Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 (I.R.S. Employer Identification No.)
incorporation or organization)
333 Seventh Avenue
New York, New York 10001
------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 362-2012
--------------
-----------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
State number of shares outstanding of each of the issuer's classes of common
equity as of the latest practical date: As of November 7, 2003 there were
1,092,367 shares of the Issuer's Common Stock, par value $.01 per share
outstanding.
1
MKTG SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
SEPTEMBER 30, 2003
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2003 and June 30, 2003 (unaudited) 3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three
months ended September 30, 2003 and 2002 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 10-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 15
Item 4. Controls and Procedures. 16
PART II- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 17
SIGNATURES 18
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MKTG SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2003 June 30, 2003
------------------ -------------
(Unaudited) (1)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 826,870 $ 1,216,642
Accounts receivable, net of allowance for doubtful
accounts of $120,000 for each period 1,734,571 1,816,546
Other current assets 459,164 475,164
----------- ------------
Total current assets 3,020,605 3,508,352
Goodwill, net 2,277,220 2,277,220
Intangible assets, net 15,000 20,000
Property and equipment, net 712,423 747,530
Related party note receivable 1,067,664 1,050,309
Other assets 28,711 44,109
----------- ------------
Total assets $ 7,121,623 $ 7,647,520
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short - term borrowing $ - $ 261,385
Accounts payable-trade 372,062 456,266
Accrued expenses and other current liabilities 1,786,164 1,877,069
Current portion of long-term obligations 101,465 201,062
--------- ---------
Total current liabilities 2,259,691 2,795,782
Other liabilities 1,343,509 1,463,132
--------- ---------
Total liabilities 3,603,200 4,258,914
Minority interest in preferred stock of discontinued subsidiary 280,946 280,946
Commitments and contingencies
Stockholders' equity:
Common stock - $.01 par value; 9,375,000 shares authorized; 1,101,198 shares
issued and 1,092,367 shares outstanding as of September 30, 2003
and June 30, 2003 11,011 11,011
Additional paid-in capital 220,258,236 220,258,236
Accumulated deficit (215,638,060) (215,767,877)
Less: 8,831 shares of common stock in treasury, at cost (1,393,710) (1,393,710)
------------ ------------
Total stockholders' equity 3,237,477 3,107,660
------------ ------------
Total liabilities and stockholders' equity $ 7,121,623 $ 7,647,520
============ ============
(1) Derived from the Audited Consolidated Financial Statements for the year
ended June 30, 2003.
See Notes to Condensed Consolidated Financial Statements.
3
MKTG SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
2003 2002
---- ----
Revenues $3,797,576 $4,504,085
---------- ----------
Operating costs and expenses:
Salaries and benefits 3,139,951 3,909,772
Direct costs 168,488 227,438
Selling, general and administrative 364,010 419,645
Depreciation and amortization 56,180 55,838
---------- -------------
Total operating costs and expenses 3,728,629 4,612,693
--------- ---------
Income (loss) from operations 68,947 (108,608)
Other income (expense):
Settlement of lawsuit - 965,486
Interest income (expense) and other, net (23,375) (28,089)
------------- ------------
Income from continuing operations
before provision for income taxes 45,572 828,789
Provision for income taxes 3,000 10,779
----------- ---------
Income from continuing operations 42,572 818,010
Discontinued operations:
Gain (loss) from discontinued operations 87,245 (660,304)
Cumulative effect of change in accounting principle - (5,075,000)
------------ -----------
Net income (loss) $ 129,817 $ (4,917,294)
========== =============
Basic earnings (loss) per share:
Continuing operations $ 0.12 $ 0.98
Discontinued operations - (0.79)
Cumulative effect of change in accounting principle - (6.10)
--------- --------
Basic earnings (loss) per share $ 0.12 $ (5.91)
========= ========
Weighted average common shares outstanding- basic 1,092,367 831,298
========= ========
Diluted earnings (loss) per share:
Continuing operations $ 0.10 $ 0.31
Discontinued operations - (0.25)
Cumulative effect of change in accounting principle - (1.92)
--------- ---------
Diluted earnings (loss) per share $ 0.10 $ (1.86)
========= =========
Weighted average common shares outstanding- diluted 1,246,263 2,636,708
========= =========
See Notes to Condensed Consolidated Financial Statements.
