SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 12, 2002
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)
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(Former name, if changed since last report)
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(Former Address and Telephone Number of Principal Executive Offices)
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Item 1. Changes in Control of Registrant.
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On July 12, 2002 ("Closing Date"), 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 (the "Merger Agreement") which was amended on May 23, 2002 ("Amendment
No. 1"), and July 11, 2002 ("Amendment No. 2"). The Merger Agreement is attached
as Exhibit 2.1 to the original Form 8-K filed on July 19, 2002. Amendment No. 1
is attached as Exhibit 2.1.1 and Amendment No. 2 is attached as Exhibit 2.1.2.
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. Upon
the closing of the merger, Mr. Cheung agreed to have 6,782,519 shares of his
common stock cancelled.
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of July 18, 2002, by each person or entity
known by us to be the beneficial owner of more than 5% of the outstanding shares
of common stock, each of our directors and named executive officers, and all of
our directors and executive officers as a group.
======================= ========================================== ======================================== =======================
Title of Class Name and Address Amount and Nature Percent of Class
of Beneficial Owner of Beneficial Owner
----------------------- ------------------------------------------ ---------------------------------------- -----------------------
Common Stock Courtney Smith 3,805,755 shares(1),
40 Exchange Place, Suite 1607 President, Secretary, Treasurer and 19.2%
New York, NY 10005 sole director
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Common Stock Angela Chen
40 Exchange Place, Suite 1607 3,220,610 shares(1) 16.2%
New York, NY 10005
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Common Stock Greater China Technology, Inc.
40 Exchange Place, Suite 1607 1,100,000 shares(2) 5.6 %
New York, NY 10005
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Common Stock All directors and named executive 3,805,755 shares 19.2%
officers as a group
======================= ========================================== ======================================== =======================
(1) 1,500,000 shares are subject to an escrow agreement and will be released if
we reach certain financial milestones. If we do not reach those financial
milestones in the next 18 months, then those shares will be cancelled.
(2) Courtney Smith owns approximately 42% of Greater China Technology, Inc.
(3) On November 17, the Registrant effected a 1 for 1.1 forward split for
holders of record on November 17, 2002. The current shareholdings are listed in
the table above.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. In accordance with Securities and Exchange
Commission rules, shares of our common stock which may be acquired upon exercise
of stock options or warrants which are currently exercisable or which become
exercisable within 60 days of the date of the table are deemed beneficially
owned by the optionees. Subject to community property laws, where applicable,
the persons or entities named in the table above have sole voting and investment
power with respect to all shares of our common stock indicated as beneficially
owned by them.
Pursuant to the Merger Agreement, Mr. Smith, age 50, became our president,
secretary, treasurer and director. Mr. Smith is also the president, secretary
and a member of the Board of Directors of MSS. Mr. Smith is primarily
responsible for our day to day operations. The duties of our chief financial
officer and controller are performed by Geller & Co. Mr. Smith was the founder
of the predecessor software company to MSS, Web Master, Inc. in 1996. Mr. Smith
is also the president and chief executive officer of Greater China Technology,
Inc. From July 1990 to the present, Mr. Smith has been the president and owner
of Courtney Smith & Co., an investment advisor firm, formerly Pinnacle Capital
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Management, Inc. He was also a Managing Director in the New York Representative
Office of Daishin Securities Co., Ltd., from October 1994 to February 1996. Mr.
Smith became Senior Vice President of Bersac International in March 1996. He is
the President and owner of Pinnacle Capital Strategies, Inc. which was
registered with the Commodity Futures Trading Commission as a commodity trading
advisor and a commodity pool operator from December 1990 to May 2001. Mr. Smith
is also the owner of CTCR, Inc. and Nexus, Inc. and the founder of DK&G
WebMaster and CollegeCentral.com. Mr. Smith attended the University of British
Columbia, Vancouver, British Columbia, Canada, from September 1970 to June 1971,
and the Simon Fraser University, Burnaby, British Columbia, Canada, and the
British Columbia Institute of Technology, Burnaby BC in 1975 and 1976. Mr. Smith
is currently not an officer or director of any other reporting company.
In October 2001, a class action lawsuit was filed against numerous defendants
including Mr. Smith in United States District Court in the Central District of
California, Case No. CV 01-9024 SVW, alleging violations of federal securities
laws. The plaintiffs ^ served an amended complaint^. Mr. Smith believes that the
plaintiffs' allegations are without merit and intends to oppose this lawsuit
zealously. As of December 24, 2002, a motion to dismiss has been filed by Mr.
Smith.
In 2000, a lawsuit was filed against numerous defendants including Mr. Smith in
United States District Court in the Eastern District of New York, Case No. 00-CV
4026, alleging violations of federal securities laws. Mr. Smith has responded to
that amended complaint and the case is currently in the discovery process. Mr.
Smith believes that Plaintiffs' allegations are without merit and intends to
oppose this lawsuit zealously. As of December 24, 2002, the plaintiff has
indicated that it may drop Mr. Smith as a defendant, and Mr. Smith believes that
the matter will be resolved shortly.
Item 2. Acquisition of Assets.
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Merger of MSAC and MSS.
On July 12, 2002, MSAC merged with and into MSS pursuant to the Merger Agreement
(the "MSS/MSAC Merger"). The MSS/MSAC Merger has been accounted for as a
reorganization. Prior to the MSS/MSAC Merger and in an effort to satisfy the
conditions of the Merger Agreement, MSS had entered into agreements to acquire
certain entities: Digit Digital Experiences Limited, a United Kingdom
corporation ("Digit"), Global Systems and Technologies Corp., a Virginia
corporation ("GSS"), PFA Research Limited, a UK corporation ("PFAR") and Prime
Marketing Publications Limited, a UK corporation ("PMP") (collectively, the
"Acquired Entities") which MSS believed complemented its business of providing
computer solutions and consulting.
As of December 24, 2002, we have decided not to close three of these
acquisitions: PMP, PFAR, and GSS. In the case of PMP and PFAR, our primary
reason not closing these acquisitions was a downturn in the business prospects
of these companies as our audit was being performed. In the case of GSS, the
primary reason not to close the transaction was incomplete financial records as
determined in our audit process. We were also having difficulty in receiving
cooperation from GSS.
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 we are under no
obligation to give consideration for the acquisitions.
We decided to not to close the transaction to acquire PMP because PMP was losing
significant amounts of money and PMP management had recently indicated to us
that sales visibility remained low. Our management decided it was in the best
interest of the shareholders to terminate our relationship with PMP in order to
avoid significant losses. We believe our earnings are higher as a result of not
closing this transaction. Prior to terminating our relationship with PMP, we had
lent and invested over $300,000 to PMP and its principals. Our management
intends to pursue all appropriate measures to gain recourse to these funds.
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We decided not to close the transaction acquiring PFAR for the same reasons
detailed above for PMP. PFAR was losing relatively significant amounts of money
and sales visibility remained low for the foreseeable future. Our management
decided it was in the best interest of the shareholders to terminate our
relationship with PFAR to avoid significant losses. We believe our earnings are
higher as a result of not closing the transaction to acquire PFAR. Prior to
terminating our relationship with PFAR, we lent and invested over $15,000 to
PFAR and 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 the transaction to acquire GSS because our audit of
GSS's records revealed incomplete information. Our management decided it was in
the best interest of the shareholders to not close on the acquisition in order
to limit potential undiscovered liabilities. GSS also failed to cooperate with
our audit, as required by the GSS Acquisition Agreement.
The Acquired Entities are described more particularly below. We intend to pursue
further acquisitions with the goal of becoming a provider of software solutions
and technology consulting. We intend to focus on acquiring companies that
complement MSS's existing assets.
1. Mechanics of the Merger. The separate corporate existence of MSAC ceased when
the Certificate of Merger was filed with the Delaware Secretary of State on July
12, 2002, and MSS was the surviving corporation. The charter documents of MSS
are the charter documents of the surviving corporation.
2. Share Conversion. Pursuant to the Merger Agreement, we issued 10,986,600
shares of our common stock to the MSS shareholders in exchange for all the
issued and outstanding shares of MSS common stock. The holders of MSS common
stock immediately prior to the MSS/MSAC Merger will receive one share of MSG
stock for each share of MSS stock owned by such holder. The number of shares
issued to the MSS shareholders may be reduced pro rata if the following occurs:
If the net annual earnings for the year ending December 31, 2001 for the
entities acquired pursuant to the Merger Agreement ("Acquired Entities"), do not
equal or exceed $2,000,000, then the number of shares issuable under the Merger
Agreement shall be reduced, pro rata, by the number of shares equal to the total
shortfall. Two of our principal shareholders, Courtney Smith and Angela Chen,
have agreed that any shortfall will be taken only from their holdings, and will
not reduce the holdings of any other shareholders. For example, if the total net
earnings of the Acquired Entities are $1,800,000, the shortfall is 10% of
$2,000,000, such that the total number of shares issuable to Mr. Smith and Ms.
