SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from________ to_______
Commission file number 0-16730
MKTG SERVICES, INC.
-------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 88-0085608
------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
333 Seventh Avenue, 20th Floor
New York, New York 10001
------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (917) 339-7100
--------------
-----------------------------------------------------
(Former name,
former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
State number of shares outstanding of each of the issuer's classes of common
equity as of the latest practical date:
As of November 8, 2002 there were 7,223,632 shares of the Issuer's Common Stock,
par value $.01 per share outstanding.
1
MKTG SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
SEPTEMBER 30, 2002
PART I - FINANCIAL INFORMATION Page
----
Item 1 Interim Condensed Consolidated Financial Statements
(unaudited)
Condensed Consolidated Balance Sheets as of
September 30, 2002 and June 30, 2002 (unaudited) 3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 2002 and 2001 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three
months ended September 30, 2002 and 2001 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-13
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-21
Item 3 Quantitative and Qualitative Disclosure About Market Risk 22
Item 4 Controls and Procedures 23
PART II- OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 24
Signatures 25
2
PART I - FINANCIAL INFORMATION
Item 1 - Interim Condensed Consolidated Financial Statements (unaudited)
------------------------------------------------------------------------
MKTG SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, 2002 June 30, 2002
------------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,290,554 $ 4,416,289
Accounts receivable, net of allowance for doubtful
accounts of $3,841,091 and $4,408,985, respectively 17,927,577 18,900,889
Restricted cash 4,945,874 4,945,874
Other current assets 1,319,142 1,292,167
------------ -------------
Total current assets 26,483,147 29,555,219
Goodwill, net 15,517,725 15,517,725
Identified intangible assets, net 568,663 557,407
Property and equipment, net 3,189,193 3,259,545
Related party note receivable 995,889 978,534
Other assets 981,771 676,348
------------ -------------
Total assets $ 47,736,388 $ 50,544,778
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short - term borrowing $ 1,425,735 $ 2,280,384
Accounts payable-trade 16,645,756 17,360,764
Accrued expenses and other current liabilities 4,861,328 5,860,112
Net liabilities of discontinued operations 1,593,123 1,714,406
Current portion of capital lease obligations 93,132 85,315
Current portion of long-term obligations 4,887,382 4,837,321
------------ -------------
Total current liabilities 29,506,456 32,138,302
Capital lease obligations, net of current portion 35,765 29,262
Long-term obligations, net of current portion 101,465 176,336
Other liabilities 5,879,966 6,145,848
------------ -------------
Total liabilities 35,523,652 38,489,748
Minority interest in preferred stock of discontinued subsidiary 280,946 280,946
Convertible preferred stock - $.01 par value; 150,000 shares
authorized; 23,201 shares of Series E issued and outstanding 10,384,064 10,384,064
Commitments and contingencies (see Note 7 and Note 10)
Stockholders' equity:
Common stock - $.01 par value; 75,000,000 authorized; 6,721,030
shares issued and outstanding as of September 30, 2002 and June 30, 2002 67,210 67,210
Additional paid-in capital 229,840,379 229,840,379
Accumulated deficit (226,966,153) (227,123,859)
Less: 70,649 shares of common stock in treasury, at cost (1,393,710) (1,393,710)
------------ -------------
Total stockholders' equity 1,547,726 1,390,020
------------ -------------
Total liabilities and stockholders' equity $ 47,736,388 $ 50,544,778
============ =============
See Notes to Condensed Consolidated Financial Statements.
3
MKTG SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(unaudited)
2002 2001
---- ----
Revenues $9,441,341 $11,681,661
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Operating costs and expenses:
Salaries and benefits 7,500,392 11,555,659
Direct costs 951,335 2,396,952
Selling, general and administrative 1,521,444 3,437,258
Depreciation and amortization 203,030 921,640
Gain on sale of Grizzard - (1,722,763)
---------- -----------
Total operating costs and expenses 10,176,201 16,588,746
---------- -----------
Loss from operations (734,860) (4,907,085)
Loss on early extinguishment of debt - (4,858,839)
Settlement of lawsuit 965,486 -
Interest expense and other, net (62,141) (517,031)
----------- -----------
Income (loss) before provision for income taxes 168,485 (10,282,955)
Provision for income taxes (10,779) (30,800)
----------- -----------
Net income (loss) $ 157,706 $(10,313,755)
========== ===========
Basic earnings (loss) per share: $ .02 $ (1.83)
========== ===========
Weighted average common shares outstanding- basic 6,650,381 5,620,601
========== ===========
Diluted earnings (loss) per share: $ .01 $ (1.83)
========== ===========
Weighted average common shares outstanding- diluted 21,093,665 5,620,601
========== ===========
See Notes to Condensed Consolidated Financial Statements.
4
MKTG SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(unaudited)
2002 2001
---- ----
Operating activities:
Net income (loss) $ 157,706 $(10,313,755)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Loss on early extinguishment of debt - 4,858,839
Gain on sale of Grizzard - (1,722,763)
Depreciation 178,993 225,313
Amortization 24,037 696,327
Non cash interest expense - 266,900
Provision for bad debts 70,000 190,657
Changes in assets and liabilities:
Accounts receivable 903,312 1,483,164
Inventory - (697,908)
Other current assets (26,975) (113,130)
Other assets (27,774) (26,197)
Accounts payable - trade (715,008) (1,439,991)
Accrued expenses and other liabilities (1,236,021) 186,109
----------- -----------
Net cash used in operating activities (671,730) (6,406,435)
----------- -----------
Investing activities:
Proceeds from sale of Grizzard, net - 81,662,392
Increase in restricted cash - (4,945,874)
Purchases of property and equipment (68,977) (421,676)
Purchases of capitalized software (35,293) -
---------- -----------
Net cash (used in) provided by investing activities (104,270) 76,294,842
---------- -----------
Financing activities:
Net repayments on credit facilities (854,649) (10,863,910)
Payment of fees in connection with refinancing Preferred Stock (277,649) -
Repayment of capital lease obligation (25,344) (31,144)
Repayment of related party note payable - (250,000)
Repayments of long term debt (70,811) (35,588,932)
---------- -----------
Net cash used in financing activities (1,228,453) (46,733,986)
Net cash used in discontinued operations (121,282) (150,941)
---------- -----------
Net (decrease) increase in cash and cash equivalents (2,125,735) 23,003,480
Cash and cash equivalents at beginning of period 4,416,289 1,725,412
---------- -----------
Cash and cash equivalents at end of period $2,290,554 $24,728,892
========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
MKTG SERVICES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements include
the accounts of MKTG Services, Inc. and Subsidiaries ("MKTG" or the "Company").
