-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mfq1SgCceAGY/aefBZPcySkQ/II+KexrO01n5zdYFviLaJa8ynAf+hK7ZC2xdTEf L9shuhjfNqnA5RO6bxpOzg== 0000950117-03-000671.txt : 20030214 0000950117-03-000671.hdr.sgml : 20030214 20030214181125 ACCESSION NUMBER: 0000950117-03-000671 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MKTG SERVICES INC CENTRAL INDEX KEY: 0000014280 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 880085608 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01768 FILM NUMBER: 03569340 BUSINESS ADDRESS: STREET 1: 333 SEVENTH AVENUE STREET 2: 20TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 917-339-7200 MAIL ADDRESS: STREET 1: 333 SEVENTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10001 FORMER COMPANY: FORMER CONFORMED NAME: SPORTS TECH INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: ALL-COMM MEDIA CORP DATE OF NAME CHANGE: 19950823 FORMER COMPANY: FORMER CONFORMED NAME: BRISTOL HOLDINGS INC DATE OF NAME CHANGE: 19920518 FORMER COMPANY: FORMER CONFORMED NAME: MARKETING SERVICES GROUP INC DATE OF NAME CHANGE: 19970707 10-Q 1 a34504.txt MKTG SERVICES, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2002 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 0-16730 MKTG SERVICES, INC. (Exact Name of Registrant as Specified in Its Charter) Nevada 88-0085608 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 333 Seventh Avenue, 20th Floor New York, New York 10001 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (917) 339-7100 ____________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] APPLICABLE ONLY TO CORPORATE ISSUERS State number of shares outstanding of each of the issuer's classes of common equity as of the latest practical date: As of February 10, 2003 there were 1,092,366 shares of the Issuer's Common Stock, par value $.01 per share outstanding. MKTG SERVICES, INC. AND SUBSIDIARIES TABLE OF CONTENTS FORM 10-Q REPORT DECEMBER 31, 2002 Page ---- PART I - FINANCIAL INFORMATION Item 1 Interim Condensed Consolidated Financial Statements (unaudited) Condensed Consolidated Balance Sheets as of December 31, 2002 and June 30, 2002 (unaudited) 3 Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2002 and 2001 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2002 and 2001 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6-14 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 15-23 Item 3 Quantitative and Qualitative Disclosure About Market Risk 24 Item 4 Controls and Procedures 25 PART II - OTHER INFORMATION Item 4 Submission of Matters to a Vote of Security Holders 26 Item 6 Exhibits and Reports on Form 8-K 26 Signatures 27 2 PART I - FINANCIAL INFORMATION Item 1 - Interim Condensed Consolidated Financial Statements (unaudited) MKTG SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
December 31, 2002 June 30, 2002 ----------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 8,670,567 $ 4,438,166 Accounts receivable, net of allowance for doubtful accounts of $94,000 as of December 31, 2002 and June 30, 2002, respectively 1,374,574 3,066,983 Net assets of discontinued operations -- 32,722,244 Restricted cash 4,945,874 4,945,874 Other current assets 680,355 446,456 ------------- ------------- Total current assets 15,671,370 45,619,723 Intangible assets, net 2,307,220 2,317,220 Related party note receivable 1,013,244 978,534 Property and equipment, net 821,700 907,087 Other assets 32,420 345,709 ------------- ------------- Total assets $ 19,845,954 $ 50,168,273 ============= ============= LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY Current liabilities: Short-term borrowing $ 168,401 $ 2,280,384 Accounts payable-trade 372,237 881,399 Accrued expenses and other current liabilities 2,882,783 5,007,640 Net liabilities of discontinued operations -- 18,608,365 Current portion of long-term obligations 4,927,720 4,837,321 ------------- ------------- Total current liabilities 8,351,141 31,615,109 Long-term obligations, net of current portion 25,543 176,336 Other liabilities 1,725,441 6,321,798 ------------- ------------- Total liabilities 10,102,125 38,113,243 ------------- ------------- Minority interest in preferred stock of discontinued subsidiary 280,946 280,946 Convertible preferred stock - $.01 par value; 18,750 shares authorized; 2,752 and 2,901 shares of Series E issued and outstanding as of December 31, 2002 and June 30, 2002, respectively 9,850,926 10,384,064 Stockholders' (deficit) equity: Common stock - $.01 par value; 9,375,000 authorized; 919,896 and 840,129 shares issued as of December 31, 2002 and June 30, 2002, respectively 9,199 8,401 Additional paid-in-capital 230,401,743 229,899,188 Accumulated deficit (229,405,275) (227,123,859) Less: 8,832 shares of common stock in treasury, at cost (1,393,710) (1,393,710) ------------- ------------- Total stockholders' (deficit) equity (388,043) 1,390,020 ------------- ------------- Total liabilities and stockholders' (deficit) equity $ 19,845,954 $ 50,168,273 ============= =============
See Notes to Condensed Consolidated Financial Statements. 3 MKTG SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001 (unaudited)
Three Months Ended Six Months Ended December 31, December 31, ------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ------------ Revenues $ 3,159,321 $ 2,926,156 $ 7,663,406 $ 6,719,077 ----------- ----------- ----------- ------------ Operating costs and expenses: Salaries and benefits 3,010,512 3,389,631 6,920,284 7,353,662 Direct costs 134,150 115,887 361,588 299,348 Selling, general and administrative 502,291 1,170,535 921,936 2,111,830 Depreciation and amortization 56,180 98,775 112,018 197,550 Gain on termination of lease (3,905,387) -- (3,905,387) -- ----------- ----------- ----------- ------------ Total operating costs and expenses (202,254) 4,774,828 4,410,439 9,962,390 ----------- ----------- ----------- ------------ Income (loss) from operations 3,361,575 (1,848,672) 3,252,967 (3,243,313) Settlement of lawsuit -- -- 965,486 -- Interest income (expense) and other, net 10,737 174,811 (17,352) 227,910 ----------- ----------- ----------- ------------ Income (loss) from continuing operations before provision for income taxes 3,372,312 (1,673,861) 4,201,101 (3,015,403) Provision for income taxes (20,100) (10,746) (30,879) (41,546) ----------- ----------- ----------- ------------ Income (loss) from continuing operations 3,352,212 (1,684,607) 4,170,222 (3,056,949) Discontinued operations: Loss from discontinued operations (599,699) (2,492,367) (1,260,003) (13,281,545) (Loss) gain from disposal of discontinued operations (116,635) -- (116,635) 1,847,764 ----------- ----------- ----------- ------------ Loss from discontinued operations (716,334) (2,492,367) (1,376,638) (11,433,781) ----------- ----------- ----------- ------------ Cumulative effect of change in accounting principle -- -- (5,075,000) -- ----------- ----------- ----------- ------------ Net income (loss) $ 2,635,878 $(4,176,974) $(2,281,416) $(14,490,730) =========== =========== =========== ============ Basic earnings (loss) per share: Continuing operations $ 3.72 $ (2.38) $ 4.81 $ (4.33) Discontinued operations (.80) (3.52) (1.59) (16.21) Cumulative effect of change in accounting principle -- -- (5.85) -- ----------- ----------- ----------- ------------ Basic earnings (loss) per share $ 2.92 $ (5.90) $ (2.63) $ (20.54) =========== =========== =========== ============ Weighted average common shares outstanding 901,987 708,197 866,644 705,386 =========== =========== =========== ============ Diluted earnings (loss) per share: Continuing operations $ 1.27 $ (2.38) $ 1.58 $ (4.33) Discontinued operations (.27) (3.52) (.52) (16.21) Cumulative effect of change in accounting principle -- -- (1.92) -- ----------- ----------- ----------- ------------ Diluted earnings (loss) per share $ 1.00 $ (5.90) $ (.86) $ (20.54) =========== =========== =========== ============ Weighted average common shares outstanding 2,637,343 708,197 2,637,028 705,386 =========== =========== =========== ============
See Notes to Condensed Consolidated Financial Statements. 4 MKTG SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001 (unaudited)
2002 2001 ----------- ------------ Operating activities: Net loss $(2,281,416) $(14,490,730) Loss from discontinued operations 1,376,638 11,433,781 Cumulative effect of change in accounting principle 5,075,000 -- ----------- ------------ Income (loss) from continuing operations 4,170,222 (3,056,949) Adjustments to reconcile loss to net cash used in operating activities: Gain on termination of lease (3,905,387) -- Depreciation 102,018 73,470 Amortization 10,000 124,080 Changes in assets and liabilities: Accounts receivable 1,692,409 1,267,767 Other current assets 266,101 (96,599) Other assets 313,289 (18,419) Accounts payable - trade (509,162) (1,283,264) Accrued expenses and other liabilities (2,792,363) (2,205,281) ----------- ------------ Net cash used in operating activities (652,873) (5,195,195) ----------- ------------ Investing activities: Proceeds from sale of discontinued operations, net of fees 8,546,182 78,812,411 Increase in restricted cash -- (4,945,874) Purchases of property and equipment (16,631) (329,471) ----------- ------------ Net cash provided by investing activities 8,529,551 73,537,066 ----------- ------------ Financing activities: Issuance of related party note receivable -- (1,000,000) Expenditures from private placement of preferred stock (29,786) -- Net (repayments on) proceeds from credit facilities (2,111,983) 512,840 Repayment of related party note payable -- (250,000) Repayments of long-term debt (118,567) (134,877) ----------- ------------ Net cash used in financing activities (2,260,336) (872,037) ----------- ------------ Net cash used in discontinued operations (1,383,941) (51,952,281) ----------- ------------ Net increase in cash and cash equivalents 4,232,401 15,517,553 Cash and cash equivalents at beginning of period 4,438,166 829,457 ----------- ------------ Cash and cash equivalents at end of period $ 8,670,567 $ 16,347,010 =========== ============
