UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 333-117495
MAGIC COMMUNICATIONS, INC.
--------------------------------------------------------------------------------
(Name of Small Business Issuer in its Charter)
Delaware 13-3926203
------------------------------------------------- --------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
5 West Main Street
Elmsford, New York 10523
------------------------------------------------- --------------------
(Address of principal Executive Offices) (Zip Code)
Issuer's Telephone Number: 914-345-0800
Securities registered under Section 12(b) of the Act:
Common Stock par value $.0001 per share
Securities registered under Section 12(g) of the Act: None
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes___ No _X__
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State Issuer's revenues for its most recent year: $ 81,937 as of
December 31, 2003.
The number of shares outstanding of each of the Registrant's classes of common
stock, as of February 28, 2005 is 2,780,000 shares, all of one class, $.0001 par
value per share. Of this number, 1,632,900 shares were held by non-affiliates of
the Registrant.
The Company's common stock has not traded on the OTCBB or elsewhere and,
accordingly, there is no aggregate "market value" to be indicated for such
shares. The "value" of the 1,632,900 shares held by non-affiliates, based upon
the book value as of February 28, 2005 is $-0-.
*Affiliates for the purpose of this item refers to the Registrant's officers and
directors and/or any persons or firms (excluding those brokerage firms and/or
clearing houses and/or depository companies holding Registrant's securities as
record holders only for their respective clienteles' beneficial interest) owing
5% or more of the Registrant's common stock, both of record and beneficially.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes__________No_________ NOT APPLICABLE
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are herewith incorporated by reference: NONE
Transitional Small Business Disclosure Format
[ ] Yes [ ] No
PART I
Item 1. Description of Business
The Company was originally formed as a New York corporation on January 16,
1997(and reincorporated as a Delaware corporation in November 2002) for the
purpose of offering Internet kiosks where the public could access the Internet
for a fee. The internet Kiosks business proposals remain in their embryonic and
developmental stages, have not been activated and the Company has no current
plans to further pursue such activities. Since June 1997 the Company has engaged
in the business of contracting with various locations such as malls, gas
stations, stores and office buildings to install pay phones that are an
alternative to those provided by the primary local service provider (Verizon).
The Company places its phones by offering larger payments to the store owner or
property owner than Verizon pays to retail location operators. The Company
realizes net revenues through the difference between what is in the coin box
when it is emptied and what it must pay to the property owner, Verizon and long
distance and local service providers as well as payments from others for toll
free calls. The Company's net revenues are principally comprised of: (i) the
difference between what the Company charges for local calls ($.25 in New York
and $.35 in New Jersey and Pennsylvania for a three minute call) and the
$.042that the Company pays to Verizon for each three (3) minute call; (ii) the
difference between the fixed rate per call that the Company pays to Qwest for
each long distance call and the rates which the Company charges for long
distance calls (as established by the Company); (iii)a commission of 50% paid by
Qwest (long distance carrier) on operator assisted services, such as collect,
reverse charges or credit card long distance calls made on the Company's phones;
and (iv) a payment of $.249 on each toll-free (800) call from Company phones by
major long distance carriers, such as: AT&T, MCI, Qwest, Sprint, etc., through a
contract with a call aggregator, Private Payphone Owners' Network ("PPON") which
computes all toll free calls made from Company phones and pays the Company
directly. The Company's expenses include the marketing expense to place
telephones, the cost of the phones and phone maintenance. The Company does not
have a written agreement with Verizon, but has a written agreement with Qwest as
well as the aggregator (PPON). Copies of such written Agreements were annexed as
Exhibits 99.01 and 99.02 to the Company's Form 10-KSB for year ended December
31, 2002.
As of December 31, 2003, the Company had approximately 100 pay phones placed in
locations in New York , New Jersey and Pennsylvania. These phones are marketed
through the Company's own employees, principally the Company's President,
through word-of-mouth. The Company filed a Registration Statement on Form 10-SB
because Management believes that as a reporting Company with the potential of
trading on the NASD Electronic Bulletin Board ("OTCBB") the Company will be
better able to attract investment capital. No assurance is given that investment
capital can ever be raised.
