UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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.
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(Exact name of small business issuer 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)
Issuer's telephone number, including area code: (212)594-7688
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the Issuer (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
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APPLICABLE ONLY TO CORPORATE ISSUERS
State number of shares outstanding of each of the issuer's classes of common
equity as of the latest practical date: As of November 11, 1997, there were
12,721,176 shares of the Issuer's Common Stock, par value $.01 per share
outstanding.
Traditional Small Business Disclosure Format (check one): Yes X No
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<PAGE>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-QSB REPORT
SEPTEMBER 30, 1997
PART I - FINANCIAL INFORMATION Page
Item 1 Interim Condensed Consolidated Financial Statements
(unaudited)
Condensed Consolidated Balance Sheet -
September 30, 1997 3
Condensed Consolidated Statements of
Operations Three months ended
September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash
Flows Three months ended
September 30, 1997 and 1996 5-6
Notes to Interim Condensed Consolidated
Financial Statements 7-9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
Signatures
Exhibit 11 Statements Regarding Computation of Net Loss Per Share
Exhibit 27 Financial Data Schedule
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Interim Condensed Consolidated Financial Statements (unaudited)
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
September 30, 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 1,237,252
Accounts receivable billed, net of
allowance for doubtful accounts of $32,000 4,421,567
Accounts receivable unbilled 755,253
Other current assets 308,497
-----------
Total current assets 6,722,569
Property and equipment at cost, net 805,841
Intangible assets at cost, net 17,990,424
Other assets 215,566
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Total assets $25,734,400
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 2,100,900
Trade accounts payable 2,097,835
Accrued salaries and wages 403,289
Other accrued expenses 556,102
Current portion of long-term obligations 1,498,575
Related party payable 379,444
-----------
Total current liabilities 7,036,145
Long-term obligations 1,249,615
Related party payable 379,444
Other liabilities 47,112
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Total liabilities 8,712,316
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Commitments and contingencies:
Stockholders' equity:
Convertible preferred stock, $.01 par value;
50,000 shares authorized, none outstanding
Common stock - authorized 36,250,000 shares
of $.01 par value 12,722,687 shares issued 127,227
Additional paid-in capital 28,629,601
Accumulated deficit (11,599,275)
Less 11,800 shares of common stock in treasury,
at cost (135,469)
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Total stockholders' equity 17,022,084
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Total liabilities and stockholders' equity $25,734,400
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See Notes to Condensed Consolidated Financial Statements.
<PAGE>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
1997 1996
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(as restated)
Revenues $7,254,619 $3,932,030
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Operating costs and expenses:
Salaries and benefits 4,438,314 4,953,499
Direct costs 1,607,006 145,230
Selling, general and administrative 787,760 506,550
Professional fees 137,347 168,187
Depreciation 78,920 38,086
Amortization of intangible assets 241,429 95,646
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Total operating costs and expenses 7,290,776 5,907,198
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Loss from operations (36,157) (1,975,168)
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Other income (expense):
Gain from sale of land 90,021
Interest income 16,766 9,561
Interest expense (124,291) (114,917)
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Total (107,525) (15,335)
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Loss before income taxes (143,682) (1,990,503)
Benefit (provision) for income taxes 47,003 (3,978)
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Net loss $ (96,679) $(1,994,481)
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Net loss attributable to common
stockholders* $ (96,679) $(2,412,561)
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Net loss per common share $(.01) $(.75)
===== =====
Weighted average common and common
equivalent shares outstanding 12,323,055 3,214,884
========== ==========
*The three months ended September 30, 1996 include the impact of $418,080 of
periodic non-cash accretions on preferred stock.