These condensed consolidated financial statements are unaudited and should be
read in conjunction with the Company's Form 10-K for the year ended June 30,
2002 and the historical consolidated financial statements and related notes
included therein. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements include all adjustments, consisting
of only normal recurring accruals, necessary to present fairly the condensed
consolidated financial position, results of operations and cash flows of the
Company. Certain information and footnote disclosure normally included in
financial statements prepared in conformity with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations. Operating results for the
three-month period ended September 30, 2002 are not necessarily indicative of
the results that may be expected for the fiscal year ending June 30, 2003.
Certain reclassifications have been made in the fiscal 2002 financial statements
to conform to the fiscal 2003 presentation.
The Company has limited capital resources and has incurred significant recurring
losses and negative cash flows from operations. In addition, certain
contingencies may require significant resources. The Company may be required to
redeem its Series E preferred stock (see Note 7) and repay its outstanding lines
of credit (see Note 4) depending on future events. The Company does not believe
its cash on hand along with existing sources of cash are sufficient to fund its
cash needs over the next twelve months under the current capital structure. In
order to address this situation, the Company has had and continues to have
discussions with multiple parties regarding the possibility of either
restructuring or refinancing the remainder of the Series E preferred stock. The
Company is also reviewing options, which include replacing the existing
Preferred Stockholders with an alternative strategic investor or selling certain
assets to gain funds to attempt to repurchase the Series E preferred stock at a
discount. The Company will also need to raise additional equity financing or
obtain other sources of liquidity (including debt or other resources). The
Company has instituted cost reduction measures, including the reduction of
workforce. In addition, the Company is reviewing its present operations with the
view towards further reducing its cost structure and workforce and to find
alternative means of increasing revenue. There can be no assurance that the
Company will be successful in restructuring its preferred stock or obtaining
additional financing. Additionally, there can be no assurances that the
Company's cost reduction efforts will be successful or that the Company will
achieve a level of revenue that will allow it to return to profitability. In the
event the Company is unable to raise needed financing and achieve profitability,
operations will need to be scaled back or discontinued. These circumstances
raise substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any adjustments
relating to the recoverability of the carrying amount of recorded assets or the
amount of liabilities that might result should the Company be unable to continue
as a going concern.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB approved two new pronouncements: SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 applies to all business combinations with a closing date after June 30,
2001. SFAS No. 141 eliminates the pooling-of-interests method of accounting and
further clarifies the criteria for recognition of intangible assets separately
from goodwill. The Company adopted SFAS No. 142 effective July 1, 2002. SFAS No.
142 eliminates the
6
amortization of goodwill and indefinite-lived intangible assets and initiates an
annual review for impairment. Identifiable intangible assets with a determinable
useful life continue to be amortized. The adoption required the Company to cease
amortization of its remaining net goodwill balance and to perform an impairment
test of its existing goodwill based on a fair value concept. The Company intends
to complete the step one process of performing a transitional impairment test of
its existing goodwill by the end of the quarter ending December 31, 2002 (see
Note 6).
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the disposal of long-lived assets. The Company adopted SFAS No.
144 as of July 1, 2002. The objectives of SFAS No. 144 are to address
significant issues relating to the implementation of SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" and to develop a single accounting model, based on the framework established
in SFAS No. 121, for the long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 recognition and measurement of the impairment of
long-lived assets to be held and used. The adoption of such pronouncement did
not have an impact on the Company's financial position and results of
operations.
In April 2002, the FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections as of April 2002." SFAS No.
145 became effective for financial statements issued for fiscal years beginning
after May 15, 2002. The Company adopted SFAS 145 on July 1, 2002. The adoption
of the statement did not have a material impact on the Company's financial
position and results of operations. However, the loss on extinguishment of debt
that was classified as an extraordinary item in the prior period has been
reclassified to an non-operating expense as the loss does not meet the criteria
in APB Opinion No. 30 "Reporting the Results of Operations Reporting the Effects
of Disposal of a Segment of a Business", for classification as an extraordinary
item.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." Under Issue No. 94-3, a
liability for an exit cost as defined in Issue 94-3 was recognized at the date
of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair market value only when the liability is incurred
and not when management has completed the plan. The provisions of this Statement
are effective for exit or disposal activities that are initiated after December
31, 2002. The Company is currently reviewing the provisions of SFAS No. 146.
3. EARNINGS PER SHARE
Common share equivalents included in weighted average shares outstanding-
diluted for the quarter ending September 30, 2002:
Weighted average common shares outstanding 6,650,381
Common stock equivalents for conversion of preferred stock 12,926,571
Common stock equivalents for options and warrants 1,516,713
-----------
Weighted average common shares outstanding- diluted 21,093,665
==========
Stock options and warrants in the amount of 714,033 shares for the three months
ended September 30, 2002 have not been included in the computation of diluted
EPS as they were antidilutive. Stock options and warrants in the amount of
1,484,219, a warrant exercisable on November 1, 2001, in the amount of
7
1,778,334 and convertible preferred stock in the amount of 408,497 for the three
months ended September 30, 2001 were not included in the computation of diluted
EPS as they were antidilutive as a result of net losses during the period.
4. DEBT
In August 2001, the Company entered into a stand by letter of credit with a bank
in the amount of $4,945,874 to support the remaining obligations under a certain
holdback agreement with the former shareholders of Grizzard Communications
Group, Inc. ("Grizzard".) The letter of credit is collateralized by cash which
has been classified as restricted cash in the current asset section of the
balance sheet as of September 30, 2002 and June 30, 2002. The letter of credit
is subject to an annual facility fee of 1.5%. The remaining obligation is
included in current portion of long term obligations and is payable in March
2003.
The Company has received waivers from its lender for certain subsidiaries, which
were in violation of certain working capital and net worth covenants of their
credit agreements as of September 30, 2002. In consideration for the waivers,
the Company repaid approximately $.8 million balance of one credit facility and
agreed to cease future advances of this facility. Based on this repayment, the
availability under the two remaining credit facilities is approximately $1.3
million as of September 30, 2002. The Company may be out of compliance in a
future period and unable to obtain waivers from the lender, who may call the
debt, which could have a material adverse effect on the Company's liquidity and
ability to continue as a going concern (see Note 1).