4
MKTG SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(unaudited)
2003 2002
---- ----
Operating activities:
Net income (loss) $ 42,572 $ (4,917,294)
Gain(loss)from discontinued operations 87,245 660,304
Cumulative effect of change in accounting principle - 5,075,000
--------- ------------
Income from continuing operations 129,817 818,010
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation 51,180 50,838
Amortization 5,000 5,000
Changes in assets and liabilities:
Accounts receivable 81,975 1,146,403
Other current assets 16,000 (147,282)
Other assets 15,398 164,979
Accounts payable - trade (84,204) (350,507)
Accrued expenses and other liabilities (210,528) (1,317,853)
--------- -----------
Net cash provided by operating activities 4,638 369,588
-------- ----------
Investing activities:
Purchases of property and equipment (16,073) (9,728)
--------- -------
Net cash used in investing activities (16,073) (9,728)
--------- -------
Financing activities:
Net repayments on credit facilities (261,385) (854,649)
Increase in related party note receivable (17,355) (17,355)
Repayment of related party note payable (99,597) -
Repayments of long-term debt - (24,810)
-------- ---------
Net cash used in financing activities (378,337) (896,814)
-------- ---------
Net cash used in discontinued operations - (1,610,658)
--------- ------------
Net decrease in cash and cash equivalents (389,772) (2,147,612)
Cash and cash equivalents at beginning of period 1,216,642 4,438,166
--------- ---------
Cash and cash equivalents at end of period $826,870 $2,290,554
========= ==========
See Notes to Condensed Consolidated Financial Statements.
5
MKTG SERVICES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements include
the accounts of MKTG Services, Inc. and Subsidiaries ("MKTG" or the "Company").
These condensed consolidated financial statements are unaudited and should be
read in conjunction with the Company's Form 10-K for the fiscal year ended June
30, 2003 and the historical consolidated financial statements and related notes
included therein. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements include all adjustments, consisting
of only normal recurring accruals, necessary to present fairly the condensed
consolidated financial position, results of operations and cash flows of the
Company. Certain information and footnote disclosure normally included in
financial statements prepared in conformity with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations. Operating results for the
three-month period ended September 30, 2003 are not necessarily indicative of
the results that may be expected for the fiscal year ending June 30, 2004.
Certain reclassifications have been made in the fiscal 2003 financial statements
to conform to the fiscal 2004 presentation.
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 5, 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. The Company believes, based on past performance as well as
the reduced corporate overhead, that its remaining operation 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.
2. EARNINGS PER SHARE
Common share equivalents included in weighted average shares outstanding-
diluted for the quarter ending September 30, 2003:
Weighted average common shares outstanding - basic 1,092,367
Common stock equivalents for options and warrants 153,896
---------
Weighted average common shares outstanding- diluted 1,246,263
=========
3. 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
6
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:
Three months ended September 30,
2003 2002
---- ----
Net income (loss) available to common
stockholders as reported $129,817 $(4,917,294)
Stock based-compensation recorded - -
-------- ------------
Subtotal 129,817 (4,917,294)
Stock-based compensation recorded under
SFAS 123 - 364,301
------- ------------
Pro forma net income (loss) available
to common stockholders $129,817 $(5,281,595)
======== ============
Earnings (loss) per share:
Basic earnings (loss) per share - as reported $0.12 $(5.91)
===== =======
Basic earnings (loss) per share - pro forma $0.12 $(6.35)
===== =======
Diluted earnings (loss) per share - as reported $0.10 $(1.86)
===== =======
Diluted earning (loss) per share - pro forma $0.10 $(2.00)
===== =======
Pro forma net loss reflects only options granted in fiscal 1996 through 2003.
The Company has not granted options during the three months ended September 30,
2003 and the year ended June 30, 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. Pro forma compensation costs
for stock options under SFAS No. 123 is recognized over the service period.
Previously recognized pro forma compensation cost is not to be reversed if a
vested employee option expires unexercised. The Company stops recognizing pro
forma compensation cost when an option expires.
4. DEBT
At September 30, 2003, the Company had no amounts outstanding on its line of
credit facility. The Company had approximately $1.3 million available on its
line of credit as of September 30, 2003. As of September 30, 2003, the Company
was in compliance with its line of credit covenants.
5. DISCONTINUED OPERATIONS
7
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
period ended September 30, 2002 have been reclassified into a one-line
presentation and is included in loss from discontinued operations and net cash
used by discontinued operations.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
As a result of the adoption of SFAS No. 142, the Company discontinued the
amortization of goodwill effective July 1, 2002. Identifiable intangible assets
are amortized under the straight-line method over the period of expected benefit
of five years.
