U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 2005
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: 000-17468
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KUPPER PARKER COMMUNICATIONS, INCORPORATED
(Exact name of the Registrant as specified in its charter)
NEW YORK 11-2250305
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8301 Maryland Avenue, St. Louis, Missouri 63105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 290-2000
____________________________________________________
(Former name, former address and former fiscal year,
if changed from last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes No .
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 5,909,653 shares of Common Stock, par
value $0.01, as of March 16, 2005.
Transitional Small Business Disclosure Format (check one): Yes No X
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1
KUPPER PARKER COMMUNICATIONS, INCORPORATED AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of
January 31, 2005 (Unaudited) and October 31, 2004 3
Condensed Consolidated Statement of Operations for the
three months ended January 31, 2005 and 2004 (Unaudited) 4
Condensed Consolidated Statement of Cash Flows for the
three months ended January 31, 2005 and 2004 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition or Plan of Operation 8
Item 3. Controls and Procedures 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits 12
Signatures 13
2
KUPPER PARKER COMMUNICATIONS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JANUARY 31, OCTOBER 31,
2005 2004
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ 635,204 $ 254,518
Accounts receivable, net of allowance for bad
debts of $185,418 in 2005 and $207,176 in 2004 4,665,351 3,991,740
Other current assets 448,217 841,718
----------- -----------
Total Current Assets 5,748,772 5,087,976
----------- -----------
Property and equipment, net of accumulated depreciation
and amortization of $2,235,157 and $2,198,670 406,703 440,446
Intangibles, net of accumulated amortization of
$552,373 and $512,459 577,380 617,294
Goodwill 4,230,342 4,230,342
Other assets 929,042 851,535
----------- -----------
Total Assets $11,892,239 $11,227,593
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term bank borrowings $ 421,500 $ 101,500
Current maturities of long-term debt and line of credit 841,729 850,900
Accounts payable 6,389,174 5,469,731
Accrued expenses 366,520 761,502
Other current liabilities 230,000 330,751
----------- -----------
Total Current Liabilities 8,248,923 7,514,384
----------- -----------
Long-term Liabilities
Long-term debt, less current maturities 1,611,097 2,225,841
Long-term accrued lease expense 316,217 334,212
----------- -----------
Total Long-term Liabilities 1,927,314 2,076,754
----------- -----------
Stockholders' Equity
Common stock, $.10 stated value, 30,000,000 shares
authorized; 6,292,840 shares issued 629,284 629,284
Paid-in capital 3,519,634 3,519,634
Retained earnings (deficit) (1,760,592) (1,840,139)
Treasury stock, at average cost; 383,187 shares (672,324) (672,324)
----------- -----------
Total Shareholders' Equity 1,716,002 1,636,455
----------- -----------
Total Liabilities and Shareholders' Equity $11,892,239 $11,227,593
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
KUPPER PARKER COMMUNICATIONS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31,
--------------------------------------
2005 2004
---------- ----------
REVENUES $2,440,179 $2,659,646
---------- ----------
OPERATING EXPENSES:
Salaries and Benefits 1,642,752 1,821,480
Office and General 636,503 592,064
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Total Operating Expenses 2,279,255 2,413,544
---------- ----------
Operating Income 160,924 246,102
OTHER INCOME (EXPENSE):
Interest income 250 66
Interest expense (21,878) (40,516)
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(21,628) (40,450)
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Pretax Income 139,296 205,652
INCOME TAX PROVISION 59,749 --
---------- ----------
NET INCOME $ 79,547 $ 205,652
========== ==========
EARNINGS PER SHARE
Basic $ 0.01 $ 0.04
========== ==========
Diluted $ 0.01 $ 0.03
========== ==========
See accompanying notes to condensed consolidated financial statements.
4
KUPPER PARKER COMMUNICATIONS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31,
--------------------------------------
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 79,547 $ 205,652
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Depreciation and amortization 77,671 119,441
Loss on disposal of property & equipment 3,844 --
Provision for bad debts 10,000 40,331
Changes in assets - (increase) decrease
Accounts receivable (683,611) 554,573
Other current assets 393,501 (62,915)
Other assets (77,507) 143,919
Changes in liabilities - increase (decrease)
Accounts payable 919,443 (732,012)
Accrued expenses (394,982) (293,021)
Other (118,746) 21,196
--------- ---------
Net Cash Provided By (Used In) Operating Activities 209,160 (2,836)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (7,858) (75,022)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (140,616) (165,364)
Proceeds from short-term bank borrowing 320,000 --
--------- ---------
Net Cash provided by (Used In) Financing Activities 179,384 (165,364)
--------- ---------
Net Increase (Decrease) In Cash And Cash Equivalents 380,686 (243,222)
Cash and cash equivalents, at beginning of period 254,518 392,516
--------- ---------
Cash and cash equivalents, at end of period $ 635,204 $ 149,294
========= =========
See accompanying notes to condensed consolidated financial statements.
5
KUPPER PARKER COMMUNICATIONS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2005
1. These unaudited interim financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted. It is therefore suggested
that these unaudited interim financial statements be read in conjunction
with the company's audited financial statements and notes thereto for the
fiscal year ended October 31, 2004 included in the company's Form 10-KSB.
Results of operations for interim periods are not necessarily indicative of
annual results.
2. These statements reflect all adjustments consisting of normal recurring
accruals, which, in the opinion of management, are necessary for a fair
presentation of the Company's financial position and results of operations
and cash flows for the periods presented.
3. A reconciliation of shares used calculating basic and diluted earnings per
share for the three months ended January 31, 2005 and 2004 are as follows:
2005 2004
--------- ---------
Basic 5,909,653 5,816,907
Effect of assumed conversion of stock options 215,692 253,695
--------- ---------
Diluted 6,125,345 6,070,602
========= =========
4. The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 148 (SFAS 148), "Accounting for
Stock-Based Compensation - Transition and Disclosure" effective November 1,
2002. SFAS 148 amends Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based compensation and also amends the
disclosure requirements of SFAS 123 to require prominent disclosures in
both annual and interim financial statements about the methods of
accounting for stock-based employee compensation and the effect of the
method used on reported results. As permitted by SFAS 148 and SFAS 123, the
Company continues to apply the accounting provisions of APB 25, and related
interpretations, with regard to the measurement of compensation cost for
options granted under the Company's equity compensation plan. No employee
compensation expense has been recorded as all options granted had an
exercise price equal to the market value of the underlying common stock on
the date of grant. The pro forma effect on our results of operations, had
expense been recognized using the fair value method described in SFAS 123,
using the Black-Scholes option-pricing model, is shown below.
6
FOR THE THREE MONTHS
ENDED JANUARY 31
--------------------
2005 2004
------- --------
Net income as reported $79,547 $205,652
Deduct: total stock-based compensation expense
determined under the fair value method -- (2,503)
------- --------
Pro forma net income $79,547 $203,149
======= ========
Basic earnings per share - as reported $ 0.01 $ 0.04
======= ========
Diluted earnings per share - as reported $ 0.01 $ 0.03
======= ========
Basic earnings per share - pro-forma $ 0.01 $ 0.03
======= ========
Diluted earnings per share - pro forma $ 0.01 $ 0.03
======= ========
5. Intangibles consists of the following:
JANUARY 31, OCTOBER 31,
2005 2004
----------- -----------
Trademarks $ 10,690 $ 10,690
Non-contractual customer relationships 983,998 983,998
Trade Name 135,065 135,065
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1,129,753 1,129,753
Less accumulated amortization (552,373) (512,459)
---------- ----------
$ 577,380 $ 617,294
========== ==========
Amortization of intangibles charged against income amounted to $39,914 for
the quarter ended January 31, 2005 and $44,901 for the quarter ended
January 31, 2004.
Scheduled future amortization expense is as follows:
YEAR AMOUNT
---- --------
2005 $124,561
2006 105,328
2007 85,527
2008 69,857
2009 69,857
Thereafter 122,250
--------
$577,380
========
6. In December, 2004, KPCG renegotiated its debt with the previous owners of
its wholly-owned subsidiary, Christopher Thomas Associates, Inc. The terms
of the agreement call for a cash settlement of $651,000. The effect of the
agreement is a reduction of the Company's long-term debt by $638,000. The
agreement was subject to the approval by the Company's commercial bank of a
debt restructuring and consolidation plan. The bank approved this plan on
February 28, 2005 and the cash settlement payments were made on March 8,
2005. As a result, the Company recognized a gain on restructuring equal to
the amount of debt reduction in March 2005.
7
7. In December 2004, KPCG renegotiated the terms of its acquisition of Jaffe &
Associates, Inc. The original agreement called for $350,000 to be paid by
the Company in the form of in-kind professional services to be performed
for pre-existing clients of Jaffe & Associates, Inc. The revised agreement
calls for three cash payments to be paid during fiscal 2005 totaling
$350,000. In return, the Company will receive the entire revenue billed to
the pre-existing clients of Jaffe & Associates, Inc. for professional
services provided. The first payment of $120,000 was made in December 2004.
8. In March 2005, the Company replaced certain bank loans with a new loan for
$1,900,000. The new loan matures on February 28, 2007. The new loan also
provided funds to settle the renegotiated payoff of $651,000 with the
former owners of Christopher Thomas Associates, Inc. The terms of the new
loan call for monthly principal payments of $35,000 along with interest on
the unpaid balance at 0.25% above the bank's prime interest rate. In
addition, the Company is required to meet minimum financial targets for
fiscal 2005, which are: after-tax net earnings of $61,400, $94,600,
$111,700 and $399,800 for the three months ended January 31, 2005, the six
months ended April 30, 2005, the nine months ended July 31, 2005 and the
fiscal year ended October 31, 2005 respectively. The Company must also
maintain a certain debt service coverage as required by the agreement. The
line of credit was not affected by this loan consolidation. As of January
31, 2005, the Company was in compliance with the bank's debt covenants.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
SPECIAL NOTE OF FORWARD-LOOKING STATEMENTS
This document includes forward-looking statements within the meaning of the
federal securities laws. When we use the words "may", "plan", "will",
"believes", "anticipates", "intends", "expects" and other similar expressions in
this document, we are making forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause our actual results to be materially different from any future results
expressed or implied by these statements. Such factors include, among other
things, the following: history of operating losses; the ability to integrate
acquired companies; variability of operating results; the ability to attract and
retain qualified professionals; the cost and timing of domestic and
international expansion; the ability to manage future growth, if any; dependence
on key management personnel; and changes in government regulation. Investors are
also directed to consider other risks and uncertainties discussed in other
reports previously and subsequently filed by us with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date hereof. We undertake no obligation
to publicly release the results of any revisions to these forward-looking
statements, which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
In light of these and other uncertainties, the forward-looking statements
included in this document should not be regarded as a representation by us that
our plans and objectives will be achieved.
8
OVERVIEW
Management has seen some opportunities in four key areas. These include:
1) Developing new business, especially in Boston and New York
2) Continued growth in interactive services
3) Continued growth in public relations services
4) Growing client budgets in branded products
We are pursuing various opportunities with special attention in Boston and New
York. A number of prospects have been contacted and discussions are proceeding.
Our goal is to realize growth in these areas in the coming quarter and we have a
number of new opportunities to do that.
Management is still seeing strong and steady growth in interactive services. We
have added account support, technical specialties, and additional manpower to
this effort. A solid number of prospects leads us to believe that demand for
interactive services will continue in the foreseeable future, and although
overall client budgets have lessened per project, we expect there are many more
projects available for development.
The Company has seen continued demand for public relations services. As clients
continue to re-evaluate the cost of general advertising, management is finding a
greater interest and reliance in the usage of public relations services and our
sales effort is seeing continued success.
Finally, management believes that the biggest opportunity across the board is a
significant increase in client budgets centered on branded products. Numerous
clients have announced to us increased budgets for brand development.
In fiscal 2004, management did a solid job of minimizing expenses and working on
margin improvement. In fiscal 2005, management is expecting to see organic
growth in the core business and expansion via new account acquisition.
After a solid fiscal 2004, management is focusing on progress in fiscal 2005.
These opportunities discussed above will be the major focus for management in
the coming fiscal year.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JANUARY 31, 2005
Revenues for the three months ended January 31, 2005 were down by 8.3% from the
same period in 2004.
Salaries and Benefits expenses were down from $1,821,480 in the first three
months of fiscal 2004 to $1,642,752 in the first three months of fiscal 2005, a
decrease of $178,278 or 9.8%. The decrease is the result of staff reductions
made by the Company during fiscal 2004.
9
Office and General Expenses increased by 7.5% or $44,439 from $592,064 in the
first quarter of 2004 to $636,503 in the first quarter of 2005. The increase was
due to the fact that in the first quarter of 2004, the company received $60,000
from a legal claim and $38,326 due to cancellation of an insurance policy.
Excluding those 2004 expense reductions, first quarter 2005 expenses are down by
$53,887 compared to the first quarter of fiscal 2004. The decrease was primarily
due to lower depreciation and amortization expenses for the period compared to
2004.
Interest income was up by $184 due to having more cash invested in overnight
interest-bearing securities. Interest expense was down from $40,516 in the first
quarter of 2004 to $21,878 in the first quarter of 2005 due to generally lower
debt levels during the period.
During the first quarter of 2004, the Company did not record a tax provision
because it reversed previously established valuation allowances equal to the
amount of the net operating losses utilized. At the end of fiscal 2004, the
Company eliminated its valuation allowance. As a result, the Company recognized
a tax provision in the first quarter of 2005 of $59,749.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2005, KPCG's cash and cash equivalents totaled $635,204
compared to $149,294 at October 31, 2004. The increase was principally due to
operating activities.
Operating Activities: Kupper Parker's funds from operating activities consist
primarily of net income adjusted for non-cash items and changes in operating
assets and liabilities. Cash provided by operating activities was $209,160 in
the first three months of 2005 compared to cash used in operating activities of
$2,836 in the first three months of 2004. The principal reason for the changes
is that while net income for first three months of 2005 was $126,105 lower than
the first three months of 2004, the relationship between the other assets and
liabilities improved by $338,101 in the first quarter of 2005. Operating cash
flows are impacted by the relationship of accounts receivable to accounts
payable, particularly those of acquisitions. KPCG's policy is to bill and
collect monies from its clients prior to payments due to the media.
Investing Activities: Cash used in investing activities was $7,858 in the first
three months of 2005 compared to $75,022 in 2004. In both years, this was for
the purchase of property and equipment.
Financing Activities: During the first three months of 2005, the Company paid
$140,616 in scheduled long-term debt payments compared to $165,364 in the first
three months of 2004. The Company borrowed $320,000 on its line of credit during
the first quarter of 2005 for operating needs. $250,000 was repaid in early
February. At January 31, 2005, the Company was in compliance with all covenants
and conditions related to its bank debt agreements.
10
CERTAIN TRENDS AND UNCERTAINTIES
The following discussion highlights trends and uncertainties, in addition to
those discussed elsewhere in this Form 10-QSB, that could materially impact our
business, results of operations and financial condition.
Economic Slowdown, Terrorism, and Armed Conflict: The events of September 11,
2001 ultimately proved to cause a severe downturn in the overall economy
resulting in decreased spending by our clients. Although we do not believe that
the recent events in Iraq have resulted in any material changes to the Company's
business and operations since October 31, 2004, it is difficult to assess the
impact the armed conflict with Iraq, combined with the lingering perception of
general economic slowdown, will have on future operations. These events could
result in reduced spending by customers and advertisers, which could reduce our
revenues and operating cash flow. Additionally, an economic slowdown could
affect our ability to collect accounts receivable. If we experience reduced
operating revenues, it could negatively affect our ability to make expected
capital expenditures and could also result in our inability to meet our
obligations under our financing agreements. These developments could also have a
negative impact on our financing and variable interest rate agreements through
disruptions in the market or negative market conditions. Terrorism and related
events may have other adverse effects on the Company in ways that cannot be
presently predicted.
ITEM 3 - CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, we have
carried out an evaluation of the effectiveness of the design and operation of
our company's disclosure controls and procedures as of January 31, 2005. This
evaluation was carried out under the supervision and with the participation of
our company's management, including our company's Chief Executive Officer along
with our company's Chief Accounting Officer. Based upon that evaluation, our
company's Chief Executive Officer along with our company's Chief Accounting
Officer concluded that our company's disclosure controls and procedures are
effective. There have been no significant changes in our company's internal
controls or in other factors, which could significantly affect internal control
subsequent to the date we carried out our evaluation.
Disclosure controls and procedures and other procedures are designed to ensure
that information required to be disclosed in our reports filed or submitted
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time period specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934 is accumulated and communicated to management including our Chief
Executive Officer and Chief Accounting Officer as appropriate, to allow timely
decisions regarding required disclosure.
11
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no material legal proceedings.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
(a) None
(b) None
ITEM 6 - EXHIBITS
31.1 Certification of Chief Executive Officer to Section 302 of The
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Accounting Officer Pursuant To Section 302 Of
The Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Accounting Officer pursuant to section 906 of
the Sarbanes-Oxley Act of 2002
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of St. Louis, State of
Missouri on March 16, 2005.
Kupper Parker Communications, Incorporated
By: /s/ Randolph Seeling March 16, 2005
--------------------------------- Date
Randolph Seeling
Chief Accounting Officer
By: /s/ Bruce Kupper March 16, 2005
--------------------------------- Date
Bruce Kupper
Chief Executive Officer
13