5. SALE OF GRIZZARD
On June 13, 2001, the board of directors and management of the Company approved
a formal plan to sell Grizzard. On July 18, 2001, the Company entered into a
definitive agreement to sell Grizzard. On July 31, 2001, the Company completed
its sale of all the outstanding capital stock of its Grizzard subsidiary to
Omnicom Group, Inc. The purchase price of the transaction was $89.8 million in
cash, net of a working capital adjustment. As a result of the sale agreement,
the Company fully paid the term loan of $35.5 million and $12.0 million line of
credit. The Company recorded a loss of approximately $4.9 million in the fiscal
year ended June 30, 2002 as a result of the early extinguishments of debt. The
Company retained $43.8 million in cash proceeds from the sale before closing
fees and other costs of approximately $8.0 million.
In the quarter ended September 30, 2001, the Company recognized a gain on sale
of Grizzard of approximately $1.7 million. The gain represented an adjustment to
the previous estimate based on the actual sale price of Grizzard as compared to
its actual book value at the closing date. The difference predominantly occurred
due to the operational losses incurred by Grizzard during the quarter ended
September 30, 2001. Grizzard's revenues and net loss included in the Company's
statement of operations for the quarter ended September 30, 2001 were $2.9
million and $8.5 million, respectively.
Supplemental
Pro forma information
(unaudited)
For the quarter ended September 30,
2001
-----------------------------------
Revenues $8,851,000
Net loss $(3,629,000)
Net loss per common share - basic
and diluted $(.65)
======
8
The pro forma information is provided for informational purposes only and
assumes that Grizzard was sold as of the beginning of fiscal year 2002. It is
based on historical information and is not necessarily indicative of future
results of operations of the consolidated entities.
6. GOODWILL AND INTANGIBLE ASSETS
As a result of the adoption of SFAS No. 142, the Company discontinued the
amortization of goodwill effective July 1, 2002. Identifiable intangible assets
are amortized under the straight-line method over the period of expected benefit
ranging from five to ten years. The Company recharacterized acquired workforce
of approximately $50,573 and non-contractual customer relationships of
approximately $835,072 which are no longer defined as an acquired intangible
asset under SFAS No. 141, as goodwill. The Company intends to complete the step
one process of performing a transitional impairment test of its existing
goodwill by the end of the quarter ending December 31, 2002.
The following table sets forth the components of goodwill, net as of September
30, 2002:
Reporting unit - 1 $12,939,562
Reporting unit - 2 2,277,220
Reporting unit - 3 300,944
-----------
$15,517,725
===========
Reporting unit - 1 includes list sales and services and database marketing
Reporting unit - 2 includes telemarketing
Reporting unit - 3 includes web site development and design
The following table sets forth the components of the intangible assets subject
to amortization as of September 30, 2002 and June 30, 2002:
September 30, 2002 June 30, 2002
------------------------------------- -------------------------------------
Gross Gross
Range of carrying Accumulated carrying Accumulated
useful life amount amortization Net amount amortization Net
----------- ------ ------------ --- ------ ------------ ---
Capitalized software 5 years $360,208 $197,764 $162,444 $324,917 $189,251 $135,666
List databases 10 years 451,978 45,759 406,219 451,978 30,235 421,741
------- ------ ------- ------- ------ -------
$812,186 $243,523 $568,663 $776,895 $219,486 $557,407
-------- -------- -------- -------- -------- --------
Amortization expense for the three months ended September 30, 2002 and 2001 was
approximately $24,037 and $696,327, respectively.
Estimated amortization expense by fiscal year as of June 30, are as
follows:
2003 $103,202
2004 103,202
2005 103,202
2006 103,202
2007 103,202
2008 78,453
--------
$594,463
========
9
The following table provides a reconciliation of net loss for exclusion of
goodwill amortization:
Three months ended September 30,
-----------------------------------
2002 2001
---- ----
Net income (loss) - as reported $157,706 $(10,313,755)
Add: Goodwill amortization - 672,291
-------- -----------
Net income (loss) - adjusted 157,706 $(9,641,464)
======== ============
Per share data:
Basic net income (loss) per share $.02 $(1.83)
Add: Goodwill amortization - .12
---- ------
Adjusted basic net income (loss)
per share $.02 $(1.71)
==== ======
Diluted net income (loss) per
share $.01 $(1.83)
Add: Goodwill amortization - .12
---- ------
Adjusted diluted net income
(loss) per share $.01 $(1.71)
==== ======
7. CONTINGENCIES AND LITIGATION
In December 2001, an action was filed by a number of purchasers of preferred
stock of WiredEmpire, Inc., a discontinued subsidiary, in the Alabama State
Court (Circuit Court of Jefferson County, Alabama, 10 Judicial Circuit of
Alabama, Birmingham Division), against J. Jeremy Barbera, Chairman of the Board
and Chief Executive Officer of MKTG, MKTG and WiredEmpire, Inc. The plaintiffs'
complaint alleges, among other things, violation of sections 8-6-19(a)(2) and
8-6-19(c) of the Alabama Securities Act and various other provisions of Alabama
state law and common law, arising from the plaintiffs' acquisition of
WiredEmpire Preferred Series A stock in a private placement. The plaintiffs
invested approximately $1,650,000 in WiredEmpire's preferred stock and they seek
that amount, attorney's fees and punitive damages. On February 8, 2002, the
defendants filed a petition to remove the action to federal court on the grounds
of diversity of citizenship. The Company believes that the allegations in the
complaint are without merit. The Company intends to vigorously defend against
the lawsuit.
In December 2000, an action was filed by Red Mountain, LLP in the United States
Court for the Northern District of Alabama, Southern Division against J. Jeremy
Barbera, Chairman of the Board and Chief Executive Officer of MKTG Services,
Inc., and WiredEmpire, Inc. Red Mountains' complaint alleges, among other
things, violations of Section 12(2) of the Securities Act of 1933, Section 10(b)
of the Securities Act of 1934 and Rule 10(b)(5) promulgated there under, and
various provisions of Alabama state law and common law, arising from Red
Mountain's acquisition of WiredEmpire Preferred Series A stock in a private
placement. Red Mountain invested $225,000 in WiredEmpire's preferred stock and
it seeks that amount, attorney's fees and punitive damages. The Company believes
that the allegations in the complaint are without merit. The Company intends to
vigorously defend against the lawsuit.
