U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-21989
Medialink Worldwide Incorporated
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1481284
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
708 Third Avenue, New York, New York 10017
------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 682-8300
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business on May 14, 2004:
Common Stock - 5,986,001
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements 3
Condensed Consolidated Balance Sheets as of March 31,
2004 (unaudited) and December 31, 2003 3
Unaudited Condensed Consolidated Statements of Operations
for the three months ended March 31, 2004 and 2003 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2004 and 2003 5
Notes to Unaudited Condensed Consolidated Financial Statements 6 - 10
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 18
ITEM 3. Qualitative and Quantitative Disclosure About Market Risk 19
ITEM 4. Controls and Procedures 19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 20
ITEM 2. Changes in Securities and Use of Proceeds 20
ITEM 3. Defaults Upon Senior Securities 20
ITEM 4. Submission of Matters to a Vote of Security Holders 20
ITEM 5. Other Information 20
ITEM 6. Exhibits and Reports on Form 8-K 20
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 2004 and December 31, 2003
March 31, December 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,484,094 $ 3,708,130
Accounts receivable, net of allowance for doubtful accounts of
$766,673 and $683,420 7,028,778 7,225,166
Prepaid expenses and other current assets 2,943,542 2,183,011
Prepaid and refundable taxes 739,095 690,657
Deferred tax assets 199,000 199,000
------------ ------------
Total current assets 13,394,509 14,005,964
------------ ------------
Property and equipment, net 5,644,030 5,800,070
Goodwill 13,234,051 13,234,051
Customer list and other intangibles,net of accumulated amortization
of $4,460,483 and $4,440,485 39,517 59,515
Investment in joint venture 270,795 365,483
Deferred tax assets 1,980,000 1,805,000
Other assets 1,136,766 1,441,802
------------ ------------
Total assets $ 35,699,668 $ 36,711,885
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of obligations under capital leases $ 93,330 $ 96,248
Borrowings on credit facilities 5,000,000 5,500,000
Accounts payable 2,588,822 1,692,713
Accrued expenses and other current liabilities 3,549,861 3,948,809
------------ ------------
Total current liabilities 11,232,013 11,237,770
Obligations under capital leases, net of current portion 142,121 173,000
Other long term liabilities 432,904 503,336
------------ ------------
Total liabilities 11,807,038 11,914,106
------------ ------------
Stockholders' Equity:
Common stock; $.01 par value. Authorized 15,000,000 shares; issued
6,043,125 shares in 2004 and 6,040,173 shares in 2003 60,431 60,401
Additional paid-in capital 25,056,216 25,047,284
Retained earnings (accumulated deficit) (779,289) 238,477
Accumulated other comprehensive loss (244,794) (348,449)
------------ ------------
24,092,564 24,997,713
------------ ------------
Less common stock in treasury (at cost, 57,124 shares) (199,934) (199,934)
------------ ------------
Total stockholders' equity 23,892,630 24,797,779
------------ ------------
Total liabilities and stockholders' equity $ 35,699,668 $ 36,711,885
============ ============
See notes to unaudited condensed consolidated financial statements
3
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2004 and 2003
2004 2003
------------ ------------
Revenues $ 10,568,020 $ 10,960,992
Direct costs 3,278,147 3,549,303
------------ ------------
Gross Profit 7,289,873 7,411,689
Operating Expenses:
Selling, general and administrative expenses 7,288,144 7,462,227
Depreciation and amortization 653,250 538,815
Loss from joint venture 94,688 100,000
Loss on impairment of investments 342,000 --
------------ ------------
Operating loss (1,088,209) (689,353)
Interest expense, net (79,557) (88,716)
------------ ------------
Loss before income taxes (1,167,766) (778,069)
Benefit from income taxes (150,000) (100,000)
------------ ------------
Net loss $ (1,017,766) $ (678,069)
============ ============
Basic and diluted loss per share $ (0.17) $ (0.11)
============ ============
See notes to unaudited condensed consolidated financial statements
4
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three Months Ended March 31, 2004 and 2003
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,017,766) $ (678,069)
------------ ------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 653,250 538,815
Deferred income taxes (175,000) 125,000
Equity loss from joint venture 94,688 100,000
Loss on impairment of investments 342,000 --
Changes in assets and liabilities
Accounts receivable 300,043 (1,983,845)
Other assets (146,227) 32,969
Prepaid expenses and other current assets (760,531) (277,407)
Accounts payable and accrued expenses 497,161 938,416
Other long term liabilities (70,432) --
Prepaid and refundable taxes (48,438) (146,684)
------------ ------------
Net cash used in operating activities (331,252) (1,350,805)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for earn out payments on acquisitions -- (315,803)