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
1997 1996
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(as restated)
Operating activities:
Net loss $ (96,679) $(1,994,481)
Adjustments to reconcile loss to net cash
provided by (used in) operating activities:
Gain from sale of land (90,021)
Depreciation 78,920 38,086
Amortization 241,429 95,646
Option issuances to two principal executive
officers 1,650,000
Warrant issuances to consultants 7,500 76,000
Accrued interest on convertible securities 18,752 66,500
Changes in assets and liabilities:
Accounts receivable (99,609) 817,323
Other current assets (56,959) (128,310)
Other assets (79,877) (6,500)
Trade accounts payable (299,034) (153,478)
Accrued expenses and other current liabilities (721,077) (749,942)
Income taxes payable (10,000)
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Net cash used in operating activities (1,006,634) (389,177)
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Investing activities:
Net proceeds from sale of land 860,443
Proceeds from issuances of warrants 5,000
Purchase of property and equipment (85,144) (233,072)
Acquisition of Pegasus, net of cash acquired
of $43,811 (256,875)
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Net cash provided by (used in) investing
activities (342,019) 632,371
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Financing activities:
Proceeds from credit facilities 1,289,354
Repayments of bank loans and credit line (850,162) (397,776)
Repayment of capital lease obligation (11,165)
Repayments of notes payable other (79,468)
Repayment of acquisition debt (691,666) (58,333)
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Net cash used in financing activities (343,107) (456,109)
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Net decrease in cash and cash equivalents (1,691,760) (212,915)
Cash and cash equivalents at beginning of
period 2,929,012 1,393,044
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Cash and cash equivalents at end of period $1,237,252 $1,180,129
========== ==========
Supplemental schedule of non cash investing and financing activities:
During the quarter ended September 30, 1997, the Company issued warrants to
acquire common stock for consulting services valued at $7,500 and recorded
non-cash accretion on debt of $18,752.
On July 1, 1997, the Company issued 600,000 shares of its common stock and paid
$200,000 in cash to acquire 100% of the outstanding stock of Pegasus Internet,
Inc. At acquisition, assets acquired and liabilities assumed, less payments made
for the acquisition, were:
Working capital, other than cash $ 102,214
Property and equipment (53,834)
Costs in excess of net assets of
acquired company (2,105,255)
Common stock issued 1,800,000
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$ (256,875)
==========
In August, 1996, 7,925 net additional shares of common stock were issued upon
exercise of stock options for 15,000 shares, using 7,075 outstanding shares as
payment of the exercise price.
In September, 1996, the Company issued 96,748 shares of common stock, valued at
$425,000, as an earn out payment to the former owner of SD&A for achieving
certain targeted earnings for the fiscal year ended June 30, 1996.
During September, 1996, two former members of executive management were granted
stock options for 600,000 shares of common stock as part of their employment
agreements. Compensation expense of $1,650,000 was recognized for the difference
between the exercise price and the fair market value at date of grant.
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
- -------------------------
The accompanying unaudited Interim Condensed Consolidated Financial Statements
include the accounts of Marketing Services Group, Inc. and Subsidiaries (the
"Company"). They have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the fiscal year ending June
30, 1998. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the fiscal year ended June 30, 1997. Certain reclassifications have
been made in the fiscal 1997 interim financial statements to conform with the
fiscal 1998 presentation.
2. ACQUISITIONS OF METRO SERVICES GROUP, INC. AND PEGASUS INTERNET, INC.
- -------------------------------------------------------------------------
Effective October 1, 1996, the Company acquired all of the outstanding common
shares of Metro Services Group, Inc., to be renamed Metro Direct, Inc.
("Metro").
Effective July 1, 1997, the Company acquired all of the outstanding common
shares of Pegasus Internet, Inc. ("Pegasus"). In exchange for all of the then
outstanding shares of Pegasus, the Company issued 600,000 shares of its Common
Stock valued at $1,800,000 plus cash of $200,000. The Company"s Chief Executive
Officer owned 25% of Pegasus, for which he received 25% of the consideration
paid. Pegasus provides Internet services including web site planning and
development, site hosting, on-line ticketing, system development, graphic design
and electronic commerce.
These acquisitions were accounted for using the purchase method of accounting.
Accordingly, the operating results of these acquisitions are included in the
results of operations from the date of acquisition. The purchase prices were
allocated to assets acquired based on their estimated fair value. For Pegasus,
this treatment resulted in approximately $2.0 million of costs in excess of net
assets acquired, after recording proprietary software of $100,000. Such excess
is being amortized over the expected period of benefit of ten years. The
software is amortized over its expected benefit period of three years.