See Notes to Condensed Consolidated Financial Statements. 5 MKTG SERVICES, INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of MKTG Services, Inc. and Subsidiaries ("MKTG" or the "Company"). These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company's Form 10-K for the year ended June 30, 2002 and the historical consolidated financial statements and related notes included therein. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary to present fairly the condensed consolidated financial position, results of operations and cash flows of the Company. Certain information and footnote disclosure normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. Operating results for the three and six-month periods ended December 31, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2003. Certain reclassifications have been made in the fiscal 2002 financial statements to conform to the fiscal 2003 presentation. The Company has limited capital resources and has incurred significant historical losses and negative cash flows from operations. The Company believes that funds on hand, funds available from its remaining operations and its unused lines of credit should be adequate to finance its operations and capital expenditure requirements and enable the Company to meet interest and debt obligations for the next twelve months. As explained in Note 5, the Company recently sold off substantially all the assets relating to its direct list sales and database services and website development and design business held by certain of its wholly owned subsidiaries. In addition, the Company has instituted cost reduction measures, including the reduction of workforce. The Company believes, based on past performance as well as the reduced corporate overhead, that its remaining operations should generate sufficient future cash flow to fund operations. Failure of the remaining operation to generate such sufficient future cash flow could have a material adverse effect on the Company's ability to continue as a going concern and to achieve its business objectives. The accompanying financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result should the Company be unable to continue as a going concern. On January 22, 2003, the Board of Directors approved an eight-for-one reverse split of the common stock. The stock split was effective January 27, 2003. Par value of the common stock remained $.01 per share and the number of authorized shares of common stock was reduced to 9,375,000 shares. The effect of the stock split has been reflected in the balance sheets and in all share and per share data in the accompanying condensed consolidated financial statements and Notes to Financial Statements. Stockholders' equity accounts have been retroactively adjusted to reflect the reclassification of an amount equal to the par value of the decrease in issued common shares from common stock account to paid-in-capital. 2. RECENT ACCOUNTING PRONOUNCEMENTS Effective July 1, 2002, the Company adopted the provisions of SFAS No. 141, "Business Combinations," in its entirety and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 applies to all business combinations with a closing date after June 30, 2001. SFAS No. 141 eliminates the pooling-of-interests method of accounting and further clarifies the criteria for recognition of intangible assets separately from goodwill. SFAS No. 142 eliminates the amortization of goodwill and indefinite-lived intangible assets and initiates an annual review for impairment. Identifiable intangible assets with a determinable useful life 6 continue to be amortized. The adoption required the Company to cease amortization of its remaining net goodwill balance and to perform a transitional impairment test of its existing goodwill based on a fair value concept as of the date of adoption (see Note 6). Goodwill is not subject to amortization and is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. The impairment test consists of a comparison of the fair value of goodwill with its carrying amount. If the carrying amount of goodwill exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. After an impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis. Effective July 1, 2002, the Company adopted SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting for the disposal of long-lived assets. The objectives of SFAS No. 144 are to address significant issues relating to the implementation of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and to develop a single accounting model, based on the framework established in SFAS No. 121, for the long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 recognition and measurement of the impairment of long-lived assets to be held and used. The Company reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, the Company will recognize an impairment when the sum of undiscounted future cash flows (without interest charges) is less than the carrying amount of such assets. The measurement for such impairment loss is based on the fair value of the asset. SFAS No. 144 supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for segments of a business to be disposed of. However, this Statement retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. The adoption of such pronouncement did not have an impact on the Company's financial position and results of operations. In April 2002, the FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002." SFAS No. 145 became effective for financial statements issued for fiscal years beginning after May 15, 2002. The Company adopted SFAS 145 on July 1, 2002. The adoption of the statement did not have a material impact on the Company's financial position and results of operations. However, the loss on extinguishment of debt that was classified as an extraordinary item in the prior period has been reclassified and included in loss from discontinued operation as the loss does not meet the criteria in APB Opinion No. 30 "Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business", for classification as an extraordinary item. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under Issue No. 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair market value only when the liability is incurred and not when management has completed the plan. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 7 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on the reported results. SFAS No. 148 is effective for fiscal years and interim periods beginning after December 15, 2002. The Company continues to account for stock-based employee compensation under the intrinsic value method of APB 25, "Accounting for Stock Issued to Employees." The Company will adopt the disclosure provisions of SFAS No. 148 in the quarter ending March 31, 2003. 3. EARNINGS PER SHARE Common share equivalents included in weighted average shares outstanding- diluted for the three and six months ending December 31, 2002 is as follows:
Three Six Months Months --------- --------- Weighted average common shares outstanding- basic 901,987 866,644 Common stock equivalents for conversion of preferred stock 1,579,484 1,597,653 Common stock equivalents for options and warrants 155,872 172,731 --------- --------- Weighted average common shares outstanding- diluted 2,637,343 2,637,028 ========= =========
Stock options and warrants in the amount of 74,250 shares for the three and six months ended December 31, 2002 have not been included in the computation of diluted EPS as they were antidilutive. Stock options and warrants in the amount of 375,268 and convertible preferred stock in the amount of 1,815,131 for the three and six months ended December 31, 2001 were not included in the computation of diluted EPS as they were antidilutive as a result of net losses during the period. 4. DEBT In November 2002, the Company repaid approximately $.3 million balance of one credit facility. In connection with the sale of the Company's Northeast Operations (See Note 5), another credit facility of approximately $.3 million was fully repaid and terminated in December 2002. At December 31, 2002, the Company had amounts outstanding of approximately $.2 million on its remaining line of credit facility. The Company had approximately $1.0 million available on its line of credit as of December 31, 2002. As of December 31, 2002, the Company was in compliance with its line of credit covenants. In August 2001, the Company entered into a stand by letter of credit with a bank in the amount of approximately $4.9 million to support the remaining obligations under a holdback agreement with the former shareholders of Grizzard Communications Group, Inc. ("Grizzard"). The letter of credit is collateralized by cash which has been classified as restricted cash in the current asset section of the balance sheet as of December 31, 2002 and June 30, 2002. The letter of credit is subject to an annual facility fee of 1.5%. The remaining obligation of approximately $4.6 million is included in current portion of long-term obligations and is payable in March 2003 (See Note 12). 5. DISCONTINUED OPERATIONS In December 2002, the Company completed its sale of substantially all the assets relating to its direct list sales and database services and website development and design business held by certain of its wholly owned subsidiaries (the "Northeast Operations") to Automation Research, Inc. ("ARI"), a wholly owned subsidiary of 8 CBC Companies, Inc. for approximately $10.4 million in cash plus the assumption of all directly related liabilities. Approximately $.5 million is being held in escrow for six months in connection with certain indemnifications made by the Company and its subsidiaries in accordance with the terms and conditions of the purchase agreement. As such, the operations and cash flows of the Northeast Operations have been eliminated from ongoing operations and the Company no longer has continuing involvement in the operations. Accordingly, the statement of operations and cash flows for the three and six months ending December 31, 2002 and 2001 have been reclassed into a one-line presentation and is included in Loss from Discontinued Operations and Net Cash Used by Discontinued Operations. In addition, the assets and liabilities of the Northeast Operations have been segregated and presented in Net Assets of Discontinued Operations and Net Liabilities of Discontinued Operations as of June 30, 2002. In connection with the sale of the Northeast Operations, the Company recognized a loss on disposal of discontinued operations of approximately $.1 million in the three and six months ended December 31, 2002. The loss represents the difference in the net book value of assets and liabilities as of the date of the sale as compared to the net consideration received after settlement of purchase price adjustments. There was no tax impact on this loss. On July 31, 2001, the Company completed the sale of all the outstanding capital stock of its Grizzard subsidiary to Omnicom Group, Inc. As a result of the sale agreement, the Company fully paid a term loan of $35.5 million and $12.0 million line of credit. The Company recorded a loss of approximately $4.9 million for the six months ended December 31, 2001 as a result of the early extinguishment of debt which is included in the loss from discontinued operations. For the six months ended December 31, 2001, the Company recognized a gain on sale of Grizzard in the amount of approximately $1.8 million which is included in the statement of operations in Gain from Disposal of Discontinued Operations. The gain represents the difference in the net book value of assets and liabilities as of the date of the sale as compared to the net consideration received after settlement of purchase price adjustments. The statement of operations and cash flows for the six months ending December 31, 2001 have been reclassified into a one-line presentation and is included in Loss from Discontinued Operations and Net Cash Used by Discontinued Operations as a result of the sale of the list and database operations in December 2002 of which Grizzard was a component. Revenue recognized for the three and six months ended December 31, 2002 relating to the discontinued operations which is included in Loss from Discontinued Operations was approximately $2.9 million and $7.6 million, respectively. Revenue recognized for the three and six months ended December 31, 2001 relating to the discontinued operations which is included in Loss from Discontinued Operations was approximately $5.3 million and $13.1 million, respectively. In connection with the disposal of the discontinued operations, the Company no longer provides services for the list sales and services, database marketing, website development design and marketing communication services product lines. 6. GOODWILL AND OTHER INTANGIBLE ASSETS As a result of the adoption of SFAS No. 142, the Company discontinued the amortization of goodwill effective July 1, 2002. Identifiable intangible assets are amortized under the straight-line method over the period of expected benefit of five years. The Company recharacterized acquired workforce of approximately $51,000 which is no longer defined as an intangible asset under SFAS No. 141. In addition, the Company recharacterized non-contractual customer relationships of approximately $.8 million which do not meet the separability criterion under SFAS No. 141. As of December 31, 2002, the Company completed the transition requirements under SFAS No. 142. The Company determined that it had three reporting units. Reporting unit 1 represents the operations of list sales and services and database marketing. Reporting unit 2 represents the operations of telemarketing. Reporting unit 3 represents the operations of web site development and design. There is no impairment for reporting unit 2. The Company recognized an impairment charge of approximately $5.1 million in connection with the adoption of SFAS No. 142 for reporting units 1 and 3. The impairment charge has been booked by the Company in 9 accordance with SFAS 142 transition provisions as a cumulative effect of change in accounting principle for the six months ended December 31, 2002. In connection with the sale of the Northeast Operations (See Note 5), the only remaining reporting unit consists of telemarketing. The following table sets forth the components of goodwill, net as of December 31, 2002:
Impairment December 31, July 1, 2002 losses Sale of Reporting Unit 2002 ------------ ----------- ---------------------- ------------ Reporting unit -1 $12,939,561 $(4,774,056) $(8,165,505) $ -- Reporting unit -2 2,277,220 -- -- 2,277,220 Reporting unit -3 300,944 (300,944) -- -- ----------- ----------- ----------- ---------- $15,517,725 $(5,075,000) $(8,165,505) $2,277,220 =========== =========== =========== ==========
Reporting unit - 1 represents list sales and services and database marketing Reporting unit - 2 represents telemarketing Reporting unit - 3 represents website development and design The following table sets forth the components of the intangible assets subject to amortization as of December 31, 2002 and June 30, 2002:
December 31, 2002 June 30, 2002 --------------------------------- --------------------------------- Gross Gross carrying Accumulated carrying Accumulated Useful life amount amortization Net amount amortization Net ----------- -------- ------------ ------- -------- ------------ ------- Capitalized software 5 years $100,000 $70,000 $30,000 $100,000 $60,000 $40,000
Amortization expense for the six months ended December 31, 2002 and 2001 was approximately $10,000 and $124,000, respectively. Amortization for the three months ended December 31, 2002 and 2001 was approximately $5,000 and $62,000, respectively. Estimated amortization expense by fiscal year as of June 30, are as follows: 2003 $20,000 2004 20,000 ------- $40,000 ======= The following table provides a reconciliation of net loss for exclusion of goodwill amortization:
Three months ended Six months ended December 31, December 31, ------------------------ ------------------------ 2002 2001 2002 2001 ---------- ----------- ---------- ----------- Net income (loss) from continuing operations - as reported $3,352,212 $(1,684,607) $4,170,222 $(3,056,949) Add: Goodwill amortization -- 57,040 -- 114,080 ---------- ----------- ---------- ----------- Net income (loss) - adjusted $3,352,212 $(1,627,567) $4,170,222 $(2,942,869) ========== =========== ========== =========== Per share data: Basic net income (loss) per share From continuing operations $ 3.72 $ (2.38) $ 4.81 $ (4.33) Add: Goodwill amortization -- .08 -- 0.16 ---------- ----------- ---------- ----------- Adjusted basic net income (loss) per share from continuing operations $ 3.72 $ (2.30) $ 4.81 $ 4.17 ========== =========== ========== =========== Diluted net income (loss) per share from continuing operations $ 1.27 $ (2.38) 1.58 $ (4.33)
10 Add: Goodwill amortization -- .08 -- 0.16 ---------- ----------- ---------- ----------- Adjusted diluted net income (loss) per share from continuing operations $ 1.27 $ (2.30) $ 1.58 $ 4.17 ========== =========== ========== ===========
7. CONTINGENCIES AND LITIGATION In December 2000, an action was filed by Red Mountain, LLP in the United States Court for the Northern District of Alabama, Southern Division against J. Jeremy Barbera, Chairman of the Board and Chief Executive Officer of MKTG Services, Inc., and WiredEmpire, Inc. Red Mountains' complaint alleges, among other things, violations of Section 12(2) of the Securities Act of 1933, Section 10(b) of the Securities Act of 1934 and Rule 10(b)(5) promulgated there under, and various provisions of Alabama state law and common law, arising from Red Mountain's acquisition of WiredEmpire Preferred Series A stock in a private placement. Red Mountain invested approximately $.2 million in WiredEmpire's preferred stock and it seeks that amount, attorney's fees and punitive damages. The Company believes that the allegations in the complaint are without merit. The Company intends to vigorously defend against the lawsuit. In December 2001, an action was filed by a number of purchasers of preferred stock of WiredEmpire, Inc., a discontinued subsidiary, in the Alabama State Court (Circuit Court of Jefferson County, Alabama, 10 Judicial Circuit of Alabama, Birmingham Division), against J. Jeremy Barbera, Chairman of the Board and Chief Executive Officer of MKTG, MKTG and WiredEmpire, Inc. The plaintiffs' complaint alleges, among other things, violation of sections 8-6-19(a)(2) and 8-6-19(c) of the Alabama Securities Act and various other provisions of Alabama state law and common law, arising from the plaintiffs' acquisition of WiredEmpire Preferred Series A stock in a private placement. The plaintiffs invested approximately $1.7 million in WiredEmpire's preferred stock and they seek that amount, attorney's fees and punitive damages. On February 8, 2002, the defendants filed a petition to remove the action to federal court on the grounds of diversity of citizenship. The Company believes that the allegations in the complaint are without merit. The Company intends to vigorously defend against the lawsuit. In June 2002, the Company entered into a Tolling Agreement (the "Agreement") with various claimants who acquired WiredEmpire Preferred Series A stock in a private placement. The Agreement states that the passage of time from June 15, 2002 through August 31, 2002 shall not be counted toward the limit as set out by any applicable statute of limitations. In addition, the claimants agree that none of them shall initiate or file a legal action against Mr. Barbera, MKTG or WiredEmpire prior to the termination of the agreement. The claimants invested approximately $1.2 million in WiredEmpire's preferred stock. In January 2003, a lawsuit was filed in Alabama, Circuit Court for Jefferson County by certain plaintiffs involved in the Agreement. The action was filed against J. Jeremy Barbera, Chairman of the Board and Chief Executive Officer of MKTG, MKTG and WiredEmpire, Inc. The plaintiffs' complaint alleges among other things violations of state securities laws and breach of fiduciary duty. The Company believes that the allegations in the complaint are without merit. The Company intends to vigorously defend against the lawsuit. In 1999, a lawsuit under Section 16(b) of the Securities Exchange Act of 1934 was commenced against General Electric Capital Corporation ("GECC") by Mark Levy, derivatively on behalf of the Company, to recover short swing profits allegedly obtained by GECC in connection with the purchase and sale of MKTG securities. The case was filed in the name of Mark Levy v. General Electric Capital Corporation, in the United States District Court for the Southern District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002, a settlement was reached among the parties. The settlement provided for a $1.3 million payment to be made to MKTG by GECC and for GECC to reimburse MKTG for the reasonable cost of mailing a notice to stockholders up to $30,000. On April 29, 2002, the court approved the settlement for approximately $1.3 million, net of attorney fees plus reimbursement of mailing costs. In July 2002, the court ruling became final and the Company received and recorded the net settlement payment of approximately $1.0 million plus reimbursement of mailing costs. The net settlement has been recorded as a 11 gain from settlement of lawsuit and is included in the statement of operations for the six months ending December 31, 2002. In June 2002, the Company received notification from The Nasdaq Stock Market ("Nasdaq") that the Company's common stock has closed below the minimum $1.00 per share requirement for continued inclusion under Marketplace Rule 4310(c)(4). In October 2002, the Company received another notification from Nasdaq that based on its June 30, 2002 filing the Company does not meet compliance with Marketplace Rule 4310(c)(2)(B). Such rule requires the Company to have a minimum of $2.0 million in net tangible assets or $2.5 million in stockholders' equity or a market value of listed securities of $35.0 million or $.5 million of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. In December 2002, the Company received notification from Nasdaq indicating that the Company was subject to delisting. The Company has responded to Nasdaq with its plan and believes that it can achieve compliance with Marketplace Rule 4310(c)(2)(B) by achieving minimum stockholders' equity of $2.5 million. In addition, in January 2003, the Company effected an eight-for-one reverse stock split. (See Note 1). In February 2003, the Company received notification from Nasdaq that the Company's was not in compliance with the Nasdaq's market value of publicly held shares requirements, as set forth in Nasdaq Marketplace Rule 4310(c)(07). The Company believes that its subsequent issuance of common shares for the redemption of its preferred stock (See Note 10) has brought the Company back into compliance with the minimum public float requirement. The Company has appealed the Staff's decision to delist the Company to a Nasdaq Listing Qualification Panel. The hearing was held on February 13, 2003. There can be no assurance that the Company will remain listed on The Nasdaq Stock Market. In addition to the above, certain other legal actions in the normal course of business are pending to which the Company is a party. The Company does not expect that the ultimate resolution of the above matters and other pending legal matters will have a material effect on the financial condition, results of operations or cash flows of the Company. 8. RELATED PARTY TRANSACTIONS During the quarter ending December 31, 2001, the Company advanced $1.0 million pursuant to a promissory note receivable agreement with an officer due and payable to the Company at maturity, October 15, 2006. The Company recorded the note receivable at a discount of approximately $58,000 to reflect the incremental borrowing rate of the officer and is being amortized into interest income over the terms of the note using the straight-line method. The note receivable is collateralized by current and future holdings of MKTG common stock owned by the officer and bears interest at prime. Interest is due and payable yearly on October 15th. The Company recognized interest income of approximately $35,000 and $10,000 for the six months ended December 31, 2002 and 2001, respectively. The note will be forgiven in the event of a change in control. 9. SEGMENT INFORMATION In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" segment information is being reported consistent with the Company's method of internal reporting. In accordance with SFAS No. 131, operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company believes it has one reporting segment. The Company has one remaining product line (telemarketing), as a result of the sale of its Northeast Operations, which are classified as Discontinued Operations. No single customer accounted for 10% or more of total revenues. The Company earns 100% of its revenue in the United States. 12 10. PREFERRED STOCK In the quarter ending December 31, 2001, the preferred shareholders converted 138 shares of preferred stock to 68,976 shares of common stock. On October 2, 2002, the common stockholders ratified the issuance of the Series E preferred stock and approved the stockholders right to convert such preferred stock to common stock beyond the previous 19.99% limitation. Subsequently, in the quarter ending December 31, 2002, the preferred shareholders converted 149 shares of Series E preferred into 79,762 shares of common stock. On December 31, 2002, the Company entered into a redemption agreement with the holders of the Series E preferred stock. The Company agreed to redeem the outstanding shares of the preferred stock for a cash payment of approximately $6.0 million and the issuance of 181,302 shares of common stock valued at approximately $.2 million as of December 31, 2002. The redemption occurred in January 2003. The carrying value of the preferred stock is approximately $20.2 million which includes a beneficial conversion feature of approximately $10.3 million (See Note 12). 11. GAIN ON TERMINATION OF LEASE In December 2002, the Company negotiated a termination of a lease for an abandoned lease property. The agreement required an up front payment of $.3 million and the Company is obligated to pay approximately $60,000 per month until the landlord has completed certain leasehold improvements for a new tenant and then Company is obligated to pay $20,000 per month until August 2010 and the Company was released from all other obligations under the lease. The gain on lease termination represents a change in estimate representing the difference between the Company's present value of its future obligations and the entire obligation that remained on the books under the original lease obligation. The remaining obligation has been recorded in accrued expenses and other current liabilities and other liabilities. 12. SUBSEQUENT EVENT In January 2003, the Company redeemed all of its outstanding Series E Preferred Stock (See Note 10). The following table illustrates the effect to certain balance sheet and statement of operations items as if the redemption of the Series E Preferred Stock was fully completed on December 31, 2002, including the issuance of the common stock. The net book value of the preferred stock as of December 31, 2002 was approximately $20.2 million which includes a beneficial conversion feature of approximately $10.3 million. The net consideration given was approximately $6.2 million which would have resulted in a gain on redemption of approximately $14.0 million as of December 31, 2002. Total stockholder's equity would have increased by approximately $3.8 million which consists of approximately $3.7 million for the gain on redemption ($14.0 million gain net of beneficial conversion feature of $10.3 million) and approximately $.2 million for the value of the additional shares issued.
