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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to________________________
Commission file number 0-16730
MKTG SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 88-0085608
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification No.)
333 Seventh Avenue
New York, New York 10001
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (917) 339-7150
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, par value $.01 per share
(Title of class)
Indicate be check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ] As of October 10, 2003, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
approximately $1,235,467.
As of October 10, 2003 , there were 1,092,367 shares of the Registrant's common
stock outstanding.
Documents incorporated by reference: Portions of the Company's definitive proxy
statement expected to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 have been incorporated by reference into Part III of this
report.
1
PART I
Special Note Regarding Forward-Looking Statements
- -------------------------------------------------
Some of the statements contained in this Annual Report on Form 10-K discuss our
plans and strategies for our business or state other forward-looking statements,
as this term is defined in the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company, or industry results to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; industry capacity; direct marketing
and other industry trends; demographic changes; competition; the loss of any
significant customers; changes in business strategy or development plans;
availability and successful integration of acquisition candidates; availability,
terms and deployment of capital; advances in technology; retention of clients
not under long-term contract; quality of management; business abilities and
judgment of personnel; availability of qualified personnel; changes in, or the
failure to comply with, government regulations; and technology,
telecommunication and postal costs.
Item 1 - Business
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General
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MKTG Services, Inc. (" The Company or MKTG") is a leading relationship marketing
company focused on assisting corporations with customer acquisition and
retention strategies and solutions. Employing highly customized telemarketing
and telefundraising operations, MKTG delivers campaigns that strengthen brands,
increase customer loyalty and consistently yield a high net return for its
clients. MKTG provides relationship-marketing solutions to approximately 100
clients with revenues for the fiscal year ended June 30, 2003 of $15.8 million.
The Company currently has over 70 full-time employees with its operations in Los
Angeles and New York.
The Company's Strategy
- ----------------------
MKTG's strategy to enhance its position as a value-added premium provider of
relationship marketing services is to:
o Focus on our existing relationship marketing services business;
o Deepen market penetration in new industries and market segments as well as
those currently served by the Company;
o Pursue strategic acquisitions, joint ventures and marketing alliances to
expand the services offered and industries served.
Background
- ----------
The Company was originally incorporated in Nevada in 1919. The current business
of MKTG, most recently known as Marketing Services Group, Inc., began operations
in 1995.
During the past seven years, the Company has acquired or formed several
direct marketing and related companies. Do in part to decreased market demands
and limited capital resources the Company disposed or ceased operations of all
such companies except its teleservices operations.
Date Name of Company Acquired Service Performed
- ---- ------------------------ -----------------
May 1995 Stephen Dunn & Associates, Inc. Provides telemarketing and
telefundraising, specializing in the arts, educational
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and other institutional tax exempt
organizations.
October 1996 Metro Direct, Inc. Develops and markets a variety of
database marketing and direct marketing products.
(sold as part of the December 2002 sale of the direct
market business)
July 1997 Pegasus Internet, Inc. Provides a full suite of Internet services including
content development and planning, marketing
strategy, on-line ticketing system development, technical
site hosting, graphic design, multimedia production
and electronic commerce.(these operations were
either terminated or moved to other operating ivisions)
December 1997 Media Marketplace, Inc. Specializes in providing list
Media Marketplace Media Division, Inc. management, list brokerage and media planning and buying
services. (sold as part of the December 2002 sale of the
direct market business)
May 1998 Formed Metro Fulfillment, Inc. Performed services such as on-line commerce, real-time
database management inbound/outbound customer service,
custom packaging, assembling, product warehousing,
shipping, payment processing and retail distribution.
(sold in March and September of 1999)
January 1999 Stevens-Knox & Associates, Inc. Specializes in providing list
Stevens-Knox List Brokerage, Inc. management, list brokerage and
Stevens-Knox International, Inc. database management services. (sold as part of
the December 2002 sale of the direct market business)
May 1999 CMG Direct Corporation Specializes in database services. (part of this business
became WiredEmpire, the balance was sold as part of the
December 2002 sale of the direct marketing business)
October 1999 Acquired 87% of Cambridge Intelligence
Agency and formed WiredEmpire, Inc. A licensor of email marketing tools.
March 2000 Grizzard Advertising, Inc. Specialized in strategic planning,
creative services, database
management, print-production,
mailing and Internet marketing.
3
March 2000 The Coolidge Company Specializes in list management
and list brokerage services. (sold in July 2001)
September 2000 Begin plan to discontinued the operation of WiredEmpire, Inc. (completed in January 2001).
Capital Stock and Certain Financing Transactions
- ------------------------------------------------
In August 2001, the Company entered into a stand by letter of credit with a bank
in the amount of approximately $4.9 million to support the remaining obligations
under a holdback agreement with the former shareholders of Grizzard
Communications Group, Inc. ("Grizzard"). The letter of credit was collateralized
by cash and has been classified as restricted cash in the current asset section
of the balance sheet as of June 30, 2002. The letter of credit was subject to an
annual facility fee of 1.5%. The remaining obligation was settled in January
2003 and accordingly the letter of credit was terminated.
On October 2, 2002, the common stockholders ratified the issuance of the Series
E preferred stock and approved the stockholders right to convert such preferred
stock to common stock beyond the previous 19.99% limitation. Subsequently, the
preferred shareholders converted 149 shares of Series E preferred stock into
79,767 shares of common stock.
In November 2002, the Company repaid approximately $.3 million balance of one
credit facility. In connection with the sale of the Company's Northeast
Operations (See Note 3), another credit facility of approximately $.3 million
was fully repaid and terminated in December 2002.
In June 2002, the Company received notification from The Nasdaq Stock Market
("Nasdaq") that the Company's common stock has closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4).
In October 2002, the Company received another notification from Nasdaq that
based on its June 30, 2002 filing the Company does not meet compliance with
Marketplace Rule 4310(c)(2)(B). Such rule requires the Company to have a minimum
of $2.0 million in net tangible assets or $2.5 million in stockholders' equity
or a market value of listed securities of $35.0 million or $.5 million of net
income from continuing operations for the most recently completed fiscal year or
two of the three most recently completed fiscal years. In December 2002, the
Company received notification from Nasdaq indicating that the Company was
subject to delisting. The Company has responded to Nasdaq with its plan and
believes that it can achieve compliance with Marketplace Rule 4310(c)(2)(B) by
achieving minimum stockholders' equity of $2.5 million. In addition, in January
2003, the Company affected an eight-for-one reverse stock split. (See Note 2).
In February 2003, the Company received notification from Nasdaq that the
Company's was not in compliance with the Nasdaq's market value of publicly held
shares requirements, as set forth in Nasdaq Marketplace Rule 4310(c)(07). The
Company believes that its subsequent issuance of common shares for the
redemption of its preferred stock (See Note 15) has brought the Company back
into compliance with the minimum public float requirement. The Company appealed
the Staff's decision to delist the Company to a Nasdaq Listing Qualification
Panel. The hearing was held on February 13, 2003. On March 5, 2003, a Nasdaq
Listing Qualifications Panel determined to continue the listing of the Company's
securities on the Nasdaq SmallCap Market on the condition, among other things,
that the Company make a public filing with the Securities and Exchange
Commission and Nasdaq evidencing shareholders' equity of at least $2,5000,000
and further that the Company file its quarterly report on Form 10Q for the March
31, 2003 quarter on or before May 15, 2003. On March 13, 2003, the Company filed
an unaudited balance sheet as of January 31, 2003 evidencing shareholders'
equity of at least $2,5000,000. On May 22, 2003, the Company received
notification from Nasdaq that the Company satisfactorily demonstrated compliance
and, accordingly, the Nasdaq Listing Qualifications Panel determined to continue
the listing of the Company's securities on The Nasdaq SmallCap Market and to
close the hearing file.
4
In December 2002, the Company completed its sale of substantially all the assets
relating to its direct list sales and database services and website development
and design business held by certain of its wholly owned subsidiaries (the
"Northeast Operations") to Automation Research, Inc. ("ARI"), a wholly owned
subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash plus
the assumption of all directly related liabilities. As such, the operations and
cash flows of the Northeast Operations have been eliminated from ongoing
operations and the Company no longer has continuing involvement in the
operations. Accordingly, the statement of operations and cash flows for the
years ended June 30, 2003, 2002 and 2001 has been reclassified into a one-line
presentation and is included in Loss from Discontinued Operations and Net Cash
Used by Discontinued Operations. In addition, the assets and liabilities of the
Northeast Operations have been segregated and presented in Net Assets of
Discontinued Operations and Net Liabilities of Discontinued Operations as of
June 30, 2002.
In connection with the sale of the Northeast Operations, the Company recognized
a loss on disposal of discontinued operations of approximately $.2 million in
the year ended June 30, 2003. The loss represents the difference in the net book
value of assets and liabilities as of the date of the sale as compared to the
net consideration received after settlement of purchase price adjustments. There
was no tax impact on this loss.
In December 2002, the Company negotiated a termination of a lease for an
abandoned lease property. The agreement required an up front payment of $.3
million and the Company is obligated to pay approximately $60,000 per month
until the landlord has completed certain leasehold improvements for a new tenant
and then Company is obligated to pay $20,000 per month until August 2010 and the
Company was released from all other obligations under the lease. The gain on
lease termination represents a change in estimate representing the difference
between the Company's present value of its future obligations and the entire
obligation that remained on the books under the original lease obligation. The
remaining obligation has been recorded in accrued expenses and other current
liabilities and other liabilities.
On January 22, 2003, the Board of Directors approved an eight-for-one reverse
split of the common stock. Par value of the common stock remains $.01 per share
and the number of authorized shares of common stock is reduced to 9,375,000. The
stock split was effective January 27, 2003. All stock prices, per share and
share amounts have been retroactively restated to reflect the reverse split and
are reflected in this document.
In January 2003, the Company redeemed the outstanding shares of the preferred
stock for a cash payment of approximately $6.0 million and the issuance of
181,302 shares of common stock valued at approximately $.2 million. The carrying
value of the preferred stock was approximately $20.2 million which included a
beneficial conversion feature of approximately $10.3 million. The transaction
resulted in a gain on redemption of approximately $14.0 million and is reflected
in net income attributable to common stockholders for the year ended June 30,
2003.
In January 2003, the Company entered into an agreement and settled the
outstanding amount owed to the former Grizzard shareholders in connection with a
holdback agreement. The Company paid approximately $4.6 million and utilized its
restricted cash. Approximately $.3 million of restricted cash became available
for general corporate use.
