UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[ x ] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from ______________ to________________
Commission file number 0-15807
MARKETSHARE RECOVERY, INC.
---------------------------------
(Name of small business issuer in its charter)
DELAWARE 31-1190725
---------------------- --------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) (Identification No.)
95 Broadhollow Road Suite 101, Melville New York 11747
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(Address of principal executive offices) (Zip Code)
(631) 385-0007
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Issuer's telephone number
Securities registered under Section 12(b) of the Exchange Act:
None
-------------------
Title of each class Name of each exchange on which registered
Securities registered under Section 12(g) of the Exchange Act:
Common Stock Par Value $.10
------------------------------
(Title of class)
Check whether the issuer (1) 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. [ x ] Yes [ ] No
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will 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 ]
1
State issuer's revenues for its most recent fiscal year. $674,146
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold was approximately $1,395,575 based upon the average bid and asked price
of $0.125 as reported by the OTC Bulletin Board as of April 12, 2004.
The Company had 45,702,256 shares of common stock outstanding, as of April
12, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (Check one): Yes [ ]; No [x]
2
PART I
Item 1. Description of Business........................................4
Item 2. Description of Property........................................5
Item 3. Legal Proceedings..............................................5
Item 4. Submission of Matters to a Vote of Security Holders............5
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters................................................................5
Item 6. Management's Discussion and Analysis or Plan of
Operation..............................................................10
Item 7. Financial Statements..........................................20
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................20
Item 8A Controls and Procedures.......................................20
PART III
Item 9. Directors and Executive Officers of the Registrant............21
Item 10. Executive Compensation........................................22
Item 11. Security Ownership of Certain Beneficial Owners and
Management.............................................................23
Item 12. Certain Relationships and Related Transactions...............23
Item 13. Exhibits and Reports on Form 8-K.............................24
Exhibit Index..........................................................24
Item 14. Principal Accountant Fees and Services.......................26
Signatures.............................................................27
3
PART I
INTRODUCTORY COMMENT
Throughout this Annual Report on Form 10-KSB the terms "we," "us," "our,"
"MarketShare" and "our company" refer to MarketShare Recovery, Inc., a Delaware
corporation, and, unless the context indicates otherwise, includes our wholly
owned subsidiary MarketShare Recovery, Inc. a New York corporatoin.
FORWARD-LOOKING STATEMENTS
The Company makes forward-looking statements in filings with the
Securities and Exchange Commission (including this Annual Report on Form 10KSB
and exhibits thereto) that are subject to risks and uncertainties. These
forward-looking statements include: statements of goals,intentions, and
expectations; estimates of risks and of future costs and benefits; assessments
of probable loan losses, market risk, and off-balance sheet arrangements;and
statements of the ability to achieve financial and other goals. These
forward-looking statements are subject to significant uncertainties because they
are based upon or are affected by: management's estimates and projections of
future interest rates and other economic conditions; future laws and
regulations; and a variety of other matters which, by their nature, are subject
to significant uncertainties. Because of these uncertainties, the Company's
actual future results may differ materially from those indicated. In addition,
the Company's past results of operations do not necessarily indicate its future
results.
Item 1. Description of Business.
Background
The Company was incorporated on March 13, 1985, under the laws of the
State of Utah with the name Univenture Capital Corp. The Company was organized
to engage in any lawful business and had no specific business plan except the
investigation, analysis, and possible acquisition of business opportunities.
On August 29, 1986, the Company acquired all of the outstanding stock
of Health & Leisure Inc., a Delaware corporation which subsequently changed its
name to Entre Vest, Inc. ("Entre Vest"), in a transaction in which a subsidiary
of the Company merged with and into Entre Vest and the former stockholders of
Entre Vest obtained a controlling interest in the Company. The Company
subsequently changed its own name from Univenture Capital Corp. to Health &
Leisure, Inc. and changed its state of incorporation from Utah to Delaware.
Entre Vest was incorporated on June 6, 1985, under the laws of the State of
Delaware. On June 13, 2003 Health & Leisure entered into an Acquisition
Agreement and Plan of Merger (the "Merger Agreement"), by and among the
Registrant; Venture Sum, Inc., a Delaware corporation and a wholly owned
subsidiary of Registrant ("Mergerco"); and MarketShare Recovery, Inc., a New
York corporation, ("MKSR"), Mergerco merged with and into MKSR, and MKSR became
a wholly owned subsidiary of the Registrant. The parent company, Health &
Leisure, Inc. changed its name to MarketShare Recovery to reflect the identity
and business of its only operating subsidiary. ( The Company and its
subsidiaries are referred to herein as the "Company.")
On November 25, 2003 Dominix, Inc. a Delaware corporation traded on NASDAQ
electronic bulletin board (DMNX) and MarketShare entered into a Stock Purchase
Agreement (the "Stock Purchase Agreement") under which Dominix, subject to
certain conditions, would acquire all of the outstanding capital stock of
MarketShare Recovery, Inc., a New York corporation and wholly owned subsidiary
of MarketShare (MarketShare Sub). The parties have determined that it is in
their mutual best interest to terminate the Stock Purchase Agreement.
4
Business
The Registrant's operating subsidiary MarketShare Recovery was
incorporated in New York in November 2000. MarketShare Recovery is a provider of
online direct marketing solutions for enterprises. Our solutions enable
corporations to create and deliver online direct marketing programs that drive
revenue, influence behavior and deepen customer relationships. Our solutions
provide customer insight and powerful program execution through a combination of
hosted applications and technology infrastructure.
Solutions
We provide comprehensive solutions for creating and executing online
direct marketing programs. Our solutions are designed to enable marketers to
build the foundation required to develop online direct marketing programs, reach
new customers, and maximize the value of existing customers. Our solutions
consist of the following offerings:
Campaign Services
Campaign Services provides marketers with an account representative to
efficiently execute their online direct marketing programs. Based upon a
marketer's guidance, the Campaign Services representative targets, tests and
executes email marketing campaigns. Marketers maintain control and visibility
over the entire process.
Program Services
Program Services provides marketers with an specialist designed to
proactively build and manage their online direct marketing programs around their
email marketing goals. The Program Services specialist delivers insight,
analysis and management to optimize the value of online customer relationships.
Customer Acquisition
Customer acquisition is a full service marketing offering that enables
clients to cost-effectively reach new prospects and drive online revenue by
converting prospects into customers. MarketShare Recovery helps clients achieve
superior results by providing access to a rich base of prospect sources,
negotiating exceptional rates and optimizing campaigns to reach the highest
value customers. Our Customer Acquisition clients receive full-service program
management, including strategic media plan development, comprehensive testing
and results analysis.
Professional Services
Professional services can be utilized by clients to enhance marketing
programs and improve results. MarketShare Recovery offers clients services to
fulfill online direct marketing needs in each of the following categories:
Strategy, Analysis, Data Management, Solutions Engineering, Web Development,
Creative and Design and Media Planning.
5
Information Distribution
Information distribution services are provided by the Company to clients
who wish to publicly announce to the marketplace corporate developments, new
product offerings and business opportunities. MarketShare Recovery will
distribute to its client's desired demographic coverage of those significant
events to our clients businesses.
Sales and Marketing
We sell our products and services in the United States through a sales and
marketing organization that consisted of 7 employees as of December 31, 2003.
These employees are located at our office in Melville, New York.
Clients
Our clients consist of a diverse group of companies operating in many
industries primarily throughout the United States, principally e-commerce
oriented businesses.
Competition
The market for online direct marketing services is highly competitive and
rapidly evolving and experiences rapid technological change. We expect
competition to increase significantly in the future because of the attention the
Internet has received as a means of advertising and direct marketing and because
there are limited barriers to entry into our market.
We believe that the factors on which we successfully compete include:
- Credibility of clients and their willingness to act as references.
- Quality of online direct marketing services.
- Technology-enhanced service offerings.
- Sophistication and reliability of technology.
- Speed of implementation of online direct marketing campaigns.
- Cost-effective online direct marketing solutions.
- Measurable results.
Although we believe that our solutions currently compete favorably as to
each of these factors, our market is relatively new and is evolving rapidly. We
may not be able to maintain our competitive position against current and
potential competitors.
6
Our principal competitors include providers of online direct marketing
solutions such as DoubleClick, Responsys, Cheetahmail, CMGI's Yesmail (through
its recent acquisition of Post Communications), eDialog, Digital Ipact and
Clickaction, as well as the in-house information technology departments of our
existing and prospective clients.
In addition, we expect competition to persist and intensify in the future,
which could harm our ability to increase sales and maintain our prices. In the
future, we may experience competition from Internet service providers,
advertising and direct marketing agencies and other large established businesses
possessing large, existing customer bases, substantial financial resources and
established distribution channels and could develop, market or resell a number
of online direct marketing solutions. These potential competitors may also
choose to enter, or have already entered, the market for online direct marketing
by acquiring one of our existing competitors or by forming strategic alliances
with a competitor.
Many of these potential competitors have broad distribution channels and
they may bundle competing products or services. As a result of future
competition, the demand for our services could substantially decline. Any of
these occurrences could harm our ability to compete effectively.
Government Regulation
The Federal government of the United States has enacted "CAN-SPAM Act of
2003," which became effective on January 1, 2004 restricting the sending of
unsolicited commercial email. The "Act" generally limits or prohibits both the
transmission of unsolicited commercial emails and requires unsolicited
commercial e-mail messages to be labeled as such and to include opt-out
instructions and the sender's physical address. It prohibits the use of
deceptive subject lines and false headers in such messages. The Act further
authorizes the FTC (but does not require) the establishment of a "do-not-email"
registry. State laws that require labels on unsolicited commercial e-mail or
prohibit such messages entirely are pre-empted, although provisions merely
addressing falsity and deception would remain in place. We believe that our
current suite of services are not affected by such legislation because the list
management practices that we espouse to our clients are intended to prevent the
sending of unsolicited commercial email. We cannot assure you that future
legislation or the application of existing legislation will not harm our
business.
Seasonality
The traditional direct marketing industry has typically generated lower
revenue during the summer months and higher revenue during the calendar year-end
months. We believe our business is affected by similar revenue fluctuations, but
we are unable to isolate and predict the magnitude of these effects.
7
Employees
As of December 31, 2003, we had a total of 5 full-time employees and 2
part time employees. Our future performance depends upon the continued service
of our existing personnel. Our future success also depends on our continuing
ability to attract, train and retain highly qualified technical, sales and
managerial personnel. None of our employees is represented by a labor union. We
have not experienced any work stoppages and consider our relations with our
employees to be good.
