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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
333 Seventh Avenue, 20th Floor
New York, New York 10001
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (917) 339-7100
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-----------------------------------------------------
(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.
<PAGE>
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
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Interim Condensed Consolidated Financial Statements (unaudited)
------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<S> <C> <C>
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
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
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)
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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)
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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.
<PAGE>
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)
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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.
<PAGE>
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
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Work in process $4,381,668 $4,076,417
Raw materials and supplies 1,222,242 497,629
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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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