Purchases of property and equipment (367,949) (563,518)
------------ ------------
Net cash used in investing activities (367,949) (879,321)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock in connection
with the exercise of stock options 8,962 --
Repayments of long term debt (33,797) (15,507)
Borrowings on line of credit - bank 52,017 98,043
Payments on line of credit - bank (552,017) (597,207)
------------ ------------
Net cash used in financing activities (524,835) (514,671)
------------ ------------
Net decrease in cash and cash equivalents (1,224,036) (2,744,797)
Cash and cash equivalents at the beginning of period 3,708,130 6,389,650
------------ ------------
Cash and cash equivalents at end of period $ 2,484,094 $ 3,644,853
============ ============
Supplemental disclosure of non-cash activities:
Common stock issued in connection with acquisitions $ -- $ 275,277
============ ============
See notes to unaudited condensed consolidated financial statements
5
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of presentation
The condensed consolidated financial statements included herein have been
prepared by Medialink Worldwide Incorporated and Subsidiaries (collectively, the
"Company" or "Medialink"), without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Company's Form 10-K filing for the year ended December 31, 2003.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) which
are, in the opinion of management, necessary to state fairly the results for the
three months ended March 31, 2004. The results for the three months ended March
31, 2004 are not necessarily indicative of the results expected for the full
fiscal year.
(2) Loss per Share
Basic loss per common share is computed using net loss applicable to common
stock and the weighted average number of shares outstanding. Diluted loss per
common share is computed using the weighted average number of shares outstanding
adjusted for the incremental shares attributed to outstanding options to
purchase common stock. For the three month periods ended March 31, 2004 and
2003, the Company had common stock equivalents of 151,216 and 41,219,
respectively, related to stock options that were not included in the computation
of loss per common share because they were antidilutive. The weighted average
number of shares for the three months ended March 31, 2004 and 2003 are as
follows:
Weighted Average Shares Outstanding
- -----------------------------------
For the three months ended March 31,
------------------------------------
2004 2003
---- ----
Basic and diluted 5,992,890 5,913,855
========= =========
6
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) Comprehensive Loss
The components of comprehensive loss consist of the following:
For the three months ended March 31,
------------------------------------
2004 2003
---- ----
Net loss $ (1,017,766) $ (678,069)
Other comprehensive income (loss):
Foreign currency translation
adjustments 103,655 (50,337)
------------ ------------
Comprehensive loss $ (914,111) $ (728,406)
============ ============
Accumulated other comprehensive loss at March 31, 2004 and December 31, 2003
consists of foreign currency translation adjustments.
(4) Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities", and amended the interpretation
with FIN 46(R) in December 2003. This interpretation and its amendment set forth
a requirement for an investor with a majority of the variable interests in a
variable interest entity ("VIE") to consolidate the entity and also requires
majority and significant variable interest investors to provide certain
disclosures. A VIE is an entity in which the equity investors do not have a
controlling interest, or the equity investment at risk is insufficient to
finance the entity's activities without receiving additional subordinated
financial support from the other parties. The provisions of FIN 46 were
effective immediately for all arrangements entered into with new VIEs created
after January 31, 2003. The Company has not entered into any arrangements with
VIEs after January 31, 2003. For arrangements entered into with VIEs created
prior to January 31, 2003, the provisions of FIN 46 have been delayed to the
first interim or annual period beginning after December 15, 2003. The Company
has evaluated the impact of adoption of FIN 46(R) for its arrangements created
before January 31, 2003. The adoption of this standard did not have a material
impact on the Company's financial statements.
(5) Investments and Acquisitions
On April 8, 2002, TTX Limited ("Teletrax(TM)"), a subsidiary of the Company,
entered into a Technology License Agreement with Koninklijke Philips Electronics
N.V. ("Philips") for the use of Philips' WaterCast technology. Medialink, which
owns 76% of Teletrax(TM), had agreed to advance to
7
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Teletrax(TM), in the form of a loan, up to a total of $1.761 million. Through
March 31, 2003, Medialink has fulfilled this commitment. The minority
shareholder of Teletrax(TM) has no future funding obligations and, accordingly,
the Company has recorded 100% of the loss from operations of this subsidiary,
which it consolidates.