The Company recognized an impairment charge of approximately $5.1 million in
connection with the adoption of SFAS No. 142. 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 period ended
September 30, 2003. In connection with the sale of the Northeast Operations, the
only remaining reporting unit consists of telemarketing. The Company completed
its annual impairment test prescribed by SFAS 142 and concluded that no
impairment of goodwill existed as of July 1, 2003.
The following table sets forth the components of the intangible assets subject
to amortization as of September 30, 2003 and June 30, 2003:
September 30, 2003 June 30, 2003
------------------------------------ -------------------------------------
Gross Gross
carrying Accumulated carrying Accumulated
Useful life amount amortization Net amount amortization Net
----------- -------- ------------ ------- -------- ------------ --------
Capitalized software 5 years $100,000 $85,000 $15,000 $100,000 $80,000 $20,000
Amortization expense for the three months ended September 30, 2003 and 2002 was
$5,000, respectively.
Estimated amortization expense by fiscal year as of June 30, is as
follows:
2004 $20,000
=======
7. CONTINGENCIES AND LITIGATION
In December 2001, an action was filed by a number of purchasers of preferred
stock of WiredEmpire, Inc., a discontinued subsidiary, in the Alabama State
Court (Circuit Court of Jefferson County, Alabama, 10 Judicial Circuit of
Alabama, Birmingham Division), against J. Jeremy Barbera, Chairman of the Board
and Chief Executive Officer of MKTG, MKTG and WiredEmpire, Inc. The plaintiffs'
complaint alleges, among other things, violation of sections 8-6-19(a)(2) and
8-6-19(c) of the Alabama Securities Act and various other provisions of Alabama
state law and common law, arising 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 action has been settled subsequent to the
period end, and stipulations of dismissal with
8
prejudice have been or will shortly be filed. The settlement will not have an
impact on the Company's net income.
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 action has been
settled subsequent to the period end, and stipulations of dismissal with
prejudice have been or will shortly be filed. The settlement will not have an
impact on the Company's net income.
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. 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 quarter ended September 30, 2002.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Special Note Regarding Forward-Looking Statements
- -------------------------------------------------
Some of the statements contained in this Report on Form 10-Q discuss our plans
and strategies for our business or state other forward-looking statements, as
this term is defined in the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of MKTG Services, Inc. ("MKTG" or the "Company"), or industry
results to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; industry capacity; direct marketing and other industry trends;
demographic changes; competition; the loss of any significant customers; changes
in business strategy or development plans; availability and successful
integration of acquisition candidates; availability, terms and deployment of
capital; advances in technology; retention of clients not under long-term
contract; quality of management; business abilities and judgment of personnel;
availability of qualified personnel; changes in, or the failure to comply with,
government regulations; and technology, telecommunication and postal costs.
Introduction
- ------------
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity/cash flows of the Company
for the three-month periods ended September 30, 2003 and 2002. This should be
read in conjunction with the financial statements, and notes thereto, included
in this Report on Form 10-Q and the Company's financial statements and notes
thereto, included in the Company's Annual Report on Form 10-K for the year ended
June 30, 2003.
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The following is a brief description of the more
significant accounting policies and methods used by the Company.
Revenue Recognition:
Revenues derived from 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:
Under Statement of Financial Accounting Standards ("SFAS"), No. 142, "Goodwill
and Other Intangible Assets", goodwill is no longer amortized. The Company
recognized an impairment charge of approximately $5.1 million in connection with
the adoption of SFAS No. 142. 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 period ended September 30, 2002. In
connection with the sale of the Northeast Operations, the only remaining
reporting unit consists of telemarketing. The Company completed its annual
impairment test prescribed by SFAS 142 and concluded that no impairment of
goodwill existed as of July 1, 2003.
10
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.
Recent Accounting Pronouncements:
There were no new accounting pronouncements during the period that would have an
effect on the Company.
To facilitate an analysis of MKTG operating results, certain significant events
should be considered.
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
period ended September 30, 2002 has been reclassified into a one-line
presentation and is included in Loss from Discontinued Operations and Net Cash
Used by Discontinued Operations.
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 for the Three Months Ended September 30, 2003, Compared to
- --------------------------------------------------------------------------------
the Three Months Ended September 30, 2002.