MANAGEMENT
The following table sets forth the names and ages of directors and
executive officers of the Company.
Name Age Position(s)
------------- --- -----------------------------------
Ray Barton 34 Chief Executive Officer, Chief Technology
Officer President, and Chairman of the
Board
Timothy Schmidt 35 Chief Financial Officer and Director
Ray Barton
Mr. Barton has served as president and a director for MarketShare
Recovery, Inc. an Internet Direct Marketing firm, which specializes in
acquisition and resale of user demographic data and targeted e-mail
marketing where, Mr. Barton's duties include managing the day to day
operations of the business, marketing and managing the Company's
growth. Upon the registrant's acquisition of MarketShare Recovery, Mr.
Barton assumed the role of president, CEO and chairman of the registrant.
As president of the parent company and subsidiary Mr. Barton is
responsible for the Company's operations. Mr. Barton also serves as
Chairman of the Board of Directors, Chief Operating Officer and Chief
Technology officer of Jade Entertainment group, Inc. a specialty website
directory and distributor of adult oriented content. Prior thereto Mr.
Barton was a stock broker at Meyers Pollock Robbins, and at Continental
Broker Dealers where he served as a retail broker. Mr. Barton also
served as, Business Development Manager with PcQuote, Inc. and was in
charge of developing business contacts and negotiating joint ventures.
Prior to that Mr. Barton served as Executive Vice President of
Financialweb.com, where his responsibilities included managing the
production of online content. Mr. Barton served as the CEO and President
of Thinkersgroup, Inc. a mobile wireless software developer, where
he developed the Company's business plan, assembled a management team
and oversaw day to day operations. Mr. Barton attended the State
University of New York at Farmingdale, and received a Bachelor of Arts
Degree in criminal justice from New York City Police Academy in 1991.
Timothy Schmidt
During the last five years; Mr. Schmidt has been a principal at MarketShare
Recovery, Inc., the wholly owned subsidiary of the registrant, an Internet
Direct Marketing firm, which specializes in acquisition and resale of user
demographic data, and targeted e-mail marketing where Mr. Schmidt's duties
include overseeing operations, accounting, human resources, and administration.
Upon the registrant's acquisition of MarketShare Recovery, Mr. Schmidt assumed
the role of vice president and CFO of the registrant. As vice president of the
parent company and subsidiary Mr. Schmidt is responsible for the Company's
accounting, human resources, and administrative needs. Mr. Schmidt also serves
as vice president of Jade Entertainment Group, Inc. a specialty website
directory and distributor of adult oriented content. Prior to that Mr. Schmidt
served as Chief Operating Officer for thinkersgroup.com, a developer of wireless
software applications where he managed company operations, administration and
human resources. Mr. Schmidt attended the State University of New York at
Farmingdale where he studied Business Administration from 1989 through 1991.
8
Item 2. Description of Property.
Our offices are located in Melville, New York, where we lease
approximately 1,100 square feet at a cost of $28,000 for the first year with
increases of 4.76% for each year thereafter for the term of the 5 year lease
that expires in 2008. Our annual rent is payable in twelve equal monthly
installments.
Item 3. Legal Proceedings.
As of the date hereof, we are not a party to any material legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Our common stock has been quoted on the OTCBB under the symbol MSRY since
August 29, 2003. Prior to which the Company traded under the symbol HLLS. The
following table sets forth, for the periods indicated, the high and low sales
prices per share of common stock as reported on the OTCBB. These quotations
reflect interdealer prices, without retail markup, markdown or commission and
may not necessarily represent actual transactions:
2003
High Low
COMMON STOCK
------------------- ----- -----
First quarter $0.10 $0.10
Second quarter $3.70 $0.00
Third quarter $3.25 $0.25
Fourth quarter $1.55 $0.10
2002
High Low
---- ---
COMMON STOCK
--------------------
First Quarter $2.00 $0.20
Second Quarter $0.80 $0.20
Third Quarter $0.60 $0.20
Fourth Quarter $0.40 $0.10
All prices are split adjusted to reflect a reverse 1:10 stock split which
occurred on August 29, 2003.
On December 31, 2003, the last sale price of our common stock reported by
the OTCBB was $0.14 per share. On April 12, 2004 the last sale price of our
common stock reported by the OTCBB was $0.10 per share.
9
As of April 12, 2004, the approximate number of common stockholders of
record was approximately 550.
The Company has never declared or paid any cash dividends on its capital
stock and currently intends to retain its future earnings, if any, to fund the
development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future.
During February 2004, the Company issued 143,825 shares of its common
stock to each of the two officers of the Company and 36,000 shares of its common
stock to a consultant.
(b) Unregistered Sales of Equity Securities.
No sales of unregistered securities were made.
Item 6. Management's Discussion and Analysis or Plan of Operation.
FORWARD-LOOKING STATEMENTS; MARKET DATA
The discussion in this report on Form 10-KSB contains forward-looking statements
that involve risks and uncertainties. The statements contained in this Report
that are not purely historical are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding our
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. Our actual results could differ materially from
those described in our forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, our unproven
business model and a limited operating history in a new and rapidly evolving
industry; our ability to implement our business plan; and our ability to manage
our growth, retain and grow our customer base and expand our service offerings.
We make forward-looking statements in the "Management's Discussion and Analysis
of Financial Condition and, Results of Operations" below. These forward-looking
statements include, but are not limited to, statements about our plans,
objectives, expectations, intentions and assumptions and other statements that
are not historical facts. We generally intend the, words "expect", "anticipate",
"intend", "plan", "believe", "seek", "estimate" and similar expressions to
identify forward-looking statements.
This Annual Report contains certain estimates and plans related to us and the
industry in which we operate, which assumes certain events, trends and
activities will occur and the projected information based on those assumptions.
We do not know that all of our assumptions are accurate. In particular, we do
not know what level of growth will exist in our industry, if any, and
particularly in the foreign markets in which we operate, have devoted resources
and in which we shall seek to expand. If our assumptions are wrong about any
events, trends and activities, then our estimates for future growth for our
business may also be wrong. There can be no assurances that any of our estimates
as to our business growth will be achieved.
The following discussion and analysis should be read in conjunction with our
financial statements and the notes associated with them contained elsewhere in
this annual report. This discussion should not be construed to imply that the
results discussed in this annual report will necessarily continue into the
future or that any conclusion reached in this annual report will necessarily be
indicative of actual operating results in the future. The discussion represents
only the best present assessment of management.
Pursuant to an Acquisition Agreement and Plan of Merger dated June 13, 2003 (the
"Merger Agreement"), by and among Health & Leisure, Inc (the "Registrant");
Venture Sum, Inc.,a Delaware corporation and a wholly owned subsidiary of
Registrant ("Mergerco"); and MarketShare Recovery, Inc., a New York corporation,
("MKSR"), Mergerco merged with and into MKSR, and MKSR became a wholly owned
subsidiary of the Registrant. The merger became effective June 13, 2003, (the
"Effective Date,") however closing of the Agreement occurred on July 15, 2003.
Subsequently, Health & Leisure, Inc. filed an amendment to its certificate of
incorporation and thereby changed its name to MarketShare Recovery, Inc.
10
MarketShare Recovery the parent company's operating subsidiary similarly named
MarketShare Recovery, Inc. was incorporated in New York in November 2000. The
subsidiary, MarketShare Recovery, Inc. is a provider of online direct marketing
solutions for enterprises. Our solutions enable corporations to create and
deliver online direct marketing programs that drive revenue, influence behavior
and deepen customer relationships. Our solutions provide customer insight and
powerful program execution through a combination of hosted applications and
technology infrastructure.
We derive our revenues from the sale of solutions that enable businesses to
proactively communicate with their customers online. Primarily, these services
have consisted of the design and execution of online direct marketing campaigns
and additional services provided by our Professional Services organization,
including the development and execution of Customer Acquisition programs.
Revenue for direct marketing and acquisition campaigns are recognized when
persuasive evidence of an arrangement exists, the campaign has been sent, the
fee is fixed or determinable and collection of the resulting receivables is
reasonably assured. Revenue generated by our professional service organization
is typically recognized as the service is provided.
Currently our ability to grow is constrained by our inability to service our
existing customer base and their present demands, this is due to limitations of
our existing technology infrastructure. We have recently upgraded our systems
and plan to continue expanding our technology infrastructure to meet our current
and projected future needs. Upon said expansion We anticipate being able to
execute campaigns more efficiently and expeditiously. This will enable our sales
associates to sell more campaigns and resultingly generate additional revenues.
We also plan to launch additional product offerings which will allow our sales
associates to up-sell and cross promote/sell the services we offer to our
existing customers as well as to prospective customers.
Our principal customers and target market are e-commerce, consumer oriented
product and service companies. We work with these customers, who are typically
engaged is selling products via the internet, by driving traffic to their
respective websites. This is accomplished through CPA and CPM campaigns, CPM
campaigns or cost per thousand campaigns are programs which generate revenues
based on service fees collected for delivering a specific pre-established number
of e-mails to prospective customers, these fees vary based on the specificity of
the demographic of the intended recipients. CPA campaigns are performance based
campaigns, the earning potential of these type of campaigns is significant and
as we expand our infrastructure we intend to allocate a certain portion of our
resources to executing these performance based campaigns.
The financial information included in this 10KSB consists of MarketShare
Recovery, Inc.'s (New York) results of operations for the twelve months ending
December 31, 2003 and 2002.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and the related disclosures. A summary of those accounting
policies can be found in the footnotes to the consolidated financial statements
included elsewhere in this report. Certain of our accounting policies are
considered critical as they are both important to the portrayal of our financial
condition and results of operations and require judgments on the part of
management about matters that are uncertain. We have identified the following
accounting policies that are important to the presentation of our financial
condition and results of operations.
Revenue Recognition
--------------------
Revenue recognition. We generate revenue from the sale of solutions that enable
businesses to proactively communicate with their customers online.
MarketShare Recovery applies the provisions of Staff Accounting Bulletin 104
"Revenue Recognition" and recognizes revenue when persuasive evidence of an
arrangement exists, the service has been delivered, the fee is fixed or
determinable and collection of the resulting receivables is reasonably assured.
Customer Marketing revenues are recognized upon sending of the campaigns.