On August 1, 1999 the Company entered into a joint venture with Business Wire to
form Business Wire/Medialink, LLC ("Newstream") for the purpose of providing its
clients with distribution of their news to multimedia Internet news sites. The
Company, which has a 50% interest in the joint venture, accounts for its
interest in Newstream under the equity method, as it does not have a controlling
interest in the entity. Although no future funding contractual obligations
exist, the Company, along with its joint venture partner, intends to continue to
fund and operate the joint venture for at least the next twelve months.
For the three month period ended March 31, 2003 the Company recorded goodwill
related to earn-out payments on acquisitions of $380,000. As of March 31, 2003
the Company had no future commitments on any of its acquisitions that would
result in additional goodwill to be recorded.
During the quarter ended March 31, 2004, the Company recorded a loss on the
impairment of investments of $342,000 related to two investments accounted for
under the cost method.
(6) Line of Credit
The Company has a line of credit facility with a bank, allowing for borrowings
of up to $7.50 million through April 15, 2004. Loans under the Credit Facility
bear interest at the 30-Day LIBOR Rate (1.09% at March 31, 2004) plus 2.25%
through 3.25% per annum, as defined.
The Company is subject to a line fee of $37,500 for the period from January 1,
2003 through April 15, 2004.
Covenants under the line of credit agreement require the Company to meet certain
financial ratios, including minimum tangible net worth and minimum earnings
before interest, taxes, depreciation, amortization and other charges, as defined
in the agreement. At December 31, 2003 the Company was not in compliance with
the minimum tangible net worth covenant which was waived by the bank through
April 15, 2004 through the issuance of a forbearance. In conjunction with the
forbearance, the bank required the Company pay down its line of credit by
$500,000, reduce the maximum borrowings under the facility to $5.00 million and
put into place a minimum cash balance and limits on capital expenditure
covenants, as defined in the forbearance.
Subsequent to March 31, 2004 the bank issued an additional forbearance (the
"Forbearance") expiring January 31, 2005. The Forbearance reduces the maximum
line to the lower of (i) $4.00 million, $3.75 million, $3.50 million and $3.00
million at April 15, 2004, July 1, 2004, October 1, 2004 and December 31, 2004,
respectively, or (ii) 80% of eligible accounts receivable balances, as defined
in the Forbearance. Interest under the Forbearance is payable monthly at the
rate of the 30-
8
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Day LIBOR Rate plus 5.5% per annum. Covenants under the Forbearance include
limits on capital expenditures, minimum earnings before interest, taxes,
depreciation and amortization and minimum tangible net worth, as defined in the
agreement. Additionally, the Forbearance requires the Company to obtain
financing by January 15, 2005, to support Teletrax(TM)'s operations.
The Company is subject to a forbearance fee of $30,000 for the period from April
15, 2004 through January 31, 2005.
Substantially all of the assets of the Company are pledged as collateral under
the credit facility.
(7) Intangible Assets
Intangible assets consist of the following:
March 31, 2004 December 31, 2003
-------------------------------- ---------------------------------
(in thousands) (in thousands)
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount Amortization Net Amount Amortization Net
------ ------ ------------ --- ------ ------------ ---
Customer List 5 years $4,000 $(4,000) $ - $4,000 $(4,000) $ -
Non-competes 4-7.5 years 500 (460) 40 500 (440) 60
------ ------- --- ------ ------- ---
Total $4,500 $(4,460) $40 $4,500 $(4,440) $60
====== ======= === ====== ======= ===
Aggregate amortization expense for the three months ended March 31, 2004 and
2003 was $20,000 for each period.
Estimated future amortization expense is as follows:
For the nine months ending December 31, 2004 $40,000
=======
(8) Stock Based Compensation
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure" ("SFAS 148"). SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation as originally provided by SFAS No. 123,
"Accounting for Stock-Based Compensation". Additionally, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosure in both the
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The transitional requirements of SFAS 148 are effective for all financial
statements for fiscal years ending after December 15, 2002. We adopted
9
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
the disclosure portion of this statement in the fiscal quarter ended March 31,
2003. The application of the disclosure portion of this standard will have no
impact on our consolidated financial position or results of operations. The
Financial Accounting Standards Board recently indicated that they will require
stock-based employee compensation to be recorded as a charge to earnings during
2004. We will continue to monitor their progress on the issuance of this
standard as well as evaluate our position with respect to current guidance.