Chen under the Merger Agreement would be reduced to account for that 10%. Net
earnings are to be determined according to U.S. GAAP, as verified by our
auditor.
3. Share Restrictions. The shares of MSG common stock issued pursuant to the
Merger Agreement shall bear a restricted legend indicating that the shares are
"restricted" securities and are not transferable unless certain conditions are
satisfied pursuant to applicable securities laws. In addition to any
restrictions on transfer pursuant to applicable securities laws, the shares of
MSG common stock issued pursuant to the Merger shall have the following
additional restrictions:
a) No shares of MSG common stock issued pursuant to the Merger
Agreement may be transferred within 12 months of the Closing
Date.
b) After 12 months from the Closing Date, 50% of the holder's shares
may be transferred subject to the provisions of the applicable
securities laws.
c) After 24 months from the Closing Date, the remaining 50% of the
holder's shares may be transferred subject to the provisions of
the applicable securities laws.
In addition to the above restrictions and any restrictions on transfer pursuant
to the applicable securities laws, MSS's officers, directors and any of their
agents, relatives, affiliates and any entities controlled by MSS's officers,
directors, and any holders of more than 5% of MSG's stock issued pursuant to the
MSS/MSAC Merger ("MSG Insiders") shall be subject to the following additional
restrictions:
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a) No shares of MSG common stock issued pursuant to the Merger may
be transferred within 12 months of the issuance pursuant to the
Merger.
b) After 12 months from the Closing Date, 25% of MSG common stock
held by an MSG Insider may be transferred, subject to any
applicable securities regulations.
c) After 18 months from the Closing Date, an additional 25% of the
MSG Insider's MSG common stock may be transferred, subject to any
applicable securities regulations.
d) After 24 months from the Closing Date, an additional 25% of the
MSG Insider's MSG common stock may be transferred, subject to any
applicable securities regulations.
e) After 30 months from the Closing Date, the remaining 25% of the
MSG Insider's MSG common stock may be transferred, subject to any
applicable securities regulations.
4. Financing. 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. One
of those investors had previously loaned us $350,000, which we had loaned to MSS
pursuant to the Merger Agreement, Amendment No.1 and Amendment No. 2. Upon the
closing of the MSS/MSAC Merger, the investor agreed to convert that promissory
note in exchange for a convertible debenture in the amount of $350,000. The
terms of those convertible debentures are as follows:
a) The debentures shall bear interest of eight percent (8%).
b) Interest and principal shall be due and payable on July 12, 2003.
c) 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.
d) 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).
Merger of MetaSource Systems UK and MSS. Immediately prior to the MSS/MSAC
Merger, MSS merged with MetaSource Systems UK, a United Kingdom corporation
("MSS UK"). MSS became the surviving entity in that merger. Courtney Smith, our
sole officer and director, is a director and a shareholder of MSS UK. The
Agreement of Merger between MSS and MSS UK is attached to this Form 8-K as
Exhibit 2.6. MSS agreed to issue 986,600 shares of MSS common stock to the
shareholders of MSS UK in exchange for all the issued and outstanding stock of
MSS UK. The merger between MSS and MSS UK will be accounted for as a
reorganization.
MetaSource Systems (MSS/MSS UK) Business Description. MSS is a New York and
London-based company which provides solutions to software development and
maintenance problems that companies encounter in the current business
environment.
MSS provides professional services through an integrated business model that
combines technical, project and relationship management teams located in the
U.S. and U.K., along with development companies located in China, Russia and
Taiwan. MSS's solutions include application development and integration,
application management, and re-engineering services. MSS's core competencies
include webcentric applications, database programming, and client-server
systems.
To date, MSS has assembled the following resources:
Sales, Project Management and Client Service Team. MSS performs all
client-facing functions using local sales, service and project
management personnel. The experienced, high quality professionals
ensure seamless integration of client needs and company capabilities.
Offshore development platform in China. Through an exclusive agreement
with Greater China Technology, Inc. located in China, MSS has an
exclusive agreement to outsource programming and development work at
costs significantly less than those in the U.S.
Corporate strategy & finance team. Many smaller IT solutions providers
have focused their resources mainly on building technical and sales &
marketing expertise and therefore lack the strategic and financial
managerial expertise to drive sustained long-term growth. MSS has
assembled an in-house team dedicated solely to developing corporate and
financial strategies aimed at building a world-leading provider of IT
solutions within the context of the current depressed market
environment.
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MSS focuses first and foremost on managing the software development process. MSS
can provide complete system analysis and design as well as hard core project
management. Typically, MSS will receive program specifications from the client
so that the primary function of MSS is to ensure that the project is implemented
on time and on budget. MSS professionals will work with the client to ensure
that the specifications will precisely solve the clients' problem.
MSS's approach to technical development is based on a combination of Prince II
and Rational methodologies. All of our work is completely PMBOK(R) compliant.
Our global staff is highly trained in project management disciplines.
The methodology is design to reduce implementation duration and risk, while
ensuring effective resource-based management. MSS's main aim is to establish
business goals and deliver results that provide our clients with strategic
advantage in their industry.
^
MSS Agreement with Digit. Pursuant to an acquisition agreement (the "Digit
Agreement"), MSS obtained the right to acquire Digit. The Agreement of Merger
between MSS, Digit, and Digit Stockholders is attached as Exhibit 2.2. According
to the Digit Agreement, the shareholders of Digit will be issued shares of MSS's
common stock (the "Digit Exchange Shares") in exchange for all the issued and
outstanding stock of Digit. Each Digit shareholder is to be issued Digit
Exchange Shares based on their pro rata ownership of Digit stock. The ultimate
number of Digit Exchange Shares to be issued to the Digit shareholders will be
calculated using the following formula: ADD--the average of 5 times Digit net
earnings from April 1, 2001 through March 31, 2002 with 5 times the Digit net
earnings from April 1, 2002 through March 31, 2003, and DIVIDE BY the average
trading price (defined hereinafter) of MSS's common stock on the first twenty
days of public trading of MSS's shares. "Net earnings" are to be determined by
MSS's auditor using U.S. GAAP. The "average trading price" shall be calculated
with reference to the average of high and low prices on the first twenty days of
public trading as reported on finance.yahoo.com.
The Digit shareholders agreed to place all of the Digit Exchange Shares in
escrow for a period of one year. Within 60 days of March 31, 2003, additional
Digit Exchange Shares will be added according to the formula above if Digit's
net earnings for the period beginning April 1, 2002 and ending March 31, 2003
are greater than the average of April 1, 2001 through March 31, 2002 Digit
earnings. If Digit net earnings for the period beginning April 1, 2002 and
ending March 31, 2003 are less than the average of April 1, 2001 through March
31, 2002, Digit earnings, the appropriate number of Digit Exchange Shares will
be subtracted according to the formula above.
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Digit Business Description. Since 1995, Digit has provided interactive digital
business solutions to a corporate client base. Those solutions include a
combination of design, marketing, branding, merchandising and technology
integration skills to create business value. Digit specializes in navigation and
flow within interactive design solutions and are experienced structural
architects for complex information management systems. By carefully selecting
technologies Digit has navigated an uncertain market environment by establishing
a reputation as the European leader in design and innovation. Recognition of
Digit's work has resulted in the award of a BAFTA for Interface Design and Best
of Show at the International Design Week Awards 2001. Furthermore in a recent
Financial Times survey of the leading 50 Creative Minds of 2001, Digit's
Creative Director, Daljit Singh, was the only New Media personality to feature
alongside the likes of Greg Dyke, Sir Paul Smith, Sir Martin Sorrell and Ridley
Scott.
Recent Work includes:
Habitat - Digit has redesigned and revitalized Habitat's global website which
was launched in September in five countries - the UK, Eire, France, Spain and
Germany. The new site has been designed to allow a seamless migration to
e-commerce elements in the future. Partnering with Dataforce to handle all of
Habitat's online customer relationship marketing, Digit will introduce dynamic
digital mailers throughout the year, informing customers of promotions and new
ranges within the stores.
World Wide Learning - Part of News Corporation, (a division of the News
International plc). WorldWide Learning has commissioned Digit to look at the
branding and design for several projects both on and off-line. Digit has been
asked to re-design their existing corporate Worldwide Learning website, as well
as design an interface and navigation for one of their main on-line learning
products - LENS. In addition to these on-line projects Worldwide Learning has
asked Digit to design and produce their company information brochure pack.
MTV Source - MTV approached Digit to design and produce a viral flash animation
and a dedicated micro site. The brief for the animation was that it should
attract students and non-professional designers to design screen identifications
for the MTV channel. After viewing the animation the user then clicks on a link
taking them directly to the microsite, which gives further information about the
project. The animation is around twenty seconds long and under MB in size and
produced entirely in Flash.
