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 March 31, 1998
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 small business issuer as specified in its charter)
Nevada 88-0085608
------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
333 Seventh Avenue, 20th Floor
New York, New York 10001
------------------------------ -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (212) 594-7688
-----------------------------------------------------
(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
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 May 15, 1998, there were
13,086,305 shares of the Issuer's Common Stock, par value $.01 per share
outstanding.
Traditional Small Business Disclosure Format (check one): Yes: X No:
--- ---
<PAGE>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-QSB REPORT
MARCH 31, 1998
PART I - FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1 Interim Condensed Consolidated Financial Statements
(unaudited)
Condensed Consolidated Balance Sheet - March 31, 1998 3
Condensed Consolidated Statements of Operations Three
and nine months ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows Nine
months ended March 31, 1998 and 1997 5-6
Notes to Interim Condensed Consolidated Financial
Statements 7-11
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
PART II - OTHER INFORMATION
- ---------------------------
Item 4 Submission of Matters to a Vote of Security Holders
Item 6 Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Interim Condensed Consolidated Financial Statements (unaudited)
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
March 31, 1998
--------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,056,633
Accounts receivable billed, net of allowance for
doubtful accounts of $336,141 11,622,392
Accounts receivable unbilled 2,761,807
Other current assets 560,599
-----------
Total current assets 23,001,431
Property and equipment at cost, net 1,048,376
Intangible assets at cost, net 24,277,757
Other assets 176,433
-----------
Total assets $48,503,997
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 1,706,630
Trade accounts payable 12,135,117
Accrued salaries and wages 564,328
Other accrued expenses 869,349
Current portion of long-term obligations 903,171
-----------
Total current liabilities 16,178,595
Long-term obligations 791,667
Other liabilities 579,687
-----------
Total liabilities 17,549,949
-----------
Commitments and contingencies
Redeemable convertible preferred stock, $.01 par value; 50,000
shares authorized at March 31, 1998, increased to 150,000 on
April 3, 1998, consisting of 50,000 shares of Series D
Convertible Preferred Stock issued and outstanding 13,696,000
-----------
Stockholders' equity:
Common stock - authorized 36,250,000 shares at March 31,
1998, increased to 75,000,000 shares on April 3, 1998,
of $.01 par value, 13,098,105 shares issued 130,981
Additional paid-in capital 29,895,984
Accumulated deficit (12,633,448)
Less 11,800 shares of common stock in treasury, at cost (135,469)
-----------
Total stockholders' equity 17,258,048
-----------
Total liabilities and stockholders' equity $48,503,997
===========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
<TABLE>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $14,968,585 $ 6,300,538 $32,896,974 $16,146,217
----------- ----------- ----------- -----------
Operating costs and expenses:
Salaries and benefits 4,562,032 3,660,568 13,218,148 10,487,878
Non-recurring compensation expense on
option grants 1,650,000
Direct costs 9,101,746 1,847,493 16,563,303 3,789,313
Restructuring costs 1,019,474 1,019,474
Selling, general and administrative 1,060,796 954,874 3,094,653 2,544,092
Depreciation and amortization 398,943 280,947 1,065,960 690,821
----------- ----------- ----------- -----------
Total operating costs and expenses 15,123,517 7,763,356 33,942,064 20,181,578
----------- ----------- ----------- -----------
Loss from operations (154,932) (1,462,818) (1,045,090) (4,035,361)
----------- ----------- ----------- -----------
Other income (expense):
Discounts on warrant exercises (113,203) (113,203)
Withdrawn public offering costs (1,307,472) (1,307,472)
Interest income (expense) and other, net 12,840 (104,645) (188,410) (248,253)
----------- ----------- ----------- -----------
Sub total 12,840 (1,525,320) (188,410) (1,668,928)
----------- ----------- ----------- -----------
Loss before income taxes (142,092) (2,988,138) (1,233,500) (5,704,289)
Benefit (provision) for income taxes (7,598) (8,083) 102,648 (32,022)
----------- ----------- ----------- -----------
Net loss $ (149,690) $(2,996,221) $(1,130,852) $(5,736,311)
=========== =========== =========== ===========
Net loss attributable to common
stockholders* $ (428,834) $(7,971,721) $(4,795,177) $(20,538,331)
=========== =========== =========== ===========
Net loss per common share, basic and diluted $(.03) $(.96) $(.37) $(3.64)
===== ===== ===== ======
Weighted average common shares outstanding 13,085,627 8,291,764 12,827,618 5,639,573
=========== =========== =========== ===========
</TABLE>
* The nine months ended March 31, 1998 include the impact of dividends on stock
for a non-cash, non-recurring beneficial conversion feature of $3,214,400.