If the Company had elected to recognize compensation cost at the grant date,
based on the fair value of the options granted, in 2004 and 2003, as prescribed
by SFAS 123, the Company's net loss and loss per share for the periods ended
March 31, 2004 and 2003 would approximate the pro forma amounts as indicated
below:
For the three months ended March 31,
------------------------------------
2004 2003
---- ----
Net loss - as reported $ (1,017,766) $ (678,069)
Deduct: total stock-based
employee compensation expense
determined under the fair
value method, net of related tax
effects (34,132) (80,210)
------------ ------------
Net loss - pro forma $ (1,051,898) $ (758,279)
============ ============
Basic and diluted EPS - as reported $ (.17) $ (.11)
Basic and diluted EPS - pro forma $ (.18) $ (.13)
The fair value of each grant is estimated using the Black-Scholes Options
Pricing Model with the following assumptions: risk free interest rate of 4.25%,
expected life of 5 years and dividend yield of 0% for all grants and expected
volatility of 5% in 2003. There were no options granted during the three months
ended March 31, 2004.
(9) Supplemental Cash Flow Information:
Cash paid for interest and income taxes during the three months ended March 31,
2004 and 2003 was as follows:
2004 2003
---- ----
Interest $ 80,000 $ 89,000
========== ==========
Income Taxes $ 72,000 $ 78,000
========== ==========
10
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(10) Liquidity
The Company has suffered recurring losses for the three-year period ended
December 31, 2003 and through March 31, 2004. At December 31, 2003, the Company
was not in compliance with the minimum tangible net worth covenant under the
Company's line of credit agreement, which was waived by the lender through April
15, 2004 through the issuance of a forbearance. The forbearance was extended
through January 31, 2005. The covenants under the forbearance are discussed
further in note 6. Based on its 2004 projections, management anticipates that it
will remain in compliance with these revised covenants. Should the company be
unable to meet its projections, management will take appropriate measures in the
second quarter, which could include seeking alternative sources of funding,
including the factoring of receivables or headcount reductions.
11
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Summary and Outlook
The Public Relations industry showed signs of rebounding in the first quarter of
2004 and client activity in the Company's principal media communications
services improved, however, the Company experienced a decline in demand on its
strategic services as a result of fewer issues-related needs from a significant
client.
Revenues from Media Communications and Media Research services decreased
$725,000, or 7% as compared to 2003. At the same time, the Company continued to
invest in its new Teletrax(TM) service and increased revenue from its
Teletrax(TM) services by $333,000, from $96,000 in to 2003 to $429,000 in 2004.
During the quarter the Company continued to focus its efforts on creating
operating efficiencies, increasing its gross profit margins, reducing its
payroll, where practicable, and identified further savings in selling, general
and administrative expenses ("S, G & A").
Improvements in gross profit margins on 2004 revenue created savings of
$144,000. Additionally, the Company achieved savings of $174,000 in S, G & A as
compared to 2003.
The Company finances its operations from cash generated from operations and from
its line of credit facility. During the first quarter of 2004, the Company
negotiated a forbearance agreement requiring the Company to limit its borrowings
to a maximum of $5.00 million. In April 2004, the bank agreed to extend the
forbearance through January 31, 2005, and required additional reductions in the
maximum line throughout 2004. The Company believes the current line of credit
facility, in conjunction with the costs savings implemented in 2003 and 2004,
will be adequate to fund the Company's needs during 2004. The Company has agreed
to find additional financing to fund the operations of Teletrax(TM) by January
15, 2005.
Three months ended March 31, 2004 compared to Three months ended March 31, 2003
Revenues for the three months ended March 31, 2004 (the "2004 Quarter") were
$10.57 million as compared $10.96 million for the three months ended March 31,
2003 (the "2003 Quarter"), broken out as follows:
(in thousands)
--------------------------------------------
For the Three Months Ended March 31,
--------------------------------------------
2004 2003 Change %
-------- -------- -------- --------
Media Communication Services $ 8,059 $ 8,582 $ (523) (6%)
Research Communication Services 2,080 2,282 (202) (9%)
Teletrax:
Service Revenue 269 92 177 192%
Equipment Sales 160 4 156 3900%
-------- -------- -------- --------
Total Teletrax 429 96 333 347%
-------- -------- -------- --------
Total Revenue $ 10,568 $ 10,960 $ (392) (4%)
======== ======== ======== ========
While the Company detected a slight rebound in spending from the public
relations industry, the Company experienced a decrease in demand for its
strategic services as a significant client had fewer issue-related needs during
the 2004 Quarter as compared to the 2003 Quarter.