The Company currently purchases its phones from North Atlantic Marketing and
during the calendar year ended December31, 2003 purchased no additional
telephones. The price for phones in the twelve month period ending December 31,
2003 averaged $1,000 for each individual telephone, which comprises: (i) the
purchase price from independent suppliers for all hardware; and (ii) wall
installation, but does not include wiring which is done by Verizon. In addition,
the Company arranges for the installation of the phones at the customers' place
of business and pays Verizon to connect the wires to the phones. The Company's
marketing is conducted primarily through the personal efforts of its President
and through "word of mouth" in order to obtain customer leads.
Competition
The Company continues to encounter substantial competition in its efforts to
locate pay telephones from both the local telephone company (Verizon) and from
other pay phone operators such as the Company. Many of these entities have
greater experience, resources and managerial capabilities than the Company. The
Company tries to compete primarily on the terms that it offers to location
owners. The Company's ability to place phones and the revenues derived from each
phone may be impaired by a general perception on the part of many consumers that
independent coin phone companies, such as the Company, charge higher rates to
consumers.
Employees
The Company currently has 1 full time employee and 2 part time employees. Its
full time employee is engaged in sales and marketing and a service technician as
well as the Company's Secretary are employed part time. The Company's employees
do not have any collective bargaining agreement and management believes that
theCompany's relations with its employees are satisfactory.
3
Description of Property
The Company currently leases 350 square feet of office space pursuant to a month
to month lease from a related party at a nominal cost. The Company believes that
its offices are sufficient for its current and short term anticipated needs and
that similar space is available in the general vicinity of its offices for
similar prices should the need arise.
Item 3. Legal Proceedings.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5. Market for Common Equity and Stockholder Matters.
The Company became subject to '34 Exchange Act reporting requirements as of
January 13, 2003. To date there has been no established trading market for the
Company's common stock. No symbol has been assigned for its securities and its
securities have not been listed on any Exchange to date.
A. Holders.
As of the close of business on February 28, 2005 there were 96 stockholders of
record of the Registrant's Common Stock and 2,780,000 shares were issued and
outstanding.
B. Dividends.
The payment by the Registrant of dividends, if any, in the future rests within
the discretion of its Board of Directors and will depend, among other things,
upon the Company's earnings, its capital requirements and its financial
condition, as well as other relevant factors. The Registrant has not paid or
declared any dividends upon its Common Stock since its inception and, by reason
of its present financial status and its contemplated financial requirements,
does not contemplate or anticipate paying any dividends upon its Common Stock in
the foreseeable future.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Year ended December 31, 2003 vs. Year ended December 31, 2002
Sales increased from $73,617 at year ended December 31, 2002 to $81,937 for year
ended December 31, 2003. Operating expenses increased from $109,044 to $180,174.
The increase of operating expenses was primarily due to a $47,325 increase in
4
professional fees and a $25,388 increase in general and administrative expenses,
while sales increased by $8,320 and operating costs increased by $71,130.
Accordingly, the Company's net loss increased by $62,810 so that as of December
31, 2003, the Company had an accumulated deficit of ($136,396) and a total
stockholders deficit of ($127,243). The number of pay telephones in service
during the years ended December 31, 2002 and December 31, 2003 were
approximately 150 and 100 respectively.
Liquidity and Capital Resources
On December 31, 2003 the Company had $4,801 in cash on hand. With these limited
funds the Company will (a) be dependent upon management to fund operations
and/or (b) be dependent upon some form of debt or equity financing, if
available, and if available, under terms deemed reasonable to management. The
Company's auditors have included a "going concern" opinion in their report on
the Company's financial statements.
Need for Additional Financing
The Company believes that its existing capital will be insufficient to meet the
Company's cash needs, including the costs of compliance with the continuing
reporting requirements of the Securities Exchange Act of 1934, as amended, for
the current fiscal year which should not exceed $50,000. The Company may rely
upon issuance of its securities to pay for the services necessary to meet
reporting requirements.
