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, 2001
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
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(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 12 , 2001 there were 5,620,601 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
SEPTEMBER 30, 2001
PART I - FINANCIAL INFORMATION Page
----
Item 1 Interim Condensed Consolidated Financial Statements
(unaudited)
Condensed Consolidated Balance Sheets as of
September 30, 2001 and June 30, 2001(unaudited) 3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 2001 and 2000 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three
months ended September 30, 2001 and 2000 (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 11-14
PART II- OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 16
2
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, 2001 June 30, 2001
------------------ -------------
ASSETS
------
Current assets:
Cash and cash equivalents $24,728,892 $1,725,412
Accounts receivable, net of allowance for doubtful
accounts of $2,475,485 and $2,423,610, respectively 28,556,108 27,507,629
Net assets held for sale - 80,882,272
Other current assets 1,114,931 990,741
--------- -------
Total current assets 54,399,931 111,106,054
Intangible assets, net 53,666,433 54,362,534
Property and equipment, net 2,271,281 2,346,152
Restricted cash 4,945,874 -
Other assets 499,612 2,574,762
----------- ---------
Total assets $115,783,131 $170,389,502
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short - term borrowing $2,158,056 $13,021,966
Accounts payable-trade 24,705,888 27,119,339
Related party payable - 400,000
Accrued expenses and other current liabilities 8,342,187 6,074,222
Net liabilities of discontinued operations 2,245,230 2,396,171
Current portion of capital lease obligations 102,138 115,598
Current portion of long-term obligations 340,537 32,833,101
------------ ----------
Total current liabilities 37,894,036 81,960,397
Capital lease obligations, net of current portion 78,143 89,913
Long-term obligations, net of current portion 4,734,463 4,339,078
Other liabilities 907,106 1,516,976
------------ ----------
Total liabilities 43,613,748 87,906,364
------------ ----------
Minority interest in preferred stock of discontinued subsidiary 280,946 280,946
Convertible preferred stock - $.01 par value; 150,000 shares
authorized; 30,000 shares of Series E issued and outstanding 13,424,198 13,424,198
Commitments and contingencies
Stockholders' equity:
Common stock - $.01 par value; 75,000,000 authorized; 5,691,250
shares issued as of September 30, 2001 and June 30, 2001 56,912 56,912
Additional paid-in capital 231,555,514 231,555,514
Accumulated deficit (171,754,477) (161,440,722)
Less: 70,649 shares of common stock in treasury, at cost (1,393,710) (1,393,710)
------------ ------------
Total stockholders' equity 58,464,239 68,777,994
------------ ------------
Total liabilities and stockholders' equity $115,783,131 $170,389,502
============ ============
See Notes to Condensed Consolidated Financial Statements.
3
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(unaudited)
2001 2000
---- ----
Revenues $11,681,661 $29,181,605
----------- -----------
Operating costs and expenses:
Salaries and benefits 11,555,659 17,426,498
Direct costs 2,396,952 7,375,179
Selling, general and administrative 3,437,258 4,436,508
Depreciation and amortization 921,640 2,907,343
Gain on sale of Grizzard (1,722,763) -
----------- -----------
Total operating costs and expenses 16,588,746 32,145,528
----------- -----------
Loss from operations (4,907,085) (2,963,923)
Interest expense and other, net (517,031) (2,066,472)
----------- -----------
Loss before provision for income taxes
and extraordinary item (5,424,116) (5,030,395)
Provision for income taxes (30,800) (41,415)
----------- -----------
Loss before extraordinary item (5,454,916) (5,071,810)
Extraordinary item:
Loss on early extinguishment of debt (4,858,839) -
----------- -----------
Net loss (10,313,755) (5,071,810)
Gain on redemption of preferred stock
of discontinued subsidiary - 8,593,846
----------- -----------
Net (loss) income available to common stockholders $(10,313,755) $3,522,036
============= ===========
Basic and diluted (loss) earnings per share:
Continuing operations before extraordinary item $(.96) $ (1.01)
Extraordinary item (.87) -
Discontinued operations - 1.71
-------- ----
Basic and diluted (loss) earnings per share $(1.83) $.70
======= ====
Weighted average common shares outstanding 5,620,601 5,012,046
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
4
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(unaudited)
2001 2000
---- ----
Operating activities:
Net loss $(10,313,755) $(5,071,810)
Adjustments to reconcile loss to net cash used in
operating activities:
Extraordinary item- Loss on early extinguishment of debt 4,858,839 -
Gain on sale of Grizzard (1,722,763) -
Depreciation 225,313 1,020,046
Amortization 696,327 1,887,297
Non cash interest expense 266,900 530,611
Provision for bad debts 190,657 200,425
Changes in assets and liabilities:
Accounts receivable 1,483,164 (6,292,623)
Inventory (697,908) (1,029,864)
Other current assets (113,130) (1,365,805)
Other assets (26,197) (612,357)
Accounts payable - trade (1,439,991) 1,906,233
Accrued expenses and other liabilities 186,109 4,528,701
---------- ---------
Net cash used in operating activities (6,406,435) (4,299,146)
---------- ---------
Investing activities:
Proceeds from sale of Grizzard, net 81,662,392 -
Increase in restricted cash (4,945,874) -
Purchases of property and equipment (421,676) (560,753)
Purchases of capitalized software - (271,219)
---------- ---------
Net cash provided by (used in) investing activities 76,294,842 (831,972)
---------- ---------
Financing activities:
Proceeds from exercises of stock options - 366
Net (repayments on) proceeds from credit facilities (10,863,910) 546,006
Repayment of capital lease obligation (31,144) (214,716)
Repayment of related party note payable (250,000) (5,000,000)
Repayments of long term debt (35,588,932) (402,818)
---------- ----------
Net cash (used in) provided by financing activities (46,733,986) (5,071,162)
Net cash (used in) provided by discontinued operations (150,941) 2,772,451
---------- ---------
Net increase (decrease) in cash and cash equivalents 23,003,480 (7,429,829)
Cash and cash equivalents at beginning of period 1,725,412 9,903,799
--------- ---------
Cash and cash equivalents at end of period $24,728,892 $2,473,970
=========== ==========
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 ("MKTG" 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, 2001 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, 2001 are not necessarily indicative of
the results that may be expected for the fiscal year ending June 30, 2002.
Certain reclassifications have been made in the fiscal 2001 financial statements
to conform to the fiscal 2002 presentation.
On October 9, 2001, the Board of Directors approved a six-for-one reverse split
of the common stock. Par value of the common stock will remain $.01 per share
and the number of authorized shares of common stock will remain at 75,000,000.
The stock split was effective October 15, 2001. The effect of the stock split
has been recognized retroactively in the shareholders' equity accounts on the
balance sheets as of September 30, 2001 and June 30, 2001, and in all share and
per share data in the accompanying condensed consolidated financial statements
and Notes to Financial Statements. Shareholders' equity accounts have been
restated to reflect the reclassification of an amount equal to the par value of
the decrease in issued common shares from the common stock account to the paid
in capital account.
2. EARNINGS PER SHARE
Stock options and warrants in the amount of 1,484,219, a warrant exercisable on
November 1, 2001 in the amount of 1,778,334 and convertible preferred stock in
the amount of 408,497 for the three months ended September 30, 2001 were not
included in the computation of diluted EPS as they were antidilutive as a result
of net losses during the period. Stock options and warrants in the amount of
1,346,352 shares, contingent warrants in the amount of 1,778,334 and convertible
preferred stock in the amount of 408,497 for the three months ended September
30, 2000 have not been included in the computation of diluted EPS as they were
antidilutive.
The Company did not meet certain financial goals for the fiscal year ended June
30, 2001 as set forth in the warrant issued in connection with a 1997 sale of
Series D preferred stock. Accordingly, the warrant in the amount of 1,778,334
shares with an exercise price of $.01 per share will become issuable and
exercisable on November 1, 2001. As a result of the issuance of the warrant,
certain antidilultive provisions of the Company's Series E preferred stock will
be triggered. The conversion price will be reset to an amount equal to the
average closing bid price of the Company's common stock for ten consecutive
trading days beginning on the first trading day of the exercise period of the
aforementioned warrant. However, the number of shares issued upon converison is
subject to certain ownership limitations as outlined in the agreement.
6
In the quarter ended September 30, 2000, the Company exchanged 218,978 shares of
unregistered MKTG common stock for WiredEmpire preferred stock. The exchange
resulted in a gain of $8,593,846 for the quarter ended September 30, 2000 which
was recorded through equity and is included in net income available to common
stockholders and included in the computation of basic and diluted earnings per
share-discontinued operations.
3. DEBT
In August 2001, the Company entered into a stand by letter of credit with a bank
in the amount of $4,945,874 to support the remaining obligations under a certain
holdback agreement with the former shareholders of Grizzard Communications
Group, Inc. ("Grizzard".) The letter of credit is collateralized by cash which
has been classified as restricted cash in the long term asset section of the
balance sheet as of September 30, 2001. The letter of credit is subject to an
annual facility fee of 1.5%. The remaining obligation is included in long term
obligations and is payable in March 2003.
Effective September 30, 2001, the Company amended its line of credit agreements
to adjust the calculations for certain covenants. As of September 30, 2001, the
Company was in compliance with its line of credit covenants, as amended.
4. REVENUE RECOGNITION
Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements," ("SAB 101") the
Company has reviewed its accounting policies for the recognition of revenue. SAB
101 was required to be implemented in fourth quarter 2001. SAB 101 provides
guidance on applying generally accepted accounting principles to revenue
recognition in financial statements. The Company's policies for revenue
recognition are consistent with the views expressed within SAB 101. The adoption
of SAB 101, did not have a material effect on the Company's consolidated
financial position, cash flows, or results of operations. Although net income
was not materially affected, the adoption did have an impact on the amount of
revenue recorded as the revenue associated with the Company's list sales and
services product line are now required to be shown net of certain costs. The
Company believes this presentation is consistent with the guidance in Emerging
Issues Task Force ("EITF") 99-19, "Reporting Revenue Gross as a Principal Versus
Net as an Agent." All prior periods presented have been restated.
5. SALE OF GRIZZARD
On June 13, 2001, the board of directors and management of the Company approved
a formal plan to sell Grizzard. On July 18, 2001, the Company entered into a
definitive agreement to sell Grizzard. On July 31, 2001, the Company completed
its sale of all the outstanding capital stock of its Grizzard subsidiary to
Omnicom Group, Inc. The purchase price of the transaction was $91.3 million
payable in cash, subject to a working capital adjustment estimated at
approximately $1.5 million. As a result of the sale agreement, the Company fully
paid the term loan of $35.5 million and $12.0 million line of credit. The
Company recorded an extraordinary loss of approximately $4.9 million in the
September 2001 quarter as a result of the early extinguishments of debt. The
purchase price was determined through arms-length negotiations between the
purchaser and MKTG. As of September 30, 2001 the estimated working capital
adjustment of $1.5 million and other liabilities of $1.6 million representing
the settlement of Grizzard intercompany debt are included in accrued expenses
and other current liabilities.
At June 30, 2001, the assets and liabilities of Grizzard were classified as net
assets held for sale in the amount of $80.9 million. In the quarter ended
September 30, 2001, the Company recognized a gain on
7
sale of Grizzard in the amount of $1.7 million. Grizzard's revenues included in
the Company's statement of operations for the quarters ended September 30, 2001
and 2000 were $2.9 million and $16.4 million, respectively. Grizzard's net loss
included in the Company's statement of operations for the quarters ended
September 30, 2001 and 2000 were $8.5 million and $2.9 million, respectively.
Supplemental
Pro forma information
For the quarter ended September 30,
(Unaudited)
2001 2000
---- ----
Revenues $8,851,000 $12,557,000
Loss from operations
before extraordinary item $(3,629,000) $(1,957,000)
Net loss per common share
from continuing operations,
basic and diluted $(.65) $(.39)
====== ======
The pro forma information is provided for informational purposes only and
assumes that Grizzard was sold as of the beginning of fiscal year 2000. It is
based on historical information and is not necessarily indicative of future
results of operations of the consolidated entities.
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. The Company
believes that funds on hand, funds available from its operations, planned cost
reductions, its unused lines of credit and proceeds from the Grizzard sale in
July 2001, should be adequate to finance its operations and capital expenditure
requirements, and enable the Company to meet interest and debt obligations for
the next twelve months. In conjunction with the Company's acquisition and growth
strategy, additional financing may be required to complete any such acquisitions
and to meet potential contingent acquisition payments. Failure to generate
sufficient revenue, achieve planned cost reductions or attain additional
financing if necessary 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 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, Chairman of the Board and Chief Executive Officer of 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 WiredEmpire Preferred Series A stock in 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 in January 2001. To date, no action has commenced.
8
In 1999 a lawsuit under Section 16(b) of the Securities Exchange Act of 1934 was
commenced against General Electric Capital Corporation ("GECC") by Mark Levy,
derivatively on behalf of the Company, to recover short swing profits allegedly
obtained by GECC in connection with the purchase and sale of MKTG securities.
The case is pending in the name of Mark Levy v. General Electric Capital
Corporation, in the United States District Court for the Southern District of
New York, Civil Action Number 99 Civ. 10560(AKH). While the Levy case was
pending, the Company and GECC engaged in negotiations pertaining to the warrant,
dated December 24, 1997, in favor of GECC to purchase, at consideration of $0.01
per share, up to 1,778,334 shares of MKTG common stock subject to certain
adjustments. Extensive negotiations among counsel for the plaintiff, counsel for
the Company, and counsel for GECC, as well as direct negotiations between the
Company and GECC, resulted in a preliminary settlement of the court action
against GECC for alleged short swing profits and all other issues under the
warrant. The parties entered into a stipulation of settlement, subject to court
approval. In August 2001, the court declined to approve the stipulation of
settlement. The plaintiff has filed a motion for summary judgment. Accordingly,
the Levy case remains pending and there are no changes to the warrant.
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 the above matters and other pending legal
matters in future periods will have a material effect on the financial
condition, results of operations or cash flows of the Company.
8. SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITITES
During the quarter ended September 30, 2000, the Company received $330,762 of
uncollaterized financing to acquire additional capitalized software.
.
During the quarter ended September 30, 2000, the Company acquired equity
interests of $324,914 in certain companies in exchange for services.
9. GAIN ON REDEMPTION OF PREFERRED STOCK OF DISCONTINUED SUBSIDIARY
In September 2000, in connection with the discontinued operations of
WiredEmpire, the Company offered to exchange preferred shares of WiredEmpire for
MKTG common shares. During the quarter ended September 30, 2000, the Company
exchanged 218,978 shares of unregistered MKTG 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 and earnings per share - discontinued operations for the quarter
ended September 30, 2000. As of September 30, 2001, 48,000 shares of WiredEmpire
preferred stock have not been exchanged.
10. 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. MKTG 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, MKTG's
subsidiaries have been aggregated. No single customer accounted for 10% or more
of total revenues. MKTG earns 100% of its revenue in the United States.
9
Supplemental disclosure of revenue by product:
Quarter Ended
September 30,
----------------------------------
2001 2000
---- ----
List sales and services $1,950,454 $3,834,265
Marketing communication services 2,831,004 16,366,367
Database marketing 2,768,362 3,627,867
Telemarketing 3,792,921 4,507,485
Website development and design 308,539 816,916
Other 30,381 28,705
----------- -----------
Consolidated total $11,681,661 $29,181,605
=========== ===========
The marketing communication services product line was included in the sale of
Grizzard (see Note 5).
11. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB approved two new pronouncements: SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 applies to all business combinations with a closing date after June 30,
2001. This Statement eliminates the pooling-of-interests method of accounting
and further clarifies the criteria for recognition of intangible assets
separately from goodwill. SFAS No. 142 eliminates the amortization of goodwill
and indefinite-lived intangible assets and initiates an annual review for
impairment. Identifiable intangible assets with a determinable useful life will
continue to be amortized. The amortization provisions apply to goodwill and
other intangible assets acquired after June 30, 2001. Goodwill and other
intangible assets acquired prior to June 30, 2001 will be affected upon
adoption. The adoption will require the Company to cease amortization of its
remaining net goodwill balance and to perform an impairment test of its existing
goodwill based on a fair value concept. The Company is still reviewing the
provisions of these Statements which must be adopted by the Company on July 1,
2003. As of September 30, 2001, the Company has net unamortized intangibles of
$53,666,433 and amortization expense of $696,327 and $1,887,297 for the quarters
ended September 30, 2001 and 2000, respectively.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the disposal of long-lived assets. SFAS No. 144 becomes effective
for financial statements issued for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. The Company is currently
evaluating the potential impact, if any, the adoption of SFAS No. 144 will have
its financial position and results of operation.
10
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
Special Note Regarding Forward-Looking Statements
-------------------------------------------------
Some of the statements contained in this Report on Form 10-Q discuss our plans
and strategies for our business or state other forward-looking statements, as
this term is defined in the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of Marketing Services Group, Inc. ("MKTG" or the "Company"), or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; industry capacity; direct marketing and other industry trends;
demographic changes; competition; the loss of any significant customers; changes
in business strategy or development plans; availability and successful
integration of acquisition candidates; availability, terms and deployment of
capital; advances in technology; retention of clients not under long-term
contract; quality of management; business abilities and judgment of personnel;
availability of qualified personnel; changes in, or the failure to comply with,
government regulations; and technology, telecommunication and postal costs.
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, 2001 and 2000. 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, 2001.
To facilitate an analysis of MKTG operating results, certain significant events
should be considered.
In September 2000, in connection with the discontinued operations of
WiredEmpire, the Company offered to exchange preferred shares of WiredEmpire for
MKTG common shares. During the quarter ended September 30, 2000, the Company
exchanged 218,978 shares of unregistered MKTG 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 and earnings per share - discontinued operations for the quarter
ended September 30, 2000. As of September 30, 2001, 48,000 shares of WiredEmpire
preferred stock have not been exchanged.
On June 13, 2001, the board of directors and management of the Company approved
a formal plan to sell Grizzard. On July 18, 2001, the Company entered into a
definitive agreement to sell Grizzard. On July 31, 2001, the Company completed
its sale of all the outstanding capital stock of its Grizzard subsidiary to
Omnicom Group, Inc. The purchase price of the transaction was $89.8 million, net
of a working capital adjustment, payable in cash. As a result of the sale
agreement, the Company fully paid the term loan of $35.5 million and $12.0
million line of credit. The Company recorded an extraordinary loss of
approximately $4.9 million in the September 2001 quarter as a result of the
early extinguishment of debt. The Company retained $43.8 million in cash
proceeds from the sale before closing fees and other costs of approximately $8.0
million. The purchase price was determined through arms-length negotiations
between the purchaser and MKTG.
At June 30, 2001, the assets and liabilities of Grizzard were classified as net
assets held for sale in the amount of $80.9 million. In the quarter ended
September 30, 2001, the Company recognized a gain on sale of Grizzard in the
amount of $1.7 million. Grizzard's revenues included in the Company's statement
of operations for the quarters ended September 30, 2001 and 2000 were $2.9
million and $16.4 million, respectively. Grizzard's net loss included in the
Company's statement of operations for the quarters ended September 30, 2001 and
2000 were $8.5 million and $2.9 million, respectively.
11
Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements," ("SAB 101") the
Company has reviewed its accounting policies for the recognition of revenue. SAB
101 was required to be implemented in fourth quarter 2001. SAB 101 provides
guidance on applying generally accepted accounting principles to revenue
recognition in financial statements. The Company's policies for revenue
recognition are consistent with the views expressed within SAB 101. See Note 4,
"Revenue Recognition," for a description of the Company's policies for revenue
recognition. The adoption of SAB 101, did not have a material effect on the
Company's consolidated financial position, cash flows, or results of operations.
Although net income was not materially affected, the adoption did have an impact
on the amount of revenue recorded as the revenue associated with the Company's
list sales and services product line are now required to be shown net of certain
costs. The Company believes this presentation is consistent with the guidance in
Emerging Issues Task Force ("EITF") 99-19, "Reporting Revenue Gross as a
Principal Versus Net as an Agent." All prior periods presented have been
restated.
On October 9, 2001, the Board of Directors approved a six-for-one reverse split
of the common stock. Par value of the common stock will remain $.01 per share
and the number of authorized shares of common stock will remain at 75,000,000.
The stock split was effective October 15, 2001. The effect of the stock split
has been recognized retroactively in the shareholders' equity accounts on the
balance sheets as of September 30, 2001 and June 30, 2001, and in all share and
per share data in the accompanying condensed consolidated financial statements
and Notes to Financial Statements. Shareholders' equity accounts have been
restated to reflect the reclassification of an amount equal to the par value of
the decrease in issued common shares from the common stock account to the paid
in capital account.
The Company's business tends to be seasonal. Certain marketing services have
higher revenues and profits occurring in the second fiscal quarter, followed by
the first fiscal quarter based on the seasonality of its clients' mail dates to
coordinate with the Thanksgiving and Holiday season. Telemarketing services have
higher revenues and profits occurring in the fourth fiscal quarter, followed by
the first fiscal quarter. This is due to subscription renewal campaigns for its
performing arts clients, which generally begin in the springtime and continue
during the summer months.
Results of Operations for the Three Months Ended September 30, 2001, Compared to
--------------------------------------------------------------------------------
the Three Months Ended September 30, 2000.
------------------------------------------
Revenues of approximately $11.7 million for the three months ended September 30,
2001 (the "Current Period") decreased by $17.5 million or 60% over revenues of
$29.2 million during the three months ended September 30, 2000 (the "Prior
Period"). Of the decrease, approximately $13.8 million is attributable to the
sale of Grizzard in July 2001. Revenue excluding the effects of the disposition
of Grizzard decreased by $3.7 million or 30% primarily due to decreased client
billings. The decrease is a direct result of the impact of a weaker economy
resulting in a reduction of our client's marketing campaigns. In addition, since
September 11 unexpected client cancellations and postponed fundraising campaigns
contributed to the decrease. Furthermore, for a period of time following
September 11 our telemarketing calling center closed and all calling campaigns
for such period were cancelled. The Company expects the decline in revenue from
the prior year results to continue in the near future due to the weakened
economy and due to the recent events in connection with the mail and
the impact on direct marketing programs. In addition, the Company is in the
process of moving its telemarketing call center to a new location during the
next fiscal quarter. The Company expects to see a decline in telemarketing
revenue for a short period of time during this transition.
Salaries and benefits of approximately $11.6 million in the Current Period
decreased by approximately $5.8 million or 34% over salaries and benefits of
approximately $17.4 million in the Prior Period. Of the decrease, approximately
$4.8 million is attributable to the sale of Grizzard in July 2001. Salaries and
benefits, excluding the effects of the disposition of Grizzard, decreased by
approximately $1.0 million or
12
11% due to decreased headcount in several areas of the Company. The Company has
been actively consolidating its offices and services.
Direct costs of approximately $2.4 million in the Current Period decreased by
$5.0 million or 67% over direct costs of $7.4 million in the Prior Period. Of
the decrease, approximately $4.8 million is attributable to direct costs
associated with sale of Grizzard in July 2001. Direct costs, excluding the
effects of the disposition of Grizzard, decreased by $.2 million or 16%
resulting from the decrease in revenue.
Selling, general and administrative expenses of approximately $3.4 million in
the Current Period decreased by approximately $1.0 million or 23% over
comparable expenses of $4.4 million in the Prior Period. Of the decrease,
approximately $.1 million is attributable to the sale of Grizzard in July 2001.
Selling, general and administrative expenses, excluding the effects of the
disposition of Grizzard, decreased by $.9 million, principally due to decreased
professional fees and decreased rent and other expenses due to the consolidation
of certain office spaces and the reduction of head count.
Depreciation and amortization expense of approximately $.9 million in the
Current Period decreased by approximately $2.0 million over expense of $2.9
million in the Prior Period. This is primarily attributable to an decrease in
depreciation and amortization expense resulting from the sale of Grizzard in
July 2001.
Net interest expense of approximately $.5 million in the Current Period
decreased by approximately $1.6 million over net interest expense of
approximately $2.1 million in the Prior Period. The decrease is principally due
to the reduced interest expense due to the repayment of certain long term debt
in connection with the sale of Grizzard in addition to the interest income
earned on the net proceeds from the sale.
As a result of the above, loss before extraordinary item of $5.5 million in the
Current Period increased by $.4 million over comparable net loss of $5.1 million
in the Prior Period. Grizzard's net loss included in loss before extraordinary
item for the quarters ended September 30, 2001 and 2000 were $3.6 million and
$2.9 million, respectively.
In connection with the sale of Grizzard, the Company fully paid the term loan of
$35.5 million and $12.0 million line of credit. As a result, the Company
recorded an extraordinary loss of approximately $4.9 million in the September
2001 quarter as a result of the early extinguishment of debt.
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, 2001,
the Company had cash and cash equivalents of $24.7 million and accounts
receivable net of allowances of $28.6 million.
The Company generated losses from operations of $4.9 million in the Current
Period. Cash used in operating activities was $6.4 million. Cash used by
operating activities principally consists of the net loss less the gain on sale
of Grizzard and the extraordinary loss from the extinguishments of debt.
In the Current Period, net cash of $76.3 million was provided by investing
activities consisting of the net proceeds from the sale of Grizzard of $81.6
million offset by the increase in restricted cash of $4.9 million and the
purchases of property and equipment of $.4 million. In the Prior Period, the
Company purchased $.8 million of property and equipment and capitalized
software. The Company intends to continue to invest in technology and
telecommunications hardware and software.
In the Current Period, net cash of $46.7 million was used in financing
activities consisting of repayments of long term debt, credit facilities and
capital leases of $46.5 million and repayments of related party debt
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of $.2 million. In the Prior Period, net cash of $5.1 million was used in
financing activities consisting principally of a repayment of a related party
note payable of $5.0 million, repayments of long term debt and capital leases of
$ .6 million, net of proceeds from credit facilities of $.5 million.
At September 30, 2001, the Company had amounts outstanding of $2.2 million on
its lines of credit. The Company had approximately $1.6 million available on its
lines of credit as of September 30, 2001. Effective September 30, 2001, the
Company amended its line of credit agreements to adjust the calculations for
certain covenants. As of September 30, 2001, the Company was in compliance with
its line of credit covenants, as amended.
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. The Company
believes that funds on hand, funds available from its operations, planned cost
reductions, its unused lines of credit and proceeds from the Grizzard sale in
July 2001, should be adequate to finance its operations and capital expenditure
requirements, and enable the Company to meet interest and debt obligations for
the next twelve months. In conjunction with the Company's acquisition and growth
strategy, additional financing may be required to complete any such acquisitions
and to meet potential contingent acquisition payments. Failure to generate
sufficient revenue, achieve planned cost reductions or attain additional
financing if necessary could have a material adverse effect on the Company's
ability to continue as a going concern and to achieve its intended business
objectives.
Recent Accounting Pronouncements
--------------------------------
In June 2001, the FASB approved two new pronouncements: SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 applies to all business combinations with a closing date after June 30,
2001. This Statement eliminates the pooling-of-interests method of accounting
and further clarifies the criteria for recognition of intangible assets
separately from goodwill. SFAS No. 142 eliminates the amortization of goodwill
and indefinite-lived intangible assets and initiates an annual review for
impairment. Identifiable intangible assets with a determinable useful life will
continue to be amortized. The amortization provisions apply to goodwill and
other intangible assets acquired after June 30, 2001. Goodwill and other
intangible assets acquired prior to June 30, 2001 will be affected upon
adoption. The adoption will require the Company to cease amortization of its
remaining net goodwill balance and to perform an impairment test of its existing
goodwill based on a fair value concept. The Company is still reviewing the
provisions of these Statements which must be adopted by the Company on July 1,
2003. As of September 30, 2001, the Company has net unamortized intangibles of
$53,666,433 and amortization expense of $696,327 and $1,887,297 for the quarters
ended September 30, 2001 and 2000, respectively.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the disposal of long-lived assets. SFAS No. 144 becomes effective
for financial statements issued for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. The Company is currently
evaluating the potential impact, if any, the adoption of SFAS No. 144 will have
its financial position and results of operation.
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PART II- OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
Exhibits
--------
None
Reports on Form 8-K
-------------------
On or about August 15, 2001, the Company filed a current report on Form 8-K
regarding the Company's disposition of all the outstanding common stock of
Grizzard Communication Group, Inc.
15
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, 2001 By: /s/ J. Jeremy Barbera
------------------------------------------
J. Jeremy Barbera
Chairman of the Board and
Chief Executive Officer
Date: November 14, 2001 By: /s/ Cindy H. Hill
------------------------------------------
Cindy H. Hill
Chief Accounting Officer
16