12
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Direct costs decreased by $271,000, or 8%, from $3.55 million in the 2003
Quarter to $3.28 million in the 2004 Quarter. Included in direct costs were
direct costs associated with Teletrax Service Revenue of $187,000 and $101,000,
respectively, in the 2004 and 2003 Quarter and direct costs associated with
Teletrax equipment sales of $119,000 and $4,000, respectively, in 2004 and 2003.
The Company's gross profit percentage was 69% and 68% in the 2004 Quarter and
the 2003 Quarter, respectively. The increase in the gross profit percentage was
due to a favorable product mix and the result of adjustments the Company made
over the last several quarters to its direct cost structure, including
renegotiating vendor rates and improving the efficiency of its operating
processes.
S, G & A decreased by $174,000, or 2%, from $7.46 million in the 2003 Quarter to
$7.29 million in the 2004 Quarter. Included in S, G & A are Teletrax related
costs of $215,000 and $318,000 in the 2004 and 2003 Quarters, respectively. The
decrease in S, G & A includes increases in payroll and payroll-related costs
("Payroll") of approximately $97,000. Not including the increase in Payroll, the
Company decreased its S, G & A expenses by $271,000 substantially the result of
reduced spending in advertising and marketing, travel and entertainment,
insurance and office costs.
Depreciation and amortization expense increased by $114,000, or 21%, from
$539,000 in the 2003 Quarter to $653,000 in the 2004 Quarter. Included in
depreciation and amortization is depreciation related to Teletrax of $131,000
and $61,000 in the 2004 and 2003 Quarter, respectively. The increase was due to
fixed asset additions during the last twelve months, substantially related to
the rollout of Teletrax(TM).
During the 2004 Quarter the Company recorded a loss on the impairment of
investments of $342,000 related to two investments accounted for under the cost
method.
As a result of the foregoing, the Company had an operating loss of $1.09 million
in the 2004 Quarter as compared to an operating loss of $689,000 in the 2003
Quarter. The operating loss in 2004 and 2003 included operating losses of
$513,000 and $619,000, respectively, from the Company's 76% owned subsidiary,
Teletrax(TM), which was formed in April 2002. The minority shareholder of
Teletrax(TM) has no future funding obligations and, accordingly, the Company has
recorded 100% of the loss from this subsidiary.
Income tax benefit was calculated using Medialink's effective tax rates of 41%
in both 2004 and 2003. In both 2004 and 2003 the Company was also subject to
minimum state and local taxes and taxes on capital. Additionally, as a result of
the historical results of its UK operations, including Teletrax(TM) and
management's limited ability to project its UK future results, the Company has
recorded a valuation allowance of $1.1 million related to the foreign deferred
tax asset generated by its UK losses. Tax assets are recognized based upon
expected taxable income. Recording the additional valuation allowance and the
minimum state and local taxes reduces the effective tax rates to 13% in each
quarter.
The Company had a net loss of $1.02 million in the 2004 Quarter as compared to a
net loss of $678,000 in the 2003 Quarter. In 2004 the Company had a loss per
share of $0.17 compared to a loss per share of $0.11 in 2003.
13
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Medialink has financed its operations primarily through cash generated from
operations and its line of credit facility. Net cash used in operating
activities amounted to $331,000 for the three month period ended March 31, 2004,
while net cash used in operating activities for the comparable period in 2003
was $1.35 million. The change was the result of the changes in operating assets
and liabilities. Most notably during the 2004 Quarter accounts receivable
decreased $300,000 as compared to the 2003 Quarter where we had an increase in
accounts receivable of $1.98 million. Capital expenditures which are primarily
incurred to support the Company's sales and operations and the continuing
roll-out of the Teletrax(TM) network in 2003 were $368,000 in 2004 compared to
$564,000 in 2003. Cash flows related to earn out payments on the Company's
various acquisitions amounted to $316,000 in 2003. As of March 31, 2003 the
Company had no potential earn-out payments on its acquisitions.