Forward-Looking Statements
When used in this form 10-KSB, or in any document incorporated by reference
herein, the words or phrases "will likely result", "are expected to," "will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties including changes in economic conditions in the
Company's market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area and
competition, that could cause actual results to differ materially from
historical earnings, if any, and those presently anticipated or projected. The
Company wishes to caution readers not to place undue reliance on any such
forward- looking statements, which speak only as to the date made. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements. The Company does not
undertake, and specifically disclaims any obligation, to publicly release the
result of any revisions which may be made to any forward-looking statements to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
5
Item 7. Financial Statements
The financial statements filed as part of this Annual Report on Form
10-KSB are set forth starting on page11.
Item 8. Changes In And Disagreements With Accountants On Accounting
And Financial Disclosure.
None
Item 8A. Controls And Procedures
Our President currently serves as both our Chief Executive Officer and Chief
Financial Officer (collectively, the "Certifying Officer") and is responsible
for establishing and maintaining disclosure controls and procedures for us. He
has concluded (based upon his evaluation of these controls and procedures as of
a date within 90 days of the filing of this report) that our disclosure controls
and procedures are effective to ensure that information required to be disclosed
by us in this report is accumulated and communicated to management, including
our principal executive officers as appropriate, to allow timely decisions
regarding required disclosure.
The Certifying Officer also has indicated that there were no significant changes
in our internal controls or other factors that could significantly affect such
controls subsequent to the date of his evaluation, and there were no corrective
actions with regard to significant deficiencies and material weaknesses.
Item 8B. Other Information
None.
PART III
Item 9. Directors And Executive Officers Of The Registrant
Set forth below is certain information concerning each current director and
executive officer of the Registrant, including age, position(s) with the
Registrant, present principal occupation and business experience during the past
five years.
Name Age Position Held
----------------- --- ----------------------------------------
Stephen D. Rogers 55 President, Chief Executive Officer,
Chief Financial Officer and Director
Maureen Rogers 49 Vice President and Director
Edwin Osias 58 Director
Suzanne Keating 34 Secretary
The directors named above will serve until the next annual meeting of the
Company's stockholders. Thereafter, directors will be elected for one-year terms
at the annual stockholders' meeting. Officers will hold their positions at the
6
pleasure of the board of directors, absent any employment agreement, of which
none currently exists or is contemplated. There is no arrangement or
understanding between the directors and officers of the Company and any other
person pursuant to which any director or officer was or is to be selected as a
director or officer.
Biographical Information
STEPHEN D. ROGERS: President, has been in the communications business since 1997
along with his wife Maureen. He has installed and maintained hundreds of Public
Pay Phones and public access equipment including Internet kiosks in hotels,
hospitals, truck stops and multiple other locations. Prior to working in the
communication field, Mr. Rogers was a principal and founder in Magic
Restaurants, and its subsidiaries from September 1985 until December 1994, which
owned and operated over 30 restaurants throughout the Northeast. He graduated
from Queens College in 1971with a Bachelors degree in Psychology and Education
and is currently living in Westchester with his wife and 3 children.
MAUREEN ROGERS: Vice President and Secretary (the latter until late
November2002) has been in the communications business since January 1997 along
with her husband Stephen. In addition to the communications field, Mrs. Rogers
is the principal and founder of Just Desserts, a small baking business which she
continues to own and operate since 1992. She was born and raised in England and
is currently living in Westchester, New York with her husband and 3 children.
EDWIN OSIAS: Director, is a former U.S. Naval Officer who worked from
1981through 1985 with Chemical Bank as an officer, then from 1985 through 1998
as the National Sales Manager for Tungsram and then from 1989 through 1994 as
the Executive Vice President for Sternberger Warehousing Trucking in Long Island
City, New York. He is currently the President and owner of Osias Sales Inc.
since 1994, a company which designs and produces custom ties and scarves for the
museum industry. He currently is married and resides in Long Island, New York.