In 1999, a lawsuit under Section 16(b) of the Securities Exchange Act of 1934
was commenced against General Electric Capital Corporation ("GECC") by Mark
Levy, derivatively on behalf of the Company, to recover short swing profits
allegedly obtained by GECC in connection with the purchase and sale of MKTG
securities. The case was filed in the name of Mark Levy v. General Electric
Capital Corporation, in the United States District Court for the Southern
5
District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002,
a settlement was reached among the parties. The settlement provided for a $1.3
million payment to be made to MKTG by GECC and for GECC to reimburse MKTG for
the reasonable cost of mailing a notice to stockholders up to $30,000. On April
29, 2002, the court approved the settlement for approximately $1.3 million, net
of attorney fees plus reimbursement of mailing costs. In July 2002, the court
ruling became final and the Company received and recorded the net settlement
payment of approximately $965,000 plus reimbursement of mailing costs. The net
settlement has been recorded as a gain from settlement of lawsuit and is
included in the statement of operations for the year ending June 30, 2003.
The Company has limited capital resources and has incurred significant
historical losses and negative cash flows from operations. The Company believes
that funds on hand, funds available from its remaining operations and its unused
lines of credit should be adequate to finance its operations and capital
expenditure requirements and enable the Company to meet interest and debt
obligations for the next twelve months. As explained in Note 3, the Company
recently sold off substantially all the assets relating to its direct list sales
and database services and website development and design business held by
certain of its wholly owned subsidiaries. In addition, the Company has
instituted cost reduction measures, including the reduction of workforce. The
Company believes, based on past performance as well as the reduced corporate
overhead, that its remaining operations should generate sufficient future cash
flow to fund operations. Failure of the remaining operation to generate such
sufficient future cash flow could have a material adverse effect on the
Company's ability to continue as a going concern and to achieve its business
objectives. The accompanying financial statements do not include any adjustments
relating to the recoverability of the carrying amount of recorded assets or the
amount of liabilities that might result should the Company be unable to continue
as a going concern.
The Telemarketing / Telefundraising Industry
- ---------------------------------------------
Overview. Telemarketing is used for a variety of purposes including fundraising,
lead-generation and prospecting for new customers, enhancing existing customer
relationships, exploring the potential for new products and services and
establishing new products. Unlike traditional mass marketing aimed at a broad
audience and focused on creating image and general brand or product awareness,
successful telemarketing requires the identification and analysis of customers
and purchasing patterns. Such patterns enable businesses to more easily identify
and create a customized message aimed at a highly defined audience.
Telemarketing/telefundraising projects generally require significant amounts of
customer information supplied by the client or third party sources. Custom
telemarketing/telefundraising programs seek to maximize a client's direct
marketing results by utilizing appropriate databases to communicate with a
specific audience. This customization is often achieved through sophisticated
and comprehensive data analysis which identifies psycho graphic, cultural and
behavioral patterns in specific geographic markets.
Industry Growth. The Company provides telemarketing and telefundraising services
primarily to the non-profit sector. As such, the Company's business activities
and operations are exempt from the effects of the new National Do Not Call
Registry amendment to the Telemarketing Sales Rules of the Federal Trade
Commission, which has it's strongest effect on the retail "cold calling"
telemarketing industry . The company's client base consists of various
non-profit organizations which rely on the Company's services for soliciting
charitable donations, program subscriptions, and other functions related to
general fund raising. These areas are exempt from the rules governed by the
National Do Not Call Registry. The Company sees no ill effects to either its
ability to perform its current business operations or to grow its business
operations within the non-profit telemarketing and telefundraising sector.
6
Services. The Company's operating business provides comprehensive custom
telemarketing/telefundraising. The principal advantages of customized services
include: (i) the ability to expand and adapt a database to the client's changing
business needs; (ii) the ability to have services operate on a flexible basis
consistent with the client's goals; and (iii) the integration with other direct
marketing, Internet, database management and list processing functions, which
are necessary to keep a given database current. The services offered by the
Company are described below.
Telemarketing / Telefundraising
Custom Telemarketing/Telefundraising Services. Custom
telemarketing/telefundraising services are designed according to the client's
existing database and any other databases, which may be purchased or rented on
behalf of the client to create a direct marketing program or fundraising
campaign to achieve specific objectives. After designing the program according
to the marketing information derived from the database analysis, it is
conceptualized in terms of the message content of the offer or solicitation, and
an assessment is made of other supporting elements, such as the use of a direct
mail letter campaign.
Typically, a campaign is designed in collaboration with a client, tested for
accuracy and responsiveness and adjusted accordingly, after which the full
campaign is commenced. The full campaign runs for a mutually agreed period,
which can be shortened or extended depending on the results achieved.
The Company maintains a state-of-the-art outbound telemarketing/telefundraising
calling center in El Segundo, California. The El Segundo calling center
increases the efficiency of its outbound calling by using a computerized
predictive dialing system supported by a UNIX based call processing server
system and networked computers. The predictive dialing system, using relational
database software, supports 64 outbound telemarketers and maximizes calling
efficiency by reducing the time between calls for each calling station and
reducing the number of calls connected to wrong numbers, answering machines and
electronic devices. The system provides on-line real time reporting of caller
efficiency and client program efficiency as well as flexible and sophisticated
reports analyzing caller sales results and client program results against
Company and client selected parameters. The El Segundo calling center has the
capacity to serve up to 20 separate clients or projects simultaneously and can
produce 36,864 or more valid contacts per week, depending on the nature of the
lead base or 3,072 calling hours per week (159,744 per year) on a single shift
basis. A valid contact occurs when the caller speaks with the intended person
and receives a "yes," "no" or "will consider" response. The existing platform
can be expanded to accommodate 100 predictive dialing stations.
Marketing and Sales
- -------------------
The Company's marketing strategy is to offer customized solutions to clients'
telemarketing/telefundraisingrequirements. Historically, the Company's operating
businesses have acquired new clients and marketed their services by attending
trade shows, advertising in industry publications, responding to requests for
proposals, pursuing client referrals and cross-selling to existing clients. The
Company targets those companies that have a high probability of generating
recurring revenues because of their ongoing telemarketing/telefundraising needs.
The Company markets its services through a sales force consisting of both
salaried and commissioned sales persons.
On-site telemarketing and telefundraising fees are generally based on hourly
billing rates and a mutually agreed percentage of amounts received by the
Company's clients from a campaign. Off-site fees are typically based on a
mutually agreed amount per telephone contact with a potential donor without
regard to amounts raised for the client.
Client Base
- -----------
7
The Company believes that its diversified client base is a primary asset, which
contributes to stability and the opportunity for growth in revenues. The Company
has approximately 100 clients who utilize its telemarketing services. Its
customized marketing capabilities combine comprehensive traditional marketing
tactics with an aggressive integration of sophisticated software applications,
Telefund and TeleSales, which track leads and results. Operating in Los Angeles,
CA as well as in a variety of on-site locations throughout United States, the
Company provides strategic services to prominent organizations in key markets
including: Entertainment, Performing Arts, Education, Healthcare and Nonprofit.
No single client accounted for more than 10% of total revenue for the fiscal
years ended June 30, 2003, 2002 and 2001.
Competition
- -----------
The relationship marketing services industry is highly competitive and
fragmented, with no single dominant competitor. The Company competes with
companies that have more extensive financial, marketing and other resources and
substantially greater assets than those of the Company, thereby enabling such
competitors to have an advantage in obtaining client contracts where sizable
asset purchases or investments are required. The Company also competes with
in-house telemarketing/telefundraising operations of certain of its clients or
potential clients.
Competition is based on quality and reliability of services, technological
expertise, historical experience, ability to develop customized solutions for
clients, technological capabilities and price. The Company believes that it
competes favorably, especially in the media and entertainment, performing arts,
education and healthcare sectors. The Company's principal competitors include:
DCM Telemarketing, Share Group and Arts Marketing Services, Inc. The current
market is highly competitive and the Company anticipates that new competitors
will continue to enter the market. These competitors tend to have greater
financial, technical and marketing resources than the Company.
Facilities
- ----------
The Company leases all of its real property. Facilities for its headquarters are
in New York City; its sales and service offices are located in El Segundo,
California and its call center is also located in El Segundo, California. The
Company believes that its remaining facilities are in good condition and are
adequate for its current needs through fiscal 2004. The Company believes such
space is readily available at commercially reasonable rates and terms. The
Company also believes that its technological resources are all adequate for its
needs through fiscal 2004.
Intellectual Property Rights
- ----------------------------
The Company relies upon its trade secret protection program and non-disclosure
safeguards to protect its proprietary computer technologies, software
applications and systems know-how. In the ordinary course of business, the
Company enters into license agreements and contracts which specify terms and
conditions prohibiting unauthorized reproduction or usage of the Company's
proprietary technologies and software applications. In addition, the Company
generally enters into confidentiality agreements with its employees, clients,
potential clients and suppliers with access to sensitive information and limits
the access to and distribution of its software documentation and other
proprietary information. No assurance can be given that steps taken by the
Company will be adequate to deter misuse or misappropriation of its proprietary
rights or trade secret know-how. The Company believes that there is rapid
technological change in its business and, as a result, legal protections
generally afforded through patent protection for its products are less
significant than the knowledge, experience and know-how of its employees, the
frequency of product enhancements and the timeliness and quality of customer
support in the usage of such products.
Government Regulation and Privacy Issues
- ----------------------------------------
8
The telemarketing industry has become subject to an increasing amount of federal
and state regulation. Violation of these rules may result in injunctive relief,
monetary penalties or disgorgement of profits and can give rise to private
actions for damages. While the Federal Trade Commission's new rules have not
required or caused the Company to alter its operating procedures, additional
federal or state consumer-oriented legislation could limit the telemarketing
activities of the Company or its clients or significantly increase the Company's
costs of regulatory compliance. Several of the industries which the Company
intends to serve, including the financial services, and healthcare industries,
are subject to varying degrees of government regulation. Although compliance
with these regulations is generally the responsibility of the Company's clients,
the Company could be subject to a variety of enforcement or private actions for
its failure or the failure of its clients to comply with such regulations.
Employees
- ---------
At June 30, 2003, the Company employed approximately 811 persons, of whom 76
were employed on a full-time basis.
Item 2 - Properties
- -------------------
The Company had owned land and buildings in Houston and Atlanta, which were
included in the sale of Grizzard (see Note to the Company's consolidated
financial statements included in this Form 10-K). In addition, the Company and
certain subsidiaries lease facilities for office space summarized as follows and
in Note 14 of Notes to the Company's consolidated financial statements included
in this Form 10-K.