The Company has a line of credit facility with a bank, allowing for borrowings
of up to $7.50 million through April 15, 2004. Loans under the Credit Facility
bear interest at the 30-Day LIBOR Rate (1.09% at March 31, 2004) plus 2.25%
through 3.25% per annum, as defined in the agreement. Covenants under the line
of credit agreement require the Company to meet certain financial ratios,
including minimum tangible net worth and minimum earnings before interest,
taxes, depreciation, amortization and other charges, as defined in the
agreement. At December 31, 2003 the Company was not in compliance with the
minimum tangible net worth covenant which was waived by the bank through April
15, 2004 through the issuance of a forbearance. In conjunction with the
forbearance, the bank required the Company to pay down its line of credit by
$500,000, reduce the maximum borrowings under the facility to $5.00 million and
put into place a minimum cash balance and limits on capital expenditure
covenants, as defined in the forbearance.
Subsequent to March 31, 2004 the bank issued an additional forbearance (the
"Forbearance") expiring January 31, 2005. The Forbearance reduces the maximum
line to the lower of (i) $4.00 million, $3.75 million, $3.50 million and $3.00
million at April 15, 2004, July 1, 2004, October 1, 2004 and December 31, 2004,
respectively, or (ii) 80% of eligible accounts receivable balances, as defined
in the Forbearance. Interest under the Forbearance is payable monthly at the
rate of the 30-Day LIBOR Rate plus 5.5% per annum. Covenants under the
Forbearance include limits on capital expenditures, minimum earnings before
interest, taxes, depreciation and amortization and minimum tangible net worth,
as defined in the agreement. Additionally, the Forbearance requires the Company
to obtain financing by January 15, 2005 to support its Teletrax(TM)'s
operations.
As of March 31, 2004 Medialink had $2.48 million in cash and cash equivalents as
compared to $3.71 million as of December 31, 2003. In addition, the Company had
a balance due under its line of credit facility of $5.00 million and $5.50
million at March 31, 2004 and December 31, 2003, respectively. The decrease in
cash and cash equivalents of $1.23 million includes purchases of fixed assets of
$368,000, and pay downs, net of borrowings on its line of credit facility
aggregating $500,000. The remaining change was substantially attributable to the
changes in its operating assets and liabilities.
14
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company believes, based upon its 2004 financial forecast, that it has
sufficient capital resources, including availability under its line of credit
facility, alternate sources of funding, and cash flow from operations, to fund
its net cash needs for at least the next twelve months. The Company also
believes that in the event that actual 2004 revenues are lower than its
forecast, the Company's Direct, Selling, General and Administrative costs can be
reduced to minimize the effect on forecasted profit.
Contractual Obligations
There were no material changes to our contractual obligations for the 2004
Quarter. For information regarding our contractual obligations at December 31,
2003, see our Annual Report on Form 10-K for the fiscal year ended December 31,
2003.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
RISK FACTORS
Major News Events
Events which dominate news broadcasts, such as the events of September 11, 2001
and the war in Iraq, may cause the Company's clients to delay or not use the
Company's services for a particular project as these clients may determine that
their messages may not receive adequate attention in light of the coverage of
other news events. These circumstances could have a material adverse effect on
the Company's business, operating results and financial condition.
Susceptibility to General Economic Conditions
The Company's revenues are affected by its clients' marketing communications,
spending and advertising budgets. The Company's revenues and results of
operations may be subject to fluctuations based upon general economic conditions
in the geographic locations where it offers its services or distributes its
material. If there were to be continued economic downturn or a continued
recession in these geographic locations, the Company expects that business
enterprises, including its clients and potential clients, could substantially
and immediately reduce their marketing and communications budgets. In the event
of such an economic climate, there would be a material adverse effect on the
Company's business, operating results, financial condition and ability to
refinance its existing line of credit agreement.
Competition
The markets for the Company's services are highly competitive. The principal
competitive factors affecting the Company are effectiveness, reliability, price,
technological sophistication and timeliness. Numerous specialty companies
compete with the Company in each of its service lines
15
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
although no single company competes across all service lines. Some of the
Company's competitors or potential competitors have longer operating histories,
longer client relationships and significantly greater financial, management,
technological, sales, marketing and other resources than the Company. In
addition, clients could perform internally all or certain of the services
provided by the Company rather than outsourcing such services. The Company could
face competition from companies in related communications markets which could
offer services that are similar or superior to those offered by the Company. In
addition, national and regional telecommunications providers could enter the
market with materially lower electronic delivery costs, and radio and television
networks could also begin transmitting business communications separate from
their news programming. The Company's ability to maintain and attract clients
depends to a significant degree on the quality of services provided and its
reputation among its clients and potential clients as compared to that of its
competitors. There can be no assurance that the Company will not face increased
competition in the future or that such competition will not have a material
adverse effect on the Company's business, operating results and financial
condition.
New Services
The Company must develop new services to remain competitive, maintain or grow
market share and to operate in new markets. There can be no assurance that the
Company will be successful in developing new services, or that those new
services will meet customer needs. As a result of the expenses incurred in
developing new services and the potential inability of the Company to market
these services successfully, the Company's operating results may be negatively
affected.
Provisions of Our Charter Documents May Have Anti-takeover Effects that Could
Prevent a Change in Control Even if the Change in Control Would be Beneficial to
our Stockholders Provisions of our amended and restated certificate of
incorporation, by-laws and Delaware law could make it more difficult for a third
party to acquire us, even if doing so would be beneficial to our stockholders.
Line of credit
The Company has a line of credit facility with a bank, allowing for borrowings
of up to $7.50 million through April 15, 2004. Loans under the Credit Facility
bear interest at the 30-Day LIBOR Rate (1.09% at March 31, 2004) plus 2.25%
through 3.25% per annum, as defined in the agreement. Covenants under the line
of credit agreement require the Company to meet certain financial ratios,
including minimum tangible net worth and minimum earnings before interest,
taxes, depreciation, amortization and other charges, as defined in the
agreement. At December 31, 2003 the Company was not in compliance with the
minimum tangible net worth covenant which was waived by the bank through April
15, 2004 through the issuance of a forbearance. In conjunction with the
forbearance, the bank required the Company to pay down its line of credit by
$500,000, reduce the maximum borrowings under the facility to $5.00 million and
put into place a minimum cash balance and limits on capital expenditure
covenants, as defined in the forbearance.
Subsequent to March 31, 2004 the bank issued an additional forbearance (the
"Forbearance") expiring January 31, 2005. The Forbearance reduces the maximum
line to the lower of (i) $4.00
16
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
million, $3.75 million, $3.50 million and $3.00 million at April 15, 2004, July
1, 2004, October 1, 2004 and December 31, 2004, respectively, or (ii) 80% of
eligible accounts receivable balances, as defined in the Forbearance. Interest
under the Forbearance is payable monthly at the rate of the 30-Day LIBOR Rate
plus 5.5% per annum. Covenants under the Forbearance include limits on capital
expenditures, minimum earnings before interest, taxes, depreciation and
amortization and minimum tangible net worth, as defined in the agreement.
Additionally, the Forbearance requires the Company to obtain financing by
January 15, 2005 to support Teletrax(TM)'s operations.
While management believes the Company is currently in compliance with the
covenants under the line of credit agreement and related forbearance agreement,
there can be no assurance that the Company will continue to be in compliance in
the future. In that event, the Company may be required to raise additional funds
in order to repay the outstanding balance under the line of credit and there can
be no assurance that, if required, the Company would be able to raise such funds
on favorable terms, if at all.
Capital Requirements
One or more of our businesses could require, or benefit from, additional
investment beyond our current capability. Such additional funding could be
raised by the Company, or one or more of its business units separately, and
could have the effect of diluting shareholders' interests.
Other Risk Factors
Other risk factors include our recent history of losses, our ability to achieve
or maintain profitability, effectiveness of our cost reduction programs, our
ability to develop new services and market acceptance of such services, such as
Teletrax(TM), our ability to develop new products and services that keep pace
with technology, our ability to develop and maintain successful relationships
with critical vendors, the potential negative effects of our international
operations on the Company. In addition, future acquisitions or divestitures and
the absence of long term contracts with customers and vendors may adversely
effect our operations and have an adverse effect on pricing, revenues, gross
margins and our customer base.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as significant to our business operations
and the understanding of our results of operations. The impact and any
associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see Note 1 in the Notes to the Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31, 2003.
Revenue Recognition
Revenue earned from the distribution and monitoring of video news releases and
the distribution of printed news releases is recognized in the period that the
release is distributed. Fees earned for
17
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
webcasts, satellite media tours and other live events and the production of
video news releases and still photographs are recognized in the period that the
services are performed. Fees earned from research services are recognized using
the percentage of completion method. Invoices to clients are generated in
accordance with the terms of the applicable contract, which may not be directly
related to the performance of services. Unbilled receivables are invoiced based
upon the achievement of specific events as defined by each agreement including
deliverables, timetables and incurrence of certain costs. Unbilled receivables
are classified as a current asset. Advanced billings to clients in excess of
revenue earned are recorded as deferred revenues and are classified as a current
liability.