Revenues attributable to one-time set-up fees for service initiation are
deferred and recognized ratably over the term of the client's service agreement.
Customer Acquisition revenues are derived primarily from programs that assist
clients in marketing their respective products or services. Customer Acquisition
programs fall into two general categories: CPM mailing programs and CPA campaign
programs. CPM mailing programs involve the execution and delivery of email
campaigns to a defined number of individuals based on a fixed fee per number of
e-mails delivered. The CPM, which stands for cost per thousand will vary based
on the specificity of the demographic to whom the campaign is delivered to. CPA
campaign programs are performance based campaigns which involve the execution
and delivery of email campaigns wherein we are paid either a flat fee of a
percentage of a successful sale or acquisition of a customer by one of our
clients.
We assess probability of collection based on a number of factors, including our
past transaction history with the customer and the credit-worthiness of the
customer. New customers and certain existing customers may be subject to a
credit review process which evaluates the customers' financial position and
ultimately their ability to pay according to the original terms of the
arrangement. Based on our review process, if it is determined from the outset or
during the term of an arrangement that collection of the resulting receivable is
not reasonably assured, then revenue is recognized on a cash-collected basis.
Results of Operations
---------------------
Comparison of Years Ended December 31,2003 and 2002
-----------------------------------------
Our net revenues increased by 119% from $308,317 for the twelve months ended
December 31, 2002 to $674,146 for the twelve months ended December 31, 2003. The
increase in revenues was a result of our expansion of products and services
which has grown our customer base to include new customers who operate in the
public market space and have in certain instances paid the Company in
freely tradable marketable securities. We have also grown our sales force adding
experienced salesmen with proven sales experience, these individuals have been
successful in generating additional revenues for the Company by upselling and
cross promoting certain of the Company's product offerings. Cost of revenues as
a percent of net revenues improved from 76% of net revenues for the twelve
months ended December 31, 2002 to 70% of net revenues for the twelve months
ended December 31, 2003. The improvement was due to higher margins.
Selling, general and administrative expenses increased by $2,143,695 for the
twelve months ended December 31, 2003. This increase is due in large part to the
company's hiring of outside consultants and issuance of common stock for
services. The consultants are charged with the task of implementing plans to
further expand our product offerings, increase customer acquisition and
facilitate and expedite implementation of these plans.
Our, (Loss) / Income before provision for income taxes decreased from $1,835 for
the twelve months ended December 31, 2002 to $(2,024,629) for the twelve months
ended December 31, 2003. The decrease was a result of stock issued as
compensation for services rendered, said shares of stock were issued and
accounted for based on the market value at the time of issuance. The value of
those services may not be commensurate with the market value of the shares when
issued, book value, liquidity and other factors were significant in making these
determinations.
11
Liquidity and Capital Resources
-------------------------------
Cash used in operating activities during the twelve months ended December 31,
2003 amounted to $(49,920). The Company had cash and marketable securities of
$9,877 and $37,925 respectively, at December 31, 2003, as compared to $4,697 and
$65,450 respectively, at December 31, 2002.
Beginning in 2004 the Company has expanded the manner in which the Company can
accept payment from customers, previously we only accepted cash, like cash
instruments and company check however, We can now accept payment by all major
credit cards, by phone and have implemented an auto-draft system which is a
billing system which allows us to directly debit funds from customers bank
accounts. We anticipate that these additional payment options will allow us to
sell our customers additional services and up-sell and cross-promote our
different product offerings by allowing our customers the ability to extend
their payment options, establish recurring billing. Although there can be no
assurance, we feel that these additional payment options should positively
impact revenues and cash flow.
Throughout 2003 the company has made significant upgrades to its database and
emailing technology. We have greatly increased capacity and can process and
execute campaigns faster and more efficiently. In addition We now have the
ability to evaluate the overall success of our campaigns by tracking how many
people viewed the campaign. We can also generate detailed reports to show the
customer how successful the campaign was, how many ads and emails were sent and
received by the intended recipients and whether the campaign generated leads,
sales or impressions. Our upgrades have also improved our ability to sort and
analyze data to generate customized reports for our customers.
In view of our accumulated deficit and recurring losses, our auditors have added
an explanatory paragraph to their report on our financial statements stating
that there is substantial doubt about our ability to continue as a going
concern. In this regard management is adopting a plan for the development of our
video and website product lines as well as seeking additional capital through
the private sale of our debt or equity securities. There is no assurance that we
will complete any financing or that we will achieve profitable operations. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
We expect to fund development expenditures and incur losses until we are able to
generate sufficient income and cash flows to meet such expenditures and other
requirements. We do not currently have adequate cash reserves to continue to
cover such anticipated expenditures and cash requirements. These factors, among
others, raise substantial doubt about our ability to continue as a going
concern.
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to income tax and marketing related agreements with our affiliates. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
12
RISK FACTORS
BECAUSE OF OUR LIMITED OPERATING HISTORY AND THE EMERGING NATURE OF THE
EMARKETING INDUSTRY, ANY PREDICTIONS ABOUT OUR FUTURE REVENUES AND EXPENSES MAY
NOT BE AS ACCURATE AS THEY WOULD BE IF WE HAD A LONGER BUSINESS HISTORY, AND WE
CANNOT DETERMINE TRENDS THAT MAY AFFECT OUR BUSINESS.
Our operating subsidiary MarketShare Recovery was incorporated in November
2000 and first recorded revenue in 2001. Our limited operating history makes
financial forecasting and evaluation of our business difficult. Since we have
limited financial data, any predictions about our future revenues and expenses
may not be as accurate as they would be if we had a longer business history.
Because of the emerging nature of the e-marketing industry, we cannot determine
trends that may emerge in our market or affect our business. The revenue and
income potential of the e-marketing industry, and our business, are unproven.
OUR OPERATING RESULTS HAVE VARIED SIGNIFICANTLY IN THE PAST AND ARE LIKELY TO
VARY SIGNIFICANTLY FROM PERIOD TO PERIOD, AND OUR STOCK PRICE MAY DECLINE IF WE
FAIL TO MEET THE EXPECTATIONS OF INVESTORS.
Our operating results have varied significantly in the past and are likely
to vary significantly from period to period. As a result, our operating results
are difficult to predict and may not meet the expectations of securities
analysts or investors. If this occurs, the price of our common stock would
likely decline.
13
SEASONAL TRENDS MAY CAUSE OUR QUARTERLY OPERATING RESULTS TO FLUCTUATE, WHICH
MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
The traditional direct marketing industry has typically generated lower
revenues during the summer months and higher revenues during the calendar
year-end months. We believe our business may be affected by similar revenue
fluctuations, but our limited operating history is insufficient to predict the
existence or magnitude of these effects. If we do experience these effects,
analysts and investors may not be able to predict our quarterly or annual
operating results, and if we fail to meet expectations of analysts and
investors, our stock price could decline.
IF BUSINESSES AND CONSUMERS FAIL TO ACCEPT E-MARKETING AS A MEANS TO ATTRACT NEW
CUSTOMERS, DEMAND FOR OUR SERVICES MAY NOT DEVELOP AND THE PRICE OF OUR COMMON
STOCK WOULD DECLINE.
The market for e-marketing is new and rapidly evolving, and our business
will be harmed if sufficient demand for our services does not develop. Our
current and planned services are very different from the traditional methods
that many of our clients have historically used to attract new customers and
maintain customer relationships. Demand for e-marketing, including our services,
may not materialize for several reasons, including:
- Businesses that have already invested substantial resources in other
methods of marketing and communications may be reluctant to adopt new
marketing strategies and methods.
- Consumers and businesses may choose not to accept e-marketing messages.
- Businesses may elect not to engage in e-marketing because consumers may
confuse permission-based email services with unsolicited commercial email.
- The effectiveness of direct marketing through the use of emails may
diminish significantly if the volume of direct marketing email saturates
consumers.
COMPETITION IN THE EMARKETING INDUSTRY IS INTENSE AND, IF WE ARE UNABLE TO
COMPETE EFFECTIVELY, THE DEMAND FOR, OR THE PRICES OF, OUR SERVICES MAY DECLINE.
The market for e-marketing is intensely competitive, rapidly evolving and
experiences rapid technological change. We expect the intensity of competition
to increase significantly in the future because of the attention the internet
has received as a medium for advertising and direct marketing and because there
are no significant barriers to entry into our market. Intense competition may
result in price reductions, reduced sales, gross margins and operating margins,
and loss of market share.
Our principal competitors include:
- Providers of e-marketing solutions such as @Once, Acxiom and its affiliate
Bigfoot, Exactis.com, Kana Communications, L-Soft, Media Synergy,
MessageMedia, Digital Impact, CoolSavings, NetCreations, Responsys.com and
YesMail.com.
14
- The in-house information technology departments of our existing and
prospective clients.
In addition, we expect competition to persist and intensify in the future,
which could harm our ability to increase sales and maintain our prices. In the
future, we may experience competition from Internet service providers,
advertising and direct marketing agencies and other large established businesses
such as America Online, DoubleClick, Microsoft, IBM, AT&T, Yahoo!, ADVO and the
Interpublic Group of Companies. Each of these companies possess large, existing
customer bases, substantial financial resources and established distribution
channels and could develop, market or resell a number of e-marketing solutions.
These potential competitors may also choose to enter the market for e-marketing
by acquiring one of our existing competitors or by forming strategic alliances
with these competitors. Any of these occurrences could harm our ability to
compete effectively.
RAPID TECHNOLOGICAL CHANGES COULD CAUSE OUR SERVICES TO BECOME OBSOLETE AND
UNMARKETABLE OR REQUIRE US TO REDESIGN OUR SERVICES, WHICH COULD BE COSTLY AND
TIME-CONSUMING.
The market for e-marketing services is characterized by rapid technological
change. Our services could become obsolete and unmarketable if we are unable to
adapt our services to these new technologies. For example, the emergence of new
media formats such as streaming video and audio may require us to adapt our
services to remain competitive which could be costly and time-consuming.
IF WE DO NOT ATTRACT AND RETAIN ADDITIONAL HIGHLY-SKILLED PERSONNEL WE MAY BE
UNABLE TO EXECUTE OUR BUSINESS STRATEGY.
Our business depends on the continued technological innovation of our core
services and our ability to provide comprehensive e-marketing expertise. If we
fail to identify, attract, retain and motivate these highly skilled personnel,
we may be unable to successfully introduce new services or otherwise implement
our business strategy. We plan to significantly expand our operations, and we
will need to hire additional personnel as our business grows. In particular, we
have experienced difficulties in hiring highly skilled technical and client
services personnel due to significant competition for experienced personnel in
our market.
