November 11, 2009

 

Ms. Jennifer Thompson

Branch Chief

United States of America

Securities and Exchange Commission

Division of Corporate Finance

Washington, D.C. 20549

 

Dear Ms. Thompson:

 

In response to your letter of October 7, 2009 regarding:

 

We acknowledge:

Our responses to your inquiries are listed in the order and numbered to correspond to your letter dated October 7, 2009:

 

Form 10-K for the Fiscal Year ended December 31, 2008

 

Consolidated Statements of Cash Flows, page F-8

 

 

 

Response:

 

The following tables shows how the amounts in the 2007, 2008 and 2009 interim period Consolidated Statement of Cash flows would have changed had we properly applied the guidance in SFAS 95. The recalculated balances are a reclassification of amounts between cash provided by (used in) operating, investing and financing activities as well, as the effect of exchange rate changes on cash and cash equivalents. The recalculated amounts have no impact on net income (loss) or earning per share for the years or interim periods presented.

 

 

 

 

 

 

 

 

 

 

While percentage and numerical thresholds are often used as a basis for determining materiality, SAB Topic 1:M and SAB 99 states that exclusive reliance on percentage or numerical thresholds has no basis in the accounting literature or the law. Materiality concerns the significance of an item to users of the financial statements. A matter is “material” if there is substantial likelihood that a reasonable person would consider it important. The omission or misstatement of an item in a financial report is material if in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.

 

In determining whether the changes in the reported cash flows were material we considered various relevant circumstances and qualitative characteristics such as:

 

 

 

 

 

 

 

We considered the above factors along with the concept that a matter is “material” if there is a substantial likelihood that a reasonable person would consider it important. Given these considerations, it is the Company’s judgment that the presentation of the cash flow statement did not have an effect on the above-mentioned circumstances.

 

 

 

 

 

 

In summary management does not believe that the Company’s previously filed financial statements should be restated or otherwise amended. The effect of the incorrect calculations regarding the effect of exchange rate changes on cash are not material to the extent that they would have modified a reasonable person’s assessment of the financial condition of the Company, based on our circumstances and qualitative assessment.

 

 

Response:

 

The minority interest reported on the statement of operations of ($163,000) and $47,000 for the 2008 and 2007 annual periods are the correct amounts. The ($188,000) and $178,000 as reported on the statement of cash flows as minority interest in (loss) earnings of subsidiaries for the 2008 and 2007 annual periods should have been reported as ($163,000) and $47,000. The difference of ($25,000) and $131,000 for 2008 and 2007 reflects the change in the minority interest account due to balance sheet misclassification recorded to the minority interest account as opposed to accrued expenses. Had the cash flows been presented correctly, reported cash flows from operating activities would not have changed as the difference of $(163,000) and $47,000 would have been reflected in the operating activities section of the cash flow statement under changes in operating assets and liabilities as demonstrated below.

 

 

 

 

Notes to Consolidated Financial Statements

 

Note 2: Summary of Significant Accounting Policies, page F-10

 

Principles of Consolidation, page F-10

 

 

Response:

 

As noted in your recent comment letter, there are five subsidiaries of the Company where its total investment (excluding cumulative losses) has exceeded 10% of total assets in each of the five entities as summarized below:

 

 

In each entity, as anticipated at the inception of the entity, the Company was required, and has continued, to provide subsequent investments in order for the entity to continue business in their respective markets. The Company anticipates at the present time that additional equity investments may be required into each of the subsidiaries consolidated under this guidance.

 

 

In accordance with Paragraph 7(d) of FIN 46R, the Company reconsiders whether each of these entities should continue to be treated as a VIE whenever “the entity receives an additional equity investment that is at risk...”

 

The Company believes that each of these five entities are and continue to be VIE’s under Paragraph 5(a) of FIN 46R.

 

Our review of each investment in the above five entities clearly demonstrates that the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support. The Company’s total equity investment at risk clearly meets the requirements of VIE, as the investments includes only equity investments in an entity where the Company participates significantly in profits and losses of the entity and the Company’s voting rights are not proportional to its obligation to absorb the expected losses of its VIE.

 

The Company believes that, in accordance with paragraph 10 of FIN 46R all five VIE’s noted above are high-risk entities in which, although the Company’s equity investment at risk is greater than 10 percent of such VIE’s assets, each such entity will likely require additional investment in order to finance its activities without subordinated support.

 

When looking at each subsidiary individually;

 

 

 

 

 

In each of these instances the Company believes it is meeting the requirements of FIN 46R, and in fact the Company believes it also will have satisfied the requirements of SFAS No.167 when it becomes effective November 15, 2009. The Company has a controlling financial interest on the basis of the provisions in paragraphs 14A-14G of SFAS No.167. The Company provides to each VIE, at significant cost to the Company, (1) the Company’s Internet based operating, accounting and reporting systems (including language translations, ongoing client and financial reports and ongoing IT support), (2) the Company’s financial reporting and disclosure controls and procedures, (3) accounting and auditing support, and (4) management teams in its corporate offices responsible for supporting and monitoring the management, sales, marketing and operations of the VIE and maintaining consistency with its other subsidiaries.. As stated in our filings, a key to the operation of these entities is that the VIE’s computer operating systems (in support of the scheduling, tracking and reporting of the contracted merchandising services, accounting and billing) are provided by and under the control of the Company, and the VIE would at a minimum experience significant financial hardship if it was unable to use the Company’s operating systems.. In addition, the Company is obligated to absorb losses of or receive benefits from the entity that could potentially be significant to the VIE.

 

Note 9. Related-Party Transactions, page F-23

 

 

Response:

 

As we stated in our previous response letter on September 18, 2009, the contracted relationships between the Company and its Affiliates are normally “slightly” more favorable to the Company than market rates, terms or conditions. Periodically, the Company engages an outside firm to conduct a survey of fees charged by comparable/national labor sourcing firms as a comparison to the rates charged by its Affiliates. These comparisons do show that the rates negotiated with the Affiliates are in fact slightly less than those charged by unrelated vendors providing similar services. For 2008 and 2007, the Company’s cost of

 

revenue would have increased by $600,000 or approximately 3.5% in both years if the Company would have used an unaffiliated entity to provide comparable services. The Company will include some qualitative disclosure of these relationships in future filings, beginning with the 10-Q filing for the quarter ended September 30, 2009.

 

Note 11. Geographic Data, page F-27

 

 

Response:

 

As background information it is important to understand the Company model. Basically, the Company provides merchandising and other marketing services world wide to manufacturers, distributors and retailers, primarily in mass merchandisers, electronic and drug store chains, convenience and grocery stores, as well as related technology services and marketing research. The Company has supplied these services in the United States since certain of its predecessors were formed in 1979 and internationally since it acquired its first international subsidiary in Japan in July of 2000. In each market in which the Company operates the margin performance varies by client and nature of services offered within each market and as such the economic characteristics will vary from year to year as the mix of business continually changes.  

 

Management believes the current trend in business toward globalization fits well with its expansion model. As companies expand into foreign markets they will need assistance in merchandising or marketing their products. As evidenced in the United States, retailer and manufacturer sponsored merchandising and marketing programs are both expensive and inefficient. The Company also believes that the difficulties encountered by these programs are only exacerbated by the logistics of operating in foreign markets. This environment has created an opportunity for management to exploit its Internet-based technology and business model world wide. In order to cultivate foreign markets and expand our merchandising and marketing services business outside of the United States, modify the necessary systems and implement its business model worldwide, and insure a consistent approach to our merchandising and marketing efforts world wide, the company has divided its world focus into two geographic areas, the United States, which is the sales territory for the Domestic Merchandising Services Division, and all locations outside the Untied States, which are the sales territories for the International Merchandising Services Division. To that end, the Company established management teams in its corporate offices that are responsible to insure that the operating systems and approach towards sales and marketing efforts are consistent in all locations and that all locations function similarly. The nature of the products and services offered are identical across all markets serviced by the Company including the method by which the Company distributes and reports on its products and services offered, however, the mix of these services (merchandising versus marketing services versus in-store event staffing vs research etc.) could vary dramatically from year to year or from market to market.

 

Merchandising services primarily consist of regularly scheduled and special project services provided at the store level, and the Company may be engaged by either the retailer or the manufacturer. Those services may include restocking and adding new products, removing spoiled products and resetting categories “on the shelf” in accordance with client or store schematics, confirming and replacing shelf tags, and setting new, sale or promotional product displays and advertising and providing in-store event staffing. Other merchandising services include whole store or departmental product sets or resets, including new store openings, new product launches, special seasonal or promotional merchandising, focused product support and product recalls. The type or class of customers (retailers and/or manufactures) is identical across all markets for both products and services offered.

 

A key to the Company’s international expansion strategy is in its internally developed capability to translate all of our current and future proprietary Internet-based logistical, communications and reporting software applications into any language for any market in which it operates or would likely to operate in the future as expansion efforts continue. Through its IT operations currently located in Auburn Hills, Michigan, the Company provides worldwide access to its proprietary logistical, communications and reporting software to its world wide operations on a 24/7/365 basis. The production processes employed world wide are identical in each market and as enhancements are implemented or new production programs are developed, they are and continue to be offered and utilized in all markets serviced by the Company.

 

As requested, the attached Exhibit A provides historical margin performance by geographic location. The Company measures the performance of its Domestic and International divisions using the same metrics. The primary measurement utilized by management is at the operating profit level as the Company is focused on reinvesting operating profits back into the local markets in an effort to improve market share and continued expansion efforts. The Company manages each market at the operating profit level as historical experience has shown that this is the key indicator to ensure long-term growth and profitability.

 

 

 

The US markets, which have been in operation for over 30 years, are mature markets with consistent performance. While there have been recent declines in revenues, management has maintained and improved gross margin while focusing on cost reductions in selling, general and administrative expenses to ensure long-term profitability in these markets.

 

The international markets, which are in their early years of development, have experienced various fluctuations in both revenue and margin performance as the products, services and clients mix vary year to year, within each market. Management’s focus is consistent throughout the world in that it strives to stabilize revenue, gross margin and spending to insure the long term profitable growth in these markets. Key factors that have influenced the most recent performance in these markets are:

 

 

 

 

While the margin performance varies from period to period, the conditions are primarily driven by the mix of business and the degree of full year operations of each of location as discussed above.

 

Hopefully, the above responses have satisfactorily answered all of your questions. If you have further questions, please contact me at 914-332-4100.

 

Sincerely,

/s/ James R. Segreto
James R. Segreto

Chief Financial Officer