In June 2002, the Company entered into a Tolling Agreement (the "Agreement")
with various claimants who acquired WiredEmpire Preferred Series A stock in a
private placement. The Agreement states that the passage of time from June 15,
2002 through August 31, 2002 shall not be counted toward the limit as set out by
any applicable statute of limitations. In addition, the claimants agree that
none of them shall initiate or file a legal action against Mr. Barbera, MKTG or
WiredEmpire prior to the termination of the agreement. The claimants invested
approximately $1,200,000 in WiredEmpire's preferred stock.
A demand letter was received from counsel for Pennstone LLC seeking rescission
of its purchase of 64,000 shares of WiredEmpire Series A Preferred Stock. That
demand was rejected in January 2001.
10
To date, no action has commenced.
In 1999, a lawsuit under Section 16(b) of the Securities Exchange Act of 1934
was commenced against General Electric Capital Corporation ("GECC") by Mark
Levy, derivatively on behalf of the Company, to recover short swing profits
allegedly obtained by GECC in connection with the purchase and sale of MKTG
securities. The case was filed in the name of Mark Levy v. General Electric
Capital Corporation, in the United States District Court for the Southern
District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002,
a settlement was reached among the parties. The settlement provided for a
$1,250,000 payment to be made to MKTG by GECC and for GECC to reimburse MKTG for
the reasonable cost of mailing a notice to stockholders up to $30,000. On April
29, 2002, the court approved the settlement for $1,250,000, net of attorney fees
plus reimbursement of mailing costs. In July 2002, the court ruling became final
and the Company received and recorded the net settlement payment of $965,486
plus reimbursement of mailing costs.
In February 2001, the Company entered into a strategic partnership agreement
(the "Agreement") with Paris based Firstream. Firstream paid the Company $3.0
million and in April 2001 received 1.5 million restricted shares of common
stock, plus a two-year warrant for 400,000 shares priced at $3.00 per share. The
warrant is exercisable over a two year period. The warrant is valued at $.9
million as determined by the Black-Scholes option pricing model and was recorded
to equity. In accordance with the Agreement, the Company recorded proceeds of
$1.8 million; net of fees and expenses, as equity and $1.0 million was
designated as deferred revenue to provide for new initiatives. As part of the
strategic partnership, MKTG would launch several new Firstream products and
services in the areas of wireless communications, online music and consumer
marketing programs for early adopters of new products. The remaining balance was
$.8 million at June 30, 2002. In July 2002, the Company received a letter from
Firstream canceling the strategic partnership agreement and requesting payment
of the remaining $.8 million, which has been categorized as a liability at June
30, 2002. Subsequent to September 30, 2002, the Company and Firststream entered
into a settlement agreement whereby the parties agreed the total remaining
balance was approximately $.5 million and would be repaid in cash over a period
of time to extend through March 2004. If the Company completes a financing or
equity transaction subsequent to December 31, 2002 which yields more than $2.0
million of net proceeds to the Company, then the remaining settlement balance
would be due and payable within one month after the receipt of funds.
In June 2002, the Company received notification from The Nasdaq Stock Market
("Nasdaq") that the Company's common stock has closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4).
If the Company cannot meet compliance under the Nasdaq rules by December 24,
2002, Nasdaq will determine whether the Company meets the initial listing
criteria for Nasdaq under Marketplace Rule 4310(c)(2)(a). If the Company meets
the initial listing criteria, the Company will be granted an additional 180
calendar day grace period to demonstrate compliance. Otherwise the securities
may be delisted. In October 2002, the Company received another notification from
Nasdaq that based on its June 30, 2002 filing the Company does not meet
compliance with Marketplace Rule 4310(c)(2)(B). Such rule requires the Company
to have a minimum of $2,000,000 in net tangible assets or $2,500,000 in
stockholders' equity or a market value of listed securities of $35,000,000 or
$500,000 of net income from continuing operations for the most recently
completed fiscal year or two of the three most recently completed fiscal years.
The Company has responded to Nasdaq with its plan and believes that it can
achieve compliance with Marketplace Rule 4310(c)(2)(B) by achieving minimum
stockholders' equity of $2,500,000. The Company has currently not received a
reply from Nasdaq in connection with its submitted plan for compliance. If the
Nasdaq Staff determines the Company's plan does not adequately address the
issues noted, the Company will be provided with written notification that the
securities will be delisted. At that time, the Company may appeal the Staff's
decision to a Nasdaq Listing Qualification Panel. Accordingly, the Company
expects that this process would take several months during which time the
Company would remain listed. The Company believes that during this time period
it will be back in compliance and a potential delisting is not probable based on
current plans and information.
11
An event of default under the Series E preferred stock includes failing to
maintain the listing of the Company's common stock on Nasdaq or other such
similar exchange. Such default would trigger a mandatory redemption in cash
under the terms of the Series E preferred stock agreement. The Company does not
have sufficient cash to satisfy such redemption (see Note 1 and 10). However, as
previously discussed, the Company believes it is not probable it will be
delisted.
In addition to the above, certain other legal actions in the normal course of
business are pending to which the Company is a party. The Company does not
expect that the ultimate resolution of the above matters and other pending legal
matters will have a material effect on the financial condition, results of
operations or cash flows of the Company.
8. SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
During the quarter ended September 30, 2002, the Company acquired computer
equipment by obtaining collateralized financing in the amount of $39,664.
9. SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" segment information is being reported consistent with
the Company's method of internal reporting. In accordance with SFAS No. 131,
operating segments are defined as components of an enterprise for which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. MKTG is organized primarily on the basis of products broken down
into separate subsidiaries. Based on the nature of the services provided and
class of customers, as well as the similar economic characteristics, MKTG's
subsidiaries have been aggregated. No single customer accounted for 10% or more
of total revenues. MKTG earns 100% of its revenue in the United States.
Supplemental disclosure of revenue by product:
Quarter Ended
September 30,
----------------------------------
2002 2001
---- ----
List sales and services $2,362,040 $ 1,950,454
Marketing communication services - 2,831,004
Database marketing 2,371,268 2,768,362
Telemarketing 4,504,085 3,792,921
Website development and design 194,614 308,539
Other 9,334 30,381
---------- -----------
Consolidated total $9,441,341 $11,681,661
========== ===========
The marketing communication services product line was included in the sale of
Grizzard (see Note 5).