SUZANNE KEATING: She became Secretary of the Company in late November 2002,
having previously been employed by the Company since 1999 in administrative and
clerical capacities. Prior thereto and from 1994 until 1999, she was employed by
Magic Restaurant, Inc., holding positions from Accounts Payable Manager to
Office Manager until the firm filed for bankruptcy. From 1992 until 1994 Ms.
Keating was employed by Universal Hotels, a hotel management company. Ms.
Keating graduated in 1992 from the Westchester Business Institute in White
Plains, New York with an Associates Degree in Accounting and Business
Administration.
Item 10. Executive Compensation
There are no written agreements or oral understandings as relates to executive
compensation. To date, there has not been any executive compensation paid or
accrued other than $36,970 paid to the Registrant's Vice President.
7
Item 11. Security Ownership Of Certain Beneficial Owners And Management
And Related Stockholder Matters
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of February 28, 2005 (except where otherwise
noted) with respect to (a) each person known by the Registrant to be the
beneficial owner of more than five percent of the outstanding shares of Common
Stock, (b) each director of the Registrant, (c) the Registrant's executive
officers and (d) all officers and directors of the Registrant as a group. Except
as may be indicated in the footnotes to the table, all such shares of Common
Stock are owned with sole voting and investment power. The title of class of all
securities indicated below is Common Stock with $.0001 par value per share.
1 Name and Address of 2 Number of Shares 3 Percentage
Beneficial Owner Beneficially Owned of Class
---------------------------- ------------------- ------------
Maureen Rogers 240,000 8.63%
Stephen D. Rogers 0
Edwin Osias 100 3
4Boulder Hill, Inc. 210,000 7.55%
Karen Glenn 240,000 8.63%
Suzanne Keating 5,000 3
5First Southwest Company 252,000 9.06%
6National Financial Services LLC 200,000 7.19%
All officers and directors as a group
(4 persons) 245,100 8.82%
Management has no plans to issue any additional securities to management,
promoters or their affiliates or associates and will do so only if such issuance
is in the best interests of shareholders of the Company and complies with all
applicable federal and state securities rules and regulations.
----------------------------------
1 The address for each person is c/o Magic Communications, Inc., 5 West Main
Street, Elmsford, New York 10523
2 Unless otherwise indicated, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of the
Common Stock beneficially owned by them. A person is deemed to be the beneficial
owner of securities which may be acquired by such person within 60 days from the
date indicated above upon the exercise of options, warrants or convertible
securities. Each beneficial owner's percentage ownership is determined by
assuming that options, warrants or convertible securities that are held by such
person (but not those held by any other person) and which are exercisable within
60 days of the date indicated above, have been exercised.
3 Represents less than 1% of the 2,780,000 outstanding shares of common stock.
4 Boulder Hill, Inc. is a New York Corporation formed in March 1998 and its sole
shareholder is Georgia Rogers.
5 First Southwest Company is located at 325 N. St. Paul, Suite 800, Dallas,
Texas 75201.
6 National Financial Services LLC mailing address is P.O. Box 3731, Church
Street Station, New York, New York 10281.
8
Item 12. Certain Relationships and Related Transactions
The Company has a 2 year consulting agreement with Magic Consulting Group, Inc.,
a company owned by Barbara Bennett, the adult niece of the Company's President
which provides consulting services. This is an oral agreement and no payments
have been made to date, however, the Company has accrued a payable of $52,306
for services performed. Magic Consulting was hired to assist and consult in
finding locations for communications equipment including public payphones and
public Internet terminals (kiosks). It assisted in designing a marketing package
as well as setting up appointments with various hotels in the New York
metropolitan area. The Company's President disclaims any beneficial interest in
this Agreement.
The Company also has payables to its President's brother in the amount of
$5,000, a receivable from its President in the amount $4,300, and a payable to
its President in the amount of $10,000. During the year ended December 31, 2003,
Boulder Hill, a related party, advanced the Company money to pay for various
expenses. At December 31, 2003, the Company owes Boulder Hill $11,391. These
transactions are unsecured and non-interest bearing and have no specified
payment terms.