Location Square Feet
---------- -----------
New York, New York 500
El Segundo, California 12,800
In addition, the Company is currently leasing approximately 36,900 square feet
in New York, California, Pennsylvania and Massachusetts which is not being
currently utilized. Accordingly, the Company has provided for the future
estimated cost of these leases.
Item 3 - Legal Proceedings
- --------------------------
In December 2000, an action was filed by Red Mountain, LLP in the United States
Court for the Northern District of Alabama, Southern Division against J. Jeremy
Barbera, Chairman of the Board and Chief Executive Officer of MKTG, MKTG and
WiredEmpire, Inc. Red Mountains' complaint alleges, among other things,
violations of Section 12(2) of the Securities Act of 1933, Section 10(b) of the
Securities Act of 1934 and Rule 10(b)(5) promulgated there under, and various
provisions of Alabama state law and common law, arising from Red Mountain's
acquisition of WiredEmpire Preferred Series A stock in a private placement. Red
Mountain invested $225,000 in WiredEmpire's preferred stock and it seeks that
amount, attorney's fees and punitive damages. The Company believes that the
allegations in the complaint are without merit. The Company intends to
vigorously defend against the lawsuit.
In December 2001, an action was filed by a number of purchasers of preferred
stock of WiredEmpire, Inc., a discontinued subsidiary, in the Alabama State
Court (Circuit Court of Jefferson County, Alabama, 10 Judicial Circuit of
Alabama, Birmingham Division), against J. Jeremy Barbera, Chairman of the Board
and Chief Executive Officer of MKTG, MKTG and WiredEmpire, Inc. The plaintiff's
complaint alleges, among other things, violation of sections 8-6-19(a)(2) and
8-6-19(c) of the Alabama Securities Act and various other provisions of Alabama
state law and common law, arising for the plaintiffs' acquisition of WiredEmpire
Preferred Series A stock in a private placement. The plaintiffs invested
approximately $1,650,000 in WiredEmpire's preferred stock and it seeks that
amount, attorney's fees and punitive damages. On February 8, 2002, the
defendants filed a petition to remove the action to federal court on the grounds
of diversity of citizenship. The Company believes that the allegations in the
complaint
9
are without merit. The Company intends to vigorously defend against the lawsuit.
In June 2002, the Company entered into a tolling agreement with various
claimants who acquired WiredEmpire Preferred Series A stock in a private
placement. The agreement states that the passage of time from June 15, 2002
through August 31, 2002 shall not be counted toward the limit as set out by any
applicable statute of limitations. In addition, the claimants agree that none of
them shall initiate or file a legal action against Mr. Barbera, MKTG or
WiredEmpire prior to the termination of the agreement. The claimants invested
approximately $1,200,000 in WiredEmpire's preferred stock. In January 2003, a
lawsuit was filed in Alabama, Circuit Court for Jefferson County by certain
plaintiffs involved in the Agreement. The action was filed against J. Jeremy
Barbera, Chairman of the Board and Chief Executive Officer of MKTG, MKTG and
WiredEmpire, Inc. This lawsuit was settled during fiscal year 2003 and was fully
covered by the Company's insurance.
In 1999, a lawsuit under Section 16(b) of the Securities Exchange Act of 1934
was commenced against General Electric Capital Corporation ("GECC") by Mark
Levy, derivatively on behalf of the Company, to recover short swing profits
allegedly obtained by GECC in connection with the purchase and sale of MKTG
securities. The case was filed in the name of Mark Levy v. General Electric
Capital Corporation, in the United States District Court for the Southern
District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002,
a settlement was reached among the parties. The settlement provided for a
$1,250,000 payment to be made to MKTG by GECC and for GECC to reimburse MKTG for
the reasonable cost of mailing a notice to stockholders up to $30,000. On April
29, 2002, the court approved the settlement for $1,250,000, net of attorney fees
plus reimbursement of mailing costs. In July 2002, the court ruling became final
and the Company received and recorded the net settlement payment of $965,486
plus reimbursement of mailing costs.
In June 2002, the Company received notification from The Nasdaq Stock Market
("Nasdaq") that the Company's common stock has closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4).
In October 2002, the Company received another notification from Nasdaq that
based on its June 30, 2002 filing the Company does not meet compliance with
Marketplace Rule 4310(c)(2)(B). Such rule requires the Company to have a minimum
of $2.0 million in net tangible assets or $2.5 million in stockholders' equity
or a market value of listed securities of $35.0 million or $.5 million of net
income from continuing operations for the most recently completed fiscal year or
two of the three most recently completed fiscal years. In December 2002, the
Company received notification from Nasdaq indicating that the Company was
subject to delisting. The Company has responded to Nasdaq with its plan and
believes that it can achieve compliance with Marketplace Rule 4310(c)(2)(B) by
achieving minimum stockholders' equity of $2.5 million. In addition, in January
2003, the Company affected an eight-for-one reverse stock split. (See Note 2).
In February 2003, the Company received notification from Nasdaq that the
Company's was not in compliance with the Nasdaq's market value of publicly held
shares requirements, as set forth in Nasdaq Marketplace Rule 4310(c)(07). The
Company believes that its subsequent issuance of common shares for the
redemption of its preferred stock (See Note 15) has brought the Company back
into compliance with the minimum public float requirement. The Company appealed
the Staff's decision to delist the Company to a Nasdaq Listing Qualification
Panel. The hearing was held on February 13, 2003. On March 5, 2003, a Nasdaq
Listing Qualifications Panel determined to continue the listing of the Company's
securities on the Nasdaq SmallCap Market on the condition, among other things,
that the Company make a public filing with the Securities and Exchange
Commission and Nasdaq evidencing shareholders' equity of at least $2,5000,000
and further that the Company file its quarterly report on Form 10Q for the March
31, 2003 quarter on or before May 15, 2003. On March 13, 2003, the Company filed
an unaudited balance sheet as of January 31, 2003 evidencing shareholders'
equity of at least $2,5000,000. In addition, the filing of this Form 10Q further
provides evidence of shareholders' equity of at least $2,5000,000. On May 22,
2003, the Company received notification from Nasdaq that the Company
satisfactorily demonstrated compliance and, accordingly, the Nasdaq Listing
Qualifications Panel determined to continue the listing of the Company's
securities on The Nasdaq SmallCap Market and to close the hearing file.
10
In addition to the above, certain other legal actions in the normal course of
business are pending to which the Company is a party. The Company does not
expect that the ultimate resolution of the above matters and other pending legal
matters will have a material effect on the financial condition, results of
operations or cash flows of the Company.
Item 4 - Submission of matters to a vote of security holders
- -------------------------------------------------------------
Not applicable.
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The common stock of the Company trades on the NASDAQ National Market under the
symbol "MKTG." Prior to July 30, 2001, the Company traded under the symbol
"MSGI." The following table reflects the high and low sales prices for the
Company's common stock for the fiscal quarters indicated, as furnished by the
NASDAQ:
Low High
Fiscal 2003 --- ----
Fourth Quarter $1.30 $2.35
Third Quarter .12 1.98
Second Quarter .10 .32
First Quarter .13 .75
Fiscal 2002
Fourth Quarter $0.25 $2.34
Third Quarter .90 3.25
Second Quarter 2.04 5.05
First Quarter 2.10 7.50
On October 2, 2002, the common stockholders ratified the issuance of the Series
E preferred stock and approved the stockholders right to convert such preferred
stock to common stock beyond the previous 19.99% limitation. Subsequently, the
preferred shareholders converted 149 shares of Series E preferred into 79,767
shares of common stock.
On January 22, 2003, the Board of Directors approved an eight-for-one reverse
split of the common stock. The stock split was effective January 27, 2003. Par
value of the common stock remained $.01 per share and the number of authorized
shares of common stock was reduced to 9,375,000 shares. The effect of the stock
split has been reflected in the balance sheets and in all share and per share
data in the accompanying condensed consolidated financial statements and Notes
to Financial Statements. Stockholders' equity accounts have been retroactively
adjusted to reflect the reclassification of an amount equal to the par value of
the decrease in issued common shares from common stock account to
paid-in-capital.
In January 2003, the Company redeemed the outstanding shares of the preferred
stock for a cash payment of approximately $6.0 million and the issuance of
181,302 shares of common stock valued at approximately $.2 million. The carrying
value of the preferred stock was approximately $20.2 million which included a
beneficial conversion feature of approximately $10.3 million. The transaction
resulted in a gain on redemption of approximately $14.0 million and is reflected
in net income(loss) attributable to common stockholders for the period ended
June 30, 2003.
As of June 30, 2003, there were approximately 1,019 registered holders of record
of the Company's common stock.
11
The Company received notification from The Nasdaq Stock Market ("Nasdaq") that
the Company's common stock has closed below the minimum $1.00 per share
requirement for continued inclusion under Marketplace Rule 4310(c)(4). In
October 2002, the Company received another notification from Nasdaq that based
on its June 30, 2002 filing the Company does not meet compliance with
Marketplace Rule 4310(c)(2)(B). Such rule requires the Company to have a minimum
of $2.0 million in net tangible assets or $2.5 million in stockholders' equity
or a market value of listed securities of $35.0 million or $.5 million of net
income from continuing operations for the most recently completed fiscal year or
two of the three most recently completed fiscal years. In December 2002, the
Company received notification from Nasdaq indicating that the Company was
subject to delisting. The Company has responded to Nasdaq with its plan and
believes that it can achieve compliance with Marketplace Rule 4310(c)(2)(B) by
achieving minimum stockholders' equity of $2.5 million. In addition, in January
2003, the Company affected an eight-for-one reverse stock split. (See Note 2).
In February 2003, the Company received notification from Nasdaq that the
Company's was not in compliance with the Nasdaq's market value of publicly held
shares requirements, as set forth in Nasdaq Marketplace Rule 4310(c)(07). The
Company believes that its subsequent issuance of common shares for the
redemption of its preferred stock has brought the Company back into compliance
with the minimum public float requirement. The Company appealed the Staff's
decision to delist the Company to a Nasdaq Listing Qualification Panel. The
hearing was held on February 13, 2003. On March 5, 2003, a Nasdaq Listing
Qualifications Panel determined to continue the listing of the Company's
securities on the Nasdaq SmallCap Market on the condition, among other things,
that the Company make a public filing with the Securities and Exchange
Commission and Nasdaq evidencing shareholders' equity of at least $2,5000,000
and further that the Company file its quarterly report on Form 10Q for the March
31, 2003 quarter on or before May 15, 2003. On March 13, 2003, the Company filed
an unaudited balance sheet as of January 31, 2003 evidencing shareholders'
equity of at least $2,5000,000. On May 22, 2003, the Company received
notification from Nasdaq that the Company satisfactorily demonstrated compliance
and, accordingly, the Nasdaq Listing Qualifications Panel determined to continue
the listing of the Company's securities on The Nasdaq SmallCap Market and to
close the hearing file.