- ------------------------------------------
Revenues of approximately $3.8 million for the three months ended September 30,
2003 (the "Current Period") decreased by $0.7 million or 16% over revenues of
$4.5 million during the three months ended September 30, 2002 (the "Prior
Period"). Revenue decreased primarily due to decreased client billings in the
onsite telemarketing services.
Salaries and benefits of approximately $3.1 million in the Current Period
decreased by approximately $0.8 million or 21% over salaries and benefits of
approximately $3.9 million in the Prior Period. Salaries
11
and benefits decreased due to a reduction in onsite telemarketing and corporate
headcount, as well as a reduction in certain executive compensation.
Direct costs of approximately $168,000 decreased by approximately $59,000 or 26%
over direct costs of approximately $227,000 in the Prior Period. The decrease is
due primarily to reductions in Los Angeles call center sales expenses, telephone
expenses and postage costs.
Selling, general and administrative expenses of approximately $364,000 in the
Current Period decreased by approximately $56,000 or 13% over comparable
expenses of $420,000 in the Prior Period. The decrease is due primarily to
reductions in expenses such as legal fees, investor relations expenses, rent
expenses, telephone costs and general office expenses, offset by increases in
consulting fees, accounting fees and travel expenses.
Depreciation and amortization expenses of approximately $60,000 remained
consistent between the Current Period and the Prior Period.
During the quarter ending September 30, 2002, the Company recognized a gain on a
settlement of a lawsuit. In 1999, a lawsuit under Section 16(b) of the
Securities Exchange Act of 1934 was commenced against General Electric Capital
Corporation ("GECC") by Mark Levy, derivatively on behalf of the Company, to
recover short swing profits allegedly obtained by GECC in connection with the
purchase and sale of MKTG securities. 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.
Net interest expense of approximately $23,000 in the Current Period decreased by
approximately $5,000 or 18% over net interest expense of approximately $28,000
in the Prior Period. The decrease is due primarily to the reduction in interest
expense incurred in Los Angeles resulting from reduced borrowings on the line of
credit.
The net provision for income taxes of approximately $3,000 in the Current Period
decreased by approximately $8,000 over the provision of approximately $11,000 in
the Prior Period. The Company records provisions for state and local taxes
incurred on taxable income or equity at the operating subsidiary level, which
cannot be offset by losses incurred at the parent company level or other
operating subsidiaries. The Company has recognized a full valuation allowance
against the deferred tax assets because it is more likely than not that
sufficient taxable income will not be generated during the carry forward period
to utilize the deferred tax assets.
As a result of the above, income from continuing operations of approximately
$43,000 in the Current Period decreased by approximately $775,000 over
comparable income from continuing operations of $818,000 in the Prior
Period.
The gain from discontinued operations of approximately $87,000 in the Current
Period is the result of a reduction in certain loss reserves expensed in prior
periods of approximately $33,000 in addition to a recovery of a security deposit
from a discontinued operation of approximately $54,000, which had been
previously written off. The loss from discontinued operations of approximately
$660,000 in the Prior Period resulted from the sale of the Northeast operations
during the fiscal year 2003.
The loss from cumulative effect of change in accounting principle of
approximately $5.1 million in the Prior period was the result of the adoption of
SFAS 142 relating to Goodwill.
As a result of the above, net income of approximately $130,000 in the Current
Period increased by approximately $5.0 million over comparable net loss of
approximately $4.9 million in the Prior Period.
12
Capital Resources and Liquidity
- -------------------------------
Financial Reporting Release No. 61, which was released by the SEC, requires all
companies to include a discussion to address, among other things, liquidity,
off-balance sheet arrangements, contractual obligations and commercial
commitments. The Company currently does not maintain any off-balance sheet
arrangements.
Leases: The Company leases various office space and equipment under
non-cancelable long-term leases. The Company incurs all costs of insurance,
maintenance and utilities.
Future minimum rental commitments under all non-cancelable leases, net of
non-cancelable subleases, as of September 30, 2003 are as follows:
Rent Expense Less: Sublease Income Net Rent Expense
----------- -------------------- ----------------
2004 $ 677,500 $ (59,400) $ 618,100
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
------------ ---------- -----------
$ 3,040,880 $ (104,700) $2,936,180
=========== =========== ===========
Debt: The Company has a renewable two-year credit facility with a lender for a
line 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 September 30,
2003, there was an aggregate of approximately $1.3 million available under this
line of credit.
