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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2003
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 incorporation or organization) (I.R.S. Employer Identification No.)
333 Seventh Avenue
New York, New York 10001
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (917) 339-7150
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, par value $.01 per share
(Title of class)
Indicate be 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.
X Yes No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ] As of October 10, 2003, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
approximately $1,235,467.
As of October 10, 2003 , there were 1,092,367 shares of the Registrant's common
stock outstanding.
Documents incorporated by reference: Portions of the Company's definitive proxy
statement expected to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 have been incorporated by reference into Part III of this
report.
1
PART I
Special Note Regarding Forward-Looking Statements
- -------------------------------------------------
Some of the statements contained in this Annual Report on Form 10-K 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 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.
Item 1 - Business
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General
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MKTG Services, Inc. (" The Company or MKTG") is a leading relationship marketing
company focused on assisting corporations with customer acquisition and
retention strategies and solutions. Employing highly customized telemarketing
and telefundraising operations, MKTG delivers campaigns that strengthen brands,
increase customer loyalty and consistently yield a high net return for its
clients. MKTG provides relationship-marketing solutions to approximately 100
clients with revenues for the fiscal year ended June 30, 2003 of $15.8 million.
The Company currently has over 70 full-time employees with its operations in Los
Angeles and New York.
The Company's Strategy
- ----------------------
MKTG's strategy to enhance its position as a value-added premium provider of
relationship marketing services is to:
o Focus on our existing relationship marketing services business;
o Deepen market penetration in new industries and market segments as well as
those currently served by the Company;
o Pursue strategic acquisitions, joint ventures and marketing alliances to
expand the services offered and industries served.
Background
- ----------
The Company was originally incorporated in Nevada in 1919. The current business
of MKTG, most recently known as Marketing Services Group, Inc., began operations
in 1995.
During the past seven years, the Company has acquired or formed several
direct marketing and related companies. Do in part to decreased market demands
and limited capital resources the Company disposed or ceased operations of all
such companies except its teleservices operations.
Date Name of Company Acquired Service Performed
- ---- ------------------------ -----------------
May 1995 Stephen Dunn & Associates, Inc. Provides telemarketing and
telefundraising, specializing in the arts, educational
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and other institutional tax exempt
organizations.
October 1996 Metro Direct, Inc. Develops and markets a variety of
database marketing and direct marketing products.
(sold as part of the December 2002 sale of the direct
market business)
July 1997 Pegasus Internet, Inc. Provides a full suite of Internet services including
content development and planning, marketing
strategy, on-line ticketing system development, technical
site hosting, graphic design, multimedia production
and electronic commerce.(these operations were
either terminated or moved to other operating ivisions)
December 1997 Media Marketplace, Inc. Specializes in providing list
Media Marketplace Media Division, Inc. management, list brokerage and media planning and buying
services. (sold as part of the December 2002 sale of the
direct market business)
May 1998 Formed Metro Fulfillment, Inc. Performed services such as on-line commerce, real-time
database management inbound/outbound customer service,
custom packaging, assembling, product warehousing,
shipping, payment processing and retail distribution.
(sold in March and September of 1999)
January 1999 Stevens-Knox & Associates, Inc. Specializes in providing list
Stevens-Knox List Brokerage, Inc. management, list brokerage and
Stevens-Knox International, Inc. database management services. (sold as part of
the December 2002 sale of the direct market business)
May 1999 CMG Direct Corporation Specializes in database services. (part of this business
became WiredEmpire, the balance was sold as part of the
December 2002 sale of the direct marketing business)
October 1999 Acquired 87% of Cambridge Intelligence
Agency and formed WiredEmpire, Inc. A licensor of email marketing tools.
March 2000 Grizzard Advertising, Inc. Specialized in strategic planning,
creative services, database
management, print-production,
mailing and Internet marketing.
3
March 2000 The Coolidge Company Specializes in list management
and list brokerage services. (sold in July 2001)
September 2000 Begin plan to discontinued the operation of WiredEmpire, Inc. (completed in January 2001).
Capital Stock and Certain Financing Transactions
- ------------------------------------------------
In August 2001, the Company entered into a stand by letter of credit with a bank
in the amount of approximately $4.9 million to support the remaining obligations
under a holdback agreement with the former shareholders of Grizzard
Communications Group, Inc. ("Grizzard"). The letter of credit was collateralized
by cash and has been classified as restricted cash in the current asset section
of the balance sheet as of June 30, 2002. The letter of credit was subject to an
annual facility fee of 1.5%. The remaining obligation was settled in January
2003 and accordingly the letter of credit was terminated.
On October 2, 2002, the common stockholders ratified the issuance of the Series
E preferred stock and approved the stockholders right to convert such preferred
stock to common stock beyond the previous 19.99% limitation. Subsequently, the
preferred shareholders converted 149 shares of Series E preferred stock into
79,767 shares of common stock.
In November 2002, the Company repaid approximately $.3 million balance of one
credit facility. In connection with the sale of the Company's Northeast
Operations (See Note 3), another credit facility of approximately $.3 million
was fully repaid and terminated in December 2002.
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).
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 $2.0 million in net tangible assets or $2.5 million in stockholders' equity
or a market value of listed securities of $35.0 million or $.5 million of net
income from continuing operations for the most recently completed fiscal year or
two of the three most recently completed fiscal years. In December 2002, the
Company received notification from Nasdaq indicating that the Company was
subject to delisting. 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 $2.5 million. In addition, in January
2003, the Company affected an eight-for-one reverse stock split. (See Note 2).
In February 2003, the Company received notification from Nasdaq that the
Company's was not in compliance with the Nasdaq's market value of publicly held
shares requirements, as set forth in Nasdaq Marketplace Rule 4310(c)(07). The
Company believes that its subsequent issuance of common shares for the
redemption of its preferred stock (See Note 15) has brought the Company back
into compliance with the minimum public float requirement. The Company appealed
the Staff's decision to delist the Company to a Nasdaq Listing Qualification
Panel. The hearing was held on February 13, 2003. On March 5, 2003, a Nasdaq
Listing Qualifications Panel determined to continue the listing of the Company's
securities on the Nasdaq SmallCap Market on the condition, among other things,
that the Company make a public filing with the Securities and Exchange
Commission and Nasdaq evidencing shareholders' equity of at least $2,5000,000
and further that the Company file its quarterly report on Form 10Q for the March
31, 2003 quarter on or before May 15, 2003. On March 13, 2003, the Company filed
an unaudited balance sheet as of January 31, 2003 evidencing shareholders'
equity of at least $2,5000,000. On May 22, 2003, the Company received
notification from Nasdaq that the Company satisfactorily demonstrated compliance
and, accordingly, the Nasdaq Listing Qualifications Panel determined to continue
the listing of the Company's securities on The Nasdaq SmallCap Market and to
close the hearing file.
4
In December 2002, the Company completed its sale of substantially all the assets
relating to its direct list sales and database services and website development
and design business held by certain of its wholly owned subsidiaries (the
"Northeast Operations") to Automation Research, Inc. ("ARI"), a wholly owned
subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash plus
the assumption of all directly related liabilities. As such, the operations and
cash flows of the Northeast Operations have been eliminated from ongoing
operations and the Company no longer has continuing involvement in the
operations. Accordingly, the statement of operations and cash flows for the
years ended June 30, 2003, 2002 and 2001 has been reclassified into a one-line
presentation and is included in Loss from Discontinued Operations and Net Cash
Used by Discontinued Operations. In addition, the assets and liabilities of the
Northeast Operations have been segregated and presented in Net Assets of
Discontinued Operations and Net Liabilities of Discontinued Operations as of
June 30, 2002.
In connection with the sale of the Northeast Operations, the Company recognized
a loss on disposal of discontinued operations of approximately $.2 million in
the year ended June 30, 2003. The loss represents the difference in the net book
value of assets and liabilities as of the date of the sale as compared to the
net consideration received after settlement of purchase price adjustments. There
was no tax impact on this loss.
In December 2002, the Company negotiated a termination of a lease for an
abandoned lease property. The agreement required an up front payment of $.3
million and the Company is obligated to pay approximately $60,000 per month
until the landlord has completed certain leasehold improvements for a new tenant
and then Company is obligated to pay $20,000 per month until August 2010 and the
Company was released from all other obligations under the lease. The gain on
lease termination represents a change in estimate representing the difference
between the Company's present value of its future obligations and the entire
obligation that remained on the books under the original lease obligation. The
remaining obligation has been recorded in accrued expenses and other current
liabilities and other liabilities.
On January 22, 2003, the Board of Directors approved an eight-for-one reverse
split of the common stock. Par value of the common stock remains $.01 per share
and the number of authorized shares of common stock is reduced to 9,375,000. The
stock split was effective January 27, 2003. All stock prices, per share and
share amounts have been retroactively restated to reflect the reverse split and
are reflected in this document.
In January 2003, the Company redeemed the outstanding shares of the preferred
stock for a cash payment of approximately $6.0 million and the issuance of
181,302 shares of common stock valued at approximately $.2 million. The carrying
value of the preferred stock was approximately $20.2 million which included a
beneficial conversion feature of approximately $10.3 million. The transaction
resulted in a gain on redemption of approximately $14.0 million and is reflected
in net income attributable to common stockholders for the year ended June 30,
2003.
In January 2003, the Company entered into an agreement and settled the
outstanding amount owed to the former Grizzard shareholders in connection with a
holdback agreement. The Company paid approximately $4.6 million and utilized its
restricted cash. Approximately $.3 million of restricted cash became available
for general corporate use.
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
5
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 $1.3
million 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 approximately $1.3 million, 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 approximately $965,000 plus reimbursement of mailing costs. The net
settlement has been recorded as a gain from settlement of lawsuit and is
included in the statement of operations for the year ending June 30, 2003.
The Company has limited capital resources and has incurred significant
historical losses and negative cash flows from operations. The Company believes
that funds on hand, funds available from its remaining operations and its unused
lines of credit should be adequate to finance its operations and capital
expenditure requirements and enable the Company to meet interest and debt
obligations for the next twelve months. As explained in Note 3, the Company
recently sold off substantially all the assets relating to its direct list sales
and database services and website development and design business held by
certain of its wholly owned subsidiaries. In addition, the Company has
instituted cost reduction measures, including the reduction of workforce. The
Company believes, based on past performance as well as the reduced corporate
overhead, that its remaining operations should generate sufficient future cash
flow to fund operations. Failure of the remaining operation to generate such
sufficient future cash flow could have a material adverse effect on the
Company's ability to continue as a going concern and to achieve its business
objectives. 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.
The Telemarketing / Telefundraising Industry
- ---------------------------------------------
Overview. Telemarketing is used for a variety of purposes including fundraising,
lead-generation and prospecting for new customers, enhancing existing customer
relationships, exploring the potential for new products and services and
establishing new products. Unlike traditional mass marketing aimed at a broad
audience and focused on creating image and general brand or product awareness,
successful telemarketing requires the identification and analysis of customers
and purchasing patterns. Such patterns enable businesses to more easily identify
and create a customized message aimed at a highly defined audience.
Telemarketing/telefundraising projects generally require significant amounts of
customer information supplied by the client or third party sources. Custom
telemarketing/telefundraising programs seek to maximize a client's direct
marketing results by utilizing appropriate databases to communicate with a
specific audience. This customization is often achieved through sophisticated
and comprehensive data analysis which identifies psycho graphic, cultural and
behavioral patterns in specific geographic markets.
Industry Growth. The Company provides telemarketing and telefundraising services
primarily to the non-profit sector. As such, the Company's business activities
and operations are exempt from the effects of the new National Do Not Call
Registry amendment to the Telemarketing Sales Rules of the Federal Trade
Commission, which has it's strongest effect on the retail "cold calling"
telemarketing industry . The company's client base consists of various
non-profit organizations which rely on the Company's services for soliciting
charitable donations, program subscriptions, and other functions related to
general fund raising. These areas are exempt from the rules governed by the
National Do Not Call Registry. The Company sees no ill effects to either its
ability to perform its current business operations or to grow its business
operations within the non-profit telemarketing and telefundraising sector.
6
Services. The Company's operating business provides comprehensive custom
telemarketing/telefundraising. The principal advantages of customized services
include: (i) the ability to expand and adapt a database to the client's changing
business needs; (ii) the ability to have services operate on a flexible basis
consistent with the client's goals; and (iii) the integration with other direct
marketing, Internet, database management and list processing functions, which
are necessary to keep a given database current. The services offered by the
Company are described below.
Telemarketing / Telefundraising
Custom Telemarketing/Telefundraising Services. Custom
telemarketing/telefundraising services are designed according to the client's
existing database and any other databases, which may be purchased or rented on
behalf of the client to create a direct marketing program or fundraising
campaign to achieve specific objectives. After designing the program according
to the marketing information derived from the database analysis, it is
conceptualized in terms of the message content of the offer or solicitation, and
an assessment is made of other supporting elements, such as the use of a direct
mail letter campaign.
Typically, a campaign is designed in collaboration with a client, tested for
accuracy and responsiveness and adjusted accordingly, after which the full
campaign is commenced. The full campaign runs for a mutually agreed period,
which can be shortened or extended depending on the results achieved.
The Company maintains a state-of-the-art outbound telemarketing/telefundraising
calling center in El Segundo, California. The El Segundo calling center
increases the efficiency of its outbound calling by using a computerized
predictive dialing system supported by a UNIX based call processing server
system and networked computers. The predictive dialing system, using relational
database software, supports 64 outbound telemarketers and maximizes calling
efficiency by reducing the time between calls for each calling station and
reducing the number of calls connected to wrong numbers, answering machines and
electronic devices. The system provides on-line real time reporting of caller
efficiency and client program efficiency as well as flexible and sophisticated
reports analyzing caller sales results and client program results against
Company and client selected parameters. The El Segundo calling center has the
capacity to serve up to 20 separate clients or projects simultaneously and can
produce 36,864 or more valid contacts per week, depending on the nature of the
lead base or 3,072 calling hours per week (159,744 per year) on a single shift
basis. A valid contact occurs when the caller speaks with the intended person
and receives a "yes," "no" or "will consider" response. The existing platform
can be expanded to accommodate 100 predictive dialing stations.
Marketing and Sales
- -------------------
The Company's marketing strategy is to offer customized solutions to clients'
telemarketing/telefundraisingrequirements. Historically, the Company's operating
businesses have acquired new clients and marketed their services by attending
trade shows, advertising in industry publications, responding to requests for
proposals, pursuing client referrals and cross-selling to existing clients. The
Company targets those companies that have a high probability of generating
recurring revenues because of their ongoing telemarketing/telefundraising needs.
The Company markets its services through a sales force consisting of both
salaried and commissioned sales persons.
On-site telemarketing and telefundraising fees are generally based on hourly
billing rates and a mutually agreed percentage of amounts received by the
Company's clients from a campaign. Off-site fees are typically based on a
mutually agreed amount per telephone contact with a potential donor without
regard to amounts raised for the client.
Client Base
- -----------
7
The Company believes that its diversified client base is a primary asset, which
contributes to stability and the opportunity for growth in revenues. The Company
has approximately 100 clients who utilize its telemarketing services. Its
customized marketing capabilities combine comprehensive traditional marketing
tactics with an aggressive integration of sophisticated software applications,
Telefund and TeleSales, which track leads and results. Operating in Los Angeles,
CA as well as in a variety of on-site locations throughout United States, the
Company provides strategic services to prominent organizations in key markets
including: Entertainment, Performing Arts, Education, Healthcare and Nonprofit.
No single client accounted for more than 10% of total revenue for the fiscal
years ended June 30, 2003, 2002 and 2001.
Competition
- -----------
The relationship marketing services industry is highly competitive and
fragmented, with no single dominant competitor. The Company competes with
companies that have more extensive financial, marketing and other resources and
substantially greater assets than those of the Company, thereby enabling such
competitors to have an advantage in obtaining client contracts where sizable
asset purchases or investments are required. The Company also competes with
in-house telemarketing/telefundraising operations of certain of its clients or
potential clients.
Competition is based on quality and reliability of services, technological
expertise, historical experience, ability to develop customized solutions for
clients, technological capabilities and price. The Company believes that it
competes favorably, especially in the media and entertainment, performing arts,
education and healthcare sectors. The Company's principal competitors include:
DCM Telemarketing, Share Group and Arts Marketing Services, Inc. The current
market is highly competitive and the Company anticipates that new competitors
will continue to enter the market. These competitors tend to have greater
financial, technical and marketing resources than the Company.
Facilities
- ----------
The Company leases all of its real property. Facilities for its headquarters are
in New York City; its sales and service offices are located in El Segundo,
California and its call center is also located in El Segundo, California. The
Company believes that its remaining facilities are in good condition and are
adequate for its current needs through fiscal 2004. The Company believes such
space is readily available at commercially reasonable rates and terms. The
Company also believes that its technological resources are all adequate for its
needs through fiscal 2004.
Intellectual Property Rights
- ----------------------------
The Company relies upon its trade secret protection program and non-disclosure
safeguards to protect its proprietary computer technologies, software
applications and systems know-how. In the ordinary course of business, the
Company enters into license agreements and contracts which specify terms and
conditions prohibiting unauthorized reproduction or usage of the Company's
proprietary technologies and software applications. In addition, the Company
generally enters into confidentiality agreements with its employees, clients,
potential clients and suppliers with access to sensitive information and limits
the access to and distribution of its software documentation and other
proprietary information. No assurance can be given that steps taken by the
Company will be adequate to deter misuse or misappropriation of its proprietary
rights or trade secret know-how. The Company believes that there is rapid
technological change in its business and, as a result, legal protections
generally afforded through patent protection for its products are less
significant than the knowledge, experience and know-how of its employees, the
frequency of product enhancements and the timeliness and quality of customer
support in the usage of such products.