Pro Forma As reported As adjusted ----------- ----------- Cash $ 8,670,567 $ 2,648,727 Total stockholder's (deficit) equity $ (388,042) $ 3,441,044 Net income (loss) attributable to common stockholders: Three months $ 2,635,878 $16,606,689 Six months $(2,281,416) $11,689,395 Earnings (loss) per share:
13 Three months Basic $ 2.92 $ 18.37 Diluted $ 1.00 $ 6.29 Weighted average shares outstanding-Basic 901,987 903,958 Weighted average shares outstanding- Diluted 2,637,343 2,639,314 Six months Basic $ (2.63) $ 13.47 Diluted $ (.86) $ 4.45 Weighted average shares outstanding-Basic 866,644 867,629 Weighted average shares outstanding- Diluted 2,637,028 2,629,230
In January 2003, the Company entered into an agreement and settled the outstanding amount owed to the former Grizzard shareholders in connection with a holdback agreement (See Note 4). The Company paid approximately $4.6 million and utilized its restricted cash. Approximately $.3 million of restricted cash became available for general corporate use. In February 2003, certain compensation arrangements were modified. The Chief Executive Officer and the Chief Accounting Officer voluntarily forgave part of their compensations to effect a reduction of approximately 30% to $350,000 and $125,000 per year, respectively. In addition, Board of Directors fees were voluntarily reduced by 50%. 14 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Special Note Regarding Forward-Looking Statements Some of the statements contained in this Report on Form 10-Q discuss our plans and strategies for our business or state other forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of MKTG Services, Inc. ("MKTG" or the "Company"), or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; industry capacity; direct marketing and other industry trends; demographic changes; competition; the loss of any significant customers; changes in business strategy or development plans; availability and successful integration of acquisition candidates; availability, terms and deployment of capital; advances in technology; retention of clients not under long-term contract; quality of management; business abilities and judgment of personnel; availability of qualified personnel; changes in, or the failure to comply with, government regulations; and technology, telecommunication and postal costs. Introduction This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flows of the Company for the three and six-month periods ended December 31, 2002 and 2001. This should be read in conjunction with the financial statements, and notes thereto, included in this Report on Form 10-Q and the Company's financial statements and notes thereto, included in the Company's Annual Report on Form 10-K for the year ended June 30, 2002. Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. The following is a brief description of the more significant accounting policies and methods used by the Company. Revenue Recognition: Revenues derived from on-site telemarketing and telefundraising are generally based on hourly billing rates and a mutually agreed percentage of amounts received by the Company's client from a campaign. These services are performed on-site at the clients' location. These revenues are earned and recognized when the cash is received by the respective client. Revenues derived from off-site telemarketing and telefundraising are generally based on a mutually agreed amount per telephone contact with a potential donor without regard to amounts raised for the client. These services are performed at the Company's calling center. These revenues are earned and recognized when the services are performed. Goodwill: Effective July 1, 2002, the Company adopted the provisions of SFAS No. 141, "Business Combinations," in its entirety and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 applies to all business combinations with a closing date after June 30, 2001. SFAS No. 141 eliminates the pooling-of-interests method of accounting and further clarifies the criteria for recognition of intangible assets separately from goodwill. SFAS No. 142 eliminates the amortization of goodwill and indefinite-lived intangible assets and initiates an annual review for impairment. Identifiable intangible assets with a determinable useful life 15 continue to be amortized. The adoption required the Company to cease amortization of its remaining net goodwill balance and to perform a transitional impairment test of its existing goodwill based on a fair value concept as of the date of adoption. Goodwill is not subject to amortization and is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. The impairment test consists of a comparison of the fair value of goodwill with its carrying amount. If the carrying amount of goodwill exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. After an impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis. Long-Lived Assets: Effective July 1, 2002, the Company adopted SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting for the disposal of long-lived assets. The objectives of SFAS No. 144 are to address significant issues relating to the implementation of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and to develop a single accounting model, based on the framework established in SFAS No. 121, for the long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 recognition and measurement of the impairment of long-lived assets to be held and used. The Company reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, the Company will recognize an impairment when the sum of undiscounted future cash flows (without interest charges) is less than the carrying amount of such assets. The measurement for such impairment loss is based on the fair value of the asset. SFAS No. 144 supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for segments of a business to be disposed of. However, this Statement retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. The adoption of such pronouncement did not have an impact on the Company's financial position and results of operations. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates and assumptions made in the preparation of the consolidated financial statements relate to the carrying amount and lives of intangible assets, deferred tax valuation allowance, abandoned lease reserves and the allowance for doubtful accounts. Actual results could differ from those estimates. Recent Accounting Pronouncements: In April 2002, the FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002." SFAS No. 145 became effective for financial statements issued for fiscal years beginning after May 15, 2002. The Company adopted SFAS 145 on July 1, 2002. The adoption of the statement did not have a material impact on the Company's financial position and results of operations. However, the loss on extinguishment of debt that was classified as an extraordinary item in the prior period has been reclassified and included in loss from discontinued operation as the loss does not meet 16 the criteria in APB Opinion No. 30 "Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business", for classification as an extraordinary item. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under Issue No. 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair market value only when the liability is incurred and not when management has completed the plan. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on the reported results. SFAS No. 148 is effective for fiscal years and interim periods beginning after December 15, 2002. The Company continues to account for stock-based employee compensation under the intrinsic value method of APB 25, "Accounting for Stock Issued to Employees." The Company will adopt the disclosure provisions of SFAS No. 148 in the quarter ending March 31, 2003. To facilitate an analysis of MKTG operating results, certain significant events should be considered. In December 2002, the Company completed its sale of substantially all the assets relating to its direct list sales and database services and website development and design business held by certain of its wholly owned subsidiaries (the "Northeast Operations") to Automation Research, Inc. ("ARI"), a wholly owned subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash plus the assumption of all directly related liabilities. Approximately $.5 million is being held in escrow for six months in connection with certain indemnifications made by the Company and its subsidiaries in accordance with the terms and conditions of the purchase agreement. As such, the operations and cash flows of the Northeast Operations have been eliminated from ongoing operations and the Company no longer has continuing involvement in the operations. Accordingly, the statement of operations and cash flows for the three and six months ending December 31, 2002 and 2001 have been reclassed into a one-line presentation and is included in Loss from Discontinued Operations and Net Cash Used by Discontinued Operations. In addition, the assets and liabilities of the Northeast Operations have been segregated and presented in Net Assets of Discontinued Operations and Net Liabilities of Discontinued Operations as of June 30, 2002. On July 31, 2001, the Company completed the sale of all the outstanding capital stock of its Grizzard subsidiary to Omnicom Group, Inc. The purchase price of the transaction was approximately $89.8 million payable in cash. As a result of the sale agreement, the Company fully paid the term loan of $35.5 million and $12.0 million line of credit. The statement of operations and cash flows for the six months ending December 31, 2001 have been reclassed into a one-line presentation and is included in Loss from Discontinued Operations and Net Cash Used by Discontinued Operations as a result of the sale of the list and database operations in December 2002 of which Grizzard was a component. On January 22, 2003, the Board of Directors approved an eight-for-one reverse split of the common stock. The stock split was effective January 27, 2003. Par value of the common stock remained $.01 per share and the number of authorized shares of common stock was reduced to 9,375,000. The Company's business tends to be seasonal. The remaining business of Telemarketing services have higher 17 revenues and profits occurring in the fourth fiscal quarter, followed by the first fiscal quarter. This is due to subscription renewal campaigns for its performing arts clients, which generally begin in the springtime and continue during the summer months. Results of Operations for the Three Months Ended December 31, 2002, Compared to the Three Months Ended December 31, 2001 Revenues of approximately $3.2 million for the three months ended December 31, 2002 (the "Current Period") increased by approximately $.2 million or 8% over revenues of approximately $2.9 million during the three months ended December 31, 2001 (the "Prior Period"). In the prior year revenue was depressed due to unexpected client cancellations and postponed fundraising campaigns due to the terrorist events of September 11th. In addition, the Company moved its call center during the Fall of 2001 and as a result slowed down operations for a period of time in the Prior Period. Salaries and benefits of approximately $3.0 million in the Current Period decreased by approximately $.4 million or 11% over salaries and benefits of approximately $3.4 million in the Prior Period. Salaries and benefits decreased due to decreased headcount in several areas of the Company. The Company has been actively consolidating its offices and infrastructure. Redundant functions in operations were eliminated due to the consolidation of offices with the move of the call center. In connection with a reduction in force corporate head count was reduced from seven to three. In February 2003, certain compensation arrangements were modified. The Chief Executive Officer and the Chief Accounting Officer voluntarily forgave part of their base compensations to effect a reduction of approximately 30% to $350,000 and $125,000 per year, respectively. Direct costs of approximately $.1 million in the Current Period and Prior Period remained consistent. Direct costs as a percentage of revenue was 4% for both the Current Period and the Prior Period. Selling, general and administrative expenses of approximately $.5 million in the Current Period decreased by approximately $.7 million or 58% over comparable expenses of approximately $1.2 million in the Prior Period. Selling, general and administrative expenses decreased principally due to decreased professional fees, rent, travel and other expenses due to the consolidation of certain office spaces and the reduction of head count. Depreciation and amortization expense of approximately $56,000 in the Current Period decreased by approximately $43,000 over expense of approximately $99,000 in the Prior Period. The decrease is primarily due to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets." The Company adopted the new pronouncement as of July 1, 2002. This Statement eliminates amortization of goodwill and indefinite-lived intangible assets and initiates an annual review for impairment. Identifiable intangible assets with a determinable useful life will continue to be amortized. The adoption required the Company to cease amortization of its remaining net goodwill balance and to perform a transitional impairment test as of the adoption date in addition to an impairment test of its existing goodwill based on a fair value concept. The Company will perform its annual impairment test during the fourth quarter of its fiscal year. Gain on termination of lease of approximately $3.9 million in the Current Period was a result of the Company successfully negotiating a termination of a lease for an abandoned lease property. The agreement required an up front payment of $.3 million and the Company is obligated to pay approximately $60,000 per month until the landlord has completed certain leasehold improvements for a new tenant and then Company is obligated to pay $20,000 per month until August 2010. The gain on lease termination represents a change in estimate representing the difference between the Company's present value of its new future obligations and the entire obligation that remained on the books under the original lease obligation as a result of the abandonment. The remaining obligation has been recorded in accrued expenses and other current liabilities and other liabilities. Net interest income of approximately $11,000 in the Current Period decreased by approximately $.2 million 18 over net interest expense of approximately $.2 million in the Prior Period. Net interest income decreased primarily due to the decrease in interest rates coupled with the decrease in average cash balances year over year. The provision for income taxes of approximately $20,000 in the Current Period increased by approximately $9,000 over the provision for income taxes of approximately $11,000 in the Prior Period. The Company records provisions for state and local taxes incurred on taxable income or equity at the operating subsidiary level, which cannot be offset by losses incurred at the parent company level or other operating subsidiaries. The Company has recognized a full valuation allowance against the deferred tax assets because it is not certain sufficient taxable income will be generated during the carry forward period to utilize the deferred tax assets. The loss from discontinued operations in the Current Period and the Prior Period are the results of losses incurred during the respective periods from Grizzard and the Northeast Operations which have been sold. In connection with the sale of the Northeast Operations, the Company incurred a loss on disposal of discontinued operations of approximately $.1 million in the three months ended December 31, 2002. The loss represents the difference in the net book value of assets and liabilities as of the date of the sale as compared to the net consideration received after settlement of purchase price adjustments. As a result of the above, net income of approximately $2.6 million in the Current Period increased by approximately $6.8 million over comparable net loss of approximately $4.2 million in the Prior Period. Results of Operations for the Six Months Ended December 31, 2002, Compared to the Six Months Ended December 31, 2001 Revenues of approximately $7.7 million for the six months ended December 31, 2002 (the "Current Period") increased by approximately $.9 million or 14% over revenues of approximately $6.7 million during the six months ended December 31, 2001 (the "Prior Period"). In the prior year revenue was depressed due to unexpected client cancellations and postponed fundraising campaigns due to the terrorist events of September 11th. In addition, the Company moved its call center during the Fall of 2001 and as a result slowed down operations for a period of time in the Prior Period. Salaries and benefits of approximately $6.9 million in the Current Period decreased by approximately $.4 million or 6% over salaries and benefits of approximately $7.3 million in the Prior Period. Salaries and benefits decreased due to decreased headcount in several areas of the Company. The Company has been actively consolidating its offices and infrastructure. Redundant functions in operations were eliminated due to the consolidation of offices with the move of the call center. In connection with a reduction in force corporate head count was reduced from seven to three. In February 2003, certain compensation arrangements were modified. The Chief Executive Officer and the Chief Accounting Officer voluntarily forgave part of their base compensation to effect a reduction of approximately 30% to $350,000 and $125,000 per year, respectively. Direct costs of approximately $.4 million in the Current Period increased by approximately $62,000 or 21% over direct costs of approximately $.3 million in the Prior Period. Direct costs as a percentage of revenue was 4% for both the Current Period and the Prior Period. Selling, general and administrative expenses of approximately $.9 million in the Current Period decreased by approximately $1.2 million or 56% over comparable expenses of approximately $2.2 million in the Prior Period. Selling, general and administrative expenses decreased principally due to decreased professional fees, rent, travel and other expenses due to the consolidation of certain office spaces and the reduction of head count. 19 Depreciation and amortization expense of approximately $.1 million in the Current Period decreased by approximately $86,000 over expense of approximately $.2 million in the Prior Period. The decrease is primarily due to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets." The Company adopted the new pronouncement as of July 1, 2002. This Statement eliminates amortization of goodwill and indefinite-lived intangible assets and initiates an annual review for impairment. Identifiable intangible assets with a determinable useful life will continue to be amortized. The adoption required the Company to cease amortization of its remaining net goodwill balance and to perform a transitional impairment test as of the adoption date in addition to an impairment test of its existing goodwill based on a fair value concept. The Company will perform its annual impairment test during the fourth quarter of its fiscal year. As of December 31, 2002, the Company completed the transition requirements under SFAS No. 142. There is no impairment for its telemarketing unit. The Company recognized an impairment charge of approximately $5.1 million in connection with the adoption of SFAS No. 142 for its list sales and database marketing and website development and design business. The impairment charge has been booked by the Company in accordance with SFAS 142 transition provisions as a cumulative effect of change in accounting for the six months ended December 31, 2002. Gain on termination of lease of approximately $3.9 million in the Current Period was a result of the Company successfully negotiating a termination of a lease for an abandoned lease property. The agreement required an up front payment of approximately $.3 million and the Company is obligated to pay approximately $60,000 per month until the landlord has completed certain leasehold improvements for a new tenant and then Company is obligated to pay $20,000 per month until August 2010. The gain on lease termination represents a change in estimate representing the difference between the Company's present value of its new future obligations and the entire obligation that remained on the books under the original lease obligation as a result of the abandonment. The remaining obligation has been recorded in accrued expenses and other current liabilities and other liabilities. During the Current Period, the Company recognized a gain on a settlement of a lawsuit. In 1999, a lawsuit under Section 16(b) of the Securities Exchange Act of 1934 was commenced against General Electric Capital Corporation ("GECC") by Mark Levy, derivatively on behalf of the Company, to recover short swing profits allegedly obtained by GECC in connection with the purchase and sale of MKTG securities. The case was filed in the name of Mark Levy v. General Electric Capital Corporation, in the United States District Court for the Southern District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002, a settlement was reached among the parties. The settlement provided for a $1.3 million payment to be made to MKTG by GECC and for GECC to reimburse MKTG for the reasonable cost of mailing a notice to stockholders up to $30,000. On April 29, 2002, the court approved the settlement for approximately $1.3 million, net of attorney fees plus reimbursement of mailing costs. In July 2002, the court ruling became final and the Company received and recorded the net settlement payment of approximately $1.0 million plus reimbursement of mailing costs. Net interest expense of approximately $17,000 in the Current Period decreased by approximately $.2 million over net interest income of approximately $.2 million in the Prior Period. Net interest income decreased primarily due to the decrease in interest rates coupled with the decrease in average cash. The provision for income taxes of approximately $31,000 in the Current Period increased by approximately $11,000 over the provision for income taxes of approximately $42,000 in the Prior Period. The Company records provisions for state and local taxes incurred on taxable income or equity at the operating subsidiary level, which cannot be offset by losses incurred at the parent company level or other operating subsidiaries. The Company has recognized a full valuation allowance against the deferred tax assets because it is not certain sufficient taxable income will be generated during the carry forward period to utilize the deferred tax assets. The loss from discontinued operations in the Current Period and the Prior Period are the results of loss 20 incurred during the respective periods from Grizzard and the Northeast Operations which have been sold. The Company recorded a loss of approximately $4.9 million for the six months ended December 31, 2001 as a result of the early extinguishment of debt which is included in the loss from discontinued operations and was previously classified as an extraordinary item. In connection with the sale of the Northeast Operations, the Company realized a loss on disposal of discontinued operations of approximately $.1 million in the six months ended December 31, 2002. The loss represents the difference in the net book value of assets and liabilities as of the date of the sale as compared to the net consideration received after settlement of purchase price adjustments. For the six months ended December 31, 2001, the Company recognized a gain on sale of Grizzard in the amount of approximately $1.8 million which is included in the statement of operations in Gain From Disposal of Discontinued Operations. The gain represents the difference in the net book value of assets and liabilities as of the date of the sale as compared to the net consideration received after settlement of purchase price adjustments. As a result of the above, net loss of approximately $2.3 million in the Current Period decreased by approximately $12.2 million over comparable net loss of $14.5 million in the Prior Period. Capital Resources and Liquidity Financial Reporting Release No. 61, which was released by the SEC, requires all companies to include a discussion to address, among other things, liquidity, off-balance sheet arrangements, contractual obligations and commercial commitments. The Company currently does not maintain any off-balance sheet arrangements. Leases: The Company leases various office space and equipment under non-cancelable long-term leases. The Company incurs all costs of insurance, maintenance and utilities. Future minimum rental commitments under all non-cancelable leases, as of December 31, 2002 are as follows: Operating Leases ---------------- 2003 $ 311,100 2004 539,010 2005 387,001 2006 199,680 2007 199,680 Thereafter 83,200 ---------- $1,719,671 ========== Debt: In August 2001, the Company entered into a stand-by letter of credit with a bank in the amount of approximately $4.9 million to support the remaining obligations under a holdback agreement with the former shareholders of Grizzard. The letter of credit is collateralized by cash, which has been classified as restricted cash in the current asset section of the balance sheet as of September 30, 2002. The Company has a remaining obligation of approximately $4.6 million under the holdback agreement. The remaining obligation is included in current portion of long-term obligations as of December 31, 2002 and is payable in March 2003. In January 2003, the Company entered into an agreement and settled the outstanding amount owed to the former Grizzard shareholders in connection with a holdback agreement. The Company paid approximately 21 $4.6 million and utilized its restricted cash. Approximately $.3 million of restricted cash became available for general corporate use. In connection with an acquisition, the Company incurred promissory notes payable to former shareholders, payable monthly at 5.59% interest through January 2004. The remaining obligation is approximately $.3 million in aggregate with approximately $26,000 included in long-term obligations, net of current portion. In December 2002, the Company successfully negotiated a termination of a lease for an abandoned lease property. The agreement required an up front payment of $.3 million and the Company is obligated to pay approximately $60,000 per month until the landlord has completed certain leasehold improvements for a new tenant and then Company is obligated to pay $20,000 per month until August 2010. The gain on lease termination represents a change in estimate representing the difference between the Company's present value of its new future obligations and the entire obligation that remained on the books under the original lease obligation as a result of the abandonment. The remaining obligation is approximately $1.7 million in aggregate with $.3 million included in accrued expense and other current liabilities and approximately $1.4 million included in other liabilities. Preferred Stock: On October 2, 2002, the common stockholders ratified the issuance of the Series E preferred stock and approve the stockholders right to convert such preferred stock to common stock beyond the previous 19.99% limitation. Subsequently, in the quarter ending December 31, 2002, the preferred shareholders converted 149 shares of Series E preferred into 79,762 shares of common stock. On December 31, 2002, the Company entered into a redemption agreement with the holders of the Series E preferred stock. The Company agreed to redeem the outstanding shares of the preferred stock for a cash payment of approximately $6.0 million and the issuance of 181,301 shares of common stock valued at approximately $.2 million as of December 31, 2002. The redemption occurred in January 2003. The carrying value of the preferred stock is approximately $20.2 million which includes a beneficial conversion feature of approximately $10.3 million. If the transaction had occurred on December 31, 2002, it would have resulted in a gain on redemption of approximately $14.0 million. Total stockholder's equity would have increased by approximately $3.8 million which consists of approximately $3.7 million for the gain on redemption ($14.0 million gain net of beneficial conversion feature of $10.3 million) and approximately $.2 million for the value of the additional shares issued. Historically, the Company has funded its operations, capital expenditures and acquisitions primarily through cash flows from operations, private placements of common and preferred stock, and its credit facilities. At December 31, 2002, the Company had cash and cash equivalents of approximately $8.7 million and accounts receivable net of allowances of approximately $1.4 million, offset by accounts payable of approximately $.4 million. The Company has limited capital resources and has incurred significant historical losses and negative cash flows from operations. The Company believes that funds on hand, funds available from its remaining operations and its unused lines of credit should be adequate to finance its operations and capital expenditure requirements and enable the Company to meet interest and debt obligations for the next twelve months. As explained in Note 5 to the Consolidated Financial Statements and in this MD&A, the Company recently sold off substantially all the assets relating to its direct list sales and database services and website development and design business held by certain of its wholly owned subsidiaries. In addition, the Company has instructed cost reduction measures, including the reduction of workforce. The Company believes, based on past performance as well as the reduced corporate overhead, that its remaining operations should generate sufficient future cash flow to fund operations. Failure of the remaining operation to generate such sufficient future cash flow could have a material adverse effect on the Company's ability to continue as a going concern and to achieve its business objectives. The accompanying financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result should the Company be unable to continue as a going concern. 22 The Company generated a net loss of approximately $2.3 million in the six months ended December 31, 2002 ("Current Period"). Cash used in operating activities in the Current Period was approximately $.7 million. Cash used by operating activities principally consists of the net income from continuing operations adjusted for the gain on termination of lease offset by a decrease in accounts payable and accrued expenses, less a decrease in accounts receivable and other assets. In the Current Period, net cash of approximately $8.5 million was provided by investing activities consisting of net proceeds from the sale of the Northeast Operations. In the Prior Period, net cash provided by investing activities of approximately $73.5 million consisted of proceeds from the sale of Grizzard of approximately $78.8 million, offset by the increase in restricted cash of approximately $4.9 million and purchases of property and equipment of approximately $.3 million. In the Current Period, net cash of approximately $2.3 million was used in financing activities consisting primarily of repayments of credit facilities and long-term debt. In the Prior Period, net cash used in financing activities of approximately $.8 million consisted of issuance of related party note receivable of approximately $1.0 million, repayments of related party notes payable of approximately $.2 million, repayments of long term debt of approximately $.1 million offset by approximately $.5 million in proceeds from credit facilities. At December 31, 2002, the Company had amounts outstanding of approximately $.2 million on its lines of credit. The Company had approximately $1.0 million available on its lines of credit as of December 31, 2002. As of December 31, 2002, the Company was in compliance with its line of credit covenants. 23 Item 3 - Quantitative and Qualitative Disclosures About Market Risk The Company is subject to market risks in the ordinary course of its business, primarily risks associated with interest rate fluctuations. Historically, fluctuations in interest rates have not had a significant impact on the Company's operating results. At December 31, 2002, the Company had approximately $.2 million of variable rate indebtedness outstanding. 24 Item 4 - Controls and Procedures Evaluation of disclosure controls and procedures. Our principal executive officer and our principal financial officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d- 14(c) as of a date within 90 days before the filing date of this quarterly report (the "Evaluation Date"), have concluded that as of the Evaluation Date our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities. Changes in internal controls There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date. 25 PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders On October 2, 2002, the Company held a Special Meeting of Stockholders to vote on the approval of shares of preferred stock and the shares of common stock issued or issuable upon the conversion of the preferred stock. The shares voted regarding the Board of Directors' proposal to approve the issuance of shares of preferred stock and the shares of common stock issued or issuable upon the conversion of the preferred stock. were as follows: For 462,940 Against 5,358 Abstain 651 Item 6 Exhibits and Reports on Form 8-K Exhibits 24 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 Sarbanes Oxley Act of 2002 (a) (a) Included herein in the Company's Report on Form 10Q for the quarter ended December 31, 2002 Reports on Form 8-K On or about October 2, 2002, the Company filed a current report on Form 8-K regarding approval by the common stockholders of the issuance of the Series E preferred stock and the stockholders right to convert such preferred stock to common stock beyond the previous 19.99% limitation. On or about December 9, 2002, the Company filed a current report on Form 8-K regarding the completion of the sale of substantially all the assets of its Northeast Operations. 26 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MKT SERVICES, INC. (Registrant) Date: February 14, 2003 By: /s/ J. Jeremy Barbera ----------------------------------- J. Jeremy Barbera Chairman of the Board and Chief Executive Officer Date: February 14, 2003 By: /s/ Cindy H. Hill ----------------------------------- Cindy H. Hill Chief Accounting Officer 27 MKTG SERVICES, INC. CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER I, J. Jeremy Barbera, certify that: 1. I have reviewed the quarterly report on this Form 10-Q of MKTG Services, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered in this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and to the audit committee of registrant's board of directors: a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ J. Jeremy Barbera ----------------------------------- J. Jeremy Barbera Chairman of the Board and Chief Executive Officer Principal Executive Officer 28 MKTG SERVICES, INC. CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER I, Cindy H. Hill, certify that: 1. I have reviewed the quarterly report on this Form 10-Q of MKTG Services, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered in this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and to the audit committee of registrant's board of directors: a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Cindy H. Hill ------------------------------- Cindy H. Hill Chief Accounting Officer Principal Financial Officer 29 STATEMENT OF DIFFERENCES ------------------------ The section symbol shall be expressed as............................... 'SS' EX-99 3 ex99.txt EXHIBIT 24 Exhibit 24 CERTIFICATION PURSUANT TO 18 U. S. C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of MKTG Services, Inc. (the "Company") on Form 10-Q for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, J. Jeremy Barbera, as Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 'SS' 1350, as adopted pursuant to 'SS' 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934: and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ J. Jeremy Barbera ------------------------------- J. Jeremy Barbera Chairman of the Board and Chief Executive Officer February 14, 2003 In connection with the Quarterly Report of MKTG Services, Inc. (the "Company") on Form 10-Q for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Cindy H. Hill, as Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. 'SS' 1350, as adopted pursuant to 'SS' 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934: and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Cindy H. Hill ------------------------------- Cindy H. Hill Chief Accounting Officer February 14, 2003 -----END PRIVACY-ENHANCED MESSAGE-----