Disney Channel - Digit has completed several projects and is currently working
with Disney Channel on various activities. One such project is the Disney
Channel site, the brief was to create an entertaining and animation rich
environment that allows children to explore and interact directly with the Live
Studio in an innovative way. It aims to encourage interactivity and
communication with playful and humorous content.
The project is divided into two phases, the second phase currently being
developed concentrates on interactive content and gaming. The aim is to create a
synergy between the on-air studio and the website. Children will be able to
interact and affect aspects of the studio by visiting the site which will
encourage children to stay and re-visit regularly. www.disneychannel.co.uk
Other projects completed for Disney include a re-design of the Disney Kids
Awards Site, the brief was to take the existing content for the Kids Awards site
www.disney.co.uk/kidsawards, and to redesign and incorporate new content, the
look and feel of the site needed to be in keeping with the existing marketing
collateral produced for the event. Digit has also produced several content
specific homepage re-fresh for the main European Disney channel homepage, the
existing Buzz Lightyear page is soon to be replaced with a new Tarzan themed
homepage.
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^
Merger of Kensington Consulting Acquisition Corporation and Kensington Group,
Inc. Immediately following the MSS/MSAC Merger, and also on July 12, 2002, our
wholly-owned subsidiary, Kensington Consulting Acquisition Corporation, a
Delaware corporation ("KCAC") filed a Certificate of Merger to merge into and
with (the "KG/KCAC Merger") Kensington Group, Inc., a Massachusetts corporation
("KG"). KCAC was to be the surviving entity and take the name "Kensington
Management Consulting, Inc."("KMC"). KCAC changed its name on December 13, 2002
to "KGI: Kensington Management Consultants, Inc." The KG/KCAC Merger is attached
as Exhibit 2.7 and was consummated with the following terms and conditions:
Prior to the consummation of KG/KCAC Merger, Norma LaRosa, officer and director
of KG, entered into a Share Purchase Agreement whereby she agreed to purchase
all the stock of Efrem Mallach. Norma LaRosa ("KG Shareholder") entered into the
KG/KCAC Merger Agreement as the sole shareholder of KG. Pursuant to that
agreement, the KG Shareholder shall receive an amount of our common stock (the
"KG Exchange Shares") according to the following formula: KG's net income for
the calendar year ended December 31, 2001 (the "2001 Income"), multiplied by
five (5), divided by the average between the high, low and closing price of
shares of our common stock on July 16, 2002 (the "Average Price"), but not more
than $5.50 per share. "Net Income" shall be determined by our auditor in
accordance with U.S. GAAP applying the accounting policies and procedures
historically used by KG. The KG Exchange Shares shall be held in escrow as
described below.
On or before August 30, 2003, the KG Exchange Shares issued to the KG
Shareholder will be adjusted according to the following formula: as soon as
practicable after June 30, 2003, KG will determine its net income for the period
from July 1, 2002 to June 30, 2003 (the "2003 Income"). If the average of the
2003 Income and the 2001 Income exceeds, by more than 10%, the 2001 Income, then
the KG Shareholder will be issued additional KG Exchange Shares determined by
multiplying (A) the difference between (i) the average of the 2003 Income and
the 2001 Income and (ii) the 2001 Income by (B) 5 and dividing that product by
the Average Price.
If the average of KG's 2003 Income and the 2001 Income is more than 10% less
than the 2001 Income, then the KG Shareholder shall return to us that number of
KG Exchange Shares determined by multiplying (A) the difference between (i) the
2001 Income and (ii) the average of the 2001 Income and the 2003 Income by (B) 5
and dividing that product by the Average Price.
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In the event that the average of 2003 Income and the 2001 Income exceeds the
2001 Income by more than 10%, we have agreed to issue additional KG Exchange
Shares, as determined herein, within 5 business days of the determination of the
2003 Income, but in no event later than August 30, 2003. In the event that the
2001 Income exceeds the average of the 2001 Income and 2003 Income by more than
10%, we will receive that number of KG Exchange Shares determined in accordance
with the formula above within 5 business days of the determination of the 2003
Income, but in no event later than August 30, 2003. In the event that the
average of the 2003 Income and 2001 Income is within 10% of (either plus or
minus) the 2001 Income, there shall be no adjustment.
Additionally, certificates representing 50% of the immediately issued KG
Exchange Shares shall be delivered to an escrow agent and certificates
evidencing and representing the remaining 50% of the immediately issued KG
Exchange Shares shall be delivered to the KG Shareholder pursuant to the
provisions of the KG/KCAC Merger Agreement.
Pursuant to the terms of an employment agreement, Norma LaRosa, co-founder of
KG, has agreed to serve as the chief executive officer of KMC, which is now our
wholly-owned subsidiary. The term of the employment agreement is two years
beginning July 12, 2002, and is renewable on a yearly basis thereafter. Her
gross annual salary shall be $85,000, plus certain employee benefits as detailed
in the employment agreement attached hereto as an exhibit.
Kensington Group, Inc. Business Description. Kensington Group, Inc. provides
companies with services such as research, consulting, and training to assist
their clients to achieve corporate objectives, maximize sales and business
opportunities, and increase shareholder value. Kensington Group, Inc. has
clients which are Fortune 500 and Global 2000 companies. Kensington Group, Inc.
believes its customers benefit by Kensington Group, Inc.'s knowledge and
hands-on experience as its principals have over 20 years of experience in the
information technology ("IT") industry.
Kensington Group, Inc. provides its clients with research that exposes those
factors which could influence a company's future success such as:
Custom Influencer Win/Loss Analysis -- Kensington Group, Inc. will work
with clients to determine the impact of certain influencers on
corporate sales and take corrective action to resolve negative
influences on a particular companies business, whether real or
perceived. The term "influencers" covers industry analysts,
consultants, the press, and others who can impact customers' buying
decisions.
Analyst Quotation Tracking System(TM) -- Kensington Group Inc. uses a
global system that tracks trends and industry analysts' and financial
analysts' quotes in the media, both print and online, of business,
trade and news press. Media quotations are a key channel through which
analysts influence the course of the market and the fortunes of
individual companies. This service comes with unlimited access to
Kensington Group, Inc.'s extensive "searchable and sortable" database
and custom, monthly executive "key indicator" reports.
Public Analyst/Consultant Relations Effectiveness Benchmark Studies(TM)
for IT and telecommunications companies. This is an annual series of
reports to companies that includes performance measurements, program
concepts, best practices and recommendations for all IT and
telecommunications companies worldwide.
Watching the Watchers(TM). An annual benchmark study for users,
vendors, venture capitalists and others. These reports seek to answer
important questions such as: Who uses which research firms, and for
what? How much are they really spending? Who is really being used to
influence sales? What are their strengths and weaknesses? Kensington
Group, Inc. is in a position to answer these questions and provide an
objective guide to these critical influencers.
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Best Practices and Trends Report. These reports detail lessons learned
in eleven years of industry studies. They incorporate thousands of
interviews with analysts and consultants from around the world in an
understandable format.
Analyst Relations Manager's Companion and Guide. This guide is a
one-stop-shopping guide to influencer programs and processes: planning,
templates, checklists and concepts for today's analyst or consultant
relations professional. The Guide is updated annually to address new
and changing market conditions.
Kensington Group, Inc. also provides public and private forums for their
clients' analyst and consultant relations staff. The available forums are
detailed immediately below.
Private Forums include:
Specialized Analyst Relations Training and Coaching: During these
forums, Kensington Group, Inc. stresses message development, briefing
preparation, spokesperson training and executive coaching with a clear
focus on content, information flow and style.
Custom Public Relations Agency Training: These training sessions focus
on learning how to be more competitive in analyst relations.
Consulting Services: Kensington Group, Inc. works to analyze its
client's specific needs for analyst and consultant services. Kensington
Group, Inc. provides its clients with a customized approach to analyst
and consultant relations.
ITEM 5. OTHER EVENTS.
LaRosa Promissory Notes. MSS agreed to loan Norma LaRosa, the officer and
director of KG, the sum of $560,000 at 2.84% interest per annum. The loan is
full-recourse. The funds are to be distributed to Ms. LaRosa in separate
payments occurring over approximately one year depending on several factors. 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.
ITEM 6. RESIGNATIONS OF REGISTRANT'S DIRECTORS.
On July 12, 2002, Joe Cheung resigned as our president, secretary, treasurer and
a member of our Board of Directors. The resignation was not the result of any
disagreement with us on any matter relating to our operations, policies or
practices. A copy of Mr. Cheung's resignation is filed as Exhibit 17.1 to the
Form 8-K filed July 19, 2002.