Allowance for Doubtful Accounts
Management must make estimates of the uncollectibility of the Company's accounts
receivable. Management specifically analyzes accounts receivable, historical bad
debt, customer concentrations, customer creditworthiness and current trends when
evaluating the adequacy of the allowance for doubtful accounts.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price and related costs over the
value assigned to the net tangible and intangible assets of businesses acquired.
In 2001 and 2000, goodwill was amortized on a straight-line basis over its
expected useful life, not to exceed 40 years, and we periodically reviewed the
recoverability of goodwill and intangible assets. Effective January 1, 2002, we
adopted the provisions of Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, which required us to cease amortizing goodwill and to assess goodwill
for impairment at least annually in the absence of an indicator of possible
impairment and immediately upon an indicator of possible impairment. The annual
impairment testing required by SFAS No. 142 also requires the Company to use its
judgment and could require the Company to write down the carrying value of its
goodwill and other intangible assets in future periods.
Other intangible assets, including customer lists and covenants not to compete,
are being amortized on a straight-line basis over the term of the agreement or
the estimated future period of benefit, which ranges from 3 to 7 1/2 years.
The agreements pursuant to which the Company acquired certain companies include
provisions that could require the Company to issue additional cash or shares of
common stock if certain performance targets are met. The value of any such
additional consideration will be added to the goodwill related to such
acquisition.
Long-lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its
18
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
Assets to be disposed of would be separately presented in the balance sheet and
reported at the lower of the carrying amount or fair value less costs to sell
and are no longer depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the appropriate
asset and liability sections of the balance sheet.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and for operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. We
considered all of the available evidence to arrive at our position on the net
deferred tax assets; however, should circumstances change which would alter our
judgment in this regard, it may have an impact on future operating results.
19
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Debt
The Company has a line of credit agreement which exposes the Company to the risk
of earnings or cash flow loss due to changes in market interest rates. At March
31, 2004, $5.00 million was outstanding on the line of credit which has a
maturity date of April 2004. The interest rate is based upon the 30-day LIBOR
rate plus 2.25% through 3.25% per annum, as defined in the agreement. All other
Company debt is fixed-rate and, therefore, does not expose the Company to the
risk of earning or cash flow loss due to changes in market interest rate. See
footnote 6, "Line of Credit".
Foreign Operations
In the normal course of business, through its UK operations, the Company is
exposed to the effect of foreign exchange rate fluctuations on the United States
dollar value of its foreign subsidiaries' results of operations and financial
condition. At March 31, 2004, the Company's primary foreign currency market
exposure was the British pound.
Market Risk
Our accounts receivables are subject, in the normal course of business, to
collection risks. We regularly assess these risks and have established policies
and business practices to protect against the adverse effects of collection
risks. As a result we do not anticipate any material losses in this area.
Item 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our chief executive officer,
principal accounting officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on this evaluation, our chief executive officer, principal
accounting officer and principal financial officer concluded that our disclosure
controls and procedures, as of the date of the evaluation, are effective in
timely alerting them to material information required to be included in our
periodic SEC reports. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.
In addition, we reviewed our internal controls, and there have been no
significant changes in those controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
20
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
From time to time, the Company becomes involved in various legal
matters that the Company considers to be in the ordinary course of
business. While the Company is not presently able to determine the
potential liability, if any, related to any such matters, the Company
believes that none of such matters, individually or in the aggregate,
will have a material adverse effect on its financial position.
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities.
None
ITEM 3. Defaults Upon Senior Securities.
None
ITEM 4. Submission of Matters to a Vote of Security Holders.
None
ITEM 5. Other Information.
None
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32. Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Report on Form 8-K:
Report on Form 8-K dated February 23, 2004 regarding amendments
to certain provisions on our loan agreement with our bank.
Report on Form 8-K dated February 24, 2004 regarding earnings for
the three months and year ended December 31, 2003.
21
MEDIALINK WORLDWIDE INCORPORATED AND SUBSIDIARIES
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.
MEDIALINK WORLDWIDE INCORPORATED
By: /s/ Laurence Moskowitz
----------------------
Laurence Moskowitz,
Chairman of the Board, Chief Executive Officer and President
By: /s/ J. Graeme McWhirter
-----------------------
J. Graeme McWhirter
Executive Vice President, Assistant Secretary,
Chief Financial Officer and Director
Dated: May 17, 2004