Item 13. Exhibits
a. Exhibits
31.1 Certification Pursuant To Section 302 Of The Sarbanes-Oxley
Act Of 2002
32.1 Certification Pursuant Section 906 Of The Sarbanes-Oxley Act
Of 2002
Item 14. Principal Accountant Fees And Services
During 2003 the Company incurred professional service fees of $24,075 for audit
and audit related services provided by the principal accountant. During 2002
these fees totaled $3,750. These fees included the cost of the annual audit and
reviews of the quarterly and annual filings with the Securities and Exchange
Commission.
9
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MAGIC COMMUNICATIONS, INC.
By: Stephen D. Rogers
----------------------------------
Stephen D. Rogers, President, Chief
Executive Officer, Chief Financial
Officer and Director
10
MAGIC COMMUNICATIONS GROUP, INC.
FINANCIAL STATEMENTS
INDEX
Page Number
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM F - 1
FINANCIAL STATEMENTS:
Balance Sheet F - 2
Statements of Operations F - 3
Statements of Stockholders' Deficit F - 4
Statements of Cash Flows F - 5
Notes to Financial Statements F - 6 to F - 10
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders'
Magic Communications Group, Inc.
We have audited the accompanying balance sheet of Magic Communications
Group, Inc. as of December 31, 2003 and the related statements of operations,
stockholders' deficit and cash flows for the years ended December 31, 2003 and
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with 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. An audit includes
examining on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, the financial position of Magic Communications Group, Inc. as of
December 31, 2003 and the results of its operations and its cash flows for the
years ended December 31, 2003 and 2002 in conformity with accounting principles
generally accepted in the United States of America.
/s/Sherb & Co., LLP
Certified Public Accountants
New York, New York
January 6, 2005
F-2
MAGIC COMMUNICATIONS GROUP, INC.
BALANCE SHEET
DECEMBER 31, 2003
ASSETS
CURRENT ASSETS:
Cash $ 4,801
-------
TOTAL CURRENT ASSETS 4,801
EQUIPMENT, net 39,146
SECURITY DEPOSITS 11,550
DUE FROM RELATED PARTY 4,300
-------
$ 59,797
=======
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 58,343
Loan Payable 50,000
Due to related parties 78,697
-------
TOTAL CURRENT LIABILITIES 187,040
STOCKHOLDERS' DEFICIT:
Common stock, $.0001 par value; authorized
50,000,000 shares; issued and outstanding
2,530,000 shares 253
Preferred stock, $.0001 par value;
authorized 1,000,000 shares; issued and
outstanding -0- shares -
Additional paid-in capital 8,900
Accumulated deficit (136,396)
-------
TOTAL STOCKHOLDERS' DEFICIT (127,243)
-------
$ 59,797
=======
The accompanying notes are an integral part of the financial statements.
F-2
MAGIC COMMUNICATIONS GROUP, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
--------------------------------
2003 2002
------- ---------
REVENUES $ 81,937 $ 73,617
OPERATING EXPENSES:
Depreciation 17,280 17,280
Salaries 36,970 30,536
Equipment lease 4,522 12,539
Professional fees 61,375 14,050
General and administrative 60,027 34,639
------- ---------
TOTAL OPERATING EXPENSES 180,174 109,044
------- ---------
NET LOSS $(98,237) $ (35,427)
======= =========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.04) $ (0.01)
======= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic and Diluted 2,505,000 2,500,000
========= =========
The accompanying notes are an integral part of the financial statements.
F-3
MAGIC COMMUNICATIONS GROUP, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
Common Stock Additional Total
------------------ Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
--------- ------- --------- ----------- --------------
Balance, January 1, 2002 2,500,000 $ 250 $ 750 $ (2,732) $ (1,732)
Contribution of common stock (5,100) (1) 1 - -
Shares issued for services 5,100 1 152 - 153
Options issued for services - - 5,000 - 5,000
Net loss - - - (35,427) (35,427)
---------- -------- --------- --------- -----------
Balance, December 31, 2002 2,500,000 250 5,903 (38,159) (32,006)
Shares issued for services 30,000 3 2,997 - 3,000
Net loss - - - (98,237) (98,237)
---------- -------- --------- --------- -----------
Balance, December 31, 2003 2,530,000 $ 253 $ 8,900 $(136,396) $ (127,243)
========== ======== ========= ========= ============
The accompanying notes are an integral part of the financial statements.
F-4
MAGIC COMMUNICATIONS GROUP, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------
2003 2002
------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(98,237) $ (35,427)
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities:
Depreciation 17,280 17,280
Stock based compensation 3,000 5,153
Changes in assets and liabilities:
Accounts payable 18,817 18,111
------- ---------
TOTAL ADJUSTMENTS 39,097 40,544
------- ---------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (59,140) 5,117
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Return of security deposits 3,850 -
------- ---------
NET CASH PROVIDED BY INVESTING
ACTIVITIES 3,850 -
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan payable 50,000 -
(Payments to) proceeds from related
parties 10,091 (5,117)
------- ---------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES 60,091 (5,117)
------- ---------
NET INCREASE IN CASH 4,801 -
CASH, BEGINNING OF YEAR - -
------- ---------
CASH, END OF YEAR $ 4,801 $ -
======= =========
Cash paid for:
Interest $ - $ -
======= =========
Taxes $ - $ -
======= =========
The accompanying notes are an integral part of the financial statements.
F-5
MAGIC COMMUNICATIONS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
1. DESCRIPTION OF BUSINESS:
Magic Communications Group, Inc. ("Magic" or the "Company")
was incorporated in New York on January 16, 1997. The Company was
originally formed for the purpose of offering Internet kiosks where the
public could access the Internet for a fee. The Company did not develop
that business and the financial statements do not include any amounts
related to it. The Company's operations consist primarily of owning and
operating pay phones in New York, New Jersey and Pennsylvania. This
business commenced on February of 1997.
In November 2002 the Company was merged into a Delaware
corporation which was created for the purpose of reincorporating the
Company accounted for as a reorganization of entities under common
control.
2. GOING CONCERN:
The Company's financial statements as of December 31, 2002 have been
prepared on a going-concern basis, which presumes that the Company will
be able to continue to meet its obligations and realize its assets in
the normal course of business. At December 31, 2003, the audited
financial statements have not been prepared as a going concern due to
the fact that the audit report has been issued twelve months past the
December 31, 2003 balance sheet date.
As shown in the accompanying financial statements, the Company has a
history of losses with an accumulated deficit of $136,396 at December
31, 2003 and, as of that date, a working capital deficiency of
$182,239. These conditions would raise substantial doubt about the
Company's ability to continue as a going concern had the audit report
not been issued twelve months past the balance sheet date. The
Company's continuation as a going concern is dependent upon its ability
to ultimately attain profitable operations, generate sufficient cash
flow to meet its obligations, and obtain additional financing as may be
required.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. Use of Estimates - 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
reporting amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
F-6
B. Cash - The Company considers all highly liquid temporary cash
investments with an original maturity of three months or less
when purchased, to be cash equivalents.
C. Revenue recognition - The Company realizes net revenues
through the difference between what is in the coin box when it
is emptied and what it must pay to the property owner, Verizon
and long distance and local service providers as well as
payments from others for toll free calls.
D. Equipment - Equipment is recorded at cost. Expenditures for
major additions and betterment's are capitalized. Maintenance
and repairs are charged to operations as incurred.
Depreciation of equipment is computed by the straight-line
method over the assets estimated useful lives of ten years.
Upon sale or retirement of plant and equipment, the related
cost and accumulated depreciation are removed from the
accounts and any gain or loss is reflected in operations.
E. Security deposit - The Company makes a deposit in the amount
of $300 to Verizon for each pay telephone installed. The
purpose of these deposits is to secure amounts owed to Verizon
by the Company for monthly phone charges as describe in Note
6. This amount is returned to the Company after three years if
it is current with all its payments. During the year ended
December 31, 2003 the Company used $3,850 of the security
deposits to pay expenses charged by Verizon. In 2004 the
Company decided to use Qwest instead of Verizon and used up
the remaining security deposit to offset Verizon expenses.
F. Fair value of financial instruments - The carrying amounts
reported in the balance sheet for, accounts payable, and due
to related parties approximate fair value based on the
short-term maturity of these instruments.
G. Income taxes - Income taxes are accounted for in accordance
with the provisions of SFAS No. 109. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amounts expected to be
realized, but no less than quarterly.
H. Stock based compensation - Financial Accounting Statement No.
123, Accounting for Stock Based Compensation, encourages, but
does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based
compensation using the intrinsic method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations.
Accordingly, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. The Company has
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adopted the "disclosure only" alternative described in SFAS
123 and SFAS 148, which require pro forma disclosures of net
income and earnings per share as if the fair value method of
accounting had been applied.
I. New Accounting Pronouncements - Management does not believe
that recently issued, but not yet effective accounting
pronouncements if currently adopted would have a material
effect on the accompanying financial statements.
4 EQUIPMENT:
Equipment consists of the following at December 31, 2003:
Payphones $ 172,790
Less: accumulated depreciation (133,644)
-----------
$ 39,146
===========
Depreciation expense for the years ended December 31, 2003 and 2002 was
$17,280 and $17, 280, respectively.
5. LOAN PAYABLE:
On August 14, 2003, the Company signed a promissory note for $50,000.
The note is due on demand and bears interest at a rate of 4% per annum.
As per the terms of the note the Company was supposed to issue 25,000
shares which have not been issued as of the above balance sheet date.
The fair value of the common stock to be issued ($2,500) is included in
accounts payable and accrued expenses. The Company has accrued interest
of $750 from the date of the note to December 31, 2003
6. COMMITMENTS:
The Company rents office space from a related party on a month - to -
month basis at a nominal cost.
The Company has entered into third party agreements with Verizon, Qwest
and property or store owners of payphone locations. Verizon services
the local telephone calls made on the payphones owned and operated by
the Company. The Company pays Verizon $0.042 per minute for each call.
Qwest services the long-distance phone calls made on the payphones
owned and operated by the Company. The Company pays Qwest between $0.03
to $0.04 per minute on each long-distance call. The Company pays
Verizon and Qwest on a monthly basis. There is no expiration date on
the agreement with Verizon and the Qwest agreement renews annually. The
property or store owners allow the Company to place its phones on their
locations for a percentage of the money in the coin box of the
payphone.
7. DUE TO RELATED PARTIES:
At December 31, 2003, the Company has a payable to Magic Consulting of
$52,306 for consulting services performed. The Company also has
payables to a related party in the amount of $5,000, a receivable from
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an officer in the amount $4,300, and a payable to the same officer in
the amount of $10,000. During the year ended December 31, 2003, Boulder
Hill, a related party, advanced the Company money to pay for various
expenses. At December 31, 2003, the Company owes Boulder Hill $11,391.
These transactions are unsecured and non-interest bearing and have no
specified payment terms.
8. STOCK OPTION PLAN:
The board of directors, on November 24, 2002, adopted the Company's
2002 Non-Statutory Stock Option Plan ("Plan") so as to provide a
critical long-term incentive for employees, non-employee directors,
consultants, attorneys and advisors of the Company and its
subsidiaries, if any. The board of directors believes that the
Company's policy of granting stock options to such persons will
continue to provide it with a critical advantage in attracting and
retaining qualified candidates. In addition, the Plan is intended to
provide the Company with maximum flexibility to compensate plan
participants. It is expected that such flexibility will be an integral
part of the Company's policy to encourage employees, non-employee
directors, consultants, attorneys and advisors to focus on the
long-term growth of stockholder value. The board of directors believes
that important advantages to the Company are gained by an option
program such as the 2002 Plan which includes incentives for motivating
employees of the Company, while at the same time promoting a closer
identity of interest between employees, non-employee directors,
consultants, attorneys and advisors on the one hand, and the
stockholders on the other.
During the year ended December 31, 2002, management issued 1,000,000
options to certain current members of its management team as well as
other persons whom it considered to be important to its current and
proposed business activities. On December 13, 2002 the Company voided
these options as if never issued and without receipt by any of the
option holders of any form of consideration. The fair value of each
option grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions dividend yield of
-0- percent; -0- percent volatility; risk-free interest rate of 4.00
percent and an expected holding period of 19 days. In connection with
these options the Company recorded consulting expense of $5,000 for the
year ended December 31, 2002.
The Company uses the intrinsic value method in accounting for stock
options issued to employees and directors. Had compensation cost for
the Company's option plans been determined based on the fair value at
the grant dates for awards, the Company's net loss and loss per share
would have resulted in the pro forma amounts indicated below.
December 31,
-----------------------
2002 2003
--------- --------
Net loss as reported $ 35,427 $ 97,486
Pro forma net loss $ 50,427 $ 97,486
Net loss per share as reported $ 0.01 $ 0.04
Pro forma net loss per share $ 0.02 $ 0.04
F-9
A summary of stock option transactions is presented below:
Number of Shares Weighted average
exercise price
---------------- ----------------
Granted on November 24, 2002 1,000,000 $ .01
Canceled on December 13, 2002 (1,000,000) (.01)
------------- -----------
Outstanding at December 31, 2002 - -0-
No activity - -0-
------------- -----------
Outstanding at December 31, 2003 - $ -0-
============= ===========
9. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes ("SFAS
No.109"). SFAS No.109 requires the recognition of deferred tax assets
and liabilities for both the expected impact of differences between the
financial statements and tax basis of assets and liabilities, and for
the expected future tax benefit to be derived from tax loss and tax
credit carry-forwards. SFAS No. 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets. Prior to 2003, the Company and its
stockholders elected to be taxed under subchapter S of the Internal
Revenue Code. As a result, all income and losses were reported by the
Company's stockholders. The following is a reconciliation of income
taxes computed using the statutory Federal rate to the income tax
expense in the financial statements for December 31, 2003.
Income tax (benefit) computed at statutory rate $ (34,000)
State income tax (benefit), net of federal benefit (6,000)
Permanent difference - stock based compensation 1,000
Change in valuation allowance 39,000
----------
Provision for income taxes $ -
==========
As of December 31, 2003, the Company has net operating losses for
Federal income tax purposes totaling approximately $95,000, expiring at
December 31, 2023.
The following is a schedule of deferred tax assets as of December 31,
2003:
Net operating loss $ 51,000
Valuation allowance (51,000)
---------
Net deferred tax asset $ -
=========
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10. STOCKHOLDERS' DEFICIT:
In November 2002 the Company was merged into a Delaware corporation
which was created for the purpose of reincorporating the Company and
accounted for as a reorganization of entities under common control. In
connection with the reincorporation merger the original shares of the
Company were changed into 2,500,000 shares, par value $.0001 per share.
All but 240,000 shares were gifted to 109 persons or entities. Of these
shares, 5,000 shares were issued to employee and 100 shares issued to a
director. The shares were valued at $.03 per share and were recorded as
stock based compensation. The authorized capital stock of the Company
consists of 50,000,000 shares of common stock, par value $.0001 per
share, of which 2,530,000 were issued an outstanding as of the date of
this filing, and 1,000,000 shares of preferred stock, par value $.0001
per share, none of which were issued, outstanding or designated as of
the date of this filing.
On October 31, 2003, the Company issued 30,000 shares of common stock
for consulting services. The Company valued the shares at $0.10 per
share and recorded $3,000 of consulting expense accordingly.
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