UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD SEPTEMBER 30, 2002
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from to
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Commission File Number: 000-28005
MetaSource Group, Inc.
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(Exact name of registrant as specified in its charter)
Nevada 88-0422028
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
40 Exchange Place, Suite 1607, New York, New York 10005
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(Address of principal executive offices) (Zip Code)
(646) 805-5141
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(Registrant's Telephone Number, Including Area Code)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date. As of December 24, 2002 there were
19,819,549 shares of the issuer's $.001 par value common stock issued and
outstanding.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated September 30, 2002
Balance Sheet
ASSETS
Current Assets
Cash and Equivalents 129,486
Notes receivable 679,015
Work in progress 325,748
Prepaid expenses 81,251
Accounts Receivable 279,535
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Total Current Assets 1,495,035
Property, Plant & Equipment 4,947
Goodwill 562,960
Long term loans 419,079
Other assets 4,455
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Total assets 2,486,476
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LIABILITIES AND STOCKHOLDERS DEFICIT
Liabilities
Current liabilities
Notes payable 2,467,655
Bank overdraft and factor 420,368
Accounts payable 415,376
Other Liabilities 131,994
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Total current liabilities 3,435,393
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Long term liabilities
Notes payable 0
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Total Liabilities 3,435,393
Stockholder's Deficit
Common Stock, $.001 par value 17,188
Treasury Stock 0
Authorized 10000000 shares 0
Issued and outstanding:
17,327,855 0
Additional paid in capital 1,181,336
Translation adjustment 65,200
Retained earnings (deficit) (2,212,642)
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Total Stockholders Deficit (948,918)
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TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT 2,486,476
The accompanying footnotes are an integral part of these financial statements
2
Consolidated
Statement of Operations three months ended September 30, 2002
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Combined
Revenue $ 589,655
Cost of Goods 459,490
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Gross Profit 130,165
Costs and expenses
Research and development -
Depreciation and amortization 68,316
General and Administrative expenses 1,392,596
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Operating income (1,330,747)
Other (income) expenses
Interest expense 43,401
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Income (loss) before taxes (1,374,147)
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Provision (recovery) for income taxes -
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Net (loss) income $ (1,374,147)
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Basic & diluted net loss per share $ (0.08)
Weighted average
average shares
used in computing
basic and diluted
net loss per share 17,327,855
Note: There are no comparables for same period 2001 because the original company
was dormant.
Note: The financing charge is a non-cash charge related to a the difference
between the strike price and the fair value of the Company's stock on the
day we issued a convertible debenture. This is a non-recurring item.
3
Consolidated
Statement of Operations nine months September 30, 2002
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Revenue $ 704,156
Cost of Goods 513,920
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Gross Profit 190,236
Costs and expenses
Depreciation and amortization 68,316
General and Administrative expenses 1,835,169
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Operating income (1,713,249)
Other (income) expenses
Interest expense, net 1,889
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Income (loss) before taxes (1,715,137)
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Provision (recovery) for income taxes -
-----------------
Net (loss) income $ (1,715,137)
=================
Basic & diluted net loss per share $ (0.10)
Weighted average
average shares
used in computing
basic and diluted
net loss per share 17,327,855
Note: There are no comparables for same period 2001 because the original company
was dormant.
4
Consolidated nine months September 30, 2002
Statement of Cash Flows
Cash flows from operating activities
Net income (loss) $ (1,715,137)
Adjustments to reconcile net loss to net cash used
in operating activities
Non-cash reduction in loan proceeds 154,435
Depreciation and amortization 68,316
Translation adjustment (33,073)
Changes in operating assets and liabilities -
Accounts receivable (25,106)
Work in progress (12,857)
Prepaid expenses (41,625)
Accounts payable and accrued expenses 70,031
Other current liabilities 37,694
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Net cash provided by (used in) operating activities (1,497,323)
Cash flow from investing activity
Loans outstanding (843,692)
Purchase of property and equipment -
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Net cash(used in) investing activities (843,692)
Cash flow from financing activities
Proceeds (payments) bank overdraft 46,316
Net proceeds from sale of common shares 658,000
Proceeds from loans 1,847,374
Due to/from officers (87,711)
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Proceeds from issuance of notes -
Net cash provided by financing activities 2,463,979
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Net increase (decrease) in cash 122,964
Cash and cash equivalents at beginning of the period 6,522
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Cash and cash equivalents at the end of the period $ 129,486
=============
The accompanying footnotes are an integral part of these financial statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
The accompanying condensed consolidated financial statements include our
accounts as well as our wholly owned subsidiaries. All significant inter-company
transactions and balances have been eliminated. In our opinion, the accompanying
unaudited consolidated financial statements reflect all adjustments, which are
of a normal recurring nature, necessary for a fair presentation of the results
for the periods presented.
The results of operations presented for the three and nine months ended
September 30, 2002 are not necessarily indicative of the results to be expected
for any other interim period or any future fiscal year. The accompanying
consolidated financial statements should be read in conjunction with the
financial statements for the six months ended June 30, 2002 and years ended 2001
and 2000 included in our amended Form 8-K/A filed with the Securities and
Exchange Commission on December 26, 2002.
Basis of Presentation
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On July 12, 2002 MetaSource Group ("MSGR") and MetaSource Systems ("MS")
executed a business combination agreement that provided for MSGR acquiring all
of the issued and outstanding common stock of MS. In connection with the
transaction, the shareholders of MS received 10,000,000 shares of MSGR common
stock for their 10,000,000 shares of MS. As a result of this transaction, the
former shareholders of MS acquired or exercise control over a majority of the
shares of MSGR. Accordingly the transaction has been treated for accounting
purposes as a recapitalization of MS and, therefore, these financial statements
represent a continuation of the accounting acquirer, MS, not MSGR, the legal
acquirer. In accounting for the transaction:
i) MS is deemed to be the purchaser and surviving company for accounting
purposes. Accordingly, its net assets are included in the balance sheet at their
historical book values.
ii) Control of the net assets and business of MSGR was acquired effective July
12, 2002 (the "Effective Date"). This transaction hasa been accounted for as a
purchase of MSGR by MS.
iii) The consolidated statements of operations and cash flows include MS's
results of operations and cash flows from November 27, 2001 (date of inception)
and MSGR's results of operations from the Effective Date. MSGR had no operations
subsequent to the Effective Date.
NOTE 2
Notes Payable
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On July 12, 2002, and pursuant to the Merger Agreement, we issued three
convertible debentures to three investors for a total of $2,000,000. Of the
three convertible debentures, one was for $1,000,000 and a second was for
$650,000. The third convertible debenture was for $350,000, which was exchanged
for a promissory note we had previously issued to an investor who had previously
loaned us $350,000, which we in turn was loaned to our wholly-owned subsidiary,
MetaSource Systems, Inc. Upon the closing of the merger between our wholly owned
subsidiary, MetaSource Acquisition Corporation and MetaSource Systems, Inc., the
investor who loaned us the funds agreed to convert that promissory note in
exchange for a convertible debenture in the amount of $350,000. The general
terms of all three convertible debentures are similar and are as follows:
o The debentures shall bear interest of eight percent (8%).
o Interest and principal shall be due and payable on July 12, 2003.
o The debenture holders shall have the right, at any time on or prior to
July 11, 2003, to convert that debt into one share of our common stock
at $2.25 per share and one warrant to purchase one share of our common
stock at $2.50 per share.
o Upon seventy five (75) days prior written notice, we have the right to
require and compel the debenture holders to convert the principal
indebtedness into shares of common stock at such time as our
historical net annual income, evidenced by reviewed financial
statements, exceeds Five Million Dollars ($5,000,000).
6
NOTE 3
Notes Receivable
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LaRosa Promissory Notes. MetaSource Systems, Inc., agreed to loan Norma LaRosa,
the officer and director of Kensington Group, certain sums at 2.84% interest per
annum. To date we have loaned Ms. LaRosa $135,000. The loan is full-recourse.
The principal and all accrued interest is due and payable no later than July 12,
2004. As collateral for the loan, Ms. LaRosa agreed to deposit in escrow that
portion of our shares owned by her equal in value to $560,000 as determined by
taking the average of the high, low, and closing price of our stock on July 16,
2002.
PMP Financing Agreement. MetaSource Systems, Inc., entered into an Agreement of
Financing with Mike Price, a director of PMP, wherein MetaSource Systems, Inc.,
agreed to loan Mike Price certain sums. To date we have loaned Mr. Price over
$250,000. The loan is a full recourse loan with a due date of July 13, 2004.
NOTE 4
Recent accounting pronouncements
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On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 141, "Business
Combinations," and SFAS 142, "Goodwill and Intangible Assets." SFAS 141 is
effective for all business combinations completed after June 30, 2001. SFAS 142
is effective for fiscal years beginning after December 15, 2001; however,
certain provisions of this Statement apply to goodwill and other intangible
assets acquired between July 1, 2001 and the effective date of SFAS 142. The
Company does not believe that these statements will have a material affect on
the Company's financial statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). This statement is effective for fiscal years beginning after December 15,
2001. This supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," while retaining many of the requirements of such statement. The
Company is currently evaluating the impact of the statement.
Item 2. Management's Discussion and Plan of Operation
This following information specifies certain forward-looking statements of
management of the company. Forward-looking statements are statements that
estimate the happening of future events are not based on historical fact.
Forward-looking statements may be identified by the use of forward-looking
terminology, such as "may", "shall", "could", "expect", "estimate",
"anticipate", "predict", "probable", "possible", "should", "continue", or
similar terms, variations of those terms or the negative of those terms. The
forward-looking statements specified in the following information have been
compiled by our management on the basis of assumptions made by management and
considered by management to be reasonable. Our future operating results,
however, are impossible to predict and no representation, guaranty, or warranty
is to be inferred from those forward-looking statements.
7
The assumptions used for purposes of the forward-looking statements specified in
the following information represent estimates of future events and are subject
to uncertainty as to possible changes in economic, legislative, industry, and
other circumstances. As a result, the identification and interpretation of data
and other information and their use in developing and selecting assumptions from
and among reasonable alternatives require the exercise of judgment. To the
extent that the assumed events do not occur, the outcome may vary substantially
from anticipated or projected results, and, accordingly, no opinion is expressed
on the achievability of those forward-looking statements. No assurance can be
given that any of the assumptions relating to the forward-looking statements
specified in the following information are accurate, and we assume no obligation
to update any such forward-looking statements.
We are a company whose subsidiaries are managed by experienced technology
entrepreneurs. Our goal is to maximize the benefits of entrepreneurship to
create shareholder value. Our services comprise custom software development,
marketing applications and strategic consulting to businesses. We intend to grow
our sales from both organic growth and further acquisition of companies which
complement our existing subsidiaries.
Each of our subsidiaries was purchased by MetaSource Group, Inc.,
(www.metasourcegroup.com) in 2002. At least one of the founding entrepreneurs of
each company currently manages each subsidiary. Our entrepreneurs carry
significant power to run their subsidiaries as they deem best.
Central to our mission is removing obstacles facing our entrepreneurs. We
believe each of our subsidiaries has achieved a measure of financial and
operational success in a difficult market environment. We believe we can build
on this success by providing financial and operational expansion while retaining
the entrepreneurial incentives and motivations which lead to success.
Our acquisition strategy marries software development firms with marketing firms
who have demonstrable success helping software companies raise their sales. We
believe this combination enhances our ability to sell software to leading
corporations. We intend to broaden our range of applications and strategic
marketing services through organic growth and acquisition.
Our operating strategy centers on the following goals:
o To acquire profitable software-related companies for stock: our goal
is to build a company of entrepreneurs committed to our company's
bottom line.
o To make acquisitions which are accretive to earnings, by swapping
stock at a rate well below our P/E ratio.
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o To lower software development costs for our subsidiaries through the
use of offshore coding centers. Management believes it has developed a
robust project management process for offshore development.
o To tie each manager's compensation in large part to divisional and
Group profits, and leave our entrepreneurs largely autonomous. Our
goal is to incentivize the manager-entrepreneur towards building
shareholder value, and to give them the power to accomplish this.
o To build sales growth by providing a wider range of services/products
each of our subsidiaries can sell to their clients.
o To create opportunities for our subsidiaries to expand geographically,
vertically, and horizontally.
o To build a base of services that all our partner companies can use.
o To create economies of scale in providing benefits and reducing
property and equipment prices for each of our subsidiaries.
Our acquisition strategy builds upon the strengths and direction of our founding
companies. We are currently targeting the following areas:
o Companies possessing key vertical expertise, specifically in the
Media, Travel, Finance, Health Care and Logistics industries.
o Consulting and research companies which complement our expertise with
IT marketing and research services.
o Companies providing innovative e-marketing services which extend our
capabilities in design, branding and delivery.
We believe we have a large pool of candidates for acquisition. There are over
12,000 IT-related companies in the United States alone. Our candidate profile
focuses on profitability and demonstrated leadership in a particular niche or
vertical market segment.
In general we seek to acquire only profitable companies for stock. We believe
that in general, each acquisition will be accretive to our earnings, because we
purchase companies at a private equity valuation, which is expected to be below
our public equity valuation.
For example, our typical acquisition involves the purchase of a privately-held
company at a price of 5 times earnings. If our price/earnings ratio is higher
than 5, the acquisition is expected to be accretive to earnings.
Our current subsidiaries are described below:
o Digit--an award-winning producer of interactive digital business
solutions to clients -such as Deutsche Bank, Habitat, Disney, News
International, MTV, Nickelodeon, Art Group, Stella McCartney, MTV and
Bertelsmann Media Group. For further information please visit
www.digitlondon.com or www.digitfeed.com.
o Kensington Group-- providing research, consulting, and training for
Information Technology firms in the field of analyst relations. For
further information please visit www.kensingtongroup.com.
o MetaSource Systems, developing software for a number of clients
including some of our subsidiaries: MSS focuses on development in C++,
Java, databases, and web development. Sales, service, and project
management are done in New York and London (MS UK) while coding is
outsourced to China. For further information please visit
www.metasourcesystems.com.
Our subsidiaries focus on client-facing activities such as sales, consultation,
project design and management, while programming and application development are
increasingly handled by MetaSource Systems.
We seek to lower software development costs through offshore coding. Our
management has experience developing offshore software applications for other
software firms and businesses. We believe that each of our subsidiaries has the
potential to significantly reduce operating costs through offshore application
development. Cost savings may be retained as profit or redirected toward sales
and marketing.
9
We handle a measure of administrative functions for our subsidiaries, and in the
future we intend to consolidate functions such as finance and human resources.
We seek to relieve entrepreneurs from the burdens of non-core business
functions.
Consolidated Financial Statements
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The following discussion should be read in conjunction with the section below
entitled "Other Factors Affecting Operating Results".
Our operating results during the three-month period ended September 30, 2002,
reflected our acquisition efforts as well as several factors which may be
considered nonrecurring. However, we do not intend to separate costs associated
with our acquisition strategy from our overall results. We believe our
acquisition strategy is a critical element of our operational goal of providing
best-of-breed software and marketing services and products. In this discussion
we detail these costs and classify them as part of our costs of operations.
The prime reason for our loss in the third quarter was expenses related to
initial audit, legal and investor relations expenses relating to our reporting
requirements. These costs were over $700,000 and relate to the following:
o Legal costs associated with making acquisitions and mergers.
o Audit costs due to the regulatory requirement that our new
acquisitions be audited over 8 quarters comprising 2000 and 2001, and
to be reviewed over the first two quarters of 2002.
o Investor relations expenses.
We expect to incur approximately $200,000 during the fourth quarter ending
December 31, 2002 for costs relating to our acquisitions, mergers and
subsidiaries. We do not foresee any significant further costs relating to the
items above. Each year we will incur costs relating to maintaining the company
as a reporting issuer.
We also lost money on an operating basis. We believe this was due to both the
continuing slowdown in IT spending in addition to the distractions our
subsidiaries faced in undergoing a lengthy audit.
We believe that our future results will improve for the following reasons:
o The costs of maintaining the company as a reporting issuer should be
lower than the costs incurred for our recent acquisitions and mergers.
o We believe the synergies between each of our subsidiaries are
beginning to develop, which should lead to lower costs and efficient
progress.
o We have made additional acquisitions recently which we believe will be
accretive to earnings.
Since we have acquired companies in both the United States and United Kingdom,
there is a natural risk we face in foreign exchange movements. We believe that
hedging foreign exchange risks can be advantageous to shareholders by reducing
risk. However, at this time, we have not hedged our risk in the British Pound.
Because the Pound is rising relative to the dollar, the value of the assets of
our UK subsidiary is increasing our value; however, the losses from our UK
subsidiary are negative to our income statement.
10
Our strategy is to merge or acquire profitable companies. We believe this is the
best way to harness an entrepreneurial spirit and, ultimately, benefit
shareholders. Rather than mandating very high growth rates, we incentivize our
subsidiaries to find ways to bring complementary and profitable businesses to
our family of companies. Unfortunately, we believe this strategy has not been
executed well. Companies that we believed were profitable before they were
acquired have subsequently become unprofitable. We believe that this is
primarily due to economic conditions but we remain diligent in working to make
each of our subsidiaries profitable.
We decided not to close on three acquisitions, Prime Marketing Publications
("PMP"), PFA Research ("PFAR"), and Global Systems and Technologies ("GSS"). In
the case of PMP and PFAR, the primary reason was a downturn in the business
prospects of these companies as our audit was being performed. In the case of
GSS, the primary reason was incomplete financial records as determined in our
audit process and the lack of cooperation from GSS in the audit process.
In performing our due diligence on these companies we collected and verified
information regarding financial performance and liability exposure. We further
relied on our audit for final confirmation of all information we collected. We
agreed to value our acquisitions solely on the results of our audit. Because our
audit reflected declining financial performance, we believe that we are under
no obligation to give consideration for the acquisitions.
We decided not to close on the acquisition of PMP because PMP was losing
significant amounts of money and PMP management had recently indicated to us
that sales visibility remained low. We decided it was in the best interest of
the shareholders and the company to not cover continuing losses. Because of our
decision to cease funding these losses, we ceased to extend loans to the CEO of
PMP and agreed with PMP to not close the acquisition (please see the notes under
Legal Proceedings for further details). Our earnings are higher as a result of
not closing on the transaction with PMP.
Up until our decision not to close on the PMP transaction, we lent and invested
over $300,000 in PMP and/or its principals. We decided not to continue funding
such losses and we will pursue all appropriate measures to gain recourse to
these funds.
We decided not to close on the transaction with PFAR for the same reasons
detailed above for PMP. Specifically, PFAR was losing money and sales visibility
remained low for the foreseeable future. We decided it was in the best interest
of the shareholders and the company to not cover continuing losses (please see
the notes under Legal Proceedings for further details). Our earnings are higher
as a result of not closing on the transaction with PFAR.
Up until our decision not to close on the PFAR transaction, we lent and invested
over $15,000 to PFAR and/or its principals. We decided not to continue funding
such losses and we will pursue all appropriate measures to gain recourse to
these funds.
We decided not to close on the transaction with GSS because our audit of GSS
records revealed incomplete information. GSS also failed to provide the required
cooperation regarding our audit. We decided it was in the best interest of our
shareholders and the company to not close on the transaction in order to limit
potential undiscovered liabilities (please see the notes under Legal Proceedings
for further details).
These developments significantly reduced our cash resources though we believe
that we will be able to recover the cash outlays in the foreseeable future. We
hope that the acquisitions which were disclosed in our Form 8-K's filed on
December 17, 2002, and December 18, 2002 will increase our financial size and
prospects.
11
Results of Operations.
Consolidated Financial Statements for the Three Months Ended September 30, 2002
The following discussion sets forth our consolidated financial results for the
three month period ending September 30, 2002. We have not compared our results
for the three months ended September 30, 2002 with our financial results for the
corresponding period in 2001 because we had minimal to no operating results
during that period.
Revenues. For the three months ended September 30, 2002, we realized revenues of
$589,655. We anticipate that we will begin to increase our revenues as we
continue to build our customer base and our product offerings.
Our subsidiaries generate revenue from software development and professional
services. Revenue is recognized as the services are rendered. Daily rates for
programming, training and consulting are determined in advance and agreed to
with the customer. Most software development jobs are on a project basis.
Revenue from research is also recognized as services are performed, however,
adjustments are sometimes needed to reflect progress against milestones or
deliverables. On fixed fee engagements, revenue and gross profit adjustments are
made to reflect revisions in estimated costs and contract values. Deferred
revenue occurs when a client prepays for work to be done in the future.
We establish an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends, and other information.
Operating and Other Expenses. For the three month period ended September 30,
2002, our total costs of goods sold were $459,490. Other operating expenses were
represented by $1,392,596 in general and administrative expenses, $0 in research
and development, expense and $68,316 in depreciation and amortization expenses.
Other expenses were $43,401 in interest and finance expenses. For the three
month period ended September 30, 2002, we experienced a net loss of $1,374,147.
Cost of services consists primarily of personnel costs and subcontractor fees,
including compensation and related costs on a project basis.
Selling, general and administrative expenses consist of salaries, commissions,
and related expenses for sales and marketing, information technology, finance,
legal and administrative personnel as well as office and information technology
expenses, professional fees and other general corporate expenses.
Research and development costs are expensed. All costs incurred to establish the
technological feasibility of software products or product enhancements to
research and development costs are expensed as incurred.
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which range from three to seven years.
12
Consolidated Financial Statements for the Nine Months Ended September 30, 2002
The following discussion sets forth our consolidated financial results for the
nine month period ending September 30, 2002. We have not compared our results
for the three months ended September 30, 2002 with our financial results for the
corresponding period in 2001 because we had minimal to no operating results
during that period.
Revenues. For the nine months ended September 30, 2002, we realized revenues of
$704,156. We anticipate that we will begin to increase our revenues as we
continue to build our customer base and our product offerings.
Our subsidiaries generate revenue from software development and professional
services. Revenue is recognized as the services are rendered. Daily rates for
programming, training and consulting are determined in advance and agreed to
with the customer. Most software development jobs are on a project basis.
Revenue from research is also recognized as services are performed, however,
adjustments are sometimes needed to reflect progress against milestones or
deliverables. On fixed fee engagements, revenue and gross profit adjustments are
made to reflect revisions in estimated costs and contract values. Deferred
revenue occurs when a client prepays for work to be done in the future.
We establish an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends, and other information.
Operating and Other Expenses. For the nine month period ended September 30,
2002, our total costs of goods sold were $513,920. Other operating expenses were
represented by $1,835,169 in general and administrative expenses, $0 in research
and development expense and $68,316 in depreciation and amortization expenses.
Other expenses were $1,889 in interest and finance expenses. For the nine
month period ended September 30, 2002, we experienced a net loss of $1,715,137.
Cost of services consists primarily of personnel costs and subcontractor fees,
including compensation and related costs on a project basis.
Selling, general and administrative expenses consist of salaries, commissions,
and related expenses for sales and marketing, information technology, finance,
legal and administrative personnel as well as office and information technology
expenses, professional fees and other general corporate expenses.
Research and development costs are expensed. All costs incurred to establish the
technological feasibility of software products or product enhancements to
research and development costs are expensed as incurred.
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which range from three to seven years.
Liquidity and Capital Resources.
Our total current assets were approximately $1,495,034 as of September 30, 2002,
which was represented by cash of $129,486, $679,015 which was represented by
notes receivable from affiliates, $325,748 which was represented by work in
progress, $81,251 which was represented by prepaid expenses and $279,535 which
was represented by accounts receivable.
13
Our total long term assets were approximately $991,441 as of September 30, 2002,
of which $4,947 was represented by plants, property and equipment, $562,960 was
represented by goodwill, $419,079 was represented by long-term loans, and $4,455
which was represented by other assets. Therefore, our total assets as of
September 30, 2002 were $2,486,476. We had no other assets as of September 30,
2002.
Our current liabilities were $3,435,393 as of September 30, 2002, which were
represented by $415,376 in accounts payable and accrued expenses, $2,467,655 by
notes payable, $420,368 by bank overdraft and factor, $131,994 by other
liabilities. We had $0 in long term liabilities. We had no other long term
commitments or contingencies.
Our Plan of Operation for the Next Twelve Months. Our plan of operation will be
affected by the acquisition of additional entities which operate in our
industry. We cannot guarantee that such acquisitions will increase the value of
our common stock.
In the opinion of management, available funds will satisfy our working capital
requirements for the next twelve months. Our forecast for the period for which
our financial resources will be adequate to support our operations involves
risks and uncertainties and actual results could fail as a result of a number of
factors.
Factors Affecting Operating Results
WE HAVE A HISTORY OF LOSSES AND MAY NOT BE ABLE TO SUSTAIN PROFITABILITY.
Our net loss for the three month period ended September 30, 2002 was
$1,374,147. To generate profits we will need to increase revenues, acquire
profitable shares and/or decrease costs, and there can be no assurance we will
successfully accomplish these goals.
14
WE HAVE A LIMITED OPERATING HISTORY WHICH MAKES AN EVALUATION OF OUR BUSINESS
DIFFICULT.
Our company was formed less than nine months ago, prior to that each of our
subsidiaries operated as separate entities. There can be no assurance we will
integrate our companies successfully.
WE ARE DEPENDENT ON CORPORATE SPENDING FOR MARKETING SERVICES AND SOFTWARE
DEVELOPMENT.
Spending patterns on marketing services and custom software development are
subject to changing business objectives, adoption of technologies and
obsolescence of other technologies, and macroeconomic cycles. There can be no
assurance that corporate spending for the services we offer will be sustained.
OUR ABILITY TO RAISE CAPITAL MAY BE KEY TO OUR VIABILITY AND GROWTH.
We may require capital to fund losses, build infrastructure, expand sales and
marketing programs and make acquisitions. Our ability to raise capital may be
limited by our size and/or market conditions, and this may negatively impact our
operations.
OUR CLIENTS MAY SUFFER FINANCIAL DIFFICULTIES, IMPACTING OUR ABILITY TO COLLECT
PAYMENT FOR SERVICES PERFORMED.
Our clients are largely from the information technology industry, which has been
subject to fluctuating fortunes. An inability to collect payments in a timely
manner may negatively impact our operating position. Negative macroeconomic or
industry specific developments may similarly impact our ability to collect
payments for services provided.
WE MAY NOT MANAGE OUR GROWTH SUCCESSFULLY AND THIS MAY ADVERSELY AFFECT OUR
BUSINESS.
We intend to continue growing by acquiring companies, and there can be no
assurance we will integrate our new employees and assets successfully. New
acquisitions may dilute shareholder value and distract management from operating
other businesses profitably.
15
WE TYPICALLY ENGAGE OUR CLIENTS ON A PROJECT BASIS, WHICH DOES NOT PROVIDE LONG
TERM PREDICTABILITY OF OUR REVENUES.
Our clients are generally under no contractual obligation to retain our services
beyond the completion of projects.
WE ARE DEPENDENT ON KEY PERSONNEL AND OUR ABILITY TO ATTRACT AND RETAIN
QUALIFIED EMPLOYEES, THE LOSS OF WHICH MAY ADVERSELY AFFECT OUR BUSINESS.
The entrepreneurs and their key employees which we have acquired may terminate
their relationship with us, and we may find it difficult to replace these
personnel without disruption to our operations.
WE FACE COMPETITION FROM BIGGER, MORE ESTABLISHED COMPANIES WHO HAVE GREATER
FINANCIAL RESOURCES THAN OURSELVES.
We are subject to significant competition in quality and price of services
provided. The loss of key clients to our competitors or reduced prices charged
may adversely impact our profitability. We may not be successful in developing a
brand to compete with larger, well-known companies.
OUR STOCK PRICE IS VOLATILE.
Our stock is subject to price fluctuations based on market judgment of our
performance, and fluctuating bid-ask spreads due to liquidity constraints. These
factors may be beyond our control.
SHARES BECOMING AVAILABLE FOR SALE COULD AFFECT OUR STOCK PRICE.
Shares owned by insiders are currently restricted but will be subject to sale as
lock-up provisions expire. This supply of shares available for sale could
negatively impact our share price.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not believe that we have any material market risk exposure with respect to
derivative or other financial instruments which would require disclosure under
this item.
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Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. We maintain controls and
procedures designed to ensure that information required to be disclosed in the
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission. Based upon
their evaluation of those controls and procedures performed within 90 days of
the filing date of this report, our chief executive officer and the principal
financial officer concluded that our disclosure controls and procedures were
adequate.
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the chief
executive officer and principal financial officer.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
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Prime Marketing Publications Limited ("PMP"). On or about July 8, 2002, we
entered into an agreement whereby we agreed to purchase all the issued and
outstanding ownership interests in PMP; to issue shares of our stock; and to
loan PMP certain funds. On or about November 11, 2002, the United Kingdom
counsel for PMP notified us of the following: an alleged breach by us of an
agreement to issue shares of our stock to Mr. Stan Packham and Mr. Steve
Markwell; an alleged breach by us to loan to Mr. Mike Price the sum of
(pound)808,000; and an alleged breach of agreement by us to place (pound)250,000
in an escrow account. PMP requested that the agreement be terminated and we
agreed. We requested a return of the funds we loaned to PMP and/or PMP's
principals.
Global Systems and Technologies, Inc. ("Global"). One of the entities acquired
by us in July 2002 was Global pursuant to the terms of an agreement dated May
29, 2002. In October 2002, certain disputes with Global arose, including the
arrangement by which the audit of Global's books and records would be conducted,
payment of an agreed-to advance to Global by us, and the alleged failure by us
to assign certain projects to Global. We have terminated the Global agreement
due to Global's failure to provide the required cooperation.
PFA Research, company number 2638871 ("PFAR"). One of the entities acquired by
us in July 2002 was PFAR pursuant to the terms of an agreement dated July 12,
2002. In December 2002, we agreed with PFAR to terminate the PFAR agreement. We
intend to attempt to recover all funds advanced to PFAR and its principals.
Item 2. Changes in Securities.
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None.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to Vote of Security Holders
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None.
Item 5. Other Information
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None.
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
On July 12, 2002, Meta Source Acquisition Corp., a Delaware corporation and our
wholly-owned subsidiary ("MSAC") merged with MetaSource Systems, Inc., a
Delaware corporation ("MSS"). MSAC was formed by us for the purpose of
effectuating a merger with MSS. The merger transaction between MSS and MSAC was
consummated pursuant to an Agreement and Plan of Merger dated April 24, 2002
with subsequent amendments dated May 23, 2002 and July 11, 2002.
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On July 18, 2002 we filed a Form 8-K attaching our July 15, 2002 press release
describing the merger transaction, with the text of the press release attached
as exhibit 99.1. Our Form 8-K filed July 19, 2002 describes the merger
transaction, and attaches the text of the Agreement as Exhibit 2.1, along with
the amendments to that Agreement, attached as Exhibit 2.1.1 and 2.1.2. The
merger and acquisition agreements pertaining to the transactions by which MSS
acquired other entities pursuant to this transaction are attached as follows:
Exhibit 2.2 is the Agreement of Merger between MSS, Digit, and Digit
Stockholders, Exhibit 2.3 is the Acquisition Agreement between MSS and
Stockholders of PFA Research Ltd., Exhibit 2.4 is the Acquisition Agreement
between MSS and the Stockholders of Prime Marketing Publications Limited,
Exhibit 2.5 is the Agreement of Merger between MSS, Global Systech, and
Stockholders of Global Systech, Exhibit 2.6 is the Agreement of Merger between
MSS, MSS UK, and Stockholders of MSS UK, and Exhibit 2.7 is the Agreement and
Plan of Merger between MSAC, Kensington Group, Inc., and Stockholders of
Kensington Group, Inc. We anticipate filing the financial statements to
accompany our Form 8-K dated July 19, 2002 within the required timeframe.
Pursuant to the Merger Agreement, Joe Cheung resigned as our sole officer and
sole member of our Board of Directors and Courtney Smith was appointed as
president, secretary, treasurer, and a member of our Board of Directors. Mr.
Cheung's resignation is attached as Exhibit 17.1 to our 8-K filed July 19, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned in the City of New York, New York, on December 26, 2002.
MetaSource Group, Inc.
By: /s/ Courtney Smith
--------------------------------------------
Courtney Smith
Its: President, Secretary, Treasurer and Director
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CERTIFICATIONS
I, Courtney Smith, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of MetaSource Group,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 26, 2002
/s/ Courtney Smith
- ----------------------
Courtney Smith
Chief Executive Officer and
Chief Financial Officer
20