The Company has not paid any cash dividends on any of its capital stock in at
least the last five years. The Company intends to retain future earnings, if
any, to finance the growth and development of its business and, therefore, does
not anticipate paying any cash dividends in the foreseeable future.
Item 6 - Selected Financial Data
- --------------------------------
The selected historical consolidated financial data for the Company presented
below as of and for the five fiscal years ended June 30, 2003 have been derived
from the Company's audited consolidated financial statements. This financial
information should be read in conjunction with management's discussion and
analysis (Item 7) and the notes to the Company's consolidated financial
statements (Item 14).
Historical
Years ended June 30,
--- --------------------
(In thousands, except per share data)
1999(1) 2000 (2) 2001 2002(15) 2003(16)
------- ------- ----- -------- --------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues (11) $ 33,489 $ 62,488 $ 16,860 $ 16,027 $ 15,833
Amortization and depreciation $ 2,282 $ 6,028 $ 351 $ 393 $ 224
Income (loss) from operations $ (7,072) $(11,292) $ (4,996) $(18,011) (12) $ 3,112 (17)
Income (loss) from continuing operations $ (7,646) (3) $(41,130) (6) $(14,670)(8) $(18,266) $ 3,940
(Loss) gain from discontinued operations - $(34,543) (7) $ 1,252 (9) $ 1,873 (13) $ (1,480) (18)
12
Net income (loss) $ (7,646) $(75,673) $(65,839) $(65,683) $ (2,615) (19)
Net income (loss) available to common
stockholders $ (20,181)(4) $(75,673) $(66,492) (10)$(66,096)(14) $ 11,356 (20)
Income (loss) per diluted share (21) :
Continuing operations $ (66.60) $ ( 74.24) $ ( 22.07) $ (24.44) $ 15.62
Discontinued operations - ( 62.35) ( 56.78) (62.03) (1.29)
Cumulative effect of change in accounting - - ( 21.15) - (4.43)
----------- --------- --------- -------- --------
$ (66.60) $ (136.59) $ (100.00) $ (86.47) $ 9.90
Weighted average common shares
Outstanding-diluted 303 554 665 764 1,147
OTHER DATA:
EBITDA (5) $ (4,346) $ (4,844) $ (4,645) $ (4,718) $(1,534)
Net cash used in operating activities: $ (45) $(11,357) $ (1,764) $ (13,086) $ (2,726)
Net cash (used in) provided by investing
activities: $ (18,939) $(60,116) $ (133) $ 72,894 $ 13,447
Net cash provided by (used in) financing
activities: $ 16,035 $ 78,904 $ (3,704) $ (6,081) $(12,955)
Net cash (used in) provided by discontinued
operations - $ (812) $ (1,789) $ (50,118) $ (988)
Historical
As of June 30,
(In thousands)
CONSOLIDATED BALANCE SHEETS DATA: 1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Cash and cash equivalents $3,285 $ 9,904 $ 1,725 $ 4,438 $ 1,217
Working capital (deficit) $(9,647) $ 813 $ 29,146 $ 14,004 $ 712
Total goodwill and intangible assets $56,978 $ 154,016 $ 54,363 $ 2,317 $ 2,297
Total assets $97,627 $ 245,567 $ 170,390 $ 50,168 $ 7,648
Total long term debt, net of current portion $ 5,937 $ 36,157 $ 4,429 $ 176 $ -
Total stockholders' equity $48,928 $ 113,957 $ 68,778 $ 1,390 $ 3,108
(1) Effective January 1, 1999, the Company acquired all of the outstanding
common shares of Stevens-Knox List Brokerage, Inc., Stevens-Knox List
Management, Inc. and Stevens-Knox International, Inc. (collectively,
"SKA"). The results of operations for SK&A are included in the consolidated
statements of operations beginning January 1, 1999. Effective March 1, 1999
the Company sold 85% of its subsidiary Metro Fulfillment. Accordingly,
effective March 1, 1999 the results of operations of MFI are no longer
consolidated in the Company's statement of operations. On May 13, 1999, the
Company acquired all of the outstanding common shares of CMG Direct, Inc.
The results of operations are included in the consolidated statements of
operations beginning May 14, 1999. The results for the year ended June 30,
1999 have not been restated to reflect discontinued operations resulting
from the sale of the Northeast operations and Grizzard. Please refer to the
footnotes number 15 and 16 below.
(2) On March 31, 2000, the Company acquired all of the outstanding common
shares of The Coolidge Company. On March 22, 2000 the Company acquired all
of the outstanding common shares of Grizzard Advertising, Inc. Effective
October 1, 1999, the Company acquired 87% of the outstanding common shares
of The Cambridge Intelligence Agency. The results of operations for these
acquisitions are included in the consolidated statements of operations from
the date of the respective acquisition. The results for the year ended June
30, 1999 have not been restated to reflect discontinued operations
resulting from the sale of the Northeast operations and Grizzard. Please
refer to the footnotes number 15 and 16 below.
(3) Loss from continuing operations includes a severance charge of $1,125 and a
compensation expense on option grants of $444 which were granted at
exercise prices below market value.
(4) Net loss available to common shareholders includes the impact of dividends
on preferred stock for (a) adjustment of the conversion ratio of $11,366
for exercises of stock options and warrants; (b) $949 in cumulative
undeclared preferred stock dividends; and (c) $220 of periodic non-cash
accretions of preferred stock.
(5) EBITDA is defined as earnings from continuing operations before interest,
income tax, depreciation, amortization and other non-recurring and non-cash
items. EBITDA should not be construed as an alternative to operating income
or net income (as determined in accordance with generally accepted
accounting principles), as an indicator of MKTG's operating performance, as
an alternative to cash flows provided by operating activities (as
determined in accordance with generally accepted accounting principles), or
as a measure of liquidity. EBITDA is
13
presented solely as a supplemental disclosure because management believes
that it enhances the understanding of the financial performance of a
company with substantial amortization and depreciation expense. MKTG's
definition of EBITDA may not be the same as that of similarly captioned
measures used by other companies.
EBITDA Reconciliation: 1999(1) 2000(2) 2001(22) 2002 2003
---- ---- ---- ---- ----
Loss from operations $(7,072) $(11,292) $(4,996) $(18,011) $3,112
Depreciation and amortization 2,282 6,027 351 393 $ 224
Goodwill write-down - - - 6,500 -
Loss (gain) on sale of subsidiary - - - - -
Compensation expense on option grants and
severance 444 106 - - -
Abandoned lease reserve / gain on
termination - - - 6,400 (3,905)
Legal settlements and legal fees - 315 - - (965)
------- --------- -------- -------- -------
EBITDA $ (4,346) $(4,844) $ (4,645) $(4,718) $(1,534)
======== ======== ========= ======== ========
(6) Loss from continuing operations includes a charge for $27,216 for
write-downs of certain Internet investments.
(7) On September 21, 2000, the Company's Board of Directors approved a plan to
discontinue the operation of its WiredEmpire subsidiary, which at the time
included the assets of Pegasus Internet, Inc. The Company shut down
operations, which was completed by the end of January 2001. The estimated
losses associated with WiredEmpire are $34,543 and are reported as
discontinued operations. All prior period results have been classified as
discontinued operations.
(8) Loss from operations includes a write-down of Internet investments of
$7,578 and expenses associated with settlement of litigation of $1,298.
(9) In January 2001, the company sold certain assets of WiredEmpire for a gain
of $1,252.
(10) Net loss available to common stockholders includes a cumulative effect of a
change in accounting of $14,064 in connection with the adoption of EITF
00-27.
(11) Pursuant to the Securities and Exchange Commission's Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101") the Company has reviewed its accounting policies for the
recognition of revenue. SAB 101 was required to be implemented in fourth
quarter 2001. SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company's policies for revenue recognition are consistent with the views
expressed within SAB 101. See Note 2, "Significant Accounting Policies,"
for a description of the Company's policies for revenue recognition. The
adoption of SAB 101 did not have a material effect on the Company's
consolidated financial position, cash flows, or results of operations.
Although net income was not materially affected, the adoption did have an
impact on the amount of revenue recorded as the revenue associated with the
Company's list sales and services product line are now required to be shown
net of certain costs. The Company believes this presentation is consistent
with the guidance in Emerging Issues Task Force ("EITF") 99-19, "Reporting
Revenue Gross as a Principal Versus Net as an Agent." All prior periods
presented have been restated.
(12) Loss from operations includes an impairment write-down of goodwill of
$6,500 and a write-down of abandoned leased property of $6,400.
(13) Discontinued operations include a loss on early extinguishment of debt of
$4,859.
(14) Net loss available to common stockholders includes a deemed dividend in the
amount of $413 in connection with the redemption of preferred stock.
(15) Effective July 31, 2001, the Company sold Grizzard Communications Group,
Inc. The results of operations for Grizzard are no longer included in the
Company's results from the date of sale. Amounts have been
reclassified to discontinued operations
(16) In December 2002, the Company completed the sale of substantially all of
the assets related to its direct list sales and database services and
website development and design business held by certain of its wholly owned
subsidiaries (the "Northeast Operations") to Automation Research, Inc. for
approximately $10.4 million in cash plus the assumption of all directly
related liabilities. The results of the operations are no longer included
in the company's results from the date of sale. Amounts have been
reclassified to discontinued operations
(17) Income from operations includes a gain on termination of lease of $3.9
million.
(18) In December 2002, the Company sold certain assets of the Northeast
Operations for a loss of $0.2 million
(19) Net loss includes a gain from settlement of lawsuit of $1.0 million and a
loss from a cumulative effect of change in accounting of $5.1 million.
14
(20) Net gain / (loss) available to common shareholders contains a gain (deemed
dividend) on redemption of preferred stock of $13.9 million.
(21) On January 22, 2003, the Board of Directors approved an eight-for-one
reverse split of the common stock. Par value of the common stock remains
$.01 per share and the number of authorized shares of common stock is
reduced to 9,375,000. The stock split was effective January 27, 2003. All
stock prices, per share and share amounts have been retroactively restated
to reflect the reverse split and are reflected in this document.
