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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 December 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-16730
MKTG SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 88-0085608
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
333 Seventh Avenue, 20th Floor
New York, New York 10001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (917) 339-7100
____________________________________________________________________
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
State number of shares outstanding of each of the issuer's classes of common
equity as of the latest practical date:
As of February 10, 2003 there were 1,092,366 shares of the Issuer's Common
Stock, par value $.01 per share outstanding.
MKTG SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
DECEMBER 31, 2002
Page
----
PART I - FINANCIAL INFORMATION
Item 1 Interim Condensed Consolidated Financial Statements
(unaudited)
Condensed Consolidated Balance Sheets as of December 31,
2002 and June 30, 2002 (unaudited) 3
Condensed Consolidated Statements of Operations for the
three and six months ended December 31, 2002 and 2001
(unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
six months ended December 31, 2002 and 2001 (unaudited) 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6-14
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-23
Item 3 Quantitative and Qualitative Disclosure About Market Risk 24
Item 4 Controls and Procedures 25
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 26
Item 6 Exhibits and Reports on Form 8-K 26
Signatures 27
2
PART I - FINANCIAL INFORMATION
Item 1 - Interim Condensed Consolidated Financial Statements (unaudited)
MKTG SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, 2002 June 30, 2002
----------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,670,567 $ 4,438,166
Accounts receivable, net of allowance
for doubtful accounts of $94,000 as of
December 31, 2002 and June 30, 2002, respectively 1,374,574 3,066,983
Net assets of discontinued operations -- 32,722,244
Restricted cash 4,945,874 4,945,874
Other current assets 680,355 446,456
------------- -------------
Total current assets 15,671,370 45,619,723
Intangible assets, net 2,307,220 2,317,220
Related party note receivable 1,013,244 978,534
Property and equipment, net 821,700 907,087
Other assets 32,420 345,709
------------- -------------
Total assets $ 19,845,954 $ 50,168,273
============= =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Short-term borrowing $ 168,401 $ 2,280,384
Accounts payable-trade 372,237 881,399
Accrued expenses and other current liabilities 2,882,783 5,007,640
Net liabilities of discontinued operations -- 18,608,365
Current portion of long-term obligations 4,927,720 4,837,321
------------- -------------
Total current liabilities 8,351,141 31,615,109
Long-term obligations, net of current portion 25,543 176,336
Other liabilities 1,725,441 6,321,798
------------- -------------
Total liabilities 10,102,125 38,113,243
------------- -------------
Minority interest in preferred stock of discontinued subsidiary 280,946 280,946
Convertible preferred stock - $.01 par value; 18,750 shares
authorized; 2,752 and 2,901 shares of Series E issued and outstanding as
of December 31, 2002 and June 30, 2002, respectively 9,850,926 10,384,064
Stockholders' (deficit) equity:
Common stock - $.01 par value; 9,375,000 authorized; 919,896 and 840,129
shares issued as of December 31, 2002 and June 30, 2002, respectively 9,199 8,401
Additional paid-in-capital 230,401,743 229,899,188
Accumulated deficit (229,405,275) (227,123,859)
Less: 8,832 shares of common stock in treasury, at cost (1,393,710) (1,393,710)
------------- -------------
Total stockholders' (deficit) equity (388,043) 1,390,020
------------- -------------
Total liabilities and stockholders' (deficit) equity $ 19,845,954 $ 50,168,273
============= =============
See Notes to Condensed Consolidated Financial Statements.
