-----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, OB9NNTrkxdYrWFmCjj8kLhQ+yjFKFsMhMj9EvilSmPWcJrC+uQ1w0Xj+xWhyz5nK LvCALbdCj07YEAW8E6Dhhw== 0000014280-01-000004.txt : 20010223 0000014280-01-000004.hdr.sgml : 20010223 ACCESSION NUMBER: 0000014280-01-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARKETING SERVICES GROUP INC CENTRAL INDEX KEY: 0000014280 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 880085608 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01768 FILM NUMBER: 1545628 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 December 31, 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 February 14, 2001 there were 32,123,606 shares of the Issuer's Common Stock, par value $.01 per share outstanding. 1 MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES TABLE OF CONTENTS FORM 10-Q REPORT DECEMBER 31, 2000 PART I - FINANCIAL INFORMATION Page Item 1 Interim Condensed Consolidated Financial Statements (unaudited) Condensed Consolidated Balance Sheets as of December 31, 2000 and June 30, 2000 (unaudited) 3 Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2000 and 1999 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2000 and 1999 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6-11 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 12-17 PART II - OTHER INFORMATION Item 1 Legal Proceedings Item 6 Exhibits and Reports on Form 8-K (a) Exhibits (b) Reports on Form 8-K Signatures 2 PART I - FINANCIAL INFORMATION Item 1 - Interim Condensed Consolidated Financial Statements (unaudited) MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) December 31, 2000 June 30, 2000 ----------------- ------------- ASSETS - ------ Current assets: Cash and cash equivalents $851,249 $9,903,799 Accounts receivable billed, net of allowance for doubtful accounts of $3,260,721 and $2,287,857 as of December 31, 2000 and June 30, 2000, respectively 48,430,140 38,324,777 Accounts receivable unbilled 7,988,513 3,834,057 Inventories 3,383,664 4,574,046 Note receivable-current portion 173,359 173,359 Other current assets 5,500,931 4,428,673 Net current assets of discontinued operations - 382,978 -------------------------- Total current assets 66,327,856 61,621,689 Investments 952,749 7,445,500 Property and equipment, net 17,577,026 18,690,478 Intangible assets, net 151,088,805 154,016,073 Note receivable 652,010 652,010 Other assets 3,681,535 3,141,343 ---------- --------- Total assets $240,279,981 $245,567,093 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Short-term borrowing $12,107,633 $9,745,053 Accounts payable-trade 35,004,662 30,098,401 Related party payable - 5,000,000 Accrued expenses and other current liabilities 13,548,605 9,531,728 Current portion of capital lease obligations 233,130 234,032 Current portion of long-term obligations 7,964,988 6,199,820 Net current liabilities of discontinued operations 3,010,406 - ----------- ------- Total current liabilities 71,869,424 60,809,034 Capital lease obligations, net of current portion 309,122 543,517 Related party obligation 650,000 - Long-term obligations, net of current portion 31,998,313 35,613,194 Other liabilities 2,264,148 2,433,450 Net noncurrent liabilities of discontinued operations 280,946 18,729,699 ----------- ----------- Total liabilities 107,371,953 118,128,894 ----------- ----------- Convertible preferred stock - $.01 par value; 150,000 shares authorized; 30,000 shares of Series E issued and outstanding 29,360,301 15,353,382 Stockholders' equity: Common stock - $.01 par value; 75,000,000 authorized; 32,547,500 and 30,442,488 shares issued as of December 31, 2000 and June 30, 2000, respectively 325,475 304,425 Additional paid-in capital 213,398,026 208,775,982 Accumulated deficit (102,107,564) (95,601,880) Accumulated other comprehensive loss (6,674,500) - Less: 423,894 shares of common stock in treasury, at cost (1,393,710) (1,393,710) ---------- ----------- Total stockholders' equity 103,547,727 112,084,817 ----------- ----------- Total liabilities and stockholders' equity $240,279,981 $245,567,093 ============ ============ See Notes to Condensed Consolidated Financial Statements. 3 MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATION FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999 (unaudited)
Three Months Ended Six Months Ended December 31, December 31, 2000 1999 2000 1999 ---- ---- ---- ---- Revenues $61,161,225 $27,628,987 $108,801,323 $54,735,664 ----------- ----------- ------------ ----------- Operating costs and expenses: Direct costs 33,878,460 18,536,676 59,712,132 36,355,854 Salaries and benefits 17,672,370 7,765,887 35,098,868 15,718,453 Selling, general and administrative 6,160,127 3,111,640 10,596,635 5,083,681 Depreciation and amortization 2,913,515 864,725 5,820,858 1,814,194 --------- ------- --------- --------- Total operating costs and expenses 60,624,472 30,278,928 111,228,493 58,972,182 ---------- ---------- ----------- ---------- Income (loss) from operations 536,753 (2,649,941) (2,427,170) (4,236,518) Interest expense and other, net (1,946,597) (65,035) (4,013,069) (544,098) ------------ ----------- ----------- ----------- Loss from continuing operations before income taxes (1,409,844) (2,714,976) (6,440,239) (4,780,616) Provision for income taxes (24,030) (48,485) (65,445) (61,769) ------------ ----------- ----------- ----------- Loss from continuing operations (1,433,874) (2,763,461) (6,505,684) (4,842,385) Loss from discontinued operations - (1,673,150) - (2,442,396) ------------ ----------- ----------- ----------- Net loss (1,433,874) (4,436,611) (6,505,684) (7,284,781) Gain on redemption of preferred stock of discontinued subsidiary 4,816,427 - 13,410,273 - ------------ ----------- ----------- ----------- Net income (loss) available to common stockholders before cumulative effect of change in accounting 3,382,553 (4,436,611) 6,904,589 (7,284,781) Cumulative effect of change in accounting (Note 2) (14,063,897) - (14,063,897) - ------------ ----------- ------------ ------------ Net loss available to common stockholders $(10,681,344) $(4,436,611) $(7,159,308) $(7,284,781) ============= ============ ============ ============ Basic earnings per share: Continuing operations $.10 $(.11) $.22 $(.20) Discontinued operations - (.06) - (.10) Cumulative effect of change in accounting (.44) - (.45) - ----- ----- ----- ----- Basic earnings per share $(.34) $(.17) $(.23) $(.30) ====== ====== ====== ====== Weighted average common shares outstanding (basic) 31,750,831 25,609,980 30,911,552 24,291,248 ========== ========== ========== ========== Diluted earnings per share: Continuing operations $.07 $(.11) $.15 $(.20) Discontinued operations - (.06) - (.10) Cumulative effect of change in accounting (.31) - (.31) - ----- ----- ----- ----- Diluted earnings per share $(.24) $(.17) $(.16) $(.30) ====== ====== ====== ====== Weighted average common shares and equivalents outstanding (diluted) 45,241,109 25,609,980 44,742,696 24,291,248 ========== ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements. 4 MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999 (unaudited) 2000 1999 ---- ---- Operating activities: Net loss $(6,505,684) $(7,284,781) Add: loss from discontinued operations - 2,442,396 ----------- ----------- Loss from continuing operations (6,505,684) (4,842,385) Adjustments to reconcile loss to net cash used in operating activities: Depreciation 2,060,452 364,196 Amortization 3,760,406 1,436,119 Amortization of debt issuance costs 1,117,161 - Provision for bad debts 747,709 53,920 Gain on sale of minority interest - (45,163) Settlement of litigation - 315,000 Compensation expense on stock option grants - 292,224 Amortization of discount on note receivable - 192,375 Changes in assets and liabilities: Accounts receivable (15,414,276) (2,671,178) Inventory 1,190,382 - Other current assets (1,072,259) 393,665 Other assets (842,254) (598,666) Accounts payable - trade 4,906,261 428,404 Accrued expenses and other current liabilities 3,547,575 (4,197,872) --------- ----------- Net cash used in operating activities (6,504,527) (8,879,361) ----------- ----------- Investing activities: Purchases of property and equipment (947,000) (1,058,309) Purchases of capitalized software (952,280) - Proceeds from sale of MFI - 556,984 Investment in internet companies - (6,848,300) --------- ----------- Net cash used in investing activities (1,899,280) (7,349,625) ----------- ----------- Financing activities: Proceeds from exercises of stock options 8,142 315,630 Proceeds from private placement of common stock, net - 30,531,827 Expenditures from private placement of preferred stock (56,977) - Net proceeds from (repayments on) credit facilities 2,362,580 (4,249,447) Repayment of capital lease obligation (235,297) (50,446) Repayment of related party note payable (5,000,000) (5,000,000) Proceeds of related party note payable 650,000 - Repayments of long-term debt (1,995,575) (387,445) ---------- --------- Net cash (used in) provided by financing activities (4,267,127) 21,160,119 Net cash provided by (used in) discontinued operations 3,618,384 (2,363,321) --------- ----------- Net (decrease) increase in cash and cash equivalents (9,052,550) 2,567,812 Cash and cash equivalents at beginning of period 9,903,799 3,285,217 --------- --------- Cash and cash equivalents at end of period $851,249 $5,853,029 ======== ========== See Notes to Condensed Consolidated Financial Statements. 5 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 six-month period ended December 31, 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. 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. 2. EARNINGS PER SHARE Stock options and warrants in the amount of 3,257,958 shares for the three and six months ended December 31, 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 commons shares and equivalents on a diluted basis for the three and six months ended December 31, 2000 was calculated as follows: December 31, 2000 Three months Ended Six Months Ended Weighted average common shares 31,750,831 30,911,552 Contingent warrants 10,670,000 10,670,000 Convertible preferred stock 2,450,980 2,450,980 Stock options and warrants 369,298 710,164 ------- ------- Total 45,241,109 44,742,696 ========== ========== 6 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 share 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 Series E Preferred Stock is convertible into shares of MSGi common stock at $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 7,647,604 and 5,383,695 shares for the three months and six months ended December 31, 2000, respectively, were not included in the computation of diluted EPS as they are antidilutive. In the quarters ended December 31, 2000 and September 30, 2000, the Company exchanged 656,137 and 1,313,863 shares, respectively of unregistered MSGi common stock for WiredEmpire preferred stock. The exchange resulted in a gain of $4,816,427 and $8,593,846 for the quarters ended December 31, 2000 and September 30, 2000, respectively, which was recorded through equity and is included in net income available to common stockholders and included in the computation of basic and fully diluted EPS. In September 2000, the FASB Emerging Issues Task Force issued EITF 00-27 "Application of EITF 98-5 to Certain Convertible Instruments." EITF 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. MSGi 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 three months ended December 31, 2000 related to the March 2000 issuance of the Series E 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 shareholders. 3. COMPREHENSIVE INCOME Comprehensive income consists of the following for the three and six months ended December 31, 2000: December 31, 2000 Three Months Ended Six Months Ended Net loss $(1,433,874) $(6,505,684) Other comprehensive income, net of tax: Unrealized loss on securities (6,016,500) (6,674,500) ----------- ----------- Comprehensive loss $(7,450,374) $(13,180,184) ============ ============= 4. INVENTORIES Inventory consists of the following at December 31, 2000 and June 30, 2000: December 31, 2000 June 30, 2000 ----------------- ------------- Work in process $3,015,952 $4,076,417 Raw materials and supplies 367,712 497,629 ------- ------- Total $3,383,664 $4,574,046 ========== ========== 7 5. SHORT TERM BORROWINGS At December 31, 2000, certain subsidiaries of the Company were in violation of certain working capital and net worth covenants and have received the applicable waivers of violation from the lenders. 6. RELATED PARTY TRANSACTIONS During the quarter ending December 31, 2000, the Company entered into a promissory note agreement with an officer for up to $1,000,000, due and payable at maturity, January 1, 2002. As of December 31, 2000, the Company received $650,000 in proceeds. The promissory note bears interest at 15% per annum and includes certain prepayment penalties. 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 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, Marketing Services Group, Inc. and WiredEmpire, Inc. Red Mountains' complaint alleges, among other things, violations of Section 12(2) of the Securities Act of 1933, Section 10(b)of the Securities Act of 1934 and Rule 10(b)(5) promulgated there under, and various provisions of Alabama state law and common law, arising from Red Mountain's acquisition of Wired Empire Preferred Series A stock on 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. A demand letter was received from counsel for Pennstone LLC seeking rescission of its purchase of 64,000 shares of WiredEmpire Series A Preferred Stock. That demand was rejected. No action has been commenced. 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 theses pending legal matters in future periods will have a material effect on the financial condition, results of operations or cash flows. 8 8. SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES During the quarter ended September 30, 2000, the Company received $330,762 of uncollateralized financing to acquire additional capitalized software. During the quarters ended December 31, 1999 and September 30, 1999, the Company entered into capital lease obligations for approximately $75,000 and $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 December 1999, the Company acquired a 10% interest in Fusion Networks, Inc. for $27,506,400 in common stock. In December and September 2000, the Company provided a valuation allowance on its investment in Fusion Networks of approximately $6,016,500 and $658,000, respectively, adjusting the investment to the fair value as determined by the quoted market price. The allowance was recorded through equity. During the quarters ended December 31, 2000 and September 30, 2000, the Company acquired equity interests of $81,835 and $324,914, respectively, in certain companies engaged in internet related businesses in exchange for services. 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 Board's of Directors of the Company and WiredEmpire approved a plan to discontinue the operation of its WiredEmpire subsidiary. The Company completed the shut down of operations in 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 quarters ended December 31, 2000 and September 20, 2000. The assets and liabilities of WiredEmpire have been separately classified on the condensed consolidated balance sheets as "Net current or noncurrent liabilities of discontinued operations." A summary of these assets and liabilities at December 31, 2000 and June 30, 2000 were as follows: 9 December 31, 2000 June 30, 2000 ----------------- ------------- Current assets including assets held for sale $ 504,567 $9,733,156 Current liabilities (3,514,973) (9,350,178) ----------- ------------ Net current assets (liabilities) of discontinued operations (3,010,406) 382,978 Minority interest in subsidiary preferred stock (280,946) (18,729,699) ----------- ------------ Net liabilities of discontinued operations $(3,291,352) $(18,346,721) ============ ============= In September 2000, the Company offered to exchange the preferred shares for MSGi common shares. In the quarters ended December 31, 2000 and September 30, 2000, the Company exchanged 656,137 and 1,313,863 shares, respectively of unregistered MSGi common stock for WiredEmpire preferred stock. The exchange resulted in a gain of $4,816,427 and $8,593,846 for the quarters ended December 31, 2000 and September 30, 2000, respectively, which was recorded through equity and is included in net income available to common stockholders. In January 2001, the Company sold certain assets of WiredEmpire (see Subsequent Events, Note 14). 11. SEGMENT INFORMATION In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" segment information is being reported consistent with the Company's method of internal reporting. In accordance with SFAS No. 131, operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. 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:
Three Months Ended Six Months Ended December 31, December 31, -------------------- --------------------- 2000 1999 2000 1999 ---- ---- ---- ---- List sales and services $18,831,172 $20,002,260 $39,881,498 $38,577,060 Marketing communication services 35,119,376 - 52,629,817 - Database marketing 3,891,900 4,157,974 8,097,054 8,503,324 Telemarketing 3,307,112 2,914,986 7,814,597 6,689,266 Website development and design 211,139 505,507 1,073,485 865,857 Other 31,234 48,260 59,939 100,157 Inter-company revenue elimination (230,708) - (755,067) - ----------- ------------ ------------ ----------- Consolidated total $61,161,225 $27,628,987 $108,801,323 $54,735,664 =========== ============ ============ ===========
10 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 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 the fourth quarter of fiscal 2001. 13. PENDING ACQUISITION 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. 14. SUBSEQUENT EVENTS In January 2001, the Company sold certain assets of its WiredEmpire subsidiary for $1,250,000, consisting of $1,000,000 in cash and $250,000 held in escrow until July 2, 2001. In February 2001, the Company entered into a strategic partnership with Paris-based Firstream. The alliance called for a $3 million cash investment by Firstream into MSGi to strengthen working capital and to provide funds for new business initiatives. Firstream will receive 1.5 million unregistered common shares of MSGi (subject to Rule 144) plus a two-year warrant for 400,000 shares priced at $3.00 per share. As part of the strategic partnership, MSGi 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. 11 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 and six month periods ended December 31, 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 3,200,000 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 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. 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 December 31, 2000. In September 2000, the Company offered to exchange the preferred shares for MSGi common shares. 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". 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. 12 Results of Operations for the Three Months Ended December 31, 2000, Compared to - -------------------------------------------------------------------------------- the Three Months Ended December 31, 1999 - ---------------------------------------- Revenues of approximately $61.2 million for the three months ended December 31, 2000 (the "Current Period") increased by $33.5 million or 121% over revenues of $27.6 million during the three months ended December 31, 1999 (the "Prior Period"). Of the increase, approximately $37.5 million is attributable to acquisitions completed after the second quarter in the Prior Period. Revenue excluding the effects of acquisitions decreased by $4.0 million primarily due to the elimination of certain lower margin list service contracts and reduced demand for web development services. Direct costs of approximately $33.8 million in the Current Period increased by $15.3 million or 83% over direct costs of $18.5 million in the Prior Period. Of the increase, approximately $18.5 million is attributable to direct costs associated with acquisitions completed after the second quarter in the Prior Period. Direct costs, excluding the effects of acquisitions, decreased by $3.2 million or 16.8% resulting from the lower volume of list and web development services. Direct costs as a percentage of revenue decreased from 67.1% in the Prior Period to 55.4% 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 $17.7 million in the Current Period increased by approximately $9.9 million or 128% over salaries and benefits of approximately $7.8 million in the Prior Period. Of the increase, approximately $9.4 million is attributable to acquisitions completed after the second quarter in the Prior Period. Salaries and benefits, excluding the effects of acquisitions, increased by approximately $.5 million or 3.5% due to salary increases. Selling, general and administrative expenses of approximately $6.1 million in the Current Period increased by approximately $3.0 million or 98% over comparable expenses of $3.1 million in the Prior Period. Of the increase, approximately $1.8 million is attributable to acquisitions completed after the second quarter in the Prior Period. Selling, general and administrative expenses, excluding the effects of acquisitions, increased by $.8 million, principally due to 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 $2.0 million over expense of $.9 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 $1.9 million in the Current Period increased by approximately $1.9 million over net interest expense of approximately $65,035 in the Prior Period, principally due to accrued interest on outstanding borrowings relating to the acquisition of Grizzard. Approximately $.3 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. The Company records provisions for state and local taxes incurred on taxable income or equity at the operating subsidiary level which cannot be offset by losses incurred at the parent company level or other operating subsidiaries. The Company has recognized a full valuation allowance against the deferred tax assets because it is not certain sufficient taxable income will be generated during the carryforward period to utilize the deferred tax assets. 13 As a result of the above, loss from continuing operations of $1.4 million in the Current Period decreased by $1.4 million over comparable net loss of $2.8 in the Prior Period. In the quarter ended December 31, 2000, the Company exchanged 656,137 shares of unregistered MSGi common stock for WiredEmpire preferred stock. The exchange resulted in a gain of $4.8 million for the quarter ended December 31, 2000, which was recorded through equity and is included in net income available to common stockholders and included in the computation of basic and fully diluted EPS. In September 2000, the FASB Emerging Issues Task Force issued EITF 00-27 "Application of EITF 98-5 to Certain Convertible Instruments." EITF 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. MSGi 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 three months ended December 31, 2000 related to the March 2000 issuance of 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 shareholders. Results of Operations for the Six Months Ended December 31, 2000, Compared to - -------------------------------------------------------------------------------- the Six Months Ended December 31, 1999. - --------------------------------------- Revenues of approximately $108.8 million for the six months ended December 31, 2000 (the "Current Period") increased by $54.1 million or 99% over revenues of $54.7 million during the six months ended December 31, 1999 (the "Prior Period"). Of the increase, approximately $57.1 million is attributable to acquisitions completed after the second quarter in the Prior Period. Revenue excluding the effects of acquisitions, decreased by approximately $3.0 million, due primarily to the elimination of certain lower margin list service contracts and reduced demand for web development services. Direct costs of approximately $59.7 million in the Current Period increased by $23.3 million or 64% over direct costs of $36.4 million in the Prior Period. Of the increase, approximately $27.1 million is attributable to acquisitions completed after the second quarter in the Prior Period. Direct costs excluding the effects of acquisitions decreased by $3.8 million or 10.2% resulting from the lower volume of list and web development services. Direct costs as a percentage of revenue decreased from 66% in the Prior Period to 55% in the Current Period. The decrease in the direct costs as a percentage of revenue results from the mix in services sold. 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 $35.1 million in the Current Period increased by approximately $19.4 million or 123% over salaries and benefits of approximately $15.7 million in the Prior Period. Of the increase, approximately $17.9 million is attributable to acquisitions completed after the second quarter in the Prior Period. Salaries and benefits, excluding acquisitions, increased by approximately $1.5million or 9.4% due to salary increases and increased headcount in several areas of the Company. Selling, general and administrative expenses of approximately $10.6 million in the Current Period increased by approximately $5.5 million or 108% over comparable expenses of $5.1 million in the Prior Period. Of the increase, approximately $3.3 million is attributable to acquisitions completed after the second quarter in the Prior Period. Selling, general and administrative expenses, excluding the effects of acquisitions, increased by $2.2 million, principally due to increased rent expense due to expansion of certain office space and increased corporate expenses due to merger and acquisition activity. Depreciation and amortization expense of approximately $5.8 million in the Current Period increased by approximately $4.0 million over expense of $1.8 million in the Prior Period. This is primarily attributable to an increase in depreciation and amortization expense resulting from acquisitions. 14 Net interest expense of approximately $4.0 million in the Current Period increased by approximately $3.4 million over net interest expense of approximately $.6 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 $.8 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. The Company records provisions for state and local taxes incurred on taxable income or equity at the operating subsidiary level which cannot be offset by losses incurred at the parent company level or other operating subsidiaries. The Company has recognized a full valuation allowance against the deferred tax assets because it is not certain sufficient taxable income will be generated during the carryforward period to utilize the deferred tax assets. As a result of the above, loss from continuing operations of $6.5 million in the Current Period increased by $1.7 million over comparable net loss of $4.8 in the Prior Period. In the six months ended December 31, 2000, the Company exchanged 1,970,000 shares of unregistered MSGi common stock for WiredEmpire preferred stock. The exchange resulted in a gain of $13.4 million for the six months ended December 31, 2000, which was recorded through equity and is included in net income available to common stockholders and included in the computation of basic and fully diluted EPS. In September 2000, the FASB Emerging Issues Task Force issued EITF 00-27 "Application of EITF 98-5 to Certain Convertible Instruments." EITF 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. MSGi 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 six months ended December 31, 2000 related to the March 2000 issuance of 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 shareholders. 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 December 31, 2000, the Company had cash and cash equivalents of $.9 million and accounts receivable net of allowances of $48.4 million. The Company generated a net loss of $6.5 million in the Current Period. Cash used in operating activities was $6.5 million. Cash used by operating activities principally consists of the net loss and increase in accounts receivable, less an increase in accounts payable and non cash items. In the Current Period, net cash of $1.9 million used in investing activities consisted of purchases of property and equipment and capitalized software. In the Prior Period, the Company invested $7.3 million in internet companies and property and equipment. The MSGi internet investment strategy has subsequently been suspended. The Company intends to continue to invest in technology and telecommunications hardware and software. 15 In the Current Period, net cash of $4.3 million was used in financing activities consisting of $7.2 million repayments of debt and capital leases, net of $2.3 million in proceeds from credit facilities and $.6 million in proceeds from a related party. In the Prior Period, net cash of $21.2 million was provided by financing activities consisting principally of proceeds of $30.5 million, net of fees and expenses for the private placement of the Company's common stock offset by repayments of lines of credit of $4.2 million and repayments on acquisition debt and other notes payable of $5.1 million. At December 31, 2000, the Company had amounts outstanding of $12.1 million on its lines of credit. The Company had approximately $4.6 million available on its lines of credit as of December 31, 2000. Certain subsidiaries of the Company were in violation of certain covenants related to long term debt and lines of credit and has received the applicable waivers of violation from the lenders. 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 offered to redeem the preferred shares in exchange for MSGi common shares. In the quarter ending 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. During the quarter ending December 31, 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 is included in net income available to common shareholders in the quarter ended December 31, 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. In January 2001, the Company sold certain assets of its WiredEmpire subsidiary for $1,250,000, consisting of $1,000,000 in cash and $250,000 held in escrow until July 2, 2001. In February 2001, the Company entered into a strategic partnership with Paris-based Firstream. The alliance called for a $3 million cash investment by Firstream into MSGi to strengthen working capital and to provide funds for new business initiatives. Firstream will receive 1.5 million unregistered common shares of MSGi (subject to Rule 144) plus a two-year warrant for 400,000 shares priced at $3.00 per share. As part of the strategic partnership, MSGi 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. 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 Company believes that it is in compliance with this guidance. 16 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 the fourth quarter of fiscal 2001. PART II - OTHER INFORMATION - --------------------------- Item 1 - 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, Marketing Services Group, Inc. and WiredEmpire, Inc. Red Mountains' complaint alleges, among other things, violations of Section 12(2) of the Securities Act of 1933, Section 10(b)of the Securities Act of 1934 and Rule 10(b)(5) promulgated there under, and various provisions of Alabama state law and common law, arising from Red Mountain's acquisition of Wired Empire Preferred Series A stock on 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. A demand letter was received from counsel for Pennstone LLC seeking rescission of its purchase of 64,000 shares of WiredEmpire Series A Preferred Stock. That demand was rejected. No action has been commenced 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 17 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: February 14, 2001 By: /s/ J. Jeremy Barbera --------------------------------- J. Jeremy Barbera Chairman of the Board and Chief Executive Officer Date: February 14, 2001 By: /s/ Rudy Howard --------------------------------- Rudy Howard Chief Financial Officer Date: February 14, 2001 By: /s/ Cindy H. Hill -------------------------------- Cindy H. Hill Chief Accounting Officer 18 -----END PRIVACY-ENHANCED MESSAGE-----