(22)
The following is a summary of the quarterly operations for the years ended June
30, 2002 and 2003.
Historical
Quarter ended June 30,
(In thousands, except per share data)
(unaudited)
9/30/2001(9) 12/31/2001(9) 3/31/2002(9) 6/30/2002(9)
--------- ---------- --------- ---------
Revenues (1) $ 3,793 $ 2,926 $ 3,381 $ 5,927
Loss from operations $(1,340) $ (1,904) $(7,826) (2) $(6,941) (3)
Net loss $(10,314) $ (4,177) $(39,439) $(11,753)
Net loss available to common stockholders $(10,314) $ (4,177) $(39,852) (4) $(11,753)
Basic and diluted loss per share (5):
Continuing operations $ (2.75) $ (2.38) $ (10.20) $ ( 9.11)
Discontinued operations (15.71) (3.52) (38.67) ( 4.13)
Cumulative effect of change in accounting - - - -
---------------------------------------------------------
Basic and diluted loss per share $ (18.46) $ (5.90) $ (48.88) $ (13.24)
=========================================================
Historical
Quarter ended June 30,
(In thousands, except per share data)
(unaudited)
9/30/2002(9) 12/31/2002(9) 3/31/2003(9) 6/30/2003(9)
--------- ---------- --------- ---------
Revenues (1) $ 4,504 $ 3,159 $ 3,483 $ 4,687
Loss from operations $ (109) $ 3,362 (6) $ (322) $ 181
Net income (loss) $(5,317) (7) $ 2,636 $ (403) $ 470
Net income (loss) available to common stockholders $(5,317) $ 2,636 $ 13,567 (8) $ 470
Basic and diluted loss per share (5):
Continuing operations $ 2.48 $ 10.16 $ 100.40 $ 11.92
Discontinued operations (2.00) (2.16) (.48) (5.68)
Cumulative effect of change in accounting (15.36) - - (20.08)
-------------------------------------------------------
Basic and diluted loss per share $(14.88) $ 8.00 $ 99.92 $(13.84)
=======================================================
(1) Prior periods presented have been restated in accordance with SAB
101. See Note 2, "Significant Accounting Policies," of the
Company's consolidated financial statements included in this Form
10-K.
(2) Includes a write-off due to goodwill impairment of $6,500.
(3) Includes a write-down of abandoned leased property of $6,400.
(4) Includes a net deemed dividend(loss on redemption)in the amount
of $413 for the quarters ending March 31,2002 in connection with
the redemption of preferred stock.
(5) On January 22, 2003, the Board of Directors approved an
eight-for-one reverse split of the common stock. Par value of the
common stock remains $.01 per share and the number of authorized
shares of common stock is reduced to 9,375,000. The stock split
was effective January 27, 2003. All stock prices, per share and
share amounts have been retroactively restated to reflect the
reverse split and are reflected in this
(6) Includes a gain on termination of lease of $3.9 million.
(7) Includes a gain on settlement of lawsuit of $1.0 million and a
loss from cumulative effect of change in accounting principle of
$5.1 million.
(8) Includes a gain on redemption of preferred stock of
$13.9 million.
(9) In December 2002, the Company completed the sale of substantially
all of the assets related to its direct list sales and database
services and website development and design business held by
certain of its wholly owned subsidiaries (the "Northeast
Operations") to Automation Research, Inc. for approximately $10.4
million in cash plus the assumption of all directly related
liabilities. The results of the operations are no longer included
in the company's results from the date of sale. Amounts have
reclassified to discontinued operations
15
Item 7 - Management's Discussion and Analysis
- ---------------------------------------------
Overview
- --------
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity/cash flows of the Company
for the twelve-month period ended June 30, 2003. This should be read in
conjunction with the financial statements, and notes thereto, included in this
Form 10-K.
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The following is a brief description of the more
significant accounting policies and methods used by the Company.
Revenue Recognition:
Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements," ("SAB 101") the
Company has reviewed its accounting policies for the recognition of revenue. SAB
101 was implemented in fourth quarter 2001. SAB 101 provides guidance on
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company's policies for revenue recognition are
consistent with the views expressed within SAB 101. The adoption of SAB 101, did
not have a material effect on the Company's consolidated financial position,
cash flows, or results of operations. Although net income was not materially
affected, the adoption did have an impact on the amount of revenue recorded as
the revenue associated with the Company's list sales and services product line
are now required to be shown net of certain costs. The Company believes this
presentation is consistent with the guidance in Emerging Issues Task Force
("EITF") 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent."
All prior periods presented have been restated.
Revenues derived from on-site telemarketing and telefundraising are generally
based on hourly billing rates and a mutually agreed percentage of amounts
received by the Company's client from a campaign. These services are performed
on-site at the clients' location. These revenues are earned and recognized when
the cash is received by the respective client. Revenues derived from off-site
telemarketing and telefundraising are generally based on a mutually agreed
amount per telephone contact with a potential donor without regard to amounts
raised for the client. These services are performed at the Company's calling
center. These revenues are earned and recognized when the services are
performed.
Goodwill and Intangible Assets:
Effective July 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS"), No. 142, "Goodwill and Other Intangible Assets". Under SFAS
142, the Company ceased amortization of goodwill and tests its goodwill on an
annual basis using a two-step fair value based test.
The first step of the goodwill impairment test, used to identify potential
impairment, compares the fair value of a reporting unit with its carrying
amount, including goodwill. If the carrying amount of the reporting unit exceeds
its fair value, the second step of the goodwill impairment test must be
performed to measure the amount of the impairment loss, if any. The Company
completed the transition requirements under SFAS No. 142. The Company determined
that it had three reporting units. Reporting unit 1 represents operations of
list sales and services and database marketing. Reporting unit 2 represents the
operations of telemarketing. Reporting unit 3 represents the operations of web
site development and design. The company recognized and impairment charge of
approximately $5.1 million in connection with the adoption of SFAS No. 142 for
reporting units 1 and 3. The impairment charge has been booked by the Company in
accordance with SFAS No. 142 transition provisions as a cumulative effect of a
change in accounting principle for the year ended June 30, 2003. In connection
with the sale of the Northeast Operations (See Note 3), the only remaining
reporting unit consists of telemarketing. The remaining Goodwill relating to the
Northeast Operations of approximately $8.1 million was included in loss from
discontinued operations for the year ended June 30, 2003. At June 30, 2002,
approximately $13.2 million of goodwill was included in net liabilities of
discontinued operations.
16
Prior to the adoption of SFAS 142 on July 1, 2002, the Company amortized
goodwill over its estimated useful life and evaluated goodwill for impairment in
conjunction with its other long-lived assets.
Intangible assets consist of capitalized software, which is being amortized
under the straight-line method over 5 years. Conditions that would necessitate
an impairment assessment include material adverse changes in operations,
significant adverse differences in actual results in comparison with initial
valuation forecasts prepared at the time of acquisition, a decision to abandon
certain acquired products, services or marketplaces, or other significant
adverse changes that would indicate the carrying amount of the recorded asset
might not be recoverable.
Long-Lived Assets:
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company reviews for impairment of long-lived assets and
certain identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
general, the Company will recognize an impairment when the sum of undiscounted
future cash flows (without interest charges) is less than the carrying amount of
such assets. The measurement for such impairment loss is based on the fair value
of the asset.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. The most significant estimates and assumptions made in the
preparation of the consolidated financial statements relate to the carrying
amount and amortization of intangible assets, deferred tax valuation allowance,
abandoned lease reserves and the allowance for doubtful accounts. Actual results
could differ from those estimates.
To facilitate an analysis of MKTG operating results, certain significant events
should be considered.
In March 2000, the Company completed a private placement of 3,200,000 shares of
Convertible Preferred Stock of its WiredEmpire subsidiary for proceeds of
approximately $18.7 million, net of placement fees and expenses of $1.3 million.
On September 21, 2000, the Company's Board of Directors approved a plan to
discontinue the operation of its WiredEmpire subsidiary. The Company shut down
the operations by the end of January 2001. In the fiscal year ended June 30,
2000, the Company recorded losses associated with WiredEmpire of approximately
$34.5 million. These losses included approximately $19.5 million in losses from
operations through the measurement date and approximately $15.0 million of loss
on disposal which included approximately $2.0 million in losses from operations
from the measurement date through the estimated date of disposal. It also
included provisions for vested compensation expense of $2.0 million, write down
of assets to net realizable value of $8.8 million, lease termination costs of
$1.9 million, employee severance and benefits of $1.8 million and other
contractual commitments of $.5 million. As of June 30, 2002, approximately $1.7
million remains accrued representing payments expected to be made related to
legal and lease obligations.
On June 13, 2001, the board of directors and management of the Company approved
a formal plan to sell Grizzard. In July 2001, the Company completed its sale of
all the outstanding capital stock of its Grizzard subsidiary to Omnicom Group,
Inc. The purchase price of the transaction was $89.8 million payable in cash,
net of a working capital adjustment. As a result of the sale agreement, the
Company fully paid the term loan of $35.5 million and $12.0 million
17
line of credit. The Company recorded an extraordinary loss of approximately $4.9
million in the year ended June 30, 2002 as a result of the early extinguishment
of debt.
At June 30, 2001, the assets and liabilities of Grizzard were classified as net
assets held for sale in the amount of $80.9 million. In the year ended June 30,
2001, the Company recognized a loss on assets held for sale in the amount of
$36.7 million representing a write-down of the amount of assets held for sale to
net realizable value. Grizzard's revenues included in the Company's statement of
operations for the fiscal years ended June 30, 2002, 2001 and 2000 were $2.8
million, $82.8 million and $19.6 million, respectively. Grizzard's net loss
included in the Company's statement of operations for the fiscal years ended
June 30, 2002, 2001 and 2000 were $8.5 million, $41.0 million and $3.8 million,
respectively.
The Company's business tends to be seasonal. Telemarketing services have higher
revenues and profits occurring in the fourth fiscal quarter, followed by the
first fiscal quarter. This is due to subscription renewal campaigns for its
performing arts clients, which generally begin in the springtime and continue
during the summer months.
Results of Operations Fiscal 2003 Compared to Fiscal 2002
- ---------------------------------------------------------
Revenues of approximately $15.8 million for the year ended June 30, 2003 (the
"Current Period") decreased by $0.2 million or 2% over revenues of $16.0 million
during the year ended June 30, 2002 (the "Prior Period"). The decrease is due
primarily to decreased teleservices billing. The decrease in such billing is a
direct result of the impact of a weaker economy resulting in a reduction in our
clients' marketing campaigns.
Salaries and benefits of approximately $13.8 million in the Current Period
decreased by approximately $1.8 million or 12% over salaries and benefits of
approximately $15.6 million in the Prior Period. Salaries and benefits decreased
due to decreased head count in several areas of the Company. The Company has
been actively consolidating its offices and infrastructure. Redundant functions
in operations were eliminated due to the consolidation of offices with the move
of the call center in the Fall of 2001. In connection with a reduction in force,
corporate head count was reduced from seven to three. In February 2003, certain
compensation arrangements were modified. The Chief Executive Officer voluntarily
forgave part of his base compensation to effect a reduction of approximately 30%
to $350,000. The Chief Accounting Officer also forgave part of her base
compensation to effect a reduction of approximately 30% and $125,000 per year
and in addition, due to medical reasons resigned as Chief Accounting Officer of
the Company in March 2003. The Chief Executive Officer has assumed the duties as
the Chief Accounting Officer until such a replacement has been elected.
Direct costs of approximately $0.6 million in the Current Period remained
consistent with direct costs of $0.6 million in the Prior Period. Direct costs
as a percentage of revenue was 4% and 4% for the Current Period and the Prior
Period, respectively.
18
Selling, general and administrative expenses of approximately $1.9 million in
the Current Period decreased by approximately $2.5 million or 55% over
comparable expenses of $4.4 million in the Prior Period. Of the decrease,
approximately $0.9 million is attributable to reductions in rent expenses for
both the Los Angeles operations and Corporate office as a result of
consolidation of office spaces. Approximately $0.5 million is attributable to
reductions in professional fees such as legal and accounting services. The
remaining reductions occurred in areas such as marketing, travel and
entertainment and office expenses due to the consolidation of certain office
spaces and the reduction of head count
In the Prior Period, the Company realized an expense of approximately $6.4
million as a result of booking reserves for the cost of certain abandoned
property.
Gain on termination of lease of approximately $3.9 million in the Current Period
was a result of the Company successfully negotiating a termination of a lease
for an abandoned lease property. The agreement required an up front payment of
approximately $.3 million and the Company is obligated to pay approximately
$60,000 per month until the landlord has completed certain leasehold
improvements for a new tenant and then Company is obligated to pay $20,000 per
month until August 2010. The gain on lease termination represents a change in
estimate representing the difference between the Company's present value of its
new future obligations and the entire obligation that remained on the books
under the original lease obligation as a result of the abandonment. The
remaining obligation has been recorded in accrued expenses and other current
liabilities and other liabilities.
In the prior period, due to the weakened economy and lower than expected
results, the Company had determined that there may not be sufficient cash flows
to recover the remaining book value of goodwill. As a result, the Company
recognized an impairment charge of approximately $6.5 million, which is included
in loss from continuing operations.
Depreciation and amortization expense of approximately $.2 million in the
Current Period decreased by approximately $.2 over expense of approximately $.4
million in the Prior Period. The decrease is primarily due to the adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets." The Company adopted the
new pronouncement as of July 1, 2002. This Statement eliminates amortization of
goodwill and indefinite-lived intangible assets and initiates an annual review
for impairment. Identifiable intangible assets with a determinable useful life
will continue to be amortized. The adoption required the Company to cease
amortization of its remaining net goodwill balance and to perform a transitional
impairment test as of the adoption date in addition to an impairment test of its
existing goodwill based on a fair value concept.
During the Current Period, the Company recognized a gain on a settlement of a
lawsuit. In 1999, a lawsuit under Section 16(b) of the Securities Exchange Act
of 1934 was commenced against General Electric Capital Corporation ("GECC") by
Mark Levy, derivatively on behalf of the Company, to recover short swing profits
allegedly obtained by GECC in connection with the purchase and sale of MKTG
securities. The case was filed in the name of Mark Levy v. General Electric
Capital Corporation, in the United States District Court for the Southern
District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002,
a settlement was reached among the parties. The settlement provided for a $1.3
million payment to be made to MKTG by GECC and for GECC to reimburse MKTG for
the reasonable cost of mailing a notice to stockholders up to $30,000. On April
29, 2002, the court approved the settlement for approximately $1.3 million, net
of attorney fees plus reimbursement of mailing costs. In July 2002, the court
ruling became final and the Company received and recorded the net settlement
payment of approximately $965,000 plus reimbursement of mailing costs.
Net interest expense of approximately $0.1 million in the Current Period
decreased by approximately $0.2 million over net interest income of
approximately $0.1 million in the Prior Period. Net interest income decreased
primarily due to the decrease in interest rates coupled with the decrease in
average cash.
The net provision for income taxes of approximately $0.05 million in the Current
Period decreased by approximately $0.05 million over net provision for income
taxes of approximately $0.1 million from the Prior Period. In addition, the
Company records provisions for state and local taxes incurred on taxable income
or equity at the operating subsidiary
19
level, which cannot be offset by losses incurred at the parent company level or
other operating subsidiaries. The Company has recognized a full valuation
allowance against the deferred tax assets because it is more likely than not
that sufficient taxable income will not be generated during the carry forward
period to utilize the deferred tax assets.
As a result of the above, income from continuing operations item of $3.9 million
in the Current Period increased by $22.2 million over comparable loss of $18.3
in the Prior Period. .
The loss from discontinued operations in the Current Period and the Prior Period
are the results of loss incurred during the respective periods from Grizzard and
the Northeast Operations which have been sold. The Company recorded a loss of
approximately $4.9 million for the nine months ended March 31, 2002 as a result
of the early extinguishment of debt which is included in the loss from
discontinued operations and was previously classified as an extraordinary item.
In connection with the sale of the Northeast Operations, the Company realized a
loss on disposal of discontinued operations of approximately $.2 million in the
year ended June 30, 2003. The loss primarily results from the difference in the
net book value of assets and liabilities as of the date of the sale as compared
to the net consideration received after settlement of purchase price
adjustments.
For the year ended June 30, 2002, the Company recognized a gain on sale of
Grizzard in the amount of approximately $1.8 million which is included in the
statement of operations in Gain From Disposal of Discontinued Operations. The
gain represents the difference in the net book value of assets and liabilities
as of the date of the sale as compared to the net consideration received after
settlement of purchase price adjustments.
As of December 31, 2002, the Company completed the transition requirements under
SFAS No. 142. There is no impairment for its telemarketing unit. The Company
recognized an impairment charge of approximately $5.1 million in connection with
the adoption of SFAS No. 142 for its list sales and database marketing and
website development and design business. The impairment charge has been booked
by the Company in accordance with SFAS 142 transition provisions as a cumulative
effect of change in accounting for the year ended June 30, 2003.
As a result of the above, net loss of approximately $2.6 million in the Current
Period decreased by approximately $63.1 million over comparable net loss of
$65.7 million in the Prior Period.
In the Current Period the Company recognized a gain on redemption of preferred
stock of approximately $14.0 million and is reflected in net income(loss)
attributable to common stockholders. The gain is a result of the difference
between the consideration paid for redemption of a cash payment of approximately
$6.0 million and the issuance of 181,302 shares of common stock valued at
approximately $.2 million and the carrying value of the preferred stock which
was approximately $20.2 million which included a beneficial conversion feature
of approximately $10.3 million
Results of Operations Fiscal 2002 Compared to Fiscal 2001
- ---------------------------------------------------------
Revenues of approximately $16.0 million for the year ended June 30, 2002 (the
"Current Period") decreased by $0.8 million or 5% over revenues of $16.8 million
during the year ended June 30, 2001 (the "Prior Period"). The decrease was a
direct result of the impact of a weaker economy resulting in a reduction in our
clients' marketing campaigns. In addition, since September 11 unexpected client
cancellations, postponed fundraising campaigns and lost clients contributed to
the decrease. Furthermore, for a period of time following September 11 our
telemarketing call center was closed and all campaigns for such period were
cancelled.
Salaries and benefits of approximately $15.7 million in the Current Period
decreased by approximately $0.5 million or 3% over salaries and benefits of
approximately $16.2 million in the Prior Period due to decreased head count in
various areas of the company during the current period.
Direct costs of approximately $.6 million in the Current Period decreased by
$0.3 million or 33% over direct costs of $0.9 million in the Prior Period due to
the lower costs associated with the telemarketing / teleservices business.
20
Selling, general and administrative expenses of approximately $4.4 million in
the Current Period remained consistent with expenses of approximately $4.4
million in the Prior Period.
Reserve for rent on abandoned property of approximately $6.4 million in the
Current Period represents a reasonable estimated reserve for all rent costs
associated with certain leased property which has been abandoned by the Company.
Goodwill impairment of $6.5 million in the Current Period represents an
impairment charge for the write down of goodwill. Due to the weakened economy
and lower than expected results, based on current information, the Company has
determined that there will not be sufficient cash flows to recover all of the
remaining book value of goodwill.
Depreciation and amortization expense of approximately $0.4 in the Current
Period remained consistent with expense of approximately $0.4 in the Prior
Period. Settlement of litigation of approximately $.3 million and $1.3 million
in the Current and Prior Periods, respectively, was due to the settlement of
lawsuits with a previously owned subsidiary and one of their employees.
Interest expense and other, net of approximately $0.09 million in the Current
Period decreased by approximately $0.8 million over interest expense and other,
net of approximately $0.7 million in the Prior Period. Of the decrease,
approximately $0.6 million is attributable to the sale of Grizzard in July 2001
and the repayment of the related debt. Interest expense and other net, excluding
the effects of the disposition of Grizzard decreased by $0.2 million due to
interest income on excess cash.
The net provision for income taxes of approximately $0.1 million in the Current
Period decreased by approximately $0.05 million over net provision for income
taxes of approximately $0.05 million from the Prior Period. In addition, the
Company records provisions for state and local taxes incurred on taxable income
or equity at the operating subsidiary level, which cannot be offset by losses
incurred at the parent company level or other operating subsidiaries. The
Company has recognized a full valuation allowance against the deferred tax
assets because it is more likely than not that sufficient taxable income will
not be generated during the carry forward period to utilize the deferred tax
assets.
As a result of the above, net loss of approximately $65.7 million in the Current
Period decreased by approximately $0.1 million over comparable net loss of $65.8
million in the Prior Period.
In the Prior Period, the Company sold certain assets of WiredEmpire for a gain
of $1.3 million, which is included in loss from discontinued operations.
In connection with the sale of Grizzard, the Company fully paid the term loan of
$35.5 million and $12.0 million line of credit. As a result, the Company
recorded an extraordinary loss of approximately $4.9 million in the Current
Period as a result of the early extinguishments of debt. This amount is included
in loss from discontinued operations.
In the Current Period, the redemption of 5,000 preferred shares for $5.0
million, less the carrying value of the preferred shares, including the
beneficial conversion feature previously recorded in equity on the balance
sheet, resulted in a deemed dividend of $412,634 which was recorded to
additional paid-in capital and included in the calculation of net loss
attributable to common stockholders.
In the Prior Period, the Company exchanged 328,334 shares of unregistered MKTG
common stock for WiredEmpire preferred stock. The exchange resulted in a gain of
$13.4 million for the year ended June 30, 2001, which was recorded through
equity and is included in net loss attributable to common stockholders and
earnings per share - discontinued operations.
In September 2000, the EITF issued EITF 00-27 "Application of EITF 98-5 to
Certain Convertible Instruments." EITF
21
00-27 addresses the accounting for convertible preferred stock issued since May
1999 that contain nondetachable conversion options that are in the money at the
commitment date. EITF 00-27 changed the approach of calculating the conversion
price used in determining the value of the beneficial conversion feature from
using the conversion price stated in the preferred stock certificate to using
the accounting conversion price. The adoption of this EITF increased the
original value of the beneficial conversion feature from zero to $14.1 million.
MKTG adopted EITF 00-27 in December 2000 and as a result has recorded a
cumulative effect of a change in accounting of approximately $14.1 million in
the year ended June 30, 2001 related to the March 2000 issuance of MKTG
convertible preferred stock. The cumulative effect was recorded to additional
paid-in capital and treated as a deemed dividend in the calculation of net loss
attributable to common stockholders.
Capital Resources and Liquidity
- -------------------------------
Financial Reporting Release No. 61, which was recently released by the SEC,
requires all companies to include a discussion to address, among other things,
liquidity, off-balance sheet arrangements, contractual obligations and
commercial commitments. The Company currently does not maintain any off-balance
sheet arrangements.
Critical Accounting Policies:
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States ("GAAP"). The
preparation of consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Company believes that the estimates, judgments and assumptions
upon which the Company relies are reasonable based upon information available to
us at the time that these estimates, judgments and assumptions are made. To the
extent there are material differences between these estimates, judgments or
assumptions and actual results, our financial statements will be affected. The
significant accounting policies that the Company believes are the most critical
to aid in fully understanding and evaluating our reported financial results
include the following:
o Revenue Recognition
o Allowances for Doubtful Accounts
o Goodwill and Intangible Assets
o Accounting for Income Taxes
In many cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP and does not require management's judgment in its
application. There are also areas in which management's judgment in selecting
among available alternatives would not produce a materially different result.
Our senior management has reviewed the Company's critical accounting policies
and related disclosures with our Audit Committee. See Notes to Consolidated
Financial Statements, which contain additional information regarding our
accounting policies and other disclosures required by GAAP.
Leases: The Company leases various office space and equipment under
non-cancelable long-term leases. The Company incurs all costs of insurance,
maintenance and utilities.
22
Future minimum rental commitments under all non-cancelable leases, as of June
30, 2003 are as follows:
Rent Expense Less: Sublease Income Net Rent Expense
2004 $ 879,600 $ (79,200) $ 800,400
2005 640,800 (45,300) 595,500
2006 439,700 439,700
2007 439,680 - 439,680
2008 323,200 - 323,200
Thereafter 520,000 - 520,000
------- ------------ -------
$3,243,000 $ (124,500) $3,118,500
Debt: In November 2002, the Company repaid approximately $.3 million balance of
one credit facility. In connection with the sale of the Company's Northeast
Operations, another credit facility of approximately $.3 million was fully
repaid and terminated in December 2002.
At June 30, 2003, the Company had amounts outstanding of approximately $.3
million on its remaining line of credit facility. The Company had approximately
$1.1 million available on its line of credit as of June 30, 2003. As of June 30,
2003, the Company was in compliance with its line of credit covenants.
In August 2001, the Company entered into a stand by letter of credit with a bank
in the amount of approximately $4.9 million to support the remaining obligations
under a holdback agreement with the former shareholders of Grizzard
Communications Group, Inc. ("Grizzard"). The letter of credit was collateralized
by cash and has been classified as restricted cash in the current asset section
of the balance sheet as of June 30, 2002. The letter of credit was subject to an
annual facility fee of 1.5%. The remaining obligation was settled in January
2003 and accordingly the letter of credit was terminated.
Preferred Stock: In January 2003, the Company redeemed the outstanding shares of
the preferred stock for a cash payment of approximately $6.0 million and the
issuance of 181,302 shares of common stock valued at approximately $.2 million.
The carrying value of the preferred stock was approximately $20.2 million which
included a beneficial conversion feature of approximately $10.3 million. The
transaction resulted in a gain on redemption of approximately $14.0 million and
is reflected in net income attributable to common stockholders for the year
ended June 30, 2003.
On October 2, 2002, the common stockholders ratified the issuance of the Series
E preferred stock and approved the stockholders right to convert such preferred
stock to common stock beyond the previous 19.99% limitation. Subsequently, the
preferred shareholders converted 149 shares of Series E preferred into 79,767
shares of common stock.
The preferred shareholders converted 1,799 shares of preferred stock to 112,983
shares of common stock for the year ended June 30, 2002.
In February 2002, the Company recognized a loss on the redemption of preferred
stock of approximately $.4 million reflected in net loss attributable to common
stockholders. The loss is the result of the difference between the consideration
paid for redemption of the preferred stock for $5.0 million cash and the
carrying value of the preferred stock of $4.6 million which included a
beneficial conversion feature of approximately $2.4 million.
On February 19, 2002, the Company entered into standstill agreements, as
amended, with the Series E preferred shareholders in order for the Company to
continue to discuss with multiple parties regarding the possibility of either
restructuring or refinancing the remainder of the preferred stock. The Company's
commitments as a result of the standstill agreements included a partial
redemption of 5,000 of the Series E preferred shares for $5.0 million, thereby
reducing the number of Series E preferred shares to 23,201 at June 30, 2002. The
value of the preferred stock was
23
initially recorded at a discount allocating a portion of the proceeds to a
warrant. The redemption of such preferred shares for $5.0 million, less the
carrying value of the preferred shares, including the beneficial conversion
feature previously recorded to equity on the balance sheet, resulted in a deemed
dividend of $0.4 million which was recorded to additional paid-in and included
in the calculation of net loss attributable to common stockholders for the year
ended June 30, 2002.
On February 24, 2000 the Company entered into a private placement with RGC
International Investors LDC and Marshall Capital Management, Inc., an affiliate
of Credit Suisse First Boston, in which the Company sold an aggregate of 30,000
shares of Series E Convertible Preferred Stock, par value $.01 ("Series E
Preferred Stock"), and warrants to acquire 30,648 shares of common stock for
proceeds of approximately $29.5 million, net of approximately $0.5 million of
placement fees and expenses. The preferred stock was convertible into cash or
shares of common stock on February 18, 2004 at the option of the Company. The
preferred stock provided for liquidation preference under certain circumstances
and accordingly had been classified in the mezzanine section of the balance
sheet. The preferred stock had no dividend requirements.
After adjustment for the reverse stock split, the Series E Preferred Stock was
convertible at any time at $1,174.70 per share, subject to reset on August 18,
2000 if the market price of the Company's common stock was lower and subject to
certain anti-dilution adjustments. On August 18, 2000, the conversion price was
reset to $587.52 per share, the market price on that date as adjusted for the
reverse stock split. As a result of the issuance of a certain warrant, certain
antidilultive provisions of the Company's Series E preferred stock were
triggered. The conversion price of such shares was reset to a fixed price of
$18.768 based on an amount equal to the average closing bid price of the
Company's common stock for ten consecutive trading days beginning on the first
trading day of the exercise period of the aforementioned warrant. No further
adjustments will be made to the conversion price other than for stock splits,
stock dividends or other organic changes. The warrant was exercisable for a
period of two years at an exercise price of $1,370.448, subject to certain
anti-dilution adjustments. The fair value of the warrant of $15,936,103, as
determined by the Black Scholes option pricing model, was recorded as additional
paid in capital and a corresponding decrease to preferred stock . The warrant
expired in February 2002.
The Company received notification from The Nasdaq Stock Market ("Nasdaq") that
the Company's common stock has closed below the minimum $1.00 per share
requirement for continued inclusion under Marketplace Rule 4310(c)(4). In
October 2002, the Company received another notification from Nasdaq that based
on its June 30, 2002 filing the Company does not meet compliance with
Marketplace Rule 4310(c)(2)(B). Such rule requires the Company to have a minimum
of $2.0 million in net tangible assets or $2.5 million in stockholders' equity
or a market value of listed securities of $35.0 million or $.5 million of net
income from continuing operations for the most recently completed fiscal year or
two of the three most recently completed fiscal years. In December 2002, the
Company received notification from Nasdaq indicating that the Company was
subject to delisting. The Company has responded to Nasdaq with its plan and
believes that it can achieve compliance with Marketplace Rule 4310(c)(2)(B) by
achieving minimum stockholders' equity of $2.5 million. In addition, in January
2003, the Company affected an eight-for-one reverse stock split. (See Note 2).
In February 2003, the Company received notification from Nasdaq that the
Company's was not in compliance with the Nasdaq's market value of publicly held
shares requirements, as set forth in Nasdaq Marketplace Rule 4310(c)(07). The
Company believes that its subsequent issuance of common shares for the
redemption of its preferred stock has brought the Company back into compliance
with the minimum public float requirement. The Company appealed the Staff's
decision to delist the Company to a Nasdaq Listing Qualification Panel. The
hearing was held on February 13, 2003. On March 5, 2003, a Nasdaq Listing
Qualifications Panel determined to continue the listing of the Company's
securities on the Nasdaq SmallCap Market on the condition, among other things,
that the Company make a public filing with the Securities and Exchange
Commission and Nasdaq evidencing shareholders' equity of at least $2.5 million
and further that the Company file its quarterly report on Form 10Q for the March
31, 2003 quarter on or before May 15, 2003. On March 13, 2003, the Company filed
an unaudited balance sheet as of January 31, 2003 evidencing shareholders'
equity of at least $2.5 million. On May 22, 2003, the Company received
notification from Nasdaq that the Company satisfactorily demonstrated compliance
and, accordingly, the Nasdaq Listing Qualifications Panel determined to continue
the listing of the Company's securities on The Nasdaq SmallCap Market and to
close the hearing file.