10. PREFERRED STOCK
On October 2, 2002, the common stockholders approved the issuance of the Series
E preferred stock and
12
the stockholders right to convert such preferred stock to common stock beyond
the previous 19.99% limitation. Subsequently, the preferred shareholders
converted 1,071.44 shares of Series E preferred stock to 573,251 shares of
common stock. The redemption value of preferred stock at October 31, 2002
including interest and penalties is $35,274,777 (see Note 1 and Note 7).
13
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Special Note Regarding Forward-Looking Statements
- -------------------------------------------------
Some of the statements contained in this Report on Form 10-Q discuss our plans
and strategies for our business or state other forward-looking statements, as
this term is defined in the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of MKTG Services, Inc. ("MKTG" or the "Company"), or industry
results to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; industry capacity; direct marketing and other industry trends;
demographic changes; competition; the loss of any significant customers; changes
in business strategy or development plans; availability and successful
integration of acquisition candidates; availability, terms and deployment of
capital; advances in technology; retention of clients not under long-term
contract; quality of management; business abilities and judgment of personnel;
availability of qualified personnel; changes in, or the failure to comply with,
government regulations; and technology, telecommunication and postal costs.
Introduction
- ------------
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity/cash flows of the Company
for the three month periods ended September 30, 2002 and 2001. This should be
read in conjunction with the financial statements, and notes thereto, included
in this Report on Form 10-Q and the Company's financial statements and notes
thereto, included in the Company's Annual Report on Form 10-K for the year ended
June 30, 2002.
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The following is a brief description of the more
significant accounting policies and methods used by the Company.
Revenue Recognition:
Revenues derived from list sales and services and database marketing are
recognized when the lists are shipped or the services have been performed and
completed. For all list sales and services, the Company serves as broker between
unrelated parties who wish to purchase a certain list and unrelated parties who
have the desired list for sale. Accordingly, the Company recognizes trade
accounts receivable and trade accounts payable, reflecting a "gross-up" of the
two concurrent transactions. The transactions are not structured providing for
the right of offset. List sales and services revenues are reflected net of costs
on the accompanying statement of operations.
Revenues derived from on-site telemarketing and telefundraising are generally
based on hourly billing rates and a mutually agreed percentage of amounts
received by the Company's client from a campaign. These services are performed
on-site at the clients' location. These revenues are earned and recognized when
the cash is received by the respective client. Revenues derived from off-site
telemarketing and telefundraising are generally based on a mutually agreed
amount per telephone contact with a potential donor without regard to amounts
raised for the client. These services are performed at the Company's calling
center. These revenues are earned and recognized when the services are
performed.
Goodwill:
In June 2001, the FASB approved two new pronouncements: SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 applies to all business combinations with a closing date after June 30,
2001. SFAS No. 141 eliminates the pooling-of-interests method of accounting and
further clarifies the criteria for recognition of intangible assets separately
from goodwill. The Company adopted SFAS No. 142 effective July 1, 2002. SFAS No.
142 eliminates the
14
amortization of goodwill and indefinite-lived intangible assets and initiates an
annual review for impairment. Identifiable intangible assets with a determinable
useful life continue to be amortized. The adoption required the Company to cease
amortization of its remaining net goodwill balance and to perform an impairment
test of its existing goodwill based on a fair value concept. The Company intends
to complete the step one process of performing a transitional impairment test of
its existing goodwill by the end of the quarter ending December 31, 2002.
Goodwill is not subject to amortization and is tested for impairment annually,
or more frequently if events or changes in circumstances indicate that the asset
may be impaired. The impairment test consists of a comparison of the fair value
of goodwill with its carrying amount. If the carrying amount of goodwill exceeds
its fair value, an impairment loss shall be recognized in an amount equal to
that excess. After an impairment loss is recognized, the adjusted carrying
amount of goodwill is its new accounting basis.
Long-Lived Assets:
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the disposal of long-lived assets. The Company adopted SFAS No.
144 as of July 1, 2002. The objectives of SFAS No. 144 are to address
significant issues relating to the implementation of SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" and to develop a single accounting model, based on the framework established
in SFAS No. 121, for the long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 recognition and measurement of the impairment of
long-lived assets to be held and used. The adoption of such pronouncement did
not have an impact on the Company's financial position and results of
operations.
MKTG assesses the recoverability of its long-lived assets and certain
identifiable intangible assets by determining whether the unamortized balance
over its remaining life can be recovered through forecasted cash flows. If
undiscounted forecasted cash flows indicate that the unamortized amounts will
not be recovered, an adjustment is made to reduce the net amounts to an amount
consistent with forecasted future cash flows discounted at a rate commensurate
with the risk associated when estimating future discounted cash flows. Future
cash flows are based on trends of historical performance and management's
estimate of future performance, giving consideration to existing and anticipated
competitive and economic conditions.
Early Extinguishment of Debt:
In April 2002, the FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections as of April 2002." SFAS No.
145 became effective for financial statements issued for fiscal years beginning
after May 15, 2002. The Company adopted SFAS 145 on July 1, 2002. The adoption
of the statement did not have a material impact on the Company's financial
position and results of operations. However, the loss on extinguishment of debt
that was classified as an extraordinary item in the prior period has been
reclassified to an non-operating expense as the loss does not meet the criteria
in APB Opinion No. 30 "Reporting the Results of Operations Reporting the Effects
of Disposal of a Segment of a Business", for classification as an extraordinary
item.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. The most significant estimates and assumptions made in the
preparation of the consolidated financial statements relate to the carrying
amount and amortization of intangible assets, deferred tax valuation allowance,
abandoned lease reserves and the allowance for doubtful accounts.
15
Actual results could differ from those estimates.
Recent Accounting Pronouncements:
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." Under Issue No. 94-3, a
liability for an exit cost as defined in Issue 94-3 was recognized at the date
of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair market value only when the liability is incurred
and not when management has completed the plan. The provisions of this Statement
are effective for exit or disposal activities that are initiated after December
31, 2002. The Company is currently reviewing the provisions of SFAS No. 146.
To facilitate an analysis of MKTG operating results, certain significant events
should be considered.