WE RELY ON THE SERVICES OF OUR FOUNDERS AND OTHER KEY PERSONNEL, WHOSE KNOWLEDGE
OF OUR BUSINESS AND TECHNICAL EXPERTISE WOULD BE EXTREMELY DIFFICULT TO REPLACE.
Our future success depends to a significant degree on the skills,
experience and efforts of our senior management. In particular, we depend upon
the continued services of Raymond Barton, our Chief Executive Officer, Chief
Technology Officer and co-founder and Timothy Schmidt, our Chief Financial
Officer and co-founder, whose vision for our company, knowledge of our business
and technical expertise would be extremely difficult to replace. In addition, we
have not obtained life insurance benefiting MarketShare Recovery on any of our
key employees. If any of our key employees left or was seriously injured and
unable to work and we
15
were unable to find a qualified replacement, the level of services we are able
to provide could decline or we may be otherwise unable to execute our business
strategy.
IF WE FAIL TO EXECUTE OUR STRATEGY TO EXPAND INTO NEW MARKETS, THE MARKET FOR
OUR SERVICES AND OUR POTENTIAL REVENUE WILL BE LIMITED.
The majority of our e-marketing clients to date have been online
business-to-consumer retailers. We intend to expand our presence among clients
in other consumer markets, in markets where the customers are businesses rather
than consumers, and in international markets. If this strategy fails, the market
for our services and our potential revenue will be limited. We have limited
experience in these markets and may encounter obstacles which we have not
anticipated.
IF WE FAIL TO INTRODUCE NEW SERVICES OUR REVENUES MAY NOT INCREASE.
Part of our strategy is to increase our revenues by introducing new
services. If we fail to introduce new services our revenues may not increase. If
any of our new service offerings are not accepted by our clients, our revenues
may be lower.
IF WE ARE UNABLE TO ENHANCE OUR SERVICES AND ADD CLIENT SERVICES PERSONNEL TO
HANDLE INCREASED EMAIL VOLUME AND CONSUMER RESPONSES, WE MAY BE UNABLE TO
ADEQUATELY RESPOND TO OUR CLIENTS' DEMANDS FOR EMARKETING SERVICES AND MAY LOSE
MARKET SHARE.
If we are unable to expand capacity to keep pace with our clients' demands,
we may lose market share. The volume of emails we are sending has grown
significantly and we expect this volume to continue to grow. We will need to
enhance our services to handle both any increased email volume and the increased
level of response from consumers that are generated by this volume. In addition,
as we seek to grow our base of clients, we must add client services personnel to
handle the increased volume of emails and campaigns. If we are unable to add
client services personnel, the level of services we are able to provide our
clients could decline.
IF THE DELIVERY OF OUR EMAILS IS LIMITED OR BLOCKED, THEN OUR CLIENTS MAY
DISCONTINUE THEIR USE OF OUR SERVICES.
Our business model relies on our ability to deliver emails over the
internet through internet service providers and to recipients in major
corporations. In particular, a significant percentage of our emails are sent to
recipients who use America Online. We do not have, and we are not required to
have, an agreement with America Online to deliver emails to their customers.
America Online uses a proprietary set of technologies to handle and deliver
email and the value of our services will be reduced if we are unable to provide
emails compatible with these technologies. In addition, America Online and other
internet service providers are able to block unwanted messages to their users.
If these companies limit or halt the delivery of our emails, or if we fail to
deliver emails in such a way as to be compatible with these companies' email
handling technologies, then our clients may discontinue their use of our
services.
16
OUR FACILITIES AND SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER
UNEXPECTED EVENTS, AND ANY OF THESE EVENTS COULD RESULT IN AN INTERRUPTION OF
OUR ABILITY TO EXECUTE OUR CLIENT'S EMARKETING CAMPAIGNS.
We depend on the efficient and uninterrupted operations of our data center
and hardware systems. Our data center and hardware systems is located in Long
Island, New York. Our data center and hardware systems are also vulnerable to
damage from fire, floods, power loss, telecommunications failures, and similar
events. If any of these events result in damage to our data center or systems,
we may be unable to execute our clients' e-marketing campaigns until the damage
is repaired, and may accordingly lose clients and revenues. In addition, we may
incur substantial costs in repairing any damage.
OUR DATA CENTER IS LOCATED AT FACILITIES PROVIDED BY A THIRD PARTY, AND IF THIS
PARTY IS UNABLE TO ADEQUATELY PROTECT OUR DATA CENTER, OUR REPUTATION MAY BE
HARMED AND WE MAY LOSE CLIENTS.
Our data center, which is critical to our ongoing operations, is located at
facilities provided by a third party. Our operations depend on this party's
ability to protect our data center from damage or interruption from human error,
break-ins, sabotage, computer viruses, intentional acts of vandalism and similar
events. If this party is unable to adequately protect our data center and
information is lost or our ability to deliver our services is interrupted, our
reputation may be harmed and we may lose clients.
OUR OPERATING RESULTS WOULD SUFFER IF WE WERE FORCED TO DEFEND AGAINST A
PROTRACTED INFRINGEMENT CLAIM OR IF A THIRD PARTY WERE AWARDED SIGNIFICANT
DAMAGES.
There is a substantial risk of litigation regarding intellectual property
rights in our industry. A successful claim of technology infringement against us
and our failure or inability to license the infringed or similar technology
could harm our business.
We expect that our technologies may experience an increase in third- party
infringement claims as the number of our competitors grows. In addition, we
believe that many of our competitors have filed or intend to file patent
applications covering aspects of their technology that they may claim our
intellectual property infringes. We cannot be certain that third parties will
not make a claim of infringement against us relating to our technology. Any
claims, with or without merit, could:
- Be time-consuming and costly to defend.
- Divert management's attention and resources.
- Cause delays in delivering services.
- Require the payment of monetary damages which may be tripled if The
infringement is found to be willful.
- Result in an injunction which would prohibit us from offering a
particular service.
17
- Require us to enter into royalty or licensing agreements which, if
required, may not be available on acceptable terms.
IF ANY OF THE THIRD PARTY TECHNOLOGIES WE USE BECOME UNAVAILABLE TO US, WE WILL
NOT BE ABLE TO OPERATE OUR BUSINESS UNTIL EQUIVALENT TECHNOLOGY CAN BE OBTAINED.
We are highly dependent on technologies we license which enable us to send
email through the internet and allow us to offer a variety of targeted marketing
capabilities. Our market is evolving, and we may need to license additional
technologies to remain competitive. However, we may not be able to license these
technologies on commercially reasonable terms or at all. Our inability to obtain
any of these licenses could delay the development of our services until
equivalent technology can be identified, licensed or developed and integrated.
IF WE ARE UNABLE TO SAFEGUARD OUR DATA, OUR REPUTATION MAY BE HARMED AND WE MAY
BE EXPOSED TO LIABILITY.
We may from time to time retain confidential customer information in our
servers. We cannot assure you, however, that we will be able to prevent
unauthorized individuals from gaining access to this data. If any compromise or
breach of security were to occur, it could harm our reputation and expose us to
possible liability. Any unauthorized access to our servers could result in the
misappropriation of confidential customer information or cause interruptions in
our services. It is also possible that one of our employees could attempt to
misuse confidential customer information, exposing us to liability. In addition,
our reputation may be harmed if we lose customer information maintained in our
data warehouse due to systems interruptions or other reasons.
ACTIVITIES OF OUR CLIENTS COULD DAMAGE OUR REPUTATION OR GIVE RISE TO LEGAL
CLAIMS AGAINST US.
Our clients' promotion of their products and services may not comply with
federal, state and local laws. We cannot predict whether our role in
facilitating these marketing activities would expose us to liability under these
laws. Any claims made against us could be costly and time-consuming to defend.
If we are exposed to this kind of liability, we could be required to pay
substantial fines or penalties, redesign our business methods, discontinue some
of our services or otherwise expend resources to avoid liability.
Our services involve the transmission of information through the internet.
Our services could be used to transmit harmful applications, negative messages,
unauthorized reproduction of copyrighted material, inaccurate data or computer
viruses to end-users in the course of delivery. Any transmission of this kind
could damage our reputation or could give rise to legal claims against us. We
could spend a significant amount of time and money defending against these legal
claims.
18
NEW REGULATION OF AND UNCERTAINTIES REGARDING THE APPLICATION OF EXISTING LAWS
AND REGULATIONS TO, E-MARKETING AND THE INTERNET, COULD PROHIBIT, LIMIT OR
INCREASE THE COST OF OUR BUSINESS.
The Federal government of t he United States has enacted "CAN-SPAM Act of
2003," which became effective on January 1, 2004 restricting the sending of
unsolicited commercial email. The "Act" generally limits or prohibits both the
transmission of unsolicited commercial emails and requires unsolicited
commercial e-mail messages to be labeled as such and to include opt-out
instructions and the sender's physical address. It prohibits the use of
deceptive subject lines and false headers in such messages. The Act further
authorizes the FTC (but does not require) the establishment of a "do-not-email"
registry. State laws that require labels on unsolicited commercial e-mail or
prohibit such messages entirely are pre-empted, although provisions merely
addressing falsity and deception would remain in place. We believe that our
current suite of services are not affected by such legislation because the list
management practices that we espouse to our clients are intended to prevent the
sending of unsolicited commercial email.
Our business could be negatively impacted by new laws or regulations
applicable to e-marketing or the internet, the application of existing laws and
regulations to e-marketing or the internet or the application of new laws and
regulations to our business as we expand into new jurisdictions. There is a
growing body of laws and regulations applicable to access to or commerce on the
internet. Moreover, the applicability to the internet of existing laws is
uncertain and may take years to resolve. Due to the increasing popularity and
use of the internet, it is likely that additional laws and regulations will be
adopted covering issues such as privacy, pricing, content, copyrights,
distribution, taxation antitrust, characteristics and quality of services and
consumer protection. The adoption of any additional laws or regulations may
impair the growth of the internet or e-marketing, which could, in turn, decrease
the demand for our services and prohibit, limit or increase our cost of doing
business.
INTERNET-RELATED STOCK PRICES ARE ESPECIALLY VOLATILE AND THIS VOLATILITY MAY
DEPRESS OUR STOCK PRICE.
The stock market and specifically the stock prices of internet- related
companies have been very volatile. Because we are an internet- related company,
we expect our stock price to be similarly volatile. As a result of this
volatility, the market price of our common stock could significantly decrease.
This volatility is often not related to the operating performance of the
companies and may accordingly reduce the price of our common stock without
regard to our operating performance.
19
Item 7. Financial Statements.
Reports are contained starting Page F-1
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Effective August 11, 2003, the Board of Directors of MarketShare
Recovery, Inc. formerly Health & Leisure, Inc. (the "Company") voted to
dismiss HJ & Associates, LLC ("HJ") as the Company's independent
accountants for the year ending December 31, 2003.
Our records indicate that on August 12, 2003, Health and Leisure, Inc. sent
a letter dismissing HJ & Associates, LLC of their accounting services. The
Company records reflect that this letter was mailed by the Company.
HJ & Associates, LLC advised us that they were not aware of their dismissal
as independent auditors until September 22, 2003. We understand that upon
learning of their dismissal, HJ & Associates responded to the Form 8-k, filed by
Health & Leisure Inc. in a timely manner. See Exhibit 16.1 as attached to the
amended form 8-k filed March 5, 2004.
Except as described in the following sentence, the reports of HJ &
Associates, LLC on the financial statements of the company for either of the
past two fiscal years did not contain any adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles. The report of HJ & Associates, LLC on the financial
statements of the company for the fiscal year ended December 31, 2002 was
modified to express substantial doubt regarding the company's ability to
continue as a going concern.
In addition, during the Company's two most recent fiscal years and through
September 22, 2003 there was no disagreement with HJ & Associates, LLC on any
matter of accounting principals or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of HJ & Associates, LLC would have caused HJ & Associates, LLC to
make reference to the subject of that disagreement in its reports on the
Company's financial statements for those fiscal periods.
On August 12, 2003, Marcum & Kliegman LLP ("MKLLP") was engaged as the
Company's new independent accountants. During the two most recent fiscal years
and the interim period preceding the engagement of MKLLP, the Company has not
consulted with MKLLP regarding either: (1) the application of accounting
principles to a specified transaction, either completed or proposed; or the type
of audit opinion that might be rendered on the Company's financial statements,
and either a written report or oral advice was provided to the Company by MKLLP
that MKLLP concluded was an important factor considered by the Company in
reaching a decision as to the accounting, auditing, or financial reporting
issue; or (ii) any matter that was either the subject of a "disagreement" or a
reportable event, as those terms are used in Item 304(a)(1)(iv) of Regulation
S-B and the related instructions to Item 304 of Regulation S-B.
Item 8A. Controls and Procedures.
Pursuant to provisions of the Securities Exchange Act of 1934, the
Company's Chief Executive Officer and Chief Financial Officer are responsible
for establishing and maintaining disclosure controls and procedures, or caused
such disclosure controls and procedures to be
20
designed under their supervision, for the Company. They have designed such
disclosure controls and procedures to ensure that material information relating
to the Company, is made known to them by others within the Company, particularly
during the periods when the Company's quarterly and annual reports are being
prepared.
Changes in Internal Controls. During the fourth quarter of fiscal year 2003,
there were no changes in our internal control over financial reporting that
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. However, we intend to continue to refine our
internal controls on an ongoing basis. Our management and our independent
auditors have reported to our board of directors certain matters involving
internal controls that our independent auditors considered to be a reportable
condition, but not material weaknesses, under standards established by the
American Institute of Certified Public Accountants. The reportable condition
relates to the December 31, 2003 financial close process. Certain adjustments
were identified in the annual audit process, related to the accounting for
stocks received by customers, payment of commissions with marketable securities,
as well as the lack of segregation of duties in the process of cash receipts and
disbursements. In addition, there were instances where accounting analyses did
not include evidence of a timely review. The adjustments related to these
matters were made by the Company in connection with the preparation of the
audited financial statements for the year ended December 31, 2003.
Given these reportable conditions, management devoted additional resources to
resolving questions that arose during our year-end audit. As a result, we are
confident that our consolidated financial statements for the year ended December
31, 2003 fairly present, in all material respects, our financial condition and
results of operations.
The reportable conditions have been discussed in detail among management, our
board of directors and our independent auditors, and we are committed to
addressing and resolving these matters fully and promptly, by putting in place
the personnel, processes, technology and other resources appropriate to support
our revenue recognition and financial close processes. In that regard we have
contracted a full time CPA who will act as our CFO and will assist in the
preparation of our financial statements, 10qsb's and 10ksb's. We have completed
a full review of our revenue recognition policy and practices and have
implemented a number of process improvements. We intend to complete a review of
our financial close process and define and implement needed improvements in the
quarter ending March 31, 2004.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Directors and Executive Officers
The members of the Board of Directors serve until the next annual meeting
of shareholders, or until their successors have been elected. The officers serve
at the pleasure of the Board of Directors. The following are the directors and
executive officers of the Company:
Name Age Position Held Position Since
---- -- -------- -------------------
Ray Barton 34 President,
Chairman and CEO 2003
Tim Schmidt 35 Vice president,
CFO and Director 2003
Ray Barton
Ray Barton, President, Chairman and Chief Executive Officer, has been the
president, director and Chief Executive Officer since August 28, 2003.
Mr. Barton has served as president and a director for MarketShare
Recovery, Inc. an Internet Direct Marketing firm, which specializes in
acquisition and resale of user demographic data and targeted e-mail
marketing where, Mr. Barton's duties include managing the day to day
operations of the business, marketing and managing the Company's
growth. Upon the registrant's acquisition of MarketShare Recovery, Mr.
Barton assumed the role of president, CEO and chairman of the registrant.
As president of the parent company and subsidiary Mr. Barton is
responsible for the Company's operations. Mr. Barton also serves as
Chairman of the Board of Directors, Chief Operating Officer and Chief
Technology officer of Jade Entertainment group, Inc. a specialty website
directory and distributor of adult oriented content. Prior thereto Mr.
Barton was a stock broker at Meyers Pollock Robbins, and at Continental
Broker Dealers where he served as a retail broker. Mr. Barton also
served as, Business Development Manager with PcQuote, Inc. and was in
charge of developing business contacts and negotiating joint ventures.
Prior to that Mr. Barton served as Executive Vice President of
Financialweb.com, where his responsibilities included managing the
production of online content. Mr. Barton served as the CEO and President
of Thinkersgroup, Inc. a mobile wireless software developer, where
he developed the Company's business plan, assembled a management team
and oversaw day to day operations. Mr. Barton attended the State
University of New York at Farmingdale, and received a Bachelor of Arts
Degree in criminal justice from New York City Police Academy in 1991.
Timothy Schmidt
Tim Schmidt, CFO, has been a director since August 28, 2003.
During the last five years; Mr. Schmidt has been a principal at MarketShare
Recovery, Inc., the wholly owned subsidiary of the registrant, an Internet
Direct Marketing firm, which specializes in acquisition and resale of user
demographic data, and targeted e-mail marketing where Mr. Schmidt's duties
include overseeing operations, accounting, human resources, and administration.
Upon the registrant's acquisition of MarketShare Recovery, Mr. Schmidt assumed
the role of vice president and CFO of the registrant. As vice president of the
parent company and subsidiary Mr. Schmidt is responsible for the Company's
accounting, human resources, and administrative needs. Mr. Schmidt also serves
as vice president of Jade Entertainment Group, Inc. a specialty website
directory and distributor of adult oriented content. Prior to that Mr. Schmidt
served as Chief Operating Officer for thinkersgroup.com, a developer of wireless
software applications where he managed company operations, administration and
human resources. Mr. Schmidt attended the State University of New York at
Farmingdale where he studied Business Administration from 1989 through 1991.
The Company has not established an Audit Committee of the Board of
Directors, or any other committee of the Board.
The Company has adopted a code of ethics that applies to its principal
executive and financial officers.
21
Item 10. Executive Compensation.
The following table sets forth certain summary information concerning the
compensation paid or accrued for each of the last three fiscal years to the
Company's Chief Executive Officer and each of its other executive officers that
received compensation in excess of $100,000 during such period:
Securities
Name Other Under- All
and Annual Restricted lying LTIP Other
Principal Compen- Stock Options/ Pay- Compen-
Position Year Salary(1) Bonus sation($) Award(s) SARs Outs sation
-------- ---- ------ ----- ------ -------- ---- ---- ------
Ray Barton 2003 $ - $ - 65,900
Chief Executive
Officer
President
Tim Schmidt 2003 $ - $ - 39,600
Chief Financial
Officer
------------------------
There have been no stock option grants to, or option exercises by,
executive officers.
Directors are not paid compensation.
22
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
The following table sets forth information relating to the beneficial
ownership of the Company's Common Stock as of April 6, 2004 by each person known
by the Company to be the beneficial owner of more than 5% of the outstanding
shares of common stock and each of the Company's directors and executive
officers. The percent ownership included in the following is based on 45,702,256
shares of Common Stock outstanding as of April 12, 2004.
Security Ownership of Certain Beneficial Owners
(1) (2) (3) (4)
Amount and Nature
Title of Name and Address of of Beneficial Percent of
Class Beneficial Owner Owner Class
-------- ---------------- ------------ -------
Common
Stock Ray Barton 17,268,825 37.8
Common
Stock Tim Schmidt 17,268,825 37.8
Security Ownership of Management
(1) (2) (3) (4)
Amount and Nature
Title of Name and Address of of Beneficial Percent of
Class Beneficial Owner Owner Class
-------- ---------------- ------------ -------
Common
Stock Ray Barton 17,268,825 37.8
Common
Stock Tim Schmidt 17,268,825 37.8
All directors and executive
officers as a group (2 persons) 34,537,650 75.6
-------------------------------
(2) The address of each of the executive officers and directors is
c/o MarketShare Recovery, Inc., 95 Broadhollow Road Suite 101,
Melville New York 11747.
(3) Shares of common stock are owned directly by Messrs. Barton and
Schmidt
Item 12. Certain Relationships and Related Transactions.
On June 13, 2003 the Company, formerly known as Health & Leisure entered
into an Acquisition Agreement and Plan of Merger (the "Merger Agreement"), with
MarketShare Recovery, Inc., a New York corporation. In connection with said
merger, a Promissory Note was delivered to H & L Concepts, Inc. ("H & L") by
MarketShare Recovery, the New York corporation. H & L was previously a
subsidiary of the registrant but at the time of the making of the Note, to the
best of our knowledge, was soley owned by Mr. Robert Feldman, the Company's
former president, CEO, chairman. The Promissory Note constituted partial payment
for a controlling interest in the Company, previously owned by Mr. Feldman Mr.
Ray Barton and Mr. Tim Schmidt, the Company's current executive officers and
directors have since purchased the Promissory Note from H & L for the full value
of the Note, in accordance with the terms of the Note. The Company and Messrs.
Barton and Schmidt have since ratified the non material parts of the Note to
reflect thier ownership and address'. The terms of repayment, including the
interest rate and payment schedule have not been modified in any way.
On November 25, 2003 Dominix, Inc. a Delaware corporation traded on NASDAQ
electronic bulletin board (DMNX), Jade Entertainment Group, a company controlled
by Messrs. Barton and Schmidt the executive officers, directors and controlling
shareholders of our Company and our Company entered into a series of agreements.
Upon execution of the agreements Jade and DMNX are to merge and Our Company was
to enter into a Stock Purchase Agreement (the "Stock Purchase Agreement") under
which Dominix, subject to certain conditions, would acquire all of the
outstanding capital stock of our wholly owned New York subsidiary also named
MarketShare Recovery, Inc. (MarketShare Sub). The parties have determined that
it is in their mutual best interest to terminate the Stock Purchase Agreement
and the MarketShare Sub is not to be sold. In consideration of the dissolution
and release of any claims against the Company We have entered into an agreement
with DMNX to license certain portions of our opt-in database for a fixed term.
Marketing Agreement. The Company had a marketing agreement with a company that
is controlled by the Company's majority stockholder. The agreement was on a
month-to-month basis and called for receipt of $5,000 per month ending during
2002. The Company received approximately $26,000 during 2002 relating to this
agreement.
Sub-lease Agreement. The Company had a sub-lease agreement with a company that
is controlled by the Company's majority stockholder. The agreement provided for
the use of office space, office equipment, telephone, internet access and other
amenities as needed to the related party. The amount of monthly rent collected
was not to exceed $1,800 per month and the agreement was month to month, which
ended during 2002. The Company received approximately $9,000 during 2002
relating to this agreement.
23
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) LISTING OF FINANCIAL STATEMENTS
The following financial statements of the Company are
incorporated by reference in Item 7:
Independent Auditors' Report.
Consolidated Balance Sheet at December 31, 2003.
Consolidated Statement of Operations for the Years
Ended December 31, 2003 and 2003, and for the period
March 13, 1985 (Inception) through December 31, 2003.
Statement of Shareholders' Equity (Deficit) for the
period March 13, 1985 (Inception) through December
31, 2003.
Consolidated Statements of Cash Flows for the years
ended December 31, 2003 and 2002, and for the period
March 13, 1985 (Inception) through December 31, 2003.
Notes to Consolidated Financial Statements for the
years ended December 31, 2003 and 2002.
(a)(2) LISTING OF FINANCIAL STATEMENT SCHEDULES
None.
24
(a)(3) The following exhibits are included as part of this report:
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
--- ---------------------- -------------------------
3.1 Certificate of Incorporation Annual Report on Form 10-K for the year ended
December 31, 1987, filed March 30, 1988 (see
Exhibit 1(A) therein).
3.1 Certificate of Amendment to Certificate Annual Report on Form 10-K for the year ended
of Incorporation filed May 2, 1988 December 31, 1988 filed December 28, 1989 (see
Exhibit 1(B) therein).
3.1 Certificate of Amendment to Certificate Annual Report on Form 10-K for the year ended
of Incorporation filed September 12, 1990 December 31, 1990 filed April 15, 1991 (see Exhibit
1(C) therein).
3.1.1 Certificate of Amendment to Certificate Contained herein.
of Incorporation filed August 26, 2003
3.1.2 Certificate of Amendment to Certificate Contained herein.
of Incorporation filed August 28, 2003
3.2 Bylaws Contained herein.
4 Designation of Preference with respect Annual Report on Form 10-KSB for the year ended
to Series A Preferred Stock, filed December 31, 2000, filed April 2, 2001 (see
August 23, 2000 Exhibit 1(D) therein).
4.1 Amended Designation of Preference with Current Report on Form 8K, filed July 18,2003
respect to Series A Preferred Stock, (See Exhibit 4 therein).
filed August 23, 2000
16 Letter on Change In Certifying Accountants Current Report on Form 8K, filed August 20,
2003
and an amendment thereto on Form 8K/a filed
March 5, 2004.
21 List of Subsidiaries Contained herein.
23 Consent of Counsel Registration Statement on Form S-8, filed
September 18, 2003 (See Exhibit 5 therein)
23 Consent of Independent Public Registration Statement on Form S-8, filed
Account Marcum & Kliegman LLP September 18, 2003 (See Exhibit 8 therin)
31.1 Certification of Chief Executive Officer Contained herein.
pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
31.2 Certification of Chief Financial Officer Contained herein.
pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
32.1 Certifications of Chief Executive Officer Contained herein.
and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certifications of Chief Executive Officer Contained herein.
and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
99.1 Form of Promissory Note dated June 13, 2003 Current Report on Form 8K, filed July 18,2003
Maker, MarketShare Recovery to holder (See Exhibit 2 therein).
H & L Concepts,Inc.
99.2 Code of Ethics, as Adopted by the Board Contained herein.
of Directors
-----------------------
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of
2003.
(c) EXHIBITS
The exhibits in response to this portion of Item 13 are
submitted as a separate section of this report following the signatures.
25
Item 14. Principal Accountant Fees and Services.
Audit Fee
----------
The aggregate fees billed for the most recent fiscal year for professional
services rendered by the principal accountant for the audit of Marketshare
Recovery, Inc. and Subsidiary's annual financial statement and review of
financial statements included in MarketShare Recovery, Inc. and Subsidiary's
10-QSB reports and services normally provided by the accountant in connection
with statutory and regulatory filings or engagements were $40,000 for fiscal
year ended 2003.
Audit-Related Fees
-------------------
Audit related fees for the fiscal year ended 2003 were $8,000, said fees
were in connection with the Registration Statement filed on form S-8.
Tax Fees
---------
There were no fees for tax compliance, tax advice and tax planning for the
fiscal years 2003 and 2002.
All Other Fees
----------------
There were no other aggregate fees billed in either of the last two fiscal
years for products and services provided by the principal accountant, other than
the services reported above.
We do not have an audit committee currently serving and as a result our
board of directors performs the duties of an audit committee. Our board of
directors will evaluate and approve in advance, the scope and cost of the
engagement of an auditor before the auditor renders audit and non-audit
services. We do not rely on pre-approval policies and procedures.
26
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MARKETSHARE RECOVERY, INC.
Date: 4/13/04 By: /s/ Ray Barton
--------- -----------------------
Ray Barton, Chief Executive Officer
and Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date: 4/13/04 By: /s/ Ray Barton
--------- -----------------------
Ray Barton, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
Date: 4/13/04 By: /s/ Tim Schmidt
--------- -----------------------
Tim Schmidt, Chief Financial Officer
and Director
(Principal Accounting Officer)
27
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(FORMERLY HEALTH & LEISURE, INC. AND SUBSIDIARY)
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003 and 2002
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(FORMERLY HEALTH & LEISURE, INC. AND SUBSIDIARY)
CONTENTS
--------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Deficiency F-4
Consolidated Statements of Cash Flows F-5-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7-15
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
MarketShare Recovery, Inc.
We have audited the accompanying consolidated balance sheet of MarketShare
Recovery, Inc. and Subsidiary (formerly Health & Leisure, Inc. and Subsidiary)
(the "Company") as of December 31, 2003 and the related consolidated statements
of operations, stockholders' equity (deficiency), and cash flows for the years
ended December 31, 2003 and 2002. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MarketShare
Recovery, Inc. and Subsidiary (formerly Health & Leisure, Inc. and Subsidiary)
as of December 31, 2003 and the results of their operations and their cash flows
for the years ended December 31, 2003 and 2002, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. For the year ended December
31, 2003, the Company has incurred a net loss of approximately $2,025,000 and
has a working capital and stockholders' deficiency of approximately $178,000 and
$173,000, respectively. As discussed in Note 3 to the consolidated financial
statements, these factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 3. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Marcum & Kliegman LLP
New York, New York
April 2, 2004
F-1
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(FORMERLY HEALTH & LEISURE, INC. AND SUBSIDIARY)
CONSOLIDATED BALANCE SHEET
December 31, 2003
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,877
Marketable securities 37,925
Prepaid expense and other current assets 1,601
-----------
TOTAL CURRENT ASSETS 49,403
SECURITY DEPOSITS 4,667
-----------
TOTAL ASSETS $ 54,070
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Due to affiliate $ 45,567
Note payable - stockholders 125,000
Due to stockholders 12,300
Accrued expenses 34,201
Accrued interest - stockholders 10,000
-----------
TOTAL CURRENT LIABILITIES 227,068
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred stock - $0.10 par value; 10,000,000 shares
authorized; no shares issues or outstanding --
Common stock - $0.10 par value; 50,000,000 shares
authorized; 45,378,606 shares issues and outstanding 4,537,861
Additional paid-in capital (2,698,022)
Accumulated deficit (2,012,837)
-----------
TOTAL STOCKHOLDERS' DEFICIENCY (172,998)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 54,070
===========
F-2
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(FORMERLY HEALTH & LEISURE, INC. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------
For the Years Ended
December 31,
2003 2002
------------ ------------
NET REVENUES (Including revenue from
related party of $-0-
and $26,000, respectively) $ 674,146 $ 308,317
COST OF REVENUES 469,658 234,929
------------ ------------
GROSS PROFIT 204,488 73,388
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 250,509 71,553
Compensatory element of stock issuances for
selling general and administrative expenses 1,964,739 --
------------ ------------
TOTAL OPERATING EXPENSES 2,215,248 71,553
------------ ------------
OPERATING (LOSS) INCOME (2,010,760) 1,835
------------ ------------
OTHER INCOME (EXPENSES)
Interest expense - stockholders (10,000) --
Gain on sale of marketable securities 8,592 --
Unrealized loss on marketable securities (12,461) --
------------ ------------
TOTAL OTHER EXPENSES (13,869) --
------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (2,024,629) 1,835
PROVISION FOR INCOME TAXES -- 1,567
------------ ------------
NET (LOSS) INCOME $ (2,024,629) $ 268
============ ============
Basic and Diluted Net
(Loss) Income Per Common Share $ (0.13) $ 0.00
============ ============
Weighted Average Number of Common Shares
Outstanding - Basic 15,100,056 1,019,767
============ ============
F-3
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(FORMERLY HEALTH & LEISURE, INC. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For the Years Ended December 31, 2003 and 2002
----------------------------------------------------------------------------------------------------------------------------
Retained Total
Additional Earnings Stockholders'
Preferred Stock Common stock Paid-in (Accumulated Equity
---------------------- -------------------------
Shares Amount Shares (1) Amount Capital Deficit) (Deficiency)
--------------------------------------------------------------------------------------
BALANCE - January 1, 2002 3,425,000 $ 34,250 1,019,767 $ 101,977 $ (136,127) $ 11,524 $ 11,624
Net income -- -- -- -- -- 268 268
-------- -------- -------- -------- -------- ---------- ----------
BALANCE - December 31, 2002 3,425,000 34,250 1,019,767 101,977 (136,127) 11,792 11,892
Shares issued to Health & Leisure, Inc.
stockholders -- -- 1,732,543 173,254 (310,954) -- (137,700)
Shares returned to the Company -- -- (752,767) (75,277) 75,277 -- --
Shares issued to settle notes payable -- -- 1,270,000 127,000 (114,300) -- 12,700
Shares issued for the conversion of
preferred stock (3,425,000) (34,250) 34,250,000 3,425,000 (3,390,750) -- --
Shares issued for services -- -- 7,859,063 785,907 1,178,832 -- 1,964,739
Net loss -- -- -- -- -- (2,024,629) (2,024,629)
-------- -------- -------- -------- -------- ---------- ----------
BALANCE - December 31, 2003 - $ -- 45,378,606 $ 4,537,861 $ (2,698,022) $(2,012,837) $(172,998)
-------- -------- -------- -------- -------- ---------- ----------
(1) Restated to reflect 1-for-10 reverse stock-split completed in August 2003.
F-4
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(FORMERLY HEALTH & LEISURE, INC. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------
For the Years Ended
December 31,
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(2,024,629) $ 268
----------- -----------
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Compensatory element of stock issuances 1,964,739 --
Changes in operating assets and liabilities:
Accounts receivable 8,932 (3,932)
Prepaid and other current assets (34) (1,567)
Accrued commissions and other current liabilities 1,172 36,879
Marketable securities 27,525 (65,450)
Unearned revenue (27,625) 27,625
----------- -----------
TOTAL ADJUSTMENTS 1,974,709 (6,445)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (49,920) (6,177)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Payment of security deposits (2,767) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from affiliate 45,567
Advances from stockholders 12,300 --
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 57,867 --
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 5,180 (6,177)
CASH AND CASH EQUIVALENTS - Beginning 4,697 10,874
----------- -----------
CASH AND CASH EQUIVALENTS - Ending $ 9,877 $ 4,697
=========== ===========
F-5
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(FORMERLY HEALTH & LEISURE, INC. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
-------------------------------------------------------------------------------
For the Years Ended
December 31,
2003 2002
----------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Income taxes $ 978 $ 4,767
Interest $ -- $ --
Non-cash investing and financing activities:
Payment of commission with marketable securities $ 280,945 $ --
Issuance of notes payable related
to reverse merger $ 137,700 $ --
Issuance of common stock to satisfy notes payable $ 12,700 $ --
F-6
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(FORMERLY HEALTH AND LEISURE, INC. AND SUBSIDIARY)
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Basis of Financial Statement Presentation
The consolidated financial statements presented are those of MarketShare
Recovery, Inc. - Delaware (formerly Health & Leisure, Inc.) and its
wholly-owned subsidiary, MarketShare Recovery, Inc. - N.Y. ("MKSR").
Collectively, they are referred to herein as the ("Company").
NOTE 2 - Business and Reverse Merger
Effective on June 13, 2003, Health & Leisure, Inc. ("HLLS"), a
publicly-traded Delaware corporation, and its wholly-owned subsidiary,
Venture Sum, Inc., a Delaware corporation ("Mergerco"), entered into a
Merger and Acquisition agreement with MKSR, a privately-held New York
corporation, in the business of providing on-line direct marketing
solutions for enterprises to customers through the United States. Pursuant
to the agreement, Mergerco merged with and into MKSR and MKSR became the
surviving corporation. As consideration for the merger, the shareholders of
MKSR received from HLLS 1,019,767 common shares of HLLS and 3,425,000
shares of its voting convertible non-cumulative preferred stock ("HLLS
Preferred Stock"). 267,000 shares of the HLLS common stock issued to the
MKSR shareholders were from HLLS authorized but unissued shares and 752,767
shares of the HLLS common stock were returned to HLLS by the HLLS' former
chief executive officer (Mr. Feldman) and then reissued by HLLS in the
merger. The 3,425,000 shares of HLLS Preferred Stock are convertible into
34,250,000 post reverse stock-split shares of HLLS common stock upon
approval of an increase in the shares the Company is authorized to issue.
After the issuance of common stock as described above and the conversion of
HLLS Preferred Stock, the shareholders of MKSR own approximately 94% of
HLLS. Accordingly, this transaction has been accounted for as a reverse
merger with MKSR as the acquirer of HLLS. The reverse merger was accounted
for as a recapitalization and the stockholders' equity was retroactively
restated to January 1, 2002. The historical financial statements prior to
the reverse merger are those of MarketShare Recovery, Inc. - N.Y.
Pursuant to the merger, the Company's former Chief Executive Officer
cancelled all indebtedness owed by HLLS to him, except for $12,700, and
cancelled all guarantees of debt by HLLS.
In addition, as part of the merger transaction, MKSR and HLLS agreed to pay
$125,000 to H&L Concepts, Inc., a wholly-owned subsidiary of HLLS. After
the execution of the promissory note, the former Chief Executive Officer
purchased all of the outstanding shares of stock of H&L Concepts, Inc. for
nominal consideration. The parties acknowledged that most of the trade
payables and other consolidated liabilities of HLLS were liabilities of H&L
Concepts, Inc., the subsidiary of HLLS, and by selling the stock of H&L
Concepts, Inc. to Mr. Feldman it had the effect of removing substantially
all of the trade payables and liabilities from the HLLS balance sheet and
fixing the post closing liabilities of HLLS to that set forth in the
promissory note, see Note 6.
F-7
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(FORMERLY HEALTH AND LEISURE, INC. AND SUBSIDIARY)
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - Going Concern and Management's Plans
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America, assuming that the Company will continue as a going
concern. For the year ended December 31, 2003, the Company has incurred a
loss of approximately $2,025,000 and has a working capital and
stockholders' deficiency of approximately $178,000 and $173,000,
respectively. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company's ability to continue
as a going-concern is dependent upon obtaining additional financing,
restructuring its existing liabilities, and the successful completion of
its business plan. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. No
assurance can be provided that the Company will be successful in locating
additional financing or completing its business plan.
NOTE 4 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of MarketShare
Recovery, Inc. - Delaware (formerly Health & Leisure, Inc.) and its
wholly-owned subsidiary, MarketShare Recovery, Inc. - N.Y. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition and Related Commission Expenses
Revenues include the sale of and/or electronic delivery of email
distribution lists. Revenues from the sale of email distribution lists are
recognized when the seller has delivered a list to the customer and the
customer has accepted the list after an up to 30-day address replacement
period. Revenues from consulting services are recognized ratably over the
period of the contract. Commissions due to sales consultants are initially
deferred and recognized ratably over the period revenue is recognized.
Deferred commission expense is netted against deferred revenue for
financial reporting purposes. At December 31, 2003 there were no deferred
commissions or deferred revenue.
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 reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-8
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(FORMERLY HEALTH AND LEISURE, INC. AND SUBSIDIARY)
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies, continued
Cash and Cash Equivalents
For the purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Website Development Costs
The Company recognizes the costs associated with developing a website in
accordance with the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") No. 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use". Relating to
website development costs the Company follows the guidance pursuant to the
Emerging Issues Task Force (EITF) No. 00-2, "Accounting for Website
Development Costs". Internal costs related to the development of website
content are expensed as incurred. As of December 31, 2003, there are no
capitalized website development costs.
Advertising Costs
Advertisement costs are expensed as incurred. For the years ended December
31, 2003 and 2002, advertising expenses were $3,900 and $75, respectively.
Income Taxes
The Company was not required to provide for a provision for income taxes
for the year ended December 31, 2003, as a result of a net operating loss
incurred during the year then ended. The provision for income taxes for the
year ended December 31, 2002 of $1,567 related to minimum New York state
income taxes. As of December 31, 2003, the Company had available
approximately $60,000 of net operating loss carryforwards ("NOL") available
for income tax purposes that may be carried forward to offset future
taxable income, if any. The carryforward expires in 2023. At December 31,
2003, the Company has a deferred tax asset of approximately $810,000
representing the benefits of its net operating loss carryforwards amounting
to approximately $24,000 and compensatory element of stock issuances
amounting to $786,000. The Company's deferred tax asset has been fully
reserved by a valuation allowance since realization of its benefit is
uncertain. The difference between the statutory tax rate of 40% and the
Company's effective tax rate (0%) is due to the increase in the valuation
allowance of $810,000. The Company's ability to utilize its carryforwards
may be subject to an annual limitation in future periods pursuant to
Section 382 of the Internal Revenue Code of 1986, as amended.
F-9
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(FORMERLY HEALTH AND LEISURE, INC. AND SUBSIDIARY)
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies, continued
Marketable Securities
On certain engagements, the Company receives shares of common stocks of
publicly-traded corporations from its customers in lieu of cash payments
for services rendered. The fair value of the common stocks received is
reflected as revenue. Subsequently, these marketable securities are
classified as trading securities and reported at fair value with unrealized
gains or losses reported as other income (expenses) in the statements of
operations except for securities related to commissions amounting to
$12,461 during 2003. Unrealized gains or losses related to marketable
securities to be transferred to sales consultants as commissions are
reflected as an increase or decrease in the accrued commission liability.
The Company recognized a gain on the sale of marketable securities of
approximately $8,600 for the year ended December 31, 2003.
Loss or Earnings Per Common Share
The Company displays earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS
No. 128 requires dual presentation of basic and diluted earnings per share.
Basic earnings per share includes no dilution and is computed by dividing
the net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted earnings per share include the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. For the
year ended December 31, 2002, the diluted number of weighted average shares
outstanding was 35,269,767, which includes the dilutive effect of the
convertible preferred stock. Due to rounding, basic and diluted earnings
per share for the year ended December 31, 2002 are identical. As a result
of the net loss for the year ended December 31, 2003, the effects of the
convertible preferred stock would be anti-dilutive. Upon conversion of the
Company's preferred stock (Note 7), there are no securities or other
contracts to issue common stock.
Stock-Based Compensation
The Company follows SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes accounting and reporting standards
for stock-based employee compensation plans. This statement allows
companies to choose between the fair value-based method of accounting as
defined in this statement and the intrinsic value-based method of
accounting as prescribed by Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees."
The Company has elected to continue to follow the accounting guidance
provided by APB 25, as permitted for stock-based compensation relative to
the Company's employees. Stock and options granted to other parties in
connection with providing goods and services to the Company are accounted
for under the fair value method as prescribed by SFAS No. 123.
F-10
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(FORMERLY HEALTH AND LEISURE, INC. AND SUBSIDIARY)
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies, continued
Stock-Based Compensation, continued
In December 2002, the Financial Accounting Standard Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of SFAS Statement No. 123". This statement amends
SFAS No. 123 to provide alternative methods of transition for a voluntary
change to the fair value-based method of accounting for stock-based
employee compensation. In addition, SFAS No.148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. SFAS No. 148 also requires that those effects be
disclosed more prominently by specifying the form, content, and location of
those disclosures. The Company adopted the increased disclosure
requirements of SFAS No. 148 during the year ended December 31, 2003. The
Company has no stock based employee compensation.
Impact of Recently Issued Accounting Standards
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). This interpretation of
Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial
Statements," provides guidance for identifying a controlling interest in a
variable interest entity ("VIE") established by means other than voting
interests. FIN No. 46 also requires consolidation of a VIE by an enterprise
that holds such a controlling interest. In December 2003, the FASB
completed its deliberations regarding the proposed modification to FIN No.
46 and issued Interpretation Number 46(R), "Consolidation of Variable
Interest Entities - an Interpretation of ARB No. 51" ("FIN No. 46(R)"). The
decisions reached included a deferral of the effective date and provisions
for additional scope exceptions for certain types of variable interests.
Application of FIN No. 46(R) is required in financial statements of public
entities that have interests in VIEs or potential VIEs commonly referred to
as special-purpose entities for periods ending after December 15, 2003.
Application by public small business issuer entities is required in all
interim and annual financial statements for periods ending after December
15, 2004. The adoption of FIN No. 46(R) is not expected to have an impact
on the Company's consolidated financial position, results of operations or
cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The statement amends and
clarifies accounting for derivative instruments, including certain
derivatives instruments embedded in other contracts and for hedging
activities under SFAS No. 133. This statement is effective for contracts
entered into or modified after June 30, 2003, except as stated below and
for hedging relationships designated after June 30, 2003 the guidance
should be applied prospectively. The provisions of this statement that
relate to SFAS No. 133, Implementation Issues, that have been effective for
fiscal quarters that began prior to June 15, 2003, should continue to be
applied in accordance with respective effective dates. In addition, certain
provisions relating to forward purchases or sales of when-issued securities
or other securities that do not yet exist, should be applied to existing
contracts as well as new contracts entered into after June 30, 2003. The
adoption of SFAS No. 149 did not have an impact on the Company's financial
statements.
F-11
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(FORMERLY HEALTH AND LEISURE, INC. AND SUBSIDIARY)
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies, continued
Impact of Recently Issued Accounting Standards, continued In May 2003, the
FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for classification and measurement in the statement
of financial position of certain financial instruments with characteristics
of both liabilities and equity. It requires classification of a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003 and, otherwise, is effective at the
beginning of the first interim period beginning after June 15, 2003. The
Company adopted SFAS No. 150 in the quarter ended September 30, 2003. The
adoption did not have an impact on the consolidated financial statements.
NOTE 5 - Due to Affiliate
The Company expects to conduct business with a public company Dominix, Inc.
("Dominix", see Note 11), related by virtue of common management. The
amount due to affiliate as of December 31, 2003 of approximately $46,000 is
unsecured and non-interest bearing. In March 2004, Dominix forgave
repayment of the amount due in exchange for the use through a sublicense to
use the Company's database for a term of ten years.
NOTE 6 - Note Payable - Stockholders
At the closing of the merger, HLLS and MKSR entered into a $125,000 secured
promissory note with H&L Concepts, Inc., a then wholly-owned subsidiary of
HLLS. The loan is payable in twelve equal installments of $11,341,
commencing July 2003. Interest is included in the monthly payment at a rate
of 16% per annum. During October 2003, Mr. Ray Barton and Mr. Tim Schmidt,
the Company's current executive officers and directors purchased the
promissory note from H&L Concepts, Inc. for the full value of the note, in
accordance with the terms of the note. The terms of repayment, including
the interest rate and payment schedule are the same. The Company is
currently in default under the terms of the note. Accrued interest at
December 31, 2003 amounted to approximately $10,000.
F-12
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(FORMERLY HEALTH AND LEISURE, INC. AND SUBSIDIARY)
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - Stockholders' Deficiency
Preferred Stock
In June of 2003, HLLS amended its designation of preferred stock and
designated 3,425,000 shares of HLLS Preferred Stock. Each share of HLLS
Preferred Stock is automatically convertible into 10 shares of common stock
upon filing of an amendment to HLLS certificate of incorporation
authorizing a sufficient number of shares of common stock to effect such a
conversion. The HLLS Preferred Stock shall be entitled to receive when, if
and as declared by the Board of Directors dividends at 6% of its par value
per annum, payable in cash. Dividends on each share of the HLLS Preferred
Stock shall be non-cumulative and shall not accrue if not declared. Each
share of the HLLS Preferred Stock shall entitle its holders to vote in all
matters submitted to a vote of the stockholders of the Company with the
number of votes per Preferred share equal to the number of votes available
on a converted basis.
As discussed in Note 2, in connection with the June 2003 merger transaction
with MKSR, 3,425,000 shares of the HLLS Preferred Stock were issued to the
stockholders of MKSR. In September 2003, these preferred shares were
converted into 34,250,000 shares of common stock.
Changes in Capital Structure
On August 5, 2003, HLLS filed with the Securities and Exchange Commission a
definitive information statement notifying the stockholders of the Company
that written consents from principal stockholders who collectively hold in
excess of 50% of the Company's common stock were obtained and approved a 1
for 10 reverse split of the HLLS common stock, to authorize up to
50,000,000 shares of HLLS common stock and to change the name of HLLS to
MarketShare Recovery, Inc.
The 1-for-10 reverse stock split became effective on August 29, 2003 and
the $12,700 of debt owed to the former Chief Executive Officer was
converted into 1,270,000 shares of common stock and the 3,425,000 shares of
HLLS Preferred Stock was converted into 34,250,000 shares of common stock.
All share and per share amounts in the consolidated financial statements
and notes thereto, were retroactively adjusted to reflect the reverse stock
split.
During the year ended December 31, 2003, the Company issued 7,859,063
shares of its common stock to consultants for services rendered, which were
valued at $1,964,739 and was all charged to operations during the year
ended December 31, 2003.
Changes in Capital Structure
In September 2003, the Company adopted a 2003 Stock Option Plan (the "2003
Plan"). Under the 2003 Plan, up to 15,000,000 incentive stock options, or
non-qualified stock options, could be granted to employees and consultants.
As of December 31, 2003, no options have been granted.
F-13
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(FORMERLY HEALTH AND LEISURE, INC. AND SUBSIDIARY)
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - Concentrations of Credit Risk
Revenue from two customers accounted for approximately 32% and 10%,
respectively during 2003 and 9% and 8% (related party - Jade see Note 11),
respectively during 2002.
NOTE 9 - Commitments and Contingencies
The Company leases a facility in New York under a lease, which expires
March 31, 2008. The Company also leases computer equipment under various
leases, which expire through February 28, 2006.
Future annual minimum lease payments under non-cancelable operating leases
as of December 31, 2003 are as follows:
For the Year Ending
December 31, Amount
----------------------------------------------------------
2004 $ 31,066
2005 32,493
2006 32,432
2007 33,629
Thereafter 8,509
----------
Total $138,129
==========
Rent expense charged to operations for the years ended December 31, 2003
and 2002 amounted to $36,796 and $23,534, respectively.
NOTE 10 - Related Party Transactions
Marketing Agreement
The Company had a marketing agreement with a company that is controlled by
the Company's majority stockholders. The agreement was on a month-to-month
basis and called for receipt of $5,000 per month ending during 2002. The
Company received approximately $26,000 during 2002 relating to this
agreement.
Sub-lease Agreement
The Company had a sub-lease agreement with a company that is controlled by
the Company's majority stockholders. The agreement provided for the use of
office space, office equipment, telephone, internet access and other
amenities as needed to the related party. The amount of monthly rent
collected was not to exceed $1,800 per month and the agreement was month to
month, which ended during 2002. The Company received approximately $9,000
during 2002 relating to this agreement.
F-14
MARKETSHARE RECOVERY, INC. AND SUBSIDIARY
(FORMERLY HEALTH AND LEISURE, INC. AND SUBSIDIARY)
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - Terminated Proposed Merger
Dominix, Inc.
On November 25, 2003 Dominix, Inc. a Delaware corporation traded on NASDAQ
electronic bulletin board (DMNX) and the Company entered into a Stock
Purchase Agreement (the "Stock Purchase Agreement") under which Dominix,
subject to certain conditions, would acquire all of the outstanding capital
stock of MKSR. The parties have determined that it is in their mutual best
interest to terminate the Stock Purchase Agreement. In March 2004, the
Company entered into a database license with Jade Entertainment Group, Inc.
("Jade"), a wholly owned subsidiary of Dominix, see Note 5.
NOTE 12 - Subsequent Events
Sub-lease Agreement
The Company and Dominix agreed to share the expenses of office facilities
occupied by them under a lease held by the Company beginning January 1,
2004.
Common stock issuances
During February 2004, the Company issued an aggregate of 287,650 shares of
its common stock to two officers of the Company for additional compensation
and 36,000 shares of its common stock to a consultant for services
provided.
F-15