10-K 1 junefy03txt.txt FISCAL YEAR 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to________________________ Commission file number 0-16730 MKTG SERVICES, INC. (Exact Name of Registrant as Specified in Its Charter) Nevada 88-0085608 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 333 Seventh Avenue New York, New York 10001 -------------------------------------- -------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (917) 339-7150 -------------- Securities registered pursuant to Section 12(b) of the Act: None -------------- Securities registered pursuant to Section 12(g) of the Act: -------------- Common Stock, par value $.01 per share (Title of class) Indicate be check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of October 10, 2003, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $1,235,467. As of October 10, 2003 , there were 1,092,367 shares of the Registrant's common stock outstanding. Documents incorporated by reference: Portions of the Company's definitive proxy statement expected to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 have been incorporated by reference into Part III of this report. 1 PART I Special Note Regarding Forward-Looking Statements ------------------------------------------------- Some of the statements contained in this Annual Report on Form 10-K discuss our plans and strategies for our business or state other forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; industry capacity; direct marketing and other industry trends; demographic changes; competition; the loss of any significant customers; changes in business strategy or development plans; availability and successful integration of acquisition candidates; availability, terms and deployment of capital; advances in technology; retention of clients not under long-term contract; quality of management; business abilities and judgment of personnel; availability of qualified personnel; changes in, or the failure to comply with, government regulations; and technology, telecommunication and postal costs. Item 1 - Business ----------------- General ------- MKTG Services, Inc. (" The Company or MKTG") is a leading relationship marketing company focused on assisting corporations with customer acquisition and retention strategies and solutions. Employing highly customized telemarketing and telefundraising operations, MKTG delivers campaigns that strengthen brands, increase customer loyalty and consistently yield a high net return for its clients. MKTG provides relationship-marketing solutions to approximately 100 clients with revenues for the fiscal year ended June 30, 2003 of $15.8 million. The Company currently has over 70 full-time employees with its operations in Los Angeles and New York. The Company's Strategy ---------------------- MKTG's strategy to enhance its position as a value-added premium provider of relationship marketing services is to: o Focus on our existing relationship marketing services business; o Deepen market penetration in new industries and market segments as well as those currently served by the Company; o Pursue strategic acquisitions, joint ventures and marketing alliances to expand the services offered and industries served. Background ---------- The Company was originally incorporated in Nevada in 1919. The current business of MKTG, most recently known as Marketing Services Group, Inc., began operations in 1995. During the past seven years, the Company has acquired or formed several direct marketing and related companies. Do in part to decreased market demands and limited capital resources the Company disposed or ceased operations of all such companies except its teleservices operations.
Date Name of Company Acquired Service Performed ---- ------------------------ ----------------- May 1995 Stephen Dunn & Associates, Inc. Provides telemarketing and telefundraising, specializing in the arts, educational 2 and other institutional tax exempt organizations. October 1996 Metro Direct, Inc. Develops and markets a variety of database marketing and direct marketing products. (sold as part of the December 2002 sale of the direct market business) July 1997 Pegasus Internet, Inc. Provides a full suite of Internet services including content development and planning, marketing strategy, on-line ticketing system development, technical site hosting, graphic design, multimedia production and electronic commerce.(these operations were either terminated or moved to other operating ivisions) December 1997 Media Marketplace, Inc. Specializes in providing list Media Marketplace Media Division, Inc. management, list brokerage and media planning and buying services. (sold as part of the December 2002 sale of the direct market business) May 1998 Formed Metro Fulfillment, Inc. Performed services such as on-line commerce, real-time database management inbound/outbound customer service, custom packaging, assembling, product warehousing, shipping, payment processing and retail distribution. (sold in March and September of 1999) January 1999 Stevens-Knox & Associates, Inc. Specializes in providing list Stevens-Knox List Brokerage, Inc. management, list brokerage and Stevens-Knox International, Inc. database management services. (sold as part of the December 2002 sale of the direct market business) May 1999 CMG Direct Corporation Specializes in database services. (part of this business became WiredEmpire, the balance was sold as part of the December 2002 sale of the direct marketing business) October 1999 Acquired 87% of Cambridge Intelligence Agency and formed WiredEmpire, Inc. A licensor of email marketing tools. March 2000 Grizzard Advertising, Inc. Specialized in strategic planning, creative services, database management, print-production, mailing and Internet marketing. 3 March 2000 The Coolidge Company Specializes in list management and list brokerage services. (sold in July 2001) September 2000 Begin plan to discontinued the operation of WiredEmpire, Inc. (completed in January 2001).
Capital Stock and Certain Financing Transactions ------------------------------------------------ In August 2001, the Company entered into a stand by letter of credit with a bank in the amount of approximately $4.9 million to support the remaining obligations under a holdback agreement with the former shareholders of Grizzard Communications Group, Inc. ("Grizzard"). The letter of credit was collateralized by cash and has been classified as restricted cash in the current asset section of the balance sheet as of June 30, 2002. The letter of credit was subject to an annual facility fee of 1.5%. The remaining obligation was settled in January 2003 and accordingly the letter of credit was terminated. On October 2, 2002, the common stockholders ratified the issuance of the Series E preferred stock and approved the stockholders right to convert such preferred stock to common stock beyond the previous 19.99% limitation. Subsequently, the preferred shareholders converted 149 shares of Series E preferred stock into 79,767 shares of common stock. In November 2002, the Company repaid approximately $.3 million balance of one credit facility. In connection with the sale of the Company's Northeast Operations (See Note 3), another credit facility of approximately $.3 million was fully repaid and terminated in December 2002. In June 2002, the Company received notification from The Nasdaq Stock Market ("Nasdaq") that the Company's common stock has closed below the minimum $1.00 per share requirement for continued inclusion under Marketplace Rule 4310(c)(4). In October 2002, the Company received another notification from Nasdaq that based on its June 30, 2002 filing the Company does not meet compliance with Marketplace Rule 4310(c)(2)(B). Such rule requires the Company to have a minimum of $2.0 million in net tangible assets or $2.5 million in stockholders' equity or a market value of listed securities of $35.0 million or $.5 million of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. In December 2002, the Company received notification from Nasdaq indicating that the Company was subject to delisting. The Company has responded to Nasdaq with its plan and believes that it can achieve compliance with Marketplace Rule 4310(c)(2)(B) by achieving minimum stockholders' equity of $2.5 million. In addition, in January 2003, the Company affected an eight-for-one reverse stock split. (See Note 2). In February 2003, the Company received notification from Nasdaq that the Company's was not in compliance with the Nasdaq's market value of publicly held shares requirements, as set forth in Nasdaq Marketplace Rule 4310(c)(07). The Company believes that its subsequent issuance of common shares for the redemption of its preferred stock (See Note 15) has brought the Company back into compliance with the minimum public float requirement. The Company appealed the Staff's decision to delist the Company to a Nasdaq Listing Qualification Panel. The hearing was held on February 13, 2003. On March 5, 2003, a Nasdaq Listing Qualifications Panel determined to continue the listing of the Company's securities on the Nasdaq SmallCap Market on the condition, among other things, that the Company make a public filing with the Securities and Exchange Commission and Nasdaq evidencing shareholders' equity of at least $2,5000,000 and further that the Company file its quarterly report on Form 10Q for the March 31, 2003 quarter on or before May 15, 2003. On March 13, 2003, the Company filed an unaudited balance sheet as of January 31, 2003 evidencing shareholders' equity of at least $2,5000,000. On May 22, 2003, the Company received notification from Nasdaq that the Company satisfactorily demonstrated compliance and, accordingly, the Nasdaq Listing Qualifications Panel determined to continue the listing of the Company's securities on The Nasdaq SmallCap Market and to close the hearing file. 4 In December 2002, the Company completed its sale of substantially all the assets relating to its direct list sales and database services and website development and design business held by certain of its wholly owned subsidiaries (the "Northeast Operations") to Automation Research, Inc. ("ARI"), a wholly owned subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash plus the assumption of all directly related liabilities. As such, the operations and cash flows of the Northeast Operations have been eliminated from ongoing operations and the Company no longer has continuing involvement in the operations. Accordingly, the statement of operations and cash flows for the years ended June 30, 2003, 2002 and 2001 has been reclassified into a one-line presentation and is included in Loss from Discontinued Operations and Net Cash Used by Discontinued Operations. In addition, the assets and liabilities of the Northeast Operations have been segregated and presented in Net Assets of Discontinued Operations and Net Liabilities of Discontinued Operations as of June 30, 2002. In connection with the sale of the Northeast Operations, the Company recognized a loss on disposal of discontinued operations of approximately $.2 million in the year ended June 30, 2003. The loss represents the difference in the net book value of assets and liabilities as of the date of the sale as compared to the net consideration received after settlement of purchase price adjustments. There was no tax impact on this loss. In December 2002, the Company negotiated a termination of a lease for an abandoned lease property. The agreement required an up front payment of $.3 million and the Company is obligated to pay approximately $60,000 per month until the landlord has completed certain leasehold improvements for a new tenant and then Company is obligated to pay $20,000 per month until August 2010 and the Company was released from all other obligations under the lease. The gain on lease termination represents a change in estimate representing the difference between the Company's present value of its future obligations and the entire obligation that remained on the books under the original lease obligation. The remaining obligation has been recorded in accrued expenses and other current liabilities and other liabilities. On January 22, 2003, the Board of Directors approved an eight-for-one reverse split of the common stock. Par value of the common stock remains $.01 per share and the number of authorized shares of common stock is reduced to 9,375,000. The stock split was effective January 27, 2003. All stock prices, per share and share amounts have been retroactively restated to reflect the reverse split and are reflected in this document. In January 2003, the Company redeemed the outstanding shares of the preferred stock for a cash payment of approximately $6.0 million and the issuance of 181,302 shares of common stock valued at approximately $.2 million. The carrying value of the preferred stock was approximately $20.2 million which included a beneficial conversion feature of approximately $10.3 million. The transaction resulted in a gain on redemption of approximately $14.0 million and is reflected in net income attributable to common stockholders for the year ended June 30, 2003. In January 2003, the Company entered into an agreement and settled the outstanding amount owed to the former Grizzard shareholders in connection with a holdback agreement. The Company paid approximately $4.6 million and utilized its restricted cash. Approximately $.3 million of restricted cash became available for general corporate use. In 1999, a lawsuit under Section 16(b) of the Securities Exchange Act of 1934 was commenced against General Electric Capital Corporation ("GECC") by Mark Levy, derivatively on behalf of the Company, to recover short swing profits allegedly obtained by GECC in connection with the purchase and sale of MKTG securities. The case was filed in the name of Mark Levy v. General Electric Capital Corporation, in the United States District Court for the Southern 5 District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002, a settlement was reached among the parties. The settlement provided for a $1.3 million payment to be made to MKTG by GECC and for GECC to reimburse MKTG for the reasonable cost of mailing a notice to stockholders up to $30,000. On April 29, 2002, the court approved the settlement for approximately $1.3 million, net of attorney fees plus reimbursement of mailing costs. In July 2002, the court ruling became final and the Company received and recorded the net settlement payment of approximately $965,000 plus reimbursement of mailing costs. The net settlement has been recorded as a gain from settlement of lawsuit and is included in the statement of operations for the year ending June 30, 2003. The Company has limited capital resources and has incurred significant historical losses and negative cash flows from operations. The Company believes that funds on hand, funds available from its remaining operations and its unused lines of credit should be adequate to finance its operations and capital expenditure requirements and enable the Company to meet interest and debt obligations for the next twelve months. As explained in Note 3, the Company recently sold off substantially all the assets relating to its direct list sales and database services and website development and design business held by certain of its wholly owned subsidiaries. In addition, the Company has instituted cost reduction measures, including the reduction of workforce. The Company believes, based on past performance as well as the reduced corporate overhead, that its remaining operations should generate sufficient future cash flow to fund operations. Failure of the remaining operation to generate such sufficient future cash flow could have a material adverse effect on the Company's ability to continue as a going concern and to achieve its business objectives. The accompanying financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result should the Company be unable to continue as a going concern. The Telemarketing / Telefundraising Industry --------------------------------------------- Overview. Telemarketing is used for a variety of purposes including fundraising, lead-generation and prospecting for new customers, enhancing existing customer relationships, exploring the potential for new products and services and establishing new products. Unlike traditional mass marketing aimed at a broad audience and focused on creating image and general brand or product awareness, successful telemarketing requires the identification and analysis of customers and purchasing patterns. Such patterns enable businesses to more easily identify and create a customized message aimed at a highly defined audience. Telemarketing/telefundraising projects generally require significant amounts of customer information supplied by the client or third party sources. Custom telemarketing/telefundraising programs seek to maximize a client's direct marketing results by utilizing appropriate databases to communicate with a specific audience. This customization is often achieved through sophisticated and comprehensive data analysis which identifies psycho graphic, cultural and behavioral patterns in specific geographic markets. Industry Growth. The Company provides telemarketing and telefundraising services primarily to the non-profit sector. As such, the Company's business activities and operations are exempt from the effects of the new National Do Not Call Registry amendment to the Telemarketing Sales Rules of the Federal Trade Commission, which has it's strongest effect on the retail "cold calling" telemarketing industry . The company's client base consists of various non-profit organizations which rely on the Company's services for soliciting charitable donations, program subscriptions, and other functions related to general fund raising. These areas are exempt from the rules governed by the National Do Not Call Registry. The Company sees no ill effects to either its ability to perform its current business operations or to grow its business operations within the non-profit telemarketing and telefundraising sector. 6 Services. The Company's operating business provides comprehensive custom telemarketing/telefundraising. The principal advantages of customized services include: (i) the ability to expand and adapt a database to the client's changing business needs; (ii) the ability to have services operate on a flexible basis consistent with the client's goals; and (iii) the integration with other direct marketing, Internet, database management and list processing functions, which are necessary to keep a given database current. The services offered by the Company are described below. Telemarketing / Telefundraising Custom Telemarketing/Telefundraising Services. Custom telemarketing/telefundraising services are designed according to the client's existing database and any other databases, which may be purchased or rented on behalf of the client to create a direct marketing program or fundraising campaign to achieve specific objectives. After designing the program according to the marketing information derived from the database analysis, it is conceptualized in terms of the message content of the offer or solicitation, and an assessment is made of other supporting elements, such as the use of a direct mail letter campaign. Typically, a campaign is designed in collaboration with a client, tested for accuracy and responsiveness and adjusted accordingly, after which the full campaign is commenced. The full campaign runs for a mutually agreed period, which can be shortened or extended depending on the results achieved. The Company maintains a state-of-the-art outbound telemarketing/telefundraising calling center in El Segundo, California. The El Segundo calling center increases the efficiency of its outbound calling by using a computerized predictive dialing system supported by a UNIX based call processing server system and networked computers. The predictive dialing system, using relational database software, supports 64 outbound telemarketers and maximizes calling efficiency by reducing the time between calls for each calling station and reducing the number of calls connected to wrong numbers, answering machines and electronic devices. The system provides on-line real time reporting of caller efficiency and client program efficiency as well as flexible and sophisticated reports analyzing caller sales results and client program results against Company and client selected parameters. The El Segundo calling center has the capacity to serve up to 20 separate clients or projects simultaneously and can produce 36,864 or more valid contacts per week, depending on the nature of the lead base or 3,072 calling hours per week (159,744 per year) on a single shift basis. A valid contact occurs when the caller speaks with the intended person and receives a "yes," "no" or "will consider" response. The existing platform can be expanded to accommodate 100 predictive dialing stations. Marketing and Sales ------------------- The Company's marketing strategy is to offer customized solutions to clients' telemarketing/telefundraisingrequirements. Historically, the Company's operating businesses have acquired new clients and marketed their services by attending trade shows, advertising in industry publications, responding to requests for proposals, pursuing client referrals and cross-selling to existing clients. The Company targets those companies that have a high probability of generating recurring revenues because of their ongoing telemarketing/telefundraising needs. The Company markets its services through a sales force consisting of both salaried and commissioned sales persons. On-site telemarketing and telefundraising fees are generally based on hourly billing rates and a mutually agreed percentage of amounts received by the Company's clients from a campaign. Off-site fees are typically based on a mutually agreed amount per telephone contact with a potential donor without regard to amounts raised for the client. Client Base ----------- 7 The Company believes that its diversified client base is a primary asset, which contributes to stability and the opportunity for growth in revenues. The Company has approximately 100 clients who utilize its telemarketing services. Its customized marketing capabilities combine comprehensive traditional marketing tactics with an aggressive integration of sophisticated software applications, Telefund and TeleSales, which track leads and results. Operating in Los Angeles, CA as well as in a variety of on-site locations throughout United States, the Company provides strategic services to prominent organizations in key markets including: Entertainment, Performing Arts, Education, Healthcare and Nonprofit. No single client accounted for more than 10% of total revenue for the fiscal years ended June 30, 2003, 2002 and 2001. Competition ----------- The relationship marketing services industry is highly competitive and fragmented, with no single dominant competitor. The Company competes with companies that have more extensive financial, marketing and other resources and substantially greater assets than those of the Company, thereby enabling such competitors to have an advantage in obtaining client contracts where sizable asset purchases or investments are required. The Company also competes with in-house telemarketing/telefundraising operations of certain of its clients or potential clients. Competition is based on quality and reliability of services, technological expertise, historical experience, ability to develop customized solutions for clients, technological capabilities and price. The Company believes that it competes favorably, especially in the media and entertainment, performing arts, education and healthcare sectors. The Company's principal competitors include: DCM Telemarketing, Share Group and Arts Marketing Services, Inc. The current market is highly competitive and the Company anticipates that new competitors will continue to enter the market. These competitors tend to have greater financial, technical and marketing resources than the Company. Facilities ---------- The Company leases all of its real property. Facilities for its headquarters are in New York City; its sales and service offices are located in El Segundo, California and its call center is also located in El Segundo, California. The Company believes that its remaining facilities are in good condition and are adequate for its current needs through fiscal 2004. The Company believes such space is readily available at commercially reasonable rates and terms. The Company also believes that its technological resources are all adequate for its needs through fiscal 2004. Intellectual Property Rights ---------------------------- The Company relies upon its trade secret protection program and non-disclosure safeguards to protect its proprietary computer technologies, software applications and systems know-how. In the ordinary course of business, the Company enters into license agreements and contracts which specify terms and conditions prohibiting unauthorized reproduction or usage of the Company's proprietary technologies and software applications. In addition, the Company generally enters into confidentiality agreements with its employees, clients, potential clients and suppliers with access to sensitive information and limits the access to and distribution of its software documentation and other proprietary information. No assurance can be given that steps taken by the Company will be adequate to deter misuse or misappropriation of its proprietary rights or trade secret know-how. The Company believes that there is rapid technological change in its business and, as a result, legal protections generally afforded through patent protection for its products are less significant than the knowledge, experience and know-how of its employees, the frequency of product enhancements and the timeliness and quality of customer support in the usage of such products. Government Regulation and Privacy Issues ---------------------------------------- 8 The telemarketing industry has become subject to an increasing amount of federal and state regulation. Violation of these rules may result in injunctive relief, monetary penalties or disgorgement of profits and can give rise to private actions for damages. While the Federal Trade Commission's new rules have not required or caused the Company to alter its operating procedures, additional federal or state consumer-oriented legislation could limit the telemarketing activities of the Company or its clients or significantly increase the Company's costs of regulatory compliance. Several of the industries which the Company intends to serve, including the financial services, and healthcare industries, are subject to varying degrees of government regulation. Although compliance with these regulations is generally the responsibility of the Company's clients, the Company could be subject to a variety of enforcement or private actions for its failure or the failure of its clients to comply with such regulations. Employees --------- At June 30, 2003, the Company employed approximately 811 persons, of whom 76 were employed on a full-time basis. Item 2 - Properties ------------------- The Company had owned land and buildings in Houston and Atlanta, which were included in the sale of Grizzard (see Note to the Company's consolidated financial statements included in this Form 10-K). In addition, the Company and certain subsidiaries lease facilities for office space summarized as follows and in Note 14 of Notes to the Company's consolidated financial statements included in this Form 10-K. Location Square Feet ---------- ----------- New York, New York 500 El Segundo, California 12,800 In addition, the Company is currently leasing approximately 36,900 square feet in New York, California, Pennsylvania and Massachusetts which is not being currently utilized. Accordingly, the Company has provided for the future estimated cost of these leases. Item 3 - Legal Proceedings -------------------------- In December 2000, an action was filed by Red Mountain, LLP in the United States Court for the Northern District of Alabama, Southern Division against J. Jeremy Barbera, Chairman of the Board and Chief Executive Officer of MKTG, MKTG and WiredEmpire, Inc. Red Mountains' complaint alleges, among other things, violations of Section 12(2) of the Securities Act of 1933, Section 10(b) of the Securities Act of 1934 and Rule 10(b)(5) promulgated there under, and various provisions of Alabama state law and common law, arising from Red Mountain's acquisition of WiredEmpire Preferred Series A stock in a private placement. Red Mountain invested $225,000 in WiredEmpire's preferred stock and it seeks that amount, attorney's fees and punitive damages. The Company believes that the allegations in the complaint are without merit. The Company intends to vigorously defend against the lawsuit. In December 2001, an action was filed by a number of purchasers of preferred stock of WiredEmpire, Inc., a discontinued subsidiary, in the Alabama State Court (Circuit Court of Jefferson County, Alabama, 10 Judicial Circuit of Alabama, Birmingham Division), against J. Jeremy Barbera, Chairman of the Board and Chief Executive Officer of MKTG, MKTG and WiredEmpire, Inc. The plaintiff's complaint alleges, among other things, violation of sections 8-6-19(a)(2) and 8-6-19(c) of the Alabama Securities Act and various other provisions of Alabama state law and common law, arising for the plaintiffs' acquisition of WiredEmpire Preferred Series A stock in a private placement. The plaintiffs invested approximately $1,650,000 in WiredEmpire's preferred stock and it seeks that amount, attorney's fees and punitive damages. On February 8, 2002, the defendants filed a petition to remove the action to federal court on the grounds of diversity of citizenship. The Company believes that the allegations in the complaint 9 are without merit. The Company intends to vigorously defend against the lawsuit. In June 2002, the Company entered into a tolling agreement with various claimants who acquired WiredEmpire Preferred Series A stock in a private placement. The agreement states that the passage of time from June 15, 2002 through August 31, 2002 shall not be counted toward the limit as set out by any applicable statute of limitations. In addition, the claimants agree that none of them shall initiate or file a legal action against Mr. Barbera, MKTG or WiredEmpire prior to the termination of the agreement. The claimants invested approximately $1,200,000 in WiredEmpire's preferred stock. In January 2003, a lawsuit was filed in Alabama, Circuit Court for Jefferson County by certain plaintiffs involved in the Agreement. The action was filed against J. Jeremy Barbera, Chairman of the Board and Chief Executive Officer of MKTG, MKTG and WiredEmpire, Inc. This lawsuit was settled during fiscal year 2003 and was fully covered by the Company's insurance. In 1999, a lawsuit under Section 16(b) of the Securities Exchange Act of 1934 was commenced against General Electric Capital Corporation ("GECC") by Mark Levy, derivatively on behalf of the Company, to recover short swing profits allegedly obtained by GECC in connection with the purchase and sale of MKTG securities. The case was filed in the name of Mark Levy v. General Electric Capital Corporation, in the United States District Court for the Southern District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002, a settlement was reached among the parties. The settlement provided for a $1,250,000 payment to be made to MKTG by GECC and for GECC to reimburse MKTG for the reasonable cost of mailing a notice to stockholders up to $30,000. On April 29, 2002, the court approved the settlement for $1,250,000, net of attorney fees plus reimbursement of mailing costs. In July 2002, the court ruling became final and the Company received and recorded the net settlement payment of $965,486 plus reimbursement of mailing costs. In June 2002, the Company received notification from The Nasdaq Stock Market ("Nasdaq") that the Company's common stock has closed below the minimum $1.00 per share requirement for continued inclusion under Marketplace Rule 4310(c)(4). In October 2002, the Company received another notification from Nasdaq that based on its June 30, 2002 filing the Company does not meet compliance with Marketplace Rule 4310(c)(2)(B). Such rule requires the Company to have a minimum of $2.0 million in net tangible assets or $2.5 million in stockholders' equity or a market value of listed securities of $35.0 million or $.5 million of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. In December 2002, the Company received notification from Nasdaq indicating that the Company was subject to delisting. The Company has responded to Nasdaq with its plan and believes that it can achieve compliance with Marketplace Rule 4310(c)(2)(B) by achieving minimum stockholders' equity of $2.5 million. In addition, in January 2003, the Company affected an eight-for-one reverse stock split. (See Note 2). In February 2003, the Company received notification from Nasdaq that the Company's was not in compliance with the Nasdaq's market value of publicly held shares requirements, as set forth in Nasdaq Marketplace Rule 4310(c)(07). The Company believes that its subsequent issuance of common shares for the redemption of its preferred stock (See Note 15) has brought the Company back into compliance with the minimum public float requirement. The Company appealed the Staff's decision to delist the Company to a Nasdaq Listing Qualification Panel. The hearing was held on February 13, 2003. On March 5, 2003, a Nasdaq Listing Qualifications Panel determined to continue the listing of the Company's securities on the Nasdaq SmallCap Market on the condition, among other things, that the Company make a public filing with the Securities and Exchange Commission and Nasdaq evidencing shareholders' equity of at least $2,5000,000 and further that the Company file its quarterly report on Form 10Q for the March 31, 2003 quarter on or before May 15, 2003. On March 13, 2003, the Company filed an unaudited balance sheet as of January 31, 2003 evidencing shareholders' equity of at least $2,5000,000. In addition, the filing of this Form 10Q further provides evidence of shareholders' equity of at least $2,5000,000. On May 22, 2003, the Company received notification from Nasdaq that the Company satisfactorily demonstrated compliance and, accordingly, the Nasdaq Listing Qualifications Panel determined to continue the listing of the Company's securities on The Nasdaq SmallCap Market and to close the hearing file. 10 In addition to the above, certain other legal actions in the normal course of business are pending to which the Company is a party. The Company does not expect that the ultimate resolution of the above matters and other pending legal matters will have a material effect on the financial condition, results of operations or cash flows of the Company. Item 4 - Submission of matters to a vote of security holders ------------------------------------------------------------- Not applicable. PART II Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters ------------------------------------------------------------------------------ The common stock of the Company trades on the NASDAQ National Market under the symbol "MKTG." Prior to July 30, 2001, the Company traded under the symbol "MSGI." The following table reflects the high and low sales prices for the Company's common stock for the fiscal quarters indicated, as furnished by the NASDAQ: Low High Fiscal 2003 --- ---- Fourth Quarter $1.30 $2.35 Third Quarter .12 1.98 Second Quarter .10 .32 First Quarter .13 .75 Fiscal 2002 Fourth Quarter $0.25 $2.34 Third Quarter .90 3.25 Second Quarter 2.04 5.05 First Quarter 2.10 7.50 On October 2, 2002, the common stockholders ratified the issuance of the Series E preferred stock and approved the stockholders right to convert such preferred stock to common stock beyond the previous 19.99% limitation. Subsequently, the preferred shareholders converted 149 shares of Series E preferred into 79,767 shares of common stock. On January 22, 2003, the Board of Directors approved an eight-for-one reverse split of the common stock. The stock split was effective January 27, 2003. Par value of the common stock remained $.01 per share and the number of authorized shares of common stock was reduced to 9,375,000 shares. The effect of the stock split has been reflected in the balance sheets and in all share and per share data in the accompanying condensed consolidated financial statements and Notes to Financial Statements. Stockholders' equity accounts have been retroactively adjusted to reflect the reclassification of an amount equal to the par value of the decrease in issued common shares from common stock account to paid-in-capital. In January 2003, the Company redeemed the outstanding shares of the preferred stock for a cash payment of approximately $6.0 million and the issuance of 181,302 shares of common stock valued at approximately $.2 million. The carrying value of the preferred stock was approximately $20.2 million which included a beneficial conversion feature of approximately $10.3 million. The transaction resulted in a gain on redemption of approximately $14.0 million and is reflected in net income(loss) attributable to common stockholders for the period ended June 30, 2003. As of June 30, 2003, there were approximately 1,019 registered holders of record of the Company's common stock. 11 The Company received notification from The Nasdaq Stock Market ("Nasdaq") that the Company's common stock has closed below the minimum $1.00 per share requirement for continued inclusion under Marketplace Rule 4310(c)(4). In October 2002, the Company received another notification from Nasdaq that based on its June 30, 2002 filing the Company does not meet compliance with Marketplace Rule 4310(c)(2)(B). Such rule requires the Company to have a minimum of $2.0 million in net tangible assets or $2.5 million in stockholders' equity or a market value of listed securities of $35.0 million or $.5 million of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. In December 2002, the Company received notification from Nasdaq indicating that the Company was subject to delisting. The Company has responded to Nasdaq with its plan and believes that it can achieve compliance with Marketplace Rule 4310(c)(2)(B) by achieving minimum stockholders' equity of $2.5 million. In addition, in January 2003, the Company affected an eight-for-one reverse stock split. (See Note 2). In February 2003, the Company received notification from Nasdaq that the Company's was not in compliance with the Nasdaq's market value of publicly held shares requirements, as set forth in Nasdaq Marketplace Rule 4310(c)(07). The Company believes that its subsequent issuance of common shares for the redemption of its preferred stock has brought the Company back into compliance with the minimum public float requirement. The Company appealed the Staff's decision to delist the Company to a Nasdaq Listing Qualification Panel. The hearing was held on February 13, 2003. On March 5, 2003, a Nasdaq Listing Qualifications Panel determined to continue the listing of the Company's securities on the Nasdaq SmallCap Market on the condition, among other things, that the Company make a public filing with the Securities and Exchange Commission and Nasdaq evidencing shareholders' equity of at least $2,5000,000 and further that the Company file its quarterly report on Form 10Q for the March 31, 2003 quarter on or before May 15, 2003. On March 13, 2003, the Company filed an unaudited balance sheet as of January 31, 2003 evidencing shareholders' equity of at least $2,5000,000. On May 22, 2003, the Company received notification from Nasdaq that the Company satisfactorily demonstrated compliance and, accordingly, the Nasdaq Listing Qualifications Panel determined to continue the listing of the Company's securities on The Nasdaq SmallCap Market and to close the hearing file. The Company has not paid any cash dividends on any of its capital stock in at least the last five years. The Company intends to retain future earnings, if any, to finance the growth and development of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. Item 6 - Selected Financial Data -------------------------------- The selected historical consolidated financial data for the Company presented below as of and for the five fiscal years ended June 30, 2003 have been derived from the Company's audited consolidated financial statements. This financial information should be read in conjunction with management's discussion and analysis (Item 7) and the notes to the Company's consolidated financial statements (Item 14).
Historical Years ended June 30, --- -------------------- (In thousands, except per share data) 1999(1) 2000 (2) 2001 2002(15) 2003(16) ------- ------- ----- -------- -------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues (11) $ 33,489 $ 62,488 $ 16,860 $ 16,027 $ 15,833 Amortization and depreciation $ 2,282 $ 6,028 $ 351 $ 393 $ 224 Income (loss) from operations $ (7,072) $(11,292) $ (4,996) $(18,011) (12) $ 3,112 (17) Income (loss) from continuing operations $ (7,646) (3) $(41,130) (6) $(14,670)(8) $(18,266) $ 3,940 (Loss) gain from discontinued operations - $(34,543) (7) $ 1,252 (9) $ 1,873 (13) $ (1,480) (18) 12 Net income (loss) $ (7,646) $(75,673) $(65,839) $(65,683) $ (2,615) (19) Net income (loss) available to common stockholders $ (20,181)(4) $(75,673) $(66,492) (10)$(66,096)(14) $ 11,356 (20) Income (loss) per diluted share (21) : Continuing operations $ (66.60) $ ( 74.24) $ ( 22.07) $ (24.44) $ 15.62 Discontinued operations - ( 62.35) ( 56.78) (62.03) (1.29) Cumulative effect of change in accounting - - ( 21.15) - (4.43) ----------- --------- --------- -------- -------- $ (66.60) $ (136.59) $ (100.00) $ (86.47) $ 9.90 Weighted average common shares Outstanding-diluted 303 554 665 764 1,147 OTHER DATA: EBITDA (5) $ (4,346) $ (4,844) $ (4,645) $ (4,718) $(1,534) Net cash used in operating activities: $ (45) $(11,357) $ (1,764) $ (13,086) $ (2,726) Net cash (used in) provided by investing activities: $ (18,939) $(60,116) $ (133) $ 72,894 $ 13,447 Net cash provided by (used in) financing activities: $ 16,035 $ 78,904 $ (3,704) $ (6,081) $(12,955) Net cash (used in) provided by discontinued operations - $ (812) $ (1,789) $ (50,118) $ (988) Historical As of June 30, (In thousands) CONSOLIDATED BALANCE SHEETS DATA: 1999 2000 2001 2002 2003 ---- ---- ---- ---- ---- Cash and cash equivalents $3,285 $ 9,904 $ 1,725 $ 4,438 $ 1,217 Working capital (deficit) $(9,647) $ 813 $ 29,146 $ 14,004 $ 712 Total goodwill and intangible assets $56,978 $ 154,016 $ 54,363 $ 2,317 $ 2,297 Total assets $97,627 $ 245,567 $ 170,390 $ 50,168 $ 7,648 Total long term debt, net of current portion $ 5,937 $ 36,157 $ 4,429 $ 176 $ - Total stockholders' equity $48,928 $ 113,957 $ 68,778 $ 1,390 $ 3,108
(1) Effective January 1, 1999, the Company acquired all of the outstanding common shares of Stevens-Knox List Brokerage, Inc., Stevens-Knox List Management, Inc. and Stevens-Knox International, Inc. (collectively, "SKA"). The results of operations for SK&A are included in the consolidated statements of operations beginning January 1, 1999. Effective March 1, 1999 the Company sold 85% of its subsidiary Metro Fulfillment. Accordingly, effective March 1, 1999 the results of operations of MFI are no longer consolidated in the Company's statement of operations. On May 13, 1999, the Company acquired all of the outstanding common shares of CMG Direct, Inc. The results of operations are included in the consolidated statements of operations beginning May 14, 1999. The results for the year ended June 30, 1999 have not been restated to reflect discontinued operations resulting from the sale of the Northeast operations and Grizzard. Please refer to the footnotes number 15 and 16 below. (2) On March 31, 2000, the Company acquired all of the outstanding common shares of The Coolidge Company. On March 22, 2000 the Company acquired all of the outstanding common shares of Grizzard Advertising, Inc. Effective October 1, 1999, the Company acquired 87% of the outstanding common shares of The Cambridge Intelligence Agency. The results of operations for these acquisitions are included in the consolidated statements of operations from the date of the respective acquisition. The results for the year ended June 30, 1999 have not been restated to reflect discontinued operations resulting from the sale of the Northeast operations and Grizzard. Please refer to the footnotes number 15 and 16 below. (3) Loss from continuing operations includes a severance charge of $1,125 and a compensation expense on option grants of $444 which were granted at exercise prices below market value. (4) Net loss available to common shareholders includes the impact of dividends on preferred stock for (a) adjustment of the conversion ratio of $11,366 for exercises of stock options and warrants; (b) $949 in cumulative undeclared preferred stock dividends; and (c) $220 of periodic non-cash accretions of preferred stock. (5) EBITDA is defined as earnings from continuing operations before interest, income tax, depreciation, amortization and other non-recurring and non-cash items. EBITDA should not be construed as an alternative to operating income or net income (as determined in accordance with generally accepted accounting principles), as an indicator of MKTG's operating performance, as an alternative to cash flows provided by operating activities (as determined in accordance with generally accepted accounting principles), or as a measure of liquidity. EBITDA is 13 presented solely as a supplemental disclosure because management believes that it enhances the understanding of the financial performance of a company with substantial amortization and depreciation expense. MKTG's definition of EBITDA may not be the same as that of similarly captioned measures used by other companies.
EBITDA Reconciliation: 1999(1) 2000(2) 2001(22) 2002 2003 ---- ---- ---- ---- ---- Loss from operations $(7,072) $(11,292) $(4,996) $(18,011) $3,112 Depreciation and amortization 2,282 6,027 351 393 $ 224 Goodwill write-down - - - 6,500 - Loss (gain) on sale of subsidiary - - - - - Compensation expense on option grants and severance 444 106 - - - Abandoned lease reserve / gain on termination - - - 6,400 (3,905) Legal settlements and legal fees - 315 - - (965) ------- --------- -------- -------- ------- EBITDA $ (4,346) $(4,844) $ (4,645) $(4,718) $(1,534) ======== ======== ========= ======== ========
(6) Loss from continuing operations includes a charge for $27,216 for write-downs of certain Internet investments. (7) On September 21, 2000, the Company's Board of Directors approved a plan to discontinue the operation of its WiredEmpire subsidiary, which at the time included the assets of Pegasus Internet, Inc. The Company shut down operations, which was completed by the end of January 2001. The estimated losses associated with WiredEmpire are $34,543 and are reported as discontinued operations. All prior period results have been classified as discontinued operations. (8) Loss from operations includes a write-down of Internet investments of $7,578 and expenses associated with settlement of litigation of $1,298. (9) In January 2001, the company sold certain assets of WiredEmpire for a gain of $1,252. (10) Net loss available to common stockholders includes a cumulative effect of a change in accounting of $14,064 in connection with the adoption of EITF 00-27. (11) Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," ("SAB 101") the Company has reviewed its accounting policies for the recognition of revenue. SAB 101 was required to be implemented in fourth quarter 2001. SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition in financial statements. The Company's policies for revenue recognition are consistent with the views expressed within SAB 101. See Note 2, "Significant Accounting Policies," for a description of the Company's policies for revenue recognition. The adoption of SAB 101 did not have a material effect on the Company's consolidated financial position, cash flows, or results of operations. Although net income was not materially affected, the adoption did have an impact on the amount of revenue recorded as the revenue associated with the Company's list sales and services product line are now required to be shown net of certain costs. The Company believes this presentation is consistent with the guidance in Emerging Issues Task Force ("EITF") 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent." All prior periods presented have been restated. (12) Loss from operations includes an impairment write-down of goodwill of $6,500 and a write-down of abandoned leased property of $6,400. (13) Discontinued operations include a loss on early extinguishment of debt of $4,859. (14) Net loss available to common stockholders includes a deemed dividend in the amount of $413 in connection with the redemption of preferred stock. (15) Effective July 31, 2001, the Company sold Grizzard Communications Group, Inc. The results of operations for Grizzard are no longer included in the Company's results from the date of sale. Amounts have been reclassified to discontinued operations (16) In December 2002, the Company completed the sale of substantially all of the assets related to its direct list sales and database services and website development and design business held by certain of its wholly owned subsidiaries (the "Northeast Operations") to Automation Research, Inc. for approximately $10.4 million in cash plus the assumption of all directly related liabilities. The results of the operations are no longer included in the company's results from the date of sale. Amounts have been reclassified to discontinued operations (17) Income from operations includes a gain on termination of lease of $3.9 million. (18) In December 2002, the Company sold certain assets of the Northeast Operations for a loss of $0.2 million (19) Net loss includes a gain from settlement of lawsuit of $1.0 million and a loss from a cumulative effect of change in accounting of $5.1 million. 14 (20) Net gain / (loss) available to common shareholders contains a gain (deemed dividend) on redemption of preferred stock of $13.9 million. (21) On January 22, 2003, the Board of Directors approved an eight-for-one reverse split of the common stock. Par value of the common stock remains $.01 per share and the number of authorized shares of common stock is reduced to 9,375,000. The stock split was effective January 27, 2003. All stock prices, per share and share amounts have been retroactively restated to reflect the reverse split and are reflected in this document. (22) The following is a summary of the quarterly operations for the years ended June 30, 2002 and 2003.
Historical Quarter ended June 30, (In thousands, except per share data) (unaudited) 9/30/2001(9) 12/31/2001(9) 3/31/2002(9) 6/30/2002(9) --------- ---------- --------- --------- Revenues (1) $ 3,793 $ 2,926 $ 3,381 $ 5,927 Loss from operations $(1,340) $ (1,904) $(7,826) (2) $(6,941) (3) Net loss $(10,314) $ (4,177) $(39,439) $(11,753) Net loss available to common stockholders $(10,314) $ (4,177) $(39,852) (4) $(11,753) Basic and diluted loss per share (5): Continuing operations $ (2.75) $ (2.38) $ (10.20) $ ( 9.11) Discontinued operations (15.71) (3.52) (38.67) ( 4.13) Cumulative effect of change in accounting - - - - --------------------------------------------------------- Basic and diluted loss per share $ (18.46) $ (5.90) $ (48.88) $ (13.24) =========================================================
Historical Quarter ended June 30, (In thousands, except per share data) (unaudited) 9/30/2002(9) 12/31/2002(9) 3/31/2003(9) 6/30/2003(9) --------- ---------- --------- --------- Revenues (1) $ 4,504 $ 3,159 $ 3,483 $ 4,687 Loss from operations $ (109) $ 3,362 (6) $ (322) $ 181 Net income (loss) $(5,317) (7) $ 2,636 $ (403) $ 470 Net income (loss) available to common stockholders $(5,317) $ 2,636 $ 13,567 (8) $ 470 Basic and diluted loss per share (5): Continuing operations $ 2.48 $ 10.16 $ 100.40 $ 11.92 Discontinued operations (2.00) (2.16) (.48) (5.68) Cumulative effect of change in accounting (15.36) - - (20.08) ------------------------------------------------------- Basic and diluted loss per share $(14.88) $ 8.00 $ 99.92 $(13.84) =======================================================
(1) Prior periods presented have been restated in accordance with SAB 101. See Note 2, "Significant Accounting Policies," of the Company's consolidated financial statements included in this Form 10-K. (2) Includes a write-off due to goodwill impairment of $6,500. (3) Includes a write-down of abandoned leased property of $6,400. (4) Includes a net deemed dividend(loss on redemption)in the amount of $413 for the quarters ending March 31,2002 in connection with the redemption of preferred stock. (5) On January 22, 2003, the Board of Directors approved an eight-for-one reverse split of the common stock. Par value of the common stock remains $.01 per share and the number of authorized shares of common stock is reduced to 9,375,000. The stock split was effective January 27, 2003. All stock prices, per share and share amounts have been retroactively restated to reflect the reverse split and are reflected in this (6) Includes a gain on termination of lease of $3.9 million. (7) Includes a gain on settlement of lawsuit of $1.0 million and a loss from cumulative effect of change in accounting principle of $5.1 million. (8) Includes a gain on redemption of preferred stock of $13.9 million. (9) In December 2002, the Company completed the sale of substantially all of the assets related to its direct list sales and database services and website development and design business held by certain of its wholly owned subsidiaries (the "Northeast Operations") to Automation Research, Inc. for approximately $10.4 million in cash plus the assumption of all directly related liabilities. The results of the operations are no longer included in the company's results from the date of sale. Amounts have reclassified to discontinued operations 15 Item 7 - Management's Discussion and Analysis --------------------------------------------- Overview -------- This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flows of the Company for the twelve-month period ended June 30, 2003. This should be read in conjunction with the financial statements, and notes thereto, included in this Form 10-K. Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. The following is a brief description of the more significant accounting policies and methods used by the Company. Revenue Recognition: Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," ("SAB 101") the Company has reviewed its accounting policies for the recognition of revenue. SAB 101 was implemented in fourth quarter 2001. SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition in financial statements. The Company's policies for revenue recognition are consistent with the views expressed within SAB 101. The adoption of SAB 101, did not have a material effect on the Company's consolidated financial position, cash flows, or results of operations. Although net income was not materially affected, the adoption did have an impact on the amount of revenue recorded as the revenue associated with the Company's list sales and services product line are now required to be shown net of certain costs. The Company believes this presentation is consistent with the guidance in Emerging Issues Task Force ("EITF") 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent." All prior periods presented have been restated. Revenues derived from on-site telemarketing and telefundraising are generally based on hourly billing rates and a mutually agreed percentage of amounts received by the Company's client from a campaign. These services are performed on-site at the clients' location. These revenues are earned and recognized when the cash is received by the respective client. Revenues derived from off-site telemarketing and telefundraising are generally based on a mutually agreed amount per telephone contact with a potential donor without regard to amounts raised for the client. These services are performed at the Company's calling center. These revenues are earned and recognized when the services are performed. Goodwill and Intangible Assets: Effective July 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS"), No. 142, "Goodwill and Other Intangible Assets". Under SFAS 142, the Company ceased amortization of goodwill and tests its goodwill on an annual basis using a two-step fair value based test. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of the impairment loss, if any. The Company completed the transition requirements under SFAS No. 142. The Company determined that it had three reporting units. Reporting unit 1 represents operations of list sales and services and database marketing. Reporting unit 2 represents the operations of telemarketing. Reporting unit 3 represents the operations of web site development and design. The company recognized and impairment charge of approximately $5.1 million in connection with the adoption of SFAS No. 142 for reporting units 1 and 3. The impairment charge has been booked by the Company in accordance with SFAS No. 142 transition provisions as a cumulative effect of a change in accounting principle for the year ended June 30, 2003. In connection with the sale of the Northeast Operations (See Note 3), the only remaining reporting unit consists of telemarketing. The remaining Goodwill relating to the Northeast Operations of approximately $8.1 million was included in loss from discontinued operations for the year ended June 30, 2003. At June 30, 2002, approximately $13.2 million of goodwill was included in net liabilities of discontinued operations. 16 Prior to the adoption of SFAS 142 on July 1, 2002, the Company amortized goodwill over its estimated useful life and evaluated goodwill for impairment in conjunction with its other long-lived assets. Intangible assets consist of capitalized software, which is being amortized under the straight-line method over 5 years. Conditions that would necessitate an impairment assessment include material adverse changes in operations, significant adverse differences in actual results in comparison with initial valuation forecasts prepared at the time of acquisition, a decision to abandon certain acquired products, services or marketplaces, or other significant adverse changes that would indicate the carrying amount of the recorded asset might not be recoverable. Long-Lived Assets: In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, the Company will recognize an impairment when the sum of undiscounted future cash flows (without interest charges) is less than the carrying amount of such assets. The measurement for such impairment loss is based on the fair value of the asset. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates and assumptions made in the preparation of the consolidated financial statements relate to the carrying amount and amortization of intangible assets, deferred tax valuation allowance, abandoned lease reserves and the allowance for doubtful accounts. Actual results could differ from those estimates. To facilitate an analysis of MKTG operating results, certain significant events should be considered. In March 2000, the Company completed a private placement of 3,200,000 shares of Convertible Preferred Stock of its WiredEmpire subsidiary for proceeds of approximately $18.7 million, net of placement fees and expenses of $1.3 million. On September 21, 2000, the Company's Board of Directors approved a plan to discontinue the operation of its WiredEmpire subsidiary. The Company shut down the operations by the end of January 2001. In the fiscal year ended June 30, 2000, the Company recorded losses associated with WiredEmpire of approximately $34.5 million. These losses included approximately $19.5 million in losses from operations through the measurement date and approximately $15.0 million of loss on disposal which included approximately $2.0 million in losses from operations from the measurement date through the estimated date of disposal. It also included provisions for vested compensation expense of $2.0 million, write down of assets to net realizable value of $8.8 million, lease termination costs of $1.9 million, employee severance and benefits of $1.8 million and other contractual commitments of $.5 million. As of June 30, 2002, approximately $1.7 million remains accrued representing payments expected to be made related to legal and lease obligations. On June 13, 2001, the board of directors and management of the Company approved a formal plan to sell Grizzard. In July 2001, the Company completed its sale of all the outstanding capital stock of its Grizzard subsidiary to Omnicom Group, Inc. The purchase price of the transaction was $89.8 million payable in cash, net of a working capital adjustment. As a result of the sale agreement, the Company fully paid the term loan of $35.5 million and $12.0 million 17 line of credit. The Company recorded an extraordinary loss of approximately $4.9 million in the year ended June 30, 2002 as a result of the early extinguishment of debt. At June 30, 2001, the assets and liabilities of Grizzard were classified as net assets held for sale in the amount of $80.9 million. In the year ended June 30, 2001, the Company recognized a loss on assets held for sale in the amount of $36.7 million representing a write-down of the amount of assets held for sale to net realizable value. Grizzard's revenues included in the Company's statement of operations for the fiscal years ended June 30, 2002, 2001 and 2000 were $2.8 million, $82.8 million and $19.6 million, respectively. Grizzard's net loss included in the Company's statement of operations for the fiscal years ended June 30, 2002, 2001 and 2000 were $8.5 million, $41.0 million and $3.8 million, respectively. The Company's business tends to be seasonal. Telemarketing services have higher revenues and profits occurring in the fourth fiscal quarter, followed by the first fiscal quarter. This is due to subscription renewal campaigns for its performing arts clients, which generally begin in the springtime and continue during the summer months. Results of Operations Fiscal 2003 Compared to Fiscal 2002 --------------------------------------------------------- Revenues of approximately $15.8 million for the year ended June 30, 2003 (the "Current Period") decreased by $0.2 million or 2% over revenues of $16.0 million during the year ended June 30, 2002 (the "Prior Period"). The decrease is due primarily to decreased teleservices billing. The decrease in such billing is a direct result of the impact of a weaker economy resulting in a reduction in our clients' marketing campaigns. Salaries and benefits of approximately $13.8 million in the Current Period decreased by approximately $1.8 million or 12% over salaries and benefits of approximately $15.6 million in the Prior Period. Salaries and benefits decreased due to decreased head count in several areas of the Company. The Company has been actively consolidating its offices and infrastructure. Redundant functions in operations were eliminated due to the consolidation of offices with the move of the call center in the Fall of 2001. In connection with a reduction in force, corporate head count was reduced from seven to three. In February 2003, certain compensation arrangements were modified. The Chief Executive Officer voluntarily forgave part of his base compensation to effect a reduction of approximately 30% to $350,000. The Chief Accounting Officer also forgave part of her base compensation to effect a reduction of approximately 30% and $125,000 per year and in addition, due to medical reasons resigned as Chief Accounting Officer of the Company in March 2003. The Chief Executive Officer has assumed the duties as the Chief Accounting Officer until such a replacement has been elected. Direct costs of approximately $0.6 million in the Current Period remained consistent with direct costs of $0.6 million in the Prior Period. Direct costs as a percentage of revenue was 4% and 4% for the Current Period and the Prior Period, respectively. 18 Selling, general and administrative expenses of approximately $1.9 million in the Current Period decreased by approximately $2.5 million or 55% over comparable expenses of $4.4 million in the Prior Period. Of the decrease, approximately $0.9 million is attributable to reductions in rent expenses for both the Los Angeles operations and Corporate office as a result of consolidation of office spaces. Approximately $0.5 million is attributable to reductions in professional fees such as legal and accounting services. The remaining reductions occurred in areas such as marketing, travel and entertainment and office expenses due to the consolidation of certain office spaces and the reduction of head count In the Prior Period, the Company realized an expense of approximately $6.4 million as a result of booking reserves for the cost of certain abandoned property. Gain on termination of lease of approximately $3.9 million in the Current Period was a result of the Company successfully negotiating a termination of a lease for an abandoned lease property. The agreement required an up front payment of approximately $.3 million and the Company is obligated to pay approximately $60,000 per month until the landlord has completed certain leasehold improvements for a new tenant and then Company is obligated to pay $20,000 per month until August 2010. The gain on lease termination represents a change in estimate representing the difference between the Company's present value of its new future obligations and the entire obligation that remained on the books under the original lease obligation as a result of the abandonment. The remaining obligation has been recorded in accrued expenses and other current liabilities and other liabilities. In the prior period, due to the weakened economy and lower than expected results, the Company had determined that there may not be sufficient cash flows to recover the remaining book value of goodwill. As a result, the Company recognized an impairment charge of approximately $6.5 million, which is included in loss from continuing operations. Depreciation and amortization expense of approximately $.2 million in the Current Period decreased by approximately $.2 over expense of approximately $.4 million in the Prior Period. The decrease is primarily due to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets." The Company adopted the new pronouncement as of July 1, 2002. This Statement eliminates amortization of goodwill and indefinite-lived intangible assets and initiates an annual review for impairment. Identifiable intangible assets with a determinable useful life will continue to be amortized. The adoption required the Company to cease amortization of its remaining net goodwill balance and to perform a transitional impairment test as of the adoption date in addition to an impairment test of its existing goodwill based on a fair value concept. During the Current Period, the Company recognized a gain on a settlement of a lawsuit. In 1999, a lawsuit under Section 16(b) of the Securities Exchange Act of 1934 was commenced against General Electric Capital Corporation ("GECC") by Mark Levy, derivatively on behalf of the Company, to recover short swing profits allegedly obtained by GECC in connection with the purchase and sale of MKTG securities. The case was filed in the name of Mark Levy v. General Electric Capital Corporation, in the United States District Court for the Southern District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002, a settlement was reached among the parties. The settlement provided for a $1.3 million payment to be made to MKTG by GECC and for GECC to reimburse MKTG for the reasonable cost of mailing a notice to stockholders up to $30,000. On April 29, 2002, the court approved the settlement for approximately $1.3 million, net of attorney fees plus reimbursement of mailing costs. In July 2002, the court ruling became final and the Company received and recorded the net settlement payment of approximately $965,000 plus reimbursement of mailing costs. Net interest expense of approximately $0.1 million in the Current Period decreased by approximately $0.2 million over net interest income of approximately $0.1 million in the Prior Period. Net interest income decreased primarily due to the decrease in interest rates coupled with the decrease in average cash. The net provision for income taxes of approximately $0.05 million in the Current Period decreased by approximately $0.05 million over net provision for income taxes of approximately $0.1 million from the Prior Period. In addition, the Company records provisions for state and local taxes incurred on taxable income or equity at the operating subsidiary 19 level, which cannot be offset by losses incurred at the parent company level or other operating subsidiaries. The Company has recognized a full valuation allowance against the deferred tax assets because it is more likely than not that sufficient taxable income will not be generated during the carry forward period to utilize the deferred tax assets. As a result of the above, income from continuing operations item of $3.9 million in the Current Period increased by $22.2 million over comparable loss of $18.3 in the Prior Period. . The loss from discontinued operations in the Current Period and the Prior Period are the results of loss incurred during the respective periods from Grizzard and the Northeast Operations which have been sold. The Company recorded a loss of approximately $4.9 million for the nine months ended March 31, 2002 as a result of the early extinguishment of debt which is included in the loss from discontinued operations and was previously classified as an extraordinary item. In connection with the sale of the Northeast Operations, the Company realized a loss on disposal of discontinued operations of approximately $.2 million in the year ended June 30, 2003. The loss primarily results from the difference in the net book value of assets and liabilities as of the date of the sale as compared to the net consideration received after settlement of purchase price adjustments. For the year ended June 30, 2002, the Company recognized a gain on sale of Grizzard in the amount of approximately $1.8 million which is included in the statement of operations in Gain From Disposal of Discontinued Operations. The gain represents the difference in the net book value of assets and liabilities as of the date of the sale as compared to the net consideration received after settlement of purchase price adjustments. As of December 31, 2002, the Company completed the transition requirements under SFAS No. 142. There is no impairment for its telemarketing unit. The Company recognized an impairment charge of approximately $5.1 million in connection with the adoption of SFAS No. 142 for its list sales and database marketing and website development and design business. The impairment charge has been booked by the Company in accordance with SFAS 142 transition provisions as a cumulative effect of change in accounting for the year ended June 30, 2003. As a result of the above, net loss of approximately $2.6 million in the Current Period decreased by approximately $63.1 million over comparable net loss of $65.7 million in the Prior Period. In the Current Period the Company recognized a gain on redemption of preferred stock of approximately $14.0 million and is reflected in net income(loss) attributable to common stockholders. The gain is a result of the difference between the consideration paid for redemption of a cash payment of approximately $6.0 million and the issuance of 181,302 shares of common stock valued at approximately $.2 million and the carrying value of the preferred stock which was approximately $20.2 million which included a beneficial conversion feature of approximately $10.3 million Results of Operations Fiscal 2002 Compared to Fiscal 2001 --------------------------------------------------------- Revenues of approximately $16.0 million for the year ended June 30, 2002 (the "Current Period") decreased by $0.8 million or 5% over revenues of $16.8 million during the year ended June 30, 2001 (the "Prior Period"). The decrease was a direct result of the impact of a weaker economy resulting in a reduction in our clients' marketing campaigns. In addition, since September 11 unexpected client cancellations, postponed fundraising campaigns and lost clients contributed to the decrease. Furthermore, for a period of time following September 11 our telemarketing call center was closed and all campaigns for such period were cancelled. Salaries and benefits of approximately $15.7 million in the Current Period decreased by approximately $0.5 million or 3% over salaries and benefits of approximately $16.2 million in the Prior Period due to decreased head count in various areas of the company during the current period. Direct costs of approximately $.6 million in the Current Period decreased by $0.3 million or 33% over direct costs of $0.9 million in the Prior Period due to the lower costs associated with the telemarketing / teleservices business. 20 Selling, general and administrative expenses of approximately $4.4 million in the Current Period remained consistent with expenses of approximately $4.4 million in the Prior Period. Reserve for rent on abandoned property of approximately $6.4 million in the Current Period represents a reasonable estimated reserve for all rent costs associated with certain leased property which has been abandoned by the Company. Goodwill impairment of $6.5 million in the Current Period represents an impairment charge for the write down of goodwill. Due to the weakened economy and lower than expected results, based on current information, the Company has determined that there will not be sufficient cash flows to recover all of the remaining book value of goodwill. Depreciation and amortization expense of approximately $0.4 in the Current Period remained consistent with expense of approximately $0.4 in the Prior Period. Settlement of litigation of approximately $.3 million and $1.3 million in the Current and Prior Periods, respectively, was due to the settlement of lawsuits with a previously owned subsidiary and one of their employees. Interest expense and other, net of approximately $0.09 million in the Current Period decreased by approximately $0.8 million over interest expense and other, net of approximately $0.7 million in the Prior Period. Of the decrease, approximately $0.6 million is attributable to the sale of Grizzard in July 2001 and the repayment of the related debt. Interest expense and other net, excluding the effects of the disposition of Grizzard decreased by $0.2 million due to interest income on excess cash. The net provision for income taxes of approximately $0.1 million in the Current Period decreased by approximately $0.05 million over net provision for income taxes of approximately $0.05 million from the Prior Period. In addition, the Company records provisions for state and local taxes incurred on taxable income or equity at the operating subsidiary level, which cannot be offset by losses incurred at the parent company level or other operating subsidiaries. The Company has recognized a full valuation allowance against the deferred tax assets because it is more likely than not that sufficient taxable income will not be generated during the carry forward period to utilize the deferred tax assets. As a result of the above, net loss of approximately $65.7 million in the Current Period decreased by approximately $0.1 million over comparable net loss of $65.8 million in the Prior Period. In the Prior Period, the Company sold certain assets of WiredEmpire for a gain of $1.3 million, which is included in loss from discontinued operations. In connection with the sale of Grizzard, the Company fully paid the term loan of $35.5 million and $12.0 million line of credit. As a result, the Company recorded an extraordinary loss of approximately $4.9 million in the Current Period as a result of the early extinguishments of debt. This amount is included in loss from discontinued operations. In the Current Period, the redemption of 5,000 preferred shares for $5.0 million, less the carrying value of the preferred shares, including the beneficial conversion feature previously recorded in equity on the balance sheet, resulted in a deemed dividend of $412,634 which was recorded to additional paid-in capital and included in the calculation of net loss attributable to common stockholders. In the Prior Period, the Company exchanged 328,334 shares of unregistered MKTG common stock for WiredEmpire preferred stock. The exchange resulted in a gain of $13.4 million for the year ended June 30, 2001, which was recorded through equity and is included in net loss attributable to common stockholders and earnings per share - discontinued operations. In September 2000, the EITF issued EITF 00-27 "Application of EITF 98-5 to Certain Convertible Instruments." EITF 21 00-27 addresses the accounting for convertible preferred stock issued since May 1999 that contain nondetachable conversion options that are in the money at the commitment date. EITF 00-27 changed the approach of calculating the conversion price used in determining the value of the beneficial conversion feature from using the conversion price stated in the preferred stock certificate to using the accounting conversion price. The adoption of this EITF increased the original value of the beneficial conversion feature from zero to $14.1 million. MKTG adopted EITF 00-27 in December 2000 and as a result has recorded a cumulative effect of a change in accounting of approximately $14.1 million in the year ended June 30, 2001 related to the March 2000 issuance of MKTG convertible preferred stock. The cumulative effect was recorded to additional paid-in capital and treated as a deemed dividend in the calculation of net loss attributable to common stockholders. Capital Resources and Liquidity ------------------------------- Financial Reporting Release No. 61, which was recently released by the SEC, requires all companies to include a discussion to address, among other things, liquidity, off-balance sheet arrangements, contractual obligations and commercial commitments. The Company currently does not maintain any off-balance sheet arrangements. Critical Accounting Policies: The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company believes that the estimates, judgments and assumptions upon which the Company relies are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The significant accounting policies that the Company believes are the most critical to aid in fully understanding and evaluating our reported financial results include the following: o Revenue Recognition o Allowances for Doubtful Accounts o Goodwill and Intangible Assets o Accounting for Income Taxes In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed the Company's critical accounting policies and related disclosures with our Audit Committee. See Notes to Consolidated Financial Statements, which contain additional information regarding our accounting policies and other disclosures required by GAAP. Leases: The Company leases various office space and equipment under non-cancelable long-term leases. The Company incurs all costs of insurance, maintenance and utilities. 22 Future minimum rental commitments under all non-cancelable leases, as of June 30, 2003 are as follows:
Rent Expense Less: Sublease Income Net Rent Expense 2004 $ 879,600 $ (79,200) $ 800,400 2005 640,800 (45,300) 595,500 2006 439,700 439,700 2007 439,680 - 439,680 2008 323,200 - 323,200 Thereafter 520,000 - 520,000 ------- ------------ ------- $3,243,000 $ (124,500) $3,118,500
Debt: In November 2002, the Company repaid approximately $.3 million balance of one credit facility. In connection with the sale of the Company's Northeast Operations, another credit facility of approximately $.3 million was fully repaid and terminated in December 2002. At June 30, 2003, the Company had amounts outstanding of approximately $.3 million on its remaining line of credit facility. The Company had approximately $1.1 million available on its line of credit as of June 30, 2003. As of June 30, 2003, the Company was in compliance with its line of credit covenants. In August 2001, the Company entered into a stand by letter of credit with a bank in the amount of approximately $4.9 million to support the remaining obligations under a holdback agreement with the former shareholders of Grizzard Communications Group, Inc. ("Grizzard"). The letter of credit was collateralized by cash and has been classified as restricted cash in the current asset section of the balance sheet as of June 30, 2002. The letter of credit was subject to an annual facility fee of 1.5%. The remaining obligation was settled in January 2003 and accordingly the letter of credit was terminated. Preferred Stock: In January 2003, the Company redeemed the outstanding shares of the preferred stock for a cash payment of approximately $6.0 million and the issuance of 181,302 shares of common stock valued at approximately $.2 million. The carrying value of the preferred stock was approximately $20.2 million which included a beneficial conversion feature of approximately $10.3 million. The transaction resulted in a gain on redemption of approximately $14.0 million and is reflected in net income attributable to common stockholders for the year ended June 30, 2003. On October 2, 2002, the common stockholders ratified the issuance of the Series E preferred stock and approved the stockholders right to convert such preferred stock to common stock beyond the previous 19.99% limitation. Subsequently, the preferred shareholders converted 149 shares of Series E preferred into 79,767 shares of common stock. The preferred shareholders converted 1,799 shares of preferred stock to 112,983 shares of common stock for the year ended June 30, 2002. In February 2002, the Company recognized a loss on the redemption of preferred stock of approximately $.4 million reflected in net loss attributable to common stockholders. The loss is the result of the difference between the consideration paid for redemption of the preferred stock for $5.0 million cash and the carrying value of the preferred stock of $4.6 million which included a beneficial conversion feature of approximately $2.4 million. On February 19, 2002, the Company entered into standstill agreements, as amended, with the Series E preferred shareholders in order for the Company to continue to discuss with multiple parties regarding the possibility of either restructuring or refinancing the remainder of the preferred stock. The Company's commitments as a result of the standstill agreements included a partial redemption of 5,000 of the Series E preferred shares for $5.0 million, thereby reducing the number of Series E preferred shares to 23,201 at June 30, 2002. The value of the preferred stock was 23 initially recorded at a discount allocating a portion of the proceeds to a warrant. The redemption of such preferred shares for $5.0 million, less the carrying value of the preferred shares, including the beneficial conversion feature previously recorded to equity on the balance sheet, resulted in a deemed dividend of $0.4 million which was recorded to additional paid-in and included in the calculation of net loss attributable to common stockholders for the year ended June 30, 2002. On February 24, 2000 the Company entered into a private placement with RGC International Investors LDC and Marshall Capital Management, Inc., an affiliate of Credit Suisse First Boston, in which the Company sold an aggregate of 30,000 shares of Series E Convertible Preferred Stock, par value $.01 ("Series E Preferred Stock"), and warrants to acquire 30,648 shares of common stock for proceeds of approximately $29.5 million, net of approximately $0.5 million of placement fees and expenses. The preferred stock was convertible into cash or shares of common stock on February 18, 2004 at the option of the Company. The preferred stock provided for liquidation preference under certain circumstances and accordingly had been classified in the mezzanine section of the balance sheet. The preferred stock had no dividend requirements. After adjustment for the reverse stock split, the Series E Preferred Stock was convertible at any time at $1,174.70 per share, subject to reset on August 18, 2000 if the market price of the Company's common stock was lower and subject to certain anti-dilution adjustments. On August 18, 2000, the conversion price was reset to $587.52 per share, the market price on that date as adjusted for the reverse stock split. As a result of the issuance of a certain warrant, certain antidilultive provisions of the Company's Series E preferred stock were triggered. The conversion price of such shares was reset to a fixed price of $18.768 based on an amount equal to the average closing bid price of the Company's common stock for ten consecutive trading days beginning on the first trading day of the exercise period of the aforementioned warrant. No further adjustments will be made to the conversion price other than for stock splits, stock dividends or other organic changes. The warrant was exercisable for a period of two years at an exercise price of $1,370.448, subject to certain anti-dilution adjustments. The fair value of the warrant of $15,936,103, as determined by the Black Scholes option pricing model, was recorded as additional paid in capital and a corresponding decrease to preferred stock . The warrant expired in February 2002. The Company received notification from The Nasdaq Stock Market ("Nasdaq") that the Company's common stock has closed below the minimum $1.00 per share requirement for continued inclusion under Marketplace Rule 4310(c)(4). In October 2002, the Company received another notification from Nasdaq that based on its June 30, 2002 filing the Company does not meet compliance with Marketplace Rule 4310(c)(2)(B). Such rule requires the Company to have a minimum of $2.0 million in net tangible assets or $2.5 million in stockholders' equity or a market value of listed securities of $35.0 million or $.5 million of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. In December 2002, the Company received notification from Nasdaq indicating that the Company was subject to delisting. The Company has responded to Nasdaq with its plan and believes that it can achieve compliance with Marketplace Rule 4310(c)(2)(B) by achieving minimum stockholders' equity of $2.5 million. In addition, in January 2003, the Company affected an eight-for-one reverse stock split. (See Note 2). In February 2003, the Company received notification from Nasdaq that the Company's was not in compliance with the Nasdaq's market value of publicly held shares requirements, as set forth in Nasdaq Marketplace Rule 4310(c)(07). The Company believes that its subsequent issuance of common shares for the redemption of its preferred stock has brought the Company back into compliance with the minimum public float requirement. The Company appealed the Staff's decision to delist the Company to a Nasdaq Listing Qualification Panel. The hearing was held on February 13, 2003. On March 5, 2003, a Nasdaq Listing Qualifications Panel determined to continue the listing of the Company's securities on the Nasdaq SmallCap Market on the condition, among other things, that the Company make a public filing with the Securities and Exchange Commission and Nasdaq evidencing shareholders' equity of at least $2.5 million and further that the Company file its quarterly report on Form 10Q for the March 31, 2003 quarter on or before May 15, 2003. On March 13, 2003, the Company filed an unaudited balance sheet as of January 31, 2003 evidencing shareholders' equity of at least $2.5 million. On May 22, 2003, the Company received notification from Nasdaq that the Company satisfactorily demonstrated compliance and, accordingly, the Nasdaq Listing Qualifications Panel determined to continue the listing of the Company's securities on The Nasdaq SmallCap Market and to close the hearing file. 24 Historically, the Company has funded its operations, capital expenditures and acquisitions primarily through cash flows from operations, private placements of equity transactions, and its credit facilities. At June 30, 2003, the Company had cash and cash equivalents of $1.2 million and accounts receivable net of allowances of $1.8 million. The Company realized income from continuing operations of $3.9 million in the Current Period. Cash used in operating activities from continuing operations was approximately $2.7 million. Net cash used in operating activities principally resulted from the income from continuing operations offset by gain on termination of lease, reduction in trade accounts payable and other non-cash items in the Current Period. The Company incurred losses from continuing operations of $18.3 million in the Prior Period. Cash used in operating activities from continuing operations was approximately $13.1 million. Net cash used in operating activities principally resulted from the loss from continuing operations offset by goodwill impairment, a decrease in accrued expenses and other liabilities and other non-cash items in the Prior Period. In the Current Period, net cash of $13.4 million was provided by investing activities consisting of net proceeds from the decrease in restricted cash and proceeds from the sale of the Northeast operations, net of fees, offset by an increase in related party note receivable and purchases of property and equipment. In the Prior Period, net cash of $72.9 million was provided from investing activities consisting primarily of $78.6 million from proceeds from the sale of Grizzard offset by an increase in restricted cash, an increase in related party note payable and purchases of property and equipment . In the Current Period, net cash of $12.8 million was used in financing activities. Net cash used in financing activities consisted of $4.8 million repayments of debt and capital leases, redemption of a portion of preferred stock of $6.0 million and repayment of proceeds from credit facilities of $2.0 million. In the Prior Period, net cash of $5.1 million was used in financing activities. Net cash used in financing activities consisted primarily of $5.0 million in redemption of a portion of preferred stock. In the Current Period net cash of $1.0 million was used in discontinued operations. In the prior period, net cash of $50.1 million was used by discontinued operations. In February 2001, the Company entered into a strategic partnership agreement (the "Agreement") with Paris based Firstream. Firstream paid the Company $3.0 million and in April 2001 received 187,500 restricted shares of common stock, plus a two-year warrant for 50,000 shares priced at $24 per share. The warrant is exercisable over a two year period. The warrant is valued at $.9 million as determined by the Black-Scholes option pricing model and was recorded to equity. In accordance with the Agreement, the Company recorded proceeds of $1.8 million; net of fees and expenses, as equity and $1.0 million was designated as deferred revenue to provide for new initiatives. As part of the strategic partnership, MKTG will launch several new Firstream products and services in the areas of wireless communications, online music and consumer marketing programs for early adopters of new products. The remaining balance is $.8 million at June 30, 2002. In July 2002, the Company received a letter from Firstream canceling the strategic partnership agreement and requesting payment of the remaining $.8 million, which has been categorized as a liability at June 30, 2002. The Company settled with Firstream during fiscal year 2003 for approximately $.2 million and the remaining liability was sold as part of the Northeast operations sale. There was no remaining liability at June 30, 2003. In December 2002, the Company completed the sale of substantially all of the assets relating to its direct list sales and database services and website development and design business held by certain of its wholly owned subsidiaries (the 'Northeast Operations') to Automation Research, Inc. ('ARI'), a wholly owned subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash plus the assumption of all directly related liabilities. As such, the operations and cash flows of the Northeast Operations have been eliminated from ongoing operations and the Company no longer has continuing involvement in the operations. Accordingly, the statement of operations and cash flows for the years ending June 30, 2003, 2002 and 2001 have been reclassed into a one-line presentation and is included in Loss from 25 Discontinued Operations and Net Cash Used by Discontinued Operations. In addition, the assets and liabilities of the Northeast Operations have been segregated and presented in Net Assets of Discontinued Operations and Net Liabilities of Discontinued Operations as of June 30, 2002. In connection with the sale of the Northeast Operations, the Company recognized a loss on disposal of discontinued operations of approximately $.2 million in the year ended June 30, 2003. The loss represents the difference in the net book value of assets and liabilities as of the date of the sale as compared to the net consideration received after settlement of purchase price adjustments plus any additional expenses incurred. There was no tax impact on this loss. On July 31, 2001, the Company completed the sale of all the outstanding capital stock of its Grizzard subsidiary to Omnicom Group, Inc. As a result of the sale agreement, the Company repaid a term loan of $35.5 million and a $12.0 million line of credit. The Company recorded a loss of approximately $4.9 million for the year ended June 30, 2002 as a result of the early extinguishment of debt which is included in the loss from discontinued operations. For the year ended June 30, 2002, the Company recognized a gain on sale of Grizzard in the amount of approximately $1.8 million which is included in the statement of operations in Gain from Disposal of Discontinued Operations. The gain represents the difference in the net book value of assets and liabilities as of the date of the sale as compared to the net consideration received after settlement of purchase price adjustments. The statement of operations and cash flows for the years ended June 30, 2002 and 2001 have been reclassified into a one-line presentation and is included in Loss from Discontinued Operations and Net Cash Used by Discontinued Operations. In January 2001, the Company sold certain assets of WiredEmpire for $1.3 million, consisting of $1.0 million in cash and $.3 million held in escrow, which was paid in May 2001. This transaction resulted in a gain on sale of assets of $1.3 million which is included in the statement of operations in Gain from disposal of discontinued operations. The statement of operations and cash flows for the year ended June 30, 2001 have been reclassified into a one-line presentation and is included in Loss from Discontinued Operations and Net Cash Used by Discontinued Operations. On September 21, 2000, the Company's Board of Directors approved a plan to discontinue the operation of its WiredEmpire subsidiary. The Company shut down the operations by the end of January 2001. The estimated losses associated with WiredEmpire were approximately $34.5 million. These losses for WiredEmpire included approximately $19.5 million in losses from operations through the measurement date and approximately $15.0 million of loss on disposal. In September 2000 the Company offered to exchange the WiredEmpire preferred shares for MKTG common shares. During the fiscal year end June 30, 2001, the Company exchanged 41,042 shares of unregistered MKTG common stock for WiredEmpire preferred stock. The exchange resulted in a gain of $13,410,273, which was recorded through equity and is included in net loss attributable to common stockholders and earnings per share - discontinued operations for the year ended June 30, 2001. As of June 30, 2003 and 2002, 48,000 shares of WiredEmpire preferred stock have not been exchanged and this is reported as minority interest in preferred stock of discontinued subsidiary as $280,946 for in each year. Summary of Recent Accounting Pronouncements ------------------------------------------- Effective July 1, 2002, the Company adopted the provisions of SFAS No. 141,"Business Combinations," in its entirety and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 applies to all business combinations with a closing date after June 30, 2001. SFAS No. 141 eliminates the pooling-of-interests method of accounting and further clarifies the criteria for recognition of intangible assets separately from goodwill. SFAS No. 142 eliminates the amortization of goodwill and indefinite-lived intangible assets and initiates an annual review for impairment. Identifiable intangible assets with a determinable useful life continue to be amortized. The adoption required the Company to cease amortization of its remaining net goodwill balance and to perform a transitional impairment test of its existing goodwill based on a fair value concept as of the date of adoption (see Note 8). 26 Goodwill is not subject to amortization and is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. The impairment test consists of a comparison of the fair value of goodwill with its carrying amount. If the carrying amount of goodwill exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. After an impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis. Effective July 1, 2002, the Company adopted SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting for the disposal of long-lived assets. The objectives of SFAS No. 144 are to address significant issues relating to the implementation of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and to develop a single accounting model, based on the framework established in SFAS No. 121, for the long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 recognition and measurement of the impairment of long-lived assets to be held and used. The Company reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, the Company will recognize an impairment when the sum of undiscounted future cash flows (without interest charges) is less than the carrying amount of such assets. The measurement for such impairment loss is based on the fair value of the asset. SFAS No. 144 supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for segments of a business to be disposed of. However, this Statement retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. The adoption of such pronouncement did not have an impact on the Company's financial position and results of operations. In April 2002, the FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002." SFAS No. 145 became effective for financial statements issued for fiscal years beginning after May 15, 2002. The Company adopted SFAS 145 on July 1, 2002. The adoption of the statement did not have a material impact on the Company's financial position and results of operations. However, the loss on extinguishment of debt that was classified as an extraordinary item in the prior period has been reclassified and included in loss from discontinued operation as the loss does not meet the criteria in APB Opinion No. 30 "Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business", for classification as an extraordinary item. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under Issue No. 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair market value only when the liability is incurred and not when management has completed the plan. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of such pronouncement did not have a material impact on the Company's financial position and results of operations. In November 2002, the FASB issued FIN 45, 'Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Other,' an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN 45 elaborates on the existing disclosure requirements of guarantees and obligations to stand ready to perform over the term of the guarantee in the event that specified triggering events or conditions occur and the identification of those contingent obligations to make future payments if those triggering events or conditions occur. Additional disclosures have been added to Commitments and Contingencies footnote describing the nature of the guarantee; amount and event triggering the Company's obligation under the guarantee and the Company's recourse to recover in such an event. Management does not believe that this pronouncement will have a material impact 27 on its financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on the reported results. SFAS No. 148 is effective for fiscal years and interim periods beginning after December 15, 2002. The Company continues to account for stock-based employee compensation under the intrinsic value method of APB 25, "Accounting for Stock Issued to Employees." The Company has adopted the disclosure provisions of SFAS No. 148 within this report. In January 2003, the FASB issued FIN 46, 'Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.' FIN 46 requires an investor to consolidate a variable interest entirety if it is determined that the investor is a primary beneficiary of that entity, subject to the criteria set forth in FIN 46. Assets, liabilities, and non controlling interests of newly consolidated variable interest entities will be initially measured at fair value. After initial measurement, the consolidated variable interest entity will be accounted for under the guidance provided by Accounting Research Bulletin No. 51, 'Consolidated Financial Statements.' FIN 46 is effective for variable interest entities created or entered into after January 2003. For variable interest entities created or acquired before February 1, 2003, FIN 46 applies in the first fiscal year or interim period beginning after June 15, 2003. Management does not believe that this pronouncement will have a material impact on its financial statements. On April 30, 2003, the FASB issued SFAS 149, Amendment of SFAS 33 on Derivative Instruments and Hedging Activities. Statement 149 is intended to result in more consistent reporting of contracts as either freestanding derivative instruments subject to SFAS 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. In addition, SFAS 149 clarifies the definition of a derivative by providing guidance on the meaning of initial net investments related to derivatives. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The Company does not expect that the adoption of SFAS 149 will have an impact on its financial position, results of operations or cash flows. On May 15, 2003, the FASB issued SFAS No. 150, Accounting for "Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatory redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. SFAS 150 is effective for all financial instruments created or modified after May 31, 2003. The Company has not entered into or modified any financial instruments subsequent to May 31, 2003. There was no impact from the adoption of this statement. Item 7 (a) - Quantative and Qualitative Disclosure about Market Risk --------------------------------------------------------------------- Not applicable Item 8 - Financial Statements and Supplementary Data ---------------------------------------------------- The Consolidated Financial Statements required by this Item 8 are set forth as indicated in the index following Item 14(a)(1). Item 9 - Changes in and Disagreements with Accountants on Accounting and ------------------------------------------------------------------------ Financial Disclosure -------------------- None. Item 9 (a) - Controls and Procedures ------------------------------------ 28 PART III The information required by this Part III (items 10, 11, 12, 13 and 14) is hereby incorporated by reference from the Company's definitive proxy statement which is expected to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 not later than 120 days after the end of the fiscal year covered by this report. Part IV Item 15 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K -------------------------------------------------------------------------- (a)(1) Financial statements - see "Index to Financial Statements" on page 28. (2) Financial statement schedules - see "Index to Financial Statements" on page 28. (3) Exhibits: 2.1 Agreement and Plan of Merger By and Among MKTG Services, Inc., GCG Merger Corp., and Grizzard Advertising, Inc. (m) 2.2 Stock Purchase Agreement by and between Omnicom Group Inc. and MKTG Services, Inc. 3.1 Amended and Restated Articles of Incorporation (c) 3.2 Certificate of Amendment to the Amended and Restated Articles of Incorporation of the Company (b) 3.3 Certificate of Amendment to the Articles of Incorporation for change of name to All-Comm Media Corporation (f) 3.4 By-Laws (c) 3.5 Certificate of Amendment of Articles of Incorporation for increase in number of authorized shares to 36,300,000 total (i) 3.6 Certificate of Amendment of Articles of Incorporation for change of name to Marketing Services Group, Inc. (k) 3.7 Certificate of Amendment of Articles of Incorporation for increase in number of authorized shares to 75,150,000 total (n) 3.8 The Amended Certificate of Designation, Preferences and Relative, Participating and Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof for the Series D Convertible Preferred Stock (l) 3.9 Certificate of Designation, Preferences, and Rights of Series E Convertible Preferred Stock of Marketing Services Group, Inc. (q) 3.10 Certificate of Amendment to Certificate of Designation, Preferences, and Rights of Series E Convertible Preferred Stock of Marketing Services Group, Inc. (r) 3.11 Certificate of Amendment of Articles of Incorporation for change of name to MKTG Services, Inc. (a) 10.1 1991 Stock Option Plan (d) 10.2 Security Agreement between Milberg Factors, Inc. and Metro Services Group, Inc. (j) 10.3 Security Agreement between Milberg Factors, Inc. and Stephen Dunn & Associates, Inc. (k) 10.4 J. Jeremy Barbera Employment Agreement (t) 10.5 Rudy Howard Employment Agreement (t) 10.6 Stephen Killeen Employment Agreement (t) 10.7 Form of Private Placement Agreement (j) 10.8 Purchase agreement dated as of December 24, 1997, by and between the Company and GE Capital (l) 10.9 Stockholders Agreement by and among the Company, GE Capital and certain existing stockholders of the Company, dated as of December 24, 1997 (l) 10.10 Registration Rights Agreement by and among the Company and GE Capital, dated as of December 24, 1997 (l) 10.11 Warrant, dated as of December 24, 1997, to purchase shares of Common Stock of the Company (l) 10.12 First Amendment to Preferred Stock Purchase Agreement Between General Electric Capital Corporation and Marketing Services Group, Inc. (o) 29 10.13 Promissory note (o) 10.14 Warrant Agreement (o) 10.15 Second Amendment (p) 10.16 Warrant Agreement between Marketing Services Group, Inc. and Marshall Capital Management, Inc. (q) 10.17 Warrant Agreement between Marketing Services Group, Inc. and RCG International Investors, LDC. (q) 10.18 Registration Rights Agreement by and Among The Company, RCG International Investors, LDC and Marshall Capital Management, Inc. (q) 10.19 Securities Purchase Agreement by and Among The Company, RCG International Investors, LDC and Marshall Capital Management, Inc. (q) 10.20 Credit Agreement Among Grizzard Communications, Inc. and Paribas (s) 10.21 Firstream Letter Agreement (b) 10.22 Steven Killeen Termination Agreement (b) 10.23 Standstill Agreement between MKTG Services, Inc. and Castle Creek Technology Partners LLC (u) 10.24 Standstill Agreement between MKTG Services, Inc. and RCG International Investors, LDS (u) 10.25 Letter Amendment to Standstill Agreement between MKTG Services, Inc. and Castle Creek Technology Partners LLC(v) 10.26 Letter Amendment Standstill Agreement between MKTG Services, Inc. and RCG International Investors, LDS(v) 21 List of Company's subsidiaries (a) 23 Consent of PricewaterhouseCoopers LLP (a) 24 Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002(a) (a) Included herein in the Company's Report on Form 10K- for the fiscal year ended June 30, 2002 (b) Incorporated by reference to the Company's Report on Form 10K- for the fiscal year ended June 30, 2001 (c) Incorporated by reference from the Company's Registration Statement on Form S-4, Registration Statement No. 33-45192 (d) Incorporated by reference to the Company's Registration Statement on Form S-8, Registration Statement 333-30839 (e) Incorporated herein by reference to the Company's Report on Form 8-K dated April 25, 1995 (f) Incorporated by reference to the Company's Report on Form 10-K for the fiscal year ended June 30, 1995 (g) Incorporated by reference to the Company's Report on Form 10-Q for the quarter ended March 31, 1996 (h) Incorporated by reference to the Company's Report on Form 8-K dated June 7, 1996 (i) Incorporated by reference to the Company's Report on Form 10-K dated June 30, 1996 (j) Incorporated by reference to the Company's Report on Form 10-Q for the quarter ended March 31, 1997 (k) Incorporated by reference to the Company's Report on Form 10-KSB for the fiscal year ended June 30, 1997 (l) Incorporated by reference to the Company's Report on Form 8-K dated January 13, 1998 (m) Incorporated by reference from the Company's Registration Statement on Form S-4, Registration Statement No. 33-85233. (n) Incorporated by reference to the Company's Report on Form 10-KSB dated June 30, 1998 (o) Incorporated by reference to the Company's Report on Form 8-K dated May 13, 1999 (p) Incorporated by reference to the Company's Report on Form 8-K dated August 30, 1999 (q) Incorporated by reference to the Company's Report on Form 8-K dated February 29, 2000 (r) Incorporated by reference to the Company's Report on Form 8-K/A dated March 23, 2000 30 (s) Incorporated by reference to the Company's Report on Form 10-Q dated May 16, 2000 (t) Incorporated by reference to the Company's Report on Form 10-K for the fiscal year ended June 30, 2000 (u) Incorporated by reference to the Company's Report on Form 8-K dated February 19, 2002 (v) Incorporated by reference to the Company's Report on Form 8-K dated July 30, 2002 (b) Reports on Form 8-K. None 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MKTG SERVICES, INC. (Registrant) By: /s/ J. Jeremy Barbera --------------------- J. Jeremy Barbera Chairman of the Board and Chief Executive Officer Date: October 14, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date ------------------------------ ------------------------------------------- -------------------- /s/ J. Jeremy Barbera Chairman of the Board and Chief Executive October 14, 2003 ------------------------------- Officer (Principal Executive Officer) J. Jeremy Barbera /s/ John T. Gerlach Director October 14, 2003 ------------------------------- John T. Gerlach /s/ Seymour Jones Director October 14, 2003 ------------------------------- Seymour Jones
32 MKTG SERVICES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS [Items 15] (1) FINANCIAL STATEMENTS: Page --------------------- ---- Report of Independent Accountants 34-35 Consolidated Balance Sheets as of June 30, 2003 and June 30, 2002 36 Consolidated Statements of Operations Years Ended June 30, 2003, 2002, and 2001 37-38 Consolidated Statement of Stockholders' Equity Years Ended June 30, 2003, 2002, and 2001 39 Consolidated Statements of Cash Flows Years Ended June 30, 2003, 2002, and 2001 40 Notes to Consolidated Financial Statements 41-61 (2) FINANCIAL STATEMENT SCHEDULES: ------------------------------ Schedule II - Valuation and Qualifying Accounts 62 Schedules other than those listed above are omitted because they are not required or are not applicable or the information is shown in the audited financial statements or related notes. 33 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Stockholders MKTG Services, Inc. We have audited the accompanying consolidated balance sheet of MKTG Services, Inc. and Subsidiaries as of June 30, 2003 and the related consolidated statements of operations, stockholders' equity, and cash flows for the fiscal year ended June 30, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MKTG Services, Inc. and Subsidiaries as of June 30, 2003 and the results of its operations and its cash flows for the fiscal year then ended in conformity with auditing standards generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and negative cash flows from operations, in addition to certain contingencies that may require significant resources, all of which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 1 to the consolidated financial statements, during the year ended June 30, 2003 the Company changed its method of accounting for goodwill in accordance with the adoption of SFAS 142 "Goodwill and other intangible assets." /s/ Amper, Politziner & Mattia P.C. October 10, 2003 Edison, New Jersey 34 Report of Independent Auditors In our opinion, the consolidated balance sheet as of June 30, 2002 and the related consolidated statements of operations, of cash flows and of changes in stockholders' equity for each of the two years in the period ended June 30, 2002 present fairly, in all material respects, the financial position, results of operations and cash flows of MKTG Services, Inc. and its Subsidiaries at June 30, 2002 and for each of the two years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has limited capital resources and has incurred significant recurring losses and negative cash flows from operations, in addition to certain contingencies that may require significant resources, all of which raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management's plan with respect to this matter is set forth as discussed in Note 2. As discussed in Note 2 to the consolidated financial statements, during the year ended June 30, 2001, the Company changed its method of accounting for securities with beneficial conversion features as a result of the issuance of Emerging Issues Task Force Issue No. 00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments." /s/ PRICEWATERHOUSECOOPERS LLP September 26, 2002, except for the reclassification and presentation of the discontinued operations of the Northeast Operations and Grizzard, Inc., as discussed in Note 3, as to which the date is October 14, 2003 New York, New York 35
MKTG SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2003 AND 2002 ASSETS 2003 2002 ------ ---- ---- Current assets: Cash and cash equivalents $ 1,216,642 $ 4,438,166 Accounts receivable, net of allowance for doubtful accounts of $ 120,000 and $ 94,000, respectively 1,816,546 3,066,983 Net assets of discontinued operations - 32,722,244 Restricted cash - 4,945,874 Other current assets 475,164 446,456 ----------- ----------- Total current assets 3,508,352 45,619,723 Property and equipment, net 747,530 907,087 Goodwill, net 2,277,220 2,277,220 Intangible assets, net 20,000 40,000 Related party note receivable 1,050,309 978,534 Other assets 44,109 345,709 ----------- ----------- Total assets $ 7,647,520 $50,168,273 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Short-term borrowing $ 261,385 $ 2,280,384 Accounts payable-trade 456,266 881,399 Accrued expenses and other current liabilities 1,877,069 5,007,640 Net liabilities of discontinued operations - 18,608,365 Current portion of long-term obligations 201,062 4,837,321 ----------- ----------- Total current liabilities 2,795,782 31,615,109 Long-term obligations, net of current portion - 176,336 Other liabilities 1,463,132 6,321,798 ----------- ----------- Total liabilities 4,258,914 38,113,243 ----------- ----------- Minority interest in preferred stock of discontinued subsidiary 280,946 280,946 Convertible preferred stock - $.01 par value; 0 and 18,750 shares authorized; 0 and 2,900 shares of Series E issued and outstanding as of June 30, 2003 and 2002 - 10,384,064 Commitments and contingencies Stockholders' equity: Common stock - $.01 par value; 9,375,000 authorized; 1,101,198 and 840,129 shares issued; 1,092,367 and 831,298 shares outstanding as of June 30, 2003 and 2002, respectively 11,011 8,401 Additional paid-in capital 220,258,236 229,899,188 Accumulated deficit (215,767,877) (227,123,859) Less: 8,831 shares of common stock in treasury, at cost (1,393,710) (1,393,710) ------------ ------------ Total stockholders' equity 3,107,660 1,390,020 ------------ ------------ Total liabilities and stockholders' equity $ 7,647,520 $50,168,273 ============ ============
The accompanying notes are an integral part of these Consolidated Financial Statements. 36
MKTG SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2003, 2002, AND 2001 2003 2002 2001 ---- ---- ---- Revenues $ 15,832,655 $ 16,027,212 $ 16,860,191 ------------- ------------ ------------ Operating costs and expenses: Salaries and benefits 13,780,263 15,663,003 16,244,483 Direct costs 642,797 656,781 872,887 Selling, general and administrative 1,978,890 4,425,685 4,387,664 Reserve for rent on abandoned property - 6,400,000 - Gain on termination of lease (3,905,387) - - Goodwill impairment - 6,500,470 - Depreciation and amortization 224,378 392,540 351,100 ----------- ----------- ----------- Total operating costs and expenses 12,720,941 34,038,479 21,856,134 ----------- ----------- ----------- Income (loss) from operations 3,111,714 (18,011,267) (4,995,943) ----------- ------------ ------------ Other income (expense): Loss on investments - - (7,577,560) Gain (loss) on legal settlement 965,486 (246,000) (1,297,970) Interest income (expense) and other, net (88,831) 91,128 (743,127) ------------- ------------ ----------- Income (loss) from continuing operations before provision for income taxes 3,988,369 (18,166,139) (14,614,600) Provision for income taxes 47,801 99,535 54,931 ------------- ----------- ------------ Income (loss) from continuing operations 3,940,568 (18,265,674) (14,669,531) Discontinued operations: Loss from discontinued operations (1,260,003) (49,290,293) (52,421,036) Gain (loss) from disposal of discontinued operations (220,396) 1,872,830 1,251,725 ------------ ------------ ----------- Loss from discontinued operations (1,480,399) (47,417,463) (51,169,311) ------------ ------------ ----------- Cumulative effect of change in accounting principle (5,075,000) - - ------------ ------------ ----------- Net loss (2,614,831) (65,683,137) (65,838,842) ----------- ------------ ------------- Gain (deemed dividend) on redemption of preferred stock 13,970,813 (412,634) - Gain on redemption of preferred stock of discontinued subsidiary - - 13,410,273 ----------- ------------ ------------ Net income (loss) attributable to common stockholders before cumulative effect of change in accounting principle 11,355,982 (66,095,771) (52,428,569) Cumulative effect of change in accounting principle - - (14,063,897) ------------ ------------ ------------ Net income (loss) attributable to common stockholders $ 11,355,982 $ (66,095,771) $ (66,492,466) ============ ============== ==============
The accompanying notes are an integral part of these Consolidated Financial Statements. 37
MKTG SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Continued) FOR THE YEARS ENDED JUNE 30, 2003, 2002, AND 2001 2003 2002 2001 ---- ---- ---- Basic earnings (loss) per share: Continuing operations $18.33 $(24.44) $(22.07) Discontinued operations (1.52) (62.03) (56.78) Cumulative effect of change in accounting principle (5.19) - (21.15) ------- ------- ------- Basic earnings (loss) per share $ 11.62 $(86.47) $(100.00) ======= ======= ========= Diluted earnings (loss) per share: Continuing operations $15.62 $(24.44) $(22.07) Discontinued operations (1.29) (62.03) (56.78) Cumulative effect of change in accounting principle (4.43) - (21.15) ------- -------- ------- Diluted earnings (loss) per share $ 9.90 $(86.47) $(100.00) ======= ======== ========= Weighted average common shares outstanding - basic 977,086 764,360 664,950 ========= ======= ======= Weighted average common shares outstanding - diluted 1,146,943 764,360 664,950 ========= ======= =======
The accompanying notes are an integral part of these Consolidated Financial Statements. 38
MKTG SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2003, 2002, AND 2001 Additional Common Stock Paid-in Deferred Accumulated Treasury Stock ------------------ ----------------- Shares Amount Capital Compensation Deficit Shares Amount Totals -------------------------------------------------------------------------------------------- Balance July 01, 2000 634,219 $6,342 $210,946,271 - $(95,601,880) (8,831) $(1,393,710) $113,957,023 Shares issued upon exercise of stock options 57 1 8,142 8,143 Issuance of common stock for exchange of preferred stock of discontinued subsidiary 41,042 410 5,038,070 5,038,480 Gain on redemption of WiredEmpire preferred stock 13,410,273 13,410,273 Issuance of common stock for settlement of earn-out provision 2,756 27 250,069 250,096 Issuance of common stock in connection with settlement of lawsuit 2,083 21 141,162 141,183 Issuance of common stock for Firstream strategic partnership 31,250 313 865,788 866,101 Issuance of warrants in connection with Firstream stock issuance 945,537 945,537 Beneficial conversion feature associated with Series E Preferred Stock 14,063,897 14,063,897 Accretion of beneficial conversion feature - Series E Preferred Stock (14,063,897) (14,063,897) Net and comprehensive loss (65,838,842) (65,838,842) --------------------------------------------------------------------------------------------- Balance June 30, 2001 711,407 $7,114 $231,605,312 - $(161,440,722) (8,831) $(1,393,710) $68,777,994 ============================================================================================= Shares issued upon conversion of Series E Preferred Stock 112,983 1,130 756,667 757,797 Issuance of common stock for settlement of earn-out provision 15,739 157 299,843 300,000 Redemption of Series E Preferred Stock (2,762,634) (2,762,634) Net and comprehensive loss (65,683,137) (65,683,137) -------------------------------------------------------------------------------------------- Balance June 30, 2002 840,129 $8,401 $229,899,188 - $(227,123,859) (8,831) $(1,393,710) $1,390,020 ============================================================================================= Shares issued upon conversion of Series E Preferred Stock 79,767 798 502,555 503,353 Redemption of Series E Preferred Stock 181,302 1,812 (10,143,507) 13,970,813 3,829,118 Net and comprehensive loss (2,614,831) (2,614,831) ---------------------------------------------------------------------------------------------- Balance June 30, 2003 1,101,198 $ 11,011 $220,258,236 - $(215,767,877) (8,831) (1,393,710) $3,107,660 ==============================================================================================
The accompanying notes are an integral part of these Consolidated Financial Statements. 39
MKTG SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2003, 2002, AND 2001 2003 2002 2001 ---- ---- ---- OPERATING ACTIVITIES: Net loss $(2,614,831) $(65,683,137) $(65,838,842) Loss from discontinued operations 1,480,399 47,417,463 51,169,311 Cumulative effect of change in accounting principle 5,075,000 - - ------------ ------------ ------------ Income (loss) from continuing operations 3,940,568 (18,265,674) (14,669,531) Adjustments to reconcile net income (loss) to net cash used in operating activities: Goodwill impairment - 6,500,400 - Gain on termination of lease (3,905,387) - - Depreciation 204,378 372,540 332,100 Amortization 20,000 20,000 20,000 Loss on investments - - 7,522,846 Bad debt expense 82,465 88,000 - Changes in assets and liabilities: Accounts receivable 1,167,972 (314,207) (74,824) Other current assets (28,708) (163,497) 94,019 Other assets 301,600 (54,134) 339,497 Trade accounts payable (425,133) (1,067,030) 1,628,425 Accrued expenses and other liabilities (4,083,850) (203,292) 3,044,016 ----------- --------- --------- Net cash used in operating activities (2,726,095) (13,086,894) (1,764,452) ---------- ----------- --------- INVESTING ACTIVITIES: Purchases of property and equipment (44,821) (769,042) (133,944) Decrease (increase) in restricted cash 4,945,874 (4,945,874) - Proceeds from sale of Grizzard - 78,609,258 - Proceeds from sale of Northeast Operations, net of fees 8,546,182 - - ---------- ---------- ------- Net cash provided by (used in) investing activities 13,447,235 72,894,342 (133,944) ---------- ---------- -------- FINANCING ACTIVITIES: Redemption of preferred stock (6,021,840) (5,000,000) - Expeditures from private placement of preferred shares (29,753) (44,971) - Proceeds from issuance of common stock and warrants, net - - 1,819,781 Proceeds from sale of Series E convertible preferred stock, net - - (56,978) Increase in related party note receivable (71,775) (1,000,000) - Net (repayments on) proceeds from credit facilities (2,018,999) 258,418 201,462 Principal payments under capital lease obligations - - (18,490) Repayment of related party notes payable - (250,000) (5,650,000) Repayments of long-term debt (4,812,595) (44,385) -- ----------- -------- --------- Net cash (used in) provided by financing activities (12,954,962) (6,080,938) (3,704,225) ------------ ------------ ----------- Net cash (used in) provided by discontinued operations (987,702) (50,117,801) (1,789,080) ----------- ------------ ----------- Net increase (decrease) in cash and cash equivalents (3,221,524) 3,608,709 (7,391,701) Cash and cash equivalents at beginning of year 4,438,166 829,457 8,221,158 ---------- ----------- ----------- Cash and cash equivalents at end of year $1,216,642 $4,438,166 $829,457 ========== ========== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 40 MKTG SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. COMPANY OVERVIEW AND PRINCIPLES OF CONSOLIDATION: MKTG Services, Inc. ("MKTG" or the "Company") provides highly customized telemarketing and telefundraising services. Substantially all of the Company's business activity is conducted with customers located within the United States. The consolidated financial statements include the accounts of MKTG and its wholly owned and majority owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Subsidiaries acquired during the year are recorded from the date of the respective acquisition. Subsidiaries sold during the year are presented as discontinued operations (See Note 3). Effective April 1, 2002, the Company changed its legal name from Marketing Services Group, Inc. to MKTG Services, Inc. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Liquidity: The Company has limited capital resources and has incurred significant historical losses and negative cash flows from operations. The Company believes that funds on hand, funds available from its remaining operations and its unused line of credit should be adequate to finance its operations and capital expenditure requirements and enable the Company to meet interest and debt obligations for the next twelve months. As explained in Note 3, the Company recently sold off substantially all the assets relating to its direct list sales and database services and website development and design business held by certain of its wholly owned subsidiaries. In addition, the Company has instituted cost reduction measures, including the reduction of workforce and corporate overhead. Failure of the remaining operation to generate such sufficient future cash flow could have a material adverse effect on the Company's ability to continue as a going concern and to achieve its business objectives. The accompanying financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result should the Company be unable to continue as a going concern. Cash and Cash Equivalents: The Company considers investments with an original maturity of three months or less to be cash equivalents. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets. Estimated useful lives are as follows: Furniture and fixtures.................2 to 7 years Computer equipment and software........3 to 5 years Leasehold improvements are amortized, using the straight-line method, over the shorter of the estimated useful life of the asset or the term of the lease. The cost of additions and betterments are capitalized, and repairs and maintenance are expensed as incurred. The cost and related accumulated depreciation and amortization of property and equipment sold or retired are removed from the accounts and resulting gains or losses are recognized in current operations. 41 Goodwill: Effective July 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS"), No. 142, "Goodwill and Other Intangible Assets". Under SFAS 142, the Company ceased amortization of goodwill and tests its goodwill on an annual basis using a two-step fair value based test. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of the impairment loss, if any. The Company completed the transition requirements under SFAS No. 142. The Company determined that it had three reporting units. Reporting unit 1 represents operations of list sales and services and database marketing. Reporting unit 2 represents the operations of telemarketing. Reporting unit 3 represents the operations of web site development and design. The company recognized an impairment charge of approximately $5.1 million in connection with the adoption of SFAS No. 142 for reporting units 1 and 3. The impairment charge has been booked by the Company in accordance with SFAS No. 142 transition provisions as a cumulative effect of a change in accounting principle for the year ended June 30, 2003. In connection with the sale of the Northeast Operations (See Note 3), the only remaining reporting unit consists of telemarketing. The remaining Goodwill relating to the Northeast Operations of approximately $8.1 million was included in loss from discontinued operations for the year ended June 30, 2003. At June 30, 2002, approximately $13.2 million of goodwill was included in net assets of discontinued operations. Prior to the adoption of SFAS 142 on July 1, 2002, the Company amortized goodwill over its estimated useful life and evaluated goodwill for impairment in conjunction with its other long-lived assets. Other Intangible Assets: Other intangible assets consist of capitalized software, which is being amortized under the straight-line method over 5 years. The Company records impairment losses on other intangible assets when events and circumstances indicate that such assets might be impaired and the estimated fair value of the asset is less than its recorded amount in accordance with SFAS No 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company reviews the value of its long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Conditions that would necessitate an impairment assessment include material adverse changes in operations, significant adverse differences in actual results in comparison with initial valuation forecasts prepared at the time of acquisition, a decision to abandon certain acquired products, services or marketplaces, or other significant adverse changes that would indicate the carrying amount of the recorded asset might not be recoverable. Long-Lived Assets: In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, the Company will recognize an impairment when the sum of undiscounted future cash flows (without interest charges) is less than the carrying amount of such assets. The measurement for such impairment loss is based on the fair value of the asset. Revenue Recognition: The Company accounts for revenue recognition in accordance with Staff Accounting Bulletin No. 101, ("SAB 101"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements, and Emerging Issues Task Force ("EITF") Issue No. 99-19 "Reporting Revenue Gross as a Principal vs. Net as an Agent" which provides guidance on the recognition of revenue gross as a principal versus net as an agent. Revenues derived from on-site telemarketing and telefundraising are generally based on hourly billing rates and a mutually agreed percentage of amounts received by the Company's client from a campaign. These services are 42 performed on-site at the clients' location. These revenues are earned and recognized when the cash is received by the respective client. Revenues derived from off-site telemarketing and telefundraising are generally based on a mutually agreed amount per telephone contact with a potential donor without regard to amounts raised for the client. These services are performed at the Company's calling center. These revenues are earned and recognized when the services are performed. Income Taxes: The Company recognizes deferred taxes for differences between the financial statement and tax bases of assets and liabilities at currently enacted statutory tax rates and laws for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates and assumptions made in the preparation of the consolidated financial statements relate to the carrying amount and amortization of intangible assets, deferred tax valuation allowance, abandoned lease reserves and the allowance for doubtful accounts. Actual results could differ from those estimates. Concentration of Credit Risk: Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of temporary cash investments and trade receivables. A significant portion of cash balances is maintained with one financial institution and may, at time, exceed federally insurable amounts. Collateral is generally not required on trade accounts receivable. Credit risk on trade receivables is minimized as a result of the large and diverse nature of the Company's customer base. Earnings (Loss) Per Share: On January 22, 2003, the Board of Directors approved an eight-for-one reverse split of the common stock. The stock split was effective January 27, 2003. Par value of the common stock remained $.01 per share and the number of authorized shares of common stock was reduced to 9,375,000 shares. The effect of the stock split has been reflected in the balance sheets and statements of stockholders' equity and in all share and per share data in the accompanying consolidated financial statements and Notes to Financial Statements. Stockholders' equity accounts have been retroactively adjusted to reflect the reclassification of an amount equal to the par value of the decrease in issued common shares from common stock account to paid-in-capital. In accordance with SFAS No. 128, "Earnings Per Share," basic earnings per share is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted earnings per share gives effect to all potentially dilutive common shares that were outstanding during the reporting period. Stock options and warrants with exercise prices below average market price in the amount of 22,776, 222,292 and 10,079 shares for the years ended June 30, 2003, 2002 and 2001, respectively, were not included in the computation of diluted earnings per share as they are antidilutive as a result of net losses during the periods presented. Convertible preferred stock in the amount of 1,584,661 shares for the year ended June 30, 2002 were not included in the computation of diluted earnings per share as they were antidilutive as a result of net losses during the periods presented. Contingent warrants in the amount of 222,292 shares, as well as, convertible preferred stock in the amount of 306,373 shares for the year ended June 30, 2001, were not included in the computation of diluted earnings per share 43 as they were antidilutive as a result of net losses during the periods presented. Change in Accounting: In September 2000, the FASB Emerging Issues Task Force issued EITF 00-27 "Application of EITF 98-5 to Certain Convertible Instruments." EITF 00-27 addresses the accounting for convertible preferred stock issued since May 1999 that contain non-detachable conversion options that are in the money at the commitment date. EITF 00-27 changed the approach of calculating the conversion price used in determining the value of the beneficial conversion feature from using the conversion price stated in the preferred stock certificate to using the accounting conversion price. The adoption of this EITF increased the original value of the beneficial conversion feature from zero to $14.1 million. MKTG adopted EITF 00-27 in December 2000 and as a result has recorded a cumulative effect of a change in accounting of approximately $14.1 million in the year ended June 30, 2001 related to the March 2000 issuance of the Series E Convertible Preferred Stock. The cumulative effect has been recorded to additional paid-in capital and treated as a deemed dividend in the calculation of net loss attributable to common stockholders. Employee Stock-Based Compensation: The accompanying financial position and results of operations for the Company have been prepared in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Under APB No. 25, generally, no compensation expense is recognized in the financial statements in connection with the awarding of stock option grants to employees provided that, as of the grant date, the number of shares and the exercise price of the award are fixed and the fair value of the Company's stock, as of the grant date, is equal to or less than the amount an employee must pay to acquire the stock. The Company has elected the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Stock based awards to non-employees are accounted for under the provisions of SFAS 123. Had the Company determined compensation cost based on the fair value methodology of SFAS 123 at the grant date for its stock options, the Company's loss and earnings per share from continuing operations would have been adjusted to the pro forma amounts indicated below: 44
Years ended June 30, -------------------------------------------------- 2003 2002 2001 -------------- -------------- -------------- Net income (loss) available to common stockholders as reported .................... $ 11,355,982 $ (66,095,771) $ (66,492,466) Stock based-compensation recorded ............. -- -- -------------- -------------- -------------- Subtotal ...................................... 11,355,982 (66,095,771) (66,492,466) Stock-based compensation recorded under SFAS 123 .................................... 910,753 4,721,019 8,660,172 Proforma net income (loss) available ---------- ---------- ---------- to common stockholders ....................... $ 10,445,229 $ (70,816,790) $ (75,152,638) ============== ============== =============== Earnings (loss) per share: Basic earnings (loss) per share - as reported . $ 11.62 $ (86.47) $ (100.00) ============= ============= ============= Basic earnings (loss) per share - pro forma ... $ 10.69 $ (92.65) $ (113.02) ============= ============= ============= Diluted earnings (loss) per share - as reported $ 9.90 $ (86.47) $ (100.00) ============= ============= ============= Diluted earning (loss) per share - pro forma .. $ 9.11 $ (92.65) $ (113.02) ============= ============= =============
Pro forma net loss reflects only options granted in fiscal 1996 through 2003. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' maximum vesting period of seven years and compensation cost for options granted prior to July 1, 1995, has not been considered. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. The following assumptions were used for grants for fiscal years ended June 30, 2003, 2002 and 2001 as follows: Risk -free interest rate 5.9% to 6.2 % Expected option life Vesting life+two years Dividend yield None Volatility 103% Comprehensive Income: SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") establishes standards for the reporting and display of comprehensive income and its components. The Company has no items of other comprehensive income in any period presented. Summary of Recent Accounting Pronouncements: Effective July 1, 2002, the Company adopted the provisions of SFAS No. 141,"Business Combinations," in its entirety and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 applies to all business combinations with a closing date after June 30, 2001. SFAS No. 141 eliminates the pooling-of-interests method of accounting and further clarifies the criteria for recognition of intangible assets separately from goodwill. SFAS No. 142 eliminates the amortization of goodwill and indefinite-lived intangible assets and initiates an annual review for impairment. Identifiable intangible assets with a determinable useful life continue to be amortized. The adoption required the Company to cease amortization of its remaining net goodwill balance and to perform a transitional impairment test of its existing goodwill based on a fair value concept as of the date of adoption (see Note 8). Goodwill is not subject to amortization and is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. The impairment test consists of a comparison of the fair value of goodwill with its carrying amount. If the carrying amount of goodwill exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. After an impairment loss is recognized, the adjusted carrying amount of 45 goodwill is its new accounting basis. Effective July 1, 2002, the Company adopted SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting for the disposal of long-lived assets. The objectives of SFAS No. 144 are to address significant issues relating to the implementation of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and to develop a single accounting model, based on the framework established in SFAS No. 121, for the long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 recognition and measurement of the impairment of long-lived assets to be held and used. The Company reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, the Company will recognize an impairment when the sum of undiscounted future cash flows (without interest charges) is less than the carrying amount of such assets. The measurement for such impairment loss is based on the fair value of the asset. SFAS No. 144 supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for segments of a business to be disposed of. However, this Statement retains the requirement of APB Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. The adoption of such pronouncement did not have an impact on the Company's financial position and results of operations. In April 2002, the FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002." SFAS No. 145 became effective for financial statements issued for fiscal years beginning after May 15, 2002. The Company adopted SFAS 145 on July 1, 2002. The adoption of the statement did not have a material impact on the Company's financial position and results of operations. However, the loss on extinguishment of debt that was classified as an extraordinary item in the prior period has been reclassified and included in loss from discontinued operation as the loss does not meet the criteria in APB Opinion No. 30 "Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business", for classification as an extraordinary item. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under Issue No. 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair market value only when the liability is incurred and not when management has completed the plan. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of such pronouncement did not have a material impact on the Company's financial position and results of operations. In November 2002, the FASB issued FIN 45, 'Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Other,' an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN 45 elaborates on the existing disclosure requirements of guarantees and obligations to stand ready to perform over the term of the guarantee in the event that specified triggering events or conditions occur and the identification of those contingent obligations to make future payments if those triggering events or conditions occur. Additional disclosures have been added to Commitments and Contingencies footnote describing the nature of the guarantee; amount and event triggering the Company's obligation under the guarantee and the Company's recourse to recover in such an event. Management does not believe that this pronouncement will have a material impact on its financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based 46 Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on the reported results. SFAS No. 148 is effective for fiscal years and interim periods beginning after December 15, 2002. The Company continues to account for stock-based employee compensation under the intrinsic value method of APB 25, "Accounting for Stock Issued to Employees." The Company has adopted the disclosure provisions of SFAS No. 148 within this report. In January 2003, the FASB issued FIN 46, 'Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.' FIN 46 requires an investor to consolidate a variable interest entirety if it is determined that the investor is a primary beneficiary of that entity, subject to the criteria set forth in FIN 46. Assets, liabilities, and non controlling interests of newly consolidated variable interest entities will be initially measured at fair value. After initial measurement, the consolidated variable interest entity will be accounted for under the guidance provided by Accounting Research Bulletin No. 51, 'Consolidated Financial Statements.' FIN 46 is effective for variable interest entities created or entered into after January 2003. For variable interest entities created or acquired before February 1, 2003, FIN 46 applies in the first fiscal year or interim period beginning after June 15, 2003. Management does not believe that this pronouncement will have a material impact on its financial statements. On April 30, 2003, the FASB issued SFAS 149, Amendment of SFAS 33 on Derivative Instruments and Hedging Activities. Statement 149 is intended to result in more consistent reporting of contracts as either freestanding derivative instruments subject to SFAS 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. In addition, SFAS 149 clarifies the definition of a derivative by providing guidance on the meaning of initial net investments related to derivatives. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The Company does not expect that the adoption of SFAS 149 will have an impact on its financial position, results of operations or cash flows. On May 15, 2003, the FASB issued SFAS No. 150, Accounting for "Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatory redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. SFAS 150 is effective for all financial instruments created or modified after May 31, 2003. The Company has not entered into or modified any financial instruments subsequent to May 31, 2003. There was no impact from the adoption of this statement. Fair Value of Financial Instruments: The carrying amounts of the Company's financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities, approximate fair value because of their short maturities. The carrying amount of the Company's lines of credit and long-term debt approximates the fair value of such instruments based upon management's best estimate of interest rates that would be available to the Company for similar debt obligations at June 30, 2003, 2002 and 2001. Reclassifications: Certain reclassifications have been made to the prior years' financial statements to conform to the current year's presentation. 3. DISCONTINUED OPERATIONS 47 On July 31, 2001, the Company completed its sale of all the outstanding capital stock of its Grizzard subsidiary to Omnicom Group, Inc. The purchase price of the transaction was $89.8 in cash, net of a working capital adjustment. In December 2002, the Company completed the sale of substantially all of the assets relating to its direct list sales and database services and website development and design business held by certain of its wholly owned subsidiaries (the 'Northeast Operations') to Automation Research, Inc. ('ARI'), a wholly owned subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash plus the assumption of all directly related liabilities. As such, the operations and cash flows of the Northeast Operations have been eliminated from ongoing operations and the Company no longer has continuing involvement in the operations. Accordingly, the statement of operations and cash flows for the years ending June 30, 2003, 2002 and 2001 have been reclassed into a one-line presentation and is included in Loss from Discontinued Operations and Net Cash Used by Discontinued Operations. In addition, the assets and liabilities of the Northeast Operations have been segregated and presented in Net Assets of Discontinued Operations and Net Liabilities of Discontinued Operations as of June 30, 2002. In connection with the sale of the Northeast Operations, the Company recognized a loss on disposal of discontinued operations of approximately $.2 million in the year ended June 30, 2003. The loss represents the difference in the net book value of assets and liabilities as of the date of the sale as compared to the net consideration received after settlement of purchase price adjustments plus any additional expenses incurred. There was no tax impact on this loss. On July 31, 2001, the Company completed the sale of all the outstanding capital stock of its Grizzard subsidiary to Omnicom Group, Inc. As a result of the sale agreement, the Company repaid a term loan of $35.5 million and a $12.0 million line of credit. The Company recorded a loss of approximately $4.9 million for the year ended June 30, 2002 as a result of the early extinguishment of debt which is included in the loss from discontinued operations. For the year ended June 30, 2002, the Company recognized a gain on sale of Grizzard in the amount of approximately $1.8 million which is included in the statement of operations in Gain from Disposal of Discontinued Operations. The gain represents the difference in the net book value of assets and liabilities as of the date of the sale as compared to the net consideration received after settlement of purchase price adjustments. The statement of operations and cash flows for the years ended June 30, 2002 and 2001 have been reclassified into a one-line presentation and is included in Loss from Discontinued Operations and Net Cash Used by Discontinued Operations. In January 2001, the Company sold certain assets of WiredEmpire for $1.3 million, consisting of $1.0 million in cash and $.3 million held in escrow, which was paid in May 2001. This transaction resulted in a gain on sale of assets of $1.3 million which is included in the statement of operations in Gain from disposal of discontinued operations. The statement of operations and cash flows for the year ended June 30, 2001 have been reclassified into a one-line presentation and is included in Loss from Discontinued Operations and Net Cash Used by Discontinued Operations. On September 21, 2000, the Company's Board of Directors approved a plan to discontinue the operation of its WiredEmpire subsidiary. The Company shut down the operations by the end of January 2001. The estimated losses associated with WiredEmpire were approximately $34.5 million. These losses for WiredEmpire included approximately $19.5 million in losses from operations through the measurement date and approximately $15.0 million of loss on disposal. In September 2000, the Company offered to exchange the WiredEmpire preferred shares for MKTG common shares. During the fiscal year end June 30, 2001, the Company exchanged 41,042 shares of unregistered MKTG common stock for WiredEmpire preferred stock. The exchange resulted in a gain of $13,410,273, which was recorded through equity and is included in net loss attributable to common stockholders and earnings per share - discontinued operations for the year ended June 30, 2001. As of June 30, 2003 and 2002, 48,000 shares of WiredEmpire preferred stock have not been exchanged and this is reported as minority interest in preferred stock of discontinued subsidiary as $280,946 each year. Revenue recognized for the years ended June 30, 2003, 2002 and 2001 relating to the discontinued operations, which is included in Loss from Discontinued Operations, was approximately $7.6 million, $22.9 million and $110.8 million, respectively. In connection with the disposal of the discontinued operations, the Company no longer provides services 48 for the list sales and services, database marketing, website development design and marketing communication services product lines. The major components of net assets of discontinued operations and net liabilities of discontinued operations at June 30, 2002 were as follows:
Assets: Liabilities: Accounts receivable, net $ 15,833,906 Accounts payable $ 16,479,365 Other current assets 845,711 Accrued liabilities 852,472 Property, plant & equipment, net 2,352,458 Capital Leases 114,577 Goodwill and intangible assets, net 13,757,912 Other liabilities 1,161,951 ------------ Cash overdrafts (607,468) Total liabilities $ 18,608,365 Other assets 539,725 ============ ------------ Total assets $ 32,722,244 ============
4. ACCOUNTS RECEIVABLE Accounts receivable consists of trade receivables, which represent sales made to customers for which short-term credit extensions are granted, which generally are not extended beyond 90 days. As of June 30, 2003 and 2002, the allowance for doubtful accounts for accounts receivables was approximately $120,000 and $94,000, respectively. 5. OTHER CURRENT ASSETS Other current assets as of June 30, 2003 and 2002 consist of the following: 2003 2002 -------- -------- Prepaid insurance $191,294 $ 49,080 Prepaid legal 130,951 136,745 Other 152,919 260,631 -------- -------- Total $475,164 $446,456 ======== ======== 6. INTERNET INVESTMENTS During the fiscal year ended June 30, 2000, the Company acquired investments of approximately $7.6 million in certain internet companies. The Company has taken charges of approximately $7.6 million for unrealized losses on Internet investments made during the fiscal year ended June 30, 2001, based on all available information. The Company believes such losses are a result of significant changes in valuations of Internet stocks and the performance of those companies. The Company has suspended its Internet investment strategy and will focus all efforts on the profitability of its core direct marketing operations. There are no remaining internet investments recorded on the balance sheets as of June 30, 2003 and 2002. 7. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment at June 30, 2003 and 2002 consist of the following: 49 2003 2002 ----------- ----------- Office furniture and equipment $ 1,279,237 $ 1,236,133 Leasehold improvements 735,891 734,174 ----------- ----------- 2,015,128 1,970,307 Less accumulated depreciation and amortization (1,267,598) (1,063,220) ----------- ----------- $ 747,530 $ 907,087 =========== =========== 8. GOODWILL AND OTHER INTANGIBLE ASSETS: In 2002 the Company recorded a goodwill impairment charge of $35.9 million. $29.4 million has been reclassified to discontinued operation. As a result of the adoption of SFAS No. 142, the Company discontinued the amortization of goodwill effective July 1, 2002. Identifiable intangible assets are amortized under the straight-line method over the period of expected benefit of five years. The Company recharacterized acquired workforce of approximately $51,000 which is no longer defined as an intangible asset under SFAS No. 141. In addition, the Company recharacterized non-contractual customer relationships of approximately $.8 million which do not meet the separability criterion under SFAS No. 141. The Company completed the transition requirements under SFAS No. 142. The Company determined that it had three reporting units. Reporting unit 1 represents the operations of list sales and services and database marketing. Reporting unit 2 represents the operations of telemarketing. Reporting unit 3 represents the operations of web site development and design. There is no impairment for reporting unit 2. The Company recognized an impairment charge of approximately $5.1 million in connection with the adoption of SFAS No. 142 for reporting units 1 and 3. The impairment charge has been booked by the Company in accordance with SFAS 142 transition provisions as a cumulative effect of change in accounting principle for the year ended June 30, 2003. In connection with the sale of the Northeast Operations (See Note 3), the only remaining reporting unit consists of telemarketing. The following table sets forth the components of goodwill, net as of June 30, 2003:
Impairment Sale of July 1, 2002 Losses reporting Unit June 30, 2003 ------------ ------------ -------------- ------------ Reporting unit -1 $12,939,561 $ (4,774,056) $ (8,165,505) $ -- Reporting unit -2 2,277,220 -- -- 2,277,220 Reporting unit -3 300,944 (300,944) -- -- ------------ ------------ ------------ ----------- $ 15,517,725 $ (5,075,000) $ (8,165,505) $ 2,277,220 ============ ============ ============= ============
Reporting unit - 1 represents list sales and services and database marketing Reporting unit - 2 represents telemarketing Reporting unit - 3 represents website development and design The following table sets forth the components of the intangible assets subject to amortization as of June 30, 2003 and June 30, 2002:
June 30, 2003 June 30, 2002 ----------------------------------------------- ----------------------------------- Gross Gross carrying Accumulated carrying Accumulated Useful life amount amortization Net amount amortization Net 50 -------- -------- ---------- ------ -------- ------- ------- Capitalized software 5 years $100,000 $80,000 $20,000 $100,000 $60,000 $40,000 ======== ======== ========== ======= ======== ======= =======
Amortization expense for the years ended June 30, 2003 and 2002 was approximately $20,000 each year, respectively. Estimated amortization expense by fiscal year as of June 30, are as follows: 2004 $ 20,000 -------- $ 20,000 ======== The following table provides a reconciliation of net income (loss) available for stockholders for exclusion of goodwill amortization:
For the years ended June 30, 2003 2002 2001 ---- ---- ---- Reported net income (loss) attributable to Common stockholders $ 11,355,982 $ (66,095,771) $ (66,492,466) Add: Goodwill amortization -- 175,210 198,476 Adjusted net income (loss) attributable ---------------------------------------------------- to Common stockholders $ 11,355,982 $ (65,920,561) $ (66,293,990) =================================================== Basic earnings (loss) per share: Reported net income (loss) attributable to Common stockholders $ 11.62 $ (86.47) $ (100.00) Add: Goodwill amortization -- .23 .30 --------------------------------------------------- Adjusted net income (loss) attributable to Common stockholders $ 11.62 $ (86.24)$ (99.70) =================================================== Diluted earnings (loss) per share: Reported net income (loss) attributable to Common stockholders $ 9.90 $ (86.47)$ (100.00) Add: Goodwill amortization -- .23 .30 ------------------------------------------------------ Adjusted net income (loss) attributable to Common stockholders $ 9.90 $ (86.24)$ (99.70) ======================================================
51 9. SHORT TERM BORROWINGS: The Company has a renewable two-year credit facility with a lender for lines of credit with a maximum availability of $2,000,000, collateralized by accounts receivable and other certain tangible assets of the Company. Borrowings are limited to the lesser of the maximum availability or 80% of eligible receivables. Interest is payable monthly at the Chase Manhattan prime rate plus 1 1/2%, but no less than 6%, with a minimum annual interest requirement of $50,000. The facility requires an annual fee of 1% of the maximum available line and has tangible net worth and working capital covenants. As of June 30, 2003, there was an aggregate of approximately $1.1 million available under this line of credit. The prime rate was 4.25% and 4.75% at June 30, 2003 and 2002, respectively. 10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES: Accrued expenses as of June 30, 2003 and 2002 consist of the following: 2003 2002 ---------- ---------- Salaries and benefits $ 413,459 $1,702,172 Due to Firstream -- 893,459 Abandoned lease reserves 441,468 1,112,392 Accrued Legal 764,292 832,519 Accrued audit 116,321 253,684 Other 141,529 213,414 ---------- ---------- Total $1,877,069 $5,007,640 ========== ========== 11. OTHER LIABILITIES Other liabilities as of June 30, 2003 and 2002 consist of the following: 2003 2002 ---------- ---------- Abandoned lease reserves $1,443,835 $6,302,501 Other 19,297 19,297 ---------- ---------- Total $1,463,132 $6,321,798 ========== ========== 12. RELATED PARTY TRANSACTIONS: On December 31, 2001, the Company advanced $1,000,000 pursuant to a promissory note receivable agreement with an officer due and payable to the Company at maturity, October 15, 2006. The Company recorded the note receivable at a discount of approximately $57,955 to reflect the incremental borrowing rate of the officer and is being amortized as interest income over the term of the note using the straight-line method. The note receivable is collateralized by current and future holdings of MKTG common stock owned by the officer and bears interest at prime. Interest is due and payable yearly on October 15th. The Company recognized interest income of $56,075 and $36,488 for the years ended June 30, 2003 and 2002. As of June 30, 2003, the interest due on October 15, 2002 of approximately $55,000 is in arrears. The note will be forgiven in the event of a change in control. During the year-ended June 30, 2001, the Company entered into a promissory note payable agreement with an officer for up to $1,000,000, due and payable at maturity, January 1, 2002. The promissory note bore interest at 15% per annum and included certain prepayment penalties. During the year ended June 30, 2001, the Company received advances of $900,000 and made repayments of $650,000. As of June 30, 2001, there was approximately $250,000 of principal outstanding and $150,000 of accrued interest and penalties, which was included in related party payable. The remaining $250,000 was paid in the year ended June 30, 2002. The Company repaid $5 million to GE Capital, a shareholder, in connection with the 1999 promissory note. 52 A former member of the Board of Directors is a partner in a law firm which provides legal services for which the Company incurred expenses aggregating approximately $476,806, $921,901, and $1,014,524 for the years ended June 30, 2003, 2002 and 2001, respectively. 13. LONG TERM OBLIGATIONS: Long-term obligations as of June 30, 2003 and 2002 consist of the following: 2003 2002 ----------- ----------- Promissory notes payable - maturity January 2004 (a) $ 201,062 $ 465,594 Hold back provision for Grizzard acquisition (b) -- 4,548,063 ----------- Total long-term obligations 201,062 5,013,657 Less: Current portion of long-term obligations (201,062) (4,837,321) Discount on notes payable to bank -- -- ----------- ----------- Long-term obligations, net of current portion $ -- $ 176,336 =========== =========== (a) In connection with an acquisition, the Company incurred promissory notes payable to a former shareholder, payable monthly at 5.59% interest per year through January 2004. (b) In August 2001, the Company entered into a stand-by letter of credit with a bank in the amount of approximately $4.9 million to support the remaining obligations under a certain holdback agreement with the former shareholders of Grizzard Communications Group, Inc. ("Grizzard"). The letter of credit was collateralized by cash, which had been classified as restricted cash in the current asset section of the balance sheet as of June 30, 2002. . In January 2003, the Company entered into an agreement and settled the outstanding amount owed to the former Grizzard shareholders in connection with such agreement. The Company paid approximately $4.6 million and utilized its restricted cash. Approximately $.3 million of restricted cash became available for general corporate use. Accordingly, the stand-by letter of credit was terminated 14. COMMITMENTS AND CONTINGENCIES: Operating Leases: ----------------- The Company leases various office space and equipment under non-cancelable long-term leases. The Company incurs all costs of insurance, maintenance and utilities. 53 Future minimum rental commitments under all non-cancelable leases, net of non-cancelable subleases, as of June 30, 2003 are as follows: Less: Rent Expense Sublease Income Net Rent Expense ------------ -------------- ---------------- 2004 $ 879,600 $ (79,200) $ 800,400 2005 640,800 (45,300) 595,500 2006 439,700 -- 439,700 2007 439,700 -- 439,700 2008 323,200 -- 323,200 Thereafter 520,000 -- 520,000 ----------- ----------- ----------- $ 3,243,000 $ (124,500) $ 3,118,500 Rent expense was approximately $277,118, $1,339,473 and $934,757 for fiscal years ended June 30, 2003, 2002 and 2001, respectively. In fiscal year 2002, the Company incurred an estimated loss in connection with the abandonment of certain leased office space of $ 6,400,000 which is recorded in accrued expenses and other current liabilities and other liabilities. (see Notes 10 and 11). Contingencies and Litigation: ----------------------------- In December 2001, an action was filed by a number of purchasers of preferred stock of WiredEmpire, Inc., a discontinued subsidiary, in the Alabama State Court (Circuit Court of Jefferson County, Alabama, 10 Judicial Circuit of Alabama, Birmingham Division), against J. Jeremy Barbera, Chairman of the Board and Chief Executive Officer of MKTG, MKTG and WiredEmpire, Inc. The plaintiffs' complaint alleges, among other things, violation of sections 8-6-19(a)(2) and 8-6-19(c) of the Alabama Securities Act and various other provisions of Alabama state law and common law, arising for the plaintiffs' acquisition of WiredEmpire Preferred Series A stock in a private placement. The plaintiffs invested approximately $1,650,000 in WiredEmpire's preferred stock and they seek that amount, attorney's fees and punitive damages. On February 8, 2002, the defendants filed a petition to remove the action to federal court on the grounds of diversity of citizenship. The Company believes that the allegations in the complaint are without merit. The Company intends to vigorously defend against the lawsuit. In December 2000, an action was filed by Red Mountain, LLP in the United States Court for the Northern District of Alabama, Southern Division against J. Jeremy Barbera, Chairman of the Board and Chief Executive Officer of Marketing Services Group, Inc., and WiredEmpire, Inc. Red Mountains' complaint alleges, among other things, violations of Section 12(2) of the Securities Act of 1933, Section 10(b) of the Securities Act of 1934 and Rule 10(b)(5) promulgated there under, and various provisions of Alabama state law and common law, arising from Red Mountain's acquisition of WiredEmpire Preferred Series A stock in a private placement. Red Mountain invested $225,000 in WiredEmpire's preferred stock and it seeks that amount, attorney's fees and punitive damages. The Company believes that the allegations in the complaint are without merit. The Company intends to vigorously defend against the lawsuit. In June 2002, the Company entered into a Tolling Agreement (the "Agreement") with various claimants who acquired WiredEmpire Preferred Series A stock in a private placement. The Agreement states that the passage of time from June 15, 2002 through August 31, 2002 shall not be counted toward the limit as set out by any applicable statute of limitations. In addition, the claimants agree that none of them shall initiate or file a legal action against Mr. Barbera, MKTG or WiredEmpire prior to the termination of the agreement. The claimants invested approximately $1,200,000 in WiredEmpire's preferred stock. In January 2003, a lawsuit was filed in Alabama, Circuit Court for Jefferson County by certain plaintiffs involved in the Agreement. The action was filed against J. Jeremy Barbera, Chairman of the Board and Chief Executive Officer of MKTG, MKTG and WiredEmpire, Inc. This lawsuit was settled during fiscal 2003 and was fully covered by the Company's insurance. 54 In 1999 a lawsuit under Section 16(b) of the Securities Exchange Act of 1934 was commenced against General Electric Capital Corporation ("GECC") by Mark Levy, derivatively on behalf of the Company, to recover short swing profits allegedly obtained by GECC in connection with the purchase and sale of MKTG securities. The case was filed in the name of Mark Levy v. General Electric Capital Corporation, in the United States District Court for the Southern District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002, a settlement was reached among the parties. The settlement provided for a $1,250,000 payment to be made to MKTG by GECC and for GECC to reimburse MKTG for the reasonable cost of mailing a notice to stockholders up to $30,000. On April 29, 2002, the court approved the settlement for $1,250,000, net of attorney fees plus reimbursement of mailing costs. In July 2002, the court ruling became final and the Company received and recorded the net settlement payment of $965,486 plus reimbursement of mailing costs. The net settlement has been recorded as a gain from settlement of lawsuit and is included in the statement of operations for the year ended June 30, 2003. In June 2002, the Company received notification from The Nasdaq Stock Market ('Nasdaq') that the Company's common stock has closed below the minimum $1.00 per share requirement for continued inclusion under Marketplace Rule 4310(c)(4). In October 2002, the Company received another notification from Nasdaq that based on its June 30, 2002 filing the Company does not meet compliance with Marketplace Rule 4310(c)(2)(B). Such rule requires the Company to have a minimum of $2.0 million in net tangible assets or $2.5 million in stockholders' equity or a market value of listed securities of $35.0 million or $.5 million of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. In December 2002, the Company received notification from Nasdaq indicating that the Company was subject to delisting. The Company has responded to Nasdaq with its plan and believed that it could achieve compliance with Marketplace Rule 4310(c)(2)(B) by achieving minimum stockholders' equity of $2.5 million. In addition, in January 2003, the Company affected an eight-for-one reverse stock split (See Note 2). In February 2003, the Company received notification from Nasdaq that the Company's was not in compliance with the Nasdaq's market value of publicly held shares requirements, as set forth in Nasdaq Marketplace Rule 4310(c)(07). The Company believed that the issuance of common shares for the redemption of its preferred stock (See Note 15) has brought the Company back into compliance with the minimum public float requirement. The Company appealed the Staff's decision to delist the Company to a Nasdaq Listing Qualification Panel. The hearing was held on February 13, 2003. On March 5, 2003, a Nasdaq Listing Qualifications Panel determined to continue the listing of the Company's securities on the Nasdaq SmallCap Market on the condition, among other things, that the Company make a public filing with the Securities and Exchange Commission and Nasdaq evidencing shareholders' equity of at least $2.5 million and further that the Company file its quarterly report on Form 10-Q for the March 31, 2003 quarter on or before May 15, 2003. On March 13, 2003, the Company filed an unaudited balance sheet as of January 31, 2003 evidencing shareholders' equity of at least $2.5 million. On May 22, 2003, the Company received notification from Nasdaq that the Company satisfactorily demonstrated compliance and, accordingly, the Nasdaq Listing Qualifications Panel determined to continue the listing of the Company's securities on The Nasdaq SmallCap Market and to close the hearing file. At June 30, 2003, shareholders' equity was approximately $3.2 million. An employee of Metro Fulfillment, Inc. ("MFI"), which, until March 1999, was a subsidiary of the Company, filed a complaint in the Superior Court of the State of California for the County of Los Angeles, Central District, against MKTG and current and former officers of MKTG. The complaint sought compensatory and punitive damages of $10,000,000 in connection with the individual's employment at MFI. In March 2001, although admitting no liability, the Company entered into a settlement agreement. The total cost of the settlement, recorded as of March 31, 2001, was $1,297,970 which included cash payments aggregating $225,000, forgiveness of a note receivable over eight years and related interest of $931,787 and the issuance of 2,083 shares of the Company's unregistered common stock valued at $141,183. In addition to the above, certain other legal actions in the normal course of business are pending to which the Company is a party. The Company does not expect that the ultimate resolution of the above matters and other pending legal matters will have a material effect on the financial condition, results of operations or cash flows of the Company. 55 15. PREFERRED STOCK: In January 2003, the Company redeemed the outstanding shares of the preferred stock for a cash payment of approximately $6.0 million and the issuance of 181,302 shares of common stock valued at approximately $.2 million. The carrying value of the preferred stock was approximately $20.2 million which included a beneficial conversion feature of approximately $10.3 million. The transaction resulted in a gain on redemption of approximately $14.0 million and is reflected in net income attributable to common stockholders for the year ended June 30, 2003. On October 2, 2002, the common stockholders ratified the issuance of the Series E preferred stock and approved the stockholders right to convert such preferred stock to common stock beyond the previous 19.99% limitation. Subsequently, the preferred shareholders converted 149 shares of Series E preferred stock into 79,767 shares of common stock. The preferred shareholders converted 225 shares of preferred stock to 112,983 shares of common stock for the year ended June 30, 2002. On February 19, 2002, the Company entered into standstill agreements, as amended, with the Series E preferred shareholders in order for the Company to continue to discuss with multiple parties regarding the possibility of either restructuring or refinancing the remainder of the preferred stock. The Company's commitments as a result of the standstill agreements included a partial redemption of 625 of the Series E preferred shares for $5,000,000, thereby reducing the number of Series E preferred shares to 2,900 at June 30, 2002. The value of the preferred stock was initially recorded at a discount allocating a portion of the proceeds to a warrant. The redemption of such preferred shares for $5,000,000, less the carrying value of the preferred shares, including the beneficial conversion feature previously recorded to equity on the balance sheet, resulted in a deemed dividend of $412,634 which was recorded to additional paid-in and included in the calculation of net loss attributable to common stockholders for the year ended June 30, 2002. The Company recognized a loss on the redemption of preferred stock of approximately $.4 million reflected in net loss attributable to common stockholders. The loss is the result of the difference between the consideration paid for redemption of the preferred stock for $5.0 million cash and the carrying value of the preferred stock of $4.6 million which included a beneficial conversion feature of approximately $2.4 million. On February 24, 2000 the Company entered into a private placement with RGC International Investors LDC and Marshall Capital Management, Inc., an affiliate of Credit Suisse First Boston, in which the Company sold an aggregate of 3,750 shares of Series E Convertible Preferred Stock, par value $.01 ("Series E Preferred Stock"), and warrants to acquire 30,648 shares of common stock for proceeds of approximately $29.5 million, net of approximately $520,000 of placement fees and expenses. The preferred stock was convertible into cash or shares of common stock on February 18, 2004 at the option of the Company. The preferred stock provided for liquidation preference under certain circumstances and accordingly had been classified in the mezzanine section of the balance sheet. The preferred stock had no dividend requirements. After adjustment for the reverse stock split, the Series E Preferred Stock was convertible at any time at $1,174.70 per share, subject to reset on August 18, 2000 if the market price of the Company's common stock was lower and subject to certain anti-dilution adjustments. On August 18, 2000, the conversion price was reset to $587.52 per share, the market price on that date as adjusted for the reverse stock split. As a result of the issuance of a certain warrant, certain antidilultive provisions of the Company's Series E preferred stock were triggered. The conversion price of such shares was reset to a fixed price of $18.768 based on an amount equal to the average closing bid price of the Company's common stock for ten consecutive trading days beginning on the first trading day of the exercise period of the aforementioned warrant. No further adjustments will be made to the conversion price other than for stock splits, stock dividends or other organic changes. The warrant was exercisable for a period of two years at an exercise price of $1,370.448, subject to certain anti-dilution adjustments. The fair value of the warrant of $15,936,103, as determined by the Black Scholes option pricing model, was recorded as additional paid in capital and a corresponding decrease 56 to preferred stock . The warrant expired in February 2002. 16. COMMON STOCK, STOCK OPTIONS, AND WARRANTS: Common Stock: In February 2001, the Company entered into a strategic partnership agreement (the "Agreement") with Paris based Firstream. Firstream paid the Company $3.0 million and in April 2001 received 31,250 restricted shares of common stock, plus a two-year warrant for 8,333 shares priced at $144.00 per share. The warrants were exercisable over a two year period. The warrants were valued at $.9 million as determined by the Black-Scholes option pricing model and were recorded to equity. In accordance with the Agreement, the Company recorded proceeds of $1.8 million; net of fees and expenses, to equity and $1.0 million was designated as deferred revenue to provide for new initiatives. The remaining balance was $.8 million as of June 30, 2002. In July 2002, the Company received a letter from Firstream canceling the Strategic Partnership Agreement and requesting payment of the remaining $.8 million, which has been categorized as a liability at June 30, 2002. The Company settled with Firstream during fiscal year 2003 for approximately $.2 million and the remaining liability was sold as part of the Northeast operations sale. There was no remaining liability at June 30, 2003. Related to the issuance of Firstream common shares, a warrant was issued to purchase 6,250 common shares for broker fee compensation. The warrant was exercisable over a two-year period. The warrant was valued at $.3 million as determined by the Black-Scholes option pricing model. During the year ended June 30, 2001, the Company exchanged 41,042 shares of unregistered MKTG common stock for WiredEmpire preferred stock. The exchange resulted in a gain of $13,410,273, which was recorded through equity and is included in net loss attributable to common stockholders and earnings per share - discontinued operations for the year ended June 30, 2001. In March 2001, the Company entered into a settlement agreement with an employee of Metro Fulfillment, Inc. ("MFI"), which, until March 1999, was a subsidiary of the Company. The complaint sought compensatory and punitive damages of $10,000,000 in connection with the individual's employment at MFI. The Company admitted no liability. The total cost of the settlement was $1,297,970 which included cash payments aggregating $225,000, foregiveness of a note receivable over eight years and related interest of $931,787 and the issuance of 2,083 shares of unregistered MKTG common shares valued at $141,183. In October 2000, the Company amended the earn-out provision of the purchase agreement of Stevens Knox and Associates, Inc. In October 2000, the Company issued 2,756 of unregistered MKTG common shares valued at $250,096 and in February 2002 the Company issued 15,739 of unregistered MKTG common shares valued at $300,000. The $550,096 earn-out settlement was considered an addition to the purchase price and goodwill in the year ended June 30, 2001. Stock Options: The Company maintains a non-qualified stock option plan (the "1991 Plan") for key employees, officers, directors and consultants to purchase 65,625 shares of common stock. The Company also maintains a qualified stock option plan (the "1999 Plan") for the issuance of up to an additional 62,500 shares of common stock under qualified and non-qualified stock options. Both plans are administered by the compensation committee of the Board of Directors which has the authority to determine which officers and key employees of the Company will be granted options, the option price and vesting of the options. In no event shall an option expire more than ten years after the date of grant. The following summarizes the stock option transactions under the 1991 Plan for the three years ended June 30, 2003: 57 Number Option Price of Shares Per Share -------- ------------ Outstanding at July 01, 2000 26,644 ====== Granted - Exercised (52) $120.00 to $149.28 Cancelled (3,337) $96.00 to $249.12 ------- Outstanding at June 30, 2001 23,255 ====== Granted - Exercised - Cancelled (2,989) $96.00 to $240.00 ------- Outstanding at June 30, 2002 20,266 ====== Granted - Exercised - Cancelled (7,570) $96.00 to $149.28 ------- Outstanding at June 30, 2003 12,696 ====== The following summarizes the stock option transactions under the 1999 Plan for the three years ended June 30, 2003: Number Option Price of Shares Per Share -------- ----------- Outstanding at July 01, 2000 52,626 ====== Granted 4,896 $171.024 to $213.00 Exercised (5) $73.92 Cancelled (3,601) $73.92 to $723.024 -------- Outstanding at June 30, 2001 53,916 ======= Granted - Exercised - Cancelled (19,785) $73.92 to $726.00 -------- Outstanding at June 30, 2002 34,131 ======= Granted - Exercised - Cancelled (27,770) $213.00 to $558.00 ------- Outstanding at June 30, 2003 6,361 ======= In addition to the 1991 and 1999 Plans, the Company has option agreements with current and former officers and employees of the Company. The following summarizes transactions for the three years ended June 30, 2003: 58 Number Option Price of Shares Per Share --------- Outstanding at July 01, 2000 31,983 ====== Granted 14,583 $213.00 to $216.00 Exercised - Cancelled (5,208) $846.00 ------ Outstanding at June 30, 2001 41,358 ====== Granted - Exercised - Cancelled (4,688) $213.00 ------- Outstanding at June 30, 2002 36,670 ====== Granted - Exercised - Cancelled (33,336) $248.16 ------- Outstanding at June 30, 2003 3,334 ======= As of June 30, 2003, 22,391 options are exercisable. The weighted average exercise price of all outstanding options is $213.70 and the weighted average remaining contractual life is 2.26 years. At June 30, 2003, 381,150 options were available for grant. As of June 30, 2003, the Company has 228,887 warrants outstanding to purchase shares of common stock at prices ranging from $0.48 to $48.00. All outstanding warrants are currently exercisable. 17. INCOME TAXES: As of June 30, -------------- 2003 2002 ------------ ------------ Deferred tax assets: Net operating loss carryforwards: Continuing operations $ 60,394,005 $ 48,645,647 Abandoned lease reserves 675,587 3,012,350 Compensation on option grants 897,029 1,232,941 Amortization of intangibles 200,077 10,104,829 Accrued settlement costs 346,048 Other 309,756 272,468 ------------ ------------ Total deferred tax assets 62,822,502 63,268,235 Valuation allowance (62,822,502) (63,268,235) ------------ ------------ Net deferred tax assets $ -- $ -- ============ ============ The difference between the Company's U.S. federal statutory rate of 35%, as well as its state and local rate net of federal benefit of 5%, when compared to the effective rate is principally comprised of the valuation allowance and other permanent disallowable items. The Company has a U.S. federal net operating loss carry forward of approximately $170,000,000 available which expires from 2011 through 2022. Of these net operating loss carry forwards approximately $61,400,000 is the result of deductions related to the exercise of non-qualified stock options. The realization of these net operating loss carry forwards would result in a credit to equity. These loss carry forwards are subject to annual limitations. The Company has recognized a full valuation allowance against deferred tax assets because it is more likely than not that sufficient taxable income will not be generated during the carry forward period available under the tax law to utilize the deferred tax assets. 59 18. GAIN ON TERMINATION OF LEASE In December 2002, the Company terminated a lease for abandoned property. The lease termination agreement required an up front payment of $.3 million and the Company is obligated to pay approximately $60,000 per month until the landlord has completed certain leasehold improvements for a new tenant, which was completed as of July 2003, and then the Company is obligated to pay $20,000 per month until August 2010. The Company was released from all other obligations under the lease. The gain on lease termination represents a change in estimate representing the difference between the Company's present value of its future obligations and the entire obligation that remained on the books under the original lease obligation. The remaining obligation has been recorded in accrued expenses and other current liabilities and other liabilities. 19. EMPLOYEE RETIREMENT SAVINGS 401(k) PLANS: The Company sponsors a tax deferred retirement savings plan ("401(k) plan") which permits eligible employees to contribute varying percentages of their compensation up to the annual limit allowed by the Internal Revenue Service. The Company currently matches the 50% of the first $3,000 of employee contribution up to a maximum of $1,500 per employee. Matching contributions charged to expense were approximately $69,700, $82,100 and $75,100, for the fiscal years ended June 30, 2003, 2002 and 2001, respectively. The Company also provided for discretionary Company contributions. There were no discretionary contributions in fiscal years 2003, 2002 or 2001. 20. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: For the year ended June 30, 2003: o The preferred shareholders converted 149 shares of preferred Series E stock to 79,767 shares of common stock during the year ended June 30, 2003. o In connection with the redemption of the preferred Series E stock, the preferred shareholders converted 2,751 shares of preferred Series E stock to 181,302 shares of common stock during the year ended June 30, 2003. In addition, the Company recognized a gain on redemption of preferred stock of $13,970,813. For the year ended June 30, 2002: o The Company issued 15,739 of unregistered MKTG common shares in February 2002 valued at $300,000 in settlement of an earn-out provision for the acquisition of Stevens Knox and Associates, Inc. entered into in the previous fiscal year. o The preferred shareholders converted 225 shares of preferred stock to 112,983 shares of common stock during the year ended June 30, 2002. For the year ended June 30, 2001: o The Company received $860,762 of uncollateralized financing to acquire additional capitalized software. The notes bear interest at 9.5% per annum and are payable in monthly installments over 36 months with maturity dates ranging from September 30, 2003 and December 30, 2003. o The Company exchanged 41,042 shares of unregistered MKTG common stock for WiredEmpire preferred stock. The exchange resulted in a gain of $13,410,273, which was recorded through equity and is included in net loss attributable to common stockholders and earnings per share - discontinued operations. o The Company issued 2,756 of unregistered MKTG common shares in October 2000 valued at $250,096 in settlement of an earn-out provision for the acquisition of Stevens Knox and Associates, Inc. 60 o The Company issued 2,083 unregistered MKTG common shares in March 2001 valued at $141,183 in settlement of a complaint in connection with an employee of MFI. Supplemental disclosures of cash flow data: ------------------------------------------- 2003 2002 2001 ---------- ---------- ---------- Cash paid during the year for: Interest $ 234,164 $ 588,683 $6,256,346 Financing charge $ -- $ -- $ 128,133 Income tax paid $ 8,119 $ 67,824 $ 75,261 21. SEGMENT INFORMATION: In accordance with SFAS No. 131, 'Disclosures about Segments of an Enterprise and Related Information' segment information is being reported consistent with the Company's method of internal reporting. In accordance with SFAS No. 131, operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company believes it has one reporting segment. The Company has one remaining product line (telemarketing), as a result of the sale of its Northeast Operations, which are classified as Discontinued Operations. No single customer accounted for 10% or more of total revenues. The Company earns 100% of its revenue in the United States. 61 Schedule II
MKTG Services, Inc. Valuation and Qualifying Accounts ----------------------------------- For the Years Ended June 30, 2003, 2002, and 2001 ------------------------------------------------------------------------------------------------------------------------ Column A Column B Column C Column D Column E ------------------------------------------------------------------------------------------------------------------------ Additions -------------------------- Balance at Charged To Charged To Description Beginning Costs And Other Deductions- Balance At Of Period Expenses Accounts- Describe1 End Of Period Describe Allowance for doubtful accounts Fiscal 2003 $ 94,000 $ 80,465 $ - $ 54,465 $ 120,000 Fiscal 2002 $ 6,000 $ 88,000 $ - $ - $ 94,000 Fiscal 2001 $ 6,000 $ - $ - $ - $ 6,000
1.Represents accounts written off during the period. 62 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT State of Incorporation ------------- Alliance Media Corporation Delaware MKTG Services - New York, Inc. New York MKTG TeleServices, Inc. California MKTG Services - Philly, Inc. New York MKTG Services - Boston, Inc. Delaware Pegasus Internet, Inc. New York WireEmpire, Inc. Deleware 63 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors MKTG Services, Inc. We hereby consent to the incorporation by reference in the Registration Statements on Forms S-3 (No. 333-33174, No. 333-34822 and No. 333-89973) and Forms S-8 (No. 333-94603 and No. 333-82541) of MKTG Services, Inc. and Subsidiaries, of our report dated September 26, 2002, except for the reclassification and presentation of the discontinued operations of the Northeast Operations and Grizzard, Inc., as discussed in Note 3, as to which the date is October 14, 2003, relating to the consolidated financial statements and financial statement schedule which appears in this Annual Report on Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP New York, New York October 14, 2003 64 Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements on Forms S-3 (No. 333-33174, No. 333-34822 and No. 333-89973) and Forms S-8 (No. 333-94603 and No. 333-82541) of MKTG Services, Inc. and Subsidiaries, of our report dated October 10, 2003 relating to the consolidated financial statements as of June 30, 2003 and for the year then ended, which is included in this Form 10-K Filing. /s/ Amper, Politziner & Mattia P.C. October 14, 2003 Edison, New Jersey 65 Exhibit 31.1 CERTIFICATION I, J. Jeremy Barbera, certify that: (1) I have reviewed this annual report on Form 10-K of MKTG Services, Inc.; (2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Registrant as of, and for, the periods presented in this report; (4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Paragraph omitted in accordance with SEC transition instructions]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: October 14, 2003 By: /s/ J. Jeremy Barbera ---------------------- J. Jeremy Barbera Chairman of the Board, Chief Executive Officer and Interim Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) 66 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of MKTG Services, Inc. (the "Company") on Form 10-K for the year ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, J. Jeremy Barbera, Chairman of the Board, Chief Executive Officer and Interim Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: October 14, 2003 By: /s/ J. Jeremy Barbera ---------------------- J. Jeremy Barbera Chairman of the Board, Chief Executive Officer and Interim Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form with the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 67