printer Division of Tektronix, Inc., located in Wilsonville, Oregon, in various sales and marketing positions, including Major Account Manager and VAR Account Manager for the Western United States. From July 1986 to October 1987, he worked as a sales manager for Silma, Inc., located in Santa Clara, California, a company that produced software for industrial equipment. From January 1985 to June 1986, he was the Western Area Sales Manager for AAB Robotics, located in Fort Collins, Colorado, a company that produced equipment for the welding industry. He received a Bachelors of Science degree in Electrical Engineering from the University of Illinois in 1974. HENRY ROYER, DIRECTOR: Henry Royer has served as a Director since December 23, 1999. Mr. Royer serves on the Compensation committee. From 1965 to 1983, Mr. Royer held several positions at First National Bank of Duluth, serving as Executive Vice President/Loans when he left First National Bank. He then joined The Merchants National Bank of Cedar Rapids, now named US Bank Cedar Rapids, N.A., where he served as Chairman and President until August 1994. From September 1994 through December 31, 1997, he served as the President and Chief Executive Officer of River City Bank, Sacramento, California. He served as an Independent Trustee of Berthel Growth & Income Trust I from its date of inception in 1995 through February 5, 1999, when he resigned to join Berthel Fisher & Company Planning Inc., and was elected President of Berthel Trust in July 1999. He was elected President of Berthel SBIC, LLC in August 1999. He currently serves as Chairman of the board of Cedar Rapids Bank and Trust and as a member of the board of QCRH a bank holding company. He also serves on various Boards of privately-held companies. He graduated in 1953 from Colorado College with a B.A. in Money and Banking.
ALAN BAZAAR, DIRECTOR: Alan Bazaar has served as a Director since June 30, 2004. He is a Certified Public Accountant. Mr. Bazaar is a Vice President and Portfolio Manager at Richard L. Scott Investments, LLC. His responsibilities include co-managing a public company portfolio for Richard L. Scott Investments, LLC, a value-oriented, family investment office, focused on both public and private equity investments. Mr. Bazaar performs all elements of due diligence on perspective investment companies. From 1995 to July 1999, Mr. Bazaar was with Arthur Anderson LLP. At Arthur Andersen, he worked for both the Assurance and Financial Buyer's Practices and in his last position he served as a Supervisory Senior Consultant in their Business Fraud and Investigation Services Unit. Mr. Bazaar graduated from Bucknell University in 1992 with a degree in History, and he received a MBA from New York University, Leonard N. Stern School of Business in 1997. BOARD COMMITTEES AND MEETINGS During the fiscal year that ended on June 30, 2004, the Board of Directors held five meetings. During this period, all of the directors serving on the Board at the time attended or participated in more than 75% of the aggregate of the total number of meetings of the Board of Directors. The Audit Committee met three times in connection with fiscal year 2004. We have an Audit Committee, which through the review of our 2003 fiscal year financials consisted of the following members of the Board of Directors: Edwin Ruzinsky, Paul Baker and Sagiv Shiv. In connection with our fiscal year ended 2004, our Audit Committee consists of: Edwin Ruzinsky and Paul Baker. Mr. Ruzinsky is a financial expert. The function of the Audit Committee includes reviewing internal financial information, monitoring cash flow, budget variances and credit arrangements, reviewing the audit program of Media Sciences, reviewing with Media Sciences' independent accountants the results of all audits upon their completion, annually selecting and recommending independent accountants, overseeing the quarterly unaudited reporting process and taking such other action as may be necessary to assure the adequacy and integrity of all financial information distribution by Media Sciences. Each member of the Audit Committee is independent as defined under the American Stock Exchange's listing standards. The Audit Committee consists of non-employee directors whom Media Sciences has determined are free of any relationship that could influence their judgement as a committee member and are not associated with a major vendor to, or a customer of, Media Sciences. We have a Compensation Committee, which has consisted of the following members of the Board of Directors: Paul Baker, Henry Royer and Michael W. Levin. The function of the Compensation Committee is to make determinations concerning salaries and incentive compensation for our officers and employees. Members of the Audit Committee and Compensation Committee are selected each year by our Board of Directors after our annual stockholders' meeting. Selection to a committee of the Board of Directors is determined by the majority vote of the Board of Directors. The Board of Directors intends to elect incumbent directors who are re-elected to the Board of Directors to continue to serve on the committees they presently serve. We have not yet adopted a code of ethics applicable to our directors, officers and employees. We are in the process of implementing a code of ethics, and expect to adopt a code of ethics prior to September 2004 during our fiscal year 2005. We presently do not have a separate nominating committee of the Board of Directors for the selection of directors, and do not have a nominating committee charter. Presently, all such actions are performed by the entire Board of Directors. OTHER INFORMATION ABOUT DIRECTORS None of the directors are directors of other reporting companies, are associated by family relationships, or have been involved in legal proceedings.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below sets forth information concerning the annual and long-term
compensation during our last three fiscal years of our Chief Executive Officer
and all of our other officers ("Named Executive Officers").
------------------------------------------------------------------------------------------------------------
Long Term
Compensation
Annual Compensation Awards
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options/SARS (#) Compensation (a)
--------------------------- ---- ------ ----- ---------------- ----------------
Michael W. Levin 2004 $200,000 $28,500 0 $4,416
Chief Executive Officer 2003 $150,000 $15,000 (b) 500,000 (c) $2,593
and President 2002 $150,000 $15,000 (d) 0 $2,625
Frances Blanco 2004 $120,000 $ 3,500 100,000 (e) $4,317
Vice President and Treasurer 2003 $100,000 $15,000 (b) 25,000 (f) $2,872
and Secretary 2002 $100,000 $15,000 (d) 0 $2,787
Duncan Huyler 2004 $120,000 $ 6,000 100,000 (e) $3,418
Vice President 2003 $107,185 $ 8,000 (b) 25,000 (f) $ 888
2002 $107,185 $ 8,000 (d) 0 $ 223
Duncan Yates 2004 $130,000 $11,000 0 $1,740
Vice President 2003 $116,845 $15,000 (b) 25,000 (f) $ 938
2002 $118,184 $15,000 (d) 0 $1,012
Donald Gunn 2004 $100,000 $20,607 0 $2,522
Vice President 2003 $ 90,833 $10,000 25,000 (f) $2,087
2002 $ 80,000 $ 0 50,001 (g) $1,510
Denise Hawkins 2004 $ 64,890 $ 1,000 0 $1,099
Vice President 2003 $ 51,731 (h) $ 0 0 $ 647
------------------------------------------------------------------------------------------------------------
(a) Refers to our matching contribution under our 401(k) plan, and premiums for
life insurance where the beneficiary is not the company.
(b) Refers to bonus compensation, including deferred bonus of $15,000 for each
of Levin, Blanco and Yates, and of $8,000 for Huyler.
(c) Refers to stock options granted in June 2003, pursuant to an employment
agreement effective as of July 1, 2003. The stock options are exercisable
at $1.00 per share and expire in June 2008. Options to purchase 250,000
shares vested immediately and options to purchase an additional 250,000
shares vest ratably over the period July 1, 2003 through June 30, 2005. As
of June 30, 2004, 375,000 options are vested.
(d) Refers to bonus compensation, including deferred bonus of $7,500 for each
of Levin, Blanco and Yates, and of $4,000 for Huyler.
(e) On May 24, 2004, we issued to each of Frances Blanco and Duncan Huyler,
stock options to purchase 100,000 shares of our common stock, of which
50,000 options vested on the grant date, and the remaining 50,000 options
are subject to vesting over a three year period. The options are
exercisable for ten years at $1.06 per share.
(f) On April 7, 2003, we issued to each of Duncan Huyler, Frances Blanco,
Duncan Yates and Donald Gunn, stock options to purchase 25,000 shares of
common stock. The stock options vested on April 6, 2004 and are exercisable
until April 5, 2008 at $0.50 per share.
(g) Refers to stock options, granted in fiscal year 2000 and reissued in fiscal
year 2002, to purchase 50,001 shares of our common stock, subject to
vesting over a three year period, exercisable for five years at $1.27 per
share.
(h) Became an officer on February 12, 3003. Her reported fiscal year 2003
compensation covers the full fiscal year.
STOCK OPTION INFORMATION
OPTION GRANTS IN FISCAL 2004
The table below sets forth information concerning stock options granted during
the fiscal year ended June 30, 2004 to the Named Executive Officers. The
percentage of total stock options is based on 247,500 stock options granted to
officers, directors, and employees during the 2004 fiscal year.
---------------- ---------- -------------- ----------- ----------
Number of
Securities Percent of
Underlying Total Options
Options Granted to Exercise of
Granted Employees in Base Price Expiration
Name (#) Fiscal Year ($/Sh) Date
---------------- ---------- -------------- ----------- ----------
Frances Blanco 100,000 40% $1.06 5-24-14
Duncan Huyler 100,000 40% $1.06 5-24-14
---------------- ---------- -------------- ----------- ----------
OPTION EXERCISES IN FISCAL 2004 AND YEAR END OPTION VALUES
The following table sets forth information concerning the value of unexercised
stock options at June 30, 2004 for the Named Executive Officers. The dollar
values of the options was determined by multiplying the number of stock options
by the difference between the fair market value of a share of common stock
underlying an option and the exercise price of the option. Out-of-the-money
options are reported as having a dollar value of $0. The last sale price of a
share of our common stock on June 30, 2004 was $1.54, as reported by AMEX.
----------------- ----------- -------- ---------------------------- --------------------------
Number of
Shares Number of Unexercised Value of Unexercised
Acquired Value Securities Underlying In-the-Money Options
Name on Exercise Realized Options at Fiscal Year End at Fiscal Year End
---------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------------- ----------- -------- ----------- ------------- ----------- -------------
Michael W. Levin 0 0 375,000 125,000 $202,500 $62,500
Frances Blanco 0 0 82,741 50,000 $ 52,245 $24,000
Duncan Huyler 0 0 84,265 50,000 $ 53,937 $24,000
Duncan Yates (a) 5,000 2,250 140,430 0 $ 55,995 $ 0
Donald Gunn 0 0 75,001 0 $ 39,500 $ 0
Denise Hawkins 0 0 6,668 3,334 $ 0 $ 0
----------------- ----------- -------- ----------- ------------- ----------- -------------
(a) Exercised 5,000 options on July 21, 2004. The value realized upon exercise
was determined by market value per share of common stock on that date of
$1.70 less the exercise price of options. At year end 2004, Yates held
17,000 out-of-the money options which are not included in the column of
unexercised in-the-money options value.
DIRECTOR COMPENSATION
We have a compensation plan for our independent directors. Eligible outside
directors are paid $5,000 per year, payable quarterly, for attendance at regular
and special meetings and may be reimbursed for their reasonable out-of-pocket
expenses incurred in connection with their attendance at meetings of the Board
of Directors and for other expenses incurred in their capacity as directors of
Media Sciences. Outside directors are granted five or ten year stock options
under the incentive stock option plan to purchase 10,000 shares of common stock,
exercisable at the fair market value on the date of appointment to the Board.
Outside directors will also be granted, annually, additional stock options to
purchase 5,000 shares of common stock.
EMPLOYMENT AGREEMENT WITH NAMED EXECUTIVE OFFICER
Michael W. Levin serves as our Chief Executive Officer and President pursuant to
a five-year employment agreement that began as of July 1, 2003. His current
annual salary for fiscal year 2004 is to be $200,000. We granted him 500,000
five-year stock options to purchase 500,000 shares of common stock. The exercise
price for the stock options is $1.00 per share. Stock options to purchase
250,000 shares vested immediately, additional stock options to purchase 125,000
shares vested on June 30, 2004, and the remaining 125,000 stock options are to
vest ratably over the period July 1, 2004 through June 30, 2005. These stock
options are cumulative and are subject to anti-dilution rights.
He is also entitled to receive:
o death benefits of $100,000;
o a fifteen-year term life insurance policy for $2,000,000;
o a luxury automobile;
o reimbursement for reasonable travel and other business related expenses;
o six weeks vacation;
o medical and dental insurance; and
o participation in any employee plan, perquisite and other benefits made
available to Media Sciences' employees or management in general.
We may also award him an annual performance bonus or other bonus as determined
by the Board of Directors.
If we undergo a "change of control", we must pay him an amount equal to 290% of
his base compensation. He has the right to terminate his employment if we
undergo a change in control. As defined in his employment agreement, a change of
control refers to:
o a change in our ownership or management that is required to be reported
under the federal securities laws;
o the acquisition, other than directly from Media Sciences, of 25% or more of
our common stock or our voting securities by persons other than Media
Sciences or Levin;
o a change in a majority of the current Board of Directors, excluding a Board
approved change that does not result from a proxy contest;
o a reorganization, merger, consolidation or sale of substantially all of our
assets, after which our shareholders do not own, in the same proportion,
more than 50% of the voting power, after which a majority of the board of
directors changes, and after which a new shareholder beneficially owns 25%
or more of the voting power; or
o shareholder approval of our liquidation or dissolution.
The employment agreement provides for termination for cause.
STOCK OPTION PLAN
Under our incentive stock option plan for employees, which was adopted by our
Board of Directors and approved by our shareholders in 1998, we reserved 500,000
shares of our common stock for issuance pursuant to exercises of incentive stock
options. An incentive stock option entitles the holder to purchase a share of
our common stock at a purchase price equal to the fair market value of the
common stock on the day of grant. During the year ended June 30, 2004, no stock
options granted under this stock option plan were exercised. As of June 30,
2004, we had outstanding stock options to purchase 367,156 shares of common
stock, exercisable, subject to vesting, for five or ten years from the date of
grant at prices of $0.43 to $4.00. If we undergo a "change of control," the
incentive based stock options shall vest immediately.
EMPLOYEE PROFIT SHARING PLAN
We have a tax-qualified employee paired profit sharing plan sponsored by Scudder
Financial Services, Inc. This 401(k) plan covers all of our employees that have
been employed for at least six months and meet other age and eligibility
requirements. Under the 401(k) plan, employees may choose to reduce their
current compensation by up to 15% each year and have that amount contributed to
the 401(k) plan. We make matching contributions equal to 25% of the employee's
contribution. In our discretion, we may contribute unmatched contributions. The
401(k) plan qualifies under Section 401 of the Internal Revenue Code, so that we
can deduct contributions by employees or by us. Employee contributions to the
401(k) plan are fully vested at all times, and our contributions, if any, vest
at the rate of 25% after two years and after two years at the rate of 25% a year
until fully vested.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Between August 2000 and September 2003, we borrowed an aggregate of $450,000
from Michael Levin, our President. The funds were used for general corporate
purposes. The debt was structured through two notes payable. The first note, in
the amount of $255,000, bore an interest rate of 10% per annum and was payable
in monthly installments of interest only through May 2004. The second note, in
the amount of $195,000, bore an interest rate of 20% per annum and was payable
in monthly installments of interest only through May 2005. In January 2004,
Michael W. Levin, voluntarily reduced the interest rate on the loan due May 2005
to 10%. We repaid both loans in May and June 2004. There is no representation or
assurance made that Mr. Levin will make any further loans to us.
The terms of loans from our officers, directors, and others having relationships
with our officers and directors were determined by the Board of Directors in
light of our financial condition, the terms of previous borrowings from such
persons, and the terms on which short-term loans were available from public
resources. The terms of these loans were deemed fair to the company and viewed
as arm's length transactions. There are no ongoing contractual or other
commitments with any of these persons resulting from these transactions, and
there is no representation or assurances made that any of these persons will
make any further loans to us.
On June 5, 2001, we issued a $400,000 promissory note and warrants to purchase
up to 200,000 shares of our common stock at $1.00 per share to Consonance
Services Group. The note matured on June 5, 2003 and bore a simple interest at
the rate of 12% per year. The note was secured by a security agreement which
covered all corporate assets. Two members of this investor group were persons
who bear the following relationships with Media Sciences or with our officers
and directors: Paul Baker is a director of Media Sciences and Mitchell Baker is
the son of Paul Baker. On June 5, 2003, we repaid the $400,000 note due to the
Consonance Services Group, through the issuance of eight, $50,000 promissory
notes, due on June 5, 2005 and carrying a 20% interest rate, to the eight
individuals comprising the Consonance Group. These notes were unsecured. In June
2004, we repaid these notes after securing a one year, $400,000 term loan from
our bank, carrying an interest rate of the banks base rate plus 2%. At June 30,
2004, the interest rate on this term loan was 6%.
On June 14, 2002, we issued short-term promissory notes aggregating $175,000 and
warrants to purchase up to 87,500 shares of our common stock exercisable for
five years at $1.00 per share to seven note holders: Paul Levin, Frank and Edna
Blanco, Nathan D. Watters, Adam H. Watters, Mitchell Baker, Esther Baker, and
Harold and Marsha Kugelman. The notes matured in December 2002 and bore simple
interest at the rate of 12% per year. In December 2002, we repaid the $175,000
borrowed in June through cash principal payments of $75,000 and through the
issuance of new, one-year notes aggregating $100,000 and bearing simple interest
of 20%, payable quarterly. In December 2003, we repaid the loan in full. The
note holders were persons who bear the following relationships with Media
Sciences or with our officers and directors: Paul Levin is the father of Michael
W. Levin, President and Chairman of Media Sciences; Frank and Edna Blanco are
the parents of Frances Blanco, Vice President and a director of Media Sciences;
Mitchell Baker is the son of Paul Baker, a director of Media Sciences; and
Esther Baker is the wife of Paul Baker.
On September 24, 2002, we granted options to purchase 5,000 shares of common
stock, exercisable for ten years at $0.65 per share to each of Paul Baker,
Berthel SBIC, and Ed Ruzinsky in connection with their services on the Board of
Directors.
In October 2002, we borrowed $100,000 at a 23% interest rate, with interest due monthly, from Paul Baker, a director of Media Sciences. This loan matured in, and was repaid in, October 2003. On November 19, 2002, Edwin Ruzinsky purchased 10,000 shares of Media Sciences common stock for $6,500 in the open market. In December 2002, we borrowed $25,000 at a 23% interest rate, with interest due monthly, from Duncan Yates, an officer. This loan matured in and was repaid in December 2003. On January 1, 2003, we granted options to purchase 10,000 shares of common stock, exercisable for ten years at $0.60 per share to Sagiv Shiv in connection with his services on the Board of Directors. On April 7, 2003, we issued to each of Duncan Huyler, Frances Blanco, Duncan Yates and Donald Gunn, stock options to purchase 25,000 shares of common stock. The stock options vested on April 6, 2004 and are exercisable until April 5, 2008 at $0.50 per share. On May 6, 2003, we granted options to purchase 10,000 shares of common stock, exercisable for ten years at $0.43 per share, to each of Paul Baker and Ed Ruzinsky in connection with their services on the Board of Directors. In June 2003, pursuant to an employment agreement effective as of July 1, 2003, we issued to Michael Levin stock options to purchase up to 500,000 shares of common stock, exercisable at $1.00 per share and expiring in June 2008. Options to purchase 250,000 shares vested immediately, options to purchase an additional 125,000 shares vested on June 30, 2004, and options to purchase an additional 125,000 shares are to vest ratably over the period July 1, 2004 through June 30, 2005. On February 10, 2004, we granted options to purchase 5,000 shares of common stock, exercisable for ten years at $0.85 per share to each of Paul Baker, Ed Ruzinsky, Berthal SBIC and Sagiv Shiv in connection with their services on the Board of Directors. On January 16, 2004, Denise Hawkins purchased 500 shares in the open market for $530. On May 11, 2004, Michael Levin gifted an aggregate of 22,000 shares to his minor children. On May 11, 2004, Shiv Sagiv resigned from our board of directors due to personal reasons. On May 24, 2004, we issued to each of Frances Blanco and Duncan Huyler stock options to purchase 100,000 shares of our common stock, of which 50,000 options vested on the grant date, and the remaining 50,000 options are subject to vesting over a two year period. The options are exercisable for ten years at $1.06 per share. On June 21, 2004, Duncan Yates exercised 5,000 stock options at $1.25 per share, and sold 5,000 shares of common stock in the open market at $1.70 per share. On June 30, 2004, we sold 1,000,000 shares of common stock to GFX Investments, LLC, an entity controlled by Richard L. Scott, for $1.25 million. In conjunction with the investment, we agreed to appoint a nominee of GFX Investments, Alan Bazaar, Vice President and Portfolio Manager for Richard L. Scott Investments, LLC, to our board of directors, and we granted Mr. Scott 10,000 stock options, exercisable at $1.69 per share for five years in connection with Board of Directors services. At various times between March 17, 2004 and May 21, 2004, Mr. Scott, through entities controlled by him, purchased an aggregate of 823,750 shares in the open market, at prices of $1.07 to $1.36 per share, for an aggregate purchase price of $982,513. On June 3, 2004, the Frances Annette Scott Revocable Trust, of which Mr. Scott's spouse is the trustee, purchased 6,000 shares in the open market for $6,735.
STOCK OWNERSHIP
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below sets forth, as of July 28, 2004, the shares of our common stock
beneficially owned by each person known to us to be the beneficial owner of more
than five percent of our outstanding shares of common stock, except that the
security ownership of management is provided in a separate table. This
information was determined in accordance with Rule 13(d)-3 under the Securities
Exchange Act of 1934, and is based upon the information provided by the persons
listed below. As of July 28, 2004, we had 9,932,210 shares of common stock
issued and outstanding.
All persons named in the table have the sole voting and dispositive power with
respect to common stock beneficially owned. Beneficial ownership of shares of
common stock that are acquirable within 60 days upon the exercise or conversion
of stock options and warrants are listed separately. For each person named in
the table, the calculation of percent of class gives effect to those acquirable
shares.
------------------------ ------------------- ----------------- --------
Additional Shares
Name and Address Amount and Nature Acquirable Within Percent
of Beneficial Owner of Beneficial Owner 60 days of Class
------------------------ ------------------- ----------------- --------
Berthel SBIC, LLC (a) 1,112,797 353,000 14.3%
100 Second Street SE,
Cedar Rapids, Iowa 52407
Richard L. Scott (b) 1,829,750 10,000 18.5%
100 First Stamford Place
Stamford, Ct. 06902
------------------------ ------------------- ----------------- --------
(a) The beneficial owners of Berthel SBIC are: Thomas J. Berthel, Chief
Executive Officer and Chairman; Ronald O. Brendengen, Chief Financial
Officer and Chief Operation Officer; Henry Royer, President; Leslie D.
Smith, Secretary; and Julie K. Driscoll, Assistant Secretary.
(b) Holds the securities through different entities, including GFX
Investments, LLC, for which he is the beneficial owner. Includes 6,000
shares purchased by the Frances Annette Scott Revocable Trust, of which
his spouse is the trustee.
SECURITY OWNERSHIP OF MANAGEMENT
The table below sets forth, as of July 28, 2004, the shares of our common stock
beneficially owned by each of our officers and directors, and by all of our
officers and directors as a group. This information was determined in accordance
with Rule 13(d)-3 under the Securities Exchange Act of 1934, and is based upon
the information provided by the persons listed below. As of July 28, 2004, we
had 9,932,210 shares of common stock issued and outstanding.
All persons named in the table have the sole voting and dispositive power with
respect to common stock beneficially owned. Beneficial ownership of shares of
common stock that are acquirable within 60 days upon the exercise or conversion
of stock options and warrants are listed separately. For each person named in
the table, the calculation of percent of class gives effect to those acquirable
shares.
The address of each of the persons named in the table is c/o Media Sciences
International, Inc., 40 Boroline Road, Allendale, New Jersey 07401, unless
otherwise indicated.
---------------------------------------- ------------------- ----------------- --------
Additional Shares
Name and Address Amount and Nature Acquirable Within Percent
of Beneficial Owner of Beneficial Owner 60 days of Class
---------------------------------------- ------------------- ----------------- --------
Michael W. Levin (a) 1,518,450 375,000 18.4%
Frances Blanco 40,775 132,741 (b) 1.7%
Duncan Huyler 40,775 134,265 (b) 1.7%
Duncan Yates 20,300 145,430 1.6%
Denise Hawkins 500 10,002 (c) 0.1%
Paul Baker 67,500 100,500 (d) 1.7%
Edwin Ruzinsky 20,000 40,000 0.6%
Donald Gunn 25,000 75,001 1.0%
Henry Royer (e) 1,112,797 353,000 14.3%
c/o Berthel SBIC
100 Second Street SE
Cedar Rapids, Iowa 52407
Alan L. Bazaar (f) 0 0 0%
c/o Richard L. Scott Investments, LLC
100 First Stamford Place
Stamford, Ct. 06902
---------------------------------------- ------------------- ----------------- --------
All present officers and directors
as a group (10 persons) 2,846,097 1,365,939 37.3%
---------------------------------------- ------------------- ----------------- --------
(a) Includes 120,000 shares owned by his minor children. Does not include stock
options, scheduled to vest ratably over the period July 1, 2004 through
June 30, 2005, exercisable into 125,000 shares.
(b) Includes 50,000 stock options, scheduled to vest ratably from May 24, 2004
through May 24, 2007. The underlying 50,000 shares are included as shares
for resale pursuant to this prospectus.
(c) Includes 3,334 shares acquirable upon vesting of stock options scheduled to
vest on July 15, 2004.
(d) Includes beneficial ownership of warrants held by spouse to purchase 12,500
shares of common stock, expiring on June 12, 2007.
(e) Henry Royer's reported beneficial ownership refers to the beneficial
ownership of Berthel SBIC.
(f) Alan Bazaar disclaims beneficial ownership of shares beneficially owned by
Richard L. Scott or entities affiliated with Richard L. Scott, for which
Mr. Scott is the beneficial owner.
CHANGES IN CONTROL
We do not have any arrangements that may result in a change in control.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Number of securities to Weighted average
be issued upon exercise exercise price of Number of securities
of outstanding options, outstanding options, remaining available
Plan category warrants and rights warrants and rights for future issuance
------------------------- ----------------------- ------------------- --------------------
Equity compensation plans 1,092,156 $1.01 132,844
approved by
securities holders
Equity compensation plans 2,544,002 $3.26 0
not approved by
security holders
Total 3,636,158 $2.58 132,844
------------------------- ----------------------- ------------------- --------------------
PLANS IN THE SHAREHOLDER APPROVED CATEGORY
Under our incentive stock option plan for employees, directors and consultants,
which was adopted by our Board of Directors and approved by our shareholders on
August 10, 1998, we reserved 500,000 shares of our common stock for issuance
pursuant to exercises of incentive stock options. An incentive stock option
entitles the holder to purchase a share of our common stock at a purchase price
equal to the fair market value of the common stock on the day of grant. As of
June 30, 2004, we have outstanding incentive stock options to purchase 367,156
shares of common stock, exercisable, subject to vesting, for five or ten years
from the date of grant, at prices of $0.43 to $4.00 per share.
On April 7, 2003, we issued to each of Duncan Huyler, Frances Blanco, Duncan
Yates, Donald Gunn and Randy Hooker, stock options to purchase 25,000 shares of
common stock. The stock options vest on April 6, 2004 and are exercisable until
April 5, 2008 at $0.50 per share.
In June 2003, we issued to Michael Levin stock options to purchase up to 500,000
shares of common stock, exercisable at $1.00 per share and expiring in June
2008. Options to purchase 250,000 shares vested immediately and options to
purchase an additional 250,000 shares vest ratably over the period July 1, 2003
through June 30, 2005.
PLANS NOT IN THE SHAREHOLDER APPROVED CATEGORY
On December 13, 1999, we issued to each of Donald Gunn and another employee,
stock options which were reissued on December 14, 2001, to purchase 50,001
shares of our common stock, subject to vesting over a three year period,
exercisable for five years at $1.27 per share. As of June 30, 2003, all 100,002
options are exercisable.
From October 1999 to March 10, 2000, we conducted a private placement of 550,000
units of our securities and raised gross proceeds of approximately $5,500,000.
Each unit consisted of one share of convertible preferred stock and a warrant,
exercisable for five years at $4.50 per share, to purchase two shares of common
stock. In connection with the private placement, we issued to the investors and
consultants, including the placement agent and members of the selling group, an
aggregate of 550,000 shares of preferred stock and 1,956,500 warrants,
exercisable for five years, to purchase shares of common stock, as follows:
15,000 shares at $3.00 per share; 40,000 shares at $3.75 per share; 15,000
shares at $4.00 per share; 550,000 shares at $3.75 per share; 236,500 shares at
$1.65 per share; and 1,100,000 shares at $4.50 per share.
Pursuant to an oral employment agreement effective as of July 2000, and as amended September 7, 2000, we issued to Duncan Yates stock options, which were reissued on May 6, 2001, to purchase up to 100,000 shares of common stock, of which stock options to acquire 50,000 shares vested immediately and stock options to acquire an additional 50,000 shares are subject to vesting upon us attaining certain specified corporate milestones, exercisable for five years at $1.25 per share. As of June 30, 2003, all 100,000 options are exercisable. In June 2004, Mr. Yates exercised options to purchase 5,000 shares at $1.25 per share and sold these shares into the open market at $1.70 per share. On May 31, 2001, we issued warrants to purchase up to 200,000 shares of our common stock exercisable for five years at $1.00 per share in consideration for consulting services. In July 2004, three warrant holders exercised their warrants to purchase 25,000 shares each at $1.00 per share. On June 14, 2002, in connection with the issuance of short-term promissory notes, we issued warrants to purchase up to 87,500 shares of our common stock exercisable for five years at $1.00 per share. On May 24, 2004, we issued to two of our management level employees, Frances Blanco and Duncan Huyler, options to purchase 100,000 shares of our common stock, of which 50,000 options vested on the grant date, and the remaining 50,000 options are subject to vesting over a three year period. The options are exercisable for ten years at $1.06 per share.
SELLING STOCKHOLDERS
This prospectus relates to the resale of 1,450,000 shares of common stock by
four stockholders. The registration of these shares does not necessarily mean
that the selling stockholder will sell all or any of the shares.
The following table provides information regarding the beneficial ownership of
our common stock by the selling stockholders as of July 28, 2004. For purposes
of the table, 10,132,210 shares are assumed to be outstanding after the
offering.
--------------------------------------------------------------------------------------------------------
Number of Percent
Number of Shares Number of Shares Owned Owned
Owned Prior Shares Being After this After
Name of Selling Stockholder to this Offer Offered Offering Offering
--------------------------- ---------------- ------------ ------------ --------
GFX Investments, LLC (1) 1,839,750 1,000,000 839,750 8.3%
Charles C. Bearoff and Charles F. Bearoff (2) 350,000 250,000 100,000 0.9%
Frances Blanco (3) 173,516 100,000 73,516 0.7%
Duncan Huyler (3) 175,040 100,000 75,040 0.7%
TOTAL 2,538,306 1,450,000 1,088,306 10.7%
--------------------------------------------------------------------------------------------------------
(1) The beneficial owner is Richard L. Scott. Mr. Scott owns or controls
entities, including GFX Investments, LLC, which collectively owns 1,839,750
shares of common stock, including 10,000 shares underlying director
compensation stock options and 6,000 shares owned by the Frances Annette
Scott Revocable Trust, of which Mr. Scott's spouse is the trustee.
(2) Includes bene ficial ownership of 100,000 shares underlying unexercised
common stock purchase warrants.
(3) Number of shares owned prior to offering includes shares underlying
unexercised stock options.
GFX Investments, LLC, an entity controlled by Richard L. Scott, purchased
1,000,000 shares of common stock from us for $1.25 million on June 30, 2004. In
accordance with the terms of a related registration rights agreement with GFX
Investments, LLC, we agreed to indemnify GFX Investments, LLC against certain
liabilities under the Securities Act or contribute to payments which GFX
Investments, LLC may be required to make in that respect. In conjunction with
the investment, we agreed to appoint a nominee of GFX Investments, Alan Bazaar,
Vice President and Portfolio Manager for Richard L. Scott Investments, to our
board of directors. Prior to June 30, 2004, we had no material relationship with
GFX Investments, LLC, or its affiliates.
Charles C. Bearoff and Charles F. Bearoff are former holders of 50,000 preferred
shares who did not timely accept our preferred stock offer of conversion which
concluded on December 31, 2003 and whose preferred shares were automatically
converted into 250,000 shares of common stock pursuant to the terms of the
preferred stock designation. Subsequent to December 31, 2003, we permitted them
to receive an additional 250,000 unregistered shares of common stock in
consideration of return of dividend payments and other consideration, such that
we and the former preferred shareholders are in similar positions as if the
former preferred shareholders had timely accepted the offer of conversion on
December 31, 2003.
Each of Frances Blanco and Duncan Huyler are officers of our company. On May 24,
2004, we issued to each of Blanco and Huyler options to purchase 100,000 shares
of our common stock, of which 50,000 options vested on the grant date, and the
remaining 50,000 options are subject to vesting over a three year period. The
options are exercisable for ten years at $1.06 per share.
PLAN OF DISTRIBUTION
The shares of common stock may be offered from time to time by the selling
stockholders or their donees, pledgees, transferees or other successors in
interest for resale by this prospectus in one or more transactions at fixed
prices, at market prices at the same time of sale, at varying prices determined
at the time of sale or at negotiated prices.
The selling stockholders may offer their shares of common stock in one or more
of the following transactions:
o on the American Stock Exchange, any other exchange upon which our shares
may trade in the future, or in the over-the-counter market;
o to purchasers directly;
o in ordinary brokerage transactions in which the broker solicits purchasers;
o through purchases by a broker or dealer as principal and resale by such
broker or dealer for its own account pursuant to this prospectus;
o block trades in which a broker-dealer so engaged will attempt to sell the
shares as agent but may take a position and resell a portion of the block
as principal to facilitate the transaction;
o in connection with short sales; or
o in any combination of one or more of these methods.
Selling stockholders may sell their shares of common stock:
o at market prices prevailing at the time of sale;
o at prices related to such prevailing market prices;
o at negotiated prices; o at fixed prices; or
o at a combination of such prices.
We will pay for substantially all of the expenses incident to the offer and sale
of the shares of common stock offered by the selling stockholders using this
prospectus. The selling stockholders will pay applicable stock transfer taxes,
transfer fees and brokerage commissions or underwriting or other discounts.
To comply with the securities laws of certain states, the shares of common stock
offered by this prospectus may need to be offered or sold in such jurisdictions
only through registered or licensed brokers or dealers.
The offering of the shares of common stock pursuant to this prospectus will
terminate on the earlier of the time when the shares of common stock:
o have been sold by the selling stockholders pursuant to this prospectus;
o the time when all of the shares of common stock are eligible to be sold
pursuant to Rule 144(k) under the Securities Act; or
o this prospectus is no longer effective.
DESCRIPTION OF OUR SECURITIES
GENERAL
Our authorized capital consists of 20,000,000 shares of common stock, par value
$.001 per share, and 5,000,000 shares of preferred stock, par value $.001 per
share.
As of July 28, 2004, we had 9,932,210 shares of common stock issued and
outstanding.
As of July 28, 2004, we had no shares of preferred stock issued and outstanding.
COMMON STOCK
The holders of the common stock are entitled to cast one vote for each share
held of record on all matters presented to stockholders. The holders of common
stock do not have cumulative voting rights, which means that the holders of more
than 50% of the outstanding shares voting for the election of our directors can
elect all of the directors, and in such an event, the holders of the remaining
shares will be unable to elect any of our directors. Our certificate of
incorporation does not provide that the holders of common stock have any
preemptive right.
The holders of the outstanding shares of common stock are entitled to receive
dividends out of assets legally available at such times and in such amounts as
the Board of Directors may from time to time determine, subject to the rights of
the holders of our preferred stock. Upon our liquidation, dissolution, or
winding up, the assets legally available for distribution to the stockholders
will be distributed equally among the holders of the shares, subject to the
rights of the holders of our preferred stock.
PREFERRED STOCK
Our Certificate of Incorporation allows our Board of Directors to issue shares
of preferred stock in one or more series. The Board can fix for each series,
voting powers, designations, preferences and relative, participating, or other
special rights to the extent permissible under the Delaware General Corporation
Law.
The Board designated 1,000,000 shares as series A preferred stock. The Board,
without a vote of the series A preferred stock holders, can increase the number
of authorized series A preferred stock above the number of shares of series A
preferred stock actually outstanding at any time. The preferred stock does not
carry voting rights.
On August 6, 2003, we filed a certificate of amendment to our preferred stock
certificate of designation which provides that no payments of dividends or
deferred dividends shall be made if the company is in default of its senior
lending agreement with a financial institution or if such payment causes an
event of default under the senior lending agreement.
In December 2003, we filed a certificate of amendment to our preferred share
certificate of designation which provides for automatic conversion of preferred
shares into common shares if less than a majority of the originally issued
preferred shares becomes outstanding.
In December 2003, we had 547,500 shares of series A preferred stock issued and
outstanding. The series A preferred stock was convertible into shares of common
stock at the rate of one preferred share into five shares of common stock in
accordance with the terms of the designation of the series A preferred stock.
On December 31, 2003, we concluded an exchange offer that provided our preferred
stockholders an opportunity to exchange each outstanding preferred share for 10
shares of our common stock. Preferred shareholders who accepted the offer waived
their rights to unpaid dividends and interest on their preferred stock. As a
consequence of matters related to the exchange offer and the automatic
conversion under the certificate of designation of the series A preferred stock,
we issued an aggregate of 5,275,000 shares to former preferred shareholders.
DIVIDEND POLICY
We have never declared any cash dividends on our common stock. Future cash
dividends on the common stock, if any, will be at the discretion of our Board of
Directors and will depend on our future operations and earnings, capital
requirements and surplus, general financial condition, contractual restrictions,
and other factors that the Board of Directors may consider important.
Prior to January 1, 2004, we had shares of series A preferred stock issued and
outstanding. Our series A preferred stock carried a fixed dividend at an annual
rate of 11.5%. Dividends were to be paid each quarter in arrears. The first
dividend payment occurred on January 1, 2000.
Unless and until we have fully paid all dividends on the outstanding shares of
series A preferred stock, we agreed not to declare or pay cash dividends, or
distribute or set aside assets, for any of our other securities. Further, the
certificate of designation for the series A preferred stock provided that we may
not pay dividends if payment of dividends would violate certain financial
criteria of our senior lending agreement with a financial institution.
Our senior lending agreement with a financial institution restricts the payment
of dividends if certain financial conditions are not met. Under the senior
lending agreement, we are required to maintain a certain level of tangible
capital funds. Tangible capital funds is defined as the sum of stockholders'
equity, PLUS subordinated debt, plus dividends payable, MINUS intangibles and
loans to stockholders, employees, other related parties. The lender sets the
level of tangible capital funds that we are required to maintain. For June 30,
2004, September 30, 2004, December 31, 2004, and March 31, 2005, the minimum
levels were set at $500,000, $600,000, $700,00 and $800,000. Additionally, under
the senior lending agreement, we are required to maintain a debt service
coverage ratio of not less than 1.2 to 1 for the quarter ending September 30,
2004 and of not less than 1.35 to 1 for the quarters ending thereafter. The
ratio is determined on a quarterly basis, considering net income PLUS interest
expense, tax expense, depreciation and amortization expense, LESS, the sum of
dividends actually paid, unfunded capital expenditures and taxes actually paid,
DIVIDED BY the sum of the current portion of long term debt actually paid, any
unscheduled debt payments, and interest expense actually paid.
We do not pay, but accrue, dividends if payment would violate the terms of the
senior lending agreement. As of June 30, 2004, we are not in default of the
financial restrictions of the senior lending agreement that prohibits the
payment of dividends. As of June 30, 2003, and as of September 30, 2003, payment
of all accrued but unpaid dividends would have violated the tangible capital
funds level and the debt service coverage ratio that we are required to maintain
under the senior lending agreement. We qualified to recommence the payment of
dividends on or about January 1, 2004.
In connection with our fiscal years ended June 30, 2002 and June 30, 2003 and
through the quarter ended March 30, 2004, we paid or accrued dividends as
follows:
o in the year ended June 30, 2002, we accrued $577,476 of stock dividends and
paid dividends totalling $52,039 through issuance of 53,558 shares of
common stock valued at $0.95 to $1.10 per share, and as of June 30, 2002,
we had $113,849 in dividends accrued and unpaid;
o in the year ended June 30, 2003, we accrued $586,059 of stock dividends and
paid dividends totalling $43,556 through issuance of 45,847 shares of
common stock valued at $0.95 per share, and as of June 30, 2003, we had
$699,919 in dividends accrued and unpaid;
o in the three months ended September 30, 2003, we accrued $157,406 in
dividends; and, as of September 30, 2003, an aggregate of $857,325 in
dividends remained accrued and unpaid;
o in 2004, we paid an aggregate of $66,125 in accrued dividends.
As of June 30, 2004, we do not have any unpaid or accrued dividends on our
preferred stock or other securities.
PROVISIONS REGARDING CHANGE OF CONTROL
Our certificate of incorporation and by-laws do not contain any provisions that
are designed to delay, defer or prevent a change in control of the company.
Our Board of Directors is not presently aware of any takeover attempts of our
company and is not aware of any agreements that exist in the event of a change
of control. The Board is Directors does not have any current plans to propose
any changes to the charter documents or corporate structure that would have an
anti-takeover purpose or effect.
DELAWARE LAW
We are subject to Section 203 of the Delaware General Corporation Law. This
statute generally prohibits a publicly-held Delaware corporation from engaging,
under certain circumstances, in a business combination with an interested
stockholder for a period of three years after the date of the transaction in
which the person becomes an interested stockholder, unless:
o prior to the date at which the person became an interested stockholder,
the board of directors approved either the business combination or the
transaction in which the person becomes an interested stockholder;
o the stockholder acquires more than 85% of the outstanding voting stock
of the corporation, excluding shares held by directors who are officers
or held in certain employee stock plans, upon consummation of the
transaction in which the person becomes an interested stockholder; or
o the business combination is approved by the board of directors and by
at least 66 2/3% of the outstanding voting stock of the corporation,
excluding shares held by the interested stockholder, at a meeting of
stockholders and not by written consent held on or subsequent to the
date such person became an interested stockholder.
An interested stockholder is a person who, together with affiliates and
associates, owns, or at any time within the prior three years did own, 15% or
more of the corporation's voting stock. Section 203 defines a business
combination to include mergers, consolidations, stock sales, asset-based
transactions and other transactions resulting in a financial benefit to the
interested stockholder.
TRANSFER AGENT
The transfer agent for our common stock is Continental Stock Transfer & Trust
Company, New York, New York.
MARKET INFORMATION
Our common stock is listed on the American Stock Exchange under the symbol
"GFX".
The following table sets forth for the periods indicated, the high and low
closing sale prices for a share of our common stock, during the relevant
periods, as reported by the American Stock Exchange.
Fiscal Year Quarter Ended High Low
----------- ------------------ ----- -----
2003 September 30, 2002 $1.00 $0.60
December 31, 2002 $0.85 $0.50
March 31, 2003 $0.63 $0.47
June 30, 2003 $0.60 $0.40
2004 September 30, 2003 $1.59 $0.60
December 31, 2003 $1.34 $1.04
March 31, 2004 $1.20 $0.85
June 30, 2004 $1.85 $1.10
----------- ------------------ ----- -----
HOLDERS
The approximate number of holders of record of our common stock as of June 30,
2004 was 404. As of that date, there were approximately 633 beneficial
stockholders, including stockholders holding common stock under nominee security
position listings.
LEGAL MATTERS
Our counsel, Law Offices of Dan Brecher, New York, New York, is giving us an
opinion on the validity of the shares offered by this prospectus. Dan Brecher,
the sole principal of the law firm, through his individual retirement accounts
and retirement plan, owns 97,491 shares of common stock of Media Sciences
International, and warrants to purchase 20,000 shares of common stock,
exercisable at $4.50 per share until October 1, 2004.
EXPERTS
Our financial statements for the years ended June 30, 2003 and 2002, included in
this prospectus have been audited by Wiss & Company, LLP, independent auditors,
as stated in their reports appearing in this prospectus, and are included in
reliance upon such reports given on the authority of said firm as experts in
accounting and auditing.
INDEMNIFICATION
We will indemnify our directors, officers, and controlling persons against
liability under the Securities Act to the extent permitted by the General
Corporation Law of Delaware. We will indemnify them against all expenses and
liabilities that is reasonably incurred in connection with this prospectus to
the extent allowed under Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities, other
than the payment by us of expenses incurred or paid by any of our directors,
officers, or controlling persons in the successful defense of any action, suit
or proceeding, is asserted by such directors, officers or controlling persons in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on Form SB-2 under the
Securities Act filed by us with the Securities and Exchange Commission. This
prospectus omits certain information set forth in the registration statement and
the exhibits filed with the registration statement. For further information
about us and the shares offered by this prospectus, reference is made to the
registration statement and the exhibits filed with it.
We are subject to the informational requirements of the Securities Exchange Act
of 1934 which requires us to file annual and quarterly reports, proxy statements
and other information with the Securities and Exchange Commission.
You may read and copy any document we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
further information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. Our filings are also available to the public from
commercial document-retrieval services and at the web site maintained by the SEC
at http://www.sec.gov.
INDEX TO FINANCIAL STATEMENTS
PAGE
FINANCIAL STATEMENTS (UNAUDITED) - MARCH 31, 2004
Condensed Consolidated Balance Sheets
as of March 31, 2004 (Unaudited) and June 30, 2003 F-1
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended March 31, 2004 and 2003 (Unaudited) F-2
Condensed Consolidated Statement of Changes in Shareholders' Equity
for the Nine Months Ended March 31, 2004 (Unaudited) F-3
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended March 31, 2004 and 2003 (Unaudited) F-4
Notes to Condensed Consolidated Financial Statements (Unaudited) F-5
FINANCIAL REPORT - JUNE 30, 2003
Independent Auditors' Report F2-1
Consolidated Balance Sheets F2-2
Consolidated Statements of Operations F2-3
Consolidated Statements of Changes in Shareholders' Equity F2-4
Consolidated Statements of Cash Flows F2-5
Notes to Consolidated Financial Statements F2-7
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2004 2003
ASSETS (Unaudited)
------ ------------ ------------
CURRENT ASSETS :
Cash $ 112,053 $ 66,467
Accounts receivable, less allowance for
doubtful accounts of $35,000 2,262,353 1,841,060
Inventories 1,786,677 1,089,809
Deferred income taxes 583,728 1,000,000
Prepaid expenses and other current assets 265,200 173,050
------------ ------------
Total Current Assets 5,010,011 4,170,386
------------ ------------
PROPERTY AND EQUIPMENT, NET 940,472 1,362,734
------------ ------------
OTHER ASSETS:
Goodwill and other intangible assets, net 4,470,827 4,478,190
Deferred income taxes -- 47,315
Other assets 51,449 58,102
------------ ------------
4,522,276 4,583,607
------------ ------------
TOTAL ASSETS $ 10,472,759 $ 10,116,727
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Bank line of credit $ 2,247,606 $ 1,779,862
Short-term debt and current maturities of long-term debt 46,215 405,256
Accounts payable 1,977,660 1,340,257
Accrued expenses and other current liabilities 95,951 258,512
Income taxes payable 95,309 131,425
Accrued product warranty 250,000 250,000
Accrued expense - supplier 90,344 448,952
Dividends payable -- 699,919
Loan from investors -- 200,000
Loan from officer 255,000 280,000
Deferred revenue 165,401 196,234
------------ ------------
Total Current Liabilities 5,223,486 5,990,417
------------ ------------
OTHER LIABILITIES :
Long-term debt, less current maturities 7,332 39,081
Loan from investors 400,000 400,000
Loan from officer 195,000 195,000
------------ ------------
Total Other Liabilities 602,332 634,081
------------ ------------
TOTAL LIABILITIES 5,825,818 6,624,498
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY :
Series A Convertible Preferred stock, $.001 par value,
Authorized 1,000,000 shares; issued none in March,
547,500 in June -- 547
Common Stock, $.001 par value,
Authorized 20,000,000 shares; issued 8,602,210 shares
in March, 3,577,210 shares in June 8,603 3,578
Additional paid-in capital 6,131,526 5,109,343
Cost of 10,564 shares of common stock in treasury (20,832) (20,832)
Accumulated deficit (1,472,356) (1,600,407)
------------ ------------
Total Shareholders' Equity 4,646,941 3,492,229
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,472,759 $ 10,116,727
============ ============
See accompanying notes to condensed consolidated financial statements.
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31 March 31
2004 2003 2004 2003
------------ ------------ ------------ ------------
NET SALES $ 4,874,606 $ 3,665,763 $ 12,907,606 $ 11,178,469
------------ ------------ ------------ ------------
COST OF GOODS:
Cost of sales, excluding depreciation 2,567,609 1,681,447 6,315,116 5,208,097
Depreciation 118,754 135,750 403,571 391,944
------------ ------------ ------------ ------------
Total cost of goods 2,686,363 1,817,197 6,718,687 5,600,041
------------ ------------ ------------ ------------
GROSS PROFIT 2,188,243 1,848,566 6,188,919 5,578,428
------------ ------------ ------------ ------------
OTHER COSTS AND EXPENSES:
Selling, general and administrative 1,817,619 1,356,297 4,606,442 3,890,148
Depreciation and amortization 61,909 65,886 191,495 203,212
------------ ------------ ------------ ------------
Total other costs and expenses 1,879,528 1,422,183 4,797,937 4,093,360
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 308,715 426,383 1,390,982 1,485,068
INTEREST EXPENSE, NET 95,298 101,043 296,506 341,736
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 213,417 325,340 1,094,476 1,143,332
------------ ------------ ------------ ------------
INCOME TAXES (CREDITS) :
Current 19,214 30,781 (25,797) 104,648
Deferred 66,152 100,855 463,587 354,433
------------ ------------ ------------ ------------
Total income taxes 85,366 131,636 437,790 459,081
------------ ------------ ------------ ------------
NET INCOME
128,051 193,704 656,686 684,251
PREFERRED STOCK DIVIDENDS AND CHARGE FOR INDUCED
CONVERSION -- 157,406 2,071,230 472,219
------------ ------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS $ 128,051 $ 36,298 $ (1,414,544) $ 212,032
============ ============ ============ ============
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,602,210 3,577,210 5,252,210 3,561,928
============ ============ ============ ============
DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 8,691,117 3,577,210 5,252,210 3,562,672
============ ============ ============ ============
BASIC AND DILUTED NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ 0.01 $ 0.01 $ (0.27) $ 0.06
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 2004
(UNAUDITED)
Additional Total
Preferred Stock Common Stock Paid-in Treasury Accumulated Shareholders'
----------------- ------------------
Shares Amount Shares Amount Capital Stock Deficit Equity
-------- ------ --------- ------ ----------- -------- ----------- -----------
BALANCES, JUNE 30, 2003 547,500 $ 547 3,577,210 $3,578 $ 5,109,343 $(20,832) $(1,600,407) $ 3,492,229
Issuance of common stock
for preferred conversion (547,500) (547) 5,025,000 5,025 2,564,778 -- -- 2,569,256
Preferred stock Dividend, 11.5% -- -- -- -- (1,542,595) -- (528,635) (2,071,230)
Net income -- -- -- -- -- -- 656,686 656,686
-------- ------ --------- ------ ----------- -------- ----------- -----------
BALANCES, MARCH 31, 2004 -- $ -- 8,602,210 $8,603 $ 6,131,526 $(20,832) $(1,472,356) $ 4,646,941
======== ====== ========= ====== =========== ======== =========== ===========
See accompanying notes to condensed consolidated financial statements.
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
March 31,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES :
Net income $ 656,686 $ 684,251
Adjustments to reconcile net income to net cash
provided by (used in) operating activities :
Depreciation and amortization 595,066 595,156
Deferred income taxes 463,587 354,433
Provision for bad debts 37,527 --
Changes in operating assets and liabilities :
Accounts receivable (458,820) (851,574)
Inventories (696,868) 131,470
Prepaid expenses and other current assets (92,150) (21,870)
Other assets 6,653 (2,369)
Accounts payable 637,403 (631,827)
Income taxes payable (124,299) 102,900
Accrued expenses and other current liabilities (86,411) 60,856
Accrued product warranty -- (250,000)
Accrued expense - supplier (358,608) (197,980)
Deferred revenue (30,833) (67,312)
--------- ---------
Net cash provided by (used in) operating activities 548,933 (93,866)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES :
Purchases of property and equipment (165,441) (201,321)
Purchase of intangible assets -- (94,609)
--------- ---------
Net cash used in investing activities (165,441) (295,930)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES :
Bank line of credit, net 467,744 90,947
Payments of debt (390,790) (140,789)
Debt proceeds -- 361,071
Loan from officer (25,000) 120,000
Payments on loans from investors (200,000) --
Dividends paid (152,375) --
Costs of issuance of common stock (37,485) --
--------- ---------
Net cash provided by (used in) financing activities (337,906) 431,229
--------- ---------
NET INCREASE IN CASH
45,586 41,433
CASH, BEGINNING OF PERIOD 66,467 42,180
--------- ---------
CASH, END OF PERIOD $ 112,053 $ 83,613
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION :
Interest paid $ 319,683 $ 263,838
========= =========
Income taxes paid $ 10,431 $ 998
========= =========
Issuance of common stock as dividend payment $ 704,950 $ 43,556
========= =========
Issuance of common stock for accrued interest on dividends $ 11,851 $ --
========= =========
See accompanying notes to condensed consolidated financial statements.
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION :
Our accounting and reporting policies conform to accounting principles
generally accepted in the United States of America. Except for the
June 30, 2003 consolidated balance sheet, the consolidated financial
statements presented herein are unaudited but reflect all adjustments
which, in our opinion, are necessary for the fair presentation of the
consolidated financial position, results of operations and cash flows
for the interim periods presented. All adjustments reflected in the
interim consolidated financial statements are of a normal recurring
nature. You should read these consolidated financial statements in
conjunction with the consolidated financial statements and notes
thereto and the report of independent accountants included elsewhere
in this registration statement. The year-end consolidated balance
sheet data was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally
accepted in the United States of America. The results of operations
for the three and nine months ended March 31, 2004 are not necessarily
indicative of the results to be expected for the full year.
NOTE 2 - NATURE OF BUSINESS :
We are engaged in the business of manufacturing and distributing
supplies for workgroup or business color printers. Our products
include solid ink sticks, color toner cartridges and other consumable
items. We distribute our products through an international network of
dealers and distributors. We also sell directly to end-users through
programs designed to foster our supplies business.
NOTE 3 - STOCK-BASED COMPENSATION PRO FORMA DISCLOSURE :
The Company follows the intrinsic value method of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations in accounting for its
employee stock options. FAS 123 permits a company to elect to follow
the intrinsic value method of APB 25 rather than the alternative fair
value accounting provided under FAS 123, but requires pro forma net
income (loss) and earnings (loss) per share disclosures as well as
various other disclosures. The Company has adopted the disclosure
provisions required under Financial Accounting Standards Board
Statement No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" (FAS 148). Because the exercise price of
the Company's stock options equals the market price of the underlying
stock on the date of grant, no compensation expense was recognized
under APB 25.
Pro forma information regarding net income (loss) and earnings (loss)
per share is required by FAS 123 and FAS 148 and has been determined
as if the Company had accounted for its employee stock options under
the fair value method of FAS 123.
The fair value of options granted in fiscal 2004 and 2003 were
estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions, respectively:
risk-free interest rates of 3.83 to 6.0%, dividend yield of 0.0%,
volatility of 74% in 2004 and 72% in 2003, and a weighted-average
expected life of the options of five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective input assumptions
including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable measure of the fair value of its employee stock options.
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income as reported $ 128,051 $ 193,704 $ 656,686 $ 684,251
Less preferred stock dividends -- 157,406 2,071,230 472,219
----------- ----------- ----------- -----------
Income (loss) applicable to common shareholders 128,051 36,298 (1,414,544) 212,032
Stock-based employee compensation expense
under fair value method, net of related
tax effects (13,204) (7,201) (30,387) (15,313)
----------- ----------- ----------- -----------
Pro forma net income (loss) $ 114,847 $ 29,097 $(1,444,931) $ 196,719
=========== =========== =========== ===========
Income (loss) per share:
Basic and diluted, as reported $ 0.01 $ 0.01 $ (0.27) $ 0.06
=========== =========== =========== ===========
Basic and diluted, pro forma $ 0.01 $ 0.01 $ (0.28) $ 0.06
=========== =========== =========== ===========
NOTE 4 - BANK LINE OF CREDIT :
We have an agreement with a lender under which we can borrow up to
$3,000,000 under a revolving line of credit, subject to availability
of collateral. Borrowings bear interest at 1.75% over the lender's
base rate, are payable on demand and are collateralized by all of the
assets of the Company. As of March 31, 2004, $2,247,606 was
outstanding under this line and the interest rate was 5.75%. The line
of credit expires on October 31, 2006.
NOTE 5 - PREFERRED STOCK CONVERSION :
In November 2003, we initiated a voluntary Offer of Conversion,
whereby preferred shareholders who accepted the offer waived their
rights to unpaid dividends and interest on their preferred stock and
they received ten shares of common stock for each preferred share
tendered. 86% of the preferred shareholders tendered a total of
457,500, or 84% of the outstanding, Series A preferred shares. The
balance of the Series A preferred shares (90,000) were automatically
converted to common stock at the rate of five shares of common stock
for each preferred share, pursuant to the terms of the amended
Certificate of Designation, which amendment was approved by a majority
of the preferred shareholders. Those preferred shareholders whose
preferred shares were converted at the rate of five to one were paid
their accrued and unpaid dividends.
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The conversion of the preferred stock was accounted for according to
EITF Topic No. D-42 as an Induced Conversion of Preferred Stock.
Consequently the fair value of the securities (ten shares of common
stock) issued over the fair value of the securities issuable pursuant
to the original conversion terms (five shares of common stock) less
the accrued dividends and interest given up by the shareholders was
subtracted from net income to arrive at net loss applicable to common
shareholders. The non-cash dividend included in the preferred stock
dividends for the nine months ended March 31, 2004 was calculated as
follows :
Fair value of securities issued (5,025,000 x $1.15) $ 5,778,750
Less :
Fair value of securities issuable pursuant to the original (3,148,125)
conversion terms (547,500 x 5 x $1.15)
Value of accrued dividends waived (704,950)
Value of accrued interest waived (11,851)
-----------
Non-cash preferred stock dividend $ 1,913,824
===========
NOTE 6 - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed using the weighted average
number of shares outstanding. Diluted earnings per common share is
computed using the weighted average number of shares outstanding
adjusted for the incremental dilutive shares attributed to outstanding
options and warrants to purchase common stock, and other potentially
dilutive securities.
The following table sets forth the computation of basic and diluted
earnings (loss) per share :
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
---------- --------- ----------- ----------
Numerator :
Income (loss) applicable to
common shareholders - basic
and diluted $ 128,051 $ 36,298 $(1,414,544) $ 212,032
========== ========= =========== ==========
Denominator :
Denominator for basic earnings
per share :
Weighted average shares 8,602,210 3,577,210 5,252,210 3,561,928
Effect of dilutive securities -
stock options and warrants 88,907 -- -- 744
---------- --------- ----------- ----------
Denominator for diluted earnings
per share 8,691,117 3,577,210 5,252,210 3,562,672
========== ========= =========== ==========
Earnings (loss) per share :
Basic $ 0.01 $ 0.01 $ (0.27) $ 0.06
========== ========= =========== ==========
Diluted $ 0.01 $ 0.01 $ (0.27) $ 0.06
========== ========= =========== ==========
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following warrants and options to purchase common stock were
excluded from the computation of diluted earnings (loss) per share for
the three and nine months ended March 31, 2004 because they were
anti-dilutive for those periods:
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
--------- --------- --------- ---------
Anti-dilutive warrants and options 2,727,373 3,382,979 2,426,873 3,388,235
========= ========= ========= =========
The conversion of the Class A convertible preferred stock has been
excluded from the computation of diluted earnings per share for the
three and nine months ended March 31, 2004. Such conversion, when
taking into account the additional income applicable to common
shareholders generated by the elimination of the dividend, would be
anti-dilutive.
NOTE 7 - RECALL AND WARRANTY EXPENSES:
The Company provides a warranty for all of its consumable supply
products. The Company's warranty stipulates that the Company will pay
reasonable and customary charges for the repair of a printer needing
service as a result of using the Company's products. The Company
estimates the costs that may be incurred and records a liability in
the amount of such costs at the time product revenue is recognized.
Factors that may affect the warranty include the number of units
shipped to customers, historical and anticipated rates of warranty
claims and cost per claim. The Company periodically assesses the
adequacy of its recorded warranty liability and adjusts the amount as
necessary. These expenses are classified as selling, general and
administrative costs.
Changes in accrued product warranty for the three and nine months
ended March 31, 2004 and 2003 are as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Warranty reserve at the beginning of the period $ 250,000 $ 250,000 $ 250,000 $ 500,000
----------- ----------- ----------- -----------
Warranties accrued during the period 390,000 280,000 970,000 1,055,000
Warranties settled during the period (390,000) (280,000) (970,000) (1,305,000)
----------- ----------- ----------- -----------
Net change in warranty reserve -- -- -- (250,000)
----------- ----------- ----------- -----------
Warranty reserve at March 31 $ 250,000 $ 250,000 $ 250,000 $ 250,000
=========== =========== =========== ===========
In January 2002, the Company recalled all solid ink products
manufactured between May 2001 and January 2002. It was discovered that
the use of the Company's solid ink sticks manufactured during that
time period could cause printer reliability issues. Management
believes that it has resolved the problem. In addition, two
independent test laboratories have tested the reliability of the
Company's solid ink and have found no reliability issues associated
with the use of the Company's solid ink products.
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company has filed a claim under its umbrella liability policy for
the unreimbursed portion of the warranty expenses associated with the
recall in January 2002. The insurance carrier has denied coverage
under the policy, and filed suit for a declaratory judgement seeking
to rescind the policy or in the alternative to have the court declare
that the insurance company has no obligation to indemnify the Company
for these claims. The Company has filed an answer and counterclaim in
this matter.
Even though management believes that the recall is complete, the
Company will continue to receive warranty claims associated with the
recalled ink and other warranty expenses for products sold and not
under the recall. While the Company believes that the reserve should
be adequate to resolve the remaining claims, it is possible that the
warranty claims may exceed the accrual and, therefore, differences, if
any, will be expensed in future periods.
To the Board of Directors and Shareholders of
Media Sciences International, Inc.
We have audited the accompanying consolidated balance sheets of Media Sciences International, Inc. and subsidiaries as of June 30, 2003 and 2002, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Media Sciences International, Inc. and subsidiaries at June 30, 2003 and 2002, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
| /s/ WISS & COMPANY, LLP WISS & COMPANY, LLP |
Livingston, New Jersey
August 6, 2003
June 30,
----------------------------
ASSETS 2003 2002
------ ------------ ------------
CURRENT ASSETS:
Cash and equivalents $ 66,467 $ 42,180
Accounts receivable, less allowance for
doubtful accounts of $35,000 1,841,060 1,257,270
Inventories 1,089,809 1,324,583
Deferred income taxes 1,000,000 1,000,000
Prepaid expenses and other current assets 173,050 59,846
------------ ------------
Total Current Assets 4,170,386 3,683,879
------------ ------------
PROPERTY AND EQUIPMENT, NET 1,362,734 1,778,497
------------ ------------
OTHER ASSETS:
Goodwill and other intangible assets, net 4,478,190 4,392,773
Deferred income taxes 47,315 500,000
Other assets 58,102 57,733
------------ ------------
4,583,607 4,950,506
------------ ------------
$ 10,116,727 $ 10,412,882
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term debt $ 2,185,118 $ 2,113,794
Accounts payable 1,340,257 2,311,790
Accrued expenses and other current liabilities 258,512 129,495
Income tax payable 131,425 --
Accrued product warranty 250,000 500,000
Accrued expense - supplier 448,952 395,153
Dividends payable 699,919 113,849
Loan from investors 200,000 535,242
Loan from officer 280,000 355,000
Deferred revenues 196,234 230,297
------------ ------------
Total Current Liabilities 5,990,417 6,684,620
------------ ------------
OTHER LIABILITIES:
Long-term debt, less current maturities 39,081 194,336
Loan from investors 400,000 --
Loan from officer 195,000 --
Accrued expense - supplier -- 330,644
------------ ------------
634,081 524,980
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Series A Convertible Preferred stock,
$.001 par value,
Authorized 1,000,000 shares;
issued and outstanding 547,500 shares 547 547
Common stock, $.001 par value,
Authorized 20,000,000 shares;
issued and outstanding 3,577,210
shares in 2003 and 3,531,363 in 2002 3,578 3,532
Additional paid-in capital 5,109,343 5,065,833
Cost of 10,564 shares of common stock in treasury (20,832) (20,832)
Retained earnings (deficit) (1,600,407) (1,845,798)
------------ ------------
Total Shareholders' Equity 3,492,229 3,203,282
------------ ------------
$ 10,116,727 $ 10,412,882
============ ============
See accompanying notes to consolidated financial statements.
Year Ended June 30,
---------------------------
2003 2002
------------ ------------
NET SALES $ 14,597,862 $ 13,844,318
------------ ------------
COSTS OF GOODS :
Cost of sales, excluding depreciation 6,642,710 6,793,527
Depreciation 532,403 447,313
------------ ------------
Total cost of goods 7,175,113 7,240,840
------------ ------------
GROSS PROFIT 7,422,749 6,603,478
OTHER COSTS AND EXPENSES :
Selling, general and administrative 5,255,743 6,282,040
Depreciation and amortization 258,109 288,784
------------ ------------
Total other costs and expenses 5,513,852 6,570,824
------------ ------------
INCOME FROM OPERATIONS 1,908,897 32,654
INTEREST EXPENSE, NET 448,623 409,857
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (CREDITS) 1,460,274 (377,203)
INCOME TAXES (CREDITS) 585,258 (147,670)
------------ ------------
NET INCOME (LOSS) $ 875,016 $ (229,533)
============ ============
PREFERRED STOCK DIVIDENDS $ 629,625 $ 629,515
============ ============
INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $ 245,391 $ (859,048)
============ ============
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,565,748 3,484,057
============ ============
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,571,374 --
============ ============
BASIC NET INCOME (LOSS) PER COMMON SHARE $ 0.07 $ (0.25)
============ ============
DILUTED NET INCOME (LOSS) PER COMMON SHARE $ 0.07 $ --
============ ============
See accompanying notes to consolidated financial statements.
Common Stock Preferred Stock Additional Retained Total
------------------ --------------- Treasury Paid-in Earnings Shareholders'
Shares Amount Shares Amount Stock Capital (Deficit) Equity
--------- ------ ------- ------ -------- ---------- ----------- -------------
BALANCES, JUNE 30, 2001 3,477,805 $3,478 547,500 $ 547 $(20,832) $5,599,991 $(1,616,265) $ 3,966,919
YEAR ENDED JUNE 30, 2002:
Issuance of stock for
dividend payment 53,558 54 -- -- -- 51,985 -- 52,039
Issuance of warrants for
services -- -- -- -- -- 43,372 -- 43,372
Preferred stock dividend, 11.5% -- -- -- -- -- (629,515) -- (629,515)
Net loss -- -- -- -- -- -- (229,533) (229,533)
--------- ------ ------- ------ -------- ---------- ----------- -------------
BALANCES, JUNE 30, 2002 3,531,363 3,532 547,500 547 (20,832) 5,065,833 (1,845,798) 3,203,282
YEAR ENDED JUNE 30, 2003:
Issuance of stock for
dividend payment 45,847 46 -- -- -- 43,510 -- 43,556
Preferred stock dividend, 11.5% -- -- -- -- -- -- (629,625) (629,625)
Net income -- -- -- -- -- -- 875,016 875,016
--------- ------ ------- ------ -------- ---------- ----------- -------------
BALANCES, JUNE 30, 2003 3,577,210 $3,578 547,500 $ 547 $(20,832) $5,109,343 $(1,600,407) $ 3,492,229
========= ====== ======= ====== ======== ========== =========== =============
See accompanying notes to consolidated financial statements.
Year Ended June 30,
--------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 875,016 $ (229,533)
Adjustments to reconcile net income (loss)
to net cash flows from operating activities:
Depreciation and amortization 790,511 739,711
Deferred income taxes 452,685 (152,000)
Provision for bad debts 118,220 77,896
Changes in operating assets and liabilities:
Accounts receivable (702,010) 470,106
Inventories 165,514 (230,152)
Prepaid expenses and other current assets (113,204) 23,740
Other assets (369) 7,525
Dividends payable -- (56,749)
Accounts payable (971,533) 921,825
Accrued expenses and other current liabilites 10,442 (11,699)
Accrued expense - supplier (276,844) (158,203)
Deferred revenues (34,063) (47,536)
----------- -----------
Net cash flows from operating activities 314,365 1,354,931
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (296,296) (461,142)
Purchase of intangible assets (94,608) --
----------- -----------
Net cash flows from investing activities (390,904) (461,142)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable to bank, net 90,947 (14,825)
Payments on short-term debt, net (19,623) (360,242)
Payments on long-term debt (155,256) (196,452)
Net advances from officer 120,000 30,000
64,758 135,242
Preferred stock dividends -- (577,476)
----------- -----------
Net cash flows from financing activities 100,826 (983,753)
----------- -----------
NET CHANGE IN CASH AND EQUIVALENTS 24,287 (89,964)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 42,180 132,144
----------- -----------
CASH AND EQUIVALENTS, END OF YEAR $ 66,467 $ 42,180
=========== ===========
See accompanying notes to consolidated financial statements.
(Continued)
Year Ended June 30,
--------------------------
2003 2002
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 401,982 $ 413,825
=========== ===========
Income taxes paid $ 1,148 $ 11,130
=========== ===========
Issuance of common stock as dividend payment $ 43,556 $ 52,039
=========== ===========
Acquisition of equipment by capital leases $ -- $ 56,106
=========== ===========
Issuance of warrants in connection with proceeds
received on short - term borrowings $ -- $ 43,372
=========== ===========
Transfer of inventory to property and equipment $ 69,260 $ 119,927
=========== ===========
See accompanying notes to consolidated financial statements.
Nature of the Business – Media Sciences International, Inc. and subsidiaries, collectively referred to as the “Company”, manufacture and distribute supplies for workgroup color printers. The Company’s products include solid ink sticks and color toner cartridges. The Company distributes its products through an international network of dealers and distributors. The Company also sells directly to end users through programs designed to foster the supplies business. The Company has its corporate headquarters in New Jersey and has offices in Redmond, Washington.
Name Change – On April 19, 2002, the Company’s shareholders approved an amendment to its Certificate of Incorporation, changing the corporate name from Cadapult Graphic Systems, Inc. to Media Sciences International, Inc.
Change of Organizational Structure – On April 19, 2002, the Company’s shareholders voted to approve a structural change by agreement between Media Sciences International, Inc. and a newly formed, wholly owned New Jersey corporation named Cadapult Graphic Systems, Inc.
As a result of the change in corporate structure, Media Sciences International, Inc. is now organized with two operating subsidiaries: Media Sciences, Inc. and Cadapult Graphic Systems, Inc. Media Sciences International, Inc., as a parent corporation, does not have a present intent to engage in substantive independent business operations. The Company intends to conduct substantially all of its operations through subsidiaries.
Principles of Consolidation – The consolidated financial statements include the accounts of Media Sciences International, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Estimates and Uncertainties – 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. Actual results, as determined at a later date, could differ from those estimates.
Revenue Recognition – Revenue is recognized at the point of shipment for goods sold, and ratably through the duration of service contracts. Deferred revenue consists principally of billings on service contracts prior to rendering related services.
Cash Equivalents – Cash equivalents include all highly liquid short-term investments purchased with original maturities of three months or less.
Concentration of Credit Risk – The Company does not use any derivatives and its financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and unsecured trade receivables. The Company maintains its cash balances in financial institutions which are insured by the Federal Deposit Insurance Corporation up to $100,000 each. At various times during the year, such balances may have exceeded the FDIC limit.
Concentrations of credit risk with respect to all trade receivables are considered to be limited due to the number of customers comprising the Company’s customer base. The Company performs ongoing credit evaluations of its customers’ financial condition and does not require collateral. Management feels that credit risk beyond the established allowance at June 30, 2003, is limited.
Financial Instruments – Financial instruments include cash, accounts receivable, accounts payable, accrued expenses, and short-term and long-term debt. The amounts reported for financial instruments are considered to be reasonable approximations of their fair values. The fair value estimates presented here in were based on market or other information available to management. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts.
Vendor Concentrations – Purchases in 2003 from one vendor amounted to 11% of Cost of Goods Sold.
Major Customers – Sales to one customer as a percentage of total sales amounted to 11% and 12% in 2003 and 2002, respectively.
Inventories – Inventories are stated at the lower of cost or market, with costs being determined on a first-in, first-out method. Work-in-process and finished goods include material costs, labor costs and manufacturing overhead. The Company evaluates its inventories periodically to identify excess, slow-moving and obsolete inventories and assess reserve adequacy. At June 30, 2003 and 2002, no reserve was deemed necessary.
Property and Equipment – Property and equipment are stated at cost. The Company provides for depreciation using straight-line and accelerated methods by charges to income at rates based upon the recovery periods of 3 to 7 years for furniture, equipment, automobiles, tooling and molds over the useful lives or the lease term, if shorter, for leasehold improvements.
Goodwill and Other Intangible Assets – In July 2001, the Company elected early adoption of Statement of Financial Accounting Standards No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets” (“SFAS 141 and 142”). See “New Accounting Pronouncements” below.
As of July 1, 2001, the Company identified those intangible assets that remain separable under the provisions of SFAS 141 and those that are to be included in goodwill. On the date of adoption and at least annually, SFAS 142 requires testing of goodwill for impairment. No indications of goodwill impairment were found during fiscal 2003.
In addition, the Company assesses long-lived assets, including intangible assets, for impairment whenever events or circumstances indicate that the carrying value may not be fully recoverable by comparing the carrying value to future undiscounted cash flows. To the extent that there is impairment, analysis is performed based on several criteria, including, but not limited to, revenue trends, discounted operating cash flows and other operating factors to determine the impairment amount.
Advertising Expense – The Company accounts for advertising costs in accordance with Statement of Position 93-7, “Reporting on Advertising Costs”. Advertising expenses are deferred until first use of the advertising. Deferred advertising costs at June 30, 2003 and 2002 totaled approximately $128,000 and $32,000, respectively. Advertising expenses for the years ended June 30, 2003 and 2002 totaled approximately $400,000 and $370,000, respectively.
Income Taxes – Deferred income taxes reflect the net tax effect of temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards.
Employee Benefit Plan – The Company has a 401(k) savings/retirement plan for all of its eligible employees. The plan allows for employee contributions to be matched by the Company. Contributions made by the Company for the years ended June 30, 2003 and 2002 were $23,000 and $22,500, respectively.
Earnings (Loss) Per Share – Basic earnings (loss) per share is based upon net income (loss) less preferred dividends divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the weighted average number of shares outstanding adjusted for the incremental shares attributable to outstanding options, dilutive securities, warrants and other potentially dilutive securities.
Stock Options – The Company accounts for stock option grants using the intrinsic value based method prescribed by APB Opinion No. 25. Since the exercise price equaled or exceeded the estimated fair value of the underlying shares at the date of grant, no compensation expense was recognized in 2003 and 2002 for stock option grants. The Company provides additional proforma disclosure of the accounting impact as if it had adopted fair value treatment (see Note 7).
Recent Accounting Pronouncements – In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a rollforward of the entity’s product warranty liabilities. The Company does not expect FIN 45 to have a material impact on its financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock- Based Compensation, Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements are effective for our 2003 fiscal year. The interim disclosure requirements are now effective. The Company does not expect the adoption of SFAS No. 148 to have a material impact on its financial position, results of operations or cash flows.
In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” This Interpretation clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies to variable interest entities created after January 31, 2003, and is effective as of July 31, 2003 for variable interest entities created prior to February 1, 2003. The Company does not expect the adoption of FIN 46 to have a material effect on its financial position, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” for implementation issues related to the definition of a derivative and other FASB projects related to financial instruments. SFAS No. 149 requires that contracts with comparable characteristics be accounted for in a similar fashion. SFAS No. 149 applies prospectively to contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company does not expect the adoption of SFAS No. 149 to have a material effect on its financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that financial instruments within the scope of SFAS No. 150 be classified as a liability or an asset. SFAS No. 150 is effective for all financial instruments entered into after May 31, 2003 and otherwise, the beginning of the first interim period after June 15, 2003. The Company does not expect the adoption of SFAS No. 150 to have a material effect on its financial position, results of operations or cash flows.
Inventories are summarized as follows:
June 30,
-----------------------
2003 2002
---------- ----------
Raw materials $ 124,429 $ 85,058
Finished goods 965,380 1,239,525
---------- ----------
$1,089,809 $1,324,583
========== ==========
Property and equipment are summarized as follows:
June 30,
-----------------------
2003 2002
---------- ----------
Equipment $1,361,238 $1,606,123
Equipment at customer location 951,109 774,102
Furniture and fixtures 329,510 472,819
Automobiles 52,035 91,415
Leasehold improvements 223,664 242,289
Tooling and molds 647,751 579,699
---------- ----------
3,565,307 3,766,447
Less: Accumulated depreciation and amortization 2,202,573 1,987,950
---------- ----------
$1,362,734 $1,778,497
========== ==========
Goodwill and other intangible assets are summarized as follows:
Life June 30,
--------------------------
(Years) 2003 2002
------- ---------- ----------
Goodwill -- $4,986,030 $4,891,421
Other 1-5 46,000 97,000
---------- ----------
5,032,030 4,988,421
Less: Accumulated amortization 553,840 595,648
---------- ----------
$4,478,190 $4,392,773
========== ==========
Intangible asset amortization expense for the fiscal year 2003 was $9,192. The components of other intangible assets include a covenant not to compete associated with an acquisition and two acquired URLs. The value of our other intangible assets is $46,000 less accumulated amortization of $31,879 at June 30, 2003 and $97,000 less accumulated amortization of $55,793 at June 30, 2002.
During the year ended June 30, 2003, $94,608 of goodwill related to the acquisition of substantially all of the assets of UltraHue, Inc. on December 31, 2001 was recorded, and no goodwill was impaired or written off. As of June 30, 2003, goodwill amounted to $4,986,030, less accumulated amortization of $521,962.
Other intangible assets are subject to amortization. During the fiscal year 2003, the Company acquired no additional intangible assets.
The Company’s borrowings consisted of the following:
June 30,
-----------------------
2003 2002
---------- ----------
Short-term debt:
Revolving line-of-credit with bank $1,779,862 $1,688,915
Note payable relating to acquisition of UltraHue 250,000 183,904
Note payable to officer 280,000 355,000
Notes payable to investors 200,000 535,242
Current maturities of long-term debt 155,256 240,975
---------- ----------
$2,665,118 $3,004,036
========== ==========
Long-term debt:
Long-term debt, less current maturities $ 39,081 $ 194,336
Note payable to officer 195,000 --
Note payable to investors 400,000 --
---------- ----------
$ 634,081 $ 194,336
========== ==========
The Company has an agreement with a bank under which it can borrow up to $3,000,000 under a revolving line-of-credit, subject to availability of collateral. Borrowings bear interest at 1.75% over the bank’s base rate, are payable on demand and are collateralized by all assets of the Company. The line-of-credit expires on October 31, 2006.
The note payable relating to acquisition of UltraHue, Inc. bears interest at a rate of 13% per annum and is due on demand.
Between August 2000 and September 2003, the Company borrowed an aggregate of $450,000 from its President. The funds were used for general corporate purposes. The debt is structured through two notes payable. One note in the amount of $255,000 bears an interest rate of 10% per annum and is payable in monthly installments of interest only through May 2004. The second note, in the amount of $195,000 bears an interest rate of 20% per annum and is payable in monthly installments of interest only through May 2005.
Long-term debt consists of notes payable to various individuals in the aggregate of $400,000, bearing 20% interest rates, and payable in quarterly installments of interest only through June of 2005. In addition, long-term debt includes $195,000 payable to our President as described above, and various capital leases, totaling $186,470. The capital leases bear interest rates of between 10% and 14% per annum and mature through June 30, 2005 (Note 8).
During November and December 2002, the Company borrowed an aggregate of $200,000 from several individuals. These notes are payable during December 2003 and bear interest at a rate of 20-23% per annum.
Long-term debt at June 30, 2003 matures as follows:
Year Ending June 30,
--------------------
2004 155,235
2005 634,081
-----------
$ 789,337
===========
The components of the income tax expense (credit) are summarized as follows:
Year Ended June 30,
--------------------------
2003 2002
----------- -----------
Current:
Federal $ -- $ --
State 132,573 4,330
----------- -----------
Total Current 132,573 4,330
----------- -----------
Deferred:
Federal 452,685 (122,000)
State -- (30,000)
----------- -----------
Total Deferred 452,685 (152,000)
----------- -----------
Income Tax Expense (Credit) $ 585,258 $ (147,670)
=========== ===========
The Company recognizes deferred tax assets, net of applicable reserves, related to net operating loss carry forwards and certain temporary differences. The Company is required to recognize a future tax benefit to the extent that realization of such benefit is more likely than not. Otherwise, a valuation allowance is applied. At June 30, 2003, the Company believes that the “more likely than not” criteria have been met, and accordingly, the Company has recorded a deferred tax asset to recognize a future tax benefit.
The Company has available federal net operating loss carry forwards of approximately $3,000,000, which expire through 2022.
A reconciliation of income tax expense (benefit) provided at the federal statutory rate (34%) to income tax expense (benefit) is as follows:
Year Ended June 30,
--------------------------
2003 2002
----------- -----------
Income tax expense (benefit) computed
at federal statutory rate $ 496,493 $ (129,000)
State income taxes (net of federal benefit) 87,617 (23,000)
Other 1,148 4,330
----------- -----------
$ 585,258 $ (147,670)
=========== ===========
Significant components of the Company’s deferred tax assets are as follows:
Year Ended June 30,
--------------------------
2003 2002
----------- -----------
Net operating loss carryforwards $ 1,200,000 $ 1,080,000
Accruals and reserves (152,685) 420,000
----------- -----------
Total deferred tax assets $ 1,047,315 $ 1,500,000
=========== ===========
| The Company has an incentive stock option (the “1998 Plan”), pursuant to which 500,000 shares of common stock have been reserved. The stock options (which may be “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended) entitle the holder to purchase shares of the Company’s common stock for up to ten years from the date of grant (five years for persons owning more than 10 percent of the total combined voting power of the Company) at a price not less than the fair market value (110% of fair market value for persons owning more than 10% of the combined voting power of the Company) of the common stock on the date of grant. In general, any employee, director, officer or exclusive agent of, advisor or consultant to, the Company or a related entity, is eligible to participate in the Plan. The stock options are nontransferable, except upon death. |
| Share option activity for the Plan since July 1, 2001, follows: |
Weighted
Average
Outstanding Exercise Price
----------- --------------
Balance at July 1, 2001 273,726 $2.03
Year ended June 30, 2002:
Granted 37,502 1.82
Exercised -- --
Cancelled (6,500) 2.26
----------- -----
Balance at June 30, 2002 304,728 2.00
Year ended June 30, 2003:
Granted 98,401 0.57
Exercised -- --
Cancelled (64,723) 1.36
----------- -----
Balance at June 30, 2003 338,406 $1.70
=========== =====
| The following table summarizes information about outstanding and exercisable options at June 30, 2003: |
Options Outstanding Options Exercisable
--------------------------------------------------------- ---------------------------
Weighted
Average
Weighted Remaining Weighted
Range of Number Average Contractual Number Average
Exercise Prices Outstanding Exercise Price Life-Years Exercisable Exercise Price
--------------- ----------- -------------- ----------- ----------- --------------
$0.43 to $0.65 94,901 $0.57 9.54 45,000 $0.54
$1.00 to $2.00 140,355 1.71 5.97 133,687 1.71
$2.01 to $4.00 103,150 2.74 6.44 103,150 2.74
------- ---- ---- ------- ----
338,406 $1.70 7.11 281,837 $1.90
======= ===== ==== ======= =====
| Non Plan Options: |
| During the year ended June 30, 2003, the Company granted its President five-year stock options to purchase up to 500,000 shares and are exercisable at $1.00 per share and expire in June 2008. Options to purchase 250,000 shares vested immediately and Options to purchase an additional 250,000 shares vest ratably over the period July 1, 2003 through June 30, 2005. |
| During the year ended June 30, 1999, the Company granted two employees five-year stock options to purchase up to 100,000 shares each, which vested upon the Company attaining certain specified milestones and are exercisable at $1.25 per share and expire in March 2004. A total of 200,000 options are vested at June 30, 2003. |
| In December 1999, the Company granted two employees five year stock options to purchase up to 50,001 shares each which vested ratably over three years, and are exercisable at $1.27 per share and expire in December 2004. A total of 100,002 options are vested at June 30, 2003. |
| During the year ended June 30, 2001, the Company granted an employee five year stock options to purchase up to 100,000 shares of which 100,000 were vested as of June 30, 2003. The options are exercisable at $1.25 per share and expire in June 2006. |
| During the year ended June 30, 2003, the Company granted five employees five-year stock options to purchase up to 25,000 shares each, which vest on April 6, 2004 and are exercisable at $0.50 per share. |
| Proforma Disclosure: |
| The Company follows the intrinsic method of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations in accounting for its employee stock options because, as discussed below, Financial Accounting Standards Board Statement No. 123, “Accounting for Stock-Based Compensation” (FAS 123) requires use of option valuation models that were not developed for use in valuing employee stock options. FAS 123 permits a company to elect to follow the intrinsic method of APB 25 rather than the alternative fair value accounting provided under FAS 123, but requires pro forma net income and earnings per share disclosures as well as various other disclosures not required under APB 123 for companies following APB 25. The Company has adopted the disclosure provisions required under Financial Accounting Standards Board Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (FAS 148). Under APB 25, because the exercise price of the Company’s stock options equals the market price of the underlying stock on the date of grant, no compensation expense was recognized. |
| Pro forma information regarding net income and earnings per share is required by FAS 123 and FAS 148, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. |
| The fair value of options granted in 2003 and 2002 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions, respectively: risk-free interest rates of 6.0%, dividend yield of 0.0%, volatility factors of the expected market price of the Company’s common stock of 74% in 2003 and 72% in 2002, and a weighted-average expected life of the options of five years. |
| The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective input assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable measure of the fair value of its employee stock options. |
| For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the options’ vesting period. The Company’s pro forma information follows: |
Fiscal Year Ended
June 30,
2003 2002
--------- ---------
Net income (loss), as reported $ 245,391 $(859,048)
Stock-based employee compensation expense under
fair value method, net of related tax effects $ (64,599) $ (21,633)
--------- ---------
Pro forma net income (loss) $ 180,792 $(880,681)
========= =========
Income/(Loss) per share:
Basic, as reported $ 0.07 $ (0.25)
========= =========
Basic, pro forma $ 0.05 $ (0.25)
========= =========
Diluted per share, as reported $ 0.07 $ --
========= =========
Diluted per share, pro forma $ 0.05 $ --
========= =========
| During the year ended June 30, 2002, the Company issued 53,558 shares of its common stock valued at $52,039 in lieu of cash payments for dividends on its Series A Preferred Stock. |
| During the year ended June 30, 2003, the Company issued 45,847 shares of its common stock valued at $43,556 in lieu of cash payments for dividends on its Series A Preferred Stock. |
| In August 1998 and February 1999, the Company issued 105,000 warrants to purchase its common stock between $4.00-$5.00 per share in exchange for legal services which were subsequently capitalized. The warrants, which had a value of $20,510, using the Black-Scholes pricing model, expire through February 15, 2004. |
| In October 1999, the Company issued 30,000 warrants to purchase its common stock at between $3.00 - $4.00 per share in exchange for investor relation services which were subsequently capitalized. The warrants, which were valued at approximately $100,000 using the Black-Scholes pricing model, were recognized as a cost of issuance of the Series A Preferred shares and expire on September 29, 2004. |
| In June 2001, the Company issued 200,000 warrants to purchase its common stock at $1.00 per share in consideration for consulting services. The warrants, which were valued at $25,000, expire on May 31, 2006. |
| In June 2002, the Company issued 87,500 warrants to purchase its common stock at $1.00 per share in connection with its notes payable. The warrants were valued at $43,372 and expire in June 2007. |
| The Company’s Certificate of Incorporation authorizes the issuance of up to 5,000,000 shares of Preferred Stock. The Board of Directors is authorized to issue shares of Preferred Stock from time to time in one or more series and to establish and designate any such series and to fix the number of shares and the relative conversion rights, voting rights, terms of redemption and liquidation. In December 1999, the Board authorized the issuance of up to 1,000,000 shares of Series A Preferred Stock. |
| On March 10, 2000, the Company completed a private placement wherein it sold 550,000 units for $10.00 per unit representing 550,000 shares of its Series A Preferred Stock and 1,100,000 warrants exercisable for five years to purchase one share of common stock for $4.50 per share. Net proceeds received from the sale totaled $4,566,549. |
| Dividends on the Series A Preferred Stock accrue at a rate of 11.5% per annum and are payable quarterly. Each Series A share was convertible at the option of the holder at a rate of 3.077 shares of common stock for one Series A share. In December 2001, the rate of conversion of the Class A Preferred Stock changed to five shares of common stock for one Series A Share of Preferred. The conversion price will adjust again in December 2003. The conversion price cannot be less than $2.00 per share. |
| The Company has the right to call the Series A shares at $15.00 per share, at any time. Holders have the right to convert upon receipt of the call notice. |
| In connection with this private placement, the placement agent received a commission and non-accountable expense allowance equal to 13% of the proceeds of the offering, five year warrants to purchase up to 236,500 shares of the Company’s common stock at $1.65 per share and up to 590,000 shares of the Company’s common stock at $3.75 per share. The value of the warrants was recognized as a cost of issuance of the Series A shares. |
| During the year ended June 30, 2001, holders of 2,500 shares of Series A Preferred Stock converted the Series A Preferred Stock into 7,692 shares of the Company’s common stock. |
| During the year ended June 30, 2001, the Company purchased 10,564 shares of its common stock, valued at $20,832, in connection with the exercise of employee stock options. |
Leases – The Company leases its premises under lease agreements which expire through 2011 and equipment under operating leases that expire through 2006. As of June 30, 2003, the Company’s property under capital leases, which is included in property and equipment, has a cost of $710,873 and accumulated depreciation of $486,798 and consists of printers placed at customer locations and manufacturing equipment.
Future minimum lease payments are as follows:
Capital Leases
Included
in Property Operating
Year Ending June 30, and Equipment Leases
-------------------- ------------- -----------
2004 198,456 467,169
2005 40,089 328,839
2006 -- 309,931
2007 -- 259,947
2008 and thereafter 1,018,126
------------- -----------
Total future minimum lease payments 238,545 $2,384,012
===========
Less: Amount representing interest 52,075
-------------
Present value of minimum lease payments (Note 5) 186,470
Less: Current maturities 149,001
-------------
Non-current $ 37,469
=============
Rent expense amounted to $267,683 and $268,579 for the years ended June 30, 2003 and 2002, respectively.
Employment Agreement – On July 1, 2003, the Company entered into a five-year employment agreement with its President for a base salary of $200,000 per annum subject to certain adjustments.
Litigation – The Company is a defendant in legal proceedings arising in the ordinary course of its business activities. Although the ultimate disposition of these proceedings is not presently determinable, management does not expect the outcome to have a material adverse effect on the Company’s financial position.
On May 4, 2001, the Company entered into an agreement with a supplier, whereby, beginning May 1, 2001, the Company was required to pay $.50 per ink stick sold, increasing to $.75 on May 1, 2002, $1.00 on May 1, 2003 and $1.50 on May 1, 2004. The present value, $884,000, of the maximum commitment under the agreement, $1,000,000, was recorded as a liability at June 30, 2001. At June 30, 2003, the balance owed by the Company was $448,952.
Media Sciences provides a warranty for all of its consumable supply products. The Company’s warranty stipulates that the Company will pay reasonable and customary charges for the repair of a printer needing service as a result of using the Company’s products. The Company estimates the costs that may be incurred and records a liability in the amount of such costs at the time product revenue is recognized. Factors that may affect the warranty include the number of units shipped to customers, historical and anticipated rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. These expenses are classified as Selling, General and Administrative costs.
In January 2002, the Company recalled all solid ink products manufactured between May 2001 and January 2002. It was discovered that the use of the Company’s solid ink sticks manufactured during that time period could cause printer reliability issues. Management believes that it has resolved the problem. In addition, two independent test laboratories have tested the reliability of the Company’s solid ink and have found no reliability issues associated with the use of the Company’s solid ink products.
Changes in accrued product warranty during the years ended June 30, 2003 and 2002 are as follows:
June 30,
2003 2002
----------- -----------
Warranty reserve at the beginning of the year $ 500,000 $ 400,000
Warranties accrued during the period 1,329,263 2,932,723
Proceeds for product liability insurance -- 1,000,000
Warranties settled during the period (1,579,263) (3,832,723)
----------- -----------
Net change in warranty reserve $ (250,000) $ 100,000
Warranty reserve at June 30, $ 250,000 $ 500,000
=========== ===========
The Company has filed a claim under its umbrella liability policy for the unreimbursed portion of the warranty expenses. The insurance carrier has not yet taken a coverage position on this claim.
Even though management believes that the recall is complete, the Company will continue to receive warranty claims associated with the recalled ink and other warranty expenses for products sold not under the recall. While the Company believes that the reserve should be adequate to resolve the remaining claims, it is possible that the warranty claims may exceed the accrual, and therefore be expensed in future periods.
Basic earnings per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per common share is computed using the weighted average number of shares outstanding as adjusted for the incremental shares attributed to outstanding options and warrants to purchase common stock , and other potentially dilutive securities.
The following table sets forth the computation of basic and diluted earnings per common share:
Year Ended June 30,
-------------------------
2003 2002
----------- -----------
Numerator:
Income (loss) applicable to common shareholders - basic $ 245,391 $ (859,048)
=========== ===========
Income (loss) applicable to common shareholders - diluted $ 245,391 $ (859,048)
=========== ===========
Denominator:
Denominator for basic earnings per common share:
Weighted average shares 3,565,748 3,484,057
Effect of dilutive securities -
Conversion of preferred stock to common -- --
Stock options and warrants 5,626 --
----------- -----------
Denominator for diluted earnings per common share 3,571,374 3,484,057
=========== ===========
Earnings (loss) per common share:
Basic $ 0.07 $(0.25)
====== ======
Diluted $ 0.07 $ --
====== ======
The conversion of the Series A convertible preferred stock has been excluded from the computation of diluted earnings per share for the year ended June 30, 2003. Such conversion, when taking into account the additional net income generated to the common shareholders by the elimination of the dividend, would have been anti-dilutive.
The following warrants and options to purchase common stock were excluded from the computation of diluted earnings per share for the years ended June 30, 2003 because their exercise price was greater than the average market price of the common stock for those periods :
Year Ended June 30,
2003 2002
-------- --------
Anti-dilutive warrants and options 3,260,839 --
========= ========
Occasionally, the Company borrows funds from its President for general corporate purposes. At June 30, 2003 and 2002 the amount due to officer was $450,000 and $355,000, respectively (note 5).
MEDIA SCIENCES INTERNATIONAL, INC.
1,450,000 SHARES OF COMMON STOCK
PROSPECTUS
[________ __, 2004]
The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not a solicitation
of an offer to buy these securities in any state where the offer or sale is not
permitted.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Certificate of Incorporation provides that to the fullest extent permitted
by the General Corporation Law of Delaware, including, without limitation, as
provided in Section 102(b)(7) of the General Corporation Law of Delaware, as the
same exists or may hereafter be amended, any of our director shall not be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director. Section 102(b)(7) of the Delaware General
Corporation Law permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability:
o for any breach of the director's duty of loyalty to the corporation or its
stockholders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o for payments of unlawful dividends or unlawful stock repurchases or
redemptions; or
o for any transaction from which the director derived an improper personal
benefit.
If the General Corporation Law of Delaware is amended to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of our directors shall be eliminated or limited to the fullest
extent permitted by the General Corporation Law of Delaware, as so amended. Any
repeal or modification of the provision of the Certificate of Incorporation by
our stockholders shall not adversely affect any right or protection of our
directors existing at the time of such repeal or modification or with respect to
events occurring prior to such time.
Our Certificate of Incorporation and Bylaws further provide for the
indemnification of our directors and officers to the fullest extent permitted by
Section 145 of the Delaware General Corporation Law, including circumstances in
which indemnification is otherwise discretionary. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to our directors,
officers and controlling persons pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
Section 145 of the Delaware General Corporation Law provides that a corporation
may indemnify directors and officers as well as other employees and individuals
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
any threatened, pending or completed actions, suits or proceedings in which such
person is made a party by reason of such person being or having been a director,
officer, employee of or agent to the registrant. The statute provides that it is
not exclusive of other rights to which those seeking indemnification may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
Our Certificate of Incorporation provides that we will indemnify any of our
directors, officers, employees, or agents with respect to actions, suits, or
proceedings relating to us and, subject to certain limitations, a director will
not be personally liable for monetary damages for breach of his or her fiduciary
duty.
Our directors or officers, or a person who at our request serves as a director,
officer, employee or agent of another business entity, shall be indemnified by
us against all expense, liability and loss, including attorneys' fees,
judgments, fines, other expenses and losses, that is reasonably incurred or
suffered in connection with any action, suit or proceeding or threatened action,
suit or proceeding. For a person to receive indemnification under this
provision, our Board of Directors must authorize the indemnification, and the
person seeking indemnification must agree to repay us for all amounts advanced
to him or her if a court of law ultimately determines that the person should not
have been indemnified by us. A person who is entitled to indemnification may
recover from us, and may sue us if we fail to make timely payment.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a statement of the estimated expenses, other than underwriting
discounts and commissions, to be incurred by us in connection with the
distribution of the securities registered under this registration statement.
AMOUNT
TO BE PAID
----------
SEC registration fee* $ 330.69
Legal fees and expenses $5,000.00
Blue Sky fees and expenses $1,000.00
Accounting fees and expenses $1,000.00
Transfer agent fees $ 500.00
Printing expenses $ 500.00
---------
Total $8,330.69
---
* Actual expenses.
We will pay all of the expenses listed above. The selling stockholders will not
pay any of those expenses. The selling stockholders are responsible for any
stock transfer taxes, transfer fees, and brokerage commissions or underwriting
discounts and commissions.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES In March 2000, we completed a private placement of 550,000 units of our securities and raised gross proceeds of approximately $5,500,000. Each unit consisted of one share of convertible preferred stock and a warrant, exercisable for five years at $4.50 per share, to purchase two shares of common stock. From time to time, in lieu of cash dividends on the preferred stock, certain preferred shareholders elected to receive certain quarterly dividend payments through common stock issuances, valued at $0.95 to $1.10 per share. In our fiscal years 2001, 2002 and 2003, we issued an aggregate of 239,837 shares of common stock as dividends on preferred stock. We relied on an exemption from registration for a private transaction not involving a public distribution provided by Section 4(2) under the Securities Act. On June 14, 2002, we issued short-term promissory notes aggregating $175,000 and warrants to purchase up to 87,500 shares of our common stock exercisable for five years at $1.00 per share to seven note holders: Paul Levin, Frank and Edna Blanco, Nathan D. Watters, Adam H. Watters, Mitchell Baker, Esther Baker, and Harold and Marsha Kugelman. The notes matured in December 2002 and bore simple interest at the rate of 12% per year. In December 2002, we repaid the $175,000 borrowed in June through cash principal payments of $75,000 and through the issuance of new, one-year notes aggregating $100,000 and bearing simple interest of 20%, payable quarterly. The note holders were persons who bear the following relationships with Media Sciences or with our officers and directors: Paul Levin is the father of Michael W. Levin, President and Chairman of Media Sciences; Frank and Edna Blanco are the parents of Frances Blanco, Vice President and a director of Media Sciences; Mitchell Baker is the son of Paul Baker, a director of Media Sciences; and Esther Baker is the wife of Paul Baker. Each of Michael W. Levin, Frances Blanco, and Paul Baker disclaims beneficial ownership of these notes and related warrants, except that Paul Baker may be deemed the beneficial owner of the $25,000 note and 12,500 warrants acquired by his wife as part of the transaction. We relied on an exemption from registration for a private transaction not involving a public distribution provided by Section 4(2) under the Securities Act. On April 7, 2003, in transactions deemed exempt from registration pursuant to Section 4(2) of the Securities Act, we issued to each of Duncan Huyler, Frances Blanco, Duncan Yates, Donald Gunn and Randy Hooker, all of whom are executive officers or senior management level personnel of the company, stock options to purchase 25,000 shares of common stock. The stock options vest on April 6, 2004 and are exercisable until April 5, 2008 at $0.50 per share. We relied on an exemption from registration for a private transaction not involving a public distribution provided by Section 4(2) under the Securities Act. In June 2003, in a transaction deemed exempt from registration pursuant to Section 4(2) of the Securities Act, pursuant to an employment agreement effective as of July 1, 2003, we issued to Michael Levin, our Chief Executive Officer, stock options to purchase up to 500,000 shares of common stock, exercisable at $1.00 per share and expiring in June 2008. Options to purchase 250,000 shares vested immediately and options to purchase an additional 250,000 shares vest ratably over the period July 1, 2003 through June 30, 2005. On December 31, 2003, we concluded an exchange offer with our preferred stockholders through which they had an opportunity to exchange each of their preferred shares for 10 shares of our common stock. Each preferred shareholder had acquired their preferred shares as part of a private placement of 550,000 units of our securities which we concluded in March 2000. In connection with the exchange offer, preferred shareholders tendered a total of 507,500 preferred shares, representing 93% of the outstanding preferred shares, in exchange for a total of 5,075,00 shares of common stock. We permitted an elderly former holder of 50,000 preferred shares who did not timely accept our preferred stock offer of conversion to exchange its preferred shares after the exchange offer expiration date. Preferred shareholders also voted upon an amendment to the preferred stock certificate of designation providing for automatic conversion if less than a majority of the originally issued preferred stock became outstanding. Preferred shareholders who accepted the offer waived their rights to unpaid dividends and interest on their preferred stock. Pursuant to the terms of the certificate of designation for our preferred stock, as amended, the other 40,000 preferred shares outstanding were converted into 200,000 shares of common stock and subsequently were paid accrued interest and dividends. We relied on an exemption from registration for a private transaction not involving a public distribution provided by Section 4(2) under the Securities Act.
On May 24, 2004, we issued to two of our management level employees, Frances Blanco and Duncan Huyler, options to purchase 100,000 shares of our common stock, of which 50,000 options vested on the grant date, and the remaining 50,000 options are subject to vesting over a three year period. The options are exercisable for ten years at $1.06 per share. We relied on an exemption from registration for a private transaction not involving a public distribution provided by Section 4(2) under the Securities Act On June 30, 2004, in a transaction deemed exempt from registration pursuant to Section 4(2) of the Securities Act, we sold 1,000,000 shares of common stock to GFX Investments, LLC, an entity controlled by Richard L. Scott, for $1.25 million. In conjunction with the investment, we agreed to appoint a nominee of GFX Investments, Alan Bazaar, Vice President and Portfolio Manager for Richard L. Scott Investments, to our board of directors. All of the above offerings and sales were deemed to be exempt under Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, and transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings. Except as expressly set forth above, the individuals and entities to whom we issued securities as indicated in this section of the registration statement are unaffiliated with the Company.
ITEM 27. EXHIBITS
The following exhibits either are filed herewith or incorporated by reference to
documents previously filed or will be filed by amendment, as indicated below:
Exhibit Description
------- -----------
2 Agreement of Change in Corporate Structure (Incorporated by
reference to Exhibit 2 of Quarterly Report on Form 10-QSB filed on
May 15, 2002).
3(i)(1) Certificate of Incorporation of Cadapult Graphic Systems, Inc., a
Delaware corporation (Incorporated by reference to Exhibit 3.1 of
Quarterly Report on Form 10-QSB/A filed on September 1, 1998).
3(i)(2) Certificate of Amendment of Certificate of Incorporation of Cadapult
Graphic Systems, Inc. (Incorporated by reference to Exhibit 3(i)(5)
of Annual Report on Form 10-KSB filed on September 28, 1999).
3(i)(3) Certificate of Incorporation of Media Sciences, Inc. (Incorporated
by reference to Exhibit 3(i)(6) of Annual Report on Form 10-KSB
filed on September 28, 1999).
3(i)(4) Certificate of Amendment of Certificate of Incorporation of Cadapult
Graphic Systems, Inc. (Incorporated by reference to Exhibit 3(i)(1)
of Quarterly Report on Form 10-QSB filed on May 15, 2002).
3(i)(5) Certificate of Incorporation of Cadapult Graphic Systems, Inc. (a
New Jersey corporation) (Incorporated by reference to Exhibit
3(i)(2) of Quarterly Report on Form 10-QSB filed on May 15, 2002).
3(ii) By-Laws (Incorporated by reference to Exhibit 3.2 of Quarterly
Report on Form 10-QSB/A filed on September 1, 1998).
4.1 Specimen of common stock certificate (Incorporated by reference to
Exhibit 4.7 of Form 8-A filed on August 8, 2000).
4.2 Specimen of preferred stock certificate (Incorporated by reference
to Exhibit 4.8 of Form 8-A filed on August 8, 2000).
4.3 1998 Incentive Plan (Incentive Stock Option Plan) (Incorporated by
reference to Exhibit 4.1 of Annual Report on Form 10-KSB filed on
September 28, 1999).
4.4 Certificate of Designation (Incorporated by reference to Exhibit 4.5
of Registration Statement on Form SB-2, Registration Number
333-91005, originally filed on November 15, 1999).
4.5 Form of Warrant Certificate for Purchasers of Units (Incorporated by
reference to Exhibit 4.6 of Registration Statement on Form SB-2,
Registration Number 333-91005, originally filed on November 15,
1999).
4.6 Certificate of Amendment of Certificate of Designation of Series A
Preferred Stock (Incorporated by reference to Exhibit 3(i)(6) of
Annual Report on Form 10-KSB filed on September 15, 2003)
4.7 Certificate of Amendment of Certificate of Designation of Series A
Preferred Stock (Incorporated by reference to Exhibit 4.7 of
Registration Statement on Form SB-2, Registration Number 333-112340,
filed on January 30, 2004).
5* Opinion of Law Offices of Dan Brecher as to validity of Common
Stock being offered.
10.1 Lease Agreement (Incorporated by reference to Exhibit 10.13 of
Annual Report on Form 10-KSB filed on or about September 28, 2000).
10.2 Amended Employment Agreement of Duncan Huyler (Incorporated by
reference to Exhibit 3.2 of Quarterly Report on Form 10-QSB filed on
May 4, 1999).
10.3 Amended Employment Agreement of Frances Blanco (Incorporated by
reference to Exhibit 3.3 of Quarterly Report on Form 10-QSB filed on
May 4, 1999).
10.4 Agreement with Consonant Services Group (Incorporated by reference
to Exhibit 10.6 of Registration Statement on Form SB-2, Registration
Number 333-83668, filed on March 4, 2002).
10.5 Form of Warrant Agreement with Consonant Services Group
(Incorporated by reference to Exhibit 10.11 of Registration
Statement on Form SB-2, Registration Number 333-83668, filed on
March 4, 2002).
10.6 Form of Amended Option Agreement with Frances Blanco (Incorporated
by reference to Exhibit 10.8 of Registration Statement on Form SB-2,
Registration Number 333-83668, filed on March 4, 2002).
10.7 Form of Amended Option Agreement with Duncan Huyler (Incorporated by
reference to Exhibit 10.9 of Registration Statement on Form SB-2,
Registration Number 333-83668, filed on March 4, 2002).
10.8 Form of Amended Option Agreement with Duncan Yates (Incorporated by
reference to Exhibit 10.10 of Registration Statement on Form SB-2,
Registration Number 333-83668, filed on March 4, 2002).
10.9 Form of Amended Option Agreement with Donald Gunn (Incorporated by
reference to Exhibit 10.12 of Registration Statement on Form SB-2,
Registration Number 333-83668, filed on March 4, 2002).
10.10 Form of Amended Option Agreement with Randy Hooker (Incorporated by
reference to Exhibit 10.13 of Registration Statement on Form SB-2,
Registration Number 333-83668, filed on March 4, 2002).
10.11 Form of Promissory Note issued in June 2002 (Incorporated by
reference to Exhibit 10.14 of Annual Report on Form 10-KSB filed on
October 15, 2002).
10.12 Form of Warrants issued in June 2002 (Incorporated by reference to
Exhibit 10.14 of Annual Report on Form 10-KSB filed on October 15,
2002).
10.13 Form of Employment Agreement with Michael W. Levin (Incorporated by
reference to Exhibit 10.16 of Annual Report on Form 10-KSB filed on
September 15, 2003).
10.14 Form of Loan and Security Agreement (Incorporated by reference to
Exhibit 10.17 of Annual Report on Form 10-KSB filed on September 15,
2003).
10.15 Form of Option Agreement with Management issued April 2003
(Incorporated by reference to Exhibit 10.15 of Registration
Statement on Form SB-2, Registration Number 333-112340, filed on
January 30, 2004).
10.16* Option Agreement with Frances Blanco issued May 2004
10.17* Option Agreement with Duncan Huyler issued May 2004
10.18* First Amendment to Loan and Security Agreement, dated June 11, 2004
10.19* Term Note, dated June 11, 2004
10.20* Common Stock Purchase Agreement, dated June 30, 2004
10.21* Registration Rights Agreement, dated June 30, 2004
11* Statement Concerning Computation of Per Share Earnings is hereby
incorporated by reference to "Financial Statements", contained in
this Form SB-2.
21* Subsidiaries of the Registrant
23.1* Consent of Wiss & Company LLP
23.2* Consent of legal counsel (see Exhibit 5)
-----
* Filed herewith
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information set
forth in the registration statement; and arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) (230.424(b) of this chapter) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of the
Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material information
on the plan of distribution
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Allendale, State of New Jersey, on July 30, 2004.
Dated: July 30, 2004
Media Sciences International, Inc.
By: /s/ Michael W. Levin
----------------------------------------
Michael W. Levin,
Chief Executive Officer and President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Michael W. Levin Chairman of the Board, President, July 30, 2004
--------------------
Michael W. Levin and Chief Executive Officer
/s/ Denis Hawkins Vice President, Controller July 30, 2004
------------------
Denis Hawkins (Principal Financial Officer)
and Secretary
/s/ Frances Blanco Director, Vice President, July 30, 2004
------------------
Frances Blanco and Treasurer
/s/ Donald Gunn Director July 30, 2004
---------------
Donald Gunn
/s/ Paul C. Baker Director July 30, 2004
-----------------
Paul C. Baker
/s/ Alan L. Bazaar Director July 30, 2004
------------------
Alan L. Bazaar