On June 13, 2001, the board of directors and management of the Company approved
a formal plan to sell Grizzard Communications Group, Inc. ("Grizzard") In July
2001, the Company completed its sale of all the outstanding capital stock of its
Grizzard subsidiary to Omnicom Group, Inc. The purchase price of the transaction
was $89.8 million payable in cash, net of a working capital adjustment. As a
result of the sale agreement, the Company fully paid the term loan of $35.5
million and $12.0 million line of credit. The Company recorded a loss of
approximately $4.9 million in the year ended June 30, 2002 as a result of the
early extinguishment of debt. Grizzard's revenues and net loss included in the
Company's statement of operations for the quarter ended September 30, 2001 were
$2.9 million and $8.5 million, respectively.
The Company's business tends to be seasonal. Certain marketing services have
higher revenues and profits occurring in the second fiscal quarter, followed by
the first fiscal quarter based on the seasonality of its clients' mail dates to
coordinate with the Thanksgiving and Holiday season. Telemarketing services have
higher revenues and profits occurring in the fourth fiscal quarter, followed by
the first fiscal quarter. This is due to subscription renewal campaigns for its
performing arts clients, which generally begin in the springtime and continue
during the summer months.
Results of Operations for the Three Months Ended September 30, 2002, Compared to
- --------------------------------------------------------------------------------
the Three Months Ended September 30, 2001.
- ------------------------------------------
Revenues of approximately $9.4 million for the three months ended September 30,
2002 (the "Current Period") decreased by $2.2 million or 19% over revenues of
$11.7 million during the three months ended September 30, 2001 (the "Prior
Period"). Of the decrease, approximately $2.8 million is attributable to the
sale of Grizzard in July 2001. Revenue excluding the effects of the disposition
of Grizzard increased by $.6 million or 7% primarily due to increased client
billings in the telemarketing and list sales and services segments, offset by
lower database marketing revenues. In the prior Period the Company incurred
unexpected client cancellations, the telemarketing calling center was closed for
a period of time and fundraising campaigns were postponed all in connection with
the terrorist event of September 11, 2001. The Company expects the revenue
levels to be comparable to the prior year results for the next fiscal quarter
and then expects improved revenue levels in the fiscal third and fourth quarters
compared to the prior year results.
Salaries and benefits of approximately $7.5 million in the Current Period
decreased by approximately $4.1 million or 35% over salaries and benefits of
approximately $11.6 million in the Prior Period. Of the decrease, approximately
$3.4 million is attributable to the sale of Grizzard in July 2001. Salaries and
benefits, excluding the effects of the disposition of Grizzard, decreased by
approximately $.7 million or
16
9% due to a significant reduction in headcount which was executed in May 2002.
Direct costs of approximately $1.0 million in the Current Period decreased by
$1.4 million or 60% over direct costs of $2.4 million in the Prior Period. Of
the decrease, approximately $1.3 million is attributable to direct costs
associated with sale of Grizzard in July 2001. Direct costs, excluding the
effects of the disposition of Grizzard, decreased by $.1 million or 11%
resulting from the decrease in database marketing revenue.
Selling, general and administrative expenses of approximately $1.5 million in
the Current Period decreased by approximately $1.9 million or 56% over
comparable expenses of $3.4 million in the Prior Period. Of the decrease,
approximately $1.2 million is attributable to the sale of Grizzard in July 2001.
Selling, general and administrative expenses, excluding the effects of the
disposition of Grizzard, decreased by $.7 million, principally due to decreased
professional fees and decreased rent and other expenses due to the consolidation
of certain office spaces and the reduction of head count.
Depreciation and amortization expense of approximately $.2 million in the
Current Period decreased by approximately $.7 million over expense of $.9
million in the Prior Period. The decrease is due to the adoption of SFAS No.
142, "Goodwill and Other Intangible Assets." The Company adopted the new
pronouncement as of July 1, 2002. This Statement eliminates amortization of
goodwill and indefinite-lived intangible assets and initiates an annual review
for impairment. Identifiable intangible assets with a determinable useful life
will continue to be amortized. The adoption required the Company to cease
amortization of its remaining net goodwill balance and to perform an impairment
test of its existing goodwill based on a fair value concept. The Company intends
to complete the step one process of performing a transitional impairment test of
its existing goodwill by the end of the quarter ending December 31, 2002.
During the quarter ending September 30, 2002, the Company recognized a gain on a
settlement of a lawsuit. In 1999, a lawsuit under Section 16(b) of the
Securities Exchange Act of 1934 was commenced against General Electric Capital
Corporation ("GECC") by Mark Levy, derivatively on behalf of the Company, to
recover short swing profits allegedly obtained by GECC in connection with the
purchase and sale of MKTG securities. The case was filed in the name of Mark
Levy v. General Electric Capital Corporation, in the United States District
Court for the Southern District of New York, Civil Action Number 99 Civ.
10560(AKH). In February 2002, a settlement was reached among the parties. The
settlement provided for a $1,250,000 payment to be made to MKTG by GECC and for
GECC to reimburse MKTG for the reasonable cost of mailing a notice to
stockholders up to $30,000. On April 29, 2002, the court approved the settlement
for $1,250,000, net of attorney fees plus reimbursement of mailing costs. In
July 2002, the court ruling became final and the Company received and recorded
the net settlement payment of $965,486 plus reimbursement of mailing costs.
In the quarter ended September 30, 2001, the Company recognized a gain on sale
of Grizzard of approximately $1.7 million. The gain represented an adjustment to
the previous estimate based on the actual sale price of Grizzard as compared to
its actual book value at the closing date. The difference predominantly occurred
due to the operational losses incurred by Grizzard during the quarter ended
September 30, 2001.
Net interest expense of approximately $.1 million in the Current Period
decreased by approximately $.4 million over net interest expense of
approximately $.5 million in the Prior Period. The decrease is principally due
to the reduced interest expense due to the repayment of certain long term debt
in connection with the sale of Grizzard in addition to the interest income
earned on the net proceeds from the sale.
In connection with the sale of Grizzard, the Company fully paid the term loan of
$35.5 million and $12.0 million line of credit. As a result, the Company
recorded a loss of approximately $4.9 million in the
17
September 2001 quarter as a result of the early extinguishment of debt.
The net provision for income taxes of approximately $11,000 in the Current
Period decreased by approximately $22,000 over the provision of approximately
$33,000 in the Prior Period. The Company records provisions for state and local
taxes incurred on taxable income or equity at the operating subsidiary level,
which cannot be offset by losses incurred at the parent company level or other
operating subsidiaries. The Company has recognized a full valuation allowance
against the deferred tax assets because it is more likely than not that
sufficient taxable income will not be generated during the carry forward period
to utilize the deferred tax assets.