The three and nine months ended March 31, 1998 also include the impact of
dividends on stock for (a) $3,000 and $152,446, respectively, from adjustment
of the conversion ratio for certain issuances of common stock and exercises
of stock options; (b) $221,918 and $239,178, respectively, in cumulative
undeclared dividends; and (c) $54,226 and $58,301, respectively, of periodic
non-cash accretions on preferred stock.
The nine months ended March 31, 1997 includes the impact of non-recurring
dividends on preferred stock for (a) $8.5 million non-cash dividend on
conversion of Series B Preferred Stock; (b) $573,000 on repurchase of Series
C Preferred Stock; and (c) periodic non-cash accretions on preferred stock.
The three and nine months ended March 31, 1997 also include the impact of
non-recurring dividends on preferred stock for $5.0 million in discounts on
warrant exercises.
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
<TABLE>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(unaudited)
<CAPTION>
1998 1997
------------ ------------
(as restated)
<S> <C> <C>
Operating activities:
Net loss $(1,130,852) $(5,736,311)
Adjustments to reconcile loss to net cash provided by
(used in) operating activities:
Gain from sale of land (90,021)
Depreciation 281,545 178,876
Amortization 784,415 511,945
Option issuances to former executive officers 1,650,000
Promissory notes issued for settlement agreements
and offering cost obligations 707,474
Discounts on exercises of warrants 113,203
Warrant and option issuances to consultants 16,072 76,000
Accrued interest on convertible securities 57,142 128,264
Accretion of discounts on convertible securities 22,857
Changes in assets and liabilities, net of acquisitions:
Accounts receivable 1,064,360 (89,118)
Other current assets (231,552) (35,871)
Other assets 5,530 (20,949)
Trade accounts payable (437,920) 986,913
Accrued expenses and other liabilities (616,945) 62,456
----------- ----------
Net cash used in operating activities (208,205) (1,534,282)
----------- ----------
Investing activities:
Net proceeds from sale of land 860,443
Purchase of property and equipment (252,271) (406,388)
Acquisition of MMI, net of cash acquired of $340,550 (5,691,172)
Acquisition of Metro, net of cash acquired of $349,446 207,335
Acquisition of Pegasus, net of cash acquired of $43,811 (277,692)
----------- ----------
Net cash provided by (used in) investing activities (6,221,135) 661,390
----------- ----------
Financing activities:
Proceeds from sale of convertible preferred stock,
net of issue costs of $1,094,138 13,905,862
Net proceeds from credit facilities 44,920 360,576
Repayment of land option (150,000)
Repayment of capital lease obligations (28,288) (27,026)
Repayments of notes payable other (253,751)
Proceeds from issuances of warrants and option exercises 7,458 70,625
Repayment of acquisition debt (2,119,240) (291,667)
----------- ----------
Net cash provided by (used in) financing activities 11,556,961 (37,492)
----------- ----------
Net increase (decrease) in cash and cash equivalents 5,127,621 (910,384)
Cash and cash equivalents at beginning of period 2,929,012 1,393,044
----------- ----------
Cash and cash equivalents at end of period $8,056,633 $ 482,660
=========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
Supplemental schedule of non cash investing and financing activities:
As a result of the sale of $15,000,000 of redeemable convertible preferred stock
and warrants to General Electric Capital Corporation, as more fully described in
Note 6, the Company has recorded the following non-cash preferred dividends as
of December 31, 1997: (a) non-cash, non-recurring beneficial conversion feature
of $3,214,400; (b) $152,446 from adjustment of the conversion ratio for certain
issuances of common stock and exercises of stock options; (c) $239,178 in
cumulative undeclared dividends; and (d) $58,301 of period non-cash accretions
on preferred stock.
Effective December 1, 1997, the Company issued 222,222 shares of its common
stock and paid $6,000,000 in cash to acquire 100% of the outstanding capital
stock of Media Marketplace, Inc. and Media Marketplace Media Division, Inc. At
acquisition, assets acquired and liabilities assumed, less payments made for the
acquisition, were:
Working capital, other than cash $ 85,928
Liabilities incurred for acquisition 87,475
Property and equipment (204,436)
Costs in excess of net assets of acquired companies (6,691,964)
Non-current liabilities 31,825
Common stock issued 1,000,000
-----------
$(5,691,172)
===========
During the nine months ended March 31, 1998, the Company recognized $33,192 of
non-cash accretion on discounts of convertible securities and $23,949 of accrued
interest.
During December 1997, the Company entered into a capital lease agreement for
computer equipment totaling $73,505.
On November 21, 1997, the Company increased intangible assets by $91,112 upon
finalizing its computation of an earn-out payment due to the former owner of
SD&A for SD&A's achievement of defined results of operations for the fiscal year
ended June 30, 1997. The earn-out was paid in full in January 1998.
