We generated $401,000 of cash from operating activities for the year ended June 30, 2009 as compared with our operating activities using $3,258,000 in the year ended June 30, 2008. The $401,000 of cash generated by operating activities for the year ended June 30, 2009 resulted from a $1,675,000 loss from operations, which included $1,500,000 received on settlement of litigation, non-cash charges totaling $3,056,000, and $980,000 of cash used primarily to increase our non-cash working capital (current assets less cash and cash equivalents net of current liabilities). The most significant drivers behind the $980,000 increase in our non-cash working capital include: (1) a $2,806,000 reduction in our trade obligations and other accrued expenses; (2) a $420,000 reduction in our deferred revenues, associated with our INKlusive program; and (3) a $256,000 increase in our accounts receivable, primarily driven by
increased sales activity late in our fiscal fourth quarter. These increases in working capital were partially offset by inventory reductions, net of reserve changes in the amount of $2,615,000, achieved during 2009.
Our new Chief Operating Officer, Robert Ward, who succeeded Lawrence Anderson when he retired in late July 2008, developed a multi-faceted plan to better manage our toner-based product inventories and supply chain. The plan integrates detailed SKU level sales forecasting with statistical modeling that accounts for demand variability based on historic order volatility. Other future elements of the plan include a reduction in minimum order quantities through our providing vendors with rolling forecasts of our production needs and the adoption of quality assurance and control processes at the vendor or closer to the production. During the year ended June 30, 2009, our inventory levels decreased by $2,824,000 or about 31%, inclusive of changes in reserves, to $6,392,000 from $9,216,000. Based on these year-end inventory levels, which include raw materials, we have achieved an 84 day or 29% reduction in our
days in inventory from 292 days at June 30, 2008 to 208 days at June 30, 2009.
During the year ended June 30, 2008, our inventory levels, inclusive of inventory reserve changes, increased by $3,414,000 or about 59% to $9,216,000 from $5,802,000. The increase in raw materials and finished goods inventories was partially due to new product introductions and those we were preparing to launch.
On September 24, 2008, we completed a $1,250,000 convertible debt financing with MicroCapital Fund, LP and MicroCapital Fund, Ltd. (MicroCapital). We issued three year notes, bearing interest at 10% payable quarterly and convertible into shares of our common stock at $1.65 per share. We also issued (a) five year warrants allowing MicroCapital to purchase 387,787 shares of our common stock at $1.65 per share, and (b) three year warrants allowing MicroCapital to repeat its investment up to $1,250,000 on substantially the same terms and conditions. The three year warrants may be called by us if certain criteria are met.
Our INKlusive program generated operating cash flow in advance of the income statement recognition associated with printer consumables being shipped and revenues being recognized over the two year term of our typical INKlusive supply agreement. This advanced funding of the INKlusive contract consideration by a third-party leasing company resulted in up-front cash receipts and corresponding deferred revenue obligations. As of June 30, 2009, deferred revenue associated with the program totaled $248,000, a decrease of $420,000 from $668,000 at June 30, 2008. The operating cash flow effect of this decrease in a liability was a corresponding decrease in cash flow generated by operations. Based on declining INKlusive sales volume, we made the decision to discontinue the program effective April 1, 2009. Although no new INKlusive contracts were originated after April 1, 2009, remaining commitments under existing
INKlusive supply obligations continue to be honored.
In fiscal 2008, our cash and equivalents decreased by $1,572,000 to $237,000. $3,258,000 of this decrease resulted from operating activities and $713,000 occurred as a result of investing activities. These decreases were partially offset by $2,384,000 of cash provided from financing activities, mostly proceeds received from borrowings under our credit facility. In 2008, we used $3,258,000 of cash from operating activities, resulting from a $1,824,000 loss from operations, add-back of net non-cash charges totaling $382,000, and $1,815,000 of cash used primarily to increase our non-cash working capital (current assets less cash and cash equivalents net of current liabilities). The most significant driver behind the $1,815,000 increase in our non-cash working capital was the $3,414,000 increase in our inventories. The increase in raw materials and finished goods inventories was partially due to new product
introductions and those we are preparing to launch.
Prior to February 12, 2008, we had a revolving line of credit facility which provided for maximum borrowings of $3,000,000. This line was replaced on February 12, 2008, when we entered into an agreement with Sovereign Bank for a three year revolving line of credit. As amended, the advance limit under the line of credit is the lesser of: (a) $4,900,000; or (b) up to 80% of eligible domestic accounts receivable and up to the lesser of $750,000 or 75% of
33
eligible foreign receivables plus up to the lesser of: (i) $2,500,000; or (ii) 50% of eligible inventory; or (iii) 60% of the maximum amount available to be advanced under the line. The line of credit is collateralized by a first priority security interest in substantially all of our U.S. based assets and our foreign receivables. As amended, under a prime rate option, the interest rate can vary from the banks prime rate to its prime rate plus 1%, and, under a LIBOR rate option, the interest rate can vary from LIBOR plus 225 basis points to LIBOR plus 275 basis points. Both the term note and the line of credit bear interest at the banks Prime Rate plus 1% (4.25% at June 30, 2009) and require payments of interest only through the facilities three year term.
The revolving loan may be converted into one or more term notes upon mutual agreement of the parties. On February 12, 2008, we entered into a non-amortizing term note with the bank in the amount of $1,500,000, due February 12, 2011. At June 30, 2009, this note had a principal balance of $1,500,000. As of June 30, 2009, we had an outstanding balance of $1,249,132 under the revolving line and approximately $1,005,000 of undrawn availability under the credit line. At June 30, 2008, we had outstanding with the bank the $1,500,000 term note and had an outstanding balance of $1,094,209 drawn under our revolving credit line, with about $819,000 of undrawn availability.
Our current and former credit facilities are and have been subject to financial covenants. Current financial covenants include monitoring a ratio of debt to tangible net worth and a fixed charge coverage ratio, as defined in the loan agreements. At June 30, 2009, we were in compliance with all of our financial covenants. At June 30, 2008, we were not in compliance with certain financial covenants, which were waived by the bank via an amendment dated September 22, 2008. As a result of a cross default and collateralization provision associated with our former debt facility, the Company agreed to refinance certain operating leases held by an affiliate of the former bank. Under terms of a separate waiver and amendment with this leasing affiliate, we received an extension of time to refinance or payoff the lease obligation until September 30, 2009. Under the terms of this amendment, we agreed to make six
lease payments of $39,668 per month, plus accrued interest at prime plus 2.5% per annum, between March 2009 and September 2009. At June 30, 2009, the remaining obligation under the agreement was $69,815. This obligation was fully satisfied in August 2009, when we obtained title to the leased equipment.
SOME SIGNIFICANT FACTORS AFFECTING FUTURE LIQUIDITY
Litigation costs.
Our liquidity could be significantly affected by future legal fees and other costs associated with our continuing litigation with Xerox. Although the litigation with Xerox is not expected to be tried until the spring or summer of 2010, the actual timing and magnitude of costs associated with this litigation are uncertain. During the year ended June 30, 2009 and 2008, we incurred $436,000 and $1,689,000 pretax, respectively, in litigation costs. For more information regarding our litigation, see Note 5 to the Consolidated Financial Statements.
Inventory management initiative.
Our liquidity can be significantly affected by increases or decreases in our inventory levels. Although we expect our inventory management initiative will be successful in achieving further reduction in our inventory levels, we do not expect that future reductions will be as significant as the 29-31% achieved in 2009. Our continued efforts do not assure success in achieving further reductions in our inventory levels. Despite this initiative, our inventories may actually increase in future reporting periods for various reasons. New product launches, which inherently build inventories before any product sales occur, may increase our overall inventory levels, our days in inventory, and directly impact our liquidity.
FUTURE FINANCING REQUIREMENTS
Management believes that cash on hand, cash available under its borrowing commitments and expected cash generated from operating activities will be sufficient to meet the Companys obligations and fund its day-to-day operations for the next 12 months. In the future, our operations may require additional funds and may seek to raise such additional funds through public or private sales of debt or equity securities, or securities convertible or exchangeable into such securities, strategic relationships, bank debt, lease financing arrangements, or other available means. We cannot provide assurance that additional funding, if sought, will be available or, if available, will be on acceptable terms to meet our business needs. If additional funds are raised through the issuance of equity securities, stockholders may experience dilution, or such equity securities may have rights, preferences, or privileges
senior to those of the holders of our common stock. If additional funds are raised through debt financing, the debt financing may involve significant cash payment obligations and financial or operational covenants that may restrict our ability
34
to operate our business. An inability to fund our operations or fulfill outstanding obligations could have a material adverse effect on our business, financial condition and results of operations.
CAPITAL EXPENDITURES
We plan on various capital expenditures over the next twelve months of approximately $750,000. These capital expenditures include toner cartridge tool and die development, evaluation printers, various quality assurance and development instruments, various leasehold improvements, equipment, and upgrades to our information technology systems. In addition, we plan to acquire certain manufacturing equipment to scale our manufacturing capability and/or increase productivity. We plan to finance these expenditures from one or more of the following: existing cash, cash generated by operations, use of operating leases, debt financing.
SEASONALITY
Historically, we have not experienced significant seasonality in our business. As we continue to grow our international business relative to our North American business, we may experience a more notable level of seasonality, especially during the summer months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Use of Estimates
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or method of its application, is generally accepted, management selects the principle or method that is appropriate in our specific circumstances. Application of the accounting principles requires our management to make estimates about the future resolution of existing uncertainties that affect the reported amounts of assets, liabilities, revenues, and expenses, which in the normal course of business are subsequently adjusted to actual results. Actual results could differ from such estimates. In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the consolidated financial statements giving due regard to materiality.
Revenue Recognition
Revenue is recognized at the point of shipment and transfer of title for goods sold, provided collection is reasonably assured. Net revenues include reimbursed shipping and freight expense. Provisions for rebates, product returns and discounts to customers are recognized as reductions in determining net revenues in the same period as the related revenues are recorded. Any sales or other taxes collected from customers are not reflected in the consolidated statements of operations but instead reflected as current obligations in the consolidated balance sheets until disbursed to the respective taxing authority.
Under our INKlusive program, we provided a customer with a business color printer or multifunction device, on-site service, and a defined, regular shipment of supplies (ink or toner), all for the cost of just the supplies. We offered this program in conjunction with a financing company. We are not exposed to the credit risk of any individual customer in the INKlusive program. Media Sciences does not own or otherwise finance the cost of the printer, nor does Media Sciences guarantee the credit worthiness of the customer. Under our agreement with the financing company, at the time of placement of the INKlusive printer, we were paid in full for the printer and the two years of supplies. Consequently, the difference in timing between receipt of contract payment from the finance company and when the supplies are shipped gives rise to deferred revenue on our balance sheet. We amortize this deferred revenue
liability and recognize revenue ratably over the contract term as we ship supplies to the customer. The current and non-current components of the deferred revenue obligation are reflected in the consolidated balance sheets.
Based on declining INKlusive sales volume, we made the decision to discontinue the program effective April 1, 2009. Although no new INKlusive contracts were originated after April 1, 2009, remaining commitments under existing INKlusive supply obligations continue to be honored. The INKlusive program was a multi-element program. We recognize revenue under this program in accordance with the provisions of EITF 00-21. Under those provisions, revenue is recognized for the printer upon shipment to the customers, while revenue for the supplies and services associated with the program are recognized equally over the contract term in proportion to product shipments.
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Accounts Receivable and Allowance for Doubtful Accounts
We market our products to an international network of dealers and distributors. Credit is extended after a credit review by management, which is based on a customers ability to perform its obligations. Such reviews are regularly updated. The allowance for doubtful accounts is based upon aging of customer balances and specific account reviews by management. For non-U.S. trade receivables and certain U.S. trade receivables, we maintain credit insurance. Most U.S. trade receivables are not covered under this credit insurance. We maintain an allowance for potential credit losses based upon expected collectability of its uninsured accounts receivable. We have no significant concentrations of credit risks and generally do not require collateral or other security from our customers.
Inventories and Inventory Reserves
Inventories, consisting of materials, labor, manufacturing overhead, and associated in-bound shipping and freight are stated at the lower of cost or market, with cost being determined on a first-in, first-out (FIFO) basis. We review the adequacy of our inventory reserves on a quarterly basis. Abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials are recognized as current period charges. We write down inventory based on forecasted demand and technological obsolescence. These factors are impacted by market and economic conditions, technology changes, new product introductions and changes in strategic direction and require estimates that may include uncertain elements. Actual demand may differ from forecasted demand and such differences may have a material effect on recorded inventory values.
Warranty
We provide a warranty for all of our consumable supply products. We warrant our products suitability for use in the intended printer models and that our products are free of defects that could cause damage to these printers. Costs covered under the product warranty include customary charges for the repair or replacement of the printer with an equivalent new or refurbished printer, at our sole discretion. The warranty does not cover damage to the product or a printer caused by accident, abuse, misuse, natural disaster, human error, unauthorized disassembly, repair, or modification. We believe that our product warranty is relatively liberal, providing in most cases, broader and more complete coverage than that provided by the original equipment printer manufacturer. Service costs associated with our INKlusive program are also included in this expense caption. We account for the estimated warranty
cost as a charge to product warranty, a captioned component of cost of goods sold, when revenue is recognized. The estimated warranty cost is based on historical product performance and field expenses. We update these estimated charges every quarter. The actual product performance and/or field expense profiles may differ, and in those cases we adjust warranty accruals accordingly.
Contingencies and Litigation
We are named from time to time as a party to various legal proceedings. While we currently believe the ultimate outcome of these proceedings, based on their merit, will not have a material adverse effect on our financial position, the results of complex legal proceedings are difficult to predict.
Income Taxes
We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109) which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. FAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. In projecting future taxable income, for the purpose of evaluating the need for a valuation allowance associated with its deferred tax assets, we consider all evidence, both positive and negative; whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. To the extent that our deferred tax assets require valuation allowances in
the future, the recording of such valuation allowances, would result in an increase to our tax provision in the period in which we determine that such a valuation allowance is required.
On a quarterly basis, we provide for income taxes based upon an annual effective income tax rate. The effective tax rate is highly dependent upon the geographic composition of forecasted worldwide earnings, tax regulations governing each region, availability of tax credits and the effectiveness of our tax planning strategies. We carefully monitor the changes in many factors and adjust our effective income tax rate on a quarterly basis. If actual results differ from these estimates, this could have a material effect on our financial condition and results of operations.
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In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. As a result of the implementation of FIN 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109, we recognize liabilities for uncertain tax positions based on the two-step process prescribed within the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based
on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Any change in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision.
See Note 7, Income Taxes to the Consolidated Financial Statements for a detailed description.
Goodwill and Impairment
The excess of the purchase consideration over the fair value of the net assets of acquired businesses is considered to be goodwill. On June 29, 2001, the FASB pronounced under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142) that purchased goodwill should not be amortized, but rather, should be periodically reviewed for impairment. We review for impairment annually, or sooner if events or changes in circumstances indicate that the carrying amount could exceed fair value. Such impairment could be caused by internal factors as well as external factors beyond our control. The FASB has further determined that at the time goodwill is considered impaired, an amount equal to the impairment loss should be charged as an operating expense in the statement of operations. The timing of such an impairment (if any) of goodwill
acquired in past and future transactions is uncertain and difficult to predict. Our results of operations in periods following any such impairment could be materially adversely affected.
We have remaining net goodwill and net acquired intangible assets of approximately $3.58 million at June 30, 2009 and 2008. This goodwill resulted from the acquisition of substantially all of the assets of ultraHue, Inc. in 1999. We test goodwill for impairment at the reporting unit level. We have determined that we have only one reporting unit. Based on the impairment review performed during the first quarter of fiscal 2010, there was no impairment of goodwill in fiscal 2009.
Due to uncertain market conditions and potential changes in our strategy and product portfolio, it is possible that the forecasts we use to support our goodwill and other intangible assets could change in the future. Significant judgments are required to estimate the fair value of goodwill and intangible assets, including estimating future cash flows, determining appropriate discount rates, estimating the applicable tax rates, foreign exchange rates and interest rates, projecting the future industry trends and market conditions, and making other assumptions. Changes in these estimates and assumptions, including changes in our reporting structure, could materially affect our determinations of fair value.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the Financial Accounting Standards Board (FASB), issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162 . SFAS No. 168 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This SFAS is effective for the Companys interim reporting period ending on September 30, 2009. This SFAS is not expected to have a material impact on the Companys consolidated financial position, results of operations and cash flows.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS No. 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This SFAS requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The disclosure requirement under this SFAS is effective for the Companys annual reporting for the fiscal year ended on June 30, 2009.
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In April 2009, FASB issued FSP SFAS No. 157-4,
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly
. FSP SFAS No. 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157,
Fair Value Measurements
. The FSP relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what SFAS No. 157 states is the objective of fair value measurementto reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions.
Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. The FSP is effective for the Companys annual reporting for the fiscal year ended on June 30, 2009. The implementation of FSP SFAS No. 157-4 did not materially impact the Companys financial position, results of operations or cash flows.
In April 2009, FASB issued FSP SFAS No. 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial Instruments
. FSP SFAS No. 107-1 and APB 28-1 enhances consistency in financial reporting by increasing the frequency of fair value disclosures. The FSP relates to fair value disclosures for any financial instruments that are not currently reflected a companys balance sheet at fair value. Prior to the effective date of this FSP, fair values for these assets and liabilities have only been disclosed once a year. The FSP will now require these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. The disclosure requirement under this FSP is effective for the Companys interim reporting period
ending on September 30, 2009.
In October 2008, the FASB issued FASB Staff Position (FSP) SFAS No. 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active.
FSP SFAS No. 157-3 clarifies the application of SFAS No. 157, which the Company adopted with respect to financial assets and liabilities as of July 1, 2008. The Company will adopt SFAS No. 157 for its non-financial assets and liabilities beginning July 1, 2009. The Company has considered the guidance provided by FSP SFAS No. 157-3 in its determination of estimated fair values, and the impact was not material.
In June 2008, the FASB ratified EITF Issue No. 07-5, "
Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock
" ("EITF 07-5''). Equity-linked instruments (or embedded features) that otherwise meet the definition of a derivative as outlined in SFAS No. 133, "
Accounting for Derivative Instruments and Hedging Activities,
are not accounted for as derivatives if certain criteria are met, one of which is that the instrument (or embedded feature) must be indexed to the entity's stock. EITF 07-5 provides guidance on determining if equity-linked instruments (or embedded features) such as warrants to purchase our stock are considered indexed to our stock. EITF 07-5 is effective for the Company in its fiscal year beginning July 1, 2009 and will be applied to outstanding instruments as
of that date. Upon adoption, a cumulative effect adjustment will be recorded, if necessary, based on amounts that would have been recognized if this guidance had been applied from the issuance date of the affected instruments. Initial adoption of EITF 07-5 is not expected to materially impact the Companys financial position or results of operations. However, future movements of our stock price alone could materially affect both our results of operations and financial position in the future. Substantial movements in our stock price could result in material volatility in our results of operations and financial position as under this pronouncement we could be required to report obligations and expense in our financial statements that will never be settled in cash.
In May 2008, the FASB issued FSP APB 14-1, "
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).
" FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, "
Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants.
" Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for the Company in its fiscal year beginning July 1,
2009, and must be applied on a retrospective basis. Adoption of the guidance provided by FSP APB 14-1 is not expected to materially impact the Companys financial position or results of operations.