10
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
Proforma Consolidated June 30, 2002
Balance Sheet
Combined
Proforma Combined Kensington Digit MetaSource CobraTech
ASSETS
Current Assets
Cash and Equivalents 101,079 101,079 1,877 99,202
Due from officers 9,511 9,511 9,511
Notes receivable - affiliates 254,403 254,403 254,403
Work in progress 308,853 308,853 308,853
Prepaid expenses 99,408 99,408 19,408 80,000
Accounts Receivable 417,130 417,130 88,650 254,330 74,150
-------------------------------------------------------------------------------
Total Current Assets 1,190,384 1,190,384 90,527 582,591 507,755 9,511
Property, Plant & Equipment 6,661 6,661 6,661
Goodwill 562,960 0
Other assets 147,690 147,690 4,455 143,235 0
-------------------------------------------------------------------------------
Total assets 1,907,695 1,344,735 101,643 725,826 507,755 9,511
===============================================================================
LIABILITIES AND STOCKHOLDERS DEFICIT
Liabilities
Current liabilities
Notes payable 728,375 728,375 306,000 350,000 72,375
Bank overdraft and factor 445,604 445,604 445,604
Accounts payable 447,842 447,842 7,900 393,882 10,684 35,376
Other Liabilities 157,260 157,260 3,761 153,499
-------------------------------------------------------------------------------
Total current liabilities 1,779,081 1,779,081 11,661 1,298,985 360,684 107,751
-------------------------------------------------------------------------------
Long term liabilities
Notes payable 0 0 0
-------------------------------------------------------------------------------
Total Liabilities 1,779,081 1,779,081 11,661 1,298,985 360,684 107,751
Stockholder's Deficit
Common Stock, $.001 par value 10,639 28,503 2,000 2,973 10,639 12,891
Treasury Stock 10,000 10,000
Authorized 10000000 shares 0 0
Issued and outstanding: 10,639,174
and 10,639,174 respectively 0 0
Additional paid in capital 593,735 812,611 791,042 21,569
Translation adjustment 47,994 47,994 47,994
Retained earnings (deficit) (523,754) (1,332,865) 87,982 (754,393) (523,754) 142,700)
-------------------------------------------------------------------------------
Total Stockholders Deficit 128,614 (433,757) 89,982 (703,426) 277,927 (98,240)
-------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT 1,907,695 1,345,324 101,643 595,559 638,611 9,511
The accompanying footnotes are an integral part of these financial statements
11
Consolidated
Statement of Operations Year ended December 31, 2001
--------------------------------------------------------------------------------
Proforma
Combined Combined Kensington Digit MSS CobraTech
Revenue $ 2,546,164 $ 2,546,164 $ 1,191,524 $ 1,354,640 $ - $ -
Cost of Goods 1,724,773 1,724,773 779,976 944,797 - -
-------------------------------------------------------------------------------------
Gross Profit 821,391 821,391 411,548 409,843 - -
Costs and expenses
Research and development 342,253 342,253 342,253 0
Depreciation and amortization 107,676 107,676 6,760 100,916 - -
General and Administrative expenses 806,805 1,112,445 484,432 471,208 142,764 14,041
------------------------------------------------------------------------------------
Operating income (435,343) (740,983) (79,644) (504,534) (142,764) (14,041)
Other (income) expenses
Interest expense 54,528 54,528 22 54,506 -
-------------------------------------------------------------------------------------
54,528 54,528 22 54,506 - -
-------------------------------------------------------------------------------------
Income (loss) before taxes (489,871) (795,511) (79,666) (559,040) (142,764) (14,041)
-------------------------------------------------------------------------------------
Provision (recovery) for income taxes (49,962) (49,962) - (49,962)
-------------------------------------------------------------------------------------
Net (loss) income $ (439,909) $ (745,549) $ (79,666) $ (509,078) $ (142,764) (14,041)
=====================================================================================
Basic & diluted net loss per share $ (0.04) $ (0.07)
The accompanying footnotes are an integral part of these financial statements
12
Consolidated
Statement of Operations six months June 30, 2002
----------------------------------------------------------------
Proforma
Combined Combined Kensington Digit MSS CobraTech
Revenue $ 1,549,033 $ 1,549,033 $ 589,692 $ 844,840 $ 114,501 $ -
Cost of Goods 1,061,973 1,061,973 424,220 583,323 54,430 -
------------------------------------------------------------------------------------
Gross Profit 487,060 487,060 165,472 261,517 60,071 -
Costs and expenses
Research and Development 200,778 200,778 200,778
Depreciation and amortization 51,763 51,763 3,429 48,334 -
General and Administrative expenses 731,523 797,170 68,248 200,954 442,573 85,395
------------------------------------------------------------------------------------
Operating income (497,004) (562,651) 93,795 (188,549) (382,502) (85,395)
Other (income) expenses
Interest expense 24,955 24,955 - 26,467 (1,512)
------------------------------------------------------------------------------------
24,955 24,955 - 26,467 (1,512) -
------------------------------------------------------------------------------------
Income (loss) before taxes (521,959) (587,606) 93,795 (215,016) (380,990) (85,395)
------------------------------------------------------------------------------------
Provision (recovery) for income taxes - - - -
------------------------------------------------------------------------------------
Net (loss) income $ (521,959) $ (587,606) $ 93,795 $ (215,016) $ (380,990) (85,395)
====================================================================================
Basic & diluted net loss per share $ (0.05) $ (0.06)
Weighted average
shares used in
computing basic
and diluted net
loss per share 10,639,174 10,639,174
Decrease in G&A expenses in Proforma Combined is a result of reclassifying
certain elements of owner's compensation as a result of shifting from a
Sub-Chapter S corporation to a Sub-Chapter C corporation.
The accompanying footnotes are an integral part of these financial statements
13
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
----------------------
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 has 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
--------------------------
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:
14
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).
NOTE 3 -- Notes Receivable
----------------------------
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
---------------------------------------------
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.
15
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Meta Source Systems, Inc.
We have audited the accompanying balance sheet of Meta Source Systems, Inc. as
of December 31, 2001, and the related statements of operations, stockholders'
equity and cash flows for the initial period November 26, 2001 to December 31,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 financial 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Meta Source Systems, Inc. as of
December 31, 2001, and the results of its operations and cash flows for the
initial period November 26, 2001 to December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
MERDINGER, FRUCHTER, ROSEN & COMPANY, P.C.
Certified Public Accountants
New York, New York
December 16, 2002
16
MetaSource Systems, Inc.
Balance Sheet Six months Year Ended
ended June 30, December 31,
2002 unaudited 2001
ASSETS
Current Assets
Cash and Equivalents 99,202 6,522
Accounts Receivable 74,150
Notes Receivable - Affiliates 384,670
Prepaid Expense 80,000 20,000
---------------------------------
Total Current Assets 638,022 26,522
---------------------------------
Total assets 638,022 26,522
=================================
LIABILITIES AND STOCKHOLDERS DEFICIT
Liabilities
Current liabilities
Notes payable 350,000
Accounts payable and accrued expenses 10,684 26,194
Total current liabilities 360,684 26,194
---------------------------------
Stockholder's Equity
Common Stock, ($.01 par value, 10 million
authorized, 9409154 issued and outstanding as
of Dec 31, 2001/ 30 million autho10,050 $.001
par val94,092,050,000 issued and outstanding as
of June 30, 2002)
Additional paid in capital 791,042 49,000
Retained earnings (deficit) (523,754) (142,764)
---------------------------------
Total Stockholders Deficit 277,338 328
---------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 638,022 26,522
The accompanying footnotes are an integral part of these financial statements
17
MetaSource Systems, Inc.
Statement of Stockholders Equity
Additional Retained
Common Stock Paid-in Earnings
Shares Amount Capital (Defiiciency) Total
--------------------------------------------------------------------------
Issuance of founders shares for services 9,309,154 93,092 0 0 93,092
Sale of Common Stock 100,000 1,000 49,000 50,000
Net loss (142,764) (142,764)
--------------------------------------------------------------------------
Balance at December 31, 2001 9,409,154 94,092 49,000 (142,764) 328
Sale of common stock 640,846 6,408 651,592 658,000
Adjustment to par value (90,450) 90,450
Net loss (380,990) (380,990)
--------------------------------------------------------------------------
Balance at June 30, 2002 10,050,000 10,050 700,592 (523,754) 277,338
(unaudited)
The accompanying footnotes are an integral part of these financial statements
18
MetaSource Systems, Inc.
Statement of Operations
Six months Year ended
ended June 30, 2002 December 31,
unaudited 2001
Revenue 114,501
----------------------------------------------
Cost of Goods 54,430
----------------------------------------------
Gross Profit 60,071
Costs and Expenses
General and Admin 442,573 142,764
Interest and finance (income) (1,512)
----------------------------------------------
Total Costs and expenses 441,061 142,764
----------------------------------------------
Net Loss (380,990) (142,764)
==============================================
Basic and diluted net loss per share $ (0.04) $ (0.02)
Weighted average
shares used in
computing basic
and diluted net
loss per share 10,500,000 9,409,154
The accompanying footnotes are an integral part of these financial statements
19
MetaSource Systems, Inc.
Statement of Cash Flows For the six
---------------------------------------------------- months ended Year ended
June 30 December 31
2002 2001
(Unaudited)
Cash flows from operating activities
Net income (loss) $ (380,990) $ (142,764)
Adjustments to reconcile net loss to net cash used
operating activities
Common stock issued to founders for services 93,092
Changes in operating assets and liabilities
Prepaid Costs (60,000) (20,000)
Accounts Receivable (74,150) -
Accounts payable and accrued expenses (15,510) 26,194
----------------- -----------------
Net cash used in operating activities (530,650) (43,478)
----------------- -----------------
Cash flow from investing activity
Loans outstanding (384,670) -
----------------- -----------------
Net cash used in investing activities (384,670) -
----------------- -----------------
Cash flow from financing activities
Net proceeds from sale of common shares 658,000 50,000
Proceeds from loans 350,000
----------------- -----------------
Net cash provided by financing activities 1,008,000 50,000
----------------- -----------------
Net increase in cash 92,680 6,522
Cash and cash equivalents at beginning of the period 6,522 -
----------------- -----------------
Cash and cash equivalents at the end of the period $ 99,202 $ 6,522
----------------- -----------------
Supplemental Disclosures
Interest Paid None None
Income Taxes Paid None None
Supplemental Schedule of Non-Cash Activities
During 2001, The Company
Issued 9,309,154 shares of common stock to the founders
for services rendered
The accompanying footnotes are an integral part of these financial statements
20
MetaSource Systems, Inc.
Notes to Financial Statements
December 31, 2001 andJune 30, 2002 (Information with respect to June 30, 2002 is
unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
-----------------------
MetaSource Systems, Inc. (MSS) was incorporated in Delaware on November 26, 2001
and is a custom software development company.
Revenue recognition
-------------------
Revenue for software development is recognized as the services are rendered.
Daily rates for programming are determined in advance and agreed to with the
customer. Most jobs are on a project basis.
Advertising costs
-----------------
The Company expenses all advertising costs as incurred and classifies these
costs under selling, general and administrative expenses. Advertising costs for
the year ended December 31, 2001 was $210 and was $295 for six months ended June
30, 2002.
Cash and cash equivalents
--------------------------
Cash and cash equivalents consists solely of cash in demand accounts at banks.
Concentration of credit risks
-----------------------------
The Company keeps it's money in non-interest bearing demand accounts. The
Company maintains its cash balances in financial institutions located in the
United States. The balances in U.S. banks are insured by the Federal Deposit
Insurance Corporation up to $100,000.
There were no accounts receivable at December 31, 2001 and 74150 at June
30,2002. The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical trends,
and other information.
Fair value of financial instruments
-----------------------------------
The carrying value of financial instruments (principally consisting of cash and
cash equivalents, accounts receivable and payable) approximates fair value
because of the short maturities.
Income taxes
------------
Income tax expense includes federal and state taxes currently payable and
deferred taxes arising from temporary differences between income for financial
reporting and income tax purposes.
Use of estimates in financial statements
----------------------------------------
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
21
MetaSource Systems, Inc.
Notes to Financial Statements
December 31, 2001 andJune 30, 2002 (Information with respect to June 30, 2002 is
unaudited)
Recent accounting pronouncements
--------------------------------
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. These
statements will have no affect on the Company's financial statements as there
was no goodwill or intangible assets on the balance sheets.
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 but believes it will
have no impact because there were no long-lived assets at December 31, 2001 nor
June 30, 2002..
NOTE 2 - PREPAID EXPENSES
Prepaid expenses represent advances to a vendor for programming
services performed in the subsequent period.
NOTE 3 - INCOME TAXES
The components of the provision for income taxes are as follows:
For the Year Ended Six Months Ended
December 31, 2001 June 30, 2002
-------------------- -------------------
Current Tax Expense
U.S. Federal $ - $ -
State and Local - -
------------------- -------------------
Total Current - -
------------------- -------------------
Deferred Tax Expense
U.S. Federal - -
State and Local
- -
------------------- -------------------
Total Deferred
- -
------------------- -------------------
Total Tax Provision
(Benefit) from Operations $ - $ -
------------------- -------------------
22
MetaSource Systems, Inc.
Notes to Financial Statements
December 31, 2001 andJune 30, 2002 (Information with respect to June 30, 2002 is
unaudited)
The reconciliation of the effective income tax rate to the Federal statutory
rate is as follows:
Federal Income Tax Rate (34.0)% (34.0)%
Deferred Tax Charge (Credit) - -
Effect on Valuation Allowance 34.0% 34.0%
State Income Tax, Net of Federal Benefit - -
--------------- -----------------
Effective Income Tax Rate 0.0% 0.0%
=============== =================
As of December 31, 2001 and June 30, 2002 the Company had a net carryforward
loss of approximately $143,000 and $524,000 respectively. Because of the current
uncertainty of realizing the benefit of the tax carryforward, a valuation
allowance equal to the tax benefit has been established. The full realization of
the tax benefit associated with the carryforwards depends predominantly upon the
Company's ability to generate taxable income during the carryforward period. Net
operating loss carryforwards expire through 2021.
Deferred tax assets and liabilities reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purpose and amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities approximate as
follows:
-------------------------- ------------------- --------------------
December 31, 2001 June 30, 2002
-------------------------- ------------------- --------------------
Deferred Tax Assets
-------------------------- ------------------- --------------------
Loss Carryforwards $49,000 178000
-------------------------- ------------------- --------------------
Less: Valuation Allowance (49,000) (178000)
-------------------------- ------------------- --------------------
Net Deferred Tax Assets $ - $ -
-------------------------- ------------------- --------------------
NOTE 4 - OFFICE SPACE
The company occupies administrative office space in New York, NY under a five
year lease held by two affiliated entities.
NOTE 5 - SUBSEQUENT EVENTS
Acquisition of Company
----------------------
Effective July 12, 2002, the Company entered into a transaction with MetaSource
Group, Inc., Inc.("MSGR") in which the shareholders exchanged 100% of the issued
and outstanding shares of the Company in exchange for shares of MSGR (the
"Exchange Shares"). Under the terms of the exchange agreement, the Exchange
shares were on a one for one basis. See detail in the relevant 8K filings of
MetaSource Group, Inc.
23
MetaSource Systems, Inc.
Notes to Financial Statements
December 31, 2001 andJune 30, 2002 (Information with respect to June 30, 2002 is
unaudited)
Concurrent with this, the Company received additional funding through the
issuance of convertible debentures totaling $2.0 million. These debentures carry
an interest rate of 8% due at the maturity date of the debentures July 11, 2003.
The debentures may be converted into common stock at $2.25 per share and upon
conversion the debenture holder receives a one year warrant to purchase common
stock at $2.50 per share for each share of common stock received at the
conversion date prior to June 30, 2002. The conversion and warrant prices will
be reduced if the company sells stock at a price per share less than the
conversion price. The Company received advances from the debenture holders of
$350,000 against the proceeds from the sales of the debentures.
Concurrent with this agreement the Company entered into an employment agreement
with a certain executive which provide for minimum compensation of $ 120,000 for
the years ending December 31, 2002 and 2003 respectively.
During the year 2002, the Company sold to various investors 640,846 shares of
common stock under Securities and exchange Commission Regulation D, Rule 506
realizing $658,000.
On June 26, 2002, the Company increased its authorized common stock from
10,000,000 shares to 30,000,000 shares and in addition reduced the par value of
its common stock from $.01 to $.001
During 2002, the Company loaned three affiliated companies $386,000 receiving
subordinated notes due in one year from the loan dates bearing interest at rates
ranging from 6% to 9%.
In July 2002, the Company loaned a related party $135,000 against a secured
full-recourse promissory notes due July 16, 2003bearing no interest secured by
the ownership of the Company's stock. In addition, the Company loaned a related
party $160,000 against a secured full-recourse promissory notes due July 16,
2003bearing no interest secured by the ownership of the Company's stock.
In December the Company acquired two companies, Sitaro Group, Inc. and
International Trade and Development, Ltd in share swaps detailed in the relevant
8K filings.
24
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Digit Digital Experiences, Limited
We have audited the accompanying balance sheets of Digit Digital Experiences,
Limited as of December 31, 2001 and 2000, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial 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 financial statements referred to above present fairly, in
all material respects, the financial position of Digit Digital Experiences,
Limited as of December 31, 2001 and 2000, and the results of its operations and
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
MERDINGER, FRUCHTER, ROSEN & COMPANY, P.C.
Certified Public Accountants
New York, New York
November 15, 2002
25
Digit Digital Experiences Limited
Balance Sheet For the six months For the years ended
--------------------------------------------------------- ended June 30 December 31,
2002 2001 2000
ASSETS (Unaudited)
Current Assets
Accounts receivable, net $ 254,330 $ - $ 72,638 $ 254,330
Due from officers - - 178,113 -
Work in progress 308,853 264,510 141,294 308,853
Prepaid expenses 19,408 - 10,142 19,408
---------------------------- ---------- ----------
Total Current assets 582,591 264,510 402,187 582,591
Property plant & equipment, net 143,235 178,057 282,068 143,235
---------------------------- ----------- ----------
Total assets $ 725,826 $ 442,567 $ 684,256 $ 725,826
============================ ========== ==========
LIABILITIES & STOCKHOLDERS' DEFICIT
Liabilities
Current liabilities
Notes payable-short term $ 306,000 $ 288,958 $ 288,958 $ 306,000
Due to factor 76,378 48,136 - 76,378
Bank overdraft 369,226 64,432 41,699 369,226
Accounts payable and accrued expenses 393,882 253,423 120,563 393,882
Dividends payable - - 149,350 -
Due to officers 153,499 112,892 - 153,499
Deferred revenue - 217,725 - -
Income taxes payable - - 53,172 -
---------------------------- ---------- ----------
Total current liabilities 1,298,984 985,566 653,741 1,298,984
Long term liabilities
Notes payable 130,267 130,267
Deferred income taxes payable - - 51,771 -
---------------------------- ---------- ----------
Total liabilities 1,429,251 985,566 705,512 1,429,251
Stockholders' Deficit
Common stock, $1.45 par value
Authorized 150,000 shares
Issued and outstanding : 2,050 and 2,050
and 2,050 respectively 2,973 2,973 2,973 2,973
Retained earnings (deficit) (754,393) (539,378) (30,298) (754,393)
Translation adjustment 47,994 (6,594) 6,070 47,994
---------------------------- ---------- ----------
Total Stockholders' Deficit (703,426) (543,000) (21,256) (703,426)
---------------------------- ---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT $ 725,826 $ 442,567 $ 684,256 $ 725,826
============================ ========== ==========
26
Digit Digital Experiences Ltd
Statement of Stockholders Equity
Additional Retained
Common Paidin Earnings Currency
Stock Shares Capital (Defiiciency) Adjustments Total
----------------------------------------------------------------------------------------
Balance at January 1, 2000 2,973 2,050 0 59,546 14,184 76,703
Translation adjustment (8,114) (8,114)
Net Income/loss (89,844) (89,844)
----------------------------------------------------------------------------------------
Balance at December 31, 2000 2,973 2,050 0 (30,298) 6,070 (21,255)
Translation adjustment (12,664) (12,664)
Net Income/Loss (509,079) (509,079)
----------------------------------------------------------------------------------------
Balance at December 31, 2001 2,973 2,050 0 (539,377) (6,594) (536,404)
Translation adjustment 54,588 54,588
Net Income/Loss (215,016) (215,016)
----------------------------------------------------------------------------------------
Balance at June 30, 2002 2,973 2,050 0 (754,393) 47,994 (703,426)
(unaudited)
The accompanying footnotes are an integral part of these financial statements
27
Digit Digital Experiences Limited
Statement of Operations
-----------------------------------------------------
For the six months ended June 30 For the year ended December 31,
2002 2001 2001 2000
unaudited unaudited
Revenue $ 844,840 835,277 $ 1,354,640 $ 1,785,566
Cost of Goods 583,323 592,960 944,797 837,006
--------------------------------------------------------------------
Gross Profit 261,517 242,317 409,843 948,560
Costs and expenses
Research and development 200,778 16,272 342,253 169,147
Depreciation and amortization 48,334 53,248 100,916 103,822
General and Administrative expenses 200,954 227,546 471,208 684,105
--------------------------------------------------------------------
Operating income (188,549) (54,749) (504,534) (8,514)
Other (income) expenses
Interest expense 26,467 36,555 54,506 26,636
--------------------------------------------------------------------
26,467 36,555 54,506 26,636
--------------------------------------------------------------------
Income (loss) before taxes (215,016) (91,305) (559,040) (35,150)
--------------------------------------------------------------------
Provision (recovery) for income taxes - (49,962) 54,693
--------------------------------------------------------------------
Net (loss) income $ (215,016) $ (91,305) $ (509,079) $ (89,844)
====================================================================
Basic & diluted net loss per share $ (104.89) (44.54) $ (272.70) $ (17.15)
Weighted average
shares used in
computing basic
and diluted net
loss per share 2,050 2,050 2,050 2,050
The accompanying footnotes are an integral part of these financial statements
28
Digit Digital Experiences Limited
Statement of Cash Flows For the six
------------------------- months ended For the years ended December 31,
June 30, 2001 2000
2002
(Unaudited)
Cash flows from operating activities
Net income (loss) $ (215,017) $ (509,078) $ (89,844)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 48,334 100,916 103,822
Translation adjustment 54,588 (4,473) (8,114)
Changes in operating assets and liabilities
Accounts receivable (254,330) 72,638 36,805
Work in progress (44,343) (123,216)
Prepaid expenses (19,408) 10,142 (10,142)
Due to factor 28,242 46,136 -
Accounts payable and accrued expenses 140,459 132,860 23,533
Deferred revenue (217,725) 217,725 -
Income taxes payable - (53,172) (4,415)
Deferred income taxes - (51,771) 51,771
----------------- ----------------- -----------------
Net cash provided by (used in) operating activities (479,200) (161,293) 103,416
----------------- ----------------- -----------------
Cash flow from investing activity
Purchase of property and equipment (13,510) (3,095) (260,938)
----------------- ----------------- -----------------
Net cash(used in) investing activities (13,510) (3,095) (260,938)
----------------- ----------------- -----------------
Cash flow from financing activities
Proceeds (payments) bank overdraft 304,794 22,733 41,699
Bank note 17,042
Due to/from officers 40,607 141,655 (203,885)
Proceeds from issuance of notes 130,267 - 285,896
----------------- ----------------- -----------------
Net cash provided by financing activities 492,710 164,388 123,710
----------------- ----------------- -----------------
Net increase (decrease) in cash - - (33,812)
Cash and cash equivalents at beginning of the period 1 1 33,813
----------------- ----------------- -----------------
Cash and cash equivalents at the end of the period $ 1 $ 1 $ 1
----------------- ----------------- -----------------
The accompanying footnotes are an integral part of these financial statements
29
Digit Digital Experience Limited
Notes to Financial Statements
December 31, 2001 and 2000
June 30, 2002 and 2001 (Information with respect to June 30, 2002 and 2001 is
unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business and basis of presentation
-------------------------------------------------
Digit Digital Experiences Limited ("the Company" or "Digit") was incorporated in
1996 in the United Kingdom and is a professional services firm that designs
interactive digital business solutions. The Company is based in the United
Kingdom.
The company's financial statements have been presented in U.S. dollars in
accordance with SFAS 52 Foreign Currency Translation. Assets and liabilities
have been translated from UK pounds sterling to U.S. dollars at year-end
exchange rates, and revenue and expenses have been translated at average rates
prevailing during the year. Translation adjustments are included as a component
of stockholder's equity. Foreign currency transaction gains and losses, which
have been immaterial, are included in results of operations.
Revenue recognition
-------------------
Revenue for professional services is recognized as the services are rendered.
Daily rates are determined in advance and agreed to with the customer. 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.
Research and development costs
------------------------------
The Company expenses all costs incurred to establish the technological
feasibility of software products or product enhancements to research and
development costs as incurred.
Advertising costs
-----------------
The Company expenses all advertising costs, as incurred and classifies these
costs under selling, general and administrative expenses. Advertising costs for
six months ending June 30, 2001 and June 30, 2002 were $6,622 and zero,
respectively.
Concentration of credit risks
-----------------------------
Financial instruments, which potentially subject the Company to concentrations
of credit risk, regardless of the degree of such risk, consist principally of
trade accounts receivable.
The Company's largest customer receivable accounts for approximately 20% of
billed accounts receivable at December 31, 2000. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends, and other information.
Fair value of financial instruments
-----------------------------------
The carrying value of financial instruments (principally consisting of accounts
receivable and payable, notes payable and due to factor) approximates fair value
because of the short maturities.
Property and equipment and depreciation
---------------------------------------
Property and equipment are stated at cost. Depreciation is on equipment computed
using the straight-line method over the estimated useful lives of the assets.
All equipment is depreciated over four years.