As a result of the above, net income of approximately $.2 million in the Current
Period increased by $10.5 million over comparable net loss of $10.3 million in
the Prior Period.
Capital Resources and Liquidity
- -------------------------------
Financial Reporting Release No. 61, which was released by the SEC, requires all
companies to include a discussion to address, among other things, liquidity,
off-balance sheet arrangements, contractual obligations and commercial
commitments. The Company currently does not maintain any off-balance sheet
arrangements.
Leases: The Company leases various office space and equipment under
non-cancelable long-term leases. The Company incurs all costs of insurance,
maintenance and utilities.
Future minimum rental commitments under all non-cancelable leases, as of
September 30, 2002 are as follows:
Operating Leases Capital Leases
---------------- --------------
2003 $2,183,731 $90,786
2004 2,763,250 51,190
2005 2,392,498 -
2006 1,927,131 -
2007 1,801,180 -
Thereafter 5,566,747 -
---------- -------
$16,634,537 141,976
=========== =======
Less interest (13,079)
-------
Present value of
capital lease obligations $128,897
========
Debt: In August 2001, the Company entered into a stand-by letter of credit with
a bank in the amount of $4,945,874 to support the remaining obligations under a
certain holdback agreement with the former shareholders of Grizzard. The letter
of credit is collateralized by cash, which has been classified as restricted
cash in the current asset section of the balance sheet as of September 30, 2002.
The Company has a remaining obligation of $4,594,062 under the holdback
agreement. The remaining obligation is included in current portion of long-term
obligations and is payable in March 2003. In connection with an acquisition, the
Company incurred promissory notes payable to former shareholders, payable
monthly at 5.59% interest through January 2004. The remaining obligation is
$394,785 in aggregate with $101,465 included in long-term obligations, net of
current portion.
Preferred Stock: On October 2, 2002, the common stockholders approved the right
of the Series E preferred shareholders to convert their preferred stock to
common stock. Subsequently, the preferred
18
shareholders converted 1,071.44 shares of Series E preferred stock to 573,251
shares of common stock. The redemption value of preferred stock at October 31,
2002 including interest and penalties is $35,274,777.
In June 2002, the Company received notification from The Nasdaq Stock Market
("Nasdaq") that the Company's common stock has closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4).
If the Company cannot meet compliance under the Nasdaq rules by December 24,
2002, Nasdaq will determine whether the Company meets the initial listing
criteria for Nasdaq under Marketplace Rule 4310(c)(2)(a). If the Company meets
the initial listing criteria, the Company will be granted an additional 180
calendar day grace period to demonstrate compliance. Otherwise the securities
may be delisted. In October 2002, the Company received another notification from
Nasdaq that based on its June 30, 2002 filing the Company does not meet
compliance with Marketplace Rule 4310(c)(2)(B). Such rule requires the Company
to have a minimum of $2,000,000 in net tangible assets or $2,500,000 in
stockholders' equity or a market value of listed securities of $35,000,000 or
$500,000 of net income from continuing operations for the most recently
completed fiscal year or two of the three most recently completed fiscal years.
The Company has responded to Nasdaq with its plan and believes that it can
achieve compliance with Marketplace Rule 4310(c)(2)(B) by achieving minimum
stockholders' equity of $2,500,000. The Company has currently not received a
reply from Nasdaq in connection with its submitted plan for compliance. If the
Nasdaq Staff determines the Company's plan does not adequately address the
issues noted, the Company will be provided with written notification that the
securities will be delisted. At that time, the Company may appeal the Staff's
decision to a Nasdaq Listing Qualification Panel. Accordingly, the Company
expects that this process would take several months during which time the
Company would remain listed. The Company believes that during this time period
it will be back in compliance and a potential delisting is not probable based on
current plans and information.
An event of default under the Series E preferred stock includes failing to
maintain the listing of the Company's common stock on Nasdaq or other such
similar exchange. Such default would trigger a mandatory redemption in cash
under the terms of the Series E preferred stock agreement. The Company does not
have sufficient cash to satisfy such redemption. However, as previously
discussed, the Company believes it is not probable it will be delisted.
Historically, the Company has funded its operations, capital expenditures and
acquisitions primarily through cash flows from operations, private placements of
equity transactions, and its credit facilities. At September 30, 2002, the
Company had cash and cash equivalents of $2.3 million and a working capital
deficit of $3.0 million.
The Company recognized net income of approximately $.2 million in the Current
Period. Cash used in operating activities from operations was approximately $.7
million. Net cash used in operating activities principally resulted from the
decrease in accrued expenses and accounts payable associated with the pay down
of certain severance and rent liabilities. Cash used in operating activities in
the Prior Period was $6.4 million. Cash used by operating activities principally
consists of the net loss of $10.3 million less the gain on sale of Grizzard and
the extraordinary loss from the extinguishment of debt.
In the Current Period, net cash of $.1 million was used in investing activities
consisting of purchases of property and equipment and software. In the Prior
Period, net cash of $76.3 million was provided by investing activities
consisting of the net proceeds from the sale of Grizzard of $81.6 million offset
by the increase in restricted cash of $4.9 million and the purchases of property
and equipment of $.4 million.
In the Current Period, net cash of $1.2 million was used in financing
activities. Net cash used in financing activities consisted of $.9 million
repayments of debt and capital leases and $.3 million for prepayments relating
to the refinancing or replacement of the Company's Preferred Stock. In the Prior
Period, net cash of $46.7 million was used in financing activities consisting of
repayments of long term
19
debt, credit facilities and capital leases of $46.5 million and repayments of
related party debt of $.2 million.
In the Current Period net cash of $.1 million was used in discontinued
operations. In the Prior Period net cash of $.2 million was used in discontinued
operations.
At September 30, 2002, the Company had amounts outstanding of $1.4 million on
its three lines of credit. The Company had $1.9 million available on its lines
of credit at September 30, 2002. On October 4, 2002, the Company repaid
approximately $.8 million of one credit facility and agreed with the lender to
cease future advances of this facility. As of September 30, 3002, the
availability under the two remaining facilities is approximately $1.3 million.
As of September 30, 2002, certain subsidiaries of the Company are in violation
of certain working capital and net worth covenants of their credit agreements
for which the Company has received waivers from the lender. The Company may be
out of compliance in a future period and unable to obtain waivers from the
lender, who may call the debt, which could have a material adverse effect on the
Company's liquidity and ability to continue as a going concern.
In February 2001, the Company entered into a strategic partnership agreement
(the "Agreement") with Paris based Firstream. Firstream paid the Company $3.0
million and in April 2001 received 1.5 million restricted shares of common
stock, plus a two-year warrant for 400,000 shares priced at $3.00 per share. The
warrant is exercisable over a two year period. The warrant is valued at $.9
million as determined by the Black-Scholes option pricing model and was recorded
to equity. In accordance with the Agreement, the Company recorded proceeds of
$1.8 million; net of fees and expenses, as equity and $1.0 million was
designated as deferred revenue to provide for new initiatives. As part of the
strategic partnership, MKTG would launch several new Firstream products and
services in the areas of wireless communications, online music and consumer
marketing programs for early adopters of new products. The remaining balance was
$.8 million at June 30, 2002. In July 2002, the Company received a letter from
Firstream canceling the strategic partnership agreement and requesting payment
of the remaining $.8 million, which has been categorized as a liability at June
30, 2002. Subsequent to September 30, 2002, the Company and Firststream entered
into a settlement agreement whereby the parties agreed the total remaining
balance was approximately $.5 million and would be repaid in cash over a period
of time to extend through March 2004. If the Company completes a financing or
equity transaction subsequent to December 31, 2002 which yields more than $2.0
million of net proceeds to the Company, then the remaining settlement balance
would be due and payable within one month after the receipt of funds.
The Company has limited capital resources and has incurred significant recurring
losses and negative cash flows from operations. In addition, certain contingent
liabilities may require significant resources. The Company may be required to
redeem the Series E preferred stock and repay its outstanding lines of credit
depending on future events. The Company does not believe its cash on hand along
with existing sources of cash are sufficient to fund its cash needs over the
next twelve months under the current capital structure. In order to address this
situation, the Company has had and continues to have discussions with multiple
parties regarding the possibility of either restructuring or refinancing the
remainder of the Series E preferred stock. The Company is also reviewing
options, which include replacing the existing Preferred Stockholders with an
alternative strategic investor or selling certain assets to obtain funds to
attempt to repurchase the Series E preferred stock at a discount. The Company
will also need to raise additional equity financing or obtain other sources of
liquidity (including debt or other resources). The Company has instituted cost
reduction measures, including the reduction of workforce. In addition, the
Company is reviewing its present operations with the view towards further
reducing its cost structure and workforce and to find alternative means of
increasing revenue. There can be no assurance that the Company will be
successful in restructuring its preferred stock or obtaining additional
financing. Additionally, there can be no assurances that the Company's cost
reduction efforts will be successful or that the Company will achieve a level of
revenue that will allow it to return to profitability. In the event the Company
is unable to raise needed financing and achieve profitability, operations will
need to be scaled back or discontinued. These circumstances raise substantial
doubt about the Company's ability to continue as a going concern.
20
The accompanying financial statements do not include any adjustments relating to
the recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result should the Company be unable to continue as a
going concern.
21
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The Company is subject to market risks in the ordinary course of its business,
primarily risks associated with interest rate fluctuations. Historically,
fluctuations in interest rates have not had a significant impact on the
Company's operating results. At September 30, 2002, the Company had
approximately $1.4 million of variable rate indebtedness outstanding.
22
Item 4 - Controls and Procedures
- --------------------------------
Evaluation of disclosure controls and procedures.
- -------------------------------------------------
Our principal executive officer and our principal financial officer, after
evaluating the effectiveness of our "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d- 14(c) as
of a date within 90 days before the filing date of this quarterly report (the
"Evaluation Date"), have concluded that as of the Evaluation Date our disclosure
controls and procedures were adequate and designed to ensure that material
information relating to us and our consolidated subsidiaries would be made known
to them by others within those entities.
Changes in internal controls
- ----------------------------
There were no significant changes in our internal controls or, to our knowledge,
in other factors that could significantly affect our disclosure controls and
procedures subsequent to the Evaluation Date.
23
PART II- OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
- ---------------------------------------
Exhibits
- --------
24 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Acdt of 2002 SarbaOxley Act of 2002 (a)
(a) Included herein in the Company's Report on Form 10Q for the quarter ended
September 30, 2002
Reports on Form 8-K
- -------------------
On or about October 2, 2002, the Company filed a current report on Form 8-K
regarding approval by the common stockholders of the issuance of the Series E
preferred stock and the stockholders right to convert such preferred stock to
common stock beyond the previous 19.99% limitation.
24
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MKTG SERVICES, INC.
(Registrant)
Date: November 14, 2002 By: /s/ J. Jeremy Barbera
------------------------------------------
J. Jeremy Barbera
Chairman of the Board and Chief Executive
Officer
Date: November 14, 2002 By: /s/ Cindy H. Hill
------------------------------------------
Cindy H. Hill
Chief Accounting Officer
25
MKTG SERVICES, INC.
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, J. Jeremy Barbera, certify that:
1. I have reviewed the quarterly report on this Form 10-Q of MKTG
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered in this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and to the
audit committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
By: /s/ J. Jeremy Barbera
-------------------------------------------------
J. Jeremy Barbera
Chairman of the Board and Chief Executive Officer
Principal Executive Officer
26
MKTG SERVICES, INC.
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Cindy H. Hill, certify that:
1. I have reviewed the quarterly report on this Form 10-Q of MKTG
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered in this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and to the
audit committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Cindy H. Hill
----------------------------
Cindy H. Hill
Chief Accounting Officer
Principal Financial Officer
27
Exhibit 24
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of MKTG Services, Inc. (the "Company")
on Form 10-Q for the period ended September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, J.
Jeremy Barbera, as Chairman of the Board and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906
of the Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934: and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ J. Jeremy Barbera
---------------------
J. Jeremy Barbera
Chairman of the Board and
Chief Executive Officer
November 14, 2002
In connection with the Quarterly Report of MKTG Services, Inc. (the "Company")
on Form 10-Q for the period ended September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Cindy
H. Hill, as Chief Accounting Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934: and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Cindy H. Hill
-----------------
Cindy H. Hill
Chief Accounting Officer
November 14, 2002
28