24
Historically, the Company has funded its operations, capital expenditures and
acquisitions primarily through cash flows from operations, private placements of
equity transactions, and its credit facilities. At June 30, 2003, the Company
had cash and cash equivalents of $1.2 million and accounts receivable net of
allowances of $1.8 million.
The Company realized income from continuing operations of $3.9 million in the
Current Period. Cash used in operating activities from continuing operations was
approximately $2.7 million. Net cash used in operating activities principally
resulted from the income from continuing operations offset by gain on
termination of lease, reduction in trade accounts payable and other non-cash
items in the Current Period. The Company incurred losses from continuing
operations of $18.3 million in the Prior Period. Cash used in operating
activities from continuing operations was approximately $13.1 million. Net cash
used in operating activities principally resulted from the loss from continuing
operations offset by goodwill impairment, a decrease in accrued expenses and
other liabilities and other non-cash items in the Prior Period.
In the Current Period, net cash of $13.4 million was provided by investing
activities consisting of net proceeds from the decrease in restricted cash and
proceeds from the sale of the Northeast operations, net of fees, offset by an
increase in related party note receivable and purchases of property and
equipment. In the Prior Period, net cash of $72.9 million was provided from
investing activities consisting primarily of $78.6 million from proceeds from
the sale of Grizzard offset by an increase in restricted cash, an increase in
related party note payable and purchases of property and equipment .
In the Current Period, net cash of $12.8 million was used in financing
activities. Net cash used in financing activities consisted of $4.8 million
repayments of debt and capital leases, redemption of a portion of preferred
stock of $6.0 million and repayment of proceeds from credit facilities of $2.0
million. In the Prior Period, net cash of $5.1 million was used in financing
activities. Net cash used in financing activities consisted primarily of $5.0
million in redemption of a portion of preferred stock.
In the Current Period net cash of $1.0 million was used in discontinued
operations. In the prior period, net cash of $50.1 million was used by
discontinued operations.
In February 2001, the Company entered into a strategic partnership agreement
(the "Agreement") with Paris based Firstream. Firstream paid the Company $3.0
million and in April 2001 received 187,500 restricted shares of common stock,
plus a two-year warrant for 50,000 shares priced at $24 per share. The warrant
is exercisable over a two year period. The warrant is valued at $.9 million as
determined by the Black-Scholes option pricing model and was recorded to equity.
In accordance with the Agreement, the Company recorded proceeds of $1.8 million;
net of fees and expenses, as equity and $1.0 million was designated as deferred
revenue to provide for new initiatives. As part of the strategic partnership,
MKTG will launch several new Firstream products and services in the areas of
wireless communications, online music and consumer marketing programs for early
adopters of new products. The remaining balance is $.8 million at June 30, 2002.
In July 2002, the Company received a letter from Firstream canceling the
strategic partnership agreement and requesting payment of the remaining $.8
million, which has been categorized as a liability at June 30, 2002. The Company
settled with Firstream during fiscal year 2003 for approximately $.2 million and
the remaining liability was sold as part of the Northeast operations sale. There
was no remaining liability at June 30, 2003.
In December 2002, the Company completed the sale of substantially all of the
assets relating to its direct list sales and database services and website
development and design business held by certain of its wholly owned subsidiaries
(the 'Northeast Operations') to Automation Research, Inc. ('ARI'), a wholly
owned subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash
plus the assumption of all directly related liabilities. As such, the operations
and cash flows of the Northeast Operations have been eliminated from ongoing
operations and the Company no longer has continuing involvement in the
operations. Accordingly, the statement of operations and cash flows for the
years ending June 30, 2003, 2002 and 2001 have been reclassed into a one-line
presentation and is included in Loss from
25
Discontinued Operations and Net Cash Used by Discontinued Operations. In
addition, the assets and liabilities of the Northeast Operations have been
segregated and presented in Net Assets of Discontinued Operations and Net
Liabilities of Discontinued Operations as of June 30, 2002.
In connection with the sale of the Northeast Operations, the Company recognized
a loss on disposal of discontinued operations of approximately $.2 million in
the year ended June 30, 2003. The loss represents the difference in the net book
value of assets and liabilities as of the date of the sale as compared to the
net consideration received after settlement of purchase price adjustments plus
any additional expenses incurred. There was no tax impact on this loss.
On July 31, 2001, the Company completed the sale of all the outstanding capital
stock of its Grizzard subsidiary to Omnicom Group, Inc. As a result of the sale
agreement, the Company repaid a term loan of $35.5 million and a $12.0 million
line of credit. The Company recorded a loss of approximately $4.9 million for
the year ended June 30, 2002 as a result of the early extinguishment of debt
which is included in the loss from discontinued operations. For the year ended
June 30, 2002, the Company recognized a gain on sale of Grizzard in the amount
of approximately $1.8 million which is included in the statement of operations
in Gain from Disposal of Discontinued Operations. The gain represents the
difference in the net book value of assets and liabilities as of the date of the
sale as compared to the net consideration received after settlement of purchase
price adjustments. The statement of operations and cash flows for the years
ended June 30, 2002 and 2001 have been reclassified into a one-line presentation
and is included in Loss from Discontinued Operations and Net Cash Used by
Discontinued Operations.
In January 2001, the Company sold certain assets of WiredEmpire for $1.3
million, consisting of $1.0 million in cash and $.3 million held in escrow,
which was paid in May 2001. This transaction resulted in a gain on sale of
assets of $1.3 million which is included in the statement of operations in Gain
from disposal of discontinued operations. The statement of operations and cash
flows for the year ended June 30, 2001 have been reclassified into a one-line
presentation and is included in Loss from Discontinued Operations and Net Cash
Used by Discontinued Operations.
On September 21, 2000, the Company's Board of Directors approved a plan to
discontinue the operation of its WiredEmpire subsidiary. The Company shut down
the operations by the end of January 2001. The estimated losses associated with
WiredEmpire were approximately $34.5 million. These losses for WiredEmpire
included approximately $19.5 million in losses from operations through the
measurement date and approximately $15.0 million of loss on disposal.
In September 2000 the Company offered to exchange the WiredEmpire preferred
shares for MKTG common shares. During the fiscal year end June 30, 2001, the
Company exchanged 41,042 shares of unregistered MKTG common stock for
WiredEmpire preferred stock. The exchange resulted in a gain of $13,410,273,
which was recorded through equity and is included in net loss attributable to
common stockholders and earnings per share - discontinued operations for the
year ended June 30, 2001. As of June 30, 2003 and 2002, 48,000 shares of
WiredEmpire preferred stock have not been exchanged and this is reported as
minority interest in preferred stock of discontinued subsidiary as $280,946 for
in each year.
Summary of Recent Accounting Pronouncements
- -------------------------------------------
Effective July 1, 2002, the Company adopted the provisions of SFAS No.
141,"Business Combinations," in its entirety and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 applies to all business combinations with
a closing date after June 30, 2001. SFAS No. 141 eliminates the
pooling-of-interests method of accounting and further clarifies the criteria for
recognition of intangible assets separately from goodwill. SFAS No. 142
eliminates the amortization of goodwill and indefinite-lived intangible assets
and initiates an annual review for impairment. Identifiable intangible assets
with a determinable useful life continue to be amortized. The adoption required
the Company to cease amortization of its remaining net goodwill balance and to
perform a transitional impairment test of its existing goodwill based on a fair
value concept as of the date of adoption (see Note 8).
26
Goodwill is not subject to amortization and is tested for impairment annually,
or more frequently if events or changes in circumstances indicate that the asset
may be impaired. The impairment test consists of a comparison of the fair value
of goodwill with its carrying amount. If the carrying amount of goodwill exceeds
its fair value, an impairment loss shall be recognized in an amount equal to
that excess. After an impairment loss is recognized, the adjusted carrying
amount of goodwill is its new accounting basis.
Effective July 1, 2002, the Company adopted SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial
accounting and reporting for the disposal of long-lived assets. The objectives
of SFAS No. 144 are to address significant issues relating to the implementation
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and to develop a single accounting model,
based on the framework established in SFAS No. 121, for the long-lived assets to
be disposed of by sale, whether previously held and used or newly acquired. SFAS
No. 144 retains the fundamental provisions of SFAS No. 121 recognition and
measurement of the impairment of long-lived assets to be held and used. The
Company reviews for impairment of long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In general, the Company will
recognize an impairment when the sum of undiscounted future cash flows (without
interest charges) is less than the carrying amount of such assets. The
measurement for such impairment loss is based on the fair value of the asset.
SFAS No. 144 supersedes the accounting and reporting provisions of APB Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", for segments of a business to be disposed
of. However, this Statement retains the requirement of Opinion 30 to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held for sale. The adoption of such pronouncement did not have an
impact on the Company's financial position and results of operations.
In April 2002, the FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections as of April 2002." SFAS No.
145 became effective for financial statements issued for fiscal years beginning
after May 15, 2002. The Company adopted SFAS 145 on July 1, 2002. The adoption
of the statement did not have a material impact on the Company's financial
position and results of operations. However, the loss on extinguishment of debt
that was classified as an extraordinary item in the prior period has been
reclassified and included in loss from discontinued operation as the loss does
not meet the criteria in APB Opinion No. 30 "Reporting the Results of Operations
Reporting the Effects of Disposal of a Segment of a Business", for
classification as an extraordinary item.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." Under Issue No. 94-3, a
liability for an exit cost as defined in Issue 94-3 was recognized at the date
of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair market value only when the liability is incurred
and not when management has completed the plan. The provisions of this Statement
are effective for exit or disposal activities that are initiated after December
31, 2002. The adoption of such pronouncement did not have a material impact on
the Company's financial position and results of operations.
In November 2002, the FASB issued FIN 45, 'Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Other,' an interpretation of FASB Statements No. 5, 57, and 107 and Rescission
of FASB Interpretation No. 34. FIN 45 elaborates on the existing disclosure
requirements of guarantees and obligations to stand ready to perform over the
term of the guarantee in the event that specified triggering events or
conditions occur and the identification of those contingent obligations to make
future payments if those triggering events or conditions occur. Additional
disclosures have been added to Commitments and Contingencies footnote describing
the nature of the guarantee; amount and event triggering the Company's
obligation under the guarantee and the Company's recourse to recover in such an
event. Management does not believe that this pronouncement will have a material
impact
27
on its financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting