-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KZV8FunI+1FOEXmHgWqcBSK/8cuVIVvwglbmjEF7KetKWEW5IfuP4BFbry6YWLzf vtj3NVpPD5Xnq8dNZkxsJw== /in/edgar/work/0000014280-00-000052/0000014280-00-000052.txt : 20001115 0000014280-00-000052.hdr.sgml : 20001115 ACCESSION NUMBER: 0000014280-00-000052 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARKETING SERVICES GROUP INC CENTRAL INDEX KEY: 0000014280 STANDARD INDUSTRIAL CLASSIFICATION: [7389 ] IRS NUMBER: 880085608 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01768 FILM NUMBER: 767702 BUSINESS ADDRESS: STREET 1: 333 SEVENTH AVENUE STREET 2: 20TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 2125947688 MAIL ADDRESS: STREET 1: 333 SEVENTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10001 FORMER COMPANY: FORMER CONFORMED NAME: ALL-COMM MEDIA CORP DATE OF NAME CHANGE: 19950823 FORMER COMPANY: FORMER CONFORMED NAME: SPORTS TECH INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BRISTOL HOLDINGS INC DATE OF NAME CHANGE: 19920518 10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 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 MARKETING SERVICES GROUP, INC. ------------------------------ (Exact Name of Registrant as Specified in Its Charter) Nevada 88-0085608 ------ ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 333 Seventh Avenue, 20th Floor New York, New York 10001 ------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (917) 339-7100 ------------- ----------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ APPLICABLE ONLY TO CORPORATE ISSUERS State number of shares outstanding of each of the issuer's classes of common equity as of the latest practical date: As of November 7, 2000 there were 32,125,343 shares of the Issuer's Common Stock, par value $.01 per share outstanding. MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES TABLE OF CONTENTS FORM 10-Q REPORT SEPTEMBER 30, 2000 PART I - FINANCIAL INFORMATION Page ---- Item 1 Interim Condensed Consolidated Financial Statements (unaudited) Condensed Consolidated Balance Sheets as of September 30, 2000 and June 30, 2000 (unaudited) 3 Condensed Consolidated Statements of Operations for the three months ended September 30, 2000 and 1999 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2000 and 1999 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6-10 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 11-13 PART II - OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K (a) Exhibits (b) Reports on Form 8-K Signatures Exhibit 27 Financial Data Schedule PART I - FINANCIAL INFORMATION Item 1 - Interim Condensed Consolidated Financial Statements (unaudited) ------------------------------------------------------------------------
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) September 30, 2000 June 30, 2000 ASSETS ------------------ ------------- - ------ Current assets: Cash and cash equivalents $2,473,970 $9,903,799 Accounts receivable billed, net of allowance for doubtful accounts of $2,349,152 and $2,287,857 as of September 30, 2000 and June 30, 2000, respectively 41,904,070 38,324,777 Accounts receivable unbilled 6,022,049 3,834,057 Inventories 5,603,910 4,574,046 Note receivable-current portion 173,359 173,359 Other current assets 5,794,477 4,428,673 --------- --------- Total current assets 61,971,835 61,238,711 Investments at cost 7,112,414 7,445,500 Property and equipment, net 18,231,185 18,690,478 Intangible assets, net 152,730,757 154,016,073 Note receivable 652,010 652,010 Other assets 3,630,638 3,141,343 --------- --------- Total assets $244,328,839 $245,184,115 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Short-term borrowing $10,291,059 $9,745,053 Accounts payable-trade 32,004,632 30,098,401 Related party payable - 5,000,000 Accrued expenses and other current liabilities 14,556,641 9,531,728 Current portion of capital lease obligations 222,062 234,032 Current portion of long-term obligations 7,404,546 6,199,820 --------- --------- Total current liabilities 64,478,940 60,809,034 Capital lease obligations, net of current portion 340,771 543,517 Long-term obligations, net of current portion 34,743,962 35,613,194 Other liabilities 1,937,239 2,433,450 Net liabilities of discontinued operations 8,815,043 18,346,721 --------- ---------- Total liabilities 110,315,955 117,745,916 ----------- ----------- Convertible preferred stock - $.01 par value; 150,000 shares authorized; 30,000 shares of Series E issued and outstanding 29,417,279 29,417,279 Stockholders' equity: Common Stock - $.01 par value; 75,000,000 authorized; 30,442,726 and 30,442,488 shares issued as of September 30, 2000 and June 30, 2000, respectively 304,427 304,425 Additional paid-in capital 207,003,439 194,712,085 Common stock to be issued 13,139 - Accumulated deficit (100,673,690) (95,601,880) Accumulated other comprehensive loss (658,000) - Less: 423,894 shares of common stock in treasury, at cost (1,393,710) (1,393,710) ---------- ---------- Total stockholders' equity 104,595,605 98,020,920 ----------- ---------- Total liabilities and stockholders' equity $244,328,839 $245,184,115 ============ ============
See Notes to Condensed Consolidated Financial Statements. MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (unaudited) 2000 1999 ---- ---- Revenues $47,640,098 $27,106,677 ----------- ----------- Operating costs and expenses: Direct costs 25,833,672 17,819,178 Salaries and benefits 17,426,498 7,952,566 Selling, general and administrative 4,436,508 1,972,041 Depreciation and amortization 2,907,343 949,469 --------- ------- Total operating costs and expenses 50,604,021 28,693,254 Loss from operations (2,963,923) (1,586,577) Interest expense and other, net (2,066,472) (479,063) Loss from continuing operations before income taxes (5,030,395) (2,065,640) Provision for income taxes (41,415) (13,284) ------- ------- Loss from continuing operations (5,071,810) (2,078,924) Loss from discontinued operations - (769,246) ---------- ----------- Net loss $(5,071,810) $(2,848,170) Gain on redemption of preferred stock of discontinued subsidiary 8,593,846 - --------- --------- Net income available to common stockholders $3,522,036 $(2,848,170) ========== =========== Basic earnings per share: Continuing operations $0.12 $(0.09) Discontinued operations - $(0.03) ----- ------- Basic earnings per share $0.12 $(0.12) ===== ======= Weighted average common shares outstanding (basic) 30,072,273 22,972,516 Diluted earnings per share: Continuing operations $0.08 $(0.09) Discontinued operations - $(0.03) ----- ------- Diluted earnings per share $0.08 $(0.12) ===== ======= Weighted average common shares and equivalents outstanding (diluted) 44,244,284 22,972,516 ========== ========== See Notes to Condensed Consolidated Financial Statements. MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (unaudited) 2000 1999 ---- ---- Operating activities: Net loss $(5,071,810) $(2,848,170) Add: loss from discontinued operations - 769,246 ----------- ----------- Loss from continuing operations (5,071,810) (2,078,924) Adjustments to reconcile loss to net cash used in operating activities: Depreciation 1,020,046 249,106 Amortization 1,887,297 700,363 Amortization of debt issuance costs 530,611 - Provision for bad debts 200,425 34,500 Gain on sale of minority interest - (45,163) Compensation expense on stock option grants - 103,155 Amortization of discount on note receivable - 160,313 Changes in assets and liabilities: Accounts receivable (6,292,623) (1,911,198) Inventory (1,029,864) - Other current assets (1,365,805) 37,020 Other assets (612,357) (133,054) Accounts payable - trade 1,906,233 889,293 Accrued expenses and other current liabilities 4,528,701 (1,597,290) --------- ----------- Net cash used in operating activities (4,299,146) (3,591,879) ---------- ---------- Investing activities: Purchases of property and equipment (560,753) (469,465) Purchases of capitalized software (271,219) - Proceeds from sale of MFI - 556,984 Investment in internet companies - (6,555,000) -------- ---------- Net cash used in investing activities (831,972) (6,467,481) -------- ---------- Financing activities: Proceeds from exercises of stock options 366 205,426 Proceeds from private placement of common stock, net - 30,733,259 Net proceeds from (repayments on) credit facilities 546,006 (3,553,315) Repayment of capital lease obligation (214,716) (28,445) Repayment of related party note payable (5,000,000) (5,000,000) Repayments of long term debt (402,818) (313,279) -------- -------- Net cash (used in) provided by financing activities (5,071,162) 22,043,646 Net cash provided by (used in) discontinued operations 2,772,451 (576,719) --------- -------- Net (decrease) increase in cash and cash equivalents (7,429,829) 11,407,567 Cash and cash equivalents at beginning of period 9,903,799 3,285,217 --------- --------- Cash and cash equivalents at end of period $2,473,970 $14,692,784 ========== =========== See Notes to Condensed Consolidated Financial Statements. MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Marketing Services Group, Inc. and Subsidiaries ("MSGi" or the "Company"). These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company's Form 10-K for the year ended June 30, 2000 and the historical consolidated financial statements and related notes included therein. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary to present fairly the condensed consolidated financial position, results of operations and cash flows of the Company. Certain information and footnote disclosure normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. Operating results for the three-month period ended September 30, 2000 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2001. Certain reclassifications have been made in the fiscal 2000 financial statements to conform to the fiscal 2001 presentation. As more fully discussed in Note 10, WiredEmpire is presented as a discontinued operation. 2. EARNINGS PER SHARE Stock options and warrants in the amount of 3,336,463 shares for the three months ended September 30, 1999 were not included in the computation of diluted EPS as they were antidilutive as a result of net losses during the period. Weighted average common shares and equivalents on a diluted basis for the three months ended September 30, 2000 was calculated as follows: Weighted average common shares 30,072,273 Contingent warrants 10,670,000 Convertible preferred stock 2,450,980 Stock options and warrants 1,051,031 --------- Total 44,244,284 ========== The contingent warrants related to the December 1997 investment by GE Capital. The warrants are subject to reduction or cancellation based on an earnings per share test at the end of the Company's current fiscal year. If the Company exceeds $0.39 per share, the warrants are cancelled. If earnings per shares is between $0.38 and $0.18 per share, the warrants are reduced according to a predefined table in the original agreement. If earnings per share is below $0.13, the full 10,670,000 become exercisable. The Company expects that all or most of the warrants will be terminated in accordance with the aforementioned earnings per share guidelines. Those expectations, however, are based upon a number of factors which may cause actual results to be materially different from expectations. The Series E Preferred Stock is convertible into shares of MSGi common stock at the rate of $12.24 per share of Series E preferred stock. Stock options and warrants are based upon the treasury stock method. Stock options in the amount of 4,865,787 shares for the three months ended September 30, 2000 were not included in the computation of diluted EPS as they are antidilutive. 3. COMPREHENSIVE INCOME Comprehensive income consists of the following for the quarter ended September 30, 2000: Net loss $(5,071,810) Other comprehensive income, net of tax: Unrealized loss on securities (658,000) -------- Comprehensive loss $(5,729,810) =========== 4. INVENTORIES Inventory consists of the following at September 30, 2000 and June 30, 2000: September 30, 2000 June 30, 2000 ------------------ ------------- Work in process $4,381,668 $4,076,417 Raw materials and supplies 1,222,242 497,629 --------- ------- Total $5,603,910 $4,574,046 ========== ========== 5. SHORT TERM BORROWINGS At September 30, 2000, a subsidiary of the Company was in violation of certain net worth covenants and has received the applicable waivers of violation from the lender. 6. LIQUIDITY The Company has continued to experience operating losses and negative cash flows. To date, the Company has funded its operations with public and private equity offerings, and external financing through debt issuance. However, management believes that the Company's current cash resources and credit facility together with expected revenue growth and planned cost reductions will be sufficient to fund the Company's operations for the next twelve months. Failure to generate sufficient revenue or achieve planned cost reductions could have a material adverse effect on the Company's ability to continue as a going concern and to achieve its intended business objectives. 7. CONTINGENCIES AND LITIGATION In June 1999, certain employees of SD&A voted against representation by the International Longshore and Warehouse Union ("ILWU"). The ILWU has filed unfair labor practices with the National Labor Relations Board ("NLRB") alleging that the Company engaged in unlawful conduct prior to the vote. The NLRB has issued a complaint seeking a bargaining order and injunctive relief compelling the Company to recognize and bargain with the ILWU. The Company intends to vigorously defend against these charges. An unfavorable finding will not have any direct financial impact on the Company. An employee of Metro Fulfillment, Inc. ("MFI"), which, until March 1999, was a subsidiary of the Company, filed a complaint in the Superior Court of the State of California for the County of Los Angeles, Central District, against MSGi and current and former officers of MSGi. The complaint seeks compensatory and punitive damages in connection with the individual's employment at MFI. The Company believes that the allegations in the complaint are without merit and, the Company has asserted numerous defenses, including that the complaint fails to state a claim upon which relief can be granted. The Company intends to vigorously defend against the lawsuit. An estimate of the possible loss cannot be determined. 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 pending legal matters in future periods will have a material effect on the financial condition, results of operations or cash flows. 8. SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITITES During the quarter ended September 30, 2000, the Company received $330,762 of unsecured financing to acquire additional capitalized software. During the quarter ended September 30, 1999, the Company entered into capital lease obligations for approximately $74,300 for certain computer equipment. During the quarter ended September 30, 1999, the Company sold its investment in Metro Fulfillment, Inc. for a Note Receivable in the amount of $222,353. 9. INVESTMENTS In September 2000, the Company provided a valuation allowance on its investment in Fusion Networks of approximately $658,000 adjusting the investment to the fair value as determined by the quoted market price. The allowance was recorded through equity. During the quarter ended September 30, 2000, the Company acquired equity interests of $324,914 in certain companies in exchange for services. The MSGi internet investment strategy has subsequently been suspended until further notice. 10. DISCONTINUED OPERATIONS On October 1, 1999, the Company completed an acquisition of approximately 87% of the outstanding common stock of Cambridge Intelligence Agency, Inc. for a total purchase price of $2.4 million which consisted of $1.6 million in common stock of the Company and an interest in the Company's Permission Plus software and related operations valued at $.8 million, subject to certain adjustments. Concurrently with this acquisition, the Company formed WiredEmpire, a licensor of email marketing tools. Effective with the acquisition, Cambridge Intelligence Agency and the Permission Plus assets were merged into WiredEmpire. 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 will shut down the operations anticipated to be completed by the end of January 2001. The estimated losses associated with WiredEmpire were included in the results of operations for the year ended June 30, 2000. There were no adjustments to the estimated losses for the quarter ended September 30, 2000. The assets and liabilities of WiredEmpire have been separately classified on the condensed consolidated balance sheets as "Net liabilities of discontinued operations." A summary of these assets and liabilities at September 30, 2000 and June 30, 2000 were as follows: September 30, 2000 June 30, 2000 ------------------ ------------- Current assets $4,055,264 $ 9,970,510 Non current assets 1,154,923 606,086 Current liabilities (7,599,660) (10,193,618) Preferred stock (6,425,570) (18,729,699) ----------- ------------ Net liabilities of discontinued operations $(8,815,043) $(18,346,721) ============ ============= In connection with the discontinued operations of WiredEmpire, the Company has offered to redeem the preferred shares in exchange for MSGi common shares. As of September 30, 2000, the Company exchanged 1,313,863 shares of unregistered MSGi common stock for WiredEmpire preferred stock. The exchange resulted in a gain of $8,593,846, which was recorded through equity and is included in net income available to common stockholders for the three months ended September 30, 2000. Subsequent to September 30, 2000, additional shares of common stock were exchanged for WiredEmpire preferred stock (see Subsequent Events, Note 13). 11. SEGMENT INFORMATTION In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" segment information is being reported consistent with the Company's method of internal reporting. In accordance with SFAS No. 131, operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. MSGi is organized primarily on the basis of products broken down into separate subsidiaries. Based on the nature of the services provided and class of customers, as well as the similar economic characteristics, MSGi's subsidiaries have been aggregated. No single customer accounted for 10% or more of total revenues. MSGi earns 100% of its revenue in the United States. Supplemental disclosure of revenue by product: Quarter Ended September 30, ------------------------------- 2000 1999 ---- ---- List sales and services $21,050,326 $18,593,394 Marketing communication services 17,510,441 - Database marketing 4,205,154 4,373,659 Telemarketing 4,507,485 3,774,280 Website development and design 862,346 360,350 Other 28,705 4,994 Inter-company revenue elimination (524,359) - --------- --------- Consolidated total $47,640,098 $27,106,677 =========== =========== 12. RECENT ACCOUNTING PRONOUNCEMENTS In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25" (FIN 44). The interpretation provides guidance for certain issues relating to stock compensation involving employees that arose in applying Opinion 25. Among other issues, FIN No. 44 clarifies (a) the definition of an employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. The provisions of FIN No. 44 are effective July 1, 2000, except for the provisions regarding modifications to fixed stock option awards, which reduce the exercise price of an award, which apply to modifications made after December 15, 1998. Provisions regarding modifications to fixed stock option awards to add reload features apply to modifications made after January 12, 2000. The Company believes that it is in compliance with this guidance. In December 1999, the staff of the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 summarizes some of the staff's interpretations of the application of generally accepted accounting principles to revenue recognition, including presentation in the financial statements. The staff provided guidance due, in part, to the large number of revenue-recognition issues that it has encountered in registrant filings. In June 2000, SAB101B, "Second Amendment: Revenue Recognition in Financial Statements", was issued, which defers the effective date of SAB 101 until no later than the fourth quarter of fiscal years beginning after December 15, 1999. The Company is currently evaluating the impact that SAB 101 will have on its financial statements and will adopt SAB 101 in fiscal 2001. In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities"("SFAS No. 133"). This statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires recognition of all derivatives as either assets or liabilities on the balance sheet and measurement of those instruments at fair value. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137 delaying the effective date of SFAS No. 133. The provisions of SFAS No. 133 are effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The effect of adopting SFAS No. 133 is not expected to have any impact on the Company, as it currently does not engage in derivative or hedging activities. 13. SUBSEQUENT EVENTS Subsequent to September 30, 2000, the Company exchanged 656,137 shares of unregistered MSGi common stock for WiredEmpire preferred stock. The exchange resulted in a gain of approximately $4.8 million, which will be recorded through equity and included in net income available to common stockholders in the quarter ended December 31, 2000. In October 2000, the Company entered into an agreement, subject to certain conditions, to acquire 80% of the outstanding common stock and all of the outstanding preferred stock of Perks.com, Inc. in a fixed share transaction. The purchase price of approximately $10.4 million consists of 5,888,957 shares of MSGi common stock. The acquisition is targeted to close by March 31, 2001, subject to certain conditions. Perks.com is an offline and online loyalty, retention and performance improvement solutions provider. The acquisition will be accounted for under the purchase method of accounting. Item 2 - Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- Introduction - ------------ This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flows of the Company for the three month periods ended September 30, 2000 and 1999. This should be read in conjunction with the financial statements, and notes thereto, included in this Report on Form 10-Q and the Company's financial statements and notes thereto, included in the Company's Annual Report on Form 10-K for the year ended June 30, 2000. To facilitate an analysis of MSGi operating results, certain significant events should be considered. On October 1, 1999, the Company completed an acquisition of approximately 87% of the outstanding common stock of Cambridge Intelligence Agency for a total purchase price of $2.4 million which consisted of $1.6 million in common stock of the Company and an interest in the Company's Permission Plus software and related operations valued at $.8 million, subject to certain adjustments. Concurrently with this acquisition, the Company formed WiredEmpire, a licensor of email marketing tools. Effective with the acquisition, Cambridge Intelligence Agency and the Permission Plus assets were merged into WiredEmpire. In March 2000, the Company completed a private placement of 3,120,001 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. In connection with the discontinued operations of WiredEmpire, the Company has offered to redeem the preferred shares in exchange for MSGi common shares. On September 21, 2000, the Company's Board of Directors approved a plan to discontinue the operation of its WiredEmpire subsidiary. The Company will shut down the operations anticipated to be completed by the end of January 2001. The estimated losses associated with WiredEmpire were included in the results of operations of the year ended June 30, 2000. There were no adjustments to the estimated loss for the quarter ended September 30, 2000. Pursuant to Accounting Principles Board Opinion ("APB") No. 30, "Reporting the Results of Operations - Reporting the Effects of a Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occuring Events and Transactions," the consolidated financial statements of MSGi have been reclassified to reflect the discontinued operations of WiredEmpire. Accordingly, revenues, costs and expenses, and cash flows of WiredEmpire have been excluded from the respective captions in the Consolidated Statement of Operations and Consolidated Cash Flows of MSGi. The net operating results of WiredEmpire have been reported as "Loss from Discontinued Operations", and the net cash flows of WiredEmpire have been reported as "Net Cash (Used In) Provided By Discontinued Operations". The assets and liabilities of WiredEmpire have been excluded from the respective captions in the Consolidated Balance Sheets of MSGi and have been reported as "Net Assets/Liabilities of Discontinued Operations". On March 22, 2000, the Company acquired all of the outstanding common shares of Grizzard Advertising, Inc. ("Grizzard") for $104.0 million. The results of operations of Grizzard are reflected in the consolidated financial statements using the purchase method of accounting from the date of acquisition. On March 31, 2000, the Company acquired all of the outstanding common shares of The Coolidge Company ("Coolidge"). The results of operations of Coolidge are reflected in the consolidated financial statements using the purchase method of accounting from the date of acquisition. The Company's business tends to be seasonal. Certain marketing services have higher revenue and profits occurring in the second fiscal quarter, due to the Thanksgiving and Holiday season direct mail campaigns. Results of Operations for the Three Months Ended September 30, 2000, Compared to the Three Months Ended September 30, 1999. Revenues of approximately $47.6 million for the three months ended September 30, 2000 (the "Current Period") increased by $20.5 million or 76% over revenues of $27.1 million during the three months ended September 30, 1999 (the "Prior Period"). Of the increase, approximately $19.5 million is attributable to acquisitions completed after the first quarter in the Prior Period. Revenue excluding the effects of acquisitions increased by $1.0 million primarily due to increased client billings. Direct costs of approximately $25.8 million in the Current Period increased by $8.0 million or 45% over direct costs of $17.8 million in the Prior Period. Of the increase, approximately $8.6 million is attributable to direct costs associated with acquisitions completed after the first quarter in the Prior Period. Direct costs, excluding the effects of acquisitions, decreased by $.6 million or 3% resulting from the increase in database and web design volume, which have lower direct costs. Direct costs as a percentage of revenue decreased from 65.6% in the Prior Period to 54.2% in the Current Period. The decrease in the direct costs as a percentage of revenue results from the acquisition in March 2000 of Grizzard, which has a lower direct cost percentage of revenues. Salaries and benefits of approximately $17.4 million in the Current Period increased by approximately $9.5 million or 120% over salaries and benefits of approximately $7.9 million in the Prior Period. Of the increase, approximately $8.5 million is attributable to acquisitions completed after the first quarter in the Prior Period. Salaries and benefits, excluding acquisitions, increased by approximately $1.0 million or 12% due to increased headcount in several areas of the Company. Selling, general and administrative expenses of approximately $4.4 million in the Current Period increased by approximately $2.4 million or 120% over comparable expenses of $2.0 million in the Prior Period. Of the increase, approximately $1.3 million is attributable to acquisitions completed after the first quarter in the Prior Period. Selling, general and administrative expenses, excluding the effects of acquisitions, increased by $.7 million, principally due to increased professional fees associated with an unsuccessful attempt by third parties to unionize the calling center, increased rent expense due to expansion of certain office space and an increase in computer equipment leases. The remaining increase is primarily due to an increase in corporate expenses of approximately $.4 million due to merger and acquisition activity. Depreciation and amortization expense of approximately $2.9 million in the Current Period increased by approximately $1.9 million over expense of $1.0 million in the Prior Period. This is primarily attributable to an increase in depreciation and amortization expense resulting from acquisitions. Net interest expense of approximately $2.1 million in the Current Period increased by approximately $1.6 million over net interest expense of approximately $.5 million in the Prior Period principally due to accrued interest on outstanding borrowings relating to the acquisition of Grizzard, less interest expense in the Prior Period on related party debt, which was fully paid in July 2000. Approximately $.5 million of interest expense in the current period resulted from the amortization of a discount on debt resulting from the issuance of warrants in connection with the financing for the Grizzard Acquisition. As a result of the above, loss from continuing operations of $5.1 million in the Current Period increased by $2.3 million over comparable net loss of $2.8 in the Prior Period. Capital Resources and Liquidity - ------------------------------- Historically, the Company has funded its operations, capital expenditures and acquisitions primarily through cash flows from operations, private placements of common and preferred stock, and its credit facilities. At September 30, 2000, the Company had cash and cash equivalents of $2.5 million and accounts receivable net of allowances of $41.9 million. The Company generated losses from operations of $5.1 million in the Current Period. Cash used in operating activities was $4.3 million. Cash used by operating activities principally consists of the net loss less a net increase in accounts payable and accrued expenses in excess of the increase in accounts receivables. In the Current Period, net cash of $0.8 million used in investing activities consisted of purchases of property and equipment and capitalized software. In the Prior Period, the Company invested $6.5 million in internet companies. The MSGi internet investment strategy has subsequently been suspended. The Company intends to continue to invest in technology and telecommunications hardware and software. In the Current Period, net cash of $5.1 million was used in financing activities consisting of $5.6 million repayments of debt and capital leases net of $.5 million in proceeds from credit facilities. In the Prior Period, net cash of $22.0 million was provided by financing activities consisting principally of proceeds of $30.8 million, net of fees and expenses for the private placement of the Company's common stock offset by repayments of lines of credit of $3.6 million and repayments on acquisition debt and other notes payable of $5.3 million. At September 30, 2000, the Company had amounts outstanding of $10.3 million on its lines of credit. The Company had approximately $6.4 million available on its lines of credit as of September 30, 2000. A subsidiary of the Company was in violation of net worth covenant and has received the applicable waivers of violation from the lender. The Company has continued to experience operating losses and negative cash flows. To date, the Company has funded its operations with public and private equity offerings, and external financing through debt issuance. However, management believes that the Company's current cash resources and credit facility together with expected revenue growth and planned cost reductions will be sufficient to fund the Company's operations for the next twelve months. Failure to generate sufficient revenue or achieve planned cost reductions could have a material adverse effect on the Company's ability to continue as a going concern and to achieve its intended business objectives. In connection with the discontinued operations of WiredEmpire, the Company has offered to redeem the preferred shares in exchange for MSGi common shares. As of September 30, 2000, the Company exchanged 1,313,863 shares of unregistered MSGi common stock for WiredEmpire preferred stock. The exchange resulted in a gain of $8.6 million which is included in net income available to common stockholders for the three months ended September 30, 2000. The Company believes that the cash on hand at WiredEmpire will be sufficient to satisfy the remaining obligations to be incurred as a result of the decision to discontinue operations. Subsequent to September 30, 2000, the Company exchanged 657,636 shares of unregistered MSGi common stock for WiredEmpire preferred stock. The exchange resulted in a gain of approximately $4.8 million which will be included in net income available to common shareholders in the quarter ended December 31, 2000. Item 6 - Exhibits and Reports on Form 8-K - ----------------------------------------- a) Exhibits Exhibit # Item Notes --------- ---- ----- Notes relating to Exhibits: a) Filed herewith. b) Reports on Form 8-K None SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MARKETING SERVICES GROUP, INC. (Registrant) Date: November 14, 2000 By: /s/ J. Jeremy Barbera --------------------------------- J. Jeremy Barbera Chairman of the Board and Chief Executive Officer Date: November 14, 2000 By: /s/ Rudy Howard -------------------------------- Rudy Howard Chief Financial Officer Date: November 14, 2000 By: /s/ Cindy H. Hill --------------------------------- Cindy H. Hill Chief Accounting Officer EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 Exhibit 27 Financial Data Schedule THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF MARKETING SERVICES GROUP, INC. AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 INCLUDED IN THIS REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS U.S. Dollars Year Jun-30-2000 Sep-30-2000 1 2,473,970 0 44,253,222 (2,349,152) 5,603,910 61,917,835 22,309,902 (4,078,717) 244,328,839 64,478,940 0 304,427 104,291,178 0 29,417,279 244,328,839 47,640,098 47,640,098 25,833,672 25,833,672 24,770,349 0 (2,066,472) (5,030,395) (41,415) (5,071,810) 0 0 0 (5,071,810) 0.12 0.08
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