Government Regulation and Privacy Issues
- ----------------------------------------
8
The telemarketing industry has become subject to an increasing amount of federal
and state regulation. Violation of these rules may result in injunctive relief,
monetary penalties or disgorgement of profits and can give rise to private
actions for damages. While the Federal Trade Commission's new rules have not
required or caused the Company to alter its operating procedures, additional
federal or state consumer-oriented legislation could limit the telemarketing
activities of the Company or its clients or significantly increase the Company's
costs of regulatory compliance. Several of the industries which the Company
intends to serve, including the financial services, and healthcare industries,
are subject to varying degrees of government regulation. Although compliance
with these regulations is generally the responsibility of the Company's clients,
the Company could be subject to a variety of enforcement or private actions for
its failure or the failure of its clients to comply with such regulations.
Employees
- ---------
At June 30, 2003, the Company employed approximately 811 persons, of whom 76
were employed on a full-time basis.
Item 2 - Properties
- -------------------
The Company had owned land and buildings in Houston and Atlanta, which were
included in the sale of Grizzard (see Note to the Company's consolidated
financial statements included in this Form 10-K). In addition, the Company and
certain subsidiaries lease facilities for office space summarized as follows and
in Note 14 of Notes to the Company's consolidated financial statements included
in this Form 10-K.
Location Square Feet
---------- -----------
New York, New York 500
El Segundo, California 12,800
In addition, the Company is currently leasing approximately 36,900 square feet
in New York, California, Pennsylvania and Massachusetts which is not being
currently utilized. Accordingly, the Company has provided for the future
estimated cost of these leases.
Item 3 - Legal Proceedings
- --------------------------
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, MKTG 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 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 plaintiff's
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 for 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 it seeks 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
9
are without merit. The Company intends to vigorously defend against the lawsuit.
In June 2002, the Company entered into a tolling 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. In January 2003, a
lawsuit was filed in Alabama, Circuit Court for Jefferson County by certain
plaintiffs involved in the Agreement. The action was filed against J. Jeremy
Barbera, Chairman of the Board and Chief Executive Officer of MKTG, MKTG and
WiredEmpire, Inc. This lawsuit was settled during fiscal year 2003 and was fully
covered by the Company's insurance.
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 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).
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 $2.0 million in net tangible assets or $2.5 million in stockholders' equity
or a market value of listed securities of $35.0 million or $.5 million of net
income from continuing operations for the most recently completed fiscal year or
two of the three most recently completed fiscal years. In December 2002, the
Company received notification from Nasdaq indicating that the Company was
subject to delisting. 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 $2.5 million. In addition, in January
2003, the Company affected an eight-for-one reverse stock split. (See Note 2).
In February 2003, the Company received notification from Nasdaq that the
Company's was not in compliance with the Nasdaq's market value of publicly held
shares requirements, as set forth in Nasdaq Marketplace Rule 4310(c)(07). The
Company believes that its subsequent issuance of common shares for the
redemption of its preferred stock (See Note 15) has brought the Company back
into compliance with the minimum public float requirement. The Company appealed
the Staff's decision to delist the Company to a Nasdaq Listing Qualification
Panel. The hearing was held on February 13, 2003. On March 5, 2003, a Nasdaq
Listing Qualifications Panel determined to continue the listing of the Company's
securities on the Nasdaq SmallCap Market on the condition, among other things,
that the Company make a public filing with the Securities and Exchange
Commission and Nasdaq evidencing shareholders' equity of at least $2,5000,000
and further that the Company file its quarterly report on Form 10Q for the March
31, 2003 quarter on or before May 15, 2003. On March 13, 2003, the Company filed
an unaudited balance sheet as of January 31, 2003 evidencing shareholders'
equity of at least $2,5000,000. In addition, the filing of this Form 10Q further
provides evidence of shareholders' equity of at least $2,5000,000. On May 22,
2003, the Company received notification from Nasdaq that the Company
satisfactorily demonstrated compliance and, accordingly, the Nasdaq Listing
Qualifications Panel determined to continue the listing of the Company's
securities on The Nasdaq SmallCap Market and to close the hearing file.
10
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.
Item 4 - Submission of matters to a vote of security holders
- -------------------------------------------------------------
Not applicable.
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The common stock of the Company trades on the NASDAQ National Market under the
symbol "MKTG." Prior to July 30, 2001, the Company traded under the symbol
"MSGI." The following table reflects the high and low sales prices for the
Company's common stock for the fiscal quarters indicated, as furnished by the
NASDAQ:
Low High
Fiscal 2003 --- ----
Fourth Quarter $1.30 $2.35
Third Quarter .12 1.98
Second Quarter .10 .32
First Quarter .13 .75
Fiscal 2002
Fourth Quarter $0.25 $2.34
Third Quarter .90 3.25
Second Quarter 2.04 5.05
First Quarter 2.10 7.50
On October 2, 2002, the common stockholders ratified the issuance of the Series
E preferred stock and approved the stockholders right to convert such preferred
stock to common stock beyond the previous 19.99% limitation. Subsequently, the
preferred shareholders converted 149 shares of Series E preferred into 79,767
shares of common stock.
On January 22, 2003, the Board of Directors approved an eight-for-one reverse
split of the common stock. The stock split was effective January 27, 2003. Par
value of the common stock remained $.01 per share and the number of authorized
shares of common stock was reduced to 9,375,000 shares. The effect of the stock
split has been reflected in the balance sheets and in all share and per share
data in the accompanying condensed consolidated financial statements and Notes
to Financial Statements. Stockholders' equity accounts have been retroactively
adjusted to reflect the reclassification of an amount equal to the par value of
the decrease in issued common shares from common stock account to
paid-in-capital.
In January 2003, the Company redeemed the outstanding shares of the preferred
stock for a cash payment of approximately $6.0 million and the issuance of
181,302 shares of common stock valued at approximately $.2 million. The carrying
value of the preferred stock was approximately $20.2 million which included a
beneficial conversion feature of approximately $10.3 million. The transaction
resulted in a gain on redemption of approximately $14.0 million and is reflected
in net income(loss) attributable to common stockholders for the period ended
June 30, 2003.
As of June 30, 2003, there were approximately 1,019 registered holders of record
of the Company's common stock.
11
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). 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 $2.0 million in net tangible assets or $2.5 million in stockholders' equity
or a market value of listed securities of $35.0 million or $.5 million of net
income from continuing operations for the most recently completed fiscal year or
two of the three most recently completed fiscal years. In December 2002, the
Company received notification from Nasdaq indicating that the Company was
subject to delisting. 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 $2.5 million. In addition, in January
2003, the Company affected an eight-for-one reverse stock split. (See Note 2).
In February 2003, the Company received notification from Nasdaq that the
Company's was not in compliance with the Nasdaq's market value of publicly held
shares requirements, as set forth in Nasdaq Marketplace Rule 4310(c)(07). The
Company believes that its subsequent issuance of common shares for the
redemption of its preferred stock has brought the Company back into compliance
with the minimum public float requirement. The Company appealed the Staff's
decision to delist the Company to a Nasdaq Listing Qualification Panel. The
hearing was held on February 13, 2003. On March 5, 2003, a Nasdaq Listing
Qualifications Panel determined to continue the listing of the Company's
securities on the Nasdaq SmallCap Market on the condition, among other things,
that the Company make a public filing with the Securities and Exchange
Commission and Nasdaq evidencing shareholders' equity of at least $2,5000,000
and further that the Company file its quarterly report on Form 10Q for the March
31, 2003 quarter on or before May 15, 2003. On March 13, 2003, the Company filed
an unaudited balance sheet as of January 31, 2003 evidencing shareholders'
equity of at least $2,5000,000. On May 22, 2003, the Company received
notification from Nasdaq that the Company satisfactorily demonstrated compliance
and, accordingly, the Nasdaq Listing Qualifications Panel determined to continue
the listing of the Company's securities on The Nasdaq SmallCap Market and to
close the hearing file.
The Company has not paid any cash dividends on any of its capital stock in at
least the last five years. The Company intends to retain future earnings, if
any, to finance the growth and development of its business and, therefore, does
not anticipate paying any cash dividends in the foreseeable future.
Item 6 - Selected Financial Data
- --------------------------------
The selected historical consolidated financial data for the Company presented
below as of and for the five fiscal years ended June 30, 2003 have been derived
from the Company's audited consolidated financial statements. This financial
information should be read in conjunction with management's discussion and
analysis (Item 7) and the notes to the Company's consolidated financial
statements (Item 14).
Historical
Years ended June 30,
--- --------------------
(In thousands, except per share data)
1999(1) 2000 (2) 2001 2002(15) 2003(16)
------- ------- ----- -------- --------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues (11) $ 33,489 $ 62,488 $ 16,860 $ 16,027 $ 15,833
Amortization and depreciation $ 2,282 $ 6,028 $ 351 $ 393 $ 224
Income (loss) from operations $ (7,072) $(11,292) $ (4,996) $(18,011) (12) $ 3,112 (17)
Income (loss) from continuing operations $ (7,646) (3) $(41,130) (6) $(14,670)(8) $(18,266) $ 3,940
(Loss) gain from discontinued operations - $(34,543) (7) $ 1,252 (9) $ 1,873 (13) $ (1,480) (18)
12
Net income (loss) $ (7,646) $(75,673) $(65,839) $(65,683) $ (2,615) (19)
Net income (loss) available to common
stockholders $ (20,181)(4) $(75,673) $(66,492) (10)$(66,096)(14) $ 11,356 (20)
Income (loss) per diluted share (21) :
Continuing operations $ (66.60) $ ( 74.24) $ ( 22.07) $ (24.44) $ 15.62
Discontinued operations - ( 62.35) ( 56.78) (62.03) (1.29)
Cumulative effect of change in accounting - - ( 21.15) - (4.43)
----------- --------- --------- -------- --------
$ (66.60) $ (136.59) $ (100.00) $ (86.47) $ 9.90
Weighted average common shares
Outstanding-diluted 303 554 665 764 1,147
OTHER DATA:
EBITDA (5) $ (4,346) $ (4,844) $ (4,645) $ (4,718) $(1,534)
Net cash used in operating activities: $ (45) $(11,357) $ (1,764) $ (13,086) $ (2,726)
Net cash (used in) provided by investing
activities: $ (18,939) $(60,116) $ (133) $ 72,894 $ 13,447
Net cash provided by (used in) financing
activities: $ 16,035 $ 78,904 $ (3,704) $ (6,081) $(12,955)
Net cash (used in) provided by discontinued
operations - $ (812) $ (1,789) $ (50,118) $ (988)
Historical
As of June 30,
(In thousands)
CONSOLIDATED BALANCE SHEETS DATA: 1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Cash and cash equivalents $3,285 $ 9,904 $ 1,725 $ 4,438 $ 1,217
Working capital (deficit) $(9,647) $ 813 $ 29,146 $ 14,004 $ 712
Total goodwill and intangible assets $56,978 $ 154,016 $ 54,363 $ 2,317 $ 2,297
Total assets $97,627 $ 245,567 $ 170,390 $ 50,168 $ 7,648
Total long term debt, net of current portion $ 5,937 $ 36,157 $ 4,429 $ 176 $ -
Total stockholders' equity $48,928 $ 113,957 $ 68,778 $ 1,390 $ 3,108
(1) Effective January 1, 1999, the Company acquired all of the outstanding
common shares of Stevens-Knox List Brokerage, Inc., Stevens-Knox List
Management, Inc. and Stevens-Knox International, Inc. (collectively,
"SKA"). The results of operations for SK&A are included in the consolidated
statements of operations beginning January 1, 1999. Effective March 1, 1999
the Company sold 85% of its subsidiary Metro Fulfillment. Accordingly,
effective March 1, 1999 the results of operations of MFI are no longer
consolidated in the Company's statement of operations. On May 13, 1999, the
Company acquired all of the outstanding common shares of CMG Direct, Inc.
The results of operations are included in the consolidated statements of
operations beginning May 14, 1999. The results for the year ended June 30,
1999 have not been restated to reflect discontinued operations resulting
from the sale of the Northeast operations and Grizzard. Please refer to the
footnotes number 15 and 16 below.
(2) On March 31, 2000, the Company acquired all of the outstanding common
shares of The Coolidge Company. On March 22, 2000 the Company acquired all
of the outstanding common shares of Grizzard Advertising, Inc. Effective
October 1, 1999, the Company acquired 87% of the outstanding common shares
of The Cambridge Intelligence Agency. The results of operations for these
acquisitions are included in the consolidated statements of operations from
the date of the respective acquisition. The results for the year ended June
30, 1999 have not been restated to reflect discontinued operations
resulting from the sale of the Northeast operations and Grizzard. Please
refer to the footnotes number 15 and 16 below.
(3) Loss from continuing operations includes a severance charge of $1,125 and a
compensation expense on option grants of $444 which were granted at
exercise prices below market value.
(4) Net loss available to common shareholders includes the impact of dividends
on preferred stock for (a) adjustment of the conversion ratio of $11,366
for exercises of stock options and warrants; (b) $949 in cumulative
undeclared preferred stock dividends; and (c) $220 of periodic non-cash
accretions of preferred stock.
(5) EBITDA is defined as earnings from continuing operations before interest,
income tax, depreciation, amortization and other non-recurring and non-cash
items. EBITDA should not be construed as an alternative to operating income
or net income (as determined in accordance with generally accepted
accounting principles), as an indicator of MKTG's operating performance, as
an alternative to cash flows provided by operating activities (as
determined in accordance with generally accepted accounting principles), or
as a measure of liquidity. EBITDA is
13
presented solely as a supplemental disclosure because management believes
that it enhances the understanding of the financial performance of a
company with substantial amortization and depreciation expense. MKTG's
definition of EBITDA may not be the same as that of similarly captioned
measures used by other companies.
EBITDA Reconciliation: 1999(1) 2000(2) 2001(22) 2002 2003
---- ---- ---- ---- ----
Loss from operations $(7,072) $(11,292) $(4,996) $(18,011) $3,112
Depreciation and amortization 2,282 6,027 351 393 $ 224
Goodwill write-down - - - 6,500 -
Loss (gain) on sale of subsidiary - - - - -
Compensation expense on option grants and
severance 444 106 - - -
Abandoned lease reserve / gain on
termination - - - 6,400 (3,905)
Legal settlements and legal fees - 315 - - (965)
------- --------- -------- -------- -------
EBITDA $ (4,346) $(4,844) $ (4,645) $(4,718) $(1,534)
======== ======== ========= ======== ========
(6) Loss from continuing operations includes a charge for $27,216 for
write-downs of certain Internet investments.
(7) On September 21, 2000, the Company's Board of Directors approved a plan to
discontinue the operation of its WiredEmpire subsidiary, which at the time
included the assets of Pegasus Internet, Inc. The Company shut down
operations, which was completed by the end of January 2001. The estimated
losses associated with WiredEmpire are $34,543 and are reported as
discontinued operations. All prior period results have been classified as
discontinued operations.
(8) Loss from operations includes a write-down of Internet investments of
$7,578 and expenses associated with settlement of litigation of $1,298.
(9) In January 2001, the company sold certain assets of WiredEmpire for a gain
of $1,252.
(10) Net loss available to common stockholders includes a cumulative effect of a
change in accounting of $14,064 in connection with the adoption of EITF
00-27.
(11) Pursuant to the Securities and Exchange Commission's Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101") the Company has reviewed its accounting policies for the
recognition of revenue. SAB 101 was required to be implemented in fourth
quarter 2001. SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company's policies for revenue recognition are consistent with the views
expressed within SAB 101. See Note 2, "Significant Accounting Policies,"
for a description of the Company's policies for revenue recognition. The
adoption of SAB 101 did not have a material effect on the Company's
consolidated financial position, cash flows, or results of operations.
Although net income was not materially affected, the adoption did have an
impact on the amount of revenue recorded as the revenue associated with the
Company's list sales and services product line are now required to be shown
net of certain costs. The Company believes this presentation is consistent
with the guidance in Emerging Issues Task Force ("EITF") 99-19, "Reporting
Revenue Gross as a Principal Versus Net as an Agent." All prior periods
presented have been restated.
(12) Loss from operations includes an impairment write-down of goodwill of
$6,500 and a write-down of abandoned leased property of $6,400.
(13) Discontinued operations include a loss on early extinguishment of debt of
$4,859.
(14) Net loss available to common stockholders includes a deemed dividend in the
amount of $413 in connection with the redemption of preferred stock.
(15) Effective July 31, 2001, the Company sold Grizzard Communications Group,
Inc. The results of operations for Grizzard are no longer included in the
Company's results from the date of sale. Amounts have been
reclassified to discontinued operations
(16) In December 2002, the Company completed the sale of substantially all of
the assets related to its direct list sales and database services and
website development and design business held by certain of its wholly owned
subsidiaries (the "Northeast Operations") to Automation Research, Inc. for
approximately $10.4 million in cash plus the assumption of all directly
related liabilities. The results of the operations are no longer included
in the company's results from the date of sale. Amounts have been
reclassified to discontinued operations
(17) Income from operations includes a gain on termination of lease of $3.9
million.
(18) In December 2002, the Company sold certain assets of the Northeast
Operations for a loss of $0.2 million
(19) Net loss includes a gain from settlement of lawsuit of $1.0 million and a
loss from a cumulative effect of change in accounting of $5.1 million.
14
(20) Net gain / (loss) available to common shareholders contains a gain (deemed
dividend) on redemption of preferred stock of $13.9 million.
(21) On January 22, 2003, the Board of Directors approved an eight-for-one
reverse split of the common stock. Par value of the common stock remains
$.01 per share and the number of authorized shares of common stock is
reduced to 9,375,000. The stock split was effective January 27, 2003. All
stock prices, per share and share amounts have been retroactively restated
to reflect the reverse split and are reflected in this document.
(22)
The following is a summary of the quarterly operations for the years ended June
30, 2002 and 2003.
Historical
Quarter ended June 30,
(In thousands, except per share data)
(unaudited)
9/30/2001(9) 12/31/2001(9) 3/31/2002(9) 6/30/2002(9)
--------- ---------- --------- ---------
Revenues (1) $ 3,793 $ 2,926 $ 3,381 $ 5,927
Loss from operations $(1,340) $ (1,904) $(7,826) (2) $(6,941) (3)
Net loss $(10,314) $ (4,177) $(39,439) $(11,753)
Net loss available to common stockholders $(10,314) $ (4,177) $(39,852) (4) $(11,753)
Basic and diluted loss per share (5):
Continuing operations $ (2.75) $ (2.38) $ (10.20) $ ( 9.11)
Discontinued operations (15.71) (3.52) (38.67) ( 4.13)
Cumulative effect of change in accounting - - - -
---------------------------------------------------------
Basic and diluted loss per share $ (18.46) $ (5.90) $ (48.88) $ (13.24)
=========================================================
Historical
Quarter ended June 30,
(In thousands, except per share data)
(unaudited)
9/30/2002(9) 12/31/2002(9) 3/31/2003(9) 6/30/2003(9)
--------- ---------- --------- ---------
Revenues (1) $ 4,504 $ 3,159 $ 3,483 $ 4,687
Loss from operations $ (109) $ 3,362 (6) $ (322) $ 181
Net income (loss) $(5,317) (7) $ 2,636 $ (403) $ 470
Net income (loss) available to common stockholders $(5,317) $ 2,636 $ 13,567 (8) $ 470
Basic and diluted loss per share (5):
Continuing operations $ 2.48 $ 10.16 $ 100.40 $ 11.92
Discontinued operations (2.00) (2.16) (.48) (5.68)
Cumulative effect of change in accounting (15.36) - - (20.08)
-------------------------------------------------------
Basic and diluted loss per share $(14.88) $ 8.00 $ 99.92 $(13.84)
=======================================================
(1) Prior periods presented have been restated in accordance with SAB
101. See Note 2, "Significant Accounting Policies," of the
Company's consolidated financial statements included in this Form
10-K.
(2) Includes a write-off due to goodwill impairment of $6,500.
(3) Includes a write-down of abandoned leased property of $6,400.
(4) Includes a net deemed dividend(loss on redemption)in the amount
of $413 for the quarters ending March 31,2002 in connection with
the redemption of preferred stock.
(5) On January 22, 2003, the Board of Directors approved an
eight-for-one reverse split of the common stock. Par value of the
common stock remains $.01 per share and the number of authorized
shares of common stock is reduced to 9,375,000. The stock split
was effective January 27, 2003. All stock prices, per share and
share amounts have been retroactively restated to reflect the
reverse split and are reflected in this
(6) Includes a gain on termination of lease of $3.9 million.
(7) Includes a gain on settlement of lawsuit of $1.0 million and a
loss from cumulative effect of change in accounting principle of
$5.1 million.
(8) Includes a gain on redemption of preferred stock of
$13.9 million.
(9) In December 2002, the Company completed the sale of substantially
all of the assets related to its direct list sales and database
services and website development and design business held by
certain of its wholly owned subsidiaries (the "Northeast
Operations") to Automation Research, Inc. for approximately $10.4
million in cash plus the assumption of all directly related
liabilities. The results of the operations are no longer included
in the company's results from the date of sale. Amounts have
reclassified to discontinued operations
15
Item 7 - Management's Discussion and Analysis
- ---------------------------------------------
Overview
- --------
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity/cash flows of the Company
for the twelve-month period ended June 30, 2003. This should be read in
conjunction with the financial statements, and notes thereto, included in this
Form 10-K.
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:
Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements," ("SAB 101") the
Company has reviewed its accounting policies for the recognition of revenue. SAB
101 was implemented in fourth quarter 2001. SAB 101 provides guidance on
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company's policies for revenue recognition are
consistent with the views expressed within SAB 101. The adoption of SAB 101, did
not have a material effect on the Company's consolidated financial position,
cash flows, or results of operations. Although net income was not materially
affected, the adoption did have an impact on the amount of revenue recorded as
the revenue associated with the Company's list sales and services product line
are now required to be shown net of certain costs. The Company believes this
presentation is consistent with the guidance in Emerging Issues Task Force
("EITF") 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent."
All prior periods presented have been restated.
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 and Intangible Assets:
Effective July 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS"), No. 142, "Goodwill and Other Intangible Assets". Under SFAS
142, the Company ceased amortization of goodwill and tests its goodwill on an
annual basis using a two-step fair value based test.
The first step of the goodwill impairment test, used to identify potential
impairment, compares the fair value of a reporting unit with its carrying
amount, including goodwill. If the carrying amount of the reporting unit exceeds
its fair value, the second step of the goodwill impairment test must be
performed to measure the amount of the impairment loss, if any. The Company
completed the transition requirements under SFAS No. 142. The Company determined
that it had three reporting units. Reporting unit 1 represents operations of
list sales and services and database marketing. Reporting unit 2 represents the
operations of telemarketing. Reporting unit 3 represents the operations of web
site development and design. The company recognized and impairment charge of
approximately $5.1 million in connection with the adoption of SFAS No. 142 for
reporting units 1 and 3. The impairment charge has been booked by the Company in
accordance with SFAS No. 142 transition provisions as a cumulative effect of a
change in accounting principle for the year ended June 30, 2003. In connection
with the sale of the Northeast Operations (See Note 3), the only remaining
reporting unit consists of telemarketing. The remaining Goodwill relating to the
Northeast Operations of approximately $8.1 million was included in loss from
discontinued operations for the year ended June 30, 2003. At June 30, 2002,
approximately $13.2 million of goodwill was included in net liabilities of
discontinued operations.
16
Prior to the adoption of SFAS 142 on July 1, 2002, the Company amortized
goodwill over its estimated useful life and evaluated goodwill for impairment in
conjunction with its other long-lived assets.
Intangible assets consist of capitalized software, which is being amortized
under the straight-line method over 5 years. Conditions that would necessitate
an impairment assessment include material adverse changes in operations,
significant adverse differences in actual results in comparison with initial
valuation forecasts prepared at the time of acquisition, a decision to abandon
certain acquired products, services or marketplaces, or other significant
adverse changes that would indicate the carrying amount of the recorded asset
might not be recoverable.
Long-Lived Assets:
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company reviews for impairment of long-lived assets and
certain identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
general, the Company will recognize an impairment when the sum of undiscounted
future cash flows (without interest charges) is less than the carrying amount of
such assets. The measurement for such impairment loss is based on the fair value
of the asset.
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. Actual results
could differ from those estimates.
To facilitate an analysis of MKTG operating results, certain significant events
should be considered.
In March 2000, the Company completed a private placement of 3,200,000 shares of
Convertible Preferred Stock of its WiredEmpire subsidiary for proceeds of
approximately $18.7 million, net of placement fees and expenses of $1.3 million.
On September 21, 2000, the Company's Board of Directors approved a plan to
discontinue the operation of its WiredEmpire subsidiary. The Company shut down
the operations by the end of January 2001. In the fiscal year ended June 30,
2000, the Company recorded losses associated with WiredEmpire of approximately
$34.5 million. These losses included approximately $19.5 million in losses from
operations through the measurement date and approximately $15.0 million of loss
on disposal which included approximately $2.0 million in losses from operations
from the measurement date through the estimated date of disposal. It also
included provisions for vested compensation expense of $2.0 million, write down
of assets to net realizable value of $8.8 million, lease termination costs of
$1.9 million, employee severance and benefits of $1.8 million and other
contractual commitments of $.5 million. As of June 30, 2002, approximately $1.7
million remains accrued representing payments expected to be made related to
legal and lease obligations.
On June 13, 2001, the board of directors and management of the Company approved
a formal plan to sell 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
17
line of credit. The Company recorded an extraordinary loss of approximately $4.9
million in the year ended June 30, 2002 as a result of the early extinguishment
of debt.
At June 30, 2001, the assets and liabilities of Grizzard were classified as net
assets held for sale in the amount of $80.9 million. In the year ended June 30,
2001, the Company recognized a loss on assets held for sale in the amount of
$36.7 million representing a write-down of the amount of assets held for sale to
net realizable value. Grizzard's revenues included in the Company's statement of
operations for the fiscal years ended June 30, 2002, 2001 and 2000 were $2.8
million, $82.8 million and $19.6 million, respectively. Grizzard's net loss
included in the Company's statement of operations for the fiscal years ended
June 30, 2002, 2001 and 2000 were $8.5 million, $41.0 million and $3.8 million,
respectively.
The Company's business tends to be seasonal. 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 Fiscal 2003 Compared to Fiscal 2002
- ---------------------------------------------------------
Revenues of approximately $15.8 million for the year ended June 30, 2003 (the
"Current Period") decreased by $0.2 million or 2% over revenues of $16.0 million
during the year ended June 30, 2002 (the "Prior Period"). The decrease is due
primarily to decreased teleservices billing. The decrease in such billing is a
direct result of the impact of a weaker economy resulting in a reduction in our
clients' marketing campaigns.
Salaries and benefits of approximately $13.8 million in the Current Period
decreased by approximately $1.8 million or 12% over salaries and benefits of
approximately $15.6 million in the Prior Period. Salaries and benefits decreased
due to decreased head count in several areas of the Company. The Company has
been actively consolidating its offices and infrastructure. Redundant functions
in operations were eliminated due to the consolidation of offices with the move
of the call center in the Fall of 2001. In connection with a reduction in force,
corporate head count was reduced from seven to three. In February 2003, certain
compensation arrangements were modified. The Chief Executive Officer voluntarily
forgave part of his base compensation to effect a reduction of approximately 30%
to $350,000. The Chief Accounting Officer also forgave part of her base
compensation to effect a reduction of approximately 30% and $125,000 per year
and in addition, due to medical reasons resigned as Chief Accounting Officer of
the Company in March 2003. The Chief Executive Officer has assumed the duties as
the Chief Accounting Officer until such a replacement has been elected.
Direct costs of approximately $0.6 million in the Current Period remained
consistent with direct costs of $0.6 million in the Prior Period. Direct costs
as a percentage of revenue was 4% and 4% for the Current Period and the Prior
Period, respectively.
18
Selling, general and administrative expenses of approximately $1.9 million in
the Current Period decreased by approximately $2.5 million or 55% over
comparable expenses of $4.4 million in the Prior Period. Of the decrease,
approximately $0.9 million is attributable to reductions in rent expenses for
both the Los Angeles operations and Corporate office as a result of
consolidation of office spaces. Approximately $0.5 million is attributable to
reductions in professional fees such as legal and accounting services. The
remaining reductions occurred in areas such as marketing, travel and
entertainment and office expenses due to the consolidation of certain office
spaces and the reduction of head count
In the Prior Period, the Company realized an expense of approximately $6.4
million as a result of booking reserves for the cost of certain abandoned
property.
Gain on termination of lease of approximately $3.9 million in the Current Period
was a result of the Company successfully negotiating a termination of a lease
for an abandoned lease property. The agreement required an up front payment of
approximately $.3 million and the Company is obligated to pay approximately
$60,000 per month until the landlord has completed certain leasehold
improvements for a new tenant and then Company is obligated to pay $20,000 per
month until August 2010. The gain on lease termination represents a change in
estimate representing the difference between the Company's present value of its
new future obligations and the entire obligation that remained on the books
under the original lease obligation as a result of the abandonment. The
remaining obligation has been recorded in accrued expenses and other current
liabilities and other liabilities.
In the prior period, due to the weakened economy and lower than expected
results, the Company had determined that there may not be sufficient cash flows
to recover the remaining book value of goodwill. As a result, the Company
recognized an impairment charge of approximately $6.5 million, which is included
in loss from continuing operations.
Depreciation and amortization expense of approximately $.2 million in the
Current Period decreased by approximately $.2 over expense of approximately $.4
million in the Prior Period. The decrease is primarily 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 a transitional
impairment test as of the adoption date in addition to an impairment test of its
existing goodwill based on a fair value concept.
During the Current Period, 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 $1.3
million 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 approximately $1.3 million, 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 approximately $965,000 plus reimbursement of mailing costs.
Net interest expense of approximately $0.1 million in the Current Period
decreased by approximately $0.2 million over net interest income of
approximately $0.1 million in the Prior Period. Net interest income decreased
primarily due to the decrease in interest rates coupled with the decrease in
average cash.
The net provision for income taxes of approximately $0.05 million in the Current
Period decreased by approximately $0.05 million over net provision for income
taxes of approximately $0.1 million from the Prior Period. In addition, the
Company records provisions for state and local taxes incurred on taxable income
or equity at the operating subsidiary
19
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, income from continuing operations item of $3.9 million
in the Current Period increased by $22.2 million over comparable loss of $18.3
in the Prior Period. .
The loss from discontinued operations in the Current Period and the Prior Period
are the results of loss incurred during the respective periods from Grizzard and
the Northeast Operations which have been sold. The Company recorded a loss of
approximately $4.9 million for the nine months ended March 31, 2002 as a result
of the early extinguishment of debt which is included in the loss from
discontinued operations and was previously classified as an extraordinary item.
In connection with the sale of the Northeast Operations, the Company realized a
loss on disposal of discontinued operations of approximately $.2 million in the
year ended June 30, 2003. The loss primarily results from the difference in the
net book value of assets and liabilities as of the date of the sale as compared
to the net consideration received after settlement of purchase price
adjustments.
For the year ended June 30, 2002, the Company recognized a gain on sale of
Grizzard in the amount of approximately $1.8 million which is included in the
statement of operations in Gain From Disposal of Discontinued Operations. The
gain represents the difference in the net book value of assets and liabilities
as of the date of the sale as compared to the net consideration received after
settlement of purchase price adjustments.
As of December 31, 2002, the Company completed the transition requirements under
SFAS No. 142. There is no impairment for its telemarketing unit. The Company
recognized an impairment charge of approximately $5.1 million in connection with
the adoption of SFAS No. 142 for its list sales and database marketing and
website development and design business. The impairment charge has been booked
by the Company in accordance with SFAS 142 transition provisions as a cumulative
effect of change in accounting for the year ended June 30, 2003.
As a result of the above, net loss of approximately $2.6 million in the Current
Period decreased by approximately $63.1 million over comparable net loss of
$65.7 million in the Prior Period.
In the Current Period the Company recognized a gain on redemption of preferred
stock of approximately $14.0 million and is reflected in net income(loss)
attributable to common stockholders. The gain is a result of the difference
between the consideration paid for redemption of a cash payment of approximately
$6.0 million and the issuance of 181,302 shares of common stock valued at
approximately $.2 million and the carrying value of the preferred stock which
was approximately $20.2 million which included a beneficial conversion feature
of approximately $10.3 million
Results of Operations Fiscal 2002 Compared to Fiscal 2001
- ---------------------------------------------------------
Revenues of approximately $16.0 million for the year ended June 30, 2002 (the
"Current Period") decreased by $0.8 million or 5% over revenues of $16.8 million
during the year ended June 30, 2001 (the "Prior Period"). The decrease was a
direct result of the impact of a weaker economy resulting in a reduction in our
clients' marketing campaigns. In addition, since September 11 unexpected client
cancellations, postponed fundraising campaigns and lost clients contributed to
the decrease. Furthermore, for a period of time following September 11 our
telemarketing call center was closed and all campaigns for such period were
cancelled.
Salaries and benefits of approximately $15.7 million in the Current Period
decreased by approximately $0.5 million or 3% over salaries and benefits of
approximately $16.2 million in the Prior Period due to decreased head count in
various areas of the company during the current period.
Direct costs of approximately $.6 million in the Current Period decreased by
$0.3 million or 33% over direct costs of $0.9 million in the Prior Period due to
the lower costs associated with the telemarketing / teleservices business.
20
Selling, general and administrative expenses of approximately $4.4 million in
the Current Period remained consistent with expenses of approximately $4.4
million in the Prior Period.
Reserve for rent on abandoned property of approximately $6.4 million in the
Current Period represents a reasonable estimated reserve for all rent costs
associated with certain leased property which has been abandoned by the Company.
Goodwill impairment of $6.5 million in the Current Period represents an
impairment charge for the write down of goodwill. Due to the weakened economy
and lower than expected results, based on current information, the Company has
determined that there will not be sufficient cash flows to recover all of the
remaining book value of goodwill.
Depreciation and amortization expense of approximately $0.4 in the Current
Period remained consistent with expense of approximately $0.4 in the Prior
Period. Settlement of litigation of approximately $.3 million and $1.3 million
in the Current and Prior Periods, respectively, was due to the settlement of
lawsuits with a previously owned subsidiary and one of their employees.
Interest expense and other, net of approximately $0.09 million in the Current
Period decreased by approximately $0.8 million over interest expense and other,
net of approximately $0.7 million in the Prior Period. Of the decrease,
approximately $0.6 million is attributable to the sale of Grizzard in July 2001
and the repayment of the related debt. Interest expense and other net, excluding
the effects of the disposition of Grizzard decreased by $0.2 million due to
interest income on excess cash.
The net provision for income taxes of approximately $0.1 million in the Current
Period decreased by approximately $0.05 million over net provision for income
taxes of approximately $0.05 million from the Prior Period. In addition, 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 loss of approximately $65.7 million in the Current
Period decreased by approximately $0.1 million over comparable net loss of $65.8
million in the Prior Period.
In the Prior Period, the Company sold certain assets of WiredEmpire for a gain
of $1.3 million, which is included in loss from discontinued operations.
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 an extraordinary loss of approximately $4.9 million in the Current
Period as a result of the early extinguishments of debt. This amount is included
in loss from discontinued operations.
In the Current Period, the redemption of 5,000 preferred shares for $5.0
million, less the carrying value of the preferred shares, including the
beneficial conversion feature previously recorded in equity on the balance
sheet, resulted in a deemed dividend of $412,634 which was recorded to
additional paid-in capital and included in the calculation of net loss
attributable to common stockholders.
In the Prior Period, the Company exchanged 328,334 shares of unregistered MKTG
common stock for WiredEmpire preferred stock. The exchange resulted in a gain of
$13.4 million for the year ended June 30, 2001, which was recorded through
equity and is included in net loss attributable to common stockholders and
earnings per share - discontinued operations.
In September 2000, the EITF issued EITF 00-27 "Application of EITF 98-5 to
Certain Convertible Instruments." EITF
21
00-27 addresses the accounting for convertible preferred stock issued since May
1999 that contain nondetachable conversion options that are in the money at the
commitment date. EITF 00-27 changed the approach of calculating the conversion
price used in determining the value of the beneficial conversion feature from
using the conversion price stated in the preferred stock certificate to using
the accounting conversion price. The adoption of this EITF increased the
original value of the beneficial conversion feature from zero to $14.1 million.
MKTG adopted EITF 00-27 in December 2000 and as a result has recorded a
cumulative effect of a change in accounting of approximately $14.1 million in
the year ended June 30, 2001 related to the March 2000 issuance of MKTG
convertible preferred stock. The cumulative effect was recorded to additional
paid-in capital and treated as a deemed dividend in the calculation of net loss
attributable to common stockholders.
Capital Resources and Liquidity
- -------------------------------
Financial Reporting Release No. 61, which was recently 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.
Critical Accounting Policies:
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States ("GAAP"). The
preparation of consolidated financial statements in accordance 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. The Company believes that the estimates, judgments and assumptions
upon which the Company relies are reasonable based upon information available to
us at the time that these estimates, judgments and assumptions are made. To the
extent there are material differences between these estimates, judgments or
assumptions and actual results, our financial statements will be affected. The
significant accounting policies that the Company believes are the most critical
to aid in fully understanding and evaluating our reported financial results
include the following:
o Revenue Recognition
o Allowances for Doubtful Accounts
o Goodwill and Intangible Assets
o Accounting for Income Taxes
In many cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP and does not require management's judgment in its
application. There are also areas in which management's judgment in selecting
among available alternatives would not produce a materially different result.
Our senior management has reviewed the Company's critical accounting policies
and related disclosures with our Audit Committee. See Notes to Consolidated
Financial Statements, which contain additional information regarding our
accounting policies and other disclosures required by GAAP.
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.
22
Future minimum rental commitments under all non-cancelable leases, as of June
30, 2003 are as follows:
Rent Expense Less: Sublease Income Net Rent Expense
2004 $ 879,600 $ (79,200) $ 800,400
2005 640,800 (45,300) 595,500
2006 439,700 439,700
2007 439,680 - 439,680
2008 323,200 - 323,200
Thereafter 520,000 - 520,000
------- ------------ -------
$3,243,000 $ (124,500) $3,118,500
Debt: In November 2002, the Company repaid approximately $.3 million balance of
one credit facility. In connection with the sale of the Company's Northeast
Operations, another credit facility of approximately $.3 million was fully
repaid and terminated in December 2002.
At June 30, 2003, the Company had amounts outstanding of approximately $.3
million on its remaining line of credit facility. The Company had approximately
$1.1 million available on its line of credit as of June 30, 2003. As of June 30,
2003, the Company was in compliance with its line of credit covenants.
In August 2001, the Company entered into a stand by letter of credit with a bank
in the amount of approximately $4.9 million to support the remaining obligations
under a holdback agreement with the former shareholders of Grizzard
Communications Group, Inc. ("Grizzard"). The letter of credit was collateralized
by cash and has been classified as restricted cash in the current asset section
of the balance sheet as of June 30, 2002. The letter of credit was subject to an
annual facility fee of 1.5%. The remaining obligation was settled in January
2003 and accordingly the letter of credit was terminated.
Preferred Stock: In January 2003, the Company redeemed the outstanding shares of
the preferred stock for a cash payment of approximately $6.0 million and the
issuance of 181,302 shares of common stock valued at approximately $.2 million.
The carrying value of the preferred stock was approximately $20.2 million which
included a beneficial conversion feature of approximately $10.3 million. The
transaction resulted in a gain on redemption of approximately $14.0 million and
is reflected in net income attributable to common stockholders for the year
ended June 30, 2003.
On October 2, 2002, the common stockholders ratified the issuance of the Series
E preferred stock and approved the stockholders right to convert such preferred
stock to common stock beyond the previous 19.99% limitation. Subsequently, the
preferred shareholders converted 149 shares of Series E preferred into 79,767
shares of common stock.
The preferred shareholders converted 1,799 shares of preferred stock to 112,983
shares of common stock for the year ended June 30, 2002.
In February 2002, the Company recognized a loss on the redemption of preferred
stock of approximately $.4 million reflected in net loss attributable to common
stockholders. The loss is the result of the difference between the consideration
paid for redemption of the preferred stock for $5.0 million cash and the
carrying value of the preferred stock of $4.6 million which included a
beneficial conversion feature of approximately $2.4 million.
On February 19, 2002, the Company entered into standstill agreements, as
amended, with the Series E preferred shareholders in order for the Company to
continue to discuss with multiple parties regarding the possibility of either
restructuring or refinancing the remainder of the preferred stock. The Company's
commitments as a result of the standstill agreements included a partial
redemption of 5,000 of the Series E preferred shares for $5.0 million, thereby
reducing the number of Series E preferred shares to 23,201 at June 30, 2002. The
value of the preferred stock was
23
initially recorded at a discount allocating a portion of the proceeds to a
warrant. The redemption of such preferred shares for $5.0 million, less the
carrying value of the preferred shares, including the beneficial conversion
feature previously recorded to equity on the balance sheet, resulted in a deemed
dividend of $0.4 million which was recorded to additional paid-in and included
in the calculation of net loss attributable to common stockholders for the year
ended June 30, 2002.
On February 24, 2000 the Company entered into a private placement with RGC
International Investors LDC and Marshall Capital Management, Inc., an affiliate
of Credit Suisse First Boston, in which the Company sold an aggregate of 30,000
shares of Series E Convertible Preferred Stock, par value $.01 ("Series E
Preferred Stock"), and warrants to acquire 30,648 shares of common stock for
proceeds of approximately $29.5 million, net of approximately $0.5 million of
placement fees and expenses. The preferred stock was convertible into cash or
shares of common stock on February 18, 2004 at the option of the Company. The
preferred stock provided for liquidation preference under certain circumstances
and accordingly had been classified in the mezzanine section of the balance
sheet. The preferred stock had no dividend requirements.
After adjustment for the reverse stock split, the Series E Preferred Stock was
convertible at any time at $1,174.70 per share, subject to reset on August 18,
2000 if the market price of the Company's common stock was lower and subject to
certain anti-dilution adjustments. On August 18, 2000, the conversion price was
reset to $587.52 per share, the market price on that date as adjusted for the
reverse stock split. As a result of the issuance of a certain warrant, certain
antidilultive provisions of the Company's Series E preferred stock were
triggered. The conversion price of such shares was reset to a fixed price of
$18.768 based on an amount equal to the average closing bid price of the
Company's common stock for ten consecutive trading days beginning on the first
trading day of the exercise period of the aforementioned warrant. No further
adjustments will be made to the conversion price other than for stock splits,
stock dividends or other organic changes. The warrant was exercisable for a
period of two years at an exercise price of $1,370.448, subject to certain
anti-dilution adjustments. The fair value of the warrant of $15,936,103, as
determined by the Black Scholes option pricing model, was recorded as additional
paid in capital and a corresponding decrease to preferred stock . The warrant
expired in February 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). 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 $2.0 million in net tangible assets or $2.5 million in stockholders' equity
or a market value of listed securities of $35.0 million or $.5 million of net
income from continuing operations for the most recently completed fiscal year or
two of the three most recently completed fiscal years. In December 2002, the
Company received notification from Nasdaq indicating that the Company was
subject to delisting. 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 $2.5 million. In addition, in January
2003, the Company affected an eight-for-one reverse stock split. (See Note 2).
In February 2003, the Company received notification from Nasdaq that the
Company's was not in compliance with the Nasdaq's market value of publicly held
shares requirements, as set forth in Nasdaq Marketplace Rule 4310(c)(07). The
Company believes that its subsequent issuance of common shares for the
redemption of its preferred stock has brought the Company back into compliance
with the minimum public float requirement. The Company appealed the Staff's
decision to delist the Company to a Nasdaq Listing Qualification Panel. The
hearing was held on February 13, 2003. On March 5, 2003, a Nasdaq Listing
Qualifications Panel determined to continue the listing of the Company's
securities on the Nasdaq SmallCap Market on the condition, among other things,
that the Company make a public filing with the Securities and Exchange
Commission and Nasdaq evidencing shareholders' equity of at least $2.5 million
and further that the Company file its quarterly report on Form 10Q for the March
31, 2003 quarter on or before May 15, 2003. On March 13, 2003, the Company filed
an unaudited balance sheet as of January 31, 2003 evidencing shareholders'
equity of at least $2.5 million. On May 22, 2003, the Company received
notification from Nasdaq that the Company satisfactorily demonstrated compliance
and, accordingly, the Nasdaq Listing Qualifications Panel determined to continue
the listing of the Company's securities on The Nasdaq SmallCap Market and to
close the hearing file.
24
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 June 30, 2003, the Company
had cash and cash equivalents of $1.2 million and accounts receivable net of
allowances of $1.8 million.
The Company realized income from continuing operations of $3.9 million in the
Current Period. Cash used in operating activities from continuing operations was
approximately $2.7 million. Net cash used in operating activities principally
resulted from the income from continuing operations offset by gain on
termination of lease, reduction in trade accounts payable and other non-cash
items in the Current Period. The Company incurred losses from continuing
operations of $18.3 million in the Prior Period. Cash used in operating
activities from continuing operations was approximately $13.1 million. Net cash
used in operating activities principally resulted from the loss from continuing
operations offset by goodwill impairment, a decrease in accrued expenses and
other liabilities and other non-cash items in the Prior Period.
In the Current Period, net cash of $13.4 million was provided by investing
activities consisting of net proceeds from the decrease in restricted cash and
proceeds from the sale of the Northeast operations, net of fees, offset by an
increase in related party note receivable and purchases of property and
equipment. In the Prior Period, net cash of $72.9 million was provided from
investing activities consisting primarily of $78.6 million from proceeds from
the sale of Grizzard offset by an increase in restricted cash, an increase in
related party note payable and purchases of property and equipment .
In the Current Period, net cash of $12.8 million was used in financing
activities. Net cash used in financing activities consisted of $4.8 million
repayments of debt and capital leases, redemption of a portion of preferred
stock of $6.0 million and repayment of proceeds from credit facilities of $2.0
million. In the Prior Period, net cash of $5.1 million was used in financing
activities. Net cash used in financing activities consisted primarily of $5.0
million in redemption of a portion of preferred stock.
In the Current Period net cash of $1.0 million was used in discontinued
operations. In the prior period, net cash of $50.1 million was used by
discontinued operations.
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 187,500 restricted shares of common stock,
plus a two-year warrant for 50,000 shares priced at $24 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 will 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 is $.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. The Company
settled with Firstream during fiscal year 2003 for approximately $.2 million and
the remaining liability was sold as part of the Northeast operations sale. There
was no remaining liability at June 30, 2003.
In December 2002, the Company completed the sale of substantially all of the
assets relating to its direct list sales and database services and website
development and design business held by certain of its wholly owned subsidiaries
(the 'Northeast Operations') to Automation Research, Inc. ('ARI'), a wholly
owned subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash
plus the assumption of all directly related liabilities. As such, the operations
and cash flows of the Northeast Operations have been eliminated from ongoing
operations and the Company no longer has continuing involvement in the
operations. Accordingly, the statement of operations and cash flows for the
years ending June 30, 2003, 2002 and 2001 have been reclassed into a one-line
presentation and is included in Loss from
25
Discontinued Operations and Net Cash Used by Discontinued Operations. In
addition, the assets and liabilities of the Northeast Operations have been
segregated and presented in Net Assets of Discontinued Operations and Net
Liabilities of Discontinued Operations as of June 30, 2002.
In connection with the sale of the Northeast Operations, the Company recognized
a loss on disposal of discontinued operations of approximately $.2 million in
the year ended June 30, 2003. The loss represents the difference in the net book
value of assets and liabilities as of the date of the sale as compared to the
net consideration received after settlement of purchase price adjustments plus
any additional expenses incurred. There was no tax impact on this loss.
On July 31, 2001, the Company completed the sale of all the outstanding capital
stock of its Grizzard subsidiary to Omnicom Group, Inc. As a result of the sale
agreement, the Company repaid a term loan of $35.5 million and a $12.0 million
line of credit. The Company recorded a loss of approximately $4.9 million for
the year ended June 30, 2002 as a result of the early extinguishment of debt
which is included in the loss from discontinued operations. For the year ended
June 30, 2002, the Company recognized a gain on sale of Grizzard in the amount
of approximately $1.8 million which is included in the statement of operations
in Gain from Disposal of Discontinued Operations. The gain represents the
difference in the net book value of assets and liabilities as of the date of the
sale as compared to the net consideration received after settlement of purchase
price adjustments. The statement of operations and cash flows for the years
ended June 30, 2002 and 2001 have been reclassified into a one-line presentation
and is included in Loss from Discontinued Operations and Net Cash Used by
Discontinued Operations.
In January 2001, the Company sold certain assets of WiredEmpire for $1.3
million, consisting of $1.0 million in cash and $.3 million held in escrow,
which was paid in May 2001. This transaction resulted in a gain on sale of
assets of $1.3 million which is included in the statement of operations in Gain
from disposal of discontinued operations. The statement of operations and cash
flows for the year ended June 30, 2001 have been reclassified into a one-line
presentation and is included in Loss from Discontinued Operations and Net Cash
Used by Discontinued Operations.
On September 21, 2000, the Company's Board of Directors approved a plan to
discontinue the operation of its WiredEmpire subsidiary. The Company shut down
the operations by the end of January 2001. The estimated losses associated with
WiredEmpire were approximately $34.5 million. These losses for WiredEmpire
included approximately $19.5 million in losses from operations through the
measurement date and approximately $15.0 million of loss on disposal.
In September 2000 the Company offered to exchange the WiredEmpire preferred
shares for MKTG common shares. During the fiscal year end June 30, 2001, the
Company exchanged 41,042 shares of unregistered MKTG common stock for
WiredEmpire preferred stock. The exchange resulted in a gain of $13,410,273,
which was recorded through equity and is included in net loss attributable to
common stockholders and earnings per share - discontinued operations for the
year ended June 30, 2001. As of June 30, 2003 and 2002, 48,000 shares of
WiredEmpire preferred stock have not been exchanged and this is reported as
minority interest in preferred stock of discontinued subsidiary as $280,946 for
in each year.
Summary of Recent Accounting Pronouncements
- -------------------------------------------
Effective July 1, 2002, the Company adopted the provisions of SFAS No.
141,"Business Combinations," in its entirety 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. SFAS No. 142
eliminates the 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 a transitional impairment test of its existing goodwill based on a fair
value concept as of the date of adoption (see Note 8).
26
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.
Effective July 1, 2002, the Company adopted 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 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
Company reviews for impairment of long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In general, the Company will
recognize an impairment when the sum of undiscounted future cash flows (without
interest charges) is less than the carrying amount of such assets. The
measurement for such impairment loss is based on the fair value of the asset.
SFAS No. 144 supersedes the accounting and reporting provisions of APB Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", for segments of a business to be disposed
of. However, this Statement retains the requirement of Opinion 30 to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held for sale. 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 and included in loss from discontinued operation 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 adoption of such pronouncement did not have a material impact on
the Company's financial position and results of operations.
In November 2002, the FASB issued FIN 45, 'Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Other,' an interpretation of FASB Statements No. 5, 57, and 107 and Rescission
of FASB Interpretation No. 34. FIN 45 elaborates on the existing disclosure
requirements of guarantees and obligations to stand ready to perform over the
term of the guarantee in the event that specified triggering events or
conditions occur and the identification of those contingent obligations to make
future payments if those triggering events or conditions occur. Additional
disclosures have been added to Commitments and Contingencies footnote describing
the nature of the guarantee; amount and event triggering the Company's
obligation under the guarantee and the Company's recourse to recover in such an
event. Management does not believe that this pronouncement will have a material
impact
27
on its financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB No. 123." SFAS
No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," 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 the reported results. SFAS No. 148 is effective for
fiscal years and interim periods beginning after December 15, 2002. The Company
continues to account for stock-based employee compensation under the intrinsic
value method of APB 25, "Accounting for Stock Issued to Employees." The Company
has adopted the disclosure provisions of SFAS No. 148 within this report.
In January 2003, the FASB issued FIN 46, 'Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51.' FIN 46 requires an investor to
consolidate a variable interest entirety if it is determined that the investor
is a primary beneficiary of that entity, subject to the criteria set forth in
FIN 46. Assets, liabilities, and non controlling interests of newly consolidated
variable interest entities will be initially measured at fair value. After
initial measurement, the consolidated variable interest entity will be accounted
for under the guidance provided by Accounting Research Bulletin No. 51,
'Consolidated Financial Statements.' FIN 46 is effective for variable interest
entities created or entered into after January 2003. For variable interest
entities created or acquired before February 1, 2003, FIN 46 applies in the
first fiscal year or interim period beginning after June 15, 2003. Management
does not believe that this pronouncement will have a material impact on its
financial statements.
On April 30, 2003, the FASB issued SFAS 149, Amendment of SFAS 33 on Derivative
Instruments and Hedging Activities. Statement 149 is intended to result in more
consistent reporting of contracts as either freestanding derivative instruments
subject to SFAS 133 in its entirety, or as hybrid instruments with debt host
contracts and embedded derivative features. In addition, SFAS 149 clarifies the
definition of a derivative by providing guidance on the meaning of initial net
investments related to derivatives. SFAS 149 is effective for contracts entered
into or modified after June 30, 2003. The Company does not expect that the
adoption of SFAS 149 will have an impact on its financial position, results of
operations or cash flows.
On May 15, 2003, the FASB issued SFAS No. 150, Accounting for "Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS 150 represents a
significant change in practice in the accounting for a number of financial
instruments, including mandatory redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003. The Company has not entered into or modified any
financial instruments subsequent to May 31, 2003. There was no impact from the
adoption of this statement.
Item 7 (a) - Quantative and Qualitative Disclosure about Market Risk
- ---------------------------------------------------------------------
Not applicable
Item 8 - Financial Statements and Supplementary Data
- ----------------------------------------------------
The Consolidated Financial Statements required by this Item 8 are set forth as
indicated in the index following Item 14(a)(1).
Item 9 - Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
Item 9 (a) - Controls and Procedures
- ------------------------------------
28
PART III
The information required by this Part III (items 10, 11, 12, 13 and 14)
is hereby incorporated by reference from the Company's definitive proxy
statement which is expected to be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934 not later than 120 days after the end of the
fiscal year covered by this report.
Part IV
Item 15 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a)(1) Financial statements - see "Index to Financial Statements" on page 28.
(2) Financial statement schedules - see "Index to Financial Statements"
on page 28.
(3) Exhibits:
2.1 Agreement and Plan of Merger By and Among MKTG Services, Inc., GCG Merger
Corp., and Grizzard Advertising, Inc. (m)
2.2 Stock Purchase Agreement by and between Omnicom Group Inc. and
MKTG Services, Inc.
3.1 Amended and Restated Articles of Incorporation (c)
3.2 Certificate of Amendment to the Amended and Restated Articles of
Incorporation of the Company (b)
3.3 Certificate of Amendment to the Articles of Incorporation for change
of name to All-Comm Media Corporation (f)
3.4 By-Laws (c)
3.5 Certificate of Amendment of Articles of Incorporation for increase
in number of authorized shares to 36,300,000 total (i)
3.6 Certificate of Amendment of Articles of Incorporation for change of name
to Marketing Services Group, Inc. (k)
3.7 Certificate of Amendment of Articles of Incorporation for increase in
number of authorized shares to 75,150,000 total (n)
3.8 The Amended Certificate of Designation, Preferences and Relative,
Participating and Optional and Other Special Rights of Preferred Stock
and Qualifications, Limitations and Restrictions Thereof for the
Series D Convertible Preferred Stock (l)
3.9 Certificate of Designation, Preferences, and Rights of Series E
Convertible Preferred Stock of Marketing Services Group, Inc. (q)
3.10 Certificate of Amendment to Certificate of Designation, Preferences,
and Rights of Series E Convertible Preferred Stock of
Marketing Services Group, Inc. (r)
3.11 Certificate of Amendment of Articles of Incorporation for change of name
to MKTG Services, Inc. (a)
10.1 1991 Stock Option Plan (d)
10.2 Security Agreement between Milberg Factors, Inc. and Metro Services
Group, Inc. (j)
10.3 Security Agreement between Milberg Factors, Inc. and Stephen Dunn &
Associates, Inc. (k)
10.4 J. Jeremy Barbera Employment Agreement (t)
10.5 Rudy Howard Employment Agreement (t)
10.6 Stephen Killeen Employment Agreement (t)
10.7 Form of Private Placement Agreement (j)
10.8 Purchase agreement dated as of December 24, 1997, by and between the
Company and GE Capital (l)
10.9 Stockholders Agreement by and among the Company, GE Capital and certain
existing stockholders of the Company, dated as of December 24, 1997 (l)
10.10 Registration Rights Agreement by and among the Company and GE Capital,
dated as of December 24, 1997 (l)
10.11 Warrant, dated as of December 24, 1997,
to purchase shares of Common Stock of the Company (l)
10.12 First Amendment to
Preferred Stock Purchase Agreement Between General Electric Capital
Corporation and Marketing Services Group, Inc. (o)
29
10.13 Promissory note (o)
10.14 Warrant Agreement (o)
10.15 Second Amendment (p)
10.16 Warrant Agreement between Marketing Services Group, Inc. and Marshall
Capital Management, Inc. (q)
10.17 Warrant Agreement between Marketing Services Group, Inc. and RCG
International Investors, LDC. (q)
10.18 Registration Rights Agreement by and Among The Company, RCG International
Investors, LDC and Marshall Capital Management, Inc. (q)
10.19 Securities Purchase Agreement by and Among The Company, RCG International
Investors, LDC and Marshall Capital Management, Inc. (q)
10.20 Credit Agreement Among Grizzard Communications, Inc. and Paribas (s)
10.21 Firstream Letter Agreement (b)
10.22 Steven Killeen Termination Agreement (b)
10.23 Standstill Agreement between MKTG Services, Inc. and Castle Creek
Technology Partners LLC (u)
10.24 Standstill Agreement between MKTG Services, Inc. and RCG International
Investors, LDS (u)
10.25 Letter Amendment to Standstill Agreement between MKTG Services, Inc. and
Castle Creek Technology Partners LLC(v)
10.26 Letter Amendment Standstill Agreement between MKTG Services, Inc. and RCG
International Investors, LDS(v)
21 List of Company's subsidiaries (a)
23 Consent of PricewaterhouseCoopers LLP (a)
24 Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002(a)
(a) Included herein in the Company's Report on Form 10K- for the fiscal year
ended June 30, 2002
(b) Incorporated by reference to the Company's Report on Form 10K- for the
fiscal year ended June 30, 2001
(c) Incorporated by reference from the Company's Registration Statement on
Form S-4, Registration Statement No. 33-45192
(d) Incorporated by reference to the Company's Registration Statement on
Form S-8, Registration Statement 333-30839
(e) Incorporated herein by reference to the Company's Report on Form 8-K
dated April 25, 1995
(f) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended June 30, 1995
(g) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended March 31, 1996
(h) Incorporated by reference to the Company's Report on Form 8-K dated
June 7, 1996
(i) Incorporated by reference to the Company's Report on Form 10-K dated June
30, 1996
(j) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended March 31, 1997
(k) Incorporated by reference to the Company's Report on Form 10-KSB for the
fiscal year ended June 30, 1997
(l) Incorporated by reference to the Company's Report on Form 8-K dated
January 13, 1998
(m) Incorporated by reference from the Company's Registration Statement on
Form S-4, Registration Statement No. 33-85233.
(n) Incorporated by reference to the Company's Report on Form 10-KSB dated
June 30, 1998
(o) Incorporated by reference to the Company's Report on Form 8-K dated
May 13, 1999
(p) Incorporated by reference to the Company's Report on Form 8-K dated
August 30, 1999
(q) Incorporated by reference to the Company's Report on Form 8-K dated
February 29, 2000
(r) Incorporated by reference to the Company's Report on Form 8-K/A dated
March 23, 2000
30
(s) Incorporated by reference to the Company's Report on Form 10-Q dated
May 16, 2000
(t) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended June 30, 2000
(u) Incorporated by reference to the Company's Report on Form 8-K dated
February 19, 2002
(v) Incorporated by reference to the Company's Report on Form 8-K dated
July 30, 2002
(b) Reports on Form 8-K.
None
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MKTG SERVICES, INC.
(Registrant)
By: /s/ J. Jeremy Barbera
---------------------
J. Jeremy Barbera
Chairman of the Board and
Chief Executive Officer
Date: October 14, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- ------------------------------ ------------------------------------------- --------------------
/s/ J. Jeremy Barbera Chairman of the Board and Chief Executive October 14, 2003
- ------------------------------- Officer (Principal Executive Officer)
J. Jeremy Barbera
/s/ John T. Gerlach Director October 14, 2003
- -------------------------------
John T. Gerlach
/s/ Seymour Jones Director October 14, 2003
- -------------------------------
Seymour Jones
32
MKTG SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
[Items 15]
(1) FINANCIAL STATEMENTS: Page
--------------------- ----
Report of Independent Accountants 34-35
Consolidated Balance Sheets as of June 30, 2003 and
June 30, 2002 36
Consolidated Statements of Operations
Years Ended June 30, 2003, 2002, and 2001 37-38
Consolidated Statement of Stockholders' Equity
Years Ended June 30, 2003, 2002, and 2001 39
Consolidated Statements of Cash Flows
Years Ended June 30, 2003, 2002, and 2001 40
Notes to Consolidated Financial Statements 41-61
(2) FINANCIAL STATEMENT SCHEDULES:
------------------------------
Schedule II - Valuation and Qualifying Accounts 62
Schedules other than those listed above are omitted because they
are not required or are not applicable or the information is
shown in the audited financial statements or related notes.
33
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
MKTG Services, Inc.
We have audited the accompanying consolidated balance sheet of MKTG Services,
Inc. and Subsidiaries as of June 30, 2003 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the fiscal
year ended June 30, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with 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 financial statements referred to above present fairly, in
all material respects, the financial position of MKTG Services, Inc. and
Subsidiaries as of June 30, 2003 and the results of its operations and its cash
flows for the fiscal year then ended in conformity with auditing standards
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and negative cash flows from operations, in addition to certain contingencies
that may require significant resources, all of which raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 1 to the consolidated financial statements, during the year
ended June 30, 2003 the Company changed its method of accounting for goodwill in
accordance with the adoption of SFAS 142 "Goodwill and other intangible assets."
/s/ Amper, Politziner & Mattia P.C.
October 10, 2003
Edison, New Jersey
34
Report of Independent Auditors
In our opinion, the consolidated balance sheet as of June 30, 2002 and the
related consolidated statements of operations, of cash flows and of changes in
stockholders' equity for each of the two years in the period ended June 30, 2002
present fairly, in all material respects, the financial position, results of
operations and cash flows of MKTG Services, Inc. and its Subsidiaries at June
30, 2002 and for each of the two years in the period ended June 30, 2002, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has limited capital resources and has incurred
significant recurring losses and negative cash flows from operations, in
addition to certain contingencies that may require significant resources, all of
which raise substantial doubt about its ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty. Management's plan with respect to this matter
is set forth as discussed in Note 2.
As discussed in Note 2 to the consolidated financial statements, during the year
ended June 30, 2001, the Company changed its method of accounting for securities
with beneficial conversion features as a result of the issuance of Emerging
Issues Task Force Issue No. 00-27, "Application of Issue No. 98-5 to Certain
Convertible Instruments."
/s/ PRICEWATERHOUSECOOPERS LLP
September 26, 2002, except for the reclassification and presentation of the
discontinued operations of the Northeast Operations and Grizzard, Inc., as
discussed in Note 3, as to which the date is October 14, 2003
New York, New York
35
MKTG SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2003 AND 2002
ASSETS 2003 2002
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 1,216,642 $ 4,438,166
Accounts receivable, net of allowance for doubtful
accounts of $ 120,000 and $ 94,000, respectively 1,816,546 3,066,983
Net assets of discontinued operations - 32,722,244
Restricted cash - 4,945,874
Other current assets 475,164 446,456
----------- -----------
Total current assets 3,508,352 45,619,723
Property and equipment, net 747,530 907,087
Goodwill, net 2,277,220 2,277,220
Intangible assets, net 20,000 40,000
Related party note receivable 1,050,309 978,534
Other assets 44,109 345,709
----------- -----------
Total assets $ 7,647,520 $50,168,273
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short-term borrowing $ 261,385 $ 2,280,384
Accounts payable-trade 456,266 881,399
Accrued expenses and other current liabilities 1,877,069 5,007,640
Net liabilities of discontinued operations - 18,608,365
Current portion of long-term obligations 201,062 4,837,321
----------- -----------
Total current liabilities 2,795,782 31,615,109
Long-term obligations, net of current portion - 176,336
Other liabilities 1,463,132 6,321,798
----------- -----------
Total liabilities 4,258,914 38,113,243
----------- -----------
Minority interest in preferred stock of
discontinued subsidiary 280,946 280,946
Convertible preferred stock - $.01 par value;
0 and 18,750 shares authorized; 0 and 2,900 shares
of Series E issued and outstanding
as of June 30, 2003 and 2002 - 10,384,064
Commitments and contingencies
Stockholders' equity:
Common stock - $.01 par value; 9,375,000 authorized;
1,101,198 and 840,129 shares issued; 1,092,367 and
831,298 shares outstanding as of June 30, 2003
and 2002, respectively 11,011 8,401
Additional paid-in capital 220,258,236 229,899,188
Accumulated deficit (215,767,877) (227,123,859)
Less: 8,831 shares of common stock in
treasury, at cost (1,393,710) (1,393,710)
------------ ------------
Total stockholders' equity 3,107,660 1,390,020
------------ ------------
Total liabilities and stockholders' equity $ 7,647,520 $50,168,273
============ ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
36
MKTG SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2003, 2002, AND 2001
2003 2002 2001
---- ---- ----
Revenues $ 15,832,655 $ 16,027,212 $ 16,860,191
------------- ------------ ------------
Operating costs and expenses:
Salaries and benefits 13,780,263 15,663,003 16,244,483
Direct costs 642,797 656,781 872,887
Selling, general and administrative 1,978,890 4,425,685 4,387,664
Reserve for rent on abandoned property - 6,400,000 -
Gain on termination of lease (3,905,387) - -
Goodwill impairment - 6,500,470 -
Depreciation and amortization 224,378 392,540 351,100
----------- ----------- -----------
Total operating costs and expenses 12,720,941 34,038,479 21,856,134
----------- ----------- -----------
Income (loss) from operations 3,111,714 (18,011,267) (4,995,943)
----------- ------------ ------------
Other income (expense):
Loss on investments - - (7,577,560)
Gain (loss) on legal settlement 965,486 (246,000) (1,297,970)
Interest income (expense) and other, net (88,831) 91,128 (743,127)
------------- ------------ -----------
Income (loss) from continuing operations
before provision for income taxes 3,988,369 (18,166,139) (14,614,600)
Provision for income taxes 47,801 99,535 54,931
------------- ----------- ------------
Income (loss) from continuing operations 3,940,568 (18,265,674) (14,669,531)
Discontinued operations:
Loss from discontinued operations (1,260,003) (49,290,293) (52,421,036)
Gain (loss) from disposal of discontinued operations (220,396) 1,872,830 1,251,725
------------ ------------ -----------
Loss from discontinued operations (1,480,399) (47,417,463) (51,169,311)
------------ ------------ -----------
Cumulative effect of change in accounting principle (5,075,000) - -
------------ ------------ -----------
Net loss (2,614,831) (65,683,137) (65,838,842)
----------- ------------ -------------
Gain (deemed dividend) on redemption of preferred stock 13,970,813 (412,634) -
Gain on redemption of preferred stock of discontinued
subsidiary - - 13,410,273
----------- ------------ ------------
Net income (loss) attributable to common stockholders
before cumulative effect of change in accounting principle 11,355,982 (66,095,771) (52,428,569)
Cumulative effect of change in accounting principle - - (14,063,897)
------------ ------------ ------------
Net income (loss) attributable to common stockholders $ 11,355,982 $ (66,095,771) $ (66,492,466)
============ ============== ==============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
37
MKTG SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
FOR THE YEARS ENDED JUNE 30, 2003, 2002, AND 2001
2003 2002 2001
---- ---- ----
Basic earnings (loss) per share:
Continuing operations $18.33 $(24.44) $(22.07)
Discontinued operations (1.52) (62.03) (56.78)
Cumulative effect of change in accounting principle (5.19) - (21.15)
------- ------- -------
Basic earnings (loss) per share $ 11.62 $(86.47) $(100.00)
======= ======= =========
Diluted earnings (loss) per share:
Continuing operations $15.62 $(24.44) $(22.07)
Discontinued operations (1.29) (62.03) (56.78)
Cumulative effect of change in accounting principle (4.43) - (21.15)
------- -------- -------
Diluted earnings (loss) per share $ 9.90 $(86.47) $(100.00)
======= ======== =========
Weighted average common shares outstanding - basic 977,086 764,360 664,950
========= ======= =======
Weighted average common shares outstanding - diluted 1,146,943 764,360 664,950
========= ======= =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
38
MKTG SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2003, 2002, AND 2001
Additional
Common Stock Paid-in Deferred Accumulated Treasury Stock
------------------ -----------------
Shares Amount Capital Compensation Deficit Shares Amount Totals
--------------------------------------------------------------------------------------------
Balance July 01, 2000 634,219 $6,342 $210,946,271 - $(95,601,880) (8,831) $(1,393,710) $113,957,023
Shares issued upon exercise of
stock options 57 1 8,142 8,143
Issuance of common stock for
exchange of preferred stock
of discontinued subsidiary 41,042 410 5,038,070 5,038,480
Gain on redemption of
WiredEmpire preferred stock 13,410,273 13,410,273
Issuance of common stock for
settlement of earn-out provision 2,756 27 250,069 250,096
Issuance of common stock in
connection with settlement
of lawsuit 2,083 21 141,162 141,183
Issuance of common stock for
Firstream strategic partnership 31,250 313 865,788 866,101
Issuance of warrants in connection
with Firstream stock issuance 945,537 945,537
Beneficial conversion feature
associated with Series E
Preferred Stock 14,063,897 14,063,897
Accretion of beneficial
conversion feature - Series E
Preferred Stock (14,063,897) (14,063,897)
Net and comprehensive loss (65,838,842) (65,838,842)
---------------------------------------------------------------------------------------------
Balance June 30, 2001 711,407 $7,114 $231,605,312 - $(161,440,722) (8,831) $(1,393,710) $68,777,994
=============================================================================================
Shares issued upon conversion of
Series E Preferred Stock 112,983 1,130 756,667 757,797
Issuance of common stock for
settlement of earn-out
provision 15,739 157 299,843 300,000
Redemption of Series E Preferred
Stock (2,762,634) (2,762,634)
Net and comprehensive loss (65,683,137) (65,683,137)
--------------------------------------------------------------------------------------------
Balance June 30, 2002 840,129 $8,401 $229,899,188 - $(227,123,859) (8,831) $(1,393,710) $1,390,020
=============================================================================================
Shares issued upon conversion
of Series E Preferred Stock 79,767 798 502,555 503,353
Redemption of Series E
Preferred Stock 181,302 1,812 (10,143,507) 13,970,813 3,829,118
Net and comprehensive
loss (2,614,831) (2,614,831)
----------------------------------------------------------------------------------------------
Balance June 30, 2003 1,101,198 $ 11,011 $220,258,236 - $(215,767,877) (8,831) (1,393,710) $3,107,660
==============================================================================================
The accompanying notes are an integral part of these Consolidated Financial
Statements.
39
MKTG SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2003, 2002, AND 2001
2003 2002 2001
---- ---- ----
OPERATING ACTIVITIES:
Net loss $(2,614,831) $(65,683,137) $(65,838,842)
Loss from discontinued operations 1,480,399 47,417,463 51,169,311
Cumulative effect of change in accounting principle 5,075,000 - -
------------ ------------ ------------
Income (loss) from continuing operations 3,940,568 (18,265,674) (14,669,531)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Goodwill impairment - 6,500,400 -
Gain on termination of lease (3,905,387) - -
Depreciation 204,378 372,540 332,100
Amortization 20,000 20,000 20,000
Loss on investments - - 7,522,846
Bad debt expense 82,465 88,000 -
Changes in assets and liabilities:
Accounts receivable 1,167,972 (314,207) (74,824)
Other current assets (28,708) (163,497) 94,019
Other assets 301,600 (54,134) 339,497
Trade accounts payable (425,133) (1,067,030) 1,628,425
Accrued expenses and other liabilities (4,083,850) (203,292) 3,044,016
----------- --------- ---------
Net cash used in operating activities (2,726,095) (13,086,894) (1,764,452)
---------- ----------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment (44,821) (769,042) (133,944)
Decrease (increase) in restricted cash 4,945,874 (4,945,874) -
Proceeds from sale of Grizzard - 78,609,258 -
Proceeds from sale of Northeast Operations, net of fees 8,546,182 - -
---------- ---------- -------
Net cash provided by (used in) investing activities 13,447,235 72,894,342 (133,944)
---------- ---------- --------
FINANCING ACTIVITIES:
Redemption of preferred stock (6,021,840) (5,000,000) -
Expeditures from private placement of preferred shares (29,753) (44,971) -
Proceeds from issuance of common stock and warrants, net - - 1,819,781
Proceeds from sale of Series E convertible preferred stock, net - - (56,978)
Increase in related party note receivable (71,775) (1,000,000) -
Net (repayments on) proceeds from credit facilities (2,018,999) 258,418 201,462
Principal payments under capital lease obligations - - (18,490)
Repayment of related party notes payable - (250,000) (5,650,000)
Repayments of long-term debt (4,812,595) (44,385) --
----------- -------- ---------
Net cash (used in) provided by financing activities (12,954,962) (6,080,938) (3,704,225)
------------ ------------ -----------
Net cash (used in) provided by discontinued operations (987,702) (50,117,801) (1,789,080)
----------- ------------ -----------
Net increase (decrease) in cash and cash equivalents (3,221,524) 3,608,709 (7,391,701)
Cash and cash equivalents at beginning of year 4,438,166 829,457 8,221,158
---------- ----------- -----------
Cash and cash equivalents at end of year $1,216,642 $4,438,166 $829,457
========== ========== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
40
MKTG SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY OVERVIEW AND PRINCIPLES OF CONSOLIDATION:
MKTG Services, Inc. ("MKTG" or the "Company") provides highly customized
telemarketing and telefundraising services. Substantially all of the Company's
business activity is conducted with customers located within the United States.
The consolidated financial statements include the accounts of MKTG and its
wholly owned and majority owned subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation. Subsidiaries acquired
during the year are recorded from the date of the respective acquisition.
Subsidiaries sold during the year are presented as discontinued operations (See
Note 3).
Effective April 1, 2002, the Company changed its legal name from Marketing
Services Group, Inc. to MKTG Services, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Liquidity:
The Company has limited capital resources and has incurred significant
historical losses and negative cash flows from operations. The Company believes
that funds on hand, funds available from its remaining operations and its unused
line of credit should be adequate to finance its operations and capital
expenditure requirements and enable the Company to meet interest and debt
obligations for the next twelve months. As explained in Note 3, the Company
recently sold off substantially all the assets relating to its direct list sales
and database services and website development and design business held by
certain of its wholly owned subsidiaries. In addition, the Company has
instituted cost reduction measures, including the reduction of workforce and
corporate overhead. Failure of the remaining operation to generate such
sufficient future cash flow could have a material adverse effect on the
Company's ability to continue as a going concern and to achieve its business
objectives. 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.
Cash and Cash Equivalents:
The Company considers investments with an original maturity of three months or
less to be cash equivalents.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the respective assets. Estimated useful lives are as follows:
Furniture and fixtures.................2 to 7 years
Computer equipment and software........3 to 5 years
Leasehold improvements are amortized, using the straight-line method, over the
shorter of the estimated useful life of the asset or the term of the lease.
The cost of additions and betterments are capitalized, and repairs and
maintenance are expensed as incurred. The cost and related accumulated
depreciation and amortization of property and equipment sold or retired are
removed from the accounts and resulting gains or losses are recognized in
current operations.
41
Goodwill:
Effective July 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS"), No. 142, "Goodwill and Other Intangible Assets". Under SFAS
142, the Company ceased amortization of goodwill and tests its goodwill on an
annual basis using a two-step fair value based test.
The first step of the goodwill impairment test, used to identify potential
impairment, compares the fair value of a reporting unit with its carrying
amount, including goodwill. If the carrying amount of the reporting unit exceeds
its fair value, the second step of the goodwill impairment test must be
performed to measure the amount of the impairment loss, if any. The Company
completed the transition requirements under SFAS No. 142. The Company determined
that it had three reporting units. Reporting unit 1 represents operations of
list sales and services and database marketing. Reporting unit 2 represents the
operations of telemarketing. Reporting unit 3 represents the operations of web
site development and design. The company recognized an impairment charge of
approximately $5.1 million in connection with the adoption of SFAS No. 142 for
reporting units 1 and 3. The impairment charge has been booked by the Company in
accordance with SFAS No. 142 transition provisions as a cumulative effect of a
change in accounting principle for the year ended June 30, 2003. In connection
with the sale of the Northeast Operations (See Note 3), the only remaining
reporting unit consists of telemarketing. The remaining Goodwill relating to the
Northeast Operations of approximately $8.1 million was included in loss from
discontinued operations for the year ended June 30, 2003. At June 30, 2002,
approximately $13.2 million of goodwill was included in net assets of
discontinued operations.
Prior to the adoption of SFAS 142 on July 1, 2002, the Company amortized
goodwill over its estimated useful life and evaluated goodwill for impairment in
conjunction with its other long-lived assets.
Other Intangible Assets:
Other intangible assets consist of capitalized software, which is being
amortized under the straight-line method over 5 years. The Company records
impairment losses on other intangible assets when events and circumstances
indicate that such assets might be impaired and the estimated fair value of the
asset is less than its recorded amount in accordance with SFAS No 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The Company
reviews the value of its long-lived assets for impairment whenever events or
changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable or that the useful lives of these assets are
no longer appropriate. Conditions that would necessitate an impairment
assessment include material adverse changes in operations, significant adverse
differences in actual results in comparison with initial valuation forecasts
prepared at the time of acquisition, a decision to abandon certain acquired
products, services or marketplaces, or other significant adverse changes that
would indicate the carrying amount of the recorded asset might not be
recoverable.
Long-Lived Assets:
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company reviews for impairment of long-lived assets and
certain identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
general, the Company will recognize an impairment when the sum of undiscounted
future cash flows (without interest charges) is less than the carrying amount of
such assets. The measurement for such impairment loss is based on the fair value
of the asset.
Revenue Recognition:
The Company accounts for revenue recognition in accordance with Staff Accounting
Bulletin No. 101, ("SAB 101"), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements, and Emerging
Issues Task Force ("EITF") Issue No. 99-19 "Reporting Revenue Gross as a
Principal vs. Net as an Agent" which provides guidance on the recognition of
revenue gross as a principal versus net as an agent.
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
42
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.
Income Taxes:
The Company recognizes deferred taxes for differences between the financial
statement and tax bases of assets and liabilities at currently enacted statutory
tax rates and laws for the years in which the differences are expected to
reverse. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
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. 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.
Actual results could differ from those estimates.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of temporary cash investments and trade
receivables. A significant portion of cash balances is maintained with one
financial institution and may, at time, exceed federally insurable amounts.
Collateral is generally not required on trade accounts receivable. Credit risk
on trade receivables is minimized as a result of the large and diverse nature of
the Company's customer base.
Earnings (Loss) Per Share:
On January 22, 2003, the Board of Directors approved an eight-for-one reverse
split of the common stock. The stock split was effective January 27, 2003. Par
value of the common stock remained $.01 per share and the number of authorized
shares of common stock was reduced to 9,375,000 shares. The effect of the stock
split has been reflected in the balance sheets and statements of stockholders'
equity and in all share and per share data in the accompanying consolidated
financial statements and Notes to Financial Statements. Stockholders' equity
accounts have been retroactively adjusted to reflect the reclassification of an
amount equal to the par value of the decrease in issued common shares from
common stock account to paid-in-capital.
In accordance with SFAS No. 128, "Earnings Per Share," basic earnings per share
is calculated based on the weighted average number of shares of common stock
outstanding during the reporting period. Diluted earnings per share gives effect
to all potentially dilutive common shares that were outstanding during the
reporting period. Stock options and warrants with exercise prices below average
market price in the amount of 22,776, 222,292 and 10,079 shares for the years
ended June 30, 2003, 2002 and 2001, respectively, were not included in the
computation of diluted earnings per share as they are antidilutive as a result
of net losses during the periods presented.
Convertible preferred stock in the amount of 1,584,661 shares for the year ended
June 30, 2002 were not included in the computation of diluted earnings per share
as they were antidilutive as a result of net losses during the periods
presented. Contingent warrants in the amount of 222,292 shares, as well as,
convertible preferred stock in the amount of 306,373 shares for the year ended
June 30, 2001, were not included in the computation of diluted earnings per
share
43
as they were antidilutive as a result of net losses during the periods
presented.
Change in Accounting:
In September 2000, the FASB Emerging Issues Task Force issued EITF 00-27
"Application of EITF 98-5 to Certain Convertible Instruments." EITF 00-27
addresses the accounting for convertible preferred stock issued since May 1999
that contain non-detachable conversion options that are in the money at the
commitment date. EITF 00-27 changed the approach of calculating the conversion
price used in determining the value of the beneficial conversion feature from
using the conversion price stated in the preferred stock certificate to using
the accounting conversion price. The adoption of this EITF increased the
original value of the beneficial conversion feature from zero to $14.1 million.
MKTG adopted EITF 00-27 in December 2000 and as a result has recorded a
cumulative effect of a change in accounting of approximately $14.1 million in
the year ended June 30, 2001 related to the March 2000 issuance of the Series E
Convertible Preferred Stock. The cumulative effect has been recorded to
additional paid-in capital and treated as a deemed dividend in the calculation
of net loss attributable to common stockholders.
Employee Stock-Based Compensation:
The accompanying financial position and results of operations for the Company
have been prepared in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"). Under APB No. 25, generally, no
compensation expense is recognized in the financial statements in connection
with the awarding of stock option grants to employees provided that, as of the
grant date, the number of shares and the exercise price of the award are fixed
and the fair value of the Company's stock, as of the grant date, is equal to or
less than the amount an employee must pay to acquire the stock.
The Company has elected the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). Stock based awards to
non-employees are accounted for under the provisions of SFAS 123.
Had the Company determined compensation cost based on the fair value methodology
of SFAS 123 at the grant date for its stock options, the Company's loss and
earnings per share from continuing operations would have been adjusted to the
pro forma amounts indicated below:
44
Years ended June 30,
--------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Net income (loss) available to common
stockholders as reported .................... $ 11,355,982 $ (66,095,771) $ (66,492,466)
Stock based-compensation recorded ............. -- --
-------------- -------------- --------------
Subtotal ...................................... 11,355,982 (66,095,771) (66,492,466)
Stock-based compensation recorded under
SFAS 123 .................................... 910,753 4,721,019 8,660,172
Proforma net income (loss) available ---------- ---------- ----------
to common stockholders ....................... $ 10,445,229 $ (70,816,790) $ (75,152,638)
============== ============== ===============
Earnings (loss) per share:
Basic earnings (loss) per share - as reported . $ 11.62 $ (86.47) $ (100.00)
============= ============= =============
Basic earnings (loss) per share - pro forma ... $ 10.69 $ (92.65) $ (113.02)
============= ============= =============
Diluted earnings (loss) per share - as reported $ 9.90 $ (86.47) $ (100.00)
============= ============= =============
Diluted earning (loss) per share - pro forma .. $ 9.11 $ (92.65) $ (113.02)
============= ============= =============
Pro forma net loss reflects only options granted in fiscal 1996 through 2003.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' maximum vesting
period of seven years and compensation cost for options granted prior to July 1,
1995, has not been considered. The fair value of each stock option is estimated
on the date of grant using the Black-Scholes option pricing model. The following
assumptions were used for grants for fiscal years ended June 30, 2003, 2002 and
2001 as follows:
Risk -free interest rate 5.9% to 6.2 %
Expected option life Vesting life+two years
Dividend yield None
Volatility 103%
Comprehensive Income:
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") establishes
standards for the reporting and display of comprehensive income and its
components. The Company has no items of other comprehensive income in any period
presented.
Summary of Recent Accounting Pronouncements:
Effective July 1, 2002, the Company adopted the provisions of SFAS No.
141,"Business Combinations," in its entirety 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. SFAS No. 142
eliminates the 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 a transitional impairment test of its existing goodwill based on a fair
value concept as of the date of adoption (see Note 8).
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
45
goodwill is its new accounting basis.
Effective July 1, 2002, the Company adopted 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 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
Company reviews for impairment of long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In general, the Company will
recognize an impairment when the sum of undiscounted future cash flows (without
interest charges) is less than the carrying amount of such assets. The
measurement for such impairment loss is based on the fair value of the asset.
SFAS No. 144 supersedes the accounting and reporting provisions of APB Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", for segments of a business to be disposed
of. However, this Statement retains the requirement of APB Opinion 30 to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held for sale. 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 and included in loss from discontinued operation 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 adoption of such pronouncement did not have a material impact on
the Company's financial position and results of operations.
In November 2002, the FASB issued FIN 45, 'Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Other,' an interpretation of FASB Statements No. 5, 57, and 107 and Rescission
of FASB Interpretation No. 34. FIN 45 elaborates on the existing disclosure
requirements of guarantees and obligations to stand ready to perform over the
term of the guarantee in the event that specified triggering events or
conditions occur and the identification of those contingent obligations to make
future payments if those triggering events or conditions occur. Additional
disclosures have been added to Commitments and Contingencies footnote describing
the nature of the guarantee; amount and event triggering the Company's
obligation under the guarantee and the Company's recourse to recover in such an
event. Management does not believe that this pronouncement will have a material
impact on its financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB No. 123." SFAS
No. 148 amends SFAS No. 123, "Accounting for Stock-Based
46
Compensation," 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 the reported results. SFAS No.
148 is effective for fiscal years and interim periods beginning after December
15, 2002. The Company continues to account for stock-based employee compensation
under the intrinsic value method of APB 25, "Accounting for Stock Issued to
Employees." The Company has adopted the disclosure provisions of SFAS No. 148
within this report.
In January 2003, the FASB issued FIN 46, 'Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51.' FIN 46 requires an investor to
consolidate a variable interest entirety if it is determined that the investor
is a primary beneficiary of that entity, subject to the criteria set forth in
FIN 46. Assets, liabilities, and non controlling interests of newly consolidated
variable interest entities will be initially measured at fair value. After
initial measurement, the consolidated variable interest entity will be accounted
for under the guidance provided by Accounting Research Bulletin No. 51,
'Consolidated Financial Statements.' FIN 46 is effective for variable interest
entities created or entered into after January 2003. For variable interest
entities created or acquired before February 1, 2003, FIN 46 applies in the
first fiscal year or interim period beginning after June 15, 2003. Management
does not believe that this pronouncement will have a material impact on its
financial statements.
On April 30, 2003, the FASB issued SFAS 149, Amendment of SFAS 33 on Derivative
Instruments and Hedging Activities. Statement 149 is intended to result in more
consistent reporting of contracts as either freestanding derivative instruments
subject to SFAS 133 in its entirety, or as hybrid instruments with debt host
contracts and embedded derivative features. In addition, SFAS 149 clarifies the
definition of a derivative by providing guidance on the meaning of initial net
investments related to derivatives. SFAS 149 is effective for contracts entered
into or modified after June 30, 2003. The Company does not expect that the
adoption of SFAS 149 will have an impact on its financial position, results of
operations or cash flows.
On May 15, 2003, the FASB issued SFAS No. 150, Accounting for "Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS 150 represents a
significant change in practice in the accounting for a number of financial
instruments, including mandatory redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003. The Company has not entered into or modified any
financial instruments subsequent to May 31, 2003. There was no impact from the
adoption of this statement.
Fair Value of Financial Instruments:
The carrying amounts of the Company's financial instruments, including cash,
accounts receivable, accounts payable and accrued liabilities, approximate fair
value because of their short maturities. The carrying amount of the Company's
lines of credit and long-term debt approximates the fair value of such
instruments based upon management's best estimate of interest rates that would
be available to the Company for similar debt obligations at June 30, 2003, 2002
and 2001.
Reclassifications:
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year's presentation.
3. DISCONTINUED OPERATIONS
47
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 in cash, net of a working capital adjustment.
In December 2002, the Company completed the sale of substantially all of the
assets relating to its direct list sales and database services and website
development and design business held by certain of its wholly owned subsidiaries
(the 'Northeast Operations') to Automation Research, Inc. ('ARI'), a wholly
owned subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash
plus the assumption of all directly related liabilities. As such, the operations
and cash flows of the Northeast Operations have been eliminated from ongoing
operations and the Company no longer has continuing involvement in the
operations. Accordingly, the statement of operations and cash flows for the
years ending June 30, 2003, 2002 and 2001 have been reclassed into a one-line
presentation and is included in Loss from Discontinued Operations and Net Cash
Used by Discontinued Operations. In addition, the assets and liabilities of the
Northeast Operations have been segregated and presented in Net Assets of
Discontinued Operations and Net Liabilities of Discontinued Operations as of
June 30, 2002.
In connection with the sale of the Northeast Operations, the Company recognized
a loss on disposal of discontinued operations of approximately $.2 million in
the year ended June 30, 2003. The loss represents the difference in the net book
value of assets and liabilities as of the date of the sale as compared to the
net consideration received after settlement of purchase price adjustments plus
any additional expenses incurred. There was no tax impact on this loss.
On July 31, 2001, the Company completed the sale of all the outstanding capital
stock of its Grizzard subsidiary to Omnicom Group, Inc. As a result of the sale
agreement, the Company repaid a term loan of $35.5 million and a $12.0 million
line of credit. The Company recorded a loss of approximately $4.9 million for
the year ended June 30, 2002 as a result of the early extinguishment of debt
which is included in the loss from discontinued operations. For the year ended
June 30, 2002, the Company recognized a gain on sale of Grizzard in the amount
of approximately $1.8 million which is included in the statement of operations
in Gain from Disposal of Discontinued Operations. The gain represents the
difference in the net book value of assets and liabilities as of the date of the
sale as compared to the net consideration received after settlement of purchase
price adjustments. The statement of operations and cash flows for the years
ended June 30, 2002 and 2001 have been reclassified into a one-line presentation
and is included in Loss from Discontinued Operations and Net Cash Used by
Discontinued Operations.
In January 2001, the Company sold certain assets of WiredEmpire for $1.3
million, consisting of $1.0 million in cash and $.3 million held in escrow,
which was paid in May 2001. This transaction resulted in a gain on sale of
assets of $1.3 million which is included in the statement of operations in Gain
from disposal of discontinued operations. The statement of operations and cash
flows for the year ended June 30, 2001 have been reclassified into a one-line
presentation and is included in Loss from Discontinued Operations and Net Cash
Used by Discontinued Operations.
On September 21, 2000, the Company's Board of Directors approved a plan to
discontinue the operation of its WiredEmpire subsidiary. The Company shut down
the operations by the end of January 2001. The estimated losses associated with
WiredEmpire were approximately $34.5 million. These losses for WiredEmpire
included approximately $19.5 million in losses from operations through the
measurement date and approximately $15.0 million of loss on disposal.
In September 2000, the Company offered to exchange the WiredEmpire preferred
shares for MKTG common shares. During the fiscal year end June 30, 2001, the
Company exchanged 41,042 shares of unregistered MKTG common stock for
WiredEmpire preferred stock. The exchange resulted in a gain of $13,410,273,
which was recorded through equity and is included in net loss attributable to
common stockholders and earnings per share - discontinued operations for the
year ended June 30, 2001. As of June 30, 2003 and 2002, 48,000 shares of
WiredEmpire preferred stock have not been exchanged and this is reported as
minority interest in preferred stock of discontinued subsidiary as $280,946 each
year.
Revenue recognized for the years ended June 30, 2003, 2002 and 2001 relating to
the discontinued operations, which is included in Loss from Discontinued
Operations, was approximately $7.6 million, $22.9 million and $110.8 million,
respectively. In connection with the disposal of the discontinued operations,
the Company no longer provides services
48
for the list sales and services, database marketing, website development design
and marketing communication services product lines.
The major components of net assets of discontinued operations and net
liabilities of discontinued operations at June 30, 2002 were as follows:
Assets: Liabilities:
Accounts receivable, net $ 15,833,906 Accounts payable $ 16,479,365
Other current assets 845,711 Accrued liabilities 852,472
Property, plant & equipment, net 2,352,458 Capital Leases 114,577
Goodwill and intangible assets, net 13,757,912 Other liabilities 1,161,951
------------
Cash overdrafts (607,468) Total liabilities $ 18,608,365
Other assets 539,725 ============
------------
Total assets $ 32,722,244
============
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of trade receivables, which represent sales made to
customers for which short-term credit extensions are granted, which generally
are not extended beyond 90 days. As of June 30, 2003 and 2002, the allowance for
doubtful accounts for accounts receivables was approximately $120,000 and
$94,000, respectively.
5. OTHER CURRENT ASSETS
Other current assets as of June 30, 2003 and 2002 consist of the following:
2003 2002
-------- --------
Prepaid insurance $191,294 $ 49,080
Prepaid legal 130,951 136,745
Other 152,919 260,631
-------- --------
Total $475,164 $446,456
======== ========
6. INTERNET INVESTMENTS
During the fiscal year ended June 30, 2000, the Company acquired investments of
approximately $7.6 million in certain internet companies. The Company has taken
charges of approximately $7.6 million for unrealized losses on Internet
investments made during the fiscal year ended June 30, 2001, based on all
available information. The Company believes such losses are a result of
significant changes in valuations of Internet stocks and the performance of
those companies. The Company has suspended its Internet investment strategy and
will focus all efforts on the profitability of its core direct marketing
operations. There are no remaining internet investments recorded on the balance
sheets as of June 30, 2003 and 2002.
7. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at June 30, 2003 and 2002 consist of the
following:
49
2003 2002
----------- -----------
Office furniture and equipment $ 1,279,237 $ 1,236,133
Leasehold improvements 735,891 734,174
----------- -----------
2,015,128 1,970,307
Less accumulated depreciation and
amortization (1,267,598) (1,063,220)
----------- -----------
$ 747,530 $ 907,087
=========== ===========
8. GOODWILL AND OTHER INTANGIBLE ASSETS:
In 2002 the Company recorded a goodwill impairment charge of $35.9 million.
$29.4 million has been reclassified to discontinued operation.
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
of five years. The Company recharacterized acquired workforce of approximately
$51,000 which is no longer defined as an intangible asset under SFAS No. 141. In
addition, the Company recharacterized non-contractual customer relationships of
approximately $.8 million which do not meet the separability criterion under
SFAS No. 141.
The Company completed the transition requirements under SFAS No. 142. The
Company determined that it had three reporting units. Reporting unit 1
represents the operations of list sales and services and database marketing.
Reporting unit 2 represents the operations of telemarketing. Reporting unit 3
represents the operations of web site development and design. There is no
impairment for reporting unit 2. The Company recognized an impairment charge of
approximately $5.1 million in connection with the adoption of SFAS No. 142 for
reporting units 1 and 3. The impairment charge has been booked by the Company in
accordance with SFAS 142 transition provisions as a cumulative effect of change
in accounting principle for the year ended June 30, 2003. In connection with the
sale of the Northeast Operations (See Note 3), the only remaining reporting unit
consists of telemarketing.
The following table sets forth the components of goodwill, net as of June 30,
2003:
Impairment Sale of
July 1, 2002 Losses reporting Unit June 30, 2003
------------ ------------ -------------- ------------
Reporting unit -1 $12,939,561 $ (4,774,056) $ (8,165,505) $ --
Reporting unit -2 2,277,220 -- -- 2,277,220
Reporting unit -3 300,944 (300,944) -- --
------------ ------------ ------------ -----------
$ 15,517,725 $ (5,075,000) $ (8,165,505) $ 2,277,220
============ ============ ============= ============
Reporting unit - 1 represents list sales and services and database marketing
Reporting unit - 2 represents telemarketing
Reporting unit - 3 represents website development and design
The following table sets forth the components of the intangible assets subject
to amortization as of June 30, 2003 and June 30, 2002:
June 30, 2003 June 30, 2002
----------------------------------------------- -----------------------------------
Gross Gross
carrying Accumulated carrying Accumulated
Useful life amount amortization Net amount amortization Net
50
-------- -------- ---------- ------ -------- ------- -------
Capitalized software 5 years $100,000 $80,000 $20,000 $100,000 $60,000 $40,000
======== ======== ========== ======= ======== ======= =======
Amortization expense for the years ended June 30, 2003 and 2002 was
approximately $20,000 each year, respectively.
Estimated amortization expense by fiscal year as of June 30, are as follows:
2004 $ 20,000
--------
$ 20,000
========
The following table provides a reconciliation of net income (loss) available for
stockholders for exclusion of goodwill amortization:
For the years ended June 30,
2003 2002 2001
---- ---- ----
Reported net income (loss) attributable
to Common stockholders $ 11,355,982 $ (66,095,771) $ (66,492,466)
Add: Goodwill amortization -- 175,210 198,476
Adjusted net income (loss) attributable ----------------------------------------------------
to Common stockholders $ 11,355,982 $ (65,920,561) $ (66,293,990)
===================================================
Basic earnings (loss) per share:
Reported net income (loss) attributable
to Common stockholders $ 11.62 $ (86.47) $ (100.00)
Add: Goodwill amortization -- .23 .30
---------------------------------------------------
Adjusted net income (loss) attributable
to Common stockholders $ 11.62 $ (86.24)$ (99.70)
===================================================
Diluted earnings (loss) per share:
Reported net income (loss) attributable
to Common stockholders $ 9.90 $ (86.47)$ (100.00)
Add: Goodwill amortization -- .23 .30
------------------------------------------------------
Adjusted net income (loss) attributable
to Common stockholders $ 9.90 $ (86.24)$ (99.70)
======================================================
51
9. SHORT TERM BORROWINGS:
The Company has a renewable two-year credit facility with a lender for lines of
credit with a maximum availability of $2,000,000, collateralized by accounts
receivable and other certain tangible assets of the Company. Borrowings are
limited to the lesser of the maximum availability or 80% of eligible
receivables. Interest is payable monthly at the Chase Manhattan prime rate plus
1 1/2%, but no less than 6%, with a minimum annual interest requirement of
$50,000. The facility requires an annual fee of 1% of the maximum available line
and has tangible net worth and working capital covenants. As of June 30, 2003,
there was an aggregate of approximately $1.1 million available under this line
of credit.
The prime rate was 4.25% and 4.75% at June 30, 2003 and 2002, respectively.
10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses as of June 30, 2003 and 2002 consist of the following:
2003 2002
---------- ----------
Salaries and benefits $ 413,459 $1,702,172
Due to Firstream -- 893,459
Abandoned lease reserves 441,468 1,112,392
Accrued Legal 764,292 832,519
Accrued audit 116,321 253,684
Other 141,529 213,414
---------- ----------
Total $1,877,069 $5,007,640
========== ==========
11. OTHER LIABILITIES
Other liabilities as of June 30, 2003 and 2002 consist of the following:
2003 2002
---------- ----------
Abandoned lease reserves $1,443,835 $6,302,501
Other 19,297 19,297
---------- ----------
Total $1,463,132 $6,321,798
========== ==========
12. RELATED PARTY TRANSACTIONS:
On December 31, 2001, the Company advanced $1,000,000 pursuant to a promissory
note receivable agreement with an officer due and payable to the Company at
maturity, October 15, 2006. The Company recorded the note receivable at a
discount of approximately $57,955 to reflect the incremental borrowing rate of
the officer and is being amortized as interest income over the term of the note
using the straight-line method. The note receivable is collateralized by current
and future holdings of MKTG common stock owned by the officer and bears interest
at prime. Interest is due and payable yearly on October 15th. The Company
recognized interest income of $56,075 and $36,488 for the years ended June 30,
2003 and 2002. As of June 30, 2003, the interest due on October 15, 2002 of
approximately $55,000 is in arrears. The note will be forgiven in the event of a
change in control.
During the year-ended June 30, 2001, the Company entered into a promissory note
payable agreement with an officer for up to $1,000,000, due and payable at
maturity, January 1, 2002. The promissory note bore interest at 15% per annum
and included certain prepayment penalties. During the year ended June 30, 2001,
the Company received advances of $900,000 and made repayments of $650,000. As of
June 30, 2001, there was approximately $250,000 of principal outstanding and
$150,000 of accrued interest and penalties, which was included in related party
payable. The remaining $250,000 was paid in the year ended June 30, 2002.
The Company repaid $5 million to GE Capital, a shareholder, in connection with
the 1999 promissory note.
52
A former member of the Board of Directors is a partner in a law firm which
provides legal services for which the Company incurred expenses aggregating
approximately $476,806, $921,901, and $1,014,524 for the years ended June 30,
2003, 2002 and 2001, respectively.
13. LONG TERM OBLIGATIONS:
Long-term obligations as of June 30, 2003 and 2002 consist of the following:
2003 2002
----------- -----------
Promissory notes payable - maturity
January 2004 (a) $ 201,062 $ 465,594
Hold back provision for
Grizzard acquisition (b) -- 4,548,063
-----------
Total long-term obligations 201,062 5,013,657
Less: Current portion of long-term obligations (201,062) (4,837,321)
Discount on notes payable to bank -- --
----------- -----------
Long-term obligations, net of current portion $ -- $ 176,336
=========== ===========
(a) In connection with an acquisition, the Company incurred
promissory notes payable to a former shareholder, payable
monthly at 5.59% interest per year through January 2004.
(b) In August 2001, the Company entered into a stand-by letter of
credit with a bank in the amount of approximately $4.9 million
to support the remaining obligations under a certain holdback
agreement with the former shareholders of Grizzard
Communications Group, Inc. ("Grizzard"). The letter of credit
was collateralized by cash, which had been classified as
restricted cash in the current asset section of the balance
sheet as of June 30, 2002. . In January 2003, the Company
entered into an agreement and settled the outstanding amount
owed to the former Grizzard shareholders in connection with
such agreement. The Company paid approximately $4.6 million
and utilized its restricted cash. Approximately $.3 million of
restricted cash became available for general corporate use.
Accordingly, the stand-by letter of credit was terminated
14. COMMITMENTS AND CONTINGENCIES:
Operating 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.
53
Future minimum rental commitments under all non-cancelable leases, net of
non-cancelable subleases, as of June 30, 2003 are as follows:
Less:
Rent Expense Sublease Income Net Rent Expense
------------ -------------- ----------------
2004 $ 879,600 $ (79,200) $ 800,400
2005 640,800 (45,300) 595,500
2006 439,700 -- 439,700
2007 439,700 -- 439,700
2008 323,200 -- 323,200
Thereafter 520,000 -- 520,000
----------- ----------- -----------
$ 3,243,000 $ (124,500) $ 3,118,500
Rent expense was approximately $277,118, $1,339,473 and $934,757 for fiscal
years ended June 30, 2003, 2002 and 2001, respectively.
In fiscal year 2002, the Company incurred an estimated loss in connection with
the abandonment of certain leased office space of $ 6,400,000 which is recorded
in accrued expenses and other current liabilities and other liabilities. (see
Notes 10 and 11).
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 for 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 Marketing Services
Group, 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. In January 2003, a
lawsuit was filed in Alabama, Circuit Court for Jefferson County by certain
plaintiffs involved in the Agreement. The action was filed against J. Jeremy
Barbera, Chairman of the Board and Chief Executive Officer of MKTG, MKTG and
WiredEmpire, Inc. This lawsuit was settled during fiscal 2003 and was fully
covered by the Company's insurance.
54
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. The net settlement has been recorded as a gain
from settlement of lawsuit and is included in the statement of operations for
the year ended June 30, 2003.
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).
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 $2.0 million in net tangible assets or $2.5 million in stockholders' equity
or a market value of listed securities of $35.0 million or $.5 million of net
income from continuing operations for the most recently completed fiscal year or
two of the three most recently completed fiscal years. In December 2002, the
Company received notification from Nasdaq indicating that the Company was
subject to delisting. The Company has responded to Nasdaq with its plan and
believed that it could achieve compliance with Marketplace Rule 4310(c)(2)(B) by
achieving minimum stockholders' equity of $2.5 million. In addition, in January
2003, the Company affected an eight-for-one reverse stock split (See Note 2). In
February 2003, the Company received notification from Nasdaq that the Company's
was not in compliance with the Nasdaq's market value of publicly held shares
requirements, as set forth in Nasdaq Marketplace Rule 4310(c)(07). The Company
believed that the issuance of common shares for the redemption of its preferred
stock (See Note 15) has brought the Company back into compliance with the
minimum public float requirement. The Company appealed the Staff's decision to
delist the Company to a Nasdaq Listing Qualification Panel. The hearing was held
on February 13, 2003. On March 5, 2003, a Nasdaq Listing Qualifications Panel
determined to continue the listing of the Company's securities on the Nasdaq
SmallCap Market on the condition, among other things, that the Company make a
public filing with the Securities and Exchange Commission and Nasdaq evidencing
shareholders' equity of at least $2.5 million and further that the Company file
its quarterly report on Form 10-Q for the March 31, 2003 quarter on or before
May 15, 2003. On March 13, 2003, the Company filed an unaudited balance sheet as
of January 31, 2003 evidencing shareholders' equity of at least $2.5 million. On
May 22, 2003, the Company received notification from Nasdaq that the Company
satisfactorily demonstrated compliance and, accordingly, the Nasdaq Listing
Qualifications Panel determined to continue the listing of the Company's
securities on The Nasdaq SmallCap Market and to close the hearing file. At June
30, 2003, shareholders' equity was approximately $3.2 million.
An employee of Metro Fulfillment, Inc. ("MFI"), which, until March 1999, was a
subsidiary of the Company, filed a complaint in the Superior Court of the State
of California for the County of Los Angeles, Central District, against MKTG and
current and former officers of MKTG. The complaint sought compensatory and
punitive damages of $10,000,000 in connection with the individual's employment
at MFI. In March 2001, although admitting no liability, the Company entered into
a settlement agreement. The total cost of the settlement, recorded as of March
31, 2001, was $1,297,970 which included cash payments aggregating $225,000,
forgiveness of a note receivable over eight years and related interest of
$931,787 and the issuance of 2,083 shares of the Company's unregistered common
stock valued at $141,183.
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.
55
15. PREFERRED STOCK:
In January 2003, the Company redeemed the outstanding shares of the preferred
stock for a cash payment of approximately $6.0 million and the issuance of
181,302 shares of common stock valued at approximately $.2 million. The carrying
value of the preferred stock was approximately $20.2 million which included a
beneficial conversion feature of approximately $10.3 million. The transaction
resulted in a gain on redemption of approximately $14.0 million and is reflected
in net income attributable to common stockholders for the year ended June 30,
2003.
On October 2, 2002, the common stockholders ratified the issuance of the Series
E preferred stock and approved the stockholders right to convert such preferred
stock to common stock beyond the previous 19.99% limitation. Subsequently, the
preferred shareholders converted 149 shares of Series E preferred stock into
79,767 shares of common stock.
The preferred shareholders converted 225 shares of preferred stock to 112,983
shares of common stock for the year ended June 30, 2002.
On February 19, 2002, the Company entered into standstill agreements, as
amended, with the Series E preferred shareholders in order for the Company to
continue to discuss with multiple parties regarding the possibility of either
restructuring or refinancing the remainder of the preferred stock. The Company's
commitments as a result of the standstill agreements included a partial
redemption of 625 of the Series E preferred shares for $5,000,000, thereby
reducing the number of Series E preferred shares to 2,900 at June 30, 2002. The
value of the preferred stock was initially recorded at a discount allocating a
portion of the proceeds to a warrant. The redemption of such preferred shares
for $5,000,000, less the carrying value of the preferred shares, including the
beneficial conversion feature previously recorded to equity on the balance
sheet, resulted in a deemed dividend of $412,634 which was recorded to
additional paid-in and included in the calculation of net loss attributable to
common stockholders for the year ended June 30, 2002. The Company recognized a
loss on the redemption of preferred stock of approximately $.4 million reflected
in net loss attributable to common stockholders. The loss is the result of the
difference between the consideration paid for redemption of the preferred stock
for $5.0 million cash and the carrying value of the preferred stock of $4.6
million which included a beneficial conversion feature of approximately $2.4
million.
On February 24, 2000 the Company entered into a private placement with RGC
International Investors LDC and Marshall Capital Management, Inc., an affiliate
of Credit Suisse First Boston, in which the Company sold an aggregate of 3,750
shares of Series E Convertible Preferred Stock, par value $.01 ("Series E
Preferred Stock"), and warrants to acquire 30,648 shares of common stock for
proceeds of approximately $29.5 million, net of approximately $520,000 of
placement fees and expenses. The preferred stock was convertible into cash or
shares of common stock on February 18, 2004 at the option of the Company. The
preferred stock provided for liquidation preference under certain circumstances
and accordingly had been classified in the mezzanine section of the balance
sheet. The preferred stock had no dividend requirements.
After adjustment for the reverse stock split, the Series E Preferred Stock was
convertible at any time at $1,174.70 per share, subject to reset on August 18,
2000 if the market price of the Company's common stock was lower and subject to
certain anti-dilution adjustments. On August 18, 2000, the conversion price was
reset to $587.52 per share, the market price on that date as adjusted for the
reverse stock split. As a result of the issuance of a certain warrant, certain
antidilultive provisions of the Company's Series E preferred stock were
triggered. The conversion price of such shares was reset to a fixed price of
$18.768 based on an amount equal to the average closing bid price of the
Company's common stock for ten consecutive trading days beginning on the first
trading day of the exercise period of the aforementioned warrant. No further
adjustments will be made to the conversion price other than for stock splits,
stock dividends or other organic changes. The warrant was exercisable for a
period of two years at an exercise price of $1,370.448, subject to certain
anti-dilution adjustments. The fair value of the warrant of $15,936,103, as
determined by the Black Scholes option pricing model, was recorded as additional
paid in capital and a corresponding decrease
56
to preferred stock . The warrant expired in February 2002.
16. COMMON STOCK, STOCK OPTIONS, AND WARRANTS:
Common Stock: 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 31,250 restricted shares of
common stock, plus a two-year warrant for 8,333 shares priced at $144.00 per
share. The warrants were exercisable over a two year period. The warrants were
valued at $.9 million as determined by the Black-Scholes option pricing model
and were recorded to equity. In accordance with the Agreement, the Company
recorded proceeds of $1.8 million; net of fees and expenses, to equity and $1.0
million was designated as deferred revenue to provide for new initiatives. The
remaining balance was $.8 million as of 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. The Company settled with Firstream during
fiscal year 2003 for approximately $.2 million and the remaining liability was
sold as part of the Northeast operations sale. There was no remaining liability
at June 30, 2003.
Related to the issuance of Firstream common shares, a warrant was issued to
purchase 6,250 common shares for broker fee compensation. The warrant was
exercisable over a two-year period. The warrant was valued at $.3 million as
determined by the Black-Scholes option pricing model.
During the year ended June 30, 2001, the Company exchanged 41,042 shares of
unregistered MKTG common stock for WiredEmpire preferred stock. The exchange
resulted in a gain of $13,410,273, which was recorded through equity and is
included in net loss attributable to common stockholders and earnings per share
- - discontinued operations for the year ended June 30, 2001.
In March 2001, the Company entered into a settlement agreement with an employee
of Metro Fulfillment, Inc. ("MFI"), which, until March 1999, was a subsidiary of
the Company. The complaint sought compensatory and punitive damages of
$10,000,000 in connection with the individual's employment at MFI. The Company
admitted no liability. The total cost of the settlement was $1,297,970 which
included cash payments aggregating $225,000, foregiveness of a note receivable
over eight years and related interest of $931,787 and the issuance of 2,083
shares of unregistered MKTG common shares valued at $141,183.
In October 2000, the Company amended the earn-out provision of the purchase
agreement of Stevens Knox and Associates, Inc. In October 2000, the Company
issued 2,756 of unregistered MKTG common shares valued at $250,096 and in
February 2002 the Company issued 15,739 of unregistered MKTG common shares
valued at $300,000. The $550,096 earn-out settlement was considered an addition
to the purchase price and goodwill in the year ended June 30, 2001.
Stock Options: The Company maintains a non-qualified stock option plan (the
"1991 Plan") for key employees, officers, directors and consultants to purchase
65,625 shares of common stock. The Company also maintains a qualified stock
option plan (the "1999 Plan") for the issuance of up to an additional 62,500
shares of common stock under qualified and non-qualified stock options. Both
plans are administered by the compensation committee of the Board of Directors
which has the authority to determine which officers and key employees of the
Company will be granted options, the option price and vesting of the options. In
no event shall an option expire more than ten years after the date of grant.
The following summarizes the stock option transactions under the 1991 Plan for
the three years ended June 30, 2003:
57
Number Option Price
of Shares Per Share
-------- ------------
Outstanding at July 01, 2000 26,644
======
Granted -
Exercised (52) $120.00 to $149.28
Cancelled (3,337) $96.00 to $249.12
-------
Outstanding at June 30, 2001 23,255
======
Granted -
Exercised -
Cancelled (2,989) $96.00 to $240.00
-------
Outstanding at June 30, 2002 20,266
======
Granted -
Exercised -
Cancelled (7,570) $96.00 to $149.28
-------
Outstanding at June 30, 2003 12,696
======
The following summarizes the stock option transactions under the 1999 Plan for
the three years ended June 30, 2003:
Number Option Price
of Shares Per Share
-------- -----------
Outstanding at July 01, 2000 52,626
======
Granted 4,896 $171.024 to $213.00
Exercised (5) $73.92
Cancelled (3,601) $73.92 to $723.024
--------
Outstanding at June 30, 2001 53,916
=======
Granted -
Exercised -
Cancelled (19,785) $73.92 to $726.00
--------
Outstanding at June 30, 2002 34,131
=======
Granted -
Exercised -
Cancelled (27,770) $213.00 to $558.00
-------
Outstanding at June 30, 2003 6,361
=======
In addition to the 1991 and 1999 Plans, the Company has option agreements with
current and former officers and employees of the Company. The following
summarizes transactions for the three years ended June 30, 2003:
58
Number Option Price
of Shares Per Share
---------
Outstanding at July 01, 2000 31,983
======
Granted 14,583 $213.00 to $216.00
Exercised -
Cancelled (5,208) $846.00
------
Outstanding at June 30, 2001 41,358
======
Granted -
Exercised -
Cancelled (4,688) $213.00
-------
Outstanding at June 30, 2002 36,670
======
Granted -
Exercised -
Cancelled (33,336) $248.16
-------
Outstanding at June 30, 2003 3,334
=======
As of June 30, 2003, 22,391 options are exercisable. The weighted average
exercise price of all outstanding options is $213.70 and the weighted average
remaining contractual life is 2.26 years. At June 30, 2003, 381,150 options were
available for grant.
As of June 30, 2003, the Company has 228,887 warrants outstanding to purchase
shares of common stock at prices ranging from $0.48 to $48.00. All outstanding
warrants are currently exercisable.
17. INCOME TAXES: As of June 30,
--------------
2003 2002
------------ ------------
Deferred tax assets:
Net operating loss carryforwards:
Continuing operations $ 60,394,005 $ 48,645,647
Abandoned lease reserves 675,587 3,012,350
Compensation on option grants 897,029 1,232,941
Amortization of intangibles 200,077 10,104,829
Accrued settlement costs 346,048
Other 309,756 272,468
------------ ------------
Total deferred tax assets 62,822,502 63,268,235
Valuation allowance (62,822,502) (63,268,235)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
The difference between the Company's U.S. federal statutory rate of 35%, as well
as its state and local rate net of federal benefit of 5%, when compared to the
effective rate is principally comprised of the valuation allowance and other
permanent disallowable items.
The Company has a U.S. federal net operating loss carry forward of approximately
$170,000,000 available which expires from 2011 through 2022. Of these net
operating loss carry forwards approximately $61,400,000 is the result of
deductions related to the exercise of non-qualified stock options. The
realization of these net operating loss carry forwards would result in a credit
to equity. These loss carry forwards are subject to annual limitations. The
Company has recognized a full valuation allowance against deferred tax assets
because it is more likely than not that sufficient taxable income will not be
generated during the carry forward period available under the tax law to utilize
the deferred tax assets.
59
18. GAIN ON TERMINATION OF LEASE
In December 2002, the Company terminated a lease for abandoned property. The
lease termination agreement required an up front payment of $.3 million and the
Company is obligated to pay approximately $60,000 per month until the landlord
has completed certain leasehold improvements for a new tenant, which was
completed as of July 2003, and then the Company is obligated to pay $20,000 per
month until August 2010. The Company was released from all other obligations
under the lease. The gain on lease termination represents a change in estimate
representing the difference between the Company's present value of its future
obligations and the entire obligation that remained on the books under the
original lease obligation. The remaining obligation has been recorded in accrued
expenses and other current liabilities and other liabilities.
19. EMPLOYEE RETIREMENT SAVINGS 401(k) PLANS:
The Company sponsors a tax deferred retirement savings plan ("401(k) plan")
which permits eligible employees to contribute varying percentages of their
compensation up to the annual limit allowed by the Internal Revenue Service.
The Company currently matches the 50% of the first $3,000 of employee
contribution up to a maximum of $1,500 per employee. Matching contributions
charged to expense were approximately $69,700, $82,100 and $75,100, for the
fiscal years ended June 30, 2003, 2002 and 2001, respectively.
The Company also provided for discretionary Company contributions. There were no
discretionary contributions in fiscal years 2003, 2002 or 2001.
20. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the year ended June 30, 2003:
o The preferred shareholders converted 149 shares of preferred Series E
stock to 79,767 shares of common stock during the year ended June 30,
2003.
o In connection with the redemption of the preferred Series E stock, the
preferred shareholders converted 2,751 shares of preferred Series E
stock to 181,302 shares of common stock during the year ended June 30,
2003. In addition, the Company recognized a gain on redemption of
preferred stock of $13,970,813.
For the year ended June 30, 2002:
o The Company issued 15,739 of unregistered MKTG common shares in
February 2002 valued at $300,000 in settlement of an earn-out provision
for the acquisition of Stevens Knox and Associates, Inc. entered into
in the previous fiscal year.
o The preferred shareholders converted 225 shares of preferred stock to
112,983 shares of common stock during the year ended June 30, 2002.
For the year ended June 30, 2001:
o The Company received $860,762 of uncollateralized financing to acquire
additional capitalized software. The notes bear interest at 9.5% per
annum and are payable in monthly installments over 36 months with
maturity dates ranging from September 30, 2003 and December 30, 2003.
o The Company exchanged 41,042 shares of unregistered MKTG common stock
for WiredEmpire preferred stock. The exchange resulted in a gain of
$13,410,273, which was recorded through equity and is included in net
loss attributable to common stockholders and earnings per share -
discontinued operations.
o The Company issued 2,756 of unregistered MKTG common shares in October
2000 valued at $250,096 in settlement of an earn-out provision for the
acquisition of Stevens Knox and Associates, Inc.
60
o The Company issued 2,083 unregistered MKTG common shares in March 2001
valued at $141,183 in settlement of a complaint in connection with an
employee of MFI.
Supplemental disclosures of cash flow data:
- -------------------------------------------
2003 2002 2001
---------- ---------- ----------
Cash paid during the year for:
Interest $ 234,164 $ 588,683 $6,256,346
Financing charge $ -- $ -- $ 128,133
Income tax paid $ 8,119 $ 67,824 $ 75,261
21. 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. The Company believes it has one reporting segment. The Company has
one remaining product line (telemarketing), as a result of the sale of its
Northeast Operations, which are classified as Discontinued Operations. No single
customer accounted for 10% or more of total revenues. The Company earns 100% of
its revenue in the United States.
61
Schedule II
MKTG Services, Inc.
Valuation and Qualifying Accounts
-----------------------------------
For the Years Ended June 30, 2003, 2002, and 2001
- ------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------
Additions
--------------------------
Balance at Charged To Charged To
Description Beginning Costs And Other Deductions- Balance At
Of Period Expenses Accounts- Describe1 End Of Period
Describe
Allowance for doubtful accounts
Fiscal 2003 $ 94,000 $ 80,465 $ - $ 54,465 $ 120,000
Fiscal 2002 $ 6,000 $ 88,000 $ - $ - $ 94,000
Fiscal 2001 $ 6,000 $ - $ - $ - $ 6,000
1.Represents accounts written off during the period.
62
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
State of
Incorporation
-------------
Alliance Media Corporation Delaware
MKTG Services - New York, Inc. New York
MKTG TeleServices, Inc. California
MKTG Services - Philly, Inc. New York
MKTG Services - Boston, Inc. Delaware
Pegasus Internet, Inc. New York
WireEmpire, Inc. Deleware
63
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
MKTG Services, Inc.
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-3 (No. 333-33174, No. 333-34822 and No. 333-89973) and
Forms S-8 (No. 333-94603 and No. 333-82541) of MKTG Services, Inc. and
Subsidiaries, of our report dated September 26, 2002, except for the
reclassification and presentation of the discontinued operations of the
Northeast Operations and Grizzard, Inc., as discussed in Note 3, as to which the
date is October 14, 2003, relating to the consolidated financial statements and
financial statement schedule which appears in this Annual Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
October 14, 2003
64
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements on
Forms S-3 (No. 333-33174, No. 333-34822 and No. 333-89973) and Forms S-8 (No.
333-94603 and No. 333-82541) of MKTG Services, Inc. and Subsidiaries, of our
report dated October 10, 2003 relating to the consolidated financial statements
as of June 30, 2003 and for the year then ended, which is included in this Form
10-K Filing.
/s/ Amper, Politziner & Mattia P.C.
October 14, 2003
Edison, New Jersey
65
Exhibit 31.1
CERTIFICATION
I, J. Jeremy Barbera, certify that:
(1) I have reviewed this annual report on Form 10-K of MKTG Services,
Inc.;
(2) Based on my knowledge, this 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 by this report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) [Paragraph omitted in accordance with SEC transition
instructions];
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: October 14, 2003
By: /s/ J. Jeremy Barbera
----------------------
J. Jeremy Barbera
Chairman of the Board, Chief Executive Officer and Interim
Chief Financial Officer (Principal Executive Officer and
Principal Financial Officer)
66
Exhibit 32.1
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 Annual Report of MKTG Services, Inc. (the "Company") on
Form 10-K for the year ended June 30, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, J. Jeremy Barbera,
Chairman of the Board, Chief Executive Officer and Interim Chief Financial
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 result of operations of the Company.
Dated: October 14, 2003
By: /s/ J. Jeremy Barbera
----------------------
J. Jeremy Barbera
Chairman of the Board, Chief Executive Officer and Interim
Chief Financial Officer (Principal Executive Officer and
Principal Financial Officer)
This certification accompanies this Report on Form 10-K pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required
by such Act, be deemed filed by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form with the electronic version of this written statement
required by Section 906, has been provided to the Company and will be retained
by the Company and furnished to the Securities and Exchange Commission or its
staff upon request.
67