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, 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
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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 February 11, 2002 there were 6,524,467 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, 2001
PART I - FINANCIAL INFORMATION Page
----
Item 1 Interim Condensed Consolidated Financial Statements
(unaudited)
Condensed Consolidated Balance Sheets as of
December 31, 2001 and June 30, 2001 (unaudited) 3
Condensed Consolidated Statements of Operations for the
three and six months ended December 31, 2001 and 2000
(unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the six months ended December 31, 2001 and 2000
(unaudited) 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 6-12
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-18
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 6 Exhibits and Reports on Form 8-K
None
Signatures 20
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, 2001 June 30, 2001
----------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $16,337,051 $1,725,412
Accounts receivable, net of allowance
for doubtful accounts of $1,917,985 and $2,423,610 as of
December 31, 2001 and June 30, 2001, respectively 26,022,839 27,507,629
Net assets held for sale - 80,882,272
Other current assets 1,155,659 990,741
--------- -------
Total current assets 43,515,549 111,106,054
Intangible assets, net 52,970,107 54,362,534
Related party note receivable 1,010,000 -
Property and equipment, net 2,684,281 2,346,152
Restricted cash 4,945,874 -
Other assets 569,622 2,574,762
------------ ------------
Total assets $105,695,433 $170,389,502
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowing $2,534,806 $13,021,966
Accounts payable-trade 22,520,564 27,119,339
Related party payable - 400,000
Accrued expenses and other current liabilities 4,489,331 6,074,222
Net current liabilities of discontinued operations 2,104,502 2,396,171
Current portion of capital lease obligations 98,053 115,598
Current portion of long-term obligations 281,304 32,833,101
------------ ----------
Total current liabilities 32,028,560 81,960,397
Capital lease obligations, net of current portion 58,843 89,913
Long-term obligations, net of current portion 4,779,046 4,339,078
Other liabilities 836,576 1,516,976
------------ ------------
Total liabilities 37,703,025 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; 28,900 and 30,000 shares of Series E issued and outstanding as
December 31, 2001 and June 30, 2001, respectively 12,932,872 13,424,198
Stockholders' equity:
Common stock - $.01 par value; 75,000,000 authorized; 6,243,056 and 5,691,250
shares issued as of December 31, 2001 and
June 30, 2001, respectively 62,430 56,912
Additional paid-in capital 232,041,322 231,555,514
Accumulated deficit (175,931,452) (161,440,722)
Less: 70,649 shares of common stock in treasury, at cost (1,393,710) (1,393,710)
------------ ------------
Total stockholders' equity 54,778,590 68,777,994
------------ ------------
Total liabilities and stockholders' equity $105,695,433 $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 AND SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
(unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------ -----------
2001 2000 2001 2000
---- ---- ---- ----
Revenues $8,178,735 $40,587,891 $19,860,396 $69,769,496
----------- ----------- ----------- -----------
Operating costs and expenses:
Salaries and benefits 7,744,540 17,672,370 19,300,197 35,098,868
Direct costs 1,103,351 13,305,126 3,500,303 20,680,305
Selling, general and administrative 2,670,851 6,160,127 6,108,111 10,596,635
Depreciation and amortization 925,921 2,913,515 1,847,561 5,820,858
Gain on sale of Grizzard - - (1,722,763) -
----------- ----------- ----------- -----------
Total operating costs and expenses 12,444,663 40,051,138 29,033,409 72,196,666
----------- ----------- ----------- -----------
(Loss) income from operations (4,265,928) 536,753 (9,173,013) (2,427,170)
Interest income (expense) and other, net 109,456 (1,946,597) (407,575) (4,013,069)
----------- ----------- ----------- -----------
Loss before provision for income taxes and
extraordinary item (4,156,472) (1,409,844) (9,580,588) (6,440,239)
Provision for income taxes (20,503) (24,030) (51,303) (65,445)
----------- ----------- ----------- -----------
Loss before extraordinary item (4,176,975) (1,433,874) (9,631,891) (6,505,684)
Extraordinary item:
Loss on early extinquishment of debt - - (4,858,839) -
----------- ----------- ----------- -----------
Net loss (4,176,975) (1,433,874) (14,490,730) (6,505,684)
Gain on redemption of preferred stock
of discontinued subsidiary - 4,816,427 - 13,410,273
----------- ----------- ----------- -----------
Net (loss) income available to common stockholders
before cumulative effect of change in
accounting (4,176,975) 3,382,553 (14,490,730) 6,904,589
Cumulative effect of change in
accounting (Note 2) - (14,063,897) - (14,063,897)
----------- ------------ ------------ -----------
Net loss available to common stockholders $(4,176,975) $(10,681,344) $(14,490,730) $(7,159,308)
=========== ============ ============ ===========
Basic and diluted (loss) earnings per share:
Continuing operations before extraordinary item $(.74) $(.27) $(1.71) $(1.26)
Extraordinary item - - (.86) -
Discontinued operations - .91 - 2.60
Cumulative effect of change in accounting - (2.66) - (2.73)
----------- ----------- ----------- -----------
Basic and diluted (loss) earnings per share $(.74) $(2.02) $(2.57) $(1.39)
=========== =========== =========== ===========
Weighted average common shares outstanding 5,665,575 5,291,805 5,643,088 5,151,925
=========== =========== =========== ===========
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, 2001 AND 2000
(unaudited)
2001 2000
---- ----
Operating activities:
Net loss $(14,490,730) $(6,505,684)
Adjustments to reconcile loss to net cash used in
operating activities:
Extraordinary item-loss on early extinquishment of debt 4,858,839 -
Gain on sale of Grizzard (1,722,763) -
Depreciation 454,907 2,060,452
Amortization 1,392,654 3,760,406
Non cash interest expense 266,900 1,117,161
Provision for bad debts 324,654 747,709
Changes in assets and liabilities:
Accounts receivable 3,882,437 (15,414,276)
Inventory (697,908) 1,190,382
Other current assets (153,859) (1,072,259)
Other assets (16,207) (842,254)
Accounts payable - trade (3,625,315) 4,906,261
Accrued expenses and other current liabilities (924,036) 3,547,575
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Net cash used in operating activities (10,450,427) (6,504,527)
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Investing activities:
Proceeds from sale of Grizzard, net of fees 78,812,411 -
Increase in restricted cash (4,945,874) -
Purchases of property and equipment (1,064,270) (947,000)
Purchases of capitalized software - (952,280)
------------ -----------
Net cash provided by (used) in investing activities 72,802,267 (1,899,280)
------------ -----------
Financing activities:
Proceeds from exercises of stock options - 8,142
Issuance of related party note receivable (1,000,000) -
Expenditures from private placement of preferred stock - (56,977)
Net (repayments on) proceeds from credit facilities (10,487,160) 2,362,580
Repayment of capital lease obligation (54,529) (235,297)
Repayment of related party note payable (250,000) (5,000,000)
Proceeds of related party note payable - 650,000
Repayments of long-term debt (35,656,843) (1,995,575)
------------ -----------
Net cash used in financing activities (47,448,532) (4,267,127)
Net cash (used in) provided by discontinued operations (291,669) 3,618,384
------------ -----------
Net increase (decrease) in cash and cash equivalents 14,611,639 (9,052,550)
Cash and cash equivalents at beginning of period 1,725,412 9,903,799
------------ -----------
Cash and cash equivalents at end of period $16,337,051 $851,249
============ ===========
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 six-month
period ended December 31, 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 remained $.01 per share and
the number of authorized shares of common stock remained at 75,000,000. The
stock split was effective October 15, 2001. The effect of the stock split has
been reflected in the balance sheets and in all share and per share data in the
accompanying condensed consolidated financial statements and Notes to Financial
Statements. Stockholders' 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 3,002,143 shares and convertible
preferred stock in the amount of 14,521,045 shares for the three and six months
ended December 31, 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 and six months ended December 31, 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 $.06 per share was issued in October 2001. As a
result of the issuance of the warrant, certain antidilultive provisions of the
Company's Series E preferred stock were triggered. The conversion price was
reset to $2.346 based on 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. No further
adjustments will be made to the conversion price other than for stock splits,
stock dividends or other organic changes. The preferred shareholders are limited
in their conversion to 903,866 shares of common stock pursuant to the conditions
of the agreement of February 24, 2000. The Company is obligated under such
agreement to seek stockholder approval based upon the 19.99% NASDAQ stock
issuance limitations and the terms of the preferred stock itself. In the event
the stockholders of the Company do not approve the conversion of the additional
shares, the Company would be required to redeem the Series E preferred stock.
6
In the quarter ending December 31, 2001, the preferred shareholders converted
1,100 of preferred stock to 551,806 of common stock. 28,900 shares of Series E
preferred stock remain outstanding.
In the quarters ended December 31, 2000 and September 30, 2000, the Company
exchanged 656,137 and 1,313,863 shares, respectively of unregistered MKTG 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. MKTG adopted EITF 00-27 in December 2000 and as a result has
recorded a cumulative effect of a change in accounting of $14,063,897 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 stockholders.
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 December 31, 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 December 31, 2001, the Company amended its line of credit agreements
to adjust the calculations for certain covenants. As of December 31, 2001, the
Company was in compliance with its line of credit covenants, as amended.
Effective February 1, 2002, the Company amended its line of credit agreements
with a lender to lower the minimum interest rate to 6% per annum and minimum
annual interest requirement to $150,000 in aggregate. The lines of credit have
renewable two-year terms that have been extended until April 3, 2005. All other
terms and conditions of the line of credit agreements remain unchanged.
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.
7
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 $89.8 million
payable in cash, net of a working capital adjustment. 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. In the December 31, 2001 quarter, the estimated
working capital adjustment of $1.5 million and other liabilities of $1.6 million
representing the settlement of Grizzard intercompany debt were substantially
paid.
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 revenue included in the Company's statement
of operations for the three-months ended December 31, 2000 was $31.0 million and
for the six months ended December 31, 2001 and 2000 was $2.9 million and $47.6
million, respectively. The Company's statement of operations for the three
months ended December 31, 2000 includes Grizzard's net income of $4.1 million
and for the six months ended December 31, 2001 and 2000 includes Grizzard's net
loss of $8.5 million and net income of $1.1 million, respectively.
Supplemental
Pro forma information
For the three and six months ended December 31,
(Unaudited)
(In $000's)
Three Months Ended Six Months Ended
December 31, December 31,
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues $8,179 $9,600 $17,029 $22,158
------ ------ ------- -------
Operating costs and expenses:
Salaries and benefits 7,745 8,488 15,918 17,642
Direct costs 1,103 874 2,201 2,180
Selling, general and administrative 2,671 4,445 4,924 7,477
Depreciation and amortization 926 925 1,848 1,840
------ ------ ------- -------
Total operating costs and expenses 12,445 14,732 24,891 29,139
------ ------ ------- -------
Loss from operations (4,266) (5,132) (7,862) (6,981)
Interest income (expense) and other, net 109 (93) 107 (159)
------- ------- ------- --------
Loss before provision for income taxes (4,157) (5,225) (7,755) (7,140)
Provision for income taxes (20) (24) (51) (66)
------- ------- ------- --------
Loss from continuing operations
before extraordinary item $(4,177) $(5,249) $(7,806) $(7,206)
======== ======== ======== ========
Net loss per common share
from continuing operations,
basic and diluted $(.74) $(.99) $(1.38) $(1.40)
====== ====== ======= =======
8
Grizzard's net cash provided by operating activities was $1.9 million for the
six months ended December 31, 2001 consisting of $1.9 million reduction in
accounts receivable and inventory, $3.2 million increase in accounts payable and
accrued expenses, offset by the net loss of Grizzard, excluding non-cash items.
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 AND OTHER UNCERTAINTIES
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 and its unused lines of credit 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. The Company may also need
additional cash if required to redeem its outstanding Series E preferred stock.
At each balance sheet date, the Company reviews the recoverability of goodwill,
not identified with long-lived assets, based on estimated undiscounted future
cash flows from operating activities compared with the carrying value of
goodwill, and recognizes any impairment on the basis of discounted cash flows.
Management expects future cash flows to improve. However, due to the weakened
economy and lower than expected results, failure to generate sufficient cash
flows may trigger an impairment of goodwill in a future period.
7. CONTINGENCIES AND LITIGATION
In October 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., 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.
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
9
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. In February 2002, a new
settlement was reached among the parties. The settlement provides for a
$1,250,000 payment to be made to MKTG by GECC and for GECC to reimburse MKTG for
the reasonable cost of mailing a notice to stockholders up to $30,000. Counsel
for the plaintiff intend to request the Court to award $375,000 for attorney
fees, plus disbursements, to be deducted from the settlement payment to MKTG.
The settlement is pending approval of the court and a date for that purpose has
been set for April 29, 2002.
In December 2001, an action was filed by a number of purchasers of preferred
stock of WiredEmpire, Inc., a discontinued subsidiary, in the Alabama State
Court (Circuit Court of Jefferson County, Alabama, 10 Judicial Circuit of
Alabama, Birmingham Division), against J. Jeremy Barbera, Chairman of the Board
and Chief Executive Officer of Marketing Services Group, Inc., Marketing
Services Group, Inc. and WiredEmpire, Inc. The plaintiffs complaint alleges,
among other things, violation of sections 8-6-19(a)(2) and 8-6-19(c) of the
Alabama Securities Act and various other provisions of Alabama state law and
common law, arising for the plaintiff's acquisition of WiredEmpire Preferred
Series A stock in a private placement. The plaintiffs invested approximately
$1,650,000 in WiredEmpire's preferred stock and it seeks that amount, attorney's
fees and punitive damages. On February 8, 2002, the defendants filed a petition
to remove the action to federal court on the grounds of diversity of
citizenship. The Company believes that the allegations in the complaint are
without merit. The Company intends to vigorously defend against the lawsuit.
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. RELATED PARTY TRANSACTIONS
During the quarter ending December 31, 2001, the Company advanced $1,000,000
pursuant to a promissory note receivable agreement with an officer due and
payable to the Company at maturity, October 15, 2006. The note receivable is
collateralized by current and future holdings of MKTG common stock owned by the
officer and bears interest at prime. Interest is due and payable yearly on
October 15th. In the quarter ending December 31, 2001, the Company recognized
$10,000 of interest income. The note will be forgiven in the event of a change
in control.
During the quarter ending December 31, 2000, the Company borrowed $650,000 from
an officer pursuant to a promissory note payable agreement for up to $1,000,000,
which was due and payable at maturity, January 1, 2002. As of December 31, 2000
such note was repaid. The promissory note carried interest at 15% per annum and
includes certain prepayment penalties, which was equal to such officer's cost of
funds.
9. 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, 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
10. GAIN ON REDEMPTION OF PREFERRED STOCK OF DISCONTIUED SUBSIDIARY
In the quarters ended December 31, 2000 and September 30, 2000, the Company
exchanged 656,137 and 1,313,863 shares, respectively of unregistered MKTG 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
earnings per share-discontinued operations. As of December 31, 2001, 48,000
shares of WiredEmpire preferred have not been exchanged.
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. 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
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.
Supplemental disclosure of revenue by product:
Three Months Ended Six Months Ended
December 31, December 31,
-----------------------------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
List sales and services (1) $2,047,722 $4,122,788 $3,998,176 $7,957,053
Marketing communication services (2) - 29,786,742 2,831,004 46,153,109
Database marketing 2,934,772 3,128,879 5,703,134 6,756,746
Telemarketing 2,926,155 3,307,112 6,719,076 7,814,597
Other 270,086 242,370 609,006 1,087,991
------- ------- ------- ---------
Consolidated total $8,178,735 $40,587,891 $19,860,396 $69,769,496
========== =========== =========== ===========
(1) List sales and services revenue for Grizzard for the three and six
months ended December 31, 2000 was $1,201,625 and $1,459,424,
respectively. Grizzard was sold in July 2001.
(2) Marketing communication services revenue for all periods presented is
solely from Grizzard, which was sold in July 2001.
12. 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
11
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 December
31, 2001, the Company has net unamortized intangibles of $52,970,107 and
amortization expense of $1,392,654 and $3,760,406 for the six months ended
December 31, 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.
12
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 and six-month periods ended December 31, 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. In the quarters ended December 31, 2000 and September 30,
2000, the Company exchanged 656,137 and 1,313,863 shares, respectively, of
unregistered MKTG 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. As of December 31, 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.
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 revenue included in the Company's statement
of operations for the three-months ended December 31, 2000 was $31.0 million and
for the six months ended December 31, 2001 and 2000 was $2.9 million and $47.6
million, respectively. The Company's statement of operations for the three
months ended December 31, 2000 includes Grizzard's net income of
13
$4.1 million and for the six months ended December 31, 2001 and 2000 includes
Grizzard's net loss of $8.5 million and net income of $1.1 million,
respectively.
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 remained $.01 per share and
the number of authorized shares of common stock remained at 75,000,000. The
stock split was effective October 15, 2001. The effect of the stock split has
been reflected in the balance sheets and in all share and per share data in the
accompanying condensed consolidated financial statements and Notes to Financial
Statements. Stockholders' 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 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 $.06 per share was issued in October 2001. As a
result of the issuance of the warrant, certain antidilultive provisions of the
Company's Series E preferred stock were triggered. The conversion price was
reset to $2.346 based on 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. No further
adjustments will be made to the conversion price other than for stock splits,
stock dividends or other organic changes. The preferred shareholders are limited
in their conversion to 903,866 shares of common stock pursuant to the conditions
of the agreement of February 24, 2000. Any additional conversion, beyond those
outlined above will require stockholder approval based upon the 19.99% NASDAQ
stock issuance limitations and the terms of the preferred stock itself. In the
event the stockholders of the Company do not approve the conversion of the
additional shares, the Company would be required to redeem the Series E
preferred stock. In the quarter ending December 31, 2001, the preferred
shareholders converted 1,100 of preferred stock to 551,806 of common stock.
28,900 shares of Series E preferred stock remain outstanding.
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.
14
Results of Operations for the Three Months Ended December 31, 2001,
Compared to the Three Months Ended December 31, 2000
---------------------------------------------------------------------
Revenues of approximately $8.2 million for the three months ended December 31,
2001 (the "Current Period") decreased by $32.4 million or 80% over revenues of
$40.6 million during the three months ended December 31, 2000 (the "Prior
Period"). Of the decrease, approximately $31.0 million is attributable to the
sale of Grizzard in July 2001. Revenue excluding the effects of the disposition
of Grizzard decreased by $1.4 million or 3% primarily due to decreased list
services billing and the move of the telemarketing call center. The decreased
list services billing is a direct result of the impact of a weaker economy
resulting in a reduction of our clients' marketing campaigns. In addition, since
September 11 unexpected client cancellations, postponed fundraising campaigns
and lost clients contributed to the decrease. The Company expects the decline in
revenue from the prior year results to continue in the next fiscal quarter due
to the weakened economy.
Salaries and benefits of approximately $7.7 million in the Current Period
decreased by approximately $10.0 million or 56% over salaries and benefits of
approximately $17.7 million in the Prior Period. Of the decrease, approximately
$8.9 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 $1.1 million or 5% due to decreased headcount in several areas of
the Company. The Company has been actively consolidating its offices and
infrastructure.
Direct costs of approximately $1.1 million in the Current Period decreased by
$12.2 million or 92% over direct costs of $13.3 million in the Prior Period. Of
the decrease, approximately $12.4 million is attributable to direct costs
associated with sale of Grizzard in July 2001. Direct costs, excluding the
effects of the Grizzard disposition, increased by $.2 million or 2% resulting
from higher costs associated with the Database marketing business.
Selling, general and administrative expenses of approximately $2.7 million in
the Current Period decreased by approximately $3.5 million or 57% over
comparable expenses of $6.2 million in the Prior Period. Of the decrease,
approximately $1.7 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 $1.8 million, principally due to decreased
professional fees, rent, travel and other expenses due to the consolidation of
certain office spaces and the reduction of head count, partially offset by move
costs of the telemarketing call center.
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 a decrease in
depreciation and amortization expense resulting from the sale of Grizzard in
July 2001.
Net interest income of approximately $.1 million in the Current Period increased
by approximately $2.0 million over net interest expense of approximately $1.9
million in the Prior Period. The increase 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, net loss of $4.2 million in the Current Period
increased by $2.8 million over comparable net loss of $1.4 million in the Prior
Period. Grizzard's net income included in the quarter ended December 30, 2000
was $4.1 million.
15
Results of Operations for the Six Months Ended December 31, 2001,
Compared to the Six Months Ended December 31, 2000
-------------------------------------------------------------------
Revenues of approximately $19.9 million for the six months ended December 31,
2001 (the "Current Period") decreased by $49.9 million or 72% over revenues of
$69.8 million during the six months ended December 31, 2000 (the "Prior
Period"). Of the decrease, approximately $44.8 million is attributable to the
sale of Grizzard in July 2001. Revenue excluding the effects of the disposition
of Grizzard decreased by $5.1 million or 6% primarily due to the decreased list
services billing and the move of the telemarketing call center. The decreased
list services billing is a direct result of the impact of a weaker economy
resulting in a reduction of our clients' marketing campaigns. In addition, since
September 11 unexpected client cancellations, postponed fundraising campaigns
and lost clients contributed to the decrease. Furthermore, for period of time
following September 11 our telemarketing calling center was closed and all
calling campaigns for such a period were cancelled. The Company expects the
decline in revenue from the prior year results to continue in the next fiscal
quarter due to the weakened economy.
Salaries and benefits of approximately $19.3 million in the Current Period
decreased by approximately $15.8 million or 45% over salaries and benefits of
approximately $35.1 million in the Prior Period. Of the decrease, approximately
$13.8 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 $2.0 million or 6% due to decreased headcount in several areas of
the Company. The Company has been actively consolidating its offices and
infrastructure.
Direct costs of approximately $3.5 million in the Current Period decreased by
$17.2 million or 83% over direct costs of $20.7 million in the Prior Period.
This is primarily attributable to direct costs associated with sale of Grizzard
in July 2001.
Selling, general and administrative expenses of approximately $6.1 million in
the Current Period decreased by approximately $4.5 million or 42% over
comparable expenses of $10.6 million in the Prior Period. Of the decrease,
approximately $1.9 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 $2.6 million, principally due to decreased
professional fees, rent, travel and other expenses due to the consolidation of
certain office spaces and the reduction of head count partially offset by move
costs of the telemarketing call center.
Depreciation and amortization expense of approximately $1.8 million in the
Current Period decreased by approximately $4.0 million over expense of $5.8
million in the Prior Period. This is primarily attributable to a decrease in
depreciation and amortization expense resulting from the sale of Grizzard in
July 2001.
Net interest expense of approximately $.4 million in the Current Period
decreased by approximately $3.6 million over net interest expense of
approximately $4.0 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 $9.6 million in the
Current Period increased by $3.1 million over comparable net loss of $6.5
million in the Prior Period. The Company's results for the six months ended
December 30, 2001 and 2000 includes Grizzard's net loss of $8.5 million and net
income of $1.1 million, respectively.
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 carry forward period
16
to utilize the deferred tax assets.
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 six months
ended December 31, 2001 as a result of the early extinguishment of debt.
In the six months ended December 31, 2000, the Company exchanged 1,970,000
shares of unregistered MKTG 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 earnings per share - discontinued
operations.
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. MKTG 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 stockholders.
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, 2001, the
Company had cash and cash equivalents of $16.3 million and accounts receivable
net of allowances of $26.0 million, offset by accounts payable of $22.5 million.
The Company generated a net loss of $14.5 million in the Current Period.
Cash used in operating activities was $10.5 million. Cash used by operating
activities principally consists of the net loss and decrease in accounts
payable, less a decrease in accounts receivable, extraordinary loss from
extinguishment of debt and other non-cash items.
In the Current Period, net cash of $72.8 million was provided by investing
activities consisting of net proceeds from the sale of Grizzard of $78.8
million, offset by the increase in restricted cash of $4.9 million and purchases
of property and equipment of $1.1 million. In the Prior Period, net cash of $1.9
million was use for purchases of property and equipment and capitalized
software.
In the Current Period, net cash of $47.5 million was used in financing
activities consisting of repayments of long term debt, credit facilities and
capital leases of $46.3 million, issuance of related party note receivable of
$1.0 million and repayments of related party notes payable of $.2 million. In
the Prior 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.
At December 31, 2001, the Company had amounts outstanding of $2.5 million on its
lines of credit. The Company had approximately $1.3 million available on its
lines of credit as of December 31, 2001. As of December 31, 2001, the Company
was in compliance with its line of credit covenants, as amended.
At each balance sheet date, the Company reviews the recoverability of goodwill,
not identified with long-lived assets, based on estimated undiscounted future
cash flows from operating activities compared with the carrying value of
goodwill, and recognizes any impairment on the basis of discounted cash flows.
17
Management expects future cash flows to improve. However, due to the weakened
economy and lower than expected results, failure to generate sufficient cash
flows may trigger an impairment of goodwill in a future period.
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 and its unused lines of credit 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. The Company may also need
additional cash if required to redeem its outstanding Series E preferred stock.
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 December 31, 2001, the Company has net unamortized intangibles of
$52,970,107 and amortization expense of $1,392,654 and $3,760,406 for the six
months ended December 31, 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.
18
PART II - OTHER INFORMATION
---------------------------
Item 1 - Legal Proceedings
--------------------------
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. In February 2002, a new settlement was reached among the parties.
The settlement provides for a $1,250,000 payment to be made to MKTG by GECC and
for GECC to reimburse MKTG for the reasonable cost of mailing a notice to
stockholders up to $30,000. Counsel for the plaintiff intend to request the
Court to award $375,000 for attorney fees, plus disbursements, to be deducted
from the settlement payment to MKTG. The settlement is pending approval of the
court and a date for that purpose has been set for April 29, 2002.
In December 2001, an action was filed by a number of purchasers of preferred
stock of WiredEmpire, Inc., a discontinued subsidiary, in the Alabama State
Court (Circuit Court of Jefferson County, Alabama, 10 Judicial Circuit of
Alabama, Birmingham Division), against J. Jeremy Barbera, Chairman of the Board
and Chief Executive Officer of Marketing Services Group, Inc., Marketing
Services Group, Inc. and WiredEmpire, Inc. The plaintiffs complaint alleges,
among other things, violation of sections 8-6-19(a)(2) and 8-6-19(c) of the
Alabama Securities Act and various other provisions of Alabama state law and
common law, arising for the plaintiff's acquisition of WiredEmpire Preferred
Series A stock in a private placement. The plaintiffs invested approximately
$1,650,000 in WiredEmpire's preferred stock and it seeks that amount, attorney's
fees and punitive damages. On February 8, 2002, the defendants filed a petition
to remove the action to federal court on the grounds of diversity of
citizenship. The Company believes that the allegations in the complaint are
without merit. The Company intends to vigorously defend against the lawsuit.
19
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, 2002 By: /s/ J. Jeremy Barbera
------------------------------------------
J. Jeremy Barbera
Chairman of the Board and
Chief Executive Officer
Date: February 14, 2002 By: /s/ Cindy H. Hill
------------------------------------------
Cindy H. Hill
Chief Accounting Officer
20