3
MKTG SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
(unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- ------------
Revenues $ 3,159,321 $ 2,926,156 $ 7,663,406 $ 6,719,077
----------- ----------- ----------- ------------
Operating costs and expenses:
Salaries and benefits 3,010,512 3,389,631 6,920,284 7,353,662
Direct costs 134,150 115,887 361,588 299,348
Selling, general and administrative 502,291 1,170,535 921,936 2,111,830
Depreciation and amortization 56,180 98,775 112,018 197,550
Gain on termination of lease (3,905,387) -- (3,905,387) --
----------- ----------- ----------- ------------
Total operating costs and expenses (202,254) 4,774,828 4,410,439 9,962,390
----------- ----------- ----------- ------------
Income (loss) from operations 3,361,575 (1,848,672) 3,252,967 (3,243,313)
Settlement of lawsuit -- -- 965,486 --
Interest income (expense) and other, net 10,737 174,811 (17,352) 227,910
----------- ----------- ----------- ------------
Income (loss) from continuing operations before
provision for income taxes 3,372,312 (1,673,861) 4,201,101 (3,015,403)
Provision for income taxes (20,100) (10,746) (30,879) (41,546)
----------- ----------- ----------- ------------
Income (loss) from continuing operations 3,352,212 (1,684,607) 4,170,222 (3,056,949)
Discontinued operations:
Loss from discontinued operations (599,699) (2,492,367) (1,260,003) (13,281,545)
(Loss) gain from disposal of discontinued
operations (116,635) -- (116,635) 1,847,764
----------- ----------- ----------- ------------
Loss from discontinued operations (716,334) (2,492,367) (1,376,638) (11,433,781)
----------- ----------- ----------- ------------
Cumulative effect of change in accounting principle -- -- (5,075,000) --
----------- ----------- ----------- ------------
Net income (loss) $ 2,635,878 $(4,176,974) $(2,281,416) $(14,490,730)
=========== =========== =========== ============
Basic earnings (loss) per share:
Continuing operations $ 3.72 $ (2.38) $ 4.81 $ (4.33)
Discontinued operations (.80) (3.52) (1.59) (16.21)
Cumulative effect of change in accounting
principle -- -- (5.85) --
----------- ----------- ----------- ------------
Basic earnings (loss) per share $ 2.92 $ (5.90) $ (2.63) $ (20.54)
=========== =========== =========== ============
Weighted average common shares outstanding 901,987 708,197 866,644 705,386
=========== =========== =========== ============
Diluted earnings (loss) per share:
Continuing operations $ 1.27 $ (2.38) $ 1.58 $ (4.33)
Discontinued operations (.27) (3.52) (.52) (16.21)
Cumulative effect of change in accounting
principle -- -- (1.92) --
----------- ----------- ----------- ------------
Diluted earnings (loss) per share $ 1.00 $ (5.90) $ (.86) $ (20.54)
=========== =========== =========== ============
Weighted average common shares outstanding 2,637,343 708,197 2,637,028 705,386
=========== =========== =========== ============
See Notes to Condensed Consolidated Financial Statements.
4
MKTG SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
(unaudited)
2002 2001
----------- ------------
Operating activities:
Net loss $(2,281,416) $(14,490,730)
Loss from discontinued operations 1,376,638 11,433,781
Cumulative effect of change in accounting principle 5,075,000 --
----------- ------------
Income (loss) from continuing operations 4,170,222 (3,056,949)
Adjustments to reconcile loss to net cash used in
operating activities:
Gain on termination of lease (3,905,387) --
Depreciation 102,018 73,470
Amortization 10,000 124,080
Changes in assets and liabilities:
Accounts receivable 1,692,409 1,267,767
Other current assets 266,101 (96,599)
Other assets 313,289 (18,419)
Accounts payable - trade (509,162) (1,283,264)
Accrued expenses and other liabilities (2,792,363) (2,205,281)
----------- ------------
Net cash used in operating activities (652,873) (5,195,195)
----------- ------------
Investing activities:
Proceeds from sale of discontinued operations, net of fees 8,546,182 78,812,411
Increase in restricted cash -- (4,945,874)
Purchases of property and equipment (16,631) (329,471)
----------- ------------
Net cash provided by investing activities 8,529,551 73,537,066
----------- ------------
Financing activities:
Issuance of related party note receivable -- (1,000,000)
Expenditures from private placement of preferred stock (29,786) --
Net (repayments on) proceeds from credit facilities (2,111,983) 512,840
Repayment of related party note payable -- (250,000)
Repayments of long-term debt (118,567) (134,877)
----------- ------------
Net cash used in financing activities (2,260,336) (872,037)
----------- ------------
Net cash used in discontinued operations (1,383,941) (51,952,281)
----------- ------------
Net increase in cash and cash equivalents 4,232,401 15,517,553
Cash and cash equivalents at beginning of period 4,438,166 829,457
----------- ------------
Cash and cash equivalents at end of period $ 8,670,567 $ 16,347,010
=========== ============
See Notes to Condensed Consolidated Financial Statements.
5
MKTG SERVICES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements include
the accounts of MKTG Services, Inc. and Subsidiaries ("MKTG" or the "Company").