During the nine months ended March 1998, the Company issued options and warrants
to acquire 22,500 shares of common stock for consulting services valued at
$19,500, of which $16,072 had been earned by March 31, 1998.
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 $ 117,214
Property and equipment (53,834)
Costs in excess of net assets of acquired company (2,141,072)
Common stock issued 1,800,000
----------
$ (277,692)
==========
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.
In October 1996, the Company issued 1,814,000 shares of its common stock and
$1,000,000 face value in debt to acquire 100% of the outstanding stock of Metro
Services Group, Inc. The debt was discounted to $920,000.
On December 23, 1996, the Company issued 3,168,857 shares of its common stock
and $1,000,000 face value in debt as part of a recapitalization. 6,200 shares of
Redeemable Series B Preferred Stock were converted into 2,480,000 common shares;
2,000 shares of Redeemable Series C Preferred Stock were repurchased for
$1,000,000; warrants for 3,000,000 shares were exchanged for 600,000 common
shares and $145,753 in accrued interest was converted into 88,857 common shares.
In February 1997, the Company entered into a promissory note payable for legal
services totaling $207,950. In March 1997, the Company entered into promissory
notes payable for executive management settlement agreements totaling $499,000.
At March 31, 1997, $1,999,500 was receivable from stockholders on warrant
exercises.
<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 ("MSGI"
or 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 and nine month periods ended March 31, 1998 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-KSB/A 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
Effective December 1, 1997, MSGI entered into a stock purchase agreement to
acquire all of the issued and outstanding capital stock (the "Shares") of Media
Marketplace, Inc. and Media Marketplace Media Division, Inc. (collectively
"MMI"). The total cost of the acquisition was $7,294,197, consisting of a cash
purchase price of $6,000,000, an aggregate of 222,222 restricted shares of
common stock of MSGI, par value $.01 per share, at an agreed upon price of $4.50
per share, assumption of a note payable of $150,000 and transaction and other
costs aggregating $144,197. The cost of the acquisition was allocated to the
assets acquired and liabilities assumed, based upon their estimated fair values,
as follows:
Working capital $ 429,622
Property and equipment 204,436
Non-current liabilities (31,825)
Intangible assets 6,691,964
----------
$7,294,197
==========
The estimated fair value of the intangible assets are being amortized by the
straight-line method over their estimated useful lives ranging from three to
forty years.
As part of the acquisition, the agreement includes an earn-out payment of up to
$1,000,000 a year for each year beginning January 1st and ending December 31st
for the years of 1998, 1999 and 2000, adjustable forward to apply to the next
calendar year if no earn out payment is due for one such year. The earn out
payments are contingent upon MMI meeting (a) targeted earnings as defined in the
agreement and (b) targeted billings of MSGI subsidiaries and affiliates for
electronic data processing services for clients originally introduced by MMI.
MMI was founded in 1973 and specializes in providing list management, list
brokerage and media planning services to national publishing and fundraising
clients in the direct marketing industry, including magazines, continuity clubs,
membership groups and catalog buyers.
Effective July 1, 1997, MSGI 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.
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").
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.
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 $93,000 of expense in the
nine months ended March 31, 1998.
The following summary, prepared on a pro forma basis, combines the consolidated
results of operations as if Metro and MMI had been acquired as of the beginning
of the periods presented, after including the impact of certain adjustments,
such as amortization of intangibles, dividends on preferred stock and increased
interest on acquisition debt.
Unaudited
For the nine months ended March 31,
1998 1997
----------- ------------
(as restated)
Revenues $50,228,002 $ 43,413,640
Net loss $ (948,514) $ (5,519,114)
Net loss to common $(2,104,821) $(21,352,977)
Loss per common share,
basic and diluted $(.16) $(3.30)
The unaudited pro forma information is provided for information purposes only.
It is based on historic information and is not necessarily indicative of future
results of operation of the combined entities.
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 March 31, 1998), 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 March 31, 1998,
the amount outstanding on the line totaled $702,846.
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. During the nine months
ended March 31, 1998, $1,700,000 face value of the notes, plus interest, were
converted into 694,412 shares of Common Stock.
5. INCOME TAXES
In each of the three months ended March 31, 1998 and 1997, the net income tax
provision totaled $8,000. In the nine month periods ended March 31, 1998 and
1997, the income tax provision (benefit) totaled ($102,000) and $32,000,
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 and benefits during periods
of operating company losses expected to be recovered in future periods. In
September 1997, 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 the year ended June 30, 1997. The impact on the quarter ended September 30,
1997, due to the change in tax reporting status created a benefit of
approximately $70,000.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On December 24, 1997, the Company and General Electric Capital Corporation ("GE
Capital") entered into a purchase agreement (the "Purchase Agreement") providing
for the purchase by GE Capital of (i) 50,000 shares of Series D redeemable
convertible preferred stock, par value $0.01 per share, (the "Convertible
Preferred Stock"), and (ii) warrants to purchase up to 10,670,000 shares of
Common Stock (the "Warrants"), all for an aggregate purchase price of
$15,000,000. The Convertible Preferred Stock is convertible into shares of
Common Stock at a conversion rate, subject to antidilution adjustments. As of
March 31, 1998, the conversion rate was 89.02, resulting in the beneficial
ownership by GE Capital of 4,451,018 shares of Common Stock. On an as-converted
basis, the Convertible Preferred Stock represents approximately 24% of the
issued and outstanding shares of Common Stock. The Warrants are exercisable in
November 2001 and are subject to reduction or cancellation based on the
Company's meeting certain financial goals set forth in the Warrants or upon
occurrence of a qualified secondary offering, as defined.
The Company has recorded the Convertible Preferred Stock at a discount of
approximately $1,362,000, to reflect an allocation of the proceeds to the
estimated value of the warrants and is being amortized into dividends using the
"interest method" over the redemption period. Approximately $54,000 and $58,000
of such discount were included as dividends for the three and nine month period
ended March 31, 1998. In addition, the Company recorded a non-cash,
non-recurring dividend of approximately $3,200,000 representing the difference
between the conversion price of the Convertible Preferred Stock and the fair
market value of the common stock as of the date of the agreement.
The Convertible Preferred Stock is convertible at the option of the holder at
any time and at the option of the Company (a) at any time the current market
price, as defined, equals or exceeds $8.75 per share, subject to adjustments,
for at least 20 days during a period of 30 consecutive business days or (b) upon
the occurrence of a qualified secondary offering, as defined.
Dividends are cumulative and accrue at the rate of 6% per annum, adjusted upon
event of default. The Convertible Preferred Stock is mandatorily redeemable for
$300 per share, if not previously converted, on the sixth anniversary of the
original issue date and is redeemable at the option of the holder upon the
occurrence of an organic change in the Company, as defined in the Purchase
Agreement. As of March 31, 1998 approximately $395,000 were accrued for
dividends in arrears.
The Purchase Agreement contains, among other provisions, requirements for
maintaining certain minimum tangible net worth, as defined, and other financial
ratios and restrictions on payment of dividends.
7. RELATED PARTY TRANSACTIONS
In July 1997, the Company paid $300,000 and $100,000 face value of notes payable
to the President of Metro and the Chief Operating Officer of Metro,
respectively. In January 1998, the Company paid $500,000 face value of notes
payable to its Chief Executive Officer.
During the current period, 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 then current fair market
price.
8. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 establishes standards for computing and presenting earnings per
share ("EPS") and is effective for financial statements issued for periods
ending after December 15, 1997. This statement eliminates the presentation of
primary EPS and requires the presentation of basic EPS (the principal difference
being that common stock equivalents will not be considered in the computation of
basic EPS). It also requires the presentation of diluted EPS which will give
effect to all dilutive potential common shares that were outstanding during the
period. The Company adopted the provisions of SFAS 128 as of October 1, 1997,
and earnings per share for all prior periods presented have been restated.
The following schedule lists the effect of securities that could potentially
dilute basic EPS in the future. Such securities were not included in the
computation of diluted EPS, as they are antidilutive as a result of net losses
during the periods presented.
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31 March 31
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Convertible preferred stock 4,451,018 4,451,018
Options and warrants with exercise
prices below average market price
computed using the treasury stock method 1,290,385 3,047,543 1,230,148 3,027,624
Convertible notes and interest 211,506 211,506
</TABLE>
Options and warrants outstanding to purchase 437,432 shares of common stock at
exercise prices above the average market price of the common stock during the
three and nine months ended March 31, 1998 were not included in the above table,
as the effect would be antidilutive.
9. RESTATEMENT FOR CORRECTION OF ERROR
The financial statements for the three and nine months ended March 31, 1997,
were restated for correction of an error.
In March 1997, to obtain $2.1 million in working capital, the Company accepted
offers from certain warrant holders to exercise their warrants for 3,152,500
shares of common stock at discounted exercised prices.
Of the 3,152,500 total warrants exercised, warrants for 3,100,000 shares of
Common Stock arose from a June 6, 1996 sale of redeemable convertible preferred
stock with attached warrants. As originally filed in the financial statements
for the three and nine months ended March 31, 1997, the discount of $4,975,500
on these warrants was originally classified as a charge to expense as the
underlying redeemable convertible preferred stock was classified as mezzanine
financing for financial reporting. Subsequently, it was determined that the
warrants and the redeemable convertible preferred stