<PAGE> 1
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UNITED STATES
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 MARCH 31, 2000
OR
[TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.]
COMMISSION FILE NUMBER 0-24667
MARKETING SPECIALISTS CORPORATION
(F/K/A MERKERT AMERICAN CORPORATION)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3411833
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
17855 N. DALLAS PARKWAY, SUITE 200
DALLAS, TEXAS 75287
(972) 349-6200
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
------------------------
FORMER NAME AND ADDRESS
MERKERT AMERICAN CORPORATION
490 TURNPIKE STREET
CANTON, MASSACHUSETTS 02021
------------------------
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 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 [ ]
The number of shares of the Registrant's Common Stock and Restricted
Common Stock outstanding as of March 30, 2000 was 19,455,135 and 335,700,
respectively.
<PAGE> 2
MARKETING SPECIALISTS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
March 31, 2000 (unaudited) and December 31, 1999....................... 3
Condensed Consolidated Statements of Operations
Three months ended March 31, 2000 and March 31, 1999
(unaudited)............................................................ 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2000 and March 31, 1999
(unaudited)............................................................ 5
Consolidated Statement of Stockholders' Equity............................. 6
Notes to Condensed Consolidated Financial Statements (unaudited)........... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.............................................................. 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................. 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.......................................................... 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................................. 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................ 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................ 17
ITEM 5. OTHER INFORMATION.......................................................... 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................... 17
SIGNATURES................................................................. 19
</TABLE>
<PAGE> 3
MARKETING SPECIALISTS CORPORATION AND SUBSIDIARIES
(FORMERLY MERKERT AMERICAN CORPORATION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
(unaudited)
March 31, 2000 December 31, 1999
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ -- $ --
Restricted cash 913 1,200
Accounts receivable net of allowance for doubtful
accounts of $4,433 and $5,730, respectively 58,322 53,579
Inventory 1,696 1,221
Properties held for sale 5,346 7,312
Prepaid expenses and other current assets 3,196 2,895
--------- ---------
Total current assets 69,473 66,207
Other assets 14,062 9,665
Property and equipment, net 28,558 35,204
Intangible assets, net 345,000 338,540
--------- ---------
Total Assets $ 457,093 $ 449,616
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable $ 18,214 $ 14,396
Accrued expenses 32,241 33,664
Current portion of long-term obligations 44,837 48,055
--------- ---------
Total current liabilities 95,292 96,115
Long-term obligations, less current portion:
Notes payable 175,047 170,065
Obligations under capital leases 717 804
Covenants not to compete 20,261 21,041
Acquisition-related deferred compensation liabilities 32,558 35,921
--------- ---------
228,583 227,831
Other liabilities 4,303 7,428
Commitments and contingencies -- --
Stockholders' equity (deficit):
Common Stock, $.01 stated value:
Authorized shares - 54,000,000
Issued and outstanding - 19,751,131 and
14,173,844, respectively 198 142
Additional paid-in capital 159,770 143,080
Note for sale of common stock (1,500) (1,500)
Accumulated deficit (29,106) (23,033)
Treasury stock at cost - 39,707 shares (447) (447)
--------- ---------
Total stockholders' equity 128,915 118,242
--------- ---------
Total Liabilities and Stockholders' Equity $ 457,093 $ 449,616
========= =========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE> 4
MARKETING SPECIALISTS CORPORATION AND SUBSIDIARIES
(FORMERLY MERKERT AMERICAN CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, 2000 March 31, 1999
<S> <C> <C>
Revenues:
Commissions $ 94,442 $ 43,876
Sales 10,524 12,749
------------ ------------
Total revenues 104,966 56,625
Expenses:
Cost of sales 9,454 11,304
Selling expenses 70,755 27,377
General and administrative expenses 18,244 11,332
Depreciation 1,670 387
Amortization 4,554 1,070
------------ ------------
Total expenses 104,677 51,470
------------ ------------
Operating income 289 5,155
Other income (expenses):
Interest expense (6,418) (1,824)
Other income (expense) 56 --
------------ ------------
Income (loss) before income taxes (6,073) 3,331
Income tax expense -- 1,499
------------ ------------
Net income (loss) $ (6,073) $ 1,832
============ ============
Net income (loss) per share $ (0.39) $ 0.25
============ ============
Weighted average shares outstanding--basic and diluted 15,743,867 7,447,000
============ ============
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE> 5
MARKETING SPECIALISTS CORPORATION AND SUBSIDIARIES
(FORMERLY MERKERT AMERICAN CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, 2000 March 31, 1999
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,073) $ 1,832
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation 1,670 387
Amortization 4,554 1,070
Other 414 --
Changes in operating assets and liabilities:
Restricted cash 287 135
Accounts receivable (4,807) (683)
Income taxes receivable -- 206
Prepaid expenses and other current assets (301) 55
Inventory (475) 200
Other assets 276 (8)
Deferred taxes -- 1,499
Accounts payable 3,818 (3,965)
Accrued expenses (5,777) (2,342)
----------- -----------
Net cash used in operating activities (6,414) (1,614)
Cash flows from investing activities:
Purchases of property and equipment (320) (99)
Proceeds from disposal of assets 6,537 --
Cash paid, net of cash assumed, in purchase of businesses (3,076) (2,687)
----------- -----------
Net cash provided by (used in) investing activities 3,141 (2,786)
Cash flows from financing activities:
Restricted cash -- 1,685
Borrowings under credit facility 4,702 3,000
Proceeds from stock issuance, net of related fees 15,000 4,046
Fees related to the New Senior Credit Facility (2,977) --
Principal payments on notes payable and other long-term liabilities (13,452) (4,154)
----------- -----------
Net cash provided by financing activities 3,273 4,577
----------- -----------
Net change in cash and cash equivalents -- 177
Cash and cash equivalents at beginning of period -- 1,185
----------- -----------
Cash and cash equivalents at end of period $ -- $ 1,362
=========== ===========
Supplemental disclosures of:
Cash flows information -
Cash payments for interest $ 2,596 $ 2,051
=========== ===========
Cash payments for income taxes $ 523 $ --
=========== ===========
Non cash flows information -
Purchase price financed with debt and other incentives $ 7,085 $ 3,768
=========== ===========
Allocation of debt value to detachable warrants $ 1,700 $ --
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE> 6
<TABLE>
<CAPTION>
Note for
Additional sale of Treasury
Common Stock paid-in Common Accumulated Stock, at
Shares Amount Capital Stock Deficit cost Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1999 14,173,844 $ 142 $ 143,080 $ (1,500) $ (23,033) $ (447) $ 118,242
Shares issued to
MS Acquisition 5,577,287 56 14,944 -- -- -- 15,000
Fair market value
of detachable warrants -- -- 1,700 -- -- -- 1,700
Deferred
compensation - option
plans -- -- 46 -- -- -- 46
Net loss -- -- -- -- (6,073) -- (6,073)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at
March 31, 2000 19,751,131 $ 198 $ 159,770 $ (1,500) $ (29,106) $ (447) $ 128,915
========== ========== ========== ========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements
6
<PAGE> 7
MARKETING SPECIALISTS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Marketing Specialists Corporation (formerly Merkert American
Corporation) (the "Company") in accordance with accounting principles generally
accepted in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments consisting of normal
recurring accruals considered necessary to present fairly the financial
position, results of operations and cash flows of the Company for the interim
periods presented have been made. The consolidated results of operations for the
interim periods in 2000 are not necessarily indicative of those that may be
expected for the year ended December 31, 2000.
This financial information should be read in conjunction with the
consolidated financial statements and notes thereto for the period ended
December 31, 1999, included in the Annual Report on Form 10-K of Marketing
Specialists Corporation and Subsidiaries (formerly Merkert American
Corporation), for the period ended December 31, 1999.
2. OPERATIONS AND ACQUISITIONS
On August 18, 1999, the Company merged with Dallas, Texas-based Richmont
Marketing Specialists Inc. ("Richmont"), one of the largest food brokers in the
United States (the "Merger"). The Company completed the Merger for an aggregate
discounted purchase price of approximately $236.8 million, which included
approximately $3.4 million in cash payments, $170.0 million in assumed debt, and
$63.4 million in Common Stock and options. Under the terms of the Merger,
Richmont stockholders received 6,705,551 shares of Common Stock. The Company
also granted certain Richmont stockholders and employees options to purchase
800,000 in additional shares of Common Stock at a price equal to $13.50 per
share. Immediately following the Merger, the Company amended its certificate of
incorporation to change its corporate name to "Marketing Specialists
Corporation."
In January 2000, the Company acquired Johnson-Lieber, Inc.
("Johnson-Lieber"), a brokerage firm operating in the Seattle, Washington;
Spokane, Washington; Portland, Oregon; Billings, Montana; and Anchorage, Alaska
markets. The Company acquired Johnson-Lieber for an aggregate discounted
purchase price of approximately $10.2 million, which included approximately $3.1
million in cash payments and $7.1 million in new debt and other incentives.
The following unaudited pro forma combined statement of operations
information gives effect to the Merger as if it had occurred on
January 1, 1999, and excludes non-recurring restructuring charges (unaudited and
amounts in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
Pro-forma
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1999
<S> <C> <C>
Commissions $ 43,876 $ 96,380
Sales $ 12,749 $ 12,749
EBITDA $ 6,612 $ 7,304
Net income (loss) $ 1,832 $ (5,692)
Net income (loss) per share:
Basic and diluted $ 0.25 $ (0.40)
Shares used in computing net income (loss) per share:
Basic and diluted 7,447,000 14,152,329
</TABLE>
7
<PAGE> 8
3. INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted income
(loss) per share (unaudited and amounts in thousands, except share and per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
<S> <C> <C>
Numerator:
Net income (loss) $ (6,073) $ 1,832
Denominator
Weighted average shares - basic 15,734,867 7,447,000
Dilutive stock options -- --
Weighted average shares - assuming dilution 15,734,867 7,447,000
Number of options excluded as they would be
anti-dilutive 1,313,667 245,000
Net income (loss) per share
Basic and diluted $ (0.39) $ 0.25
</TABLE>
4. SEGMENT INFORMATION
The Company operates in two principal segments: Food Brokerage and Private
Label in the United States. The Company provides outsourced sales and marketing
services to manufacturers of branded food and non-food products (the
"Manufacturers") in the Food Brokerage segment. The Private Label segment
includes the Company's private label division, which procures private label
products on behalf of certain retailers (the "Retailers") as well as the
distribution of price marking equipment and other ancillary products to
retailers.
Information on the Company's business segments is as follows (unaudited and
amounts in thousands):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
<S> <C> <C>
Revenues
Food Brokerage $ 94,442 $ 43,876
Private Label 10,524 12,749
--------- ---------
$ 104,966 $ 56,625
========= =========
Operating
Profit (loss)
Food Brokerage $ 31,762 $ 7,828
Private Label 648 1,445
General Corporate
Expenses ( 32,121) (4,118)
--------- ---------
$ 289 $ 5,155
========= =========
Identifiable
Assets at
March 31,
2000:
Food Brokerage 52,553
Private Label 5,769
General Corporate
Assets 398,771
---------
$ 457,093
=========
</TABLE>
8
<PAGE> 9
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
(Unaudited)
<S> <C> <C>
10.125% Senior Subordinated Notes, due
December 15, 2007 $ 100,000 $ 100,000
Credit Facility:
Revolving Credit 25,002 20,300
Term Loan 33,300 43,750
Covenants not to compete 23,923 24,762
Bank - mortgage loans 12,708 12,781
Notes payable 40,102 32,379
Acquisition-related deferred compensation 37,218 40,660
Obligations under capital leases 1,167 1,254
--------- ---------
273,420 275,886
Less current maturities (44,837) (48,055)
--------- ---------
Net long-term obligations $ 228,583 $ 227,831
========= =========
</TABLE>
Senior Subordinated Notes
In December 1997, concurrently with the sale by Richmont of $100.0 million
of 10 1/8% Senior Subordinated Notes due 2007 (the "Issued Notes"), Richmont
entered into an Exchange and Registration Rights Agreement with the initial
purchaser of the notes. Under the terms of that agreement, Richmont agreed to
file a registration statement regarding the exchange of the Issued Notes for
new notes registered under the Securities Act of 1933, and to offer the holders
of the Issued Notes an opportunity to exchange their unregistered notes for
registered notes.
On June 21, 1999, Richmont filed a Registration Statement on Form S-4 with
the Securities and Exchange Commission to register $100.0 million of new notes
(the "Notes"). Subsequently, Richmont completed an exchange of the Issued Notes
for the Notes. The Notes are identical in all material respects to the Issued
Notes, except for transfer restrictions and registration rights. The Company
assumed this outstanding indebtedness in connection with the Merger.
The Notes are unsecured and will be subordinated in right of payment to
all existing and future senior indebtedness of the Company. The Notes are fully
and unconditionally guaranteed on an unsecured, senior subordinated, joint and
several basis by certain guarantor wholly-owned subsidiaries of the Company as
defined in the Registration Statement, which comprise substantially all the
direct and indirect subsidiaries of the Company. The Company is a holding
company with no assets or operations other than its interests in its
subsidiaries. Separate financials and other disclosures for such subsidiaries
have not been presented due to management's determination that such information
is not material to investors.
Interest on the Notes is payable semiannually on June 15 and December 15
of each year, commencing June 15, 1998. The principal on the Notes is payable
on December 15, 2007, the maturity date. Except as described below, the Company
may not redeem the Notes prior to December 15, 2002. On or after such date, the
Company may redeem the Notes, in whole or in part, at the following redemption
prices: 2002 - 105.063%; 2003 - 103.375%; 2004 - 101.688%; 2005 or thereafter -
100.000%, together with accrued and unpaid interest, if any, to the date of
redemption. The Notes are not subject to any sinking fund requirement. Upon a
change of control, as defined (not triggered by the merger with Richmont), each
holder of the Notes will have the right to require the Company to make an offer
to repurchase such holder's notes at a price equal to 101% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of repurchase.
The Notes subject the Company to certain limitations and restrictions
primarily related to obtaining additional indebtedness, payment of dividends,
and sales of assets and subsidiary stock.
INITIAL CREDIT FACILITY AND TERM LOAN
The Initial Credit Facility was amended and restated August 18, 1999, among
the Company and First Union National Bank, as agent. The Initial Credit
Facility, as amended, refinanced, in part, the Credit Agreement dated as of
October 14, 1997, as amended and restated, among Richmont and The Chase
Manhattan Bank, as agent (the "Former Chase Facility") at the effective time of
the Merger. The Former Chase Facility provided for a revolving credit facility
with a maximum borrowing capacity of $25.0 million. As of the effective time of
the Merger, the Initial Credit Facility had outstanding borrowings under the
Initial Revolving Credit of approximately $11.1 million, and the Former Chase
Facility had no outstanding borrowings. As of March 15, 2000, the Initial Credit
Facility had outstanding borrowings under the Initial Revolving Credit of
approximately $17.3 million, plus an outstanding letter of credit in the amount
of approximately $1.1 million. The letter of credit secures the Company's rental
payment obligations for its corporate headquarters in Dallas. In addition, the
outstanding balance of the Initial Term Loan was approximately $43.8 million.
The borrowings of the Company under the Initial Credit Facility were
secured by a lien on substantially all of the Company's and its subsidiaries
tangible and intangible property. In addition, the Company's obligations under
the Initial Credit Facility were jointly and severally guaranteed by all of the
Company's operating subsidiaries.
Amended Term Loan
On March 30, 2000, the Company became a party to a Second Amended and
Restated Credit Agreement among the Company and First Union National Bank, as
agent (the "Amended Term Loan"). The Amended Term Loan consists of a 2-year,
secured $35.0 million term loan. Under the Amended Term Loan, the principal
amount of the term loan was reduced from approximately $43.8 million (as of
December 31, 1999) to $35.0 million.
The Amended Term Loan is secured by a lien on substantially all of the
Company's and its subsidiaries' tangible and intangible property. In addition,
the Amended Term Loan will be jointly and severally guaranteed by all current
and future subsidiaries of the Company. Interest is payable on the Amended Term
Loan at a rate based on one of two customary interest rates plus an additional
interest margin of 375 or 500 basis points, as applicable.
9
<PAGE> 10
The Amended Term Loan requires the Company to comply with various
affirmative and negative covenants, including, among others: (i) the maintenance
of certain financial ratios, (ii) restrictions on additional indebtedness, (iii)
restrictions on liens, guarantees, dividends and the disposition of assets and
(iv) restrictions on certain mergers, consolidations, and acquisitions. The
Amended Term Loan contains customary events of default, including cross-default
provisions relating to the Notes.
In connection with the Amended Term Loan, the Company issued to an
affiliate of First Union National Bank detachable warrants to purchase up to
4.0% of the Company's Common Stock on a diluted basis. The exercise price of the
warrants is nominal, and the warrants are exercisable at any time after the
second anniversary of the issuance of the warrants. The proceeds of the Amended
Term Loan were allocated between debt and warrants based on their respective
estimated fair market values.
The letter of credit outstanding under the Initial Credit Facility was
replaced on March 29, 2000 by a $1.1 million letter of credit issued for the
account of Richmont Capital Partners I, L.P. ("RCPI"), an affiliate of MS
Acquisition Limited ("MS Acquisition"), the Company's largest shareholder. The
Company in turn issued to RCPI a reimbursement note subordinated in right of
payment to the Notes in the amount of the letter of credit. The promissory note
will become payable if the letter of credit is drawn.
New Revolver
On March 30, 2000, the Company also became a party to a Credit Agreement
among the Company, certain of its subsidiaries and The Chase Manhattan Bank, as
agent, and the lenders named therein (the "New Revolver", and together with the
Amended Term Loan, the "New Senior Credit Facility"). The New Revolver consists
of a 2-year, senior secured $50.0 million revolving line of credit, subject to a
borrowing base equal to a specified percentage of eligible receivables. Funds
advanced under the New Revolver were used by the Company to repay a portion of
outstanding amounts under the Initial Credit Facility, to partially finance the
acquisition of The Sales Force Companies, Inc. ("Sales Force"), to finance the
Company's working capital and capital expenditure requirements in the ordinary
course of business, and to pay fees and expenses relating to the closing of the
New Senior Credit Facility. The New Revolver contains customary events of
default, including cross-default provisions relating to the Notes.
The New Revolver will be secured by a first priority security interest in
cash, cash equivalents, accounts receivable and inventory of the Company and its
subsidiaries and proceeds thereof but not in assets that are the proceeds of
equipment, fixtures, real estate, intellectual property or the stock of
subsidiaries. In addition, Sales Force, Paul Inman Associates, Inc. (Inman),
Marketing Specialists Sales Company ("MSSC") and Bromar, Inc. ("Bromar") are
co-borrowers under the New Revolver, jointly and severally liable for all
borrowings and other related obligations thereunder. Interest is payable on the
New Revolver at a rate based on one of two customary interest rates plus an
additional interest margin ranging from 150 to 350 basis points. The applicable
margin is determined based on certain financial ratios of the Company.
The New Revolver requires the Company to comply with various affirmative
and negative covenants, including, among others: (i) the maintenance of certain
financial ratios, (ii) restrictions on additional indebtedness, (iii)
restrictions on liens, guarantees, dividends and the disposition of assets and
(iv) restrictions on certain mergers, consolidations, and acquisitions.
Amounts borrowed under the New Revolver will be guaranteed by RCPI, subject
to a maximum guaranty amount of $10.0 million. The RCPI guaranty will be
released by the lenders if the Company achieves $40.0 million of EBITDA for the
9-month period ended December 31, 2000, or if the Company achieves $50.0 million
of EBITDA during any subsequent 12 month period.
As of March 31, 2000, the Company capitalized approximately $5.0 million in
eligible costs related to obtaining the New Senior Credit Facility. The Company
plans to expense these costs over 24 months, the term of the New Senior Credit
Facility.
10
<PAGE> 11
6. INTANGIBLE ASSETS
Intangible assets include goodwill, covenants not to compete, Manufacturer
relationships, and trained workforce. Goodwill represents the excess of the
purchase price over the fair value of the net assets of various businesses
acquired. The recorded goodwill is amortized over its estimated useful life,
which ranges from 20 to 40 years. Non-compete assets are recorded at fair value
and are amortized over the term of the related agreement, generally 3 to 10
years. Manufacturer relationships and trained workforce are recorded at
estimated fair value based on independent appraisals and are amortized over
periods ranging from 1 to 10 years.
7. INCOME TAXES
The Company's income tax provision varies from the statutory rate primarily
because of the difference in book and tax treatment of intangible assets, the
non-deductibility of certain portions of meal and entertainment expenses and
officer's life insurance premiums, state income taxes imposed by the various
states on the Company's operations and the valuation allowance provided for
deferred tax assets that may not be realizable in the future.
8. SUBSEQUENT EVENT
In April 2000, the Company completed the acquisition of Sales Force, a full
service brokerage firm operating in the Central Region of the United States. The
Company acquired Sales Force for an aggregate discounted purchase price of
approximately $21.6 million, which included approximately $8.3 million in cash
payments, $8.1 million in new debt, and $5.2 million in assumed debt.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The words "believe,"
"expect," "anticipate," "intend," "estimate," "assume," and other similar
expressions, which are predictions of or indicate future events and trends that
do not relate solely to historical matters, identify forward-looking statements.
Reliance should not be place on forward-looking statements because they involve
known and unknown risks, uncertainties and other factors, that in some cases are
beyond the control of the Company. These items may cause the actual results,
performance or achievements of the Company to differ materially from the
anticipated future results, performance or achievements expressed or implied by
such forward-looking statements.
INTRODUCTION
The Company was incorporated on March 4, 1998, to create a leading national
food brokerage firm providing outsourced sales, merchandising and marketing
services to Manufacturers. The Company acts as an independent sales and
marketing representative, selling grocery and consumer products on behalf of
Manufacturers and coordinating the execution of Manufacturers' marketing
programs with Retailers. The Company's principal source of revenue is
commissions it receives from Manufacturers. The Company's other activities
include managing private label programs on behalf of selected Retailers.
11
<PAGE> 12
ACQUISITION HISTORY
The acquisition noted below was accounted for using the purchase method
of accounting. The intangible assets resulting from this acquisition are being
amortized over their estimated useful lives.
In January 2000, the Company acquired Johnson-Lieber for an aggregate
discounted purchase price of approximately $10.2 million, which included
approximately $3.1 million in cash payments and $7.1 million in new debt and
other incentives. The operating results of Johnson-Lieber have been included in
the Company's operating results for all periods subsequent to the acquisition
date.
12
<PAGE> 13
RESULTS OF OPERATIONS
The following defined terms are used in conjunction with the Company's
discussion of operating results.
Revenues. Revenues are derived mainly from commissions earned from
Manufacturers based on the Manufacturers' invoices to Retailers for products
sold. Commissions are usually expressed as a percentage of the invoice as agreed
by contract between the Manufacturer and broker. Commission rates typically
range from 3% for full brokerage services to 1% for retail-only services. The
Company also derives revenues, referred to as "Sales," from the sale of products
including private label packaging materials and frozen products, such as fruits
and vegetables, to certain Retailers, and other products for certain
Manufacturers.
Cost of sales. Cost of sales are primarily the direct cost of private label
products sold by the Company, such as the cost of packaging and frozen
vegetables purchased from suppliers.
Selling expenses. Selling expenses consist predominately of salaries,
fringe benefits and incentives for personnel directly involved in providing
services to Manufacturers and Retailers. Other selling expenses include, among
other things, automobiles utilized by the sales personnel, promotional expenses,
and travel and entertainment.
General and administrative expenses. General and administrative expenses
consist primarily of salaries and fringe benefits for administrative and
corporate personnel, occupancy and other office expenses, information
technology, communications and insurance.
Depreciation and amortization expenses. Depreciation and amortization
expenses relate to property, plant and equipment and intangible assets,
including goodwill and non-compete agreements.
RESULTS FOR THE QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED
MARCH 31, 1999
Commissions. Commissions increased $50.6 million (or 115.2%) to $94.4
million for the quarter ended March 31, 2000, as compared to $43.9 million for
the quarter ended March 31, 1999. This increase is primarily related to the
inclusion of commissions for Richmont in 2000.
Sales. Sales decreased to $10.5 million for the quarter ended March 31,
2000 from $12.7 million for quarter ended March 31, 1999. Gross profit on sales
also decreased to $1.1 million (or 10.2% of sales) for the quarter ended March
31, 2000, from $1.4 million (or 11.3% of sales) for the quarter ended March 31,
1999.
Selling expenses. Selling expenses increased $43.4 million to $70.8 million
for the quarter ended March 31, 2000, as compared to $27.4 million for the
quarter ended March 31, 1999. The Company's expenses for the quarter ended March
31, 2000, include costs relating to Richmont.
General and administrative expenses. General and administrative expenses
increased $6.9 million to $18.2 million for the quarter ended March 31, 2000, as
compared to $11.3 million for the quarter ended March 31, 1999. This increase is
related to the inclusion of costs for Richmont in 2000. General and
administrative costs, as a percentage of revenues, decreased to 17.4% from 20.0%
due to the cost saving measures put into place relating to the elimination of
duplicative facilities resulting from the Merger for the quarter ended March 31,
2000 and 1999, respectively.
Earnings before depreciation and amortization decreased to approximately
$6.5 million for the quarter ended March 31, 2000, as compared to $6.6 million
for the quarter ended March 31, 1999, as a result of the factors noted above.
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<PAGE> 14
Depreciation and amortization. Depreciation and amortization expenses
increased $4.8 million to $6.2 million for the quarter ended March 31, 2000, as
compared to $1.5 million for the quarter ended March 31, 1999. This increase is
the result of the effect of the goodwill and other intangible assets associated
with the Merger.
Interest expense. Interest expense increased $4.6 million to $6.4 million
for the quarter ended March 31, 2000, as compared to $1.8 million for the
quarter ended March 31, 1999. The increase in 2000 is attributable to increased
borrowing and interest on the Notes.
Loss before income taxes. As a result of the factors noted above, loss
before income taxes was approximately ($6.1) million for the quarter ended March
31, 2000, as compared to income of $3.3 million for the three months ended March
31, 1999.
Provision for income taxes. The Company has not recorded the full tax
benefit associated with historical losses since its future realizability is not
assured.
Net loss. As a result of the factors noted above, the Company's net loss
was approximately ($6.1) million for the quarter ended March 31, 2000, as
compared to income of $1.8 million for the three months ended March 31, 1999.
COMBINED INTEGRATION ACTIVITIES
During 1999, the Company completed 5 acquisitions, resulting in the
coverage of new geographic markets and expanding representation of
Manufacturers' product offerings within existing markets. The Company's
strategic acquisition plan includes the selection, acquisition and management of
businesses in various brokerage markets, including the retail food, food service
and private label markets.
As part of the Merger, the Company further integrated many of its sales
offices and most of its administrative operations (including accounting,
treasury, payroll, human resources, and information technology). This process
resulted in the integration and consolidation of 37 facilities throughout the
Southeast and Mid-Atlantic regions of the country. As a result of its ongoing
integration activities, the Company recorded a restructuring charge during the
year ended December 31, 1999 of approximately $13.3 million. The charge
consisted of approximately $8.6 million relating to non-cancelable lease
obligations on vacated facilities and $4.7 million relating to severance and
other personnel-related amounts.
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<PAGE> 15
REFINANCING OF COMPANY'S EXISTING CREDIT FACILITY
See Note 5 to Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
On January 7, 2000, the Company received an equity investment from its
largest stockholder, MS Acquisition. MS Acquisition increased its equity
position by purchasing 1,577,287 additional shares of Common Stock at an
aggregate purchase price of $5.0 million ($3.17 per share) pursuant to the terms
of a stock purchase agreement. On March 30, 2000, MS Acquisition purchased an
additional 4,000,000 shares of Common Stock for an aggregate purchase price of
$10.0 million ($2.50 per share) pursuant to the terms of a stock purchase
agreement. The funds will serve as an additional source of capital for the
Company's operations, and will provide the Company with additional short-term
and long-term liquidity. The offering, sale and issuance of these shares was
exempt from registration under the Securities Act of 1933, as amended, pursuant
to a private offering exemption under Section 4(2) promulgated thereunder.
Net cash used in operating activities for the 3 months ended March 31,
2000, were approximately ($6.4) million as compared to approximately ($1.6)
million for the same period in 1999. The Company's net loss of approximately
($6.1) million for the 2000 period included approximately $4.6 million in
non-cash amortization expense. Operating cash flows for the 2000 period also
included approximately $2.0 million in cash uses related to a net decrease in
accounts payable and accrued expenses. The Company's net income of approximately
$1.8 million for the 1999 period included a $1.5 million tax provision and
approximately $1.1 million in non-cash amortization expense, which was offset by
approximately $6.3 million in cash uses related to accounts payable and accrued
expenses.
Net cash provided by investing activities for the 3 months ended March 31,
2000, was approximately $3.1 million as compared to approximately ($2.8) million
in net cash used in investing activities for the same period in 1999. Investing
cash flows for the 2000 period included approximately $6.5 million in cash
proceeds related to the sale of the Company's Orange County and Phoenix
buildings in February 2000. These proceeds were offset by approximately $3.1
million in cash payments related to the purchase of Johnson-Lieber in January
2000. Investing cash flows for the 1999 period included approximately $2.7
million in net cash payments related to the purchase of Sell in January 1999.
Net cash provided by financing activities for the 3 months ended March 31,
2000, was approximately $3.3 million as compared to approximately $4.6 million
for the same period in 1999. Financing cash flows for the 2000 period included
$15.0 million in proceeds from the sale of Common Stock to MS Acquisition and
approximately $4.7 million in incremental borrowings under the New Revolver.
These proceeds were offset by approximately $13.5 million in principal payments
in long-term obligations, of which approximately $8.8 million were related to
the Initial Term Loan, and approximately $3.0 million in cash payments related
to the refinancing of the Company's refinancing activities in 2000. Financing
cash flows for the 1999 period included approximately $4.0 million in proceeds
from the sale of Common Stock and $3.0 million in incremental borrowings under
the Initial Credit Facility. These proceeds were offset by approximately $4.2
million in principal payments on long-term obligations.
At March 31, 2000, the working capital deficit of the Company was
approximately ($25.8) million. Excluding the $25.0 million balance of the New
Revolver at March 31, 2000, the working capital deficit was approximately ($0.8)
million. The Company believes that cash flows provided by its operations,
together with its existing cash and amounts available under the New Senior
Credit Facility should be sufficient to fund its debt service requirements,
working capital needs, capital expenditures, and other operating expenses in the
foreseeable future. The Company's future operating performance
15
<PAGE> 16
and ability to service or refinance long-term obligations will be subject to
future economic conditions and to financial, business, and other factors, many
of which are beyond the Company's control.
SEASONALITY; FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced and expects to continue to experience
fluctuations in quarterly revenues and operating results as a result of seasonal
patterns. The revenues of the Company have been stronger in the third and fourth
calendar quarters as a result of the historically strong sales associated with
consumer consumption during the holiday season and weaker in the first quarter
following such season. Results of operations for any particular quarter
therefore are not necessarily indicative of the results of operations for any
future period. Future seasonal and quarterly fluctuations could have a material
adverse effect on the Company's business, financial condition and results of
operations.
INFLATION
The Company does not believe that its revenues have been materially
affected by inflation.
YEAR 2000 DISCLOSURE
The Company dedicated internal resources and engaged external resources to
identify and resolve "Year 2000" compliance issues with respect to computer
systems and applications utilized by the Company.
The Company experienced no significant Year 2000 issues in January 2000. No
assurance can be given that Year 2000 compliance issues will not materialize and
be resolved without future disruption or that the Company will not incur
significant additional expense. In addition, the failure of certain of the
Company's significant suppliers, Manufacturers and Retailers to address the Year
2000 compliance issues could have a material adverse effect on the Company.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to its New Revolver as
discussed in the notes to the Company's consolidated financial statements. The
interest on the New Revolver is subject to fluctuations in the market. The
Company does not believe that a change in the interest rate will have a material
effect on its financial position, results of operations or cash flows.
The Company does not engage in trading market risk sensitive instruments
and does not purchase as investments, as hedges, or for purposes "other than
trading", instruments that are likely to expose the Company to certain types of
market risk, including interest rate, commodity price or equity price risk. The
Company has not entered into any forward or futures contracts, purchased any
options or entered into any swaps.
16
<PAGE> 17
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
The Company previously disclosed the litigation brought against it by
Monroe & Company, LLC ("Monroe") in Form 10-K Annual Report (the "Annual
Report") filed with the Securities and Exchange Commission ("SEC"). The court
has since that filing allowed Monroe's motion for reconsideration of the court's
denial of its motion for summary judgment, but again denied Monroe's original
summary judgment motion.
Item 2: Changes in Securities and Use of Proceeds
There have not been any material changes in or additions to the
information previously reported in the Annual Report.
Item 3: Defaults Upon Senior Securities
None.
Item 4: Submission of Matters to a Vote of Security Holders
None.
Item 5: Other Information
On April 11, 2000, the Company filed a Current Report on Form 8-K
dated April 7, 2000 relating to a letter of intent to enter into a joint venture
between the Company and Mancini & Groesbeck, Inc. Negotiations are continuing as
to the terms of the letter of intent.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
(i) Current Report on Form 8-K, dated January 7, 2000, relating to
the announcement of the Company's largest stockholder increasing
its position in the Company, filed with the SEC on January 13,
2000.
(ii) Current Report on Form 8-K, dated January 27, 2000, relating to
the acquisition by MSSC wholly-owned subsidiary of the Company,
of the assets of Johnson-Lieber, Inc., filed with the SEC on
February 1, 2000.
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<PAGE> 18
(iii) Current Report on Form 8-K, dated February 2, 2000, relating to
the announcement of the Company's senior management realignment,
filed with the SEC on February 3, 2000.
(iv) Current Report on Form 8-K, dated March 10, 2000, relating to
the announcement of the Company's appointment as the primary
merchandising organization for SC Johnson, filed with the
SEC on March 14, 2000.
(v) Current Report on Form 8-K, dated March 24, 2000, relating to
the release of certain unaudited financial statements for the
Company's fourth quarter, filed with the SEC on March 24, 2000.
(vi) Current Report on Form 8-K, dated March 28, 2000, relating to
the distribution of a Consent Solicitation Statement to the
holders of its 10 1/8% Senior Subordinated Notes due 2007, filed
with the SEC on March 29, 2000.
(vii) Current Report on Form 8-K, dated March 31, 2000, relating to
(a) the announcement of the closing on the refinancing of the
Company's existing $68 million senior credit facility with $85
million of senior secured credit facilities and (b) the purchase
by MS Acquisition of approximately 4.0 million shares of the
Company's common stock, filed with the SEC on March 31, 2000.
(viii) Current Report on Form 8-K, dated April 7, 2000, relating to the
announcement of the signing of a letter of intent to enter into
a joint venture effective May 1, 2000 between the Company and
Mancini & Groesbeck, Inc, filed with the SEC on April 11, 2000.
(ix) Current Report on Form 8-K, dated April 17, 2000, relating to
(a) the announcement of the Company as national broker for
Aurora Food Inc., (b) the Company's 1999 fourth quarter and
year end results, and (c) the closing of the acquisition of
Sales Force, filed with the SEC on April 20, 2000.
(x) Current Report on Form 8-K, dated April 27, 2000, relating to
the announcement that, effective upon the open of business April
27, 2000, the Company's common stock would begin trading on the
Nasdaq SmallCap market, filed with the SEC on April 27, 2000.
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Marketing Specialists Corporation
--------------------------------------------
(Registrant)
/s/ Timothy Byrd
--------------------------------------------
Timothy Byrd
Chief Financial Officer
/s/ Jay DiNucci
--------------------------------------------
Jay DiNucci
Corporate Controller
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 62,755
<ALLOWANCES> 4,433
<INVENTORY> 1,696
<CURRENT-ASSETS> 69,473
<PP&E> 33,696
<DEPRECIATION> 5,138
<TOTAL-ASSETS> 457,093
<CURRENT-LIABILITIES> 95,292
<BONDS> 228,583
0
0
<COMMON> 198
<OTHER-SE> 128,717
<TOTAL-LIABILITY-AND-EQUITY> 457,093
<SALES> 10,524
<TOTAL-REVENUES> 104,966
<CGS> 9,454
<TOTAL-COSTS> 9,454
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,836
<INTEREST-EXPENSE> 6,418
<INCOME-PRETAX> (6,073)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,073)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,073)
<EPS-BASIC> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