These condensed consolidated financial statements are unaudited and should be
read in conjunction with the Company's Form 10-K for the year ended June 30,
2002 and the historical consolidated financial statements and related notes
included therein. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements include all adjustments, consisting
of only normal recurring accruals, necessary to present fairly the condensed
consolidated financial position, results of operations and cash flows of the
Company. Certain information and footnote disclosure normally included in
financial statements prepared in conformity with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations. Operating results for the three and
six-month periods ended December 31, 2002 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 2003. Certain
reclassifications have been made in the fiscal 2002 financial statements to
conform to the fiscal 2003 presentation.
The Company has limited capital resources and has incurred significant
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. 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.
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.
2. 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
6
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 6).
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.
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
7
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 will adopt
the disclosure provisions of SFAS No. 148 in the quarter ending March 31, 2003.
3. EARNINGS PER SHARE
Common share equivalents included in weighted average shares outstanding-
diluted for the three and six months ending December 31, 2002 is as follows:
Three Six
Months Months
--------- ---------
Weighted average common shares outstanding- basic 901,987 866,644
Common stock equivalents for conversion of preferred stock 1,579,484 1,597,653
Common stock equivalents for options and warrants 155,872 172,731
--------- ---------
Weighted average common shares outstanding- diluted 2,637,343 2,637,028
========= =========
Stock options and warrants in the amount of 74,250 shares for the three and six
months ended December 31, 2002 have not been included in the computation of
diluted EPS as they were antidilutive. Stock options and warrants in the amount
of 375,268 and convertible preferred stock in the amount of 1,815,131 for the
three and six months ended December 31, 2001 were not included in the
computation of diluted EPS as they were antidilutive as a result of net losses
during the period.
4. DEBT
In 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 5), another credit facility of approximately $.3 million
was fully repaid and terminated in December 2002.
At December 31, 2002, the Company had amounts outstanding of approximately $.2
million on its remaining line of credit facility. The Company had approximately
$1.0 million available on its line of credit as of December 31, 2002. As of
December 31, 2002, 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 is collateralized
by cash which has been classified as restricted cash in the current asset
section of the balance sheet as of December 31, 2002 and June 30, 2002. The
letter of credit is subject to an annual facility fee of 1.5%. The remaining
obligation of approximately $4.6 million is included in current portion of
long-term obligations and is payable in March 2003 (See Note 12).
5. DISCONTINUED OPERATIONS
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
8
CBC Companies, Inc. for approximately $10.4 million in cash plus the assumption
of all directly related liabilities. Approximately $.5 million is being held in
escrow for six months in connection with certain indemnifications made by the
Company and its subsidiaries in accordance with the terms and conditions of the
purchase agreement. 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 three and six months ending December 31,
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 $.1 million in
the three and six months ended December 31, 2002. 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.
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 fully paid a term loan of $35.5 million and $12.0 million
line of credit. The Company recorded a loss of approximately $4.9 million for
the six months ended December 31, 2001 as a result of the early extinguishment
of debt which is included in the loss from discontinued operations. For the six
months ended December 31, 2001, 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 six months ending December 31, 2001 have been reclassified into a
one-line presentation and is included in Loss from Discontinued Operations and
Net Cash Used by Discontinued Operations as a result of the sale of the list and
database operations in December 2002 of which Grizzard was a component.
Revenue recognized for the three and six months ended December 31, 2002 relating
to the discontinued operations which is included in Loss from Discontinued
Operations was approximately $2.9 million and $7.6 million, respectively.
Revenue recognized for the three and six months ended December 31, 2001 relating
to the discontinued operations which is included in Loss from Discontinued
Operations was approximately $5.3 million and $13.1 million, respectively. In
connection with the disposal of the discontinued operations, the Company no
longer provides services for the list sales and services, database marketing,
website development design and marketing communication services product lines.
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 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.
As of December 31, 2002, 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
9
accordance with SFAS 142 transition provisions as a cumulative effect of change
in accounting principle for the six months ended December 31, 2002. In
connection with the sale of the Northeast Operations (See Note 5), the only
remaining reporting unit consists of telemarketing.
The following table sets forth the components of goodwill, net as of December
31, 2002:
Impairment December 31,
July 1, 2002 losses Sale of Reporting Unit 2002
------------ ----------- ---------------------- ------------
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 December 31, 2002 and June 30, 2002:
December 31, 2002 June 30, 2002
--------------------------------- ---------------------------------
Gross Gross
carrying Accumulated carrying Accumulated
Useful life amount amortization Net amount amortization Net
----------- -------- ------------ ------- -------- ------------ -------
Capitalized software 5 years $100,000 $70,000 $30,000 $100,000 $60,000 $40,000
Amortization expense for the six months ended December 31, 2002 and 2001 was
approximately $10,000 and $124,000, respectively. Amortization for the three
months ended December 31, 2002 and 2001 was approximately $5,000 and $62,000,
respectively.
Estimated amortization expense by fiscal year as of June 30, are as follows:
2003 $20,000
2004 20,000
-------
$40,000
=======
The following table provides a reconciliation of net loss for exclusion of
goodwill amortization:
Three months ended Six months ended
December 31, December 31,
------------------------ ------------------------
2002 2001 2002 2001
---------- ----------- ---------- -----------
Net income (loss) from continuing
operations - as reported $3,352,212 $(1,684,607) $4,170,222 $(3,056,949)
Add: Goodwill amortization -- 57,040 -- 114,080
---------- ----------- ---------- -----------
Net income (loss) - adjusted $3,352,212 $(1,627,567) $4,170,222 $(2,942,869)
========== =========== ========== ===========
Per share data:
Basic net income (loss) per share
From continuing operations $ 3.72 $ (2.38) $ 4.81 $ (4.33)
Add: Goodwill amortization -- .08 -- 0.16
---------- ----------- ---------- -----------
Adjusted basic net income (loss)
per share from continuing
operations $ 3.72 $ (2.30) $ 4.81 $ 4.17
========== =========== ========== ===========
Diluted net income (loss) per
share from continuing operations $ 1.27 $ (2.38) 1.58 $ (4.33)
10
Add: Goodwill amortization -- .08 -- 0.16
---------- ----------- ---------- -----------
Adjusted diluted net income (loss)
per share from continuing
operations $ 1.27 $ (2.30) $ 1.58 $ 4.17
========== =========== ========== ===========
7. CONTINGENCIES AND LITIGATION
In December 2000, an action was filed by Red Mountain, LLP in the United States
Court for the Northern District of Alabama, Southern Division against J. Jeremy
Barbera, Chairman of the Board and Chief Executive Officer of MKTG Services,
Inc., and WiredEmpire, Inc. Red Mountains' complaint alleges, among other
things, violations of Section 12(2) of the Securities Act of 1933, Section 10(b)
of the Securities Act of 1934 and Rule 10(b)(5) promulgated there under, and
various provisions of Alabama state law and common law, arising from Red
Mountain's acquisition of WiredEmpire Preferred Series A stock in a private
placement. Red Mountain invested approximately $.2 million 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 plaintiffs'
complaint alleges, among other things, violation of sections 8-6-19(a)(2) and
8-6-19(c) of the Alabama Securities Act and various other provisions of Alabama
state law and common law, arising from the plaintiffs' acquisition of
WiredEmpire Preferred Series A stock in a private placement. The plaintiffs
invested approximately $1.7 million 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 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 $1.2 million 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. The plaintiffs' complaint alleges among other things
violations of state securities laws and breach of fiduciary duty. The Company
believes that the allegations in the complaint are without merit. The Company
intends to vigorously defend against the 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 $1.0 million plus reimbursement of mailing costs. The
net settlement has been recorded as a
11
gain from settlement of lawsuit and is included in the statement of operations
for the six months ending December 31, 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 effected an eight-for-one reverse stock split. (See Note 1).
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 10) has brought the Company back
into compliance with the minimum public float requirement. The Company has
appealed the Staff's decision to delist the Company to a Nasdaq Listing
Qualification Panel. The hearing was held on February 13, 2003. There can be no
assurance that the Company will remain listed on The Nasdaq Stock Market.
In addition to the above, certain other legal actions in the normal course of
business are pending to which the Company is a party. The Company does not
expect that the ultimate resolution of the above matters and other pending legal
matters will have a material effect on the financial condition, results of
operations or cash flows of the Company.
8. RELATED PARTY TRANSACTIONS
During the quarter ending December 31, 2001, the Company advanced $1.0 million
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 $58,000 to reflect the
incremental borrowing rate of the officer and is being amortized into interest
income over the terms 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 approximately
$35,000 and $10,000 for the six months ended December 31, 2002 and 2001,
respectively. The note will be forgiven in the event of a change in control.
9. SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" segment information is being reported consistent with
the Company's method of internal reporting. In accordance with SFAS No. 131,
operating segments are defined as components of an enterprise for which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. 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.
12
10. PREFERRED STOCK
In the quarter ending December 31, 2001, the preferred shareholders converted
138 shares of preferred stock to 68,976 shares of common stock.
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, in
the quarter ending December 31, 2002, the preferred shareholders converted 149
shares of Series E preferred into 79,762 shares of common stock.
On December 31, 2002, the Company entered into a redemption agreement with the
holders of the Series E preferred stock. The Company agreed to redeem 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 as of December 31, 2002. The redemption occurred in
January 2003. The carrying value of the preferred stock is approximately $20.2
million which includes a beneficial conversion feature of approximately $10.3
million (See Note 12).
11. GAIN ON TERMINATION OF LEASE
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.
12. SUBSEQUENT EVENT
In January 2003, the Company redeemed all of its outstanding Series E Preferred
Stock (See Note 10). The following table illustrates the effect to certain
balance sheet and statement of operations items as if the redemption of the
Series E Preferred Stock was fully completed on December 31, 2002, including the
issuance of the common stock. The net book value of the preferred stock as of
December 31, 2002 was approximately $20.2 million which includes a beneficial
conversion feature of approximately $10.3 million. The net consideration given
was approximately $6.2 million which would have resulted in a gain on redemption
of approximately $14.0 million as of December 31, 2002. Total stockholder's
equity would have increased by approximately $3.8 million which consists of
approximately $3.7 million for the gain on redemption ($14.0 million gain net of
beneficial conversion feature of $10.3 million) and approximately $.2 million
for the value of the additional shares issued.
Pro Forma
As reported As adjusted
----------- -----------
Cash $ 8,670,567 $ 2,648,727
Total stockholder's (deficit) equity $ (388,042) $ 3,441,044
Net income (loss) attributable to
common stockholders:
Three months $ 2,635,878 $16,606,689
Six months $(2,281,416) $11,689,395
Earnings (loss) per share:
13
Three months
Basic $ 2.92 $ 18.37
Diluted $ 1.00 $ 6.29
Weighted average shares outstanding-Basic 901,987 903,958
Weighted average shares outstanding- Diluted 2,637,343 2,639,314
Six months
Basic $ (2.63) $ 13.47
Diluted $ (.86) $ 4.45
Weighted average shares outstanding-Basic 866,644 867,629
Weighted average shares outstanding- Diluted 2,637,028 2,629,230
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 (See Note 4). 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 February 2003, certain compensation arrangements were modified. The Chief
Executive Officer and the Chief Accounting Officer voluntarily forgave part
of their compensations to effect a reduction of approximately 30% to $350,000
and $125,000 per year, respectively. In addition, Board of Directors fees were
voluntarily reduced by 50%.
14
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 and six-month periods ended December 31, 2002 and 2001. This
should be read in conjunction with the financial statements, and notes thereto,
included in this Report on Form 10-Q and the Company's financial statements and
notes thereto, included in the Company's Annual Report on Form 10-K for the year
ended June 30, 2002.
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The following is a brief description of the more
significant accounting policies and methods used by the Company.
Revenue Recognition:
Revenues derived from 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:
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
15
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.
Goodwill is not subject to amortization and is tested for impairment annually,
or more frequently if events or changes in circumstances indicate that the asset
may be impaired. The impairment test consists of a comparison of the fair value
of goodwill with its carrying amount. If the carrying amount of goodwill exceeds
its fair value, an impairment loss shall be recognized in an amount equal to
that excess. After an impairment loss is recognized, the adjusted carrying
amount of goodwill is its new accounting basis.
Long-Lived Assets:
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.
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 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 lives 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:
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
16
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.
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
will adopt the disclosure provisions of SFAS No. 148 in the quarter ending March
31, 2003.
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. Approximately $.5 million is
being held in escrow for six months in connection with certain indemnifications
made by the Company and its subsidiaries in accordance with the terms and
conditions of the purchase agreement. 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 three and six months ending
December 31, 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.
On July 31, 2001, the Company completed the sale of all the outstanding capital
stock of its Grizzard subsidiary to Omnicom Group, Inc. The purchase price of
the transaction was approximately $89.8 million payable in cash. As a result of
the sale agreement, the Company fully paid the term loan of $35.5 million and
$12.0 million line of credit. The statement of operations and cash flows for the
six months ending December 31, 2001 have been reclassed into a one-line
presentation and is included in Loss from Discontinued Operations and Net Cash
Used by Discontinued Operations as a result of the sale of the list and database
operations in December 2002 of which Grizzard was a component.
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.
The Company's business tends to be seasonal. The remaining business of
Telemarketing services have higher
17
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 December 31, 2002, Compared to
the Three Months Ended December 31, 2001
Revenues of approximately $3.2 million for the three months ended December 31,
2002 (the "Current Period") increased by approximately $.2 million or 8% over
revenues of approximately $2.9 million during the three months ended December
31, 2001 (the "Prior Period"). In the prior year revenue was depressed due to
unexpected client cancellations and postponed fundraising campaigns due to the
terrorist events of September 11th. In addition, the Company moved its call
center during the Fall of 2001 and as a result slowed down operations for a
period of time in the Prior Period.
Salaries and benefits of approximately $3.0 million in the Current Period
decreased by approximately $.4 million or 11% over salaries and benefits of
approximately $3.4 million in the Prior Period. Salaries and benefits decreased
due to decreased headcount 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 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 and the Chief Accounting
Officer voluntarily forgave part of their base compensations to effect a
reduction of approximately 30% to $350,000 and $125,000 per year, respectively.
Direct costs of approximately $.1 million in the Current Period and Prior Period
remained consistent. Direct costs as a percentage of revenue was 4% for both the
Current Period and the Prior Period.
Selling, general and administrative expenses of approximately $.5 million in the
Current Period decreased by approximately $.7 million or 58% over comparable
expenses of approximately $1.2 million in the Prior Period. Selling, general and
administrative expenses decreased principally due to decreased professional
fees, rent, travel and other expenses due to the consolidation of certain office
spaces and the reduction of head count.
Depreciation and amortization expense of approximately $56,000 in the Current
Period decreased by approximately $43,000 over expense of approximately $99,000
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. The Company will perform its
annual impairment test during the fourth quarter of its fiscal year.
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
$.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.
Net interest income of approximately $11,000 in the Current Period decreased by
approximately $.2 million
18
over net interest expense of approximately $.2 million in the Prior Period. Net
interest income decreased primarily due to the decrease in interest rates
coupled with the decrease in average cash balances year over year.
The provision for income taxes of approximately $20,000 in the Current Period
increased by approximately $9,000 over the provision for income taxes 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 not certain
sufficient taxable income will be generated during the carry forward period to
utilize the deferred tax assets.
The loss from discontinued operations in the Current Period and the Prior
Period are the results of losses incurred during the respective periods from
Grizzard and the Northeast Operations which have been sold.
In connection with the sale of the Northeast Operations, the Company incurred a
loss on disposal of discontinued operations of approximately $.1 million in the
three months ended December 31, 2002. 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.
As a result of the above, net income of approximately $2.6 million in the
Current Period increased by approximately $6.8 million over comparable net loss
of approximately $4.2 million in the Prior Period.
Results of Operations for the Six Months Ended December 31, 2002, Compared to
the Six Months Ended December 31, 2001
Revenues of approximately $7.7 million for the six months ended December 31,
2002 (the "Current Period") increased by approximately $.9 million or 14% over
revenues of approximately $6.7 million during the six months ended December 31,
2001 (the "Prior Period"). In the prior year revenue was depressed due to
unexpected client cancellations and postponed fundraising campaigns due to the
terrorist events of September 11th. In addition, the Company moved its call
center during the Fall of 2001 and as a result slowed down operations for a
period of time in the Prior Period.
Salaries and benefits of approximately $6.9 million in the Current Period
decreased by approximately $.4 million or 6% over salaries and benefits of
approximately $7.3 million in the Prior Period. Salaries and benefits decreased
due to decreased headcount 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 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 and the Chief Accounting
Officer voluntarily forgave part of their base compensation to effect a
reduction of approximately 30% to $350,000 and $125,000 per year, respectively.
Direct costs of approximately $.4 million in the Current Period increased by
approximately $62,000 or 21% over direct costs of approximately $.3 million in
the Prior Period. Direct costs as a percentage of revenue was 4% for both the
Current Period and the Prior Period.
Selling, general and administrative expenses of approximately $.9 million in the
Current Period decreased by approximately $1.2 million or 56% over comparable
expenses of approximately $2.2 million in the Prior Period. Selling, general and
administrative expenses decreased principally due to decreased professional
fees, rent, travel and other expenses due to the consolidation of certain office
spaces and the reduction of head count.
19
Depreciation and amortization expense of approximately $.1 million in the
Current Period decreased by approximately $86,000 over expense of approximately
$.2 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. The Company will perform its
annual impairment test during the fourth quarter of its fiscal year.
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 six months ended December 31, 2002.
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.
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 $1.0 million plus reimbursement of mailing costs.
Net interest expense of approximately $17,000 in the Current Period decreased by
approximately $.2 million over net interest income of approximately $.2 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 provision for income taxes of approximately $31,000 in the Current Period
increased by approximately $11,000 over the provision for income taxes of
approximately $42,000 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 not certain
sufficient taxable income will be generated during the carry forward period to
utilize the deferred tax assets.
The loss from discontinued operations in the Current Period and the Prior Period
are the results of loss
20
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 six months ended December 31, 2001 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 $.1 million in the
six months ended December 31, 2002. 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.
For the six months ended December 31, 2001, 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 a result of the above, net loss of approximately $2.3 million in the Current
Period decreased by approximately $12.2 million over comparable net loss of
$14.5 million in the Prior Period.
Capital Resources and Liquidity
Financial Reporting Release No. 61, which was released by the SEC, requires all
companies to include a discussion to address, among other things, liquidity,
off-balance sheet arrangements, contractual obligations and commercial
commitments. The Company currently does not maintain any off-balance sheet
arrangements.
Leases: The Company leases various office space and equipment under
non-cancelable long-term leases. The Company incurs all costs of insurance,
maintenance and utilities.
Future minimum rental commitments under all non-cancelable leases, as of
December 31, 2002 are as follows:
Operating Leases
----------------
2003 $ 311,100
2004 539,010
2005 387,001
2006 199,680
2007 199,680
Thereafter 83,200
----------
$1,719,671
==========
Debt: 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.
The letter of credit is collateralized by cash, which has been classified as
restricted cash in the current asset section of the balance sheet as of
September 30, 2002. The Company has a remaining obligation of approximately $4.6
million under the holdback agreement. The remaining obligation is included in
current portion of long-term obligations as of December 31, 2002 and is payable
in March 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
21
$4.6 million and utilized its restricted cash. Approximately $.3 million of
restricted cash became available for general corporate use.
In connection with an acquisition, the Company incurred promissory notes payable
to former shareholders, payable monthly at 5.59% interest through January 2004.
The remaining obligation is approximately $.3 million in aggregate with
approximately $26,000 included in long-term obligations, net of current portion.
In December 2002, the Company successfully 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. 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 is
approximately $1.7 million in aggregate with $.3 million included in accrued
expense and other current liabilities and approximately $1.4 million included in
other liabilities.
Preferred Stock: On October 2, 2002, the common stockholders ratified the
issuance of the Series E preferred stock and approve the stockholders right to
convert such preferred stock to common stock beyond the previous 19.99%
limitation. Subsequently, in the quarter ending December 31, 2002, the preferred
shareholders converted 149 shares of Series E preferred into 79,762 shares of
common stock.
On December 31, 2002, the Company entered into a redemption agreement with the
holders of the Series E preferred stock. The Company agreed to redeem the
outstanding shares of the preferred stock for a cash payment of approximately
$6.0 million and the issuance of 181,301 shares of common stock valued at
approximately $.2 million as of December 31, 2002. The redemption occurred in
January 2003. The carrying value of the preferred stock is approximately $20.2
million which includes a beneficial conversion feature of approximately $10.3
million. If the transaction had occurred on December 31, 2002, it would have
resulted in a gain on redemption of approximately $14.0 million. Total
stockholder's equity would have increased by approximately $3.8 million which
consists of approximately $3.7 million for the gain on redemption ($14.0 million
gain net of beneficial conversion feature of $10.3 million) and approximately
$.2 million for the value of the additional shares issued.
Historically, the Company has funded its operations, capital expenditures and
acquisitions primarily through cash flows from operations, private placements of
common and preferred stock, and its credit facilities. At December 31, 2002, the
Company had cash and cash equivalents of approximately $8.7 million and accounts
receivable net of allowances of approximately $1.4 million, offset by accounts
payable of approximately $.4 million.
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 to the
Consolidated Financial Statements and in this MD&A, 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 instructed 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.
22
The Company generated a net loss of approximately $2.3 million in the six months
ended December 31, 2002 ("Current Period").
Cash used in operating activities in the Current Period was approximately $.7
million. Cash used by operating activities principally consists of the net
income from continuing operations adjusted for the gain on termination of lease
offset by a decrease in accounts payable and accrued expenses, less a decrease
in accounts receivable and other assets.
In the Current Period, net cash of approximately $8.5 million was provided by
investing activities consisting of net proceeds from the sale of the Northeast
Operations. In the Prior Period, net cash provided by investing activities of
approximately $73.5 million consisted of proceeds from the sale of Grizzard of
approximately $78.8 million, offset by the increase in restricted cash of
approximately $4.9 million and purchases of property and equipment of
approximately $.3 million.
In the Current Period, net cash of approximately $2.3 million was used in
financing activities consisting primarily of repayments of credit facilities and
long-term debt. In the Prior Period, net cash used in financing activities of
approximately $.8 million consisted of issuance of related party note receivable
of approximately $1.0 million, repayments of related party notes payable of
approximately $.2 million, repayments of long term debt of approximately $.1
million offset by approximately $.5 million in proceeds from credit facilities.
At December 31, 2002, the Company had amounts outstanding of approximately $.2
million on its lines of credit. The Company had approximately $1.0 million
available on its lines of credit as of December 31, 2002. As of December 31,
2002, the Company was in compliance with its line of credit covenants.
23
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 December 31, 2002, the Company had approximately
$.2 million of variable rate indebtedness outstanding.
24
Item 4 - Controls and Procedures
Evaluation of disclosure controls and procedures.
Our principal executive officer and our principal financial officer, after
evaluating the effectiveness of our "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d- 14(c) as
of a date within 90 days before the filing date of this quarterly report (the
"Evaluation Date"), have concluded that as of the Evaluation Date our disclosure
controls and procedures were adequate and designed to ensure that material
information relating to us and our consolidated subsidiaries would be made known
to them by others within those entities.
Changes in internal controls
There were no significant changes in our internal controls or, to our knowledge,
in other factors that could significantly affect our disclosure controls and
procedures subsequent to the Evaluation Date.
25
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On October 2, 2002, the Company held a Special Meeting of Stockholders to vote
on the approval of shares of preferred stock and the shares of common stock
issued or issuable upon the conversion of the preferred stock.
The shares voted regarding the Board of Directors' proposal to approve the
issuance of shares of preferred stock and the shares of common stock issued or
issuable upon the conversion of the preferred stock. were as follows:
For 462,940
Against 5,358
Abstain 651
Item 6 Exhibits and Reports on Form 8-K
Exhibits
24 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002 Sarbanes Oxley Act of 2002 (a)
(a) Included herein in the Company's Report on Form 10Q for the quarter ended
December 31, 2002
Reports on Form 8-K
On or about October 2, 2002, the Company filed a current report on Form 8-K
regarding approval by the common stockholders of the issuance of the Series E
preferred stock and the stockholders right to convert such preferred stock to
common stock beyond the previous 19.99% limitation.
On or about December 9, 2002, the Company filed a current report on Form 8-K
regarding the completion of the sale of substantially all the assets of its
Northeast Operations.
26
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MKT SERVICES, INC.
(Registrant)
Date: February 14, 2003 By: /s/ J. Jeremy Barbera
-----------------------------------
J. Jeremy Barbera
Chairman of the Board and Chief
Executive Officer
Date: February 14, 2003 By: /s/ Cindy H. Hill
-----------------------------------
Cindy H. Hill
Chief Accounting Officer
27
MKTG SERVICES, INC.
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, J. Jeremy Barbera, certify that:
1. I have reviewed the quarterly report on this Form 10-Q of MKTG
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered in this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and to the
audit committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
By: /s/ J. Jeremy Barbera
-----------------------------------
J. Jeremy Barbera
Chairman of the Board and Chief
Executive Officer
Principal Executive Officer
28
MKTG SERVICES, INC.
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Cindy H. Hill, certify that:
1. I have reviewed the quarterly report on this Form 10-Q of MKTG
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered in this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and to the
audit committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Cindy H. Hill
-------------------------------
Cindy H. Hill
Chief Accounting Officer
Principal Financial Officer
29
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as............................... 'SS'