At September 30, 2003, the Company had no amounts outstanding on its line of
credit. As of September 30, 2003, the Company is in compliance with certain
working capital and net worth covenants of its credit agreement.
Historically, the Company has funded its operations, capital expenditures and
acquisitions primarily through cash flows from operations, private placements of
equity transactions, and its credit facilities. At September 30, 2003, the
Company had cash and cash equivalents of $0.9 million and a working capital of
$0.7 million.
The Company recognized net income of approximately $130,000 in the Current
Period. Cash provided by operating activities from operations was approximately
$5,000. Net cash provided by operating activities principally resulted from the
decrease in accounts receivable and other assets offset by decreases in accrued
expenses and accounts payable. Cash provided by operating activities in the
Prior Period was approximately $0.4 million. Cash provided by operating
activities principally consists of a decrease in accounts receivable.
In the Current Period, net cash of $16,073 was used in investing activities
consisting of
13
purchases of property and equipment. In the Prior Period, net cash of $9,728 was
used in investing activities consisting of the purchases of property and
equipment.
In the Current Period, net cash of $378,337 was used in financing activities.
Net cash used in financing activities consisted of $361,982 repayments of debt
and credit facilities and $17,355 for an increase in a related party receivable.
In the Prior Period, net cash of $896,814 million was used in financing
activities consisting of repayments of long-term debt and credit facilities of
$879,459 and an increase in a related party receivable of $17,355.
In the Prior Period net cash of $1.6 million was used in discontinued
operations, while there were no discontinued operations in the Current Period.
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is subject to market risks in the ordinary course of its business,
primarily risks associated with interest rate fluctuations. Historically,
fluctuations in interest rates have not had a significant impact on the
Company's operating results. At September 30, 2003, the Company had no variable
rate indebtedness outstanding.
15
Item 4. Controls and Procedures.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including Jeremy Barbera, the
Company's Chairman, Chief Executive Officer and interim Chief Financial Officer,
of the effectiveness of the Registrant's disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of
1934. Based on that evaluation, Mr. Barbera has concluded that the Company's
disclosure controls and procedures as of September 30, 2003 were effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission's rules and forms.
There were no changes in the Company's internal control over financial reporting
that occurred during the quarter ended September 30, 2003 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
16
PART II- OTHER INFORMATION
Item 1. Legal Proceedings.
Two actions brought by purchasers of the preferred stock of WiredEmpire, Inc.
against the Company, J. Jeremy Barbera, the Company's Chairman of the Board and
Chief Executive Officer, and WiredEmpire, Inc. alleging violations of federal
and Alabama state securities laws have been resolved. These actions, Red
Mountain, LLP v. Barbera et al., Case No. CV-00-B3068-S, and Weeks et al. v.
Barbera et al., Case No. CV-01-7633, were pending in the United States District
Court for the Northern District of Alabama. Each of these has been settled
subsequent to the period end, and stipulations of dismissal with prejudice have
been or will shortly be filed.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31 Rule 13a-14(a)/15d-14(a) Certification.(a)
32 Section 1350 Certification.(a)
- -------------
(a) Included herein in the Company's Report on Form 10Q for the quarter ended
September 30, 2003.
(b) Reports on Form 8-K
-------------------
1. On or about August 12, 2003, the Company filed a current report on form 8-K
regarding a change in the Company's certifying accountants.
2. On or about September 24, 2003, the Company filed an amended current report
on form 8-K/A regarding an addition to the exhibits filed with the current
report on form 8-K dated August 12, 2003.
17
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
MKTG SERVICES, INC.
(Registrant)
Date: November 13, 2003 /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)
18
Exhibit 31
CERTIFICATION
I, J. Jeremy Barbera, certify, pursuant to 18 U.S.C.ss.1350, as adopted
pursuant to ss.302 of the Sarbanes-Oxley Act of 2002, that:
(1) I have reviewed this quarterly report on Form 10-Q of MKTG
Services, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in al
material respects the financial condition, results of operations and cash flows
of registrant as of, and for, the periods presented in this quarterly report;
and
(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 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 quarterly report is being prepared;
(b) Intentionally omitted.
(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 officers 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 function):
(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 data; 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.
Date: November 13, 2003 /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)
19
Exhibit 32
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of MKTG Services, Inc. (the "Company")
on Form 10-Q for the period ended September 30, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, J.
Jeremy Barbera, as 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 results of operations
of the Company.
Date: November 13, 2003 /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 Quarterly Report on Form 10-Q 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 registrant for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
20