The following summary, prepared on a pro forma basis, combines the consolidated
results of operations as if Metro and Pegasus had been acquired as of the
beginning of the period presented, after including the impact of certain
adjustments, such as the amortization of intangibles and increased interest on
acquisition debt. The net loss for the three months ended September 30, 1996
includes the non-cash compensation expense of $1,650,000 recorded on the grant
of options to members of the Company's former executive management. See Note 8.
Net loss to common stockholders includes $418,000 of accretion on preferred
stock in the prior period.
Unaudited
For the three months ended September 30,
1996
----
Revenues $ 6,249,128
Net loss (2,059,728)
Net loss to common (2,477,808)
Loss per common share $(0.44)
The unaudited pro forma information is provided for informational purposes only.
It is based on historical information and is not necessarily indicative of
future results of operations of the combined entities.
Effective July 1, 1997, the Company entered into agreements to extend the
covenants-not-to-compete with the former Metro principals from three years to
six years. Accordingly, the amortization period was extended prospectively. The
impact of the extended amortization was a reduction of $31,000 of expense in the
current quarter.
3. CREDIT FACILITIES
- ---------------------
In August, 1997, the Company's subsidiary, Stephen Dunn & Associates, Inc.
("SD&A") entered into a two-year renewable credit facility with a lender for a
line of credit commitment of up to a maximum of $2,000,000 collateralized by its
accounts receivable. Interest is payable monthly at the Chase Manhattan
reference rate (8 1/2% at September 30, 1997), plus 1 1/2% with a minimum annual
interest requirement of $80,000. The facility has an annual fee of 1% of the
available line. It has tangible net worth and working capital covenants. In
August, 1997, the outstanding balances on SD&A's previous bank line and note
payable were fully paid from borrowings on the new facility. At September 30,
1997, the amount outstanding on the line totaled $1,323,000.
4. 6% CONVERTIBLE NOTES
- ------------------------
In April, 1997, the Company obtained $2,046,000, net of fees from the private
placement of 6% convertible notes, with a face value of $2,200,000. The notes
are payable with interest on April 15, 1999, if not previously converted. The
notes are convertible into shares of the Company's Common Stock at the lesser of
$2.50 per share or 83% of the average closing bid price of the Common Stock
during the last five trading days prior to conversion. From August 15, 1997
through October 9, 1997, $1,700,000 face value of the notes, plus interest, were
converted into 694,412 shares of Common Stock.
5. INCOME TAXES
- ----------------
In the three months ended September 30, 1997 and 1996, the net income tax
benefit (provision) totaled $47,000 and ($4,000) on losses from operations of
$144,000 and $1,991,000, respectively. The Company recognizes provisions
resulting from state and local taxes incurred on taxable income at the operating
subsidiary level which can not be offset by losses incurred at the corporate
level. During the current quarter, the Company determined that it qualified to
file as a combined entity in a certain state for the fiscal years beginning July
1, 1996. The Company had estimated its state income tax for such state on a
standalone basis for each subsidiary for the year ended June 30, 1997. The
impact on the current quarter due to the change in tax reporting status created
a benefit of approximately $70,000.
6. RELATED PARTY TRANSACTIONS
- ------------------------------
In July, 1997, the Company repaid $300,000 and $100,000 face value of notes
payable to the President of Metro and the Chief Operating Officer of Metro,
respectively.
During the current quarter, the Chief Executive Officer of the Company forgave
all interest due him on notes payable from July 1, 1997 through December 31,
1997, and forgave an increase in his annual salary from May 27, 1997 to December
31, 1997. The impact on the quarters ended September 30, 1997 and December 31,
1997, is approximately $41,000 per quarter. In consideration for this, on
November 6, 1997, the Board of Directors granted the Chief Executive Officer
options to acquire 50,000 shares of Common Stock at the current fair market
price.
Effective September 30, 1997, approximately $88,000 in accounts receivable from
the Chief Executive Officer were offset against $500,000 in notes payable due to
him.
7. SUBSEQUENT EVENT
- --------------------
On November 13, 1997, the Company entered into a letter of commitment with a
strategic investor for the issuance of $15 million of convertible preferred
stock. Consummation of the financing is subject to several conditions, including
satisfactory completion of legal and business due diligence and final approval
by the purchaser's management. Accordingly, no assurance can be given that the
financing will be consummated.
8. RESTATEMENTS FOR CORRECTIONS OF ERRORS
- ------------------------------------------
The accompanying financial statements for the three months ended September 30,
1996 have been restated for corrections of errors.
On September 26, 1996, the Board of Directors granted options exercisable for
300,000 shares of common stock, par value $.01 per share (the "Common Stock") to
each of the Company's former Chief Executive Officer and Chief Operating
Officer. Options exercisable for the first 150,000 shares were granted to each
such officer at an exercise price of $2.50 per share and the remaining 150,000
each were granted at an exercise price of $3.00 per share.
As originally filed, the financial statements for the three months ended
September 30, 1996 did not include compensation expense for the stock options
granted to such former officers, as the Company intended the options to be
granted in May 1996 when the market price of the stock was $2.50. The net loss
attributable to common stockholders was originally reported at $344,481 and
related net loss per share was $(0.11).
Subsequently, the Company determined that the grant of these options was not
effective until ratification by the Board on September 26, 1996, when the market
price was $5.50. Accordingly, the Company amended the financial statements for
the three months ended September 30, 1996 to record a non-recurring, non-cash
charge of $1,650,000 for compensation expense in connection with the grant of
these options, which has increased the net loss to $1,994,481 and net loss per
share by $(0.51).
Additionally, as originally filed, the Company reported its Convertible
Preferred Stock as equity and did not include its accretion as a dividend
impacting net income to common stockholders in the earnings per share
calculation. The Preferred Stock contains two provisions for mandatory
redemption, which the Company had considered remote and not within the control
of the holders. Subsequently, in accordance with the Securities and Exchange
Commission requirements, these securities were reclassified as mezzanine
financing and the accompanying financial statements have been restated
accordingly. There was no impact on earnings per share for this
reclassification, as the dividends had previously increased the net loss
attributable to common stockholders. The non-cash accretion of the redeemable
convertible preferred stock had no impact on the net loss; however, the net loss
attributable to common stockholders increased by $418,000 and the net loss per
common share increased by $(0.13).
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
Introduction:
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and cash flows of the Company for the
three month period ended September 30, 1997. This should be read in conjunction
with the financial statements and notes thereto, included in this Report on Form
10-QSB and the Company's financial statements and notes thereto, included in the
Company's Annual Report on Form 10-KSB for the year ended June 30, 1997. As more
fully described in Note 4 to the consolidated financial statements included in
such Form 10-KSB, on April 25, 1995, the Company purchased 100% of the stock of
Alliance Media Corporation which had simultaneously acquired Stephen Dunn &
Associates, Inc. ("SD&A").
From April 25, 1995, through September 30, 1996, the Company operated as a
direct marketing services provider with its initial concentration in a
telemarketing and telefundraising company that specializes in direct marketing
services for the arts, educational and other cultural organizations. As more
fully described in Note 3 to the consolidated financial statements included in
the Company's Annual Report on Form 10-KSB for the year ended June 30, 1997, in
October 1996 the Company purchased 100% of the stock of Metro Services Group,
Inc. ("Metro"). This acquisition is reflected in the consolidated financial
statements using the purchase method of accounting starting in October 1996.
Metro develops and markets information-based services used primarily in direct
marketing by a variety of commercial and not-for-profit organizations. As more
fully described in Note 2 to the condensed consolidated financial statements
included in this Form 10-QSB, effective July 1, 1997, the Company acquired all
of the outstanding common shares of Pegasus Internet, Inc. ("Pegasus"). This
acquisition is reflected in the consolidated financial statements using the
purchase method of accounting, starting July 1, 1997. Pegasus provides Internet
services, including web site planning and development, site hosting, on-line
ticketing, system development, graphic design and electronic commerce.
Results of Operations for the Three Months Ended September 30, 1997, Compared to
the Three Months Ended September 30, 1996:
Revenues of $7,255,000 in the three months ended September 30, 1997 (the
"current period") increased by $3,323,000 over revenues of $3,932,000 in the
three months ended September 30, 1996 (the "prior period"). Of the increase,
$2,715,000 and $146,000 are attributable to the inclusion of Metro and Pegasus,
respectively. Revenues from on-site telemarketing and telefundraising campaigns
at SD&A totaled $3,948,000 and $3,417,000, respectively, or 89.9% and 86.9% of
SD&A revenues in the current and prior periods, respectively. Revenues from
off-site campaigns totaled $445,000 and $516,000, respectively, or 10.1% and
13.1% of revenues, respectively, in the current and prior periods. During the
three months ended September 30, 1997 and 1996, the Company"s margins relating
to off-site campaigns were generally higher than margins relating to on-site
campaigns.
Salaries and benefits of $4,438,000 in the current period decreased by $516,000
over the prior period total of $4,954,000. Salaries and benefits also decreased
as a percentage of revenues, from 126% in the prior period, to 61% in the
current period. Of the increase, $749,000 and $103,000 are attributable to the
inclusion of Metro and Pegasus, respectively. On-site telemarketing sales labor
expense at SD&A increased by $300,000, or 12%, in the current period, but
decreased as a percent of on-site revenues, from 73% in the prior period to 71%
in the current period, primarily due to improved contract pricing. Off-site and
administrative salaries at SD&A increased by a net of $39,000, the majority of
which was attributable to the hiring of additional administrative staff to
manage the increasing on-site growth. These increases were partially offset by a
$56,000 reduction in parent company administrative salaries in the current
period as compared to the prior period due to reductions in head count. In
addition, in the prior period, the Company incurred a non-recurring, non-cash
charge of $1,650,000 to compensation expense relating to options granted to two
principal executive officers. Such charge was incurred because the exercise
price of each such option, which was based upon the market price of the common
stock on May 30, 1996 (the date which the Company intended as the effective of
the grant) rather than the market price on September 26, 1996 (the actual
effective date of the grant), was lower than the market price of the common
stock on September 26, 1996.
Direct costs of $1,607,000 in the current period increased by $1,462,000 over
direct costs of $145,000 in the prior period. Of the increase, $1,405,000 and
$21,000 are attributable to the inclusion of Metro and Pegasus, respectively.
Direct costs at Metro consist principally of list commissions paid to use
marketing lists. Direct costs at SD&A increased by $36,000, principally due to
increased advertising for sales agents to fulfill on-site growth requirements.
Selling, general and administrative expenses of $788,000 in the current period
increased by $281,000 over comparable expenses of $507,000 in the prior period.
The inclusion of Metro and Pegasus resulted in increases of $280,000 and
$33,000, respectively. Administrative expenses at SD&A increased by $64,000 and
corporate administration decreased by $96,000. At SD&A, the net increase in the
current period generally resulted from administrative cost increases incurred in
developing and managing the growth in on-site business. This included relocation
costs for a senior executive, increases in payroll and related tax processing
fees and printing of marketing brochures, as well as increased property taxes as
a result of the move and expansion of the Berkeley Calling Center during the
prior fiscal year. At the parent company, the net decrease of $96,000 generally
resulted from the changes in management of the Company. Public relations
expenses decreased by $30,000 due to termination of the firm used in the prior
period. Parent company travel and meal expenses decreased by $22,000 as a result
of the management change. Directors fees of $9,000 were incurred for a September
1996 meeting; no such fees were incurred in the current period. Net decreases of
$35,000 resulted from reductions in director and officer insurance premiums,
telephone charges, office expenses, dues, fees and rent associated with the
change in management and headcount reductions.
Professional fees of $137,000 in the current period decreased by $31,000 over
professional fees of $168,000 in the prior period. Professional fees at Metro
and Pegasus totaled $45,000 and $3,000, respectively, for the current period.
Professional fees at the parent company and SD&A decreased by $79,000, net. The
prior period included a non-recurring charge at the parent company of
approximately $76,000 in consulting fees attributable to the value of warrants
acquired by former consultants during the period.
Depreciation expense of $79,000 in the current period increased by $41,000 over
$38,000 in the prior period. Of the increase, $32,000 and $7,000 are
attributable to the inclusion of Metro and Pegasus, respectively. The net
changes at SD&A and the parent company were not significant.
Amortization of intangible assets of $241,000 in the current period increased by
$145,000 over amortization of $96,000 in the prior period. Of the increase,
$82,000 and $58,000 are attributable to the inclusion in the current period of
Metro and Pegasus, respectively. Amortization of the goodwill associated with
the SD&A acquisition increased in the current period due to an increase in
goodwill for payments due to the former owner of SD&A resulting from achievement
of defined results of operations of SD&A for the year ended June 30, 1997.
The Company recorded a net gain of $90,000 from the sale of the its undeveloped
parcel of land in Laughlin, Nevada in August 1996, which gain was recorded net
of commissions and related selling expenses.
Interest expense of $124,000 in the current period increased by $9,000 compared
to $115,000 in the prior period. The inclusion of Metro and Pegasus resulted in
increases of $32,000 and $1,000, respectively. Interest expense at SD&A
increased by $22,000 due to a change in borrowing relationship in August 1997,
resulting in expansion of their credit line from $875,000 to $2,000,000 and
increased drawdowns to pay down the SD&A seller debt. Interest expense at the
parent company level decreased by $46,000 principally due to conversions of
convertible securities, principal payments on the SD&A seller debt and
reductions in the interest rate.
The income tax benefit of $47,000 in the current period changed by $51,000
compared to a provision of $4,000 in the prior period. During the current
quarter, the Company determined that it qualified to file as a combined entity
in a certain state for the fiscal years beginning July 1, 1996. The Company had
estimated its state income tax for such state on a stand alone basis for each
subsidiary for the year ended June 30, 1997. The impact on the current quarter
for this change in estimate resulted in a benefit of approximately $70,000. The
Company recognized offsetting provisions resulting from state and local taxes
incurred on taxable income at the operating subsidiary level, which could not be
offset by losses incurred at the parent company level.
As a result of the foregoing factors, the Company's net loss decreased from
$1,994,000 ($0.75 per share) in the prior period to $97,000 ($0.01 per share) in
the current period.
Capital Resources and Liquidity:
At September 30, 1997, the Company had cash and cash equivalents of $1,237,000
and accounts receivable net of allowances of $5,177,000.
The Company generated losses from operations of $36,000 in the current period
and used net cash in operating activities of $1,007,000. The usage was
principally due to final payments made on the Company's withdrawn public
offering liabilities and a seasonal decrease in accrued salaries at SD&A during
the current quarter.
In part due to certain seasonal marketing patterns and subscriptions, revenues
and salaries at SD&A are expected to decrease during the second and third fiscal
quarters. The Company's second fiscal quarter has historically been Metro's
strongest. The Company cannot predict the degree to which these trends will
continue.
In the current period, net cash of $342,000 was used in investing activities.
The Company paid $257,000 in the acquisition of Pegasus, net of $44,000 of cash
acquired. Purchases of property and equipment of $85,000 were principally
comprised of computer equipment. The Company intends to continue to invest in
computer technology.
In the current period, financing activities used $343,000. During the period,
SD&A entered into a two-year renewable credit facility with a lender for a line
of credit commitment of up to a maximum of $2,000,000 collateralized by its
accounts receivable. In August, SD&A drew upon the facility to fully pay down
the outstanding balance of $746,000 on its previous bank line and the $104,000
remaining on its bank note. At September 30, 1997, SD&A had amounts outstanding
of $1,323,000 on the line.
Metro has a credit facility with the same lender for a line of credit commitment
of up to a maximum of $1,500,000. During the period, Metro repaid a net of
$34,000 on the line, reducing its outstandings from $812,000 at June 30, 1997 to
$778,000 at September 30, 1997.
The Company has $1.4 million available on its lines of credit at Metro and SD&A
as of September 30, 1997.
During the current period the Company repaid $692,000 of its acquisition debt,
comprised of $400,000 to the former principals of Metro and $292,000 to the
former principal of SD&A.
On November 13, 1997, the Company entered into a letter of commitment with a
strategic investor for the issuance of $15 million of convertible preferred
stock. Consummation of the financing is subject to a number of conditions
including satisfactory completion of legal and business due diligence and final
approval by the purchaser's management. Accordingly, no assurance can be given
that the financing will be consummated.
The Company believes that the funds available from operations and its unused
line 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. There can be no assurance, however, that such capital, if required,
will be available on terms acceptable to the Company, if at all.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
a) Exhibits:
Exhibit # Item Notes
- --------- ---- -----
11 Statement Regarding Computation of Net Income Per Share A
27 Financial Data Schedule A
Notes relating to Exhibits:
A Filed herewith.
b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MARKETING SERVICES GROUP, INC.
(Registrant)
Date: November 14, 1997 By: /s/ J. Jeremy Barbera
---------------------------
Chairman of the Board and Chief
Executive Officer
Date: November 14, 1997 By: /s/ Scott Anderson
---------------------------
Chief Financial Officer (Principal
Financial and Accounting Officer)
Exhibit 11
STATEMENTS REGARDING COMPUTATION OF NET LOSS PER SHARE
Three Months Ended September 30
1997 1996
---- ----
(as restated)
Net loss per share was calculated as follows:
Net loss $ (96,679) $(1,994,481)
Periodic non-cash accretions on redeemable
convertible preferred stock (418,080)
Net loss attributable to common stockholders (96,679) (2,412,561)
Primary:
Weighted average common shares outstanding 12,323,055 3,214,884
Incremental shares under stock options
computed under the treasury stock method
using the average market price of the
issuer's common stock during the periods 902,343 3,500,731
Incremental shares under convertible
preferred stock 1,907,295
Incremental shares under convertible notes 215,811
Weighted average common and common equivalent
shares outstanding unless antidilutive 12,323,055 3,214,884
Net loss per common share (.01) (.75)
Fully diluted:
Weighted average common shares outstanding 12,323,055 3,214,884
Incremental shares under stock options
computed under the treasury stock method
using the market price of the issuer's
common stock at the end of the periods if
higher than the average market price 1,309,496 3,500,731
Incremental shares under convertible
preferred stock 1,907,295
Incremental shares under convertible notes 215,811
Weighted average common and common equivalent
shares outstanding unless antidilutive 12,323,055 3,214,884
Net loss per common share (.01) (.75)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF MARKETING SERVICES GROUP, INC. AS
OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 INCLUDED IN THIS REPORT ON
FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-START> Jul-01-1997
<PERIOD-END> Sep-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,237,252
<SECURITIES> 0
<RECEIVABLES> 5,208,820
<ALLOWANCES> (32,000)
<INVENTORY> 0
<CURRENT-ASSETS> 6,722,569
<PP&E> 1,274,336
<DEPRECIATION> (468,495)
<TOTAL-ASSETS> 25,734,400
<CURRENT-LIABILITIES> 7,036,145
<BONDS> 1,676,171
0
0
<COMMON> 127,227
<OTHER-SE> 16,894,857
<TOTAL-LIABILITY-AND-EQUITY> 25,734,400
<SALES> 7,254,619
<TOTAL-REVENUES> 7,254,619
<CGS> 1,607,006
<TOTAL-COSTS> 1,607,006
<OTHER-EXPENSES> 5,683,770
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 124,291
<INCOME-PRETAX> (143,682)
<INCOME-TAX> 47,003
<INCOME-CONTINUING> (96,679)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (96,679)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