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In April 2008, the FASB adopted FSP SFAS No. 142-3,
Determination of the Useful Life of Intangible Assets
, amending the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets
. This FSP is effective for intangible assets acquired on or after July 1, 2009. This SFAS is not expected to have a material impact on the Companys consolidated financial position, results of operations and cash flows.
In February 2008, the FASB adopted FSP SFAS No. 157-2,
Effective Date of FASB Statement No.
157,
delaying the effective date of SFAS No. 157 for one year for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is currently evaluating the impact of the implementation of the deferred portion of SFAS No. 157 on its consolidated financial position, results of operations and cash flows.
ITEM 7A.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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We are exposed to various market risks, including changes in foreign currency exchange rates and commodity price inflation. Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange, commodity price inflation and interest rates. We do not hedge our foreign currency exposures. We had no forward foreign exchange contracts outstanding as of June 30, 2009. In the future we may hedge these exposures based on our assessment of their significance.
Foreign Currency Exchange Risk
A large portion of our business is conducted in countries other than the U.S. We are primarily exposed to changes in exchange rates for the Euro, the British pound, the Japanese yen, and the Chinese yuan. At June 30, 2009, about 41% of our receivables were invoiced in foreign currencies. Beginning in our fiscal second quarter ended December 31, 2007, we were exposed to currency exchange risk from euro and British pound-denominated sales. For these transactions we expect to be a net receiver of the foreign currency and therefore benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar.
Today, a significant portion of our toner-based products are purchased in U.S. dollars from Asian vendors and contract manufacturers. Although such transactions are denominated in U.S. dollars, over time, we are adversely affected by a weaker U.S. dollar, in the form of price increases, and, conversely, benefit from a stronger U.S. dollar. Accordingly, changes in exchange rates, and in particular a weakening of the U.S. dollar, may adversely affect our consolidated operating expenses and operating margins which are expressed in U.S. dollars.
Commodity Price Inflation Risk
Over the last twelve months we have experienced increases in some raw material costs and the costs of shipping and freight to deliver those materials and finished products to our facility and, where paid for by us, shipments to customers. While we have historically offset a significant portion of this inflation in operating costs through increased productivity and improved yield, recent increases have impacted profit margins. We are pursuing efforts to improve our procurement of raw materials. We can provide no assurance that our efforts to mitigate increases in raw materials and shipping and freight costs will be successful.
Interest Rate Risk
At June 30, 2009, we had about $2,749,000 of debt outstanding under our line of credit. Interest expense under this line of credit is variable, based on its lenders prime rate. Accordingly, we are subject to interest rate risk in the form of greater interest expense in the event of rising interest rates. We estimate that a 10% increase in interest rates, based on our present level of borrowings, would result in the incurring about $12,000 pretax (about $8,000 after tax) of greater interest expense.
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ITEM 8.
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Media Sciences International, Inc.
We have audited the accompanying consolidated balance sheets of Media Sciences International, Inc. and Subsidiaries as of June 30, 2009 and 2008, and the related consolidated statements of operations, shareholders equity and comprehensive loss and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Media Sciences International, Inc. and Subsidiaries as of June 30, 2009 and 2008, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The additional supplemental information on pages 67 through 70 are presented for the purpose of additional analysis and are not a required part of the basic consolidated financial statements. The additional information is the responsibility of the Companys management. Such information has not been subjected to the auditing procedures applied in our audit of the basic consolidated financial statements and, accordingly, we express no opinion on the supplemental information.
/s/ Amper, Politziner & Mattia, LLP
September 24, 2009
New York, New York
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MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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As of June 30,
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2009
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|
2008
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CURRENT ASSETS:
|
|
|
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Cash and cash equivalents
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$ 550,602
|
|
$ 236,571
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Accounts receivable, net
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3,427,550
|
|
3,082,516
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Inventories, net
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6,392,441
|
|
9,216,439
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Taxes receivable
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20,257
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|
70,282
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Deferred tax assets
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830,447
|
|
772,288
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Prepaid expenses and other current assets
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541,153
|
|
285,241
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Total Current Assets
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11,762,450
|
|
13,663,337
|
|
|
|
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PROPERTY AND EQUIPMENT, NET
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2,096,986
|
|
2,472,570
|
|
|
|
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OTHER ASSETS:
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|
|
|
Goodwill and other intangible assets, net
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3,584,231
|
|
3,584,231
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Deferred tax assets
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279,486
|
|
260,292
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Other assets
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75,159
|
|
124,359
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Total Other Assets
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3,938,876
|
|
3,968,882
|
|
|
|
|
TOTAL ASSETS
|
$ 17,798,312
|
|
$ 20,104,789
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
Accounts payable
|
1,128,187
|
|
3,046,563
|
Accrued compensation and benefits
|
690,948
|
|
731,744
|
Other accrued expenses and current liabilities
|
1,151,325
|
|
1,829,919
|
Short-term capital lease obligation
|
69,815
|
|
|
Income taxes payable
|
|
|
12,606
|
Accrued product warranty costs
|
436,578
|
|
198,666
|
Deferred revenue
|
209,079
|
|
519,139
|
Total Current Liabilities
|
3,685,932
|
|
6,338,637
|
|
|
|
|
OTHER LIABILITIES:
|
|
|
|
Long-term debt, less current maturities
|
2,749,132
|
|
2,594,209
|
Deferred rent liability
|
121,873
|
|
166,969
|
Convertible debt, net of discount of $401,830 in 2009
|
848,170
|
|
|
Deferred revenue, less current portion
|
38,708
|
|
148,553
|
Total Other Liabilities
|
3,757,883
|
|
2,909,731
|
|
|
|
|
TOTAL LIABILITIES
|
7,443,815
|
|
9,248,368
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY:
|
|
|
|
Preferred Stock, $.001 par value
|
|
|
|
Authorized 5,000,000 shares; none issued
|
|
|
|
Common Stock, $.001 par value 25,000,000 shares authorized;
|
|
|
|
issued and outstanding, respectively, 12,413,292 and 11,771,966
shares in 2009 and 11,794,101 and 11,708,964 shares in 2008
|
11,772
|
|
11,709
|
Additional paid-in capital
|
13,000,680
|
|
11,798,443
|
Accumulated other comprehensive income
|
216
|
|
29,167
|
Accumulated deficit
|
(2,658,171)
|
|
(982,898)
|
Total Shareholders' Equity
|
10,354,497
|
|
10,856,421
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ 17,798,312
|
|
$ 20,104,789
|
See accompanying notes to consolidated financial statements
42
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
Year Ended June 30,
|
|
2009
|
|
2008
|
|
|
|
|
NET REVENUES
|
$ 21,718,141
|
|
$ 24,237,566
|
|
|
|
|
COST OF GOODS SOLD:
|
|
|
|
Cost of goods sold, excluding depreciation and amortization,
product warranty, and shipping and freight
|
10,162,977
|
|
11,159,459
|
Depreciation and amortization
|
537,471
|
|
568,837
|
Product warranty
|
1,561,785
|
|
877,442
|
Shipping and freight
|
561,018
|
|
528,228
|
Total cost of goods sold
|
12,823,251
|
|
13,133,966
|
|
|
|
|
GROSS PROFIT
|
8,894,890
|
|
11,103,600
|
|
|
|
|
OTHER COSTS AND EXPENSES:
|
|
|
|
Research and development
|
1,359,270
|
|
1,857,044
|
Selling, general and administrative, excluding depreciation
and amortization
|
9,163,416
|
|
11,914,987
|
Depreciation and amortization
|
359,040
|
|
374,427
|
Impairment charge
|
1,009,088
|
|
|
Litigation settlement
|
(1,500,000)
|
|
|
Total other costs and expenses
|
10,390,814
|
|
14,146,458
|
|
|
|
|
LOSS FROM OPERATIONS
|
(1,495,924)
|
|
(3,042,858)
|
|
|
|
|
Interest expense
|
(273,169)
|
|
(119,358)
|
Interest income
|
3,039
|
|
25,918
|
Amortization of debt discount on convertible debt
|
(84,785)
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES
|
(1,850,839)
|
|
(3,136,298)
|
Benefit for income taxes
|
(175,566)
|
|
(1,312,091)
|
|
|
|
|
NET LOSS
|
$ (1,675,273)
|
|
$ (1,824,207)
|
|
|
|
|
|
|
|
|
LOSS PER SHARE
|
|
|
|
Basic
|
$ (0.14)
|
|
$ ( 0.16)
|
Diluted
|
$ (0.14)
|
|
$ ( 0.16)
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES USED TO COMPUTE LOSS PER SHARE
|
|
|
|
Basic and diluted
|
11,727,175
|
|
11,610,128
|
See accompanying notes to consolidated financial statements
43
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE LOSS
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Additional
|
|
Retained
|
|
Other
|
|
Total
|
|
Common Stock
|
|
Paid-in
|
|
Earnings
|
|
Comprehensive
|
|
Shareholders'
|
|
Shares
|
|
Amount
|
|
Capital
|
|
(Deficit)
|
|
Income
|
|
Equity
|
BALANCES, JUNE 30, 2007
|
11,435,354
|
|
$ 11,435
|
|
$ 11,136,505
|
|
$ 873,123
|
|
$
|
|
$ 12,021,063
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
(1,824,207)
|
|
|
|
(1,824,207)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
29,167
|
|
29,167
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(1,795,040)
|
Cumulative Change in Accounting -FIN 48
|
|
|
|
|
|
|
(31,814)
|
|
|
|
(31,814)
|
Issuance of common stock for
exercise of stock options
|
251,431
|
|
252
|
|
260,681
|
|
|
|
|
|
260,933
|
Vested restricted stock units
|
22,179
|
|
22
|
|
(22)
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
477,584
|
|
|
|
|
|
477,584
|
Tax benefit of stock-based compensation
|
|
|
|
|
(76,305)
|
|
|
|
|
|
(76,305)
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES, JUNE 30, 2008
|
11,708,964
|
|
$ 11,709
|
|
$ 11,798,443
|
|
$ (982,898)
|
|
29,167
|
|
$ 10,856,421
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
(1,675,273)
|
|
|
|
(1,675,273)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
(28,951)
|
|
(28,951)
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(1,704,224)
|
Fair value of warrants and beneficial
conversion discount on convertible note
|
|
|
|
|
422,660
|
|
|
|
|
|
422,660
|
Vested restricted stock units
|
63,002
|
|
63
|
|
(63)
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
779,640
|
|
|
|
|
|
779,640
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES, JUNE 30, 2009
|
11,771,966
|
|
$ 11,772
|
|
$ 13,000,680
|
|
$ (2,658,171)
|
|
$ 216
|
|
$ 10,354,497
|
See accompanying notes to consolidated financial statements
44
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Year Ended June 30,
|
|
2009
|
|
2008
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net loss
|
$ (1,675,273)
|
|
$ (1,824,207)
|
Adjustments to reconcile net loss
|
|
|
|
to net cash provided (used) by operating activities:
|
|
|
|
Depreciation and amortization
|
955,410
|
|
992,241
|
Stock-based compensation expense
|
777,014
|
|
475,822
|
Deferred income taxes
|
(141,308)
|
|
(1,254,415)
|
Impairment charge
|
1,009,088
|
|
|
Provision for inventory obsolescence
|
211,623
|
|
133,801
|
Provision for product warranties
|
237,912
|
|
5,959
|
Recovery of allowance for returns and doubtful accounts
|
(78,839)
|
|
(69,052)
|
Amortization of debt discount on convertible debt
|
84,785
|
|
|
Changes in operating assets and liabilities :
|
|
|
|
Accounts receivable
|
(256,139)
|
|
(835,778)
|
Inventories
|
2,615,001
|
|
(3,546,952)
|
Current and long-term income taxes receivable/payable
|
37,419
|
|
297,468
|
Prepaid expenses and other assets
|
(65,811)
|
|
(89,095)
|
Accounts payable
|
(1,916,378)
|
|
1,618,851
|
Accrued compensation and benefits
|
(39,149)
|
|
(26,016)
|
Other accrued expenses and current liabilities
|
(889,779)
|
|
1,107,643
|
Deferred rent liability
|
(45,096)
|
|
(67,409)
|
Deferred revenue
|
(419,905)
|
|
(176,435)
|
Net cash provided (used) by operating activities
|
400,575
|
|
(3,257,574)
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Purchases of property and equipment
|
(948,242)
|
|
(712,588)
|
Proceeds from disposition of property and equipment
|
92,895
|
|
|
Net cash used in investing activities
|
(855,347)
|
|
(712,588)
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Increase in restricted cash
|
(140,901)
|
|
|
Bank line of credit, net of repayments
|
154,923
|
|
1,094,209
|
Bank term loan repayments
|
|
|
(471,083)
|
Bank term loan proceeds
|
|
|
1,500,000
|
Capital lease obligation repayments
|
(458,673)
|
|
|
Proceeds from issuance of subordinated convertible debt
|
1,250,000
|
|
|
Proceeds from issuance of common stock, net
|
|
|
260,933
|
Net cash provided by financing activities
|
805,349
|
|
2,384,059
|
Effect of exchange rate changes on cash and cash equivalents
|
(36,546)
|
|
14,389
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
314,031
|
|
(1,571,714)
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
236,571
|
|
1,808,285
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
$ 550,602
|
|
$ 236,571
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
Interest paid
|
$ 239,473
|
|
$ 100,956
|
Income taxes refunded
|
$ (91,764)
|
|
$ (355,144)
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
|
|
|
|
Capital lease additions
|
$ 528,488
|
|
$
|
See accompanying notes to consolidated financial statements
45
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts of Media Sciences International, Inc., a Delaware corporation, and its subsidiaries (collectively referred to as the Company or Media Sciences) and have been prepared in United States dollars, and in accordance with accounting principles generally accepted in the United States of America (GAAP). Unless otherwise indicated, references in the consolidated financial statements and these notes to 2009 and 2008 are to the Companys fiscal years ended June 30, 2009 and 2008, respectively.
Nature of Business and Principles of Consolidation
Media Sciences International, Inc. is a holding company which conducts its business through its operating subsidiaries. The Company is a manufacturer of business color printer supplies, which the Company distributes through an international network of dealers and distributors. The Company consolidates companies in which it owns or controls more than fifty percent of the voting shares. All significant intercompany balances and transactions have been eliminated in consolidation. The Company has evaluated material subsequent events through September 24, 2009, the date these financial statements were issued.
Estimates and Uncertainties
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Companys most significant estimates and assumptions made in the preparation of the financial statements relate to revenue recognition, accounts receivable reserves, inventory reserves, income taxes, income tax valuation allowances, product warranty costs and certain accrued expenses. Actual results, as determined at a later date, could differ from those estimates.
Liquidity
Management believes that cash on hand, cash available under its borrowing commitments and expected cash generated from operating activities will be sufficient to meet the Companys obligations and fund its day-to-day operations for the next 12 months. In the future, the Companys operations may require additional funds and it may seek to raise such additional funds through public or private sales of debt or equity securities, or securities convertible or exchangeable into such securities, strategic relationships, bank debt, lease financing arrangements, or other available means. No assurance can be provided that additional funding, if sought, will be available or, if available, will be on acceptable terms to meet the Companys business needs. If additional funds are raised through the issuance of
equity securities, stockholders may experience dilution, or such equity securities may have rights, preferences, or privileges senior to those of the holders of the Companys common stock. If additional funds are raised through debt financing, the debt financing may involve significant cash payment obligations and financial or operational covenants that may restrict the Companys ability to operate its business. An inability to fund its operations or fulfill outstanding obligations could have a material adverse effect on the Companys business, financial condition and results of operations.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform to the current year presentation.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and short-term debt reasonably approximate their fair value due to the relatively short maturities of these instruments. Long-term debt carrying values approximate their fair values at the balance sheet dates. The fair value estimates presented herein were based on market or other information available to management. The use of different assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts.
Cash Equivalents
All highly-liquid debt instruments with original or remaining maturities of less than three months at the date of purchase are considered to be cash equivalents.
46
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Restricted Cash
At June 30, 2009, $140,901 of bank deposits located in China were classified as restricted due to regulatory restrictions impacting the availability of the funds during legal dissolution of the legal entity. This restricted cash is reflected in other current assets in the June 30, 2009 consolidated balance sheet.
Inventories
Inventories, consisting of materials, labor, manufacturing overhead, and associated in-bound shipping and freight costs, are stated at the lower of cost or market, with cost being determined on a first-in, first-out (FIFO) basis. Abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials, if any, are recognized as current period charges. The Company reviews the adequacy of its inventory reserves on a quarterly basis. Additions to inventory reserves are recognized as current period charges to cost of goods sold. The Company writes down inventory based on forecasted demand and technological obsolescence. These factors are impacted by market and economic conditions, technology changes, new product introductions and changes in strategic
direction and require estimates that may include uncertain elements. Actual demand may differ from forecasted demand and such differences may have a material effect on recorded inventory values.
Property and Equipment
Property and equipment are reported at cost, net of accumulated depreciation and amortization. Depreciation of property and equipment is based on the straight-line method over the estimated useful lives of the assets, which are three to seven years for furniture, equipment, automobiles, tooling and molds. Leasehold improvements are amortized by the straight-line method over the shorter of the life of the related asset or the term of the underlying lease. Construction in progress is not depreciated until the assets are placed in service. Depreciation and amortization associated with the Companys manufacturing operations, including tooling and molds, are classified in the consolidated statements of operations as components of cost of goods sold. Depreciation
and amortization related to assets employed in the Companys research and development activities is classified as a component of research and development expense. All other depreciation and amortization is classified as a component of selling, general and administrative expense.
Impairment of Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets with finite lives whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An impairment loss is recognized when estimated future cash flows expected to result from the use of the asset including disposition are less than the carrying value of the asset. No impairment adjustments to long-lived assets were made during the years ended June 30, 2009 or 2008.
Goodwill and Other Intangible Assets
As required by SFAS No. 142, Goodwill and Other Intangible Assets, goodwill has an indefinite life and is not amortized but subject to impairment testing annually, or earlier if indicators of potential impairment exist, using a two-step process. The first is to identify any potential impairment by comparing the carrying value of reporting units to their fair value. If a potential impairment is identified, the second step is to compare the implied fair value of goodwill with its carrying amount to measure the impairment loss. Reporting unit fair value is estimated using the income approach, which assumes that the value of a reporting unit can be computed as the present value of the assumed future returns of an enterprise discounted at a rate
of return that reflects the riskiness of an investment. Purchased technology, patents, trademarks and other intangible assets with finite lives are presented at cost, net of accumulated amortization. Intangible assets with finite lives are amortized over their estimated useful lives and assessed for impairment under SFAS No. 144. The Company completed its annual impairment test as of June 30, 2009 and June 30, 2008 and concluded that no goodwill was impaired at the end of either reporting period.
47
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Contingencies and Litigation
The Company is subject to the possibility of losses from various contingencies. Considerable judgment is necessary to estimate the probability and amount of any loss from such contingencies. An accrual is made in the period in which it becomes probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. With respect to litigation, the Company assesses the adequacy of any loss provisions based on the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Based on experience, the Company believes that damage amounts claimed in the specific matters are not a meaningful indicator of the Companys potential liability. Litigation is inherently
unpredictable. Accordingly, it is possible that cash flows or results of operations could be materially and adversely affected in any particular period by the unfavorable resolution of a contingency or because of the diversion of managements attention and the creation of significant expenses (see Note 5 Commitments, Litigation and Contingencies).
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents and trade accounts receivable. The Company from time to time may invest its cash indirectly in a variety of money-market instruments, including, but not limited to, commercial paper, repurchase agreements, variable rate obligations, certificates of deposit, United States Treasury and agency securities. The Company also maintains cash balances with financial institutions which are insured by the Federal Deposit Insurance Corporation up to $250,000 each. At various times during the year, such balances do exceed the FDIC limit. The Company has not experienced any credit losses with respect to its cash and cash
equivalent assets.
Concentration of credit risk with respect to all trade receivables is considered to be limited due to the quantity and diversity of customers comprising the Companys customer base. The Company performs ongoing credit evaluations of its customers financial condition and does not require collateral to secure accounts receivable. When considered appropriate, the Company may utilize letters of credit or other means to mitigate credit risk. For its non U.S. trade receivables and certain U.S. trade receivables the Company maintains credit insurance. Most U.S. trade receivables are not covered under this credit insurance. The Company maintains an allowance for potential credit losses based upon expected collectability of its uninsured accounts receivable.
Vendor Concentrations
In 2009, one vendor represented 13% of the Companys cost of goods sold. No other vendor represented 10% or more of the Companys costs of goods sold in 2009. In 2008, four vendors represented 55% of the Companys cost of goods sold, with no single vendor accounting for more than 18%.
Major Customers
In 2009, four customers collectively represented 55% of the Companys net revenues and 47% of its accounts receivable at June 30, 2009. Among this group, the largest two customers represented 18% and 14%, respectively, of the Companys net revenues and 21% and 12% of accounts receivable at June 30, 2009. In 2008, two customers represented 18% and 13% of the Companys net revenues and 26% and 15%, respectively, of accounts receivable at June 30, 2008.
Revenue Recognition
Revenue is recognized at the point of shipment and transfer of title for goods sold, provided collection is reasonably assured. Net revenues include $17,000 and $60,000 of reimbursed shipping and freight expense for 2009 and 2008, respectively. Provisions for rebates, product returns and discounts to customers are recognized as reductions in determining net revenues in the same period as the related revenues are recorded. Any sales or other taxes collected from customers are not reflected in the consolidated statements of operations, but instead are reflected as current obligations in the consolidated balance sheets until disbursed to the respective taxing authority.
48
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Under the INKlusive program, Media Sciences provided a customer with a business color printer or multifunction device, on-site service and a defined, regular shipment of supplies (ink or toner), all for the cost of just the supplies. Media Sciences offered this program in conjunction with a financing company. Media Sciences does not own or otherwise finance the cost of the printer, nor does Media Sciences guarantee the credit worthiness of the customer. Under an agreement with the financing company, at the time of placement of the INKlusive printer, the Company was paid in full for the printer and the two years of supplies. Consequently, the difference in timing between receipt of contract payment from the finance company and when the supplies are shipped gives rise to a deferred revenue liability on the Companys balance sheet. The Company amortizes this deferred revenue liability and recognizes
revenue ratably over the contract term as the Company ships supplies to the customer. At June 30, 2009 and 2008, the deferred revenue liability totaled $248,000 and $668,000, respectively. The current and non-current components of the deferred revenue obligation are reflected in the consolidated balance sheets.
Based on declining INKlusive sales volume, we made the decision to discontinue the program effective April 1, 2009. Although no new INKlusive contracts were originated after April 1, 2009, remaining commitments under existing INKlusive supply obligations continue to be honored. The INKlusive program was a multi-element program. The Company recognizes revenue under this program in accordance with the provisions of Emerging Issues Task Force (EITF) 00-21. Under those provisions, revenue was recognized for the printer upon shipment to the customers, while revenue for the supplies and services associated with the program are recognized equally over the contract term in proportion to product shipments.
Product Warranty
The Company warranties its products suitability for use in the intended printer models and that its products are free of defects that could cause damage to these printers. Costs covered under the product warranty include customary charges for the repair or replacement of the printer with an equivalent new or refurbished printer, at the Companys sole discretion. The warranty does not cover damage to the product or a printer caused by accident, abuse, misuse, natural disaster, human error, unauthorized disassembly, repair, or modification. The Company believes that its product warranty is relatively liberal, providing, in most cases, broader and more complete coverage than that provided by the original equipment printer manufacturer. The Company accounts for the
estimated warranty cost as a charge to product warranty, a captioned component of cost of goods sold, when revenue is recognized. The Companys estimated warranty liability is based on historic product performance and program expense. The Company updates its warranty program estimates, based on actual experience, every quarter. The actual product performance and/or program expense profiles may differ, and in those cases the Company adjusts warranty accruals accordingly (see Note 6 Product Warranty Expenses).
Deferred Rent Liability
Rent expense related to operating leases where scheduled rent increases exist is determined by expensing the total amount of rent due over the life of the operating lease on a straight-line basis. The difference between the rent paid under the terms of the lease and the rent expensed on a straight-line basis is included in deferred rent liability on the accompanying consolidated balance sheets.
Shipping and Freight
Shipping and freight costs are included as a separate captioned component of cost of goods sold in the consolidated statements of operations and represent out-bound costs incurred to ship goods to customers. These amounts exclude in-bound shipping and freight expense associated with acquired raw materials and finished goods, which are included in cost of goods sold. Reimbursements by customers of out-bound shipping and freight expense are included in net revenues.
Research and Development
Research and product development costs, which consist of salary and related benefits costs of its technical staff, as well as product development costs including research of existing patents, conceptual formulation, design and testing of product alternatives, and construction of prototypes, are expensed as incurred. It also includes indirect costs, including facility costs based on the departments proportionate share of facility use. Research and development costs are expensed as incurred.
49
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Advertising Expense
Advertising expenses are deferred until the first use of the advertising. Deferred advertising costs at June 30, 2009 and 2008 totaled approximately $0 and $35,000, respectively. Advertising expense for 2009 and 2008 amounted to approximately $715,000 and $1,168,000, respectively.
Employee Benefit Plan
The Company maintains defined contribution plans for eligible employees, as defined. The U.S. plan allows for employee contributions to be matched by the Company. The U.K. plan is 100% Company funded. The Companys contributions for 2009 and 2008 were $40,000 and $64,000, respectively.
Income Taxes
The Company recognizes deferred tax assets, net of applicable valuation allowances, related to net operating loss carry-forwards and certain temporary differences and deferred tax liabilities related to certain temporary differences. The Company recognizes a future tax benefit to the extent that realization of such benefit is considered to be more likely than not. This determination is based primarily on projected taxable income. Otherwise, a valuation allowance is applied. To the extent that the Companys deferred tax assets require valuation allowances in the future, the recording of such valuation allowances would result in an increase to its tax provision in the period in which the Company determines that such a valuation allowance is required.
The Company evaluates the need for a deferred tax valuation allowance quarterly. Based on its evaluation for the quarter ending March 31, 2009, a valuation allowance was required as it was deemed more likely than not that certain State net operating loss carry forwards and other future deductible temporary differences included in the Companys deferred tax assets will not be realized. At June 30, 2009, the valuation allowance associated with these state tax attributes was $532,000. Although the Company incurred substantial losses before income taxes for the years ended June 30, 2009 and 2008, management believes that it is more likely than not that the Company will have sufficient taxable income in future years to realize its remaining net deferred income tax assets. However, if future events change managements assumptions and estimates regarding the Companys future earnings, a significant
deferred tax asset valuation allowance may have to be established.
This valuation allowance adjustment has no impact on the Companys cash flows or future prospects, nor does it alter the Companys ability to utilize these tax attributes, the utilization of which is primarily dependent upon future taxable income. Under United States GAAP, if and when the Companys results demonstrate a pattern of future profitability and reverse the current cumulative loss trend, this valuation allowance may be adjusted and may result in the reinstatement of all or a part of the net deferred tax assets.
Accounting for Stock-Based Compensation Plans
The Company accounts for stock-based compensation using the provisions of SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R) establishes accounting for stock-based awards exchanged for employee services. Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the employees requisite service period.
Accumulated Other Comprehensive Income (loss) and Foreign Currency Translation
Assets and liabilities of the Companys United Kingdom subsidiary have been translated at current exchange rates, and related revenues and expenses have been translated at average rates of exchange in effect during the period. The functional currencies of the Companys foreign subsidiaries are as follows: Media Sciences UK, Ltd., the British Pound, Media Sciences (Dongguan) Company Limited, the Chinese Yuan, and Media Sciences Hong Kong Co. Ltd., the Hong Kong Dollar. Cumulative translation adjustments have been classified within accumulated other comprehensive income, which is a separate component of shareholders equity. Foreign currency transaction gains and losses are
recorded as a component of selling, general and administrative expense. Other comprehensive income (loss) represents net income (loss) and currency translation adjustments.
50
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB), issued SFAS No. 168,
The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No.
162
. SFAS No. 168 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This SFAS is effective for the Companys interim reporting period ending on September 30, 2009. This SFAS is not expected to have a material impact on the Companys consolidated financial position,
results of operations and cash flows.
In May 2009, the FASB issued SFAS No. 165,
Subsequent Events
. SFAS No. 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This SFAS requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The disclosure requirement under this SFAS is effective for the Companys annual reporting for the fiscal year ended on June 30, 2009.
In April 2009, FASB issued FSP SFAS No. 157-4,
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly
. FSP SFAS No. 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157,
Fair Value Measurements
. The FSP relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what SFAS No. 157 states is the objective of fair value measurementto reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions.
Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. The FSP is effective for the Companys annual reporting for the fiscal year ended on June 30, 2009. The implementation of FSP SFAS No. 157-4 did not materially impact the Companys financial position, results of operations or cash flows.
In April 2009, FASB issued FSP SFAS No. 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial Instruments
. FSP SFAS No. 107-1 and APB 28-1 enhances consistency in financial reporting by increasing the frequency of fair value disclosures. The FSP relates to fair value disclosures for any financial instruments that are not currently reflected a companys balance sheet at fair value. Prior to the effective date of this FSP, fair values for these assets and liabilities have only been disclosed once a year. The FSP will now require these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. The disclosure requirement under this FSP is effective for the Companys interim reporting period
ending on September 30, 2009.
In October 2008, the FASB issued FASB Staff Position (FSP) SFAS No. 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active.
FSP SFAS No. 157-3 clarifies the application of SFAS No. 157, which the Company adopted with respect to financial assets and liabilities as of July 1, 2008. The Company will adopt SFAS No. 157 for its non-financial assets and liabilities beginning July 1, 2009. The Company has considered the guidance provided by FSP SFAS No. 157-3 in its determination of estimated fair values, and the impact was not material.
51
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent Accounting Pronouncements
In June 2008, the FASB ratified EITF Issue No. 07-5, "
Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock
" ("EITF 07-5''). Equity-linked instruments (or embedded features) that otherwise meet the definition of a derivative as outlined in SFAS No. 133, "
Accounting for Derivative Instruments and Hedging Activities,
are not accounted for as derivatives if certain criteria are met, one of which is that the instrument (or embedded feature) must be indexed to the entity's stock. EITF 07-5 provides guidance on determining if equity-linked instruments (or embedded features) such as warrants to purchase our stock are considered indexed to our stock. EITF 07-5 is effective for the Company in its fiscal year beginning July 1, 2009 and will be applied to outstanding instruments as
of that date. Upon adoption, a cumulative effect adjustment will be recorded, if necessary, based on amounts that would have been recognized if this guidance had been applied from the issuance date of the affected instruments. Initial adoption of EITF 07-5 is not expected to materially impact the Companys financial position or results of operations. However, future movements of our stock price alone could materially affect both our results of operations and financial position in the future. Substantial movements in our stock price could result in material volatility in our results of operations and financial position as under this pronouncement we could be required to report obligations and expense in our financial statements that will never be settled in cash.
In May 2008, the FASB issued FSP APB 14-1, "
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).
" FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, "
Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants.
" Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for the Company in its fiscal year beginning July 1,
2009, and must be applied on a retrospective basis. Adoption of the guidance provided by FSP APB 14-1 is not expected to materially impact the Companys financial position or results of operations.
In April 2008, the FASB adopted FSP SFAS No. 142-3,
Determination of the Useful Life of Intangible Assets
, amending the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets
. This FSP is effective for intangible assets acquired on or after July 1, 2009. This SFAS is not expected to have a material impact on the Companys consolidated financial position, results of operations and cash flows.
In February 2008, the FASB adopted FSP SFAS No. 157-2,
Effective Date of FASB Statement No.
157,
delaying the effective date of SFAS No. 157 for one year for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is currently evaluating the impact of the implementation of the deferred portion of SFAS No. 157 on its consolidated financial position, results of operations and cash flows.
52
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Earnings (Loss) Per Share
Basic earnings (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted earnings (loss) per common share is computed using the weighted average number of shares outstanding as adjusted for the incremental shares attributable to the assumed exercise of outstanding options and warrants to purchase common stock, and other potentially dilutive securities.
The following table sets forth the computation of the basic and diluted earnings (loss) per common share:
|
|
|
Year Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
Numerator for basic and diluted:
|
|
|
|
|
|
Net loss
|
|
$ (1,675,273)
|
|
$ (1,824,207)
|
|
|
|
|
|
|
|
Denominator :
|
|
|
|
|
|
For basic loss per common share
- weighted average shares outstanding
|
|
11,727,175
|
|
11,610,128
|
|
Effect of dilutive securities - stock options,
restricted stock units and warrants
|
|
|
|
|
|
For diluted loss per common share
- weighted average shares outstanding
adjusted for assumed exercises
|
|
11,727,175
|
|
11,610,128
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$ (0.14)
|
|
$ (0.16)
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$ (0.14)
|
|
$ (0.16)
|
|
|
|
|
|
|
The following warrants and options to purchase common stock were excluded from the computation of diluted earnings per share for the years ended June 30, 2009 and 2008 as the Company was in a net loss position and all potential common shares derived from stock options would have had an anti-dilutive effect.
|
|
Year Ended June 30,
|
|
|
2009
|
|
2008
|
|
Anti-dilutive warrants and options
|
825,774
|
|
372,677
|
53
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 FINANCIAL STATEMENT COMPONENTS:
CONSOLIDATED BALANCE SHEETS
|
|
As of June 30,
|
|
|
2009
|
|
2008
|
Accounts receivable, net
|
|
|
|
|
Accounts receivable, gross
|
|
$ 3,513,756
|
|
$ 3,247,561
|
Allowance for doubtful accounts
|
|
(50,000)
|
|
(95,000)
|
Allowance for returns
|
|
(36,206)
|
|
(70,045)
|
|
|
$ 3,427,550
|
|
$ 3,082,516
|
|
|
|
|
|
Inventories, net of reserves
|
|
|
|
|
Raw materials
|
|
$ 2,184,245
|
|
$ 3,281,742
|
Finished goods
|
|
4,549,431
|
|
6,513,609
|
Less: reserves for obsolescence
|
|
(341,235)
|
|
(578,912)
|
|
|
$ 6,392,441
|
|
$ 9,216,439
|
|
|
|
|
|
Property and Equipment, net
|
Useful Lives
|
|
|
|
Equipment
|
3 7 years
|
$ 2,801,027
|
|
$ 2,074,649
|
Furniture and fixtures
|
7 years
|
578,672
|
|
578,672
|
Automobiles
|
5 years
|
30,434
|
|
30,434
|
Leasehold improvements
|
5 10 years
|
895,909
|
|
916,252
|
Tooling and molds
|
3 years
|
2,908,778
|
|
2,780,391
|
Construction-in-progress (tooling and die)
|
|
297,230
|
|
556,640
|
|
|
7,512,050
|
|
6,937,038
|
Less: Accumulated depreciation and amortization
|
|
5,415,064
|
|
4,464,468
|
|
|
$ 2,096,986
|
|
$ 2,472,570
|
|
|
|
|
|
Goodwill and other intangible assets, net
|
|
|
|
|
Goodwill
|
|
$ 3,965,977
|
|
$ 3,965,977
|
Other
|
1-5 years
|
46,000
|
|
46,000
|
|
|
4,011,977
|
|
4,011,977
|
Less: Accumulated amortization
|
|
427,746
|
|
427,746
|
|
|
$ 3,584,231
|
|
$ 3,584,231
|
NOTE 3 DEBT:
The Companys indebtedness under secured commercial loan agreements consisted of the following:
|
|
Year Ended June 30,
|
|
|
2009
|
|
2008
|
|
Short-term capital lease obligation
|
$ 69,815
|
|
|
|
|
|
|
|
|
Bank term notes
|
$ 1,500,000
|
|
$ 1,500,000
|
|
Bank line of credit
|
1,249,132
|
|
1,094,209
|
|
Less: current maturities
|
|
|
|
|
Long-term debt
|
$ 2,749,132
|
|
$ 2,594,209
|
|
Total bank debt
|
$ 2,818,947
|
|
$ 2,594,209
|
54
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 DEBT (CONTINUED):
Prior to February 12, 2008, the Company had a revolving line of credit facility which provided for maximum borrowings of $3,000,000. This line was replaced on February 12, 2008, when the Company entered into an agreement with Sovereign Bank for a three year revolving line of credit. As amended, the advance limit under the line of credit is the lesser of: (a) $4,900,000; or (b) up to 80% of eligible domestic accounts receivable and up to the lesser of $750,000 or 75% of eligible foreign receivables plus up to the lesser of: (i) $2,500,000; or (ii) 50% of eligible inventory; or (iii) 60% of the maximum amount available to be advanced under the line. The line of credit is collateralized by a first priority security interest in substantially all of the Companys U.S. based assets and its foreign receivables. As amended, under a prime rate option, the interest rate can vary from the banks prime rate
to its prime rate plus 1%, and, under a LIBOR rate option, the interest rate can vary from LIBOR plus 225 basis points to LIBOR plus 275 basis points. Both the term note and the line of credit bear interest at the banks Prime Rate plus 1% (4.25% at June 30, 2009) and require payments of interest only through the facilities three year term. Subsequent to June 30, 2009, Sovereign Bank committed to amend certain covenants and terms of the loan effective for our first fiscal quarter ended September 30, 2009.
The revolving loan may be converted into one or more term notes upon mutual agreement of the parties. On February 12, 2008, the Company entered into a non-amortizing term note with the bank in the amount of $1,500,000, due February 12, 2011. At June 30, 2009, this note had a principal balance of $1,500,000. As of June 30, 2009, the Company had an outstanding balance of $1,249,132 under the revolving line and approximately $1,005,000 of undrawn availability under the credit line. At June 30, 2008, the Company had outstanding with the bank the $1,500,000 term note and had an outstanding balance of $1,094,209 drawn under its revolving credit line, with about $819,000 of undrawn availability.
The Companys current and former credit facilities are/were subject to financial covenants. Current financial covenants include monitoring a ratio of debt to tangible net worth and a fixed charge coverage ratio, as defined in the loan agreements. At June 30, 2009, the Company was in compliance with all of its financial covenants. At June 30, 2008, the Company was not in compliance with the financial covenants, which were waived by the bank via an amendment dated September 22, 2008. As a result of a cross default and collateralization provision associated with its former debt facility, the Company agreed to refinance certain operating leases held by an affiliate of the former bank. Under terms of a separate waiver and amendment with this leasing affiliate, the Company received an extension of time to refinance or payoff the lease obligation until September 30, 2009. Under the terms of this amendment,
the Company agreed to make six lease payments of $39,668 per month, plus accrued interest at prime plus 2.5% per annum, between March 2009 and September 2009. At June 30, 2009, the remaining obligation under the agreement was $69,815. This obligation was fully satisfied in August 2009, when the Company obtained title to the leased equipment.
Convertible Debt
On September 24, 2008, the Company completed a $1,250,000 convertible debt financing with MicroCapital Fund, LP and MicroCapital Fund, Ltd. (MicroCapital). The Company issued three year notes, bearing interest at 10% payable quarterly and convertible into shares of the Companys common stock at $1.65 per share. The Company also issued (a) five year warrants to purchase 378,787 shares of the Companys common stock at $1.65 per share, and (b) three year warrants allowing MicroCapital to repeat its investment up to $1,250,000 on substantially the same terms and conditions.
55
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 DEBT (CONTINUED):
The Company may call the three year warrants, subject to MicroCapitals preemptive right to exercise, at a redemption price of $0.001 per share. The three year warrants may only be called after the earlier of 90 days after the registration statement is effective or June 24, 2009 if the closing sale price of the Companys common stock equals or exceeds $1.83 per share for at least 24 trading days within a 30 trading day period; this threshold price increases by $0.02 per share starting with the end of the following calendar month. MicroCapital has agreed to limit the number of shares that may be acquired upon the exercise of warrants by them to 4.999% of the Companys outstanding shares of common stock, which may be waived by MicroCapital upon 60 days notice. MicroCapital has also agreed to limit the number of shares that may be acquired upon the exercise the warrants to 9.999% of the
Companys outstanding shares of common stock; this limit may not be waived. The Company agreed that within sixty days from the date of issuance of the note and warrants that it would file a registration statement with the SEC covering the resale of the shares of the Company's stock issuable upon conversion of the note and the exercise of the warrants. On November 7, 2008, the Company fulfilled this commitment with the filing of an S-3 registration statement covering the shares potentially issuable as a result of the transaction.
The transaction was recorded in accordance with EITF 00-27 Application of Issue #98-5 to Certain Convertible Instruments and EITF 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjusted Conversion Ratios", on a relative fair value basis. The $486,615 fair value of the warrants and the debts beneficial conversion feature was recorded to equity and as a debt discount to the value of the convertible note. This discount is being amortized using the effective interest method over the three year term of the convertible note. Amortization of debt discount on this convertible note payable amounted to $84,785 for the year ended June 30, 2009. The remaining unamortized discount was $401,830 at June 30, 2009. In connection with this transaction, the Company also recognized a $63,955 increase in its deferred tax liabilities reflecting the
non-deductible nature of future debt discount amortization that will result from the value of the beneficial conversion feature. The elements of the debt discount and corresponding value recorded to additional paid-in capital were as follow:
Transaction Element
|
Value
|
Warrants issued
|
$ 327,524
|
Beneficial conversion feature of convertible debt issued
|
159,091
|
Debt discount
|
$ 486,615
|
Less: deferred tax liability resulting from beneficial conversion feature
|
(63,955)
|
Value recorded to additional paid-in capital
|
$ 422,660
|
Scheduled payments due on long-term debt for the next five years and thereafter are as follows as of June 30, 2009:
|
|
Debt
|
Year Ending June 30,
|
|
Maturities
|
2010
|
|
$
|
2011
|
|
2,749,000
|
2012
|
|
1,250,000
|
2013
|
|
|
2014
|
|
|
Aggregate future maturities of long-term debt
|
|
$ 3,999,000
|
56
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 STOCK-BASED COMPENSATION:
The effect of recording stock-based compensation for the years ended June 30, 2009 and June 30, 2008 was as follows:
|
|
|
Year ended
June 30, 2009
|
|
Year ended
June 30, 2008
|
|
Stock-based compensation expense by type of award:
|
|
|
|
|
|
Employee stock options
|
|
$ 323,832
|
|
$ 159,803
|
|
Non-employee director stock options
|
|
79,293
|
|
143,247
|
|
Employee restricted stock units
|
|
300,415
|
|
172,397
|
|
Non-employee director restricted stock units
|
|
132,850
|
|
|
|
Forfeiture rate adjustment
|
|
(56,751)
|
|
|
|
Amounts capitalized in inventory
|
|
(2,625)
|
|
375
|
|
Total stock-based compensation expense
|
|
$ 777,014
|
|
$ 475,822
|
|
Tax effect of stock-based compensation recognized
|
|
(275,376)
|
|
(172,254)
|
|
Net stock-based compensation expense recognized in 2009 and 2008
|
|
$ 501,638
|
|
$ 303,568
|
|
|
|
|
|
|
|
Effect on loss per share:
|
|
|
|
|
|
Basic and diluted
|
|
$ 0.04
|
|
$ 0.03
|
As of June 30, 2009, the unrecognized stock-based compensation balance was $687,818 after estimated forfeitures and will be recognized over an estimated weighted average amortization period of about 1.4 years.
During the year ended June 30, 2009, the Company granted 435,047 stock options with an estimated total grant-date fair value of $271,182 after estimated forfeitures. During the same period, the Company granted 613,698 shares of restricted stock with a grant date fair value of $549,997 after estimated forfeitures.
During the year ended June 30, 2008, the Company granted 236,260 stock options with an estimated total grant-date fair value of $479,866 after estimated forfeitures. During the same period, the Company granted 3,157 shares of restricted stock with a grant date fair value of $13,890 after estimated forfeitures.
Valuation Assumptions.
The Company estimates the fair value of stock options using a Black-Scholes option-pricing model, consistent with the provisions of SFAS No. 123(R) and SEC Staff Accounting Bulletin (SAB) No. 107. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and the straight-line attribution approach with the following weighted-average assumptions without regard to estimated forfeitures:
|
|
Year Ended June 30,
|
|
|
2009
|
|
2008
|
|
Risk-free interest rate
|
2.8%
|
|
3.8%
|
|
Dividend yield
|
0.0%
|
|
0.0%
|
|
Expected stock price volatility
|
58%
|
|
59%
|
|
Average expected life of options
|
3.2 years
|
|
4.4 years
|
57
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 STOCK-BASED COMPENSATION (CONTINUED):
SFAS No. 123(R) requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the options expected life and the price volatility of the underlying stock. The expected stock price volatility assumption was determined using a blend of the Companys historic volatility and that of a peer group of technology-based manufacturing companies with similar attributes, including market capitalization, annual revenues, and debt leverage. The Company places limited reliance on the historic volatility of its common stock given the substantial reorganization of the Company in 2005.
In 2005, the Company discontinued the electronic pre-press sales and service operations of its Cadapult Graphic Systems subsidiary. Historically, these discontinued operations represented a significant portion of the Companys operations. These discontinued operations were also materially different, in many respects, from the Companys present technology-based manufacturing business. For these reasons, the Company determined that historic peer group volatility was more reflective of market conditions and a better indicator of expected future volatility than its own historic volatility for years prior to 2005.
The Company is using the simplified method suggested by the SEC in SAB No. 107 for determining the expected life of the options. Under this method, the Company calculates the expected term of an option grant by averaging its vesting and contractual term. Based on studies of the Companys historic actual option terms, compared with expected terms predicted by the simplified method, the Company has concluded that the simplified method yields materially accurate expected term estimates. The Company estimates its applicable risk-free rate based upon the yield of U.S. Treasury securities having maturities similar to the estimated term of an option grant, adjusted to reflect its continuously compounded zero-coupon equivalent.
Equity Incentive Program.
The Companys equity incentive program is a broad-based, long-term retention program that is intended to attract and retain qualified management and technical employees, and align stockholder and employee interests. The equity incentive program presently consists of three plans (the Plans): the Company's 1998 Incentive Stock Plan (the 1998 Plan); the Companys 2006 Incentive Stock Plan (the 2006 Plan); and the Companys 2009 Stock Incentive Plan (the 2009 Plan). Under these Plans, non-employee directors, officers, key employees, consultants and all other employees may be granted options to purchase shares of our stock, restricted stock units and other types of equity awards. The stock options (which may be incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended) entitle the holder to purchase shares of the Companys common stock for up to ten years from the date of grant (five years for persons owning more than 10% of the total combined voting power of the Company) at a price not less than the fair market value (110% of fair market value for persons owning more than 10% of the combined voting power of the Company) of the common stock on the date of grant. In general, any employee, director, officer or exclusive agent of, or advisor or consultant to, the Company or a related entity, is eligible to participate in the Plan. Vesting periods, if any, are determined by the Board of Directors. The outstanding option grants vest over periods not exceeding five years. The stock options are nontransferable, except upon death.
Under the Plans, stock options generally have a vesting period of three to five years, are exercisable for a period not to exceed ten years from the date of issuance and are not granted at prices less than the fair market value of the Companys common stock at the grant date. Restricted stock units may be granted with varying service-based vesting requirements.
58
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 STOCK-BASED COMPENSATION (CONTINUED):
On June 17, 2008 the Companys 1998 Plan ended. Under this Plan 840,809 common shares of the 1,000,000 common shares authorized were issuable as a result of awards of options or other equity instruments. Under the Companys 2006 Plan, 1,000,000 common shares are authorized for issuance. As of June 30, 2009, 971,448 common shares were issuable as a result of awards of options or other equity instruments under the 2006 Plan, leaving 28,552 available under the Plan for future issuance. Under the Companys 2009 Plan, 1,250,000 common shares are authorized for issuance. As of June 30, 2009, 200,000 common shares were issued as a result of awards of options or other equity instruments under the 2009 Plan, leaving 1,050,000 available under the Plan for future issuance.
Non-Plan Options.
During the year ended June 30, 2003, the Company granted each of five employees stock options with a five-year life, which vested on April 6, 2004, to purchase up to 25,000 shares at an exercise price of $0.50 per share. In 2005, two of these employees exercised 25,000 options each for net proceeds to the Company of $25,000 and one employee executed a cashless exercise of 25,000 options, for which the Company received 6,250 shares of common stock with a fair value of $12,500, and no cash proceeds. During 2006, one employee exercised 25,000 options for net proceeds to the Company of $12,500. During 2008, one employee exercised the remaining 25,000 options for net proceeds to the Company of $12,500.
During the year ended June 30, 2003, the Company granted its Chief Executive Officer stock options with a five-year life, expiring in June 2008, to purchase up to 500,000 shares at $1.00 per share. Options to purchase 250,000 shares vested immediately and options to purchase the remaining 250,000 shares vested ratably over the period from July 1, 2003 through June 30, 2005. Through the year ended June 30, 2007, options covering 150,000 shares were exercised for net proceeds to the Company of $150,000. During the year ended June 30, 2008, options covering 110,000 shares were exercised for net proceeds to the Company of $110,000. Options covering the remaining 240,000 shares expired unexercised in June 2008.
During the year ended June 30, 2004, the Company granted each of two employees stock options with a ten-year life to purchase up to 100,000 shares, which were exercisable at $1.06 per share. Options to purchase 50,000 shares each vested immediately and options to purchase the remaining 50,000 shares each vested ratably over the period from May 24, 2004 through May 23, 2006. During 2005, one employee executed a cashless exercise of 50,000 options for which the Company received 25,090 shares of common stock with a fair value of $53,000, and the Company received no cash proceeds. 50,000 options for that same employee were cancelled upon the termination of his employment. During 2008, one employee exercised 100,000 shares for net proceeds to the Company of $106,000.
During the year ended June 30, 2005, the Company granted to an employee stock options with a ten-year life, expiring in June 2015, to purchase up to 100,000 shares at $1.60 per share. The options vest ratably, on an annual basis, over the period from June 6, 2005 through June 6, 2010. On September 29, 2006, options covering 15,000 shares were exercised for net proceeds to the Company of $24,000.
During the year ended June 30, 2006, the Company granted to an employee stock options with a ten-year life, expiring in August 2015, to purchase up to 100,000 shares at $1.65 per share. Options to purchase 50,000 shares were originally scheduled to vest ratably, on an annual basis, over the period from August 9, 2005 through August 8, 2010. Options to purchase the remaining 50,000 shares were originally scheduled to vest fully upon relocation. The option grant was modified by an agreement dated March 31, 2006 between the Company and the employee. As modified, stock options to purchase 50,000 shares of common stock became fully vested as of April 2006, and the other stock options were forfeited. During the year ended June 30, 2007, options covering 50,000 shares were exercised for net proceeds to the Company of $82,500.
59
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 STOCK-BASED COMPENSATION (CONTINUED):
The following table summarizes the combined stock option plan and non-plan activity for the indicated periods:
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
Balance outstanding at June 30, 2007
|
1,188,694
|
|
$2.46
|
Year ended June 30, 2008:
|
|
|
|
Options granted
|
236,260
|
|
4.82
|
Options exercised
|
(251,431)
|
|
1.04
|
Options cancelled/expired/forfeited
|
(273,629)
|
|
1.21
|
Balance outstanding at June 30, 2008
|
899,894
|
|
$3.86
|
Year ended June 30, 2009:
|
|
|
|
Options granted
|
435,047
|
|
2.03
|
Options exercised
|
|
|
|
Options cancelled/expired/forfeited
|
(249,725)
|
|
2.64
|
Balance outstanding at June 30, 2009
|
1,085,216
|
|
$3.41
|
The options outstanding and exercisable at June 30, 2009 were in the following exercise price ranges:
Options Outstanding
|
Options Exercisable
|
Range of
Exercise
Prices
|
Number
Outstanding
|
Weighted
Average
Remaining
Contractual
Life-Years
|
Weighted
Average
Exercise
Price
|
Number
Vested and
Exercisable
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
$0.43 to $0.85
|
26,600
|
3.8
|
.59
|
26,600
|
.59
|
$1.00 to $2.00
|
495,288
|
4.1
|
1.99
|
78,102
|
1.76
|
$2.01 to $6.33
|
563,328
|
5.6
|
4.78
|
366,408
|
4.59
|
|
1,085,216
|
4.9
|
$3.41
|
471,110
|
$3.89
|
At June 30, 2009, none of the Companys exercisable options were in-the-money. Accordingly, all outstanding and exercisable options at that date had no aggregate intrinsic value.
The weighted average grant date fair value of options, as determined under SFAS No. 123(R), granted during the year ended June 30, 2009 and 2008 was $0.84 and $2.43 per share, respectively.
The total intrinsic value of options exercised during the years ended June 30, 2009 and 2008 was $0 and $959,824, respectively. The total cash received from employees as a result of employee stock option exercises during the years ended June 30, 2009 and 2008 was $0 and $260,933, respectively. In connection with these exercises, the tax benefits realized by the Company for the years ended June 30, 2009 and 2008 were $0 and $383,354, respectively.
The Company settles employee stock option exercises with newly issued common shares.
60
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 STOCK-BASED COMPENSATION (CONTINUED):
Restricted Stock Units.
During the year ended June 30, 2009, the Companys Board of Directors approved the grant of 480,363 shares of restricted stock units to selected employees and senior management and 133,335 shares to non-employee directors. These restricted stock units generally vest over one to two years for the employees and senior management. The restricted stock units for non-employee directors vest over one year from the grant date. The value of the restricted stock units is based on the closing market price of the Companys common stock on the date of the award. The total grant date fair value of the restricted stock units granted during the year ended June 30, 2009 was $549,997 after estimated forfeitures. Stock based compensation cost for restricted stock units for the year ended June 30, 2009 was $433,265.
During the year ended June 30, 2008, the Companys Board of Directors approved the grant of 3,157 shares of restricted stock units to an employee. These restricted stock units vest in equal installments on the first, second and third anniversaries of the grant date. The value of the restricted stock units are based on the closing market price of the Companys common stock on the date of award. The total grant date fair value of the restricted stock units granted during the year ended June 30, 2008 was $13,890 after estimated forfeitures. Stock based compensation cost for restricted stock units for the year ended June 30, 2008 was $172,397.
As of June 30, 2009, there was $289,860 of total unrecognized deferred stock-based compensation after estimated forfeitures related to non-vested restricted stock units granted under the Plans. That cost is expected to be recognized over an estimated weighted average period of 1.0 year.
For substantially all restricted stock grants, at the date of grant, the recipient has all rights of a stockholder, subject to certain restrictions on transferability and a risk of forfeiture. These restricted stock grants generally vest in equal installments over one to five years from the date of grant. These restricted stock units are included in the calculation of diluted earnings per share utilizing the treasury stock method. All restricted stock grants are approved by the Compensation Committee of the Board of Directors.
The following table summarizes the Companys restricted stock unit activity for the indicated periods:
|
Number of
Shares
|
|
Grant Date
Fair Value
|
|
Weighted
Average Grant
Date Fair Value
Per Share
|
Balance unvested at June 30, 2007
|
104,159
|
|
$ 494,403
|
|
$ 4.75
|
Year ended June 30, 2008:
|
|
|
|
|
|
Restricted stock units granted
|
3,157
|
|
17,837
|
|
5.65
|
Restricted stock units vested
|
(22,179)
|
|
(88,702)
|
|
4.00
|
Restricted stock units cancelled/forfeited
|
|
|
|
|
|
Balance unvested at June 30, 2008
|
85,137
|
|
$ 423,538
|
|
$ 4.97
|
|
|
|
|
|
|
Year ended June 30, 2009:
|
|
|
|
|
|
Restricted stock units granted
|
613,698
|
|
644,086
|
|
1.05
|
Restricted stock units vested
|
(63,002)
|
|
(274,030)
|
|
4.35
|
Restricted stock units cancelled/forfeited
|
(10,042)
|
|
(20,084)
|
|
2.00
|
Balance unvested at June 30, 2009
|
625,791
|
|
$ 773,510
|
|
$ 1.24
|
61
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 COMMITMENTS, LITIGATION AND CONTINGENCIES:
Litigation
On June 23, 2006, Xerox Corporation filed a patent infringement lawsuit in the United States District Court, for the Southern District of New York, Case No. 06CV4872, against Media Sciences International, Inc. and Media Sciences, Inc., alleging that the Companys solid inks designed for use in the Xerox Phaser 8500 and 8550 printers infringe four Xerox-held patents related to the shape of the ink sticks in combination with the Xerox ink stick feed assembly. The suit seeks unspecified damages and fees. In the Companys answer and counterclaims in this action, it denied infringement and it seeks a finding of invalidity of the Xerox patents in question. The Company also submitted counterclaims against Xerox for breach of contract and violation of U.S. antitrust laws, seeking treble damages and recovery of legal fees. On
September 14, 2007, the court denied Xeroxs motion to dismiss the antitrust counterclaims brought by the Company. Pre-trial discovery on the infringement action was completed in September 2007. Pre-trial discovery on the Companys antitrust action was completed in July 2008. In March 2009 the court dismissed, without prejudice, the Companys antitrust claims relating to Xeroxs loyalty rebate programs. In the ruling, the court relied on a 2001 Settlement Agreement between the parties resulting from a different matter, and found that before such claims are pursued, the Company must submit to arbitration. Certain other antitrust claims remain before the court. Both actions, which the court has ruled will be tried together, may be heard in the spring or summer of 2010. The loss of all or a part of the patent infringement claims could have a material adverse affect on the Companys results of operations and financial position. The Company believes that
its inks do not infringe any valid U.S. patents and therefore it has meritorious grounds for success in this case. The Company intends to vigorously defend these allegations of infringement. There can be no assurance, however, that the Company will be successful in its defense of this action. Proceeds of this suit, if any, will be recorded in the period when received.
In May 2005, the Company filed suit in New Jersey state court against its former insurance broker for insurance malpractice. This litigation was settled in August 2008. Under the settlement, Media Sciences received proceeds of $1,500,000. Proceeds of this settlement are recognized in the Companys results of operations. The settlement is recorded as a reduction to operating expense during the quarter ended September 30, 2008. The settlement received represents a recovery of legal fees incurred to pursue the action and a partial recovery of product warranty expense the Company incurred during its fiscal 2002 year.
Other than the above, as at June 30, 2009, the Company was not a party to any material pending legal proceeding, other than ordinary routine litigation incidental to its business.
Leases
We lease our premises under operating lease agreements which expire through 2011 and equipment under operating leases that expire through 2011.
On July 27, 2005, the Company entered into an equipment lease line of credit with an affiliate of the former bank. The former bank affiliate holds title to equipment leased under the facility. In December 2005, the Company entered into an operating lease under this line that required monthly payments of $3,453, for 72 months. This equipment was subsequently purchased for $163,668 on May 9, 2008. In September 2006, the Company entered into an additional operating lease under this facility that required monthly payments of $10,621, for 72 months. As a result of a cross default and collateralization provision associated with the former debt facility, the Company agreed to refinance this remaining operating lease held by the leasing affiliate of the former bank. Under terms of a separate waiver and amendment with this leasing affiliate, the Company received an extension of time to refinance or payoff the
lease obligation until September 30, 2009. This obligation was fully satisfied in August 2009. See Note 3 for amended terms of this lease agreement.
In January 2008, the Company entered in an operating lease agreement, covering various equipment used for research and development activities. This lease requires monthly payments of $6,126 for 48 months.
62
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 COMMITMENTS, LITIGATION AND CONTINGENCIES (CONTINUED):
Future minimum lease payments are as follows:
|
|
Operating
|
Sublease
|
Net Lease
|
Year Ending June 30,
|
|
Leases
|
Rents
|
Obligation
|
2010
|
|
414,799
|
232,300
|
182,499
|
2011
|
|
242,587
|
212,942
|
29,645
|
2012
|
|
|
|
|
2013
|
|
|
|
|
Thereafter
|
|
|
|
|
Total future minimum lease payments
|
|
$657,386
|
445,242
|
212,144
|
Rent expense was $740,800 net of $246,400 of sublease rents for the year ended June 30, 2009 and $569,300 net of $241,200 of sublease rents for the year ended June 30, 2008.
NOTE 6 PRODUCT WARRANTY EXPENSES:
The Company provides a warranty for all of its consumable supply products and for printers under its INKlusive program. The Companys warranty stipulates that it will pay reasonable and customary charges for the repair of printers requiring service as a result of using the Companys products. The Company estimates warranty costs that may be incurred and records a liability in the amount of such costs at the time product revenue is recognized. Factors that may affect the warranty obligation reserve include the volume of products shipped to customers, historical and anticipated rates of warranty claims and expected cost per claim. The Company periodically assesses the adequacy of its recorded warranty reserve. Product warranty expense is classified as a component of costs of goods sold.
Changes in accrued product warranty reserve for the years ended June 30, 2009 and 2008 are as follows:
|
|
Year Ended June 30,
|
|
|
2009
|
|
2008
|
|
Warranty reserve at the beginning of the year
|
$
198,666
|
|
$
192,707
|
|
|
|
|
|
|
Warranties accrued during the period
|
1,561,785
|
|
877,442
|
|
Warranties settled during the period
|
(1,323,873)
|
|
(871,483)
|
|
Net change in warranty reserve
|
237,912
|
|
5,959
|
|
|
|
|
|
|
Warranty reserve at the end of the year
|
$
436,578
|
|
$
198,666
|
63
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 INCOME TAXES:
The components of provision (benefit) for income taxes are summarized as follows:
|
|
Year Ended June 30,
|
|
|
2009
|
|
2008
|
|
Current:
|
|
|
|
|
Federal
|
$
|
|
$ (96,813)
|
|
State
|
13,654
|
|
26,531
|
|
Foreign
|
15,350
|
|
12,606
|
|
Total Current
|
$ 29,004
|
|
$ (57,676)
|
|
Deferred:
|
|
|
|
|
Federal
|
$ (736,738)
|
|
$ (920,117)
|
|
State
|
532,168
|
|
(334,298)
|
|
Foreign
|
|
|
|
|
Total Deferred
|
(204,570)
|
|
(1,254,415)
|
|
Income tax benefit
|
$ (175,566)
|
|
$ (1,312,091)
|
A reconciliation of the total income tax benefit provided at the federal statutory rate (34%) to the income tax benefit recorded is as follows:
|
|
Year Ended June 30,
|
|
|
2009
|
|
2008
|
|
Expected income tax benefit
|
$ (629,312)
|
|
$ (1,066,341)
|
|
State income taxes (net of federal benefit)
|
9,012
|
|
(216,153)
|
|
State valuation allowance
|
532,168
|
|
13,027
|
|
Other (including permanent differences)
|
(87,434)
|
|
(42,624)
|
|
|
$ (175,566)
|
|
$ (1,312,091)
|
Significant components of the Companys deferred tax assets and liabilities are as follows:
|
|
As of June 30,
|
|
|
2009
|
|
2008
|
|
Deferred tax assets:
|
|
|
|
|
Accounts receivable
|
$ 34,431
|
|
$ 66,311
|
|
Inventories
|
248,459
|
|
345,367
|
|
Deferred compensation
|
573,258
|
|
270,936
|
|
Deferred rent liability
|
36,887
|
|
55,225
|
|
Accruals and reserves
|
183,859
|
|
94,347
|
|
Net operating loss carry-forwards
|
1,638,555
|
|
1,156,783
|
|
Federal and state credits
|
845,980
|
|
671,011
|
|
Other
|
29,266
|
|
76,945
|
|
Total deferred tax assets
|
$ 3,590,695
|
|
$ 2,736,925
|
|
|
|
|
|
|
Valuation allowance
|
(639,470)
|
|
(107,302)
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Intangible assets
|
$ (721,521)
|
|
$ (587,527)
|
|
Fixed assets
|
(178,452)
|
|
(179,514)
|
|
Total deferred tax liabilities
|
$ (899,973)
|
|
$ (767,041)
|
|
|
|
|
|
|
Net deferred tax assets
|
$ 2,051,252
|
|
$ 1,862,582
|
64
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 INCOME TAXES (CONTINUED):
At June 30, 2009, the Company has available Federal net operating loss carry-forwards of approximately $3,600,000 which will begin to expire as of June 30, 2028 and state net operating loss carry-forwards of approximately $6,500,000 which will begin to expire in the years ending June 30, 2010 through June 30, 2015. In accordance with SFAS No. 123(R), excess tax benefits of approximately $320,000 associated with approximately $800,000 of the Federal net operating loss carry-forwards will be credited to additional paid-in capital as such losses were the result of excess tax deductions related to share based compensation.
The Company believes that it is more likely than not that the net remaining deferred tax assets of approximately $1,110,000 at June 30, 2009 will be realized, based primarily upon forecasted taxable income. Although the Company has experienced operating losses in the past two years, it anticipates operating profits and taxable income in fiscal 2010 and thereafter. The minimum annual taxable income required to realize the deferred tax assets over the 20-year net operating loss carry-forward period is approximately $165,000.
As of June 30, 2009, the Company had approximately $942,000 of unrecognized tax benefits associated with its uncertain tax positions, of which approximately $859,000 could ultimately reduce the Companys effective tax rate. Also, as of June 30, 2008, the liability for uncertain tax positions is netted against long-term deferred tax assets and, as a result, presented on a "net" rather than "gross" basis. Any potential adjustment to the underlying uncertain tax positions by the relevant tax authorities would only reduce net operating loss and/or tax credit carry-forwards without any impact to cash tax obligations.
During the twelve months beginning July 1, 2009, the Company does not expect any material change in the amount of its uncertain tax positions. The Company is not currently under audit in any of the jurisdictions in which it conducts operations. Generally, all tax years prior to and including June 30, 2005 are closed under statute.
It is the Companys continuing policy to account for interest and penalties associated with all of its income tax obligations as a component of income tax expense. No interest or penalties were recognized as part of this provision during the twelve months ended June 30, 2009 and 2008. No interest or penalties were reported in the balance sheet as of June 30, 2009 and 2008.
A roll-forward of activity associated with the Companys uncertain tax position is as follows:
Balance as of July 1, 2008
|
$ 830,001
|
Changes in amounts related to prior year positions
|
36,500
|
Changes in amounts related to current year positions
|
75,000
|
Changes due to settlements
|
|
Changes due to lapses in statutes of limitation
|
|
Balance as of June 30, 2009
|
$ 941,501
|
65
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 IMPAIRMENT CHARGE:
In conjunction with a plan approved by the Companys Board of Directors, the Company closed its not yet operational manufacturing facility in China. During the year ended June 30, 2009, a charge totaling $1,009,088 was recognized to reflect the impairment of improvements made to the facility and other capitalized assets as well as a provision for severance and direct incremental costs associated with the disposition and closure. The impairment costs include $830,000 of non-cash charges associated with asset impairments, net of estimated recoveries, $95,000 related to lease commitments, $48,000 of incremental direct costs associated with the disposition and closure, and $36,000 of severance and benefits costs. The above impairment costs were recognized in accordance with the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.
66
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
|
Three Months Ended September 30,
|
|
2008
|
|
2007
|
|
|
|
|
NET REVENUES
|
$ 5,752,404
|
|
$ 6,430,890
|
|
|
|
|
COST OF GOODS SOLD:
|
|
|
|
Cost of goods sold, excluding depreciation and amortization,
product warranty and shipping and freight
|
2,652,224
|
|
2,959,104
|
Depreciation and amortization
|
117,489
|
|
147,007
|
Product warranty
|
214,168
|
|
212,117
|
Shipping and freight
|
147,626
|
|
167,572
|
Total cost of goods sold
|
3,131,507
|
|
3,485,800
|
|
|
|
|
GROSS PROFIT
|
2,620,897
|
|
2,945,090
|
|
|
|
|
OTHER COSTS AND EXPENSES:
|
|
|
|
Research and development
|
373,052
|
|
497,366
|
Selling, general and administrative, excluding depreciation and amortization
|
2,752,907
|
|
2,692,046
|
Depreciation and amortization
|
93,933
|
|
89,395
|
Litigation settlement
|
(1,500,000)
|
|
|
Total other costs and expenses
|
1,719,892
|
|
3,278,807
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
901,005
|
|
(333,717)
|
|
|
|
|
Interest expense
|
(54,924)
|
|
(8,500)
|
Interest income
|
659
|
|
16,490
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
846,740
|
|
(325,727)
|
Provision (benefit) for income taxes
|
369,345
|
|
(138,569)
|
|
|
|
|
NET INCOME (LOSS)
|
$ 477,395
|
|
$ (187,158)
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER SHARE
|
|
|
|
Basic and diluted
|
$ 0.04
|
|
$ (0.02)
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET EARNINGS (LOSS) PER SHARE
|
|
|
|
Basic
|
11,716,971
|
|
11,470,759
|
Diluted
|
11,787,659
|
|
11,470,759
|
67
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
|
Three Months Ended December 31,
|
|
2008
|
|
2007
|
|
|
|
|
NET REVENUES
|
$ 5,156,705
|
|
$ 5,685,477
|
|
|
|
|
COST OF GOODS SOLD:
|
|
|
|
Cost of goods sold, excluding depreciation and amortization,
product warranty and shipping and freight
|
2,551,580
|
|
2,567,505
|
Depreciation and amortization
|
139,627
|
|
153,293
|
Product warranty
|
227,330
|
|
199,234
|
Shipping and freight
|
116,141
|
|
163,136
|
Total cost of goods sold
|
3,034,678
|
|
2,083,168
|
|
|
|
|
GROSS PROFIT
|
2,122,027
|
|
2,602,309
|
|
|
|
|
OTHER COSTS AND EXPENSES:
|
|
|
|
Research and development
|
348,194
|
|
468,914
|
Selling, general and administrative, excluding depreciation and amortization
|
2,495,540
|
|
2,876,776
|
Depreciation and amortization
|
92,467
|
|
95,160
|
Total other costs and expenses
|
2,936,201
|
|
3,440,850
|
|
|
|
|
LOSS FROM OPERATIONS
|
(814,174)
|
|
(838,541)
|
|
|
|
|
Interest expense
|
(74,231)
|
|
(7,637)
|
Interest income
|
2,307
|
|
8,689
|
Amortization of debt discount on convertible debt
|
(26,211)
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES
|
(912,309)
|
|
(837,489)
|
Benefit for income taxes
|
(395,572)
|
|
(352,330)
|
|
|
|
|
NET LOSS
|
$ (516,737)
|
|
$ (485,159)
|
|
|
|
|
|
|
|
|
LOSS PER SHARE
|
|
|
|
Basic and diluted
|
$ (0.04)
|
|
$ (0.04)
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES USED TO COMPUTE LOSS PER SHARE
|
|
|
|
Basic and diluted
|
11,721,467
|
|
11,576,357
|
68
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
|
Three Months Ended March 31,
|
|
2009
|
|
2008
|
|
|
|
|
NET REVENUES
|
$ 5,184,056
|
|
$ 6,473,997
|
|
|
|
|
COST OF GOODS SOLD:
|
|
|
|
Cost of goods sold, excluding depreciation and amortization,
product warranty and shipping and freight
|
2,298,917
|
|
2,877,042
|
Depreciation and amortization
|
140,331
|
|
150,040
|
Product warranty
|
497,635
|
|
260,754
|
Shipping and freight
|
144,652
|
|
120,707
|
Total cost of goods sold
|
3,081,535
|
|
3,408,543
|
|
|
|
|
GROSS PROFIT
|
2,102,521
|
|
3,065,454
|
|
|
|
|
OTHER COSTS AND EXPENSES:
|
|
|
|
Research and development
|
321,839
|
|
467,031
|
Selling, general and administrative, excluding depreciation and amortization
|
2,154,973
|
|
3,298,070
|
Depreciation and amortization
|
87,305
|
|
91,437
|
Impairment charge
|
1,121,401
|
|
|
Total other costs and expenses
|
3,685,518
|
|
3,856,538
|
|
|
|
|
LOSS FROM OPERATIONS
|
(1,582,997)
|
|
(791,084)
|
|
|
|
|
Interest expense
|
(72,712)
|
|
(50,559)
|
Interest income
|
70
|
|
115
|
Amortization of debt discount on convertible debt
|
(28,211)
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES
|
(1,683,850)
|
|
(841,528)
|
Benefit for income taxes
|
(188,102)
|
|
(353,548)
|
|
|
|
|
NET LOSS
|
$ (1,495,748)
|
|
$ (487,980)
|
|
|
|
|
|
|
|
|
LOSS PER SHARE
|
|
|
|
Basic and diluted
|
$ (0.13)
|
|
$ (0.04)
|
|
|
|
|
WEIGHTED AVERAGE SHARES USED TO COMPUTE LOSS PER SHARE
|
|
|
|
Basic and diluted
|
11,723,716
|
|
11,687,517
|
69
MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)
|
Three Months Ended June 30,
|
|
2009
|
|
2008
|
|
|
|
|
NET REVENUES
|
$ 5,624,976
|
|
$ 5,647,202
|
|
|
|
|
COST OF GOODS SOLD:
|
|
|
|
Cost of goods sold, excluding depreciation and amortization,
product warranty and shipping and freight
|
2,660,256
|
|
2,755,808
|
Depreciation and amortization
|
140,024
|
|
118,497
|
Product warranty
|
622,652
|
|
205,335
|
Shipping and freight
|
152,599
|
|
76,815
|
Total cost of goods sold
|
3,575,531
|
|
3,156,455
|
|
|
|
|
GROSS PROFIT
|
2,049,445
|
|
2,490,747
|
|
|
|
|
OTHER COSTS AND EXPENSES:
|
|
|
|
Research and development
|
316,185
|
|
423,734
|
Selling, general and administrative, excluding depreciation and amortization
|
1,759,996
|
|
3,048,095
|
Depreciation and amortization
|
85,335
|
|
98,434
|
Impairment charge
|
(112,313)
|
|
|
Total other costs and expenses
|
2,049,203
|
|
3,570,263
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
242
|
|
(1,079,516)
|
|
|
|
|
Interest expense
|
(71,302)
|
|
(52,662)
|
Interest income
|
3
|
|
624
|
Amortization of debt discount on convertible debt
|
(30,363)
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES
|
(101,420)
|
|
(1,131,554)
|
Provision (benefit) for income taxes
|
38,763
|
|
(467,644)
|
|
|
|
|
NET LOSS
|
$ (140,183)
|
|
$ (663,910)
|
|
|
|
|
|
|
|
|
LOSS PER SHARE
|
|
|
|
Basic and diluted
|
$ (0.01)
|
|
$ (0.06)
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET LOSS PER SHARE
|
|
|
|
Basic and diluted
|
11,746,732
|
|
11,707,964
|
70
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
Not applicable.
ITEM 9A.
|
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Companys financial reports and to other members of senior management and the Board of Directors. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures are effective.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our management has conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of June 30, 2009. This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. We were not required to have, nor have we engaged our independent registered public accounting firm to perform, an audit on our internal control over financial reporting pursuant to
the rules of the Securities and Exchange Commission that permit us to provide only managements report in this annual report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2009 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
ITEM 9B.
|
OTHER INFORMATION
|
Not applicable.
71
PART III
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Our Management
The persons listed in the table below are our present directors and executive officers as of June 30, 2009.
Name
|
|
Age
|
|
Position
|
Michael W. Levin
|
|
44
|
|
Chief Executive Officer, President and a Director
|
Kevan D. Bloomgren
|
|
48
|
|
Chief Financial Officer
|
Robert M. Ward
|
|
42
|
|
Chief Operating Officer
|
Denise Hawkins
|
|
40
|
|
Vice President, Controller and Secretary
|
Vincent G. Kelly
|
|
60
|
|
Vice President of Sales for the Americas
|
Willem van Rijn
|
|
60
|
|
Non-executive Chairman and Director
|
Paul C. Baker
|
|
72
|
|
Director
|
Edwin Ruzinsky
|
|
76
|
|
Director
|
Henry Royer
|
|
77
|
|
Director
|
Dennis Ridgeway
|
|
60
|
|
Director
|
Frank J. Tanki
|
|
69
|
|
Director
|
Management Profile
Michael W. Levin, Chief Executive Officer and President:
Michael W. Levin has served as our Chief Executive Officer and President since June 18, 1998, and served as Chairman of the Board from June 18, 1998 through February 2008. Before June 1998, he served as President, Treasurer, Secretary and Chairman of Media Sciences predecessor, Cadapult Graphic Systems Inc., which he founded in 1987 while attending Lehigh University. In 2002, Mr. Levin was recognized in
Business News New Jerseys
annual 40 under 40 issue, which profiles the states outstanding business leaders under the age of 40. In 1987, Mr. Levin graduated summa cum laude from Lehigh University, receiving a Bachelor of Science Degree in Mechanical Engineering.
Kevan D. Bloomgren, Chief Financial Officer:
Kevan D. Bloomgren joined Media Sciences International, Inc. in the position of Chief Financial Officer on March 15, 2006. From 2004 to March 10, 2006, Mr. Bloomgren was Chief Financial Officer for Rapid Solutions Group, a digital communications company located in Melville, New York. From 1997 to 2004, he was Managing Partner of Crown Investment Management, LLC, a financial services company located in Sparta, New Jersey. From 1992 to 1996, he was Vice President and Chief Financial Officer of Satellite Paging, a telecommunications company located in Fairfield, New Jersey. Mr. Bloomgren also held the following positions: Vice President of RBC Daniels, formerly Daniels and Associates, a boutique investment bank specializing in merger and acquisitions (1988-1992) and Senior Auditor and Consultant for Arthur Andersen & Co. (1983-1986). In 1983, Mr. Bloomgren graduated cum laude from University of Denver
with a B.S. degree in Business Administration, and Accounting, and in 1988, he received a MBA in Finance from The Wharton School, University of Pennsylvania. Mr. Bloomgren is a Certified Public Accountant and a member of the American Institute of CPAs.
Robert M. Ward, Chief Operating Officer:
On July 28, 2008, Robert M. Ward was promoted to the position of Chief Operating Officer, succeeding Lawrence Anderson, who retired on July 25, 2008. Mr. Ward has previously served as Managing Director for the Companys Asian operations since June 2007, where he was responsible for establishing the Companys China-based product development and manufacturing subsidiary. Mr. Ward has more than nineteen years of experience in operations, product management, engineering, and manufacturing. Prior to joining the Company, from April 2006 to June 2007, Mr. Ward served as Director of Product Management for WatchGuard Technologies Inc., a Seattle, Washington based
72
provider of Computer Network Firewalls and Software Security Services for Small to Medium Enterprises. From November of 2001 to March 2006, Mr. Ward served as the Director of Operations for WatchGuard Technologies Inc. Mr. Ward earned a Bachelor of Science Degree in Mechanical Engineering from the University of Minnesota Institute of Technology in 1989. Mr. Ward earned a Masters of Business Administration from the University of Minnesota Carlson School of Management in 2001.
Denise Hawkins, Vice President, Controller and Secretary:
Denise Hawkins has served as Vice President for Media Sciences since February 12, 2003, and as Secretary since July 1, 2004. Ms. Hawkins began her employment with the company in July of 2001 as the Controller. Prior to her position at Media Sciences, Ms. Hawkins was the Controller for NFK Excavating and Construction, Inc. (2000-2001), Horizon Medical Group, PC (1998-2000) and VAC Service Corp. (1992-1998). Ms. Hawkins also held the following positions: Staff Accountant for Alex Goldfarb, CPA PC (1990 to 1992) and Accountant in the Accounting Services Department for the State University of New York - The College at New Paltz (1989 to 1990). In 1990, Ms. Hawkins graduated summa cum laude from the State University of New York-The College at New Paltz with a Bachelor of Science degree in Accountancy, and in 1998, she graduated from Marist College with a Masters in Business
Administration in Finance. Ms Hawkins is a member of the American Institute of CPAs, the New Jersey State Society of Certified Public Accountants, the Institute of Management Accountants and the Society for Human Resource Management, as well as a Certified Public Accountant and a Certified Management Accountant. Ms. Hawkins also currently serves on the board of Helping Hands Christian Pre-School as Treasurer.
Vincent G. Kelly, Vice President of Sales for the Americas:
Vince Kelly joined Media Sciences, in January 2007 as Vice President of Sales for the Americas. From 1996 to 2006, Mr. Kelly was Vice President of Sales, United States, for the DYMO division of Esselte Corporation (later acquired by Newell Rubbermaid). Previously, Mr. Kelly served as Senior Vice President of Sales for Port Incorporated in 1995, as Chief Executive Officer from 1991 to 1994 for Occam Research Corporation, as Executive Vice President of Sales and Marketing, North America, for Corporate Software from 1988 to 1991, as Vice President of Sales, North America, for Lotus Development Corporate from 1985 to 1988, and in various sales and marketing positions for IBM from 1972 to 1985. Mr. Kelly received a Bachelor of Engineering Degree in Electrical Engineering from Stevens Institute of Technology in 1971.
Willem van Rijn, Director:
Willem van Rijn became a director on May 2, 2006 and was appointed non-executive Chairman of the Board on March 1, 2008. Mr. van Rijn is the Organization Director (COO) of Greenpeace International, the environmental NGO, based at its global headquarters in Amsterdam. Prior to this, Mr. van Rijn has been Senior Advisor to the founder and management committee of Capco, an international operations and technology consulting and solutions firm, from 2002 to 2008. From 1995 to 2002, Mr. van Rijn was a Senior Partner at PricewaterhouseCoopers Consulting, and its predecessor firm Coopers & Lybrand, where he served as the Managing Partner of the Japanese financial services consulting practice from 1998 to 2002, and of the global strategy and financial risk management consulting practices from 1995 to 1998. Mr. van Rijns business experience includes: President of Rhode Island-based Gtech International (a
division of Gtech Corporation), a provider of state and national lottery technology, outsourcing, software and professional services, from 1994-1995; Partner in the New York office of Coopers & Lybrand from 1990 to 1994; Partner at Bank Street Consulting Group, a management consulting firm, from 1986 to 1990; Senior Vice President in charge of international banking activities in the United States for Bank of America from 1981 to 1986; Corporate Treasurer and member of the Managing Committee for global window covering and machine tooling company Hunter Douglas NV from 1976 to 1981; and Vice President, Account Manager of large accounts for commercial banking services, based in The Netherlands, for Bank of America from 1971 to 1976. Mr. van Rijn also currently serves on the board of Computer Horizons Corp.
Paul C. Baker, Director:
Paul C. Baker has served as a Director since June 18, 1998. Mr. Baker is the chairman of the Compensation committee and also serves on the Audit committee. From 1986 to 2000 he was President of Sherwood Partners, Inc., a venture capital and management consulting company, which he founded, that focused on developing companies with high growth potential. From 2000 to present, he has been General Partner of PCB Associates, LLC which performs similar services. Prior to 1986, Baker held various management positions during 25 years of employment with American Cyanamid Co., including President of Cyanamids Shulton, Inc. subsidiary from 1977
73
to 1979 and Group Vice President of Cyanamid from 1979 to1984. Baker graduated from Lehigh University in 1959 and 1960 with degrees in Engineering and Liberal Arts and received his MBA degree from Fairleigh Dickinson University in 1963. Mr. Baker also currently serves on the board of Pascack Community Bank.
Edwin Ruzinsky, Director:
Mr. Ruzinsky has served as a Director since August 27, 1999 and is the chairman of the Audit committee and also serves on the Nominating and Corporate Governance committee. Prior to his retirement on June 1, 1996 as a Partner in Deloitte Consulting LLC, a wholly-owned subsidiary of Deloitte & Touche LLP, he served for many years as the firms National Director- Media Industry Services. He previously served Times Mirror Company as Vice President of Finance & Administration/Book Publishing Group and Parents Magazine Enterprises, Inc. as Chief Accounting Officer. Mr. Ruzinsky continues serving as a member of the Pace University/ Dyson School of Liberal Arts & Sciences/Master of Science in Publishing Advisory Board. On June 15, 2007, Mr. Ruzinsky resigned as a director of Gentis, Inc., a bioscience company, due to its recapitalization. On March 31, 2005, Dowden Health Media, Inc. on
whose board Mr. Ruzinsky served, was sold.
Henry Royer, Director:
Henry Royer has served as a Director since December 23, 1999 and is currently a member of the Compensation and the Nominating and Corporate Governance committees. He graduated from Colorado College in 1953 with a B.A. in Money and Banking. From 1953 to 1961 he served as a grain merchandiser for Pillsbury Mills and The Peavey Company. From 1959 through 1965 he served on the Board of Directors and as EVP of Lehigh Sewer Pipe and Tile Company. From 1965 through 1983 he served in many capacities with the First National Bank of Duluth (Wells Fargo) leaving as EVP to join the Merchants National Bank of Cedar Rapids (US Bank) as Chairman, President and CEO. In 1994 he became President and CEO of the River City Bank of Sacramento, CA, retiring in 1998. He served as an independent trustee and as President of Berthel Growth and Income Trust retiring in 2005. In 1999 he assisted in organizing and served
as Chairman of the Board of the Cedar Rapids Bank and Trust and as a member of the board of QCRH, a bank holding company, retiring in 2006. He currently serves on the boards of Physicians Total Care, Inc of Tulsa, OK, CRST International, Inc and Great Plains Casualty, Inc. of Cedar Rapids, IA.
Dennis Ridgeway, Director:
Dennis Ridgeway became a director on February 22, 2006. Mr. Ridgeway is a member of the Compensation and the Nominating and Corporate Governance committees. From 1998 through 2005, Mr. Ridgeway served as an independent management consultant and since 2004 has also served as a board member and technical advisor for a working museum in the United Kingdom. From 1984 to 1998, Mr. Ridgeway held various positions with Katun Corporation, an aftermarket manufacturer of components and supplies for the business equipment industry. Headquartered in the United Kingdom, his positions included European Sales Manager, General Manager, Assistant Vice President, and Vice President of European Operations from 1994 to 1998. Prior to 1984 Mr. Ridgeway held senior management positions with Kalle Infotec the business equipment subsidiary of Hoechst AG in Europe.
Frank J. Tanki, Director:
Frank Tanki joined our Board in December, 2006. Mr. Tanki serves on the Audit committee and is the chairman of the Nominating and Corporate Governance committee. He is a Certified Public Accountant and retired in 1998 as a Senior Partner of Coopers & Lybrand, the predecessor of PricewaterhouseCoopers. Mr. Tanki was a member of the firms Executive Management Committee from 1994 to 1995. During his time with the firm he served as Director of Accounting and SEC Technical Services and as the Business Assurance Partner In Charge of the New York Metro practice. He has served on the Auditing Standards Board of the American Institute of Certified Public Accountants. Mr. Tanki also currently serves on the board of directors of Computer Horizons Corp. and MonoSol Rx, Inc.
Other Information About Executive Officers and Directors
Our executive officers or directors are not associated with another by family relationships. Based solely in reliance on representations made by our officers and directors, during the past five years, none of the following occurred with respect to such persons: (1) no petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such persons, or any partnership in which he or she was a general partner or any corporation or business association
74
of which he or she was an executive officer at or within two years before the time of such filing; (2) no such persons were convicted in a criminal proceeding or are a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) no such persons were the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of any competent jurisdiction, permanently or temporarily enjoining, or of any federal or state authority barring, suspending or otherwise limiting, their involvement in any type of business practice, or in securities or banking or other financial institution activities; and (4) no such persons were found by a court of competent jurisdiction in a civil action or by the SEC or by the Commodity Futures Trading Commission to have violated any federal or state securities or commodities law, and the judgment has not
been reversed, suspended or vacated.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers, directors, and persons who beneficially own more than ten percent of our common stock to file with the Securities and Exchange Commission initial reports of beneficial ownership and reports of changes in beneficial ownership of our common stock. Such persons are also required by Securities and Exchange Commission regulations to furnish us with copies of all such Section 16(a) forms filed by such person. Based solely on a review of the copies of such reports furnished to us during and in connection with our 2009 fiscal year, we are not aware of any material delinquencies in the filing of such reports.
Code of Ethics
We have adopted a Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer and all other executive officers. Our Code of Ethics is publicly available on our website at www.mediasciences.com.
Corporate Governance
The Board is responsible for the control and direction of the Company. The Board represents the Companys shareholders and its primary purpose is to build long-term shareholder value. Our Board currently consists of seven members. Our bylaws provide that our Board consists of seven to nine persons. Each director stands for election every year. Directors hold office until the next annual meeting of the stockholders and until their successors are elected and qualified.
Board Committees.
The Board has three principal committees: Audit Committee; Compensation Committee, and Nominating and Corporate Governance Committee. The charter of each committee can be found on our web site at www.mediasciences.com.
Members of the Board Committees are selected each year by our Board of Directors. Selection to a committee of the Board of Directors is determined by the majority vote of the Board of Directors. Each committee is comprised of at least three non-employee Board members, each of whom are the Board has determined satisfies applicable NASDAQ standards for independence.
Committee Membership.
The following table summarizes the membership of the Board and each of its committees for our 2009 fiscal year.
Name
|
|
Audit
Committee
|
|
Compensation
Committee
|
|
Nominating and Corporate
Governance Committee
|
Michael W. Levin
|
|
|
|
|
|
|
Paul C. Baker
|
|
Member
|
|
Chairman
|
|
|
Edwin Ruzinsky
|
|
Chairman
|
|
|
|
Member
|
Henry Royer
|
|
|
|
Member
|
|
Member
|
Dennis Ridgeway
|
|
|
|
Member
|
|
Member
|
Willem van Rijn
|
|
|
|
|
|
|
Frank J. Tanki
|
|
Member
|
|
|
|
Chairman
|
75
Audit Committee Financial Expert.
Mr. Ruzinsky and Mr. Tanki are financial experts serving on our Audit Committee and each are independent members of our Board.
Audit Committee.
The function of the Audit Committee includes reviewing internal financial information, monitoring cash flow, budget variances and credit arrangements, reviewing the audit program of Media Sciences, reviewing with Media Sciences independent accountants the results of all audits upon their completion, annually selecting and recommending independent accountants, overseeing the quarterly unaudited reporting process and taking such other action as may be necessary to assure the adequacy and integrity of all financial information distribution by Media Sciences. Each member of the Audit Committee is independent as defined under the NASDAQs listing standards. The Audit Committee consists of non-employee directors whom Media Sciences has determined are free of any relationship that could influence their judgment as a committee member and are not
associated with a major vendor to, or a customer of, Media Sciences.
Compensation Committee.
The function of the Compensation Committee is to make determinations concerning salaries and incentive compensation for our officers and employees.
Nominating and Corporate Governance Committee.
The primary function of the Nominating and Corporate Governance Committee is to identify individuals qualified to become members of the Board consistent with criteria approved by the Board, and to select, or recommend that the Board select, the director nominees for each annual meeting of stockholders or when vacancies occur. The Committee shall also develop and recommend to the Board corporate governance principles applicable to the Company and be responsible for leading the annual review of Board performance.
ITEM 11.
|
EXECUTIVE COMPENSATION
|
Compensation Summary
The following table summarizes the compensation we paid to our Chief Executive Officer and our next two most highly compensated executive officers who served during our fiscal year ended June 30, 2009 (the Named Executive Officers).
Summary Compensation Table
Name and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Stock
awards
($)(1)(2)
|
|
Option
awards
($)(1)(3)
|
|
Non-equity
incentive
plan
compensation
earnings
($)(4)
|
|
All other
compensation
($)(5)
|
|
Total
($)
|
Michael W. Levin
|
|
2009
|
|
238,500
|
|
7,895
|
|
29,270
|
|
64,800
|
|
|
|
340,465
|
Chief Executive Officer and President
|
|
2008
|
|
250,000
|
|
0
|
|
0
|
|
0
|
|
19,441
|
|
269,441
|
Kevan D. Bloomgren
|
|
2009
|
|
162,000
|
|
78,386
|
|
32,008
|
|
30,600
|
|
|
|
302,994
|
Chief Financial Officer
|
|
2008
|
|
170,000
|
|
39,100
|
|
29,822
|
|
34,000
|
|
|
|
272,922
|
Robert M. Ward (a)
|
|
2009
|
|
156,200
|
|
65,281
|
|
54,053
|
|
26,568
|
|
|
|
302,102
|
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Mr. Ward was promoted to the position of Chief Operating Officer on July 28, 2008.
|
(1)
|
Represents the stock-based compensation recognized in the fiscal year in accordance with SFAS No. 123(R). Estimates of forfeitures related to service-based vesting conditions have been disregarded. Assumptions made in the valuation of stock and option awards are discussed in Note 4 to the consolidated financial statements. The grant date fair value of each award, adjusted for estimated forfeiture, is recognized as stock-based compensation expense in the Companys financial statements over the service period.
|
(2)
|
On March 3, 2009, we granted to each of Mr. Levin, Mr. Bloomgren, and Mr. Ward 50,000 shares of common stock, subject to vesting over ten months on December 31, 2009. None of these shares vested in fiscal 2009. The total grant date fair value of each award is $20,000, disregarding estimates of forfeitures related to service-based vesting conditions.
|
76
|
On March 15, 2006, we granted Mr. Bloomgren 50,000 shares of common stock, subject to vesting over five years at 20% per year on each anniversary of the grant. 10,000 shares vested in each of fiscal years 2009, 2008 and 2007. The total grant date fair value of the award is $195,500, disregarding estimates of forfeitures related to service-based vesting conditions.
|
|
On July 8, 2008, we granted Mr. Bloomgren 32,000 shares of common stock, subject to vesting over two years at 50% per year on each anniversary of the grant. None of these shares vested in fiscal 2009. The total grant date fair value of the award is $64,000, disregarding estimates of forfeitures related to service-based vesting conditions.
|
|
On June 18, 2007, we granted Mr. Ward 29,802 shares of common stock, subject to performance based vesting criteria. 14,901 of these shares vested in fiscal 2009. The total grant date fair value of the award is $180,004, disregarding estimates of forfeitures related to service-based vesting conditions.
|
|
On December 18, 2008, we granted Mr. Ward 23,429 shares of common stock, subject to vesting over two years at 50% per year on each anniversary of the grant. None of these shares vested in fiscal 2009. The total grant date fair value of the award is $9,372, disregarding estimates of forfeitures related to service-based vesting conditions.
|
(3)
|
On July 8, 2008, we granted Mr. Levin stock options to purchase 75,073 shares of our common stock, exercisable for five years at $2.20 per share, subject to vesting over two years at 50% per year on each anniversary of the grant. None of these options vested in fiscal 2009. The total grant date fair value of the award is $59,676, computed using a Black-Scholes model.
|
|
On March 15, 2006, we granted Mr. Bloomgren stock options to purchase 50,000 shares of our common stock, exercisable for ten years at $3.91 per share, subject to vesting over five years at 20% per year on each anniversary of the grant. 10,000 of these options vested in each of fiscal years 2009, 2008 and 2007. The total grant date fair value of the award is $135,040, computed using a Black-Scholes model.
|
|
On October 10, 2007, we granted Mr. Bloomgren stock options to purchase 5,027 shares of our common stock, exercisable for seven years at $5.65 per share, subject to vesting over three years at 33.3% per year on each anniversary of the grant. 1,676 of these options vested in fiscal 2009. The total grant date fair value of the award is $14,999, computed using a Black-Scholes model.
|
|
On June 18, 2007, we granted Mr. Ward stock options to purchase 47,452 shares of our common stock, exercisable for seven years at $6.04 per share, subject to vesting over three years beginning on July 28, 2008 at 33.3% per year on each anniversary date. None of these options vested in fiscal 2009. The total grant date fair value of the award is $174,998, computed using a Black-Scholes model.
|
(4)
|
Refers to amounts under an incentive based bonus structure for certain executives. See the discussion under the heading Performance Based Bonus Compensation for additional information.
|
(5)
|
This column reports the total amount of perquisites and other benefits provided, if such total amount exceed $10,000. In fiscal 2008, for Mr. Levin, this includes $14,575 for lease of an automobile, $3,726 for a matching contribution under our 401(k) plan, and $1,140 for life insurance premiums, where the beneficiary is not the company.
|
In general, compensation payable to a Named Executive Officer consists of a base salary, a performance based bonus, an annual stock or stock option grant under our incentive stock plan and other benefits, which generally do not exceed $10,000 annually in the aggregate, such as 401(k) plan matching contributions and life insurance premiums, where the beneficiary is not the Company.
Employment Agreements
We have entered into written employment agreements with several of our executive officers. In addition to the terms described below, under the employment agreement, each of the executives are entitled to participate in: the Companys stock incentive plans; reimbursement for reasonable travel and other business related expenses; health care benefits under our medical, dental and vision insurance; and participation in any employee plan, perquisite and other benefits made available to our employees or management in general. Further, each of the employment agreements contain provisions providing delay of payments to conform to applicable law, and indemnification on an after-tax basis for excise taxes. Pursuant to the terms of the agreement described below, on March 3, 2009, we issued to each of these executives a restricted stock award of 50,000 shares of our common stock, subject to vesting upon the
earlier of: (i) January 1, 2010, or (ii) upon a change in control, as such term is defined in the agreement.
77
Each of the agreements is for personal services, and the rights and obligations there under are not assignable except in accordance with the terms of the respective agreements. The following summarizes the terms of the employment agreements and do not include discussion of other compensation, such as bonuses or equity awards, received prior to or separate from the employment agreements.
Michael W. Levin
We have an employment agreement with Mr. Levin, pursuant to which Mr. Levin serves as our Chief Executive Officer and President through December 31, 2010. The agreement was entered on November 7, 2008 and amended on March 3, 2009. Mr. Levin is entitled to a base annual salary of $250,000. The Board of Directors may provide for a greater annual salary, and an annual performance bonus or other bonus as the Board of Directors may determine. It may be terminated at any time, without severance, by Mr. Levin voluntarily or by us with cause. In the event that Mr. Levins employment is terminated by us without cause, due to disability, or by Mr. Levin with good reason, Mr. Levin would be entitled to severance pay, payable within two weeks of termination, equal to $300,000 if his employment is terminated prior to January 1, 2010, thereafter, in
an amount equal to one year of his annual base salary. In the event of without cause termination during a change in control circumstance, the amount payable as severance is governed by a change in control provision. If Mr. Levin elects to terminate his employment under circumstances of a change in control within the meaning of Treasury Regulations Section 1.409A-3(i)(5), he is entitled to a lump sum payment of $540,000 upon a change in control on or before December 31, 2009, and, of 200% of his base amount, as defined in §280G(3) of the Internal Revenue Code upon a change in control occurring after December 31, 2009, with payment is due within one month of termination. In the event of early termination for a reason other than cause, Mr. Levin is entitled to twelve months of continued health care benefit coverage, paid for by us, under the same terms, conditions and coverage he enjoys at the time of termination. Mr. Levin is also entitled to receive the
following benefits:
|
death benefits of $100,000;
|
|
a fifteen-year term life insurance policy for $2,000,000, subject to insurability, during the term of employment and for one year thereafter, for which he has the right to maintain at his own expense thereafter;
|
|
the use of an automobile, the costs of which, including maintenance, repairs, and insurance, are paid for by us; and
|
|
six weeks vacation.
|
Kevan D. Bloomgren, Chief Financial Officer
Robert M. Ward, Chief Operating Officer
Vince Kelly, Vice President of Sales
On March 3, 2009, we entered into employment agreements with each of three above-named executives. The employment term is through December 31, 2009. These agreements may be terminated at any time, without severance, by the individuals voluntarily or by us with cause. In the event that employment is terminated by us without cause, due to disability, or by the individuals with good reason, the named individuals would be entitled to severance, payable in a lump sum within two weeks of termination, in the amounts of $204,000, $196,800, and $192,000, for Messrs. Bloomgren, Ward and Kelly, respectively. These executives are entitled to an annual salary as established by the Board of Directors (currently, the base salaries of Messrs. Bloomgren, Ward and Kelly are $170,000, $164,000, and $160,000, respectively), an annual performance bonus or other bonus as the Board of Directors
may determine, and certain employee benefits, including:
|
a fifteen-year term life insurance policy for $1,000,000, subject to insurability, during the term of employment, for which the employee has the right to maintain at his own expense thereafter; and
|
|
four weeks vacation.
|
Performance Based Bonus Compensation
From year to year, our Compensation Committee may establish certain performance criteria for our executive officers, based on factors and criteria as the Compensation Committee may deem relevant.
78
For our 2009 fiscal year, we had in effect a performance based cash bonus compensation plan for certain executive officers. In fiscal 2009, for our Chief Executive Officer, the potential cash bonus was $240,000, of which 33% was based on individualized performance goals (Individual Performance Bonus), and 67% determined wholly upon attaining earnings per share criteria determined by the Board (EPS Bonus). For other Named Executive Officers, the potential cash bonus was 20-40% of their base salary, of which 50% was based on the Individual Performance Bonus criteria, and 50% on the EPS Bonus. Bonuses are paid after the fiscal year end.
The following table summarizes the payout structure under the fiscal year 2009 bonus structure. The EPS Bonus was to be earned if our Companys earnings per share equaled or exceeded a minimum level established by the Compensation Committee. The EPS Bonus range set forth in the table assumed the achievement of the minimum targeted level and up to 100% of the targeted goal. If the minimum level was not achieved, no EPS Bonus was earned. If the minimum level is achieved or exceeded, the amount of the EPS Bonus was based upon the level of earnings per share achieved by the Company. If the maximum targeted goal was exceeded, the EPS Bonus payable could exceed the EPS Bonus potential set forth in the table below. Factors in determining the Individual Performance Bonus includes matters such as achieving specified leadership initiatives, and the achievement of certain strategic and business goals
including, but not limited to, customer growth, new product development, information technology upgrades, manufacturing efficiencies and corporate compliance goals.
|
Fiscal 2009 Bonus Potential
|
|
Fiscal 2009 Bonus Earned
|
Name
|
|
EPS
Bonus ($)
|
|
Individual
Performance
Bonus ($)
|
|
Total
Bonus ($)
|
|
EPS
Bonus ($)
|
|
Individual
Performance
Bonus ($)
|
|
Total
Bonus ($)
|
Michael W. Levin
|
|
80,000 160,000
|
|
0 80,000
|
|
240,000
|
|
0
|
|
64,800
|
|
64,800
|
Kevan D. Bloomgren
|
|
17,000 34,000
|
|
0 34,000
|
|
68,000
|
|
0
|
|
30,600
|
|
30,600
|
Robert M. Ward
|
|
16,000 33,000
|
|
0 33,000
|
|
66,000
|
|
0
|
|
26,568
|
|
26,568
|
In September 2009, the Compensation Committee adopted a performance based bonus compensation plan for the 2010 fiscal year, similar in structure to the fiscal 2009 plan. For our Chief Executive Officer, the potential cash bonus in fiscal 2010 is $200,000, of which $66,000 is based on individualized performance goals (Individual Performance Bonus), and $134,000 is determined wholly upon attaining earnings per share criteria determined by the Board (EPS Bonus). For the other officer, the potential cash bonus is 20-40% of their base salary, of which 50% is based on the Individual Performance Bonus criteria, and 50% on the EPS Bonus.
Outstanding Equity Awards at 2009 Fiscal Year End
The following table sets forth information concerning outstanding option and stock awards held by the Named Executive Officers as at June 30, 2009.
|
Option Awards
|
|
Stock Awards
|
Name
|
|
Number of
securities
underlying
unexercised
options
(#)
exercisable
|
|
Number of
securities
underlying
unexercised
options
(#)
unexercisable
|
|
Option
exercise
price
($)
|
|
Option
expiration
date
|
|
Number of
shares or units
of stock that
have not vested
(#)
|
|
Market value
of shares or
units of stock
that have
not vested
($)(a)
|
Michael W. Levin (1)
|
|
|
|
75,073
|
|
2.20
|
|
07-08-2013
|
|
|
|
|
Michael W. Levin (2)
|
|
|
|
|
|
|
|
|
|
50,000
|
|
17,500
|
Kevan D. Bloomgren (3)
|
|
|
|
|
|
|
|
|
|
20,000
|
|
7,000
|
Kevan D. Bloomgren (4)
|
|
30,000
|
|
20,000
|
|
3.91
|
|
03-15-2016
|
|
|
|
|
Kevan D. Bloomgren (5)
|
|
1,676
|
|
3,351
|
|
5.65
|
|
10-10-2014
|
|
|
|
|
Kevan D. Bloomgren (6)
|
|
|
|
|
|
|
|
|
|
32,000
|
|
11,200
|
Kevan D. Bloomgren (2)
|
|
|
|
|
|
|
|
|
|
50,000
|
|
17,500
|
Robert M. Ward (7)
|
|
|
|
47,452
|
|
6.04
|
|
06-18-2014
|
|
|
|
|
Robert M. Ward (8)
|
|
|
|
|
|
|
|
|
|
14,901
|
|
5,215
|
Robert M. Ward (9)
|
|
|
|
|
|
|
|
|
|
23,429
|
|
8,200
|
Robert M. Ward (2)
|
|
|
|
|
|
|
|
|
|
50,000
|
|
17,500
|
(a)
|
The amounts in this column reflect the fair market value of outstanding restricted stock awards for the named executive officers using the closing price on June 30, 2009 of $0.35, the last trading day of our common stock in fiscal 2009.
|
79
(1)
|
Granted July 8, 2008. Unexercisable options are subject to equal vesting annually on July 8, 2009 and 2010.
|
(2)
|
Granted March 3, 2009. Subject to full vesting on December 31, 2009.
|
(3)
|
Granted March 15, 2006. Subject to vesting annually in increments of 10,000 on March 15, 2010 and 2011.
|
(4)
|
Granted March 15, 2006. Un-exercisable options are subject to vesting annually in increments of 10,000 on March 15, 2010 and 2011.
|
(5)
|
Granted October 10, 2007. Unexercisable options are subject to vesting annually in equal increments on October 10, 2009 and 2010.
|
(6)
|
Granted July 8, 2008. Subject to equal vesting annually on July 8, 2009 and 2010.
|
(7)
|
Granted June 18, 2007. Unexercisable options are subject to equal vesting annually on July 28, 2009, 2010 and 2011.
|
(8)
|
Granted June 18, 2007. Subject to subject to performance-based vesting criteria.
|
(9)
|
Granted December 18, 2008. Subject to equal vesting annually on December 18, 2009 and 2010
|
Incentive Stock Plans
Our equity incentive program is a broad-based, long-term retention program that is intended to attract and retain qualified management and technical employees, and align stockholder and employee interests. The equity incentive program presently consists of two active plans: the Companys 2006 Incentive Stock Plan and the Companys 2009 Incentive Stock Plan. Under both plans, non-employee directors, officers, key employees, consultants and all other employees may be granted options to purchase shares of our stock, restricted stock units and other types of equity awards.
On June 17, 2008, the Companys 1998 Incentive Plan ended and we can issue no further awards under the plan. Under the 1998 plan, up to 1,000,000 common shares were authorized for issuance through awards of options or other equity instruments. As of June 30, 2009, 196,069 shares were issued upon exercise of option awards. As of June 30, 2009, we had outstanding, subject to vesting, stock options to purchase 517,424 shares of common stock, exercisable for up to ten years at prices of $0.43 to $6.33 per share, and 127,316 shares issuable pursuant to restricted stock awards.
Under the Companys 2006 plan, 1,000,000 common shares are authorized for issuance through awards of options or other equity instruments. As of June 30, 2009, we had outstanding under the 2006 plan, subject to vesting, stock options to purchase 567,792 common shares, exercisable for up to seven years from grant at prices of $1.85 to $5.65 per share, and 403,656 shares issuable pursuant to restricted stock awards. As of June 30, 2009, 28,552 common shares were available for future issuance under the 2006 plan.
Under the Companys 2009 plan, 1,250,000 common shares are authorized for issuance through awards of options or other equity instruments. As of June 30, 2009, we had outstanding under the 2009 plan, subject to vesting, 200,000 shares issuable pursuant to restricted stock awards. As of June 30, 2009, 1,050,000 common shares were available for future issuance under the 2009 plan.
Employee Profit Sharing Plan
We have a tax-qualified employee paired profit sharing plan. This 401(k) plan covers all of our employees that have been employed for at least six months and meet other age and eligibility requirements. Under the 401(k) plan, employees may choose to reduce their current compensation by up to 15% each year and have that amount contributed to the 401(k) plan. We make matching contributions equal to 25% of the employees contribution. In our discretion, we may contribute unmatched contributions. The 401(k) plan qualifies under Section 401 of the Internal Revenue Code, so that we can deduct contributions by employees or by us. Employee contributions to the 401(k) plan are fully vested at all times, and our contributions, if any, vest at the rate of 25% after two years and after two years at the rate of 25% a year until fully vested. We also maintain a defined contribution plan for our eligible UK employees.
The U.K. plan is 100% Company funded. Our contributions to these plans totaled $40,000 in 2009 and $64,000 in 2008.
80
Director Compensation
Based on economic uncertainties facing the Company in fiscal 2009, our directors voluntarily waived their prospective cash compensation effective October 1, 2008. At June 30, 2009, this waiver remained in effect. In fiscal 2009, we paid outside directors an aggregate of $30,625 in cash and stock-based compensation with an aggregate grant date fair value of $200,000 for attendance at regular and special meetings. Chairpersons of the following committees were also paid an additional fee for their committee service: Audit $375 and Compensation $250. The compensation plan, in the absence of waiver, provides for the following annual compensation: for the non-executive Chairman, cash compensation of $45,000 and stock-based compensation valued at $75,000; and for the other outside directors, cash compensation of $15,000 and stock-based compensation valued at $25,000. Stock-based compensation may be issued in the
form of restricted stock or stock options. Our directors were also reimbursed for reasonable out-of-pocket expenses incurred in connection with their attendance at meetings as well as for other expenses incurred in their capacity as directors.
2009 Compensation of Non-Employee Directors
Name
|
|
Fees earned
or paid in cash
($)
|
|
Stock-based
compensation
($)(a)(b)
|
|
All other
compensation
($)
|
|
Total
($)
|
Paul Baker
|
|
4,000
|
|
24,049
|
|
|
|
28,049
|
Dennis Ridgeway
|
|
3,750
|
|
24,049
|
|
|
|
27,799
|
Henry Royer
|
|
3,750
|
|
24,049
|
|
|
|
27,799
|
Edwin Ruzinsky
|
|
4,125
|
|
24,049
|
|
|
|
28,174
|
Willem van Rijn
|
|
11,250
|
|
91,529
|
|
|
|
102,779
|
Frank J. Tanki
|
|
3,750
|
|
24,049
|
|
|
|
27,799
|
(a)
|
Represents the stock-based compensation recognized in fiscal 2009 in accordance with SFAS No. 123(R). Stock-based compensation awards are valued at fair value on the date of grant. Estimates of forfeitures related to service-based vesting conditions have been disregarded. Assumptions made in the valuation of stock and option awards are discussed in Note 4 to the consolidated financial statements.
|
(b)
|
On October 24, 2008, each director was awarded 16,667 shares of the Companys common stock, vesting on October 24, 2009. The Companys non-executive Chairman, Mr. van Rijn, was awarded an additional 33,333 shares, also vesting on October 24, 2009. Stock options granted to the Companys directors in the prior fiscal year vested on the anniversary of the grant date. At June 30, 2009, the total number of outstanding options, granted as director compensation, held by each director was: Mr. Baker, 64,123 options; Mr. Ridgeway, 29,123 options; Mr. Royer, 29,123 options; Mr. Ruzinsky, 54,123 options, Mr. van Rijn, 60,012 options; and Mr. Tanki 19,123 options.
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
The tables below sets forth, as of June 30, 2009, the shares of our common stock beneficially owned by: each of our directors; each of our executive officers; all of our officers and directors as a group; and each person known to us to be the beneficial owner of more than 5% of our common stock.
This information was determined in accordance with Rule 13(d)-3 under the Securities Exchange Act of 1934, and is based upon the information provided by the persons listed below. All persons named in the table, unless otherwise noted in the footnotes, have the sole voting and dispositive power with respect to common stock that they beneficially own. Beneficial ownership of common stock that are acquirable within 60 days upon the exercise or conversion of stock options and warrants are listed separately. For purposes hereof, for each named person, restricted stock awards that are subject to vesting are included being beneficially owned, and the calculation of percent of class gives effect to those restricted shares and those shares acquirable within 60 days. For purposes hereof, beneficial ownership has been determined based upon the number of shares reported as outstanding as of June 30, 2009.
The address of each of the persons named in the table, unless otherwise indicated, is c/o Media Sciences International, Inc., 8 Allerman Road, Oakland, New Jersey 07463.
81
Name and Address
of Beneficial Owner
|
|
Amount and Nature
of Beneficial Owner
|
|
Additional Shares
Acquirable Within 60 days
|
|
Percent
of Class
|
Officers and Directors
|
|
|
|
|
|
|
|
|
Michael W. Levin
|
|
1,306,450
|
(a)
|
|
37,537
|
(b)
|
|
11.4%
|
Kevan D. Bloomgren
|
|
172,000
|
(c)
|
|
31,676
|
(d)
|
|
1.7%
|
Robert M. Ward
|
|
103,231
|
(e)
|
|
15,817
|
(f)
|
|
1.0%
|
Denise Hawkins
|
|
3,657
|
(g)
|
|
46,009
|
(h)
|
|
*
|
Vince Kelly
|
|
50,000
|
(i)
|
|
63,472
|
(j)
|
|
*
|
Paul Baker
|
|
106,667
|
(k)
|
|
64,123
|
(l)
|
|
1.4%
|
Dennis Ridgeway
|
|
25,938
|
(k)
|
|
29,123
|
(m)
|
|
*
|
Henry Royer
|
|
26,667
|
(n)
|
|
29,123
|
(o)
|
|
*
|
Edwin Ruzinsky
|
|
56,667
|
(k)
|
|
54,123
|
(p)
|
|
*
|
Willem van Rijn
|
|
66,000
|
(q)
|
|
60,012
|
(r)
|
|
1.1%
|
Frank J. Tanki
|
|
29,660
|
(k)
|
|
19,123
|
(s)
|
|
*
|
All officers and directors as a group
(11 persons)
|
|
1,946,937
|
|
|
450,138
|
|
|
19.6%
|
5% Security Holders
|
|
|
|
|
|
|
|
|
Richard L. Scott (t)
1400 Gulfshore Boulevard North,
Suite 145
Naples, FL 34102
|
|
992,050
|
|
|
0
|
|
|
8.4%
|
Richard E. Teller and Kathleen A. Rogers
545 Boylston Street
Brookline, MA 02445
|
|
694,231
|
|
|
0
|
|
|
5.9%
|
*
|
Represents less than 1%.
|
(a)
|
Includes 50,000 restricted shares granted on March 3, 2009 that are subject to vesting on December 31, 2009, and also includes 120,000 shares owned by his minor children and 8,000 shares owned by his spouse.
|
(b)
|
Refers to shares underlying options exercisable at $2.20 per share until July 8, 2013. Does not include 37,536 shares underlying options that are subject to vesting on July 8, 2010, exercisable at $2.20 per share.
|
(c)
|
Includes the following restricted share awards : 20,000 shares granted on March 15, 2006 that subject to vesting in equal installments on March 15, 2010 and 2011; 32,000 shares granted on July 8, 2008 that subject to vesting in equal installments on July 8, 2009 and 2010; and 50,000 shares granted on March 3, 2009 that are subject to vesting on December 31, 2009.
|
(d)
|
Refers to shares acquirable upon exercises of the following option grants: 30,000 shares at $3.91 per share until March 15, 2016; and 1,676 shares at $5.65 per share until October 10, 2014. Does not include 20,000 shares underlying options that are subject to vesting in equal increments on March 15, 2010 and 2011, exercisable at $3.91 per share until March 15, 2016, or 3,351 shares underlying options that are subject to vesting in equal increments on October 10, 2009 and 2010, exercisable at $5.65 per share until October 10, 2014.
|
(e)
|
Includes the following restricted share awards: 14,901 shares granted on June 18, 2007 that are subject to performance vesting criteria; 23,429 shares granted on December 18, 2008 that are subject to vesting in equal installments on December 18, 2009 and 2010; and 50,000 shares granted on March 3, 2009 that are subject to vesting on December 31, 2009.
|
(f)
|
Refers to shares underlying options exercisable at $6.04 per share until June 18, 2014. Does not include 31,635 shares underlying options that are subject to vesting in equal installments on July 28, 2010 and 2011, exercisable at $6.04 per share until June 18, 2014.
|
(g)
|
Includes 2,104 restricted shares granted on October 10, 2007 that are subject to vesting in equal installments on October 10, 2009 and 2010.
|
(h)
|
Refers to shares acquirable upon exercise of the following option grants: 10,002 shares at $1.70 per share until July 16, 2011; 20,000 shares at $1.91 per share until January 12, 2015; and 16,007 shares at $2.00 per share until July 8, 2013.
|
(i)
|
Refers to restricted shares granted on March 3, 2009 that are subject to vesting on December 31, 2009.
|
82
(j)
|
Refers to shares acquirable upon exercise of the following option grants: 22,416 shares at $6.04 per share until January 22, 2014 and 41,056 shares at $2.00 per share until July 8, 2013. Does not include 33,624 shares underlying options that are subject to vesting in equal installments on Januayr 22, 2010, 2011 and 2012, exercisable at $6.04 per share until January 22, 2014, or 41,055 shares underlying options that are subject to vesting on July 8, 2010, exercisable at $2.00 per share until July 8, 2013.
|
(k)
|
Includes 16,667 restricted shares granted on October 24, 2008 subject to vesting on October 24, 2009.
|
(l)
|
Refers to shares acquirable upon exercise of the following option grants: 5,000 shares at $2.19 per share until July 3, 2010; 5,000 shares at $2.00 per share until July 2, 2011; 5,000 shares at $0.65 per share until September 24, 2012; 10,000 shares at $0.43 per share until May 6, 2013; 5,000 shares at $0.85 per share until February 10, 2014; 5,000 shares at $1.45 per share until December 17, 2014; 10,000 shares at $2.71 per share until January 30, 2016; 10,000 shares at $6.30 per share until December 14, 2016; and 9,123 shares at $5.65 per share until October 10, 2014.
|
(m)
|
Refers to shares acquirable upon the exercise of the following option grants: 10,000 shares at $3.38 per share until February 26, 2016; 10,000 shares at $6.30 per share until December 14, 2016; and 9,123 shares at $5.65 per share until October 10, 2014.
|
(n)
|
Does not include 50,000 shares held by Heffernen 1966 Trust B, a trust controlled by Mr. Royers spouse. Mr. Royer disclaims beneficial ownership of such shares.
|
(o)
|
Refers to shares acquirable upon the exercise of the following option grants: 10,000 shares at $2.71 per share until January 30, 2016; 10,000 shares at $6.30 per share until December 14, 2016; and 9,123 shares at $5.65 per share until October 10, 2014.
|
(p)
|
Refers to shares acquirable upon exercise of the following option grants: 10,000 shares at $2.06 per share until August 27, 2009; 5,000 shares at $2.19 per share until July 3, 2010; 5,000 shares at $2.00 per share until July 2, 2011; 5,000 shares at $1.45 per share until December 17, 2014; 10,000 shares at $2.71 per share until January 30, 2016; 10,000 shares at $6.30 per share until December 14, 2016; and 9,123 shares at $5.65 per share until October 10, 2014.
|
(q)
|
Includes 50,000 restricted shares granted on October 24, 2008 subject to vesting on October 24, 2009.
|
(r)
|
Refers to shares acquirable upon the exercise of the following option grants: 10,000 shares at $4.09 per share until May 2, 2016; 10,000 shares at $6.30 per share until December 14, 2016; 9,123 shares at $5.65 per share until October 10, 2014; and 30,889 shares at $3.50 per share until March 1, 2015.
|
(s)
|
Refers to shares acquirable upon exercise of the following option grants: 10,000 shares at $6.30 per share until December 14, 2016 and 9,123 shares at $5.65 per share until October 10, 2014.
|
(t)
|
Based on the last information provided by holder in September 2008. Beneficially owns securities through different entities, including: 202,300 shares held by GFX Investments, LLC, for which he is the beneficial owner; 606,050 shares held by Scott Family Florida Partnership Trust; 93,300 shares held by F. Annette Scott Florida Trust, of which his spouse is the trustee; and 90,400 shares held by Richard L. Scott Florida Trust.
|
Securities Authorized for Issuance under Equity Compensation Plans
The following table set forth outstanding securities authorized for issuance under equity compensation plans as of June 30, 2009.
Plan Category
|
|
Number of securities
to be issued upon
exercise of outstanding
options, warrants
and rights (a)
|
|
Weighted average
exercise price
of outstanding
options, warrants
and rights (a)(b)
|
|
Number of
securities
remaining
available for
future issuance
|
|
|
|
|
|
|
|
Equity compensation plans
approved by securities holders
|
|
1,085,216
|
|
$3.41
|
|
1,078,552
|
Equity compensation plans not
approved by security holders
|
|
|
|
|
|
|
Total
|
|
1,085,216
|
|
$3.41
|
|
1,078,552
|
(a)
|
Does not include 625,791 shares subject to restricted stock awards.
|
(b)
|
Calculation excludes shares subject to restricted stock awards. There is no exercise price associated with a restricted stock award.
|
83
Plans in the Shareholder Approved Category
Our equity incentive program is a broad-based, long-term retention program that is intended to attract and retain qualified management and technical employees, and align stockholder and employee interests. The equity incentive program presently consists of two active plans, our 2006 Stock Incentive Plan and our 2009 Stock Incentive Stock Plan, and formerly included our 1998 Incentive Plan. Under each of the plans, non-employee directors, officers, key employees, consultants and all other employees may be granted options to purchase shares of our stock, restricted stock units and other types of equity awards. Collectively, the plans have provided for the issuance of up to 3,250,000 shares of common stock. As of June 30, 2009, under the 1998 plan, we had issued 196,069 shares upon exercise of option awards and, outstanding, subject to vesting, options to purchase 517,424 shares of common stock, exercisable
for up to ten years at prices of $0.43 to $6.33 per share, and 127,316 shares issuable pursuant to restricted stock awards. On June 17, 2008, the 1998 plan expired and no new awards can be made under it. As of June 30, 2009, we had outstanding under the 2006 plan, subject to vesting, stock options to purchase 567,792 common shares, exercisable for up to seven years from grant at prices of $1.85 to $5.65 per share, and 403,656 shares issuable pursuant to restricted stock awards. As of June 30, 2009, 28,552 common shares were available for future issuance under the 2006 plan. As of June 30, 2009, we had outstanding under the 2009 plan, subject to vesting, 200,000 shares issuable pursuant to restricted stock awards. As of June 30, 2009, 1,050,000 common shares were available for future issuance under the 2009 plan.
Changes in Control
We do not have any arrangements that may result in a change in control.
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
All of our directors, other than Michael W. Levin, our Chief Executive Officer, and all members of Board committees, are non-employee members that the Board has determined satisfies applicable NASDAQ standards for independence. Reference is made to Item 10 of Part III of this Report on Form 10-K for additional information about our Board and Board Committees, including their composition.
ITEM 14.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
Audit Fees
Fees for audit services provided by Amper, Politziner & Mattia, LLP, our current principal independent registered public accounting firm, for the years ended June 30, 2009 and 2008 were $165,719 and $161,000, respectively. Audit fees consist of the aggregate fees billed for the audits of our annual financial statements, reviews of our interim financial statements, and services that are normally provided in connection with statutory and regulatory filings or engagements for those fiscal years.
Audit-Related Fees
Fees for audit-related services provided by Amper, Politziner & Mattia, LLP during the years ended June 30, 2009 and 2008 were $0. Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements outside of those fees disclosed above under the caption Audit Fees.
Tax Fees
Fees for tax services provided by Amper, Politziner & Mattia, LLP during the fiscal years ended June 30, 2009 and 2008 were $0. Tax fees consist of fees billed for tax compliance, tax advice, and tax planning.
84
All Other Fees
Fees for customer rebate compliance testing provided by Amper, Politziner & Mattia, LLP during the fiscal year ended June 30, 2009 were $1,250. There were no other fees billed for services by Amper, Politziner & Mattia, LLP for the fiscal years ended June 30, 2009 and 2008.
Pre-Approval Policies and Procedures
The Audit Committee has adopted a policy that requires advance approval of all audit, audit-related, tax services, and other services, including non-audit services, performed by the independent registered public accounting firm. The policy provides for pre-approval by the Audit Committee of specifically defined audit and non-audit services. As part of its pre-approval policy, the Audit Committee considers whether the provision of any proposed non-audit services is consistent with the SECs rules on auditor independence. Unless the specific service has been pre-approved with respect to that year, the Audit Committee must approve the permitted service before the independent registered public accounting firm is engaged to perform it. All services performed in our 2009 and 2008 fiscal years were pre-approved.
ITEM 15.
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
(a)
|
List of documents filed as a part of this report:
|
(1)
|
Index to Consolidated Financial Statements
|
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at June 30, 2009 and 2008
Consolidated Statements of Operations for the years ended June 30, 2009 and 2008
Consolidated Statements of Shareholders Equity and Comprehensive Loss for the years ended June 30, 2009 and 2008
Consolidated Statements of Cash Flows for the years ended June 30, 2009 and 2008
Notes to Consolidated Financial Statements
(2)
|
Index to Financial Statement Schedules
|
Not required.
Exhibit No.
|
|
Description
|
3(i)(1)
|
|
Certificate of Incorporation of Cadapult Graphic Systems, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 of Quarterly Report on Form 10-QSB/A filed on September 1, 1998)
|
3(i)(2)
|
|
Certificate of Amendment of Certificate of Incorporation of Cadapult Graphic Systems, Inc. (incorporated by reference to Exhibit 3(i)(5) of Annual Report on Form 10-KSB filed on September 28, 1999)
|
3(i)(3)
|
|
Certificate of Amendment of Certificate of Incorporation of Cadapult Graphic Systems, Inc. (incorporated by reference to Exhibit 3(i)(1) of Quarterly Report on Form 10-QSB filed on May 15, 2002)
|
3(i)(4)
|
|
Certificate of Amendment of Certificate of Incorporation of Media Sciences International, Inc. (incorporated by reference to Exhibit 3(i)(1) of Current Report on Form 8-K filed on June 28, 2007)
|
3(i)(5)
|
|
Certificate of Designation (incorporated by reference to Exhibit 4.5 of Registration Statement on Form SB-2, Registration Number 333-91005, originally filed on November 15, 1999)
|
3(i)(6)
|
|
Certificate of Amendment of Certificate of Designation of Series A Preferred Stock (incorporated by reference to Exhibit 3(i)(6) of Annual Report on Form 10-KSB filed on September 15, 2003)
|
3(i)(7)
|
|
Certificate of Amendment of Certificate of Designation of Series A Preferred Stock (incorporated by reference to Exhibit 4.7 of Registration Statement on Form SB-2, Registration Number 333-112340 filed on January 30, 2004)
|
85
3(ii)
|
|
By-Laws, as amended and restated (incorporated by reference to Exhibit 3(ii) of Current Report on Form 8-K filed on August 2, 2007)
|
10.1+
|
|
1998 Incentive Plan, as Amended and Restated (incorporated by reference to Exhibit 4.10 of Registration Statement on Form S-8 filed on March 22, 2006)
|
10.2+
|
|
2006 Stock Incentive Plan (incorporated by reference to Exhibit 4.9 of Registration Statement on Form S-8 filed on October 9, 2007)
|
10.3+
|
|
2006 Stock Incentive Plan, as Amended and Restated (incorporated by reference to Exhibit 10.2 of Quarterly Report on Form 10-Q filed on February 12, 2009)
|
10.4+
|
|
2009 Stock Incentive Plan (incorporated by reference to Exhibit 4.9 of Registration Statement on Form S-8 filed on February 5, 2009)
|
10.5+
|
|
Form of Employment Agreement with Michael W. Levin (incorporated by reference to Exhibit 10.16 of Annual Report on Form 10-KSB filed on September 15, 2003)
|
10.6+
|
|
Form of Option Agreement with Management issued April 2003 (incorporated by reference to Exhibit 10.15 of Registration Statement on Form SB-2, Registration Number 333-112340 filed on January 30, 2004)
|
10.7+
|
|
Option Agreement with Lawrence Anderson, June 2005 (incorporated by reference to Exhibit 10.28 of Annual Report on Form 10-KSB filed on September 13, 2005)
|
10.8+
|
|
Employment Agreement with Michael Levin (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed on November 13, 2008)
|
10.9+
|
|
Amended and Restated Employment Agreement with Michael Levin (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed on March 4, 2009)
|
10.10+
|
|
Employment Agreement with Kevan Bloomgren (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed on March 4, 2009)
|
10.11+
|
|
Employment Agreement with Robert Ward (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed on March 4, 2009)
|
10.12+
|
|
Employment Agreement with Vince Kelly (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed on March 4, 2009)
|
10.13
|
|
Amendment to Loan Documents, dated as of January 23, 2006 (incorporated by reference to Exhibit 10.1 of Form 10-QSB filed on February 9, 2006)
|
10.14
|
|
Guaranty and Suretyship Agreement, dated January 23, 2006 (incorporated by reference to Exhibit 10.3 of Form 10-QSB filed on February 9, 2006)
|
10.15
|
|
Term Note with PNC Bank, dated March 17, 2006, with Security Agreement and Guarantee (incorporated by reference to Exhibit 10.4 of Form 10-QSB filed on May 15, 2006)
|
10.16
|
|
Fourth Amendment to Loan Documents (incorporated by reference to Exhibit 10.1 of Form 8-K filed on October 3, 2007)
|
10.17
|
|
Waiver to Loan and Security Agreement, February 12, 2008 (incorporated by reference to Exhibit 10.11 of Annual Report on Form 10-K filed on September 25, 2008)
|
10.18
|
|
Waiver and Amendment to Lease, dated February 13, 2008 (incorporated by reference to Exhibit 10.11 of Annual Report on Form 10-K filed on September 25, 2008)
|
10.19
|
|
Amendment to Lease, dated May 13, 2008 (incorporated by reference to Exhibit 10.11 of Annual Report on Form 10-K filed on September 25, 2008)
|
10.20
|
|
Agreement with PNC, dated as of September 2008 (incorporated by reference to Exhibit 10.11 of Annual Report on Form 10-K filed on September 25, 2008)
|
10.21
|
|
Amendment to Forbearance Agreement (incorporated by reference to Exhibit 10.5 of Quarterly Report on Form 10-Q filed on May 14, 2009)
|
10.22
|
|
Form of Loan Agreement Documents (incorporated by reference to Exhibit 10.1 of Form 8-K filed on February 14, 2008)
|
10.23*
|
|
Agreement of Amendment to Revolving Loan and Security Agreement
|
10.24
|
|
Second Agreement of Amendment to Revolving Loan and Security Agreement (incorporated by reference to Exhibit 10.11 of Annual Report on Form 10-K filed on September 25, 2008)
|
10.25
|
|
Third Agreement of Amendment to Revolving Loan and Security Agreement and Other Documents
(incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed on June 26, 2009)
|
10.26
|
|
Lease Agreement (incorporated by reference to Exhibit 10.13 of Annual Report on Form 10-KSB filed on or about September 28, 2000)
|
10.27
|
|
Sublease Agreement (incorporated by reference to Exhibit 10 of Current Report on Form 8-K filed on January 24, 2005)
|
86
10.28
|
|
Master Lease Agreement, July 2005 (incorporated by reference to Exhibit 10.27 of Annual Report on Form 10-KSB filed on September 13, 2005)
|
10.29
|
|
Purchase Agreement (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed on September 30, 2008)
|
10.30
|
|
Form of Convertible Note (incorporated by reference to Exhibit 10.2 of Current Report on Form 8-K filed on September 30, 2008)
|
10.31
|
|
Form of Series A Warrants (incorporated by reference to Exhibit 10.3 of Current Report on Form 8-K filed on September 30, 2008)
|
10.32
|
|
Form of Series B Warrants (incorporated by reference to Exhibit 10.4 of Current Report on Form 8-K filed on September 30, 2008)
|
10.33
|
|
Form of Series C Warrants (incorporated by reference to Exhibit 10.5 of Current Report on Form 8-K filed on September 30, 2008)
|
10.34
|
|
Registration Rights Agreement (incorporated by reference to Exhibit 10.6 of Current Report on Form 8-K filed on September 30, 2008)
|
11
|
|
Statement re: computation of per share earnings is hereby incorporated by reference to Part II, Item 8 of this report
|
21*
|
|
Subsidiaries of the Registrant
|
23.1*
|
|
Consent of Amper, Politziner & Mattia, LLP
|
31.1*
|
|
Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
|
31.2*
|
|
Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
|
32.1*
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
|
32.2*
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
|
* Filed herewith
+ Represents executive compensation plan or agreement
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, as of September 24, 2009.
|
MEDIA SCIENCES INTERNATIONAL, INC.
|
|
|
|
By:
/s/ Michael W. Levin
|
|
Michael W. Levin
|
|
Chief Executive Officer and President
|
|
|
|
Dated: September 24, 2009
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Michael W. Levin
|
|
Chief Executive Officer, President and Director
|
|
September 24, 2009
|
Michael W. Levin
|
|
|
|
|
|
|
|
|
|
/s/ Kevan D. Bloomgren
|
|
Chief Financial Officer
|
|
September 24, 2009
|
Kevan D. Bloomgren
|
|
|
|
|
|
|
|
|
|
/s/ Willem van Rijn
|
|
Director and Non-executive Chairman
|
|
September 24, 2009
|
Willem van Rijn
|
|
|
|
|
|
|
|
|
|
/s/ Paul C. Baker
|
|
Director
|
|
September 24, 2009
|
Paul C. Baker
|
|
|
|
|
|
|
|
|
|
/s/ Edwin Ruzinsky
|
|
Director
|
|
September 24, 2009
|
Edwin Ruzinsky
|
|
|
|
|
|
|
|
|
|
/s/ Henry Royer
|
|
Director
|
|
September 24, 2009
|
Henry Royer
|
|
|
|
|
|
|
|
|
|
/s/ Dennis Ridgeway
|
|
Director
|
|
September 24, 2009
|
Dennis Ridgeway
|
|
|
|
|
|
|
|
|
|
/s/ Frank J. Tanki
|
|
Director
|
|
September 24, 2009
|
Frank J. Tanki
|
|
|
|
|
88
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