30
Digit Digital Experience Limited
Notes to Financial Statements
December 31, 2001 and 2000
June 30, 2002 and 2001 (Information with respect to June 30, 2002 and 2001 is
unaudited)
Impairment of long-lived assets and long-lived assets to be disposed
---------------------------------------------------------------------
Up to and including the year ended December 31, 2001, the Company evaluated its
long-lived assets and certain identifiable intangibles for impairment whenever
events or changes in circumstances indicated that the carrying amount of such
assets or intangibles may not be recoverable. Recoverability of assets to be
held and used was measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such an asset
was considered to be impaired, the impairment to be recognized was measured by
the amount by which the carrying amount of the asset exceeded the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Income taxes
------------
Deferred income taxes result from temporary differences between income reported
for financial and income tax purposes. These temporary differences result
primarily from the allowance for doubtful accounts provision and certain accrued
expenses which are deductible, for tax purposes, only when paid. A valuation
allowance is provided when it is more likely than not that some portion or all
of the deferred tax asset will not be realized. The deferred tax liability was
$51,771 on December 31, 2000.
Use of estimates in financial statements
----------------------------------------
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent accounting pronouncements
--------------------------------
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.
31
Digit Digital Experience Limited
Notes to Financial Statements
December 31, 2001 and 2000
June 30, 2002 and 2001 (Information with respect to June 30, 2002 and 2001 is
unaudited)
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31:
2001 2000
Billed, net of advances $ - $ 126,438
Less allowance for doubtful accounts - ( 53,800)
------------- -------------
$ - $ 72,638
============= =============
Billed accounts receivables have been factored with a financing company (the
"Factor"). Under the terms of the agreement the Factor advances the Company up
to 85% of a billed receivable for working capital purposes. The receivables and
the remaining assets of the Company secure the advances. A finance charge of
prime plus 2.5% is assessed on all advanced balances. Finance charges were
approximately $23,200 and $13,600 for the years ended December 31, 2001 and
2000, respectively. Advanced billed receivable balances are approximately
$272,000 and $225,500 at December 31, 2001 and 2000 respectively.
NOTE 3 - Property and Equipment
As of December 31 property and equipment consisted of:
June 30, 2002 2001 2000
Leasehold improvements $44,585 $ 45,685 $ 47,007
Machinery and equipment 397,154 384,741 400,572
------- --------- ----------
441,739 358,462 227,241
Less accumulated depreciation 300,704 (252,370) (165,511)
------- --------- ----------
Property and equipment, net $141,034 $ 178,056 $ 282,068
-------- --------- ----------
NOTE 4 - REVOLVING CREDIT AND TERM LOAN
The Company has a revolving credit agreement with a bank that expires in 2003.
The agreement provides for borrowings up to $153,000 for working capital
purposes and earns interest at the bank's prime lending rate (6.0% at December
31, 2001) plus 2.5%. The borrowing are personally guaranteed by the Company's
shareholder's.
The Company has a term loan of approximately $288,000 with a financial
institution which is currently in default. The borrowings are secured by Digit's
assets and are personally guaranteed by the Company's shareholder's and earns
interest at the bank's prime lending rate (6.0% at December 31, 2001) plus 3.0%.
32
Digit Digital Experience Limited
Notes to Financial Statements
December 31, 2001 and 2000
June 30, 2002 and 2001 (Information with respect to June 30, 2002 and 2001 is
unaudited)
NOTE 5 - DUE FROM / TO OFFICERS
The Company paid approximately $83,600 and $112,470 during the years ended
December 31, 2001 and 2000, respectively for expenses related to property owned
by two officers of the Company. These amounts were offset by interest free loans
made by the officers to the company for working capital purposes.
NOTE 6 - DIVIDENDS PAYABLE
In December 2000 the Company declared a divided of $74,675 to the holders of the
Class A common stock and $74,675 to the holders of the Class B common stock at
December 31, 2000. The dividend was offset against amount owed by shareholders,
who are also officers of the Company.
NOTE 7 - EMPLOYEE BENEFITS PLANS
The Company maintains a defined contribution savings plan covering eligible
employees. The Company makes contributions up to a specific percentage of
participants' contributions. The Company contributed approximately $26,200 and
$12,900 in 2001, and 2000 respectively.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company leases office space under a long-term operating lease expiring in
2004. Lease expense for 2000 and 2001 were $65,250 each year. As of December 31,
2001, approximate minimum rental commitments were as follows:
Year Ending December 31,
2002 $ 65,250
2003 65,250
2004 65,250
----------
$ 195,750
==========
NOTE 9 - CAPITAL STRUCTURE
Only common shares are issues. Andrew Chambers and Daljit Singh own 1000 shares
each while Simon Sankaray and Nick Christea each own 25 shares.
NOTE 10 - SUBSEQUENT EVENTS
Effective July 12, 2002, the Company entered into a transaction with MetaSource
Group, Inc., Inc. ("MSGR") in which the shareholders exchanged 100% of the
issued and outstanding shares of the Company in exchange for shares of MSGR (the
"Exchange Shares"). Under the terms of the exchange agreement the Exchange
shares to be issued to the Company's shareholders will be determined by dividing
the average of five times Digit's pro-forma net income for (i) the period April
1, 2001 through March 31, 2002 (ii) the period of April 1, 2002 through March
31, 2003 by the average of MSGR's high, low and closing stock price during the
first twenty business days of public trading of MSGR.
The Exchange shares will be maintained in escrow for a period of one year and on
or before May 30,2003 the Exchange Shares may be increased or decreased if the
average pro-forma net income for the period April 1, 2002 to March 31, 2003
exceeds or is less than the average pro-forma net income for the period April 1,
2001 through March 31, 2002.
33
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Kensington Group, Inc.
We have audited the accompanying balance sheets of Kensington Group, Inc. as of
December 31, 2001 and 2000, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial 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 financial statements referred to above present fairly, in
all material respects, the financial position of Kensington Group, Inc. as of
December 31, 2001 and 2000, and the results of its operations and cash flows for
the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
MERDINGER, FRUCHTER, ROSEN & COMPANY, P.C.
Certified Public Accountants
New York, New York
October 3, 2002
34
Kensington
Balance Sheet For the 6
-------------------- months ended
June 30 For the years ended December 31,
2002 2001 2000
ASSETS (Unaudited)
Current Assets
Cash and cash equivalents $ 1,877 $ 65,466 $ 14,679
Accounts Receivable, net of allowance for
doubtful accounts of 88,650 129,465 207,137
----------------- ----------------- -----------------
Total Current assets 90,527 194,931 221,816
Property plant & equipment, net 6,661 9,691 12,906
Cap. Software - -
Other assets 4,455 2,000 15,266
----------------- ----------------- -----------------
Total assets $ 101,644 $ 206,622 $ 249,988
================= ================= =================
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities
Current liabilities
Accounts payable $ 7,900 $ 12,419 $ 44,731
Accrued expenses - related party - 20,858 40,294
Accrued expenses - - 46,614
Other Liabilities 3,761 825 2,996
Deferred Revenue - 176,333 39,500
----------------- ----------------- -----------------
Total current liabilities 11,662 210,435 174,135
----------------- ----------------- -----------------
Total liabilities 11,662 210,435 174,135
Stockholders' Equity
Common stock, $.01 par value 2,000 2,000 2,000
Authorized 200,000 shares
Issued and outstanding: 200,000 and 200,000 respectively
Preferred Stock -
Retained earnings (deficit) 87,982 (5,813) 73,853
----------------- ----------------- -----------------
Total Stockholders' Equity 89,982 (3,813) 75,853
----------------- ----------------- -----------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 101,644 $ 206,622 $ 249,988
================= ================= =================
The accompanying footnotes are an integral part of these financial statements
35
Kensington Group, Inc.
Statement of Stockholders Equity
Additional Retained
Common Paidin Earnings
Stock Shares Capital (Defiiciency) Total
-----------------------------------------------------------------------------------
Balance at January 1, 2000 2,000 200,000 0 150,783 152,783
Net Income/loss (76,930) (76,930)
-----------------------------------------------------------------------------------
Balance at December 31, 2000 2,000 200,000 0 73,853 75,853
Net Income/Loss (79,666) (79,666)
-----------------------------------------------------------------------------------
Balance at December 31, 2001 2,000 200,000 0 (5,813) (3,813)
Net Income/Loss 93,795 93,795
-----------------------------------------------------------------------------------
Balance at June 30, 2002 2,000 200,000 0 87,982 89,982
(unaudited)
The accompanying footnotes are an integral part of these financial statements
36
Kensington
Statement of Operations
-----------------------------------------------------
For the six months ended June 30 For the years ended December 31,
2002 2001 2001 2000
unaudited unaudited
Revenue $ 589,692 $ 484,235 $ 1,191,524 $ 852,910
Cost of Goods 424,220 347,851 779,976 524,203
--------------------------------------------------------------------------
Gross Profit 165,472 136,384 411,548 328,707
Gross Margin 28% 28% 35% 39%
Costs and expenses
------------------
General and Administrative expenses 68,248 206,347 484,432 401,387
Interest and finance expense 22 126
Depreciation 3,429 3,380 6,760 4,124
--------------------------------------------------------------------------
Total costs and expenses 71,677 209,727 491,214 405,637
--------------------------------------------------------------------------
Net income (loss) $ 93,795 $ (73,343) $ (79,666) $ (76,930)
==========================================================================
Basic & diluted net loss per share 0.47 (0.37) (0.40) (0.38)
Weighted
average shares
used in
computing basic
and diluted net
loss per share 200,000 200,000 200,000 200,000
The accompanying footnotes are an integral part of these financial statements
37
Kensington
Statement of Cash Flows For the 6 For the 6
--------------------------------------- months months
ended June ended June
30 30 For the year For the year
2002 2001 2001 2000
(Unaudited) (Unaudited)
----------------- ------------------ ----------------- -----------------
Cash flows from operating activities
Net income (loss) $ 93,795 $ 113,339 $ (79,667) $ (76,930)
Adjustments to reconcile net loss to net cash used
by operating activities
Depreciation 3,429 3,380 6,760 4,123
Changes in operating assets and liabilities
Accounts receivable 42,815 (87,246) 7,767 (129,957)
Deferred Revenue (176,333) - 136,833 57,100
Other assets (4,455) 528 13,266 (11,976)
Accounts payable and accrued expenses (25,376) (10,946) (98,362) 87,548
Other current liabilities 2,936 791 (2,171) 2,996
----------------- -----------------
Net cash used by operating activities (63,189) 19,846 (15,574) (67,095)
----------------- ------------------ ----------------- -----------------
Cash flow from investing activity
Purchase of property and equipment (399) (4,068) (3,544) (10,995)
----------------- ------------------ ----------------- -----------------
Net cash used in investing activities (399) (4,068) (3,544) (10,995)
----------------- ------------------ ----------------- -----------------
Cash flow from financing activities
Net proceeds from issuance of Preferred Stock -
Proceeds from bridge loans - -
Proceeds (payments) on lines of credit -
Payments on capital lease obligations -
Payments to (provided by) shareholders -
----------------- ------------------ ----------------- -----------------
Net cash provided by financing activities - - - -
----------------- ------------------ ----------------- -----------------
Net increase (decrease) in cash (63,588) 15,778 (19,118) (78,090)
Cash and cash equivalents at beginning of the year 65,466 14,679 14,679 92,769
----------------- ------------------ ----------------- -----------------
Cash and cash equivalents at the end of the year $ 1,878 $ 30,457 $ (4,439) $ 14,679
----------------- ------------------ ----------------- -----------------
The accompanying footnotes are an integral part of these fiinancial statements
38
Kensington Group, Inc.
Notes to Financial Statements
December 31, 2001 and 2000 and
June 30, 2002 and June 30, 2001 (Information with respect to June 30, 2002 and
June 30, 2001 is unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
-----------------------
Kensington Group, Inc.("the Company" or "KGI") was incorporated in the state of
Massachusetts in 1996 and is a professional services firm that provides
research, consulting, and training to assist end-users, vendors, media,
analysts, venture capitalists and others. The Company is operates in California
and Massachusetts.
Revenue recognition
-------------------
Revenue for professional services is recognized as the services are rendered.
Daily rates for training and consulting are determined in advance and agreed to
with the customer. 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.
Advertising costs
-----------------
The Company expenses all advertising costs as incurred and classifies these
costs under selling, general and administrative expenses. Advertising costs for
the years ended December 31, 2001, and 2000 were approximately $22,000 and
$1,000, respectively. Advertising costs for six months 2002 were $100 and six
months 2001 were $13,656.
Cash and cash equivalents
-------------------------
Cash and cash equivalents include highly liquid instruments with a maturity of
three months or less at the time of purchase.
Concentration of credit risks
-----------------------------
Financial instruments, which potentially subject the Company to concentrations
of credit risk, regardless of the degree of such risk, consist principally of
cash and cash equivalents and trade accounts receivable.
The Company invests the majority of its excess cash in overnight commercial
paper of high-credit, high-quality financial institutions or companies, with
certain limitations as to the amount that can be invested in any one entity. The
Company maintains its cash balances in financial institutions located in the
United States. The balances in U.S. banks are insured by the Federal Deposit
Insurance Corporation up to $100,000 for each entity at each institution.
The Company's largest customer receivable accounts for approximately 17% and 16%
of billed accounts receivable at December 31, 2001 and 2000, respectively. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends, and other
information.
Fair value of financial instruments
-----------------------------------
The carrying value of financial instruments (principally consisting of cash and
cash equivalents, accounts receivable and payable) approximates fair value
because of the short maturities.
39
Kensington Group, Inc.
Notes to Financial Statements
December 31, 2001 and 2000 and
June 30, 2002 and June 30, 2001 (Information with respect to June 30, 2002 and
June 30, 2001 is unaudited)
Property and equipment and depreciation
---------------------------------------
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.
Rent Expense and Lease Commitments
----------------------------------
The Company does not rent or lease any space so there is no rent expense or
lease commitments.
Income taxes
------------
The Company was incorporated as an S Corporation for Federal and Massachusetts
State purposes. Accordingly, the Company is not responsible for Federal or
Massachusetts State income taxes, which are reportable instead by the Company's
shareholders.
Use of estimates in financial statements
----------------------------------------
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent accounting pronouncements
--------------------------------
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.
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31:
2001 2000
Billed $ 98,715 $ 154487
Unbilled 30,750 52,650
--------- ---------
$ 129,465 $ 207137
========= ========
40
Kensington Group, Inc.
Notes to Financial Statements
December 31, 2001 and 2000 and
June 30, 2002 and June 30, 2001 (Information with respect to June 30, 2002 and
June 30, 2001 is unaudited)
NOTE 3 - EMPLOYEE BENEFITS PLANS
The Company maintains a defined contribution savings plan covering eligible
employees. Employees may contribute up to 20% of their pay. The Company makes
cash contributions of 100% to a specific percentage of participants'
contributions up to 6% of an employees salary. The Company contributed
approximately $29,100 and $13,400 in 2001, and 2000 respectively. The company
amended the plan effective December 1, 2001 to terminate contributions.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists primarily of computer equipment and is
summarized as follows:
June 30 December 31
2002 2001 2000
------------------------------------------
Cost $20,973 20,574 17,030
Accumulated depreciation 14,312 10,803 4,124
------------------------------------------
Net $ 6,661 9,771 12,906
Depreciation expense was $6679 and 4124 for the years ended December 31, 2001
and 2000 respectively and $3429 and $3380 for the six month periods ended June
30 2002 and 2001 respectively.
NOTE 5 - SUBSEQUENT EVENTS
Acquisition of Company
----------------------
Effective July 12, 2002, the Company entered into a transaction with MetaSource
Group, Inc., Inc.("MSGR") in which the shareholders exchanged 100% of the issued
and outstanding shares of the Company in exchange for shares of MSGR (the
"Exchange Shares"). Under the terms of the exchange agreement, the Exchange
shares are determined by multiplying the Company's pro-forma net income for the
year ended December 31, 2001 (the "2001 Income") by five and then dividing the
result by the average of MSGR's high, low and closing stock price on July 16,
2002 (the "Average Price").
On or before August 30, 2003 the Exchange shares may be increased or decreased
if the average of pro-forma net income for the period July 1, 2002 to June 30,
2003 (the "2003 Income"), and the 2001 Income exceeds or is less than the 2001
Income by greater than 10%, respectively.
The adjustment shall be calculated by multiplying the difference between (i) the
average of the 2003 Income and the 2001 Income and (ii) the 2001 Income by five
and dividing the product by the Average Price.
Concurrent with this agreement the Company entered into an employment agreement
with a certain executive which provide for minimum compensation of $ 85,000 for
the years ending December 31, 2002 and 2003 respectively.
41
Index to Exhibits
-----------------
2.1 Agreement and Plan of Merger between MSS, MSG and MSAC*
2.1.1 Amendment No. 1 to Agreement and Plan of Merger between MSS, MSG and
MSAC*
2.1.2 Amendment No. 2 to Agreement and Plan of Merger between MSS, MSG and
MSAC*
2.2 Agreement of Merger between MSS, Digit, and Digit Stockholders*
2.3 Acquisition Agreement between MSS and Stockholders of PFAR*
2.4 Acquisition Agreement between MSS and PMP Stockholders*
2.5 Agreement of Merger between MSS, GSS and Stockholders of GSS*
2.6 Agreement of Merger between MSS, MSS UK, and Stockholders of MSS UK*
2.7 Agreement and Plan of Merger between MSAC, KG, and Stockholders of KG*
17.1 Resignation of Mr. Cheung*
* Filed as Exhibits to Form 8-K filed July 19, 2002.
42
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, thereunto duly authorized.
MetaSource Group, Inc.
January 14, 2003 By: /s/ Courtney Smith
--------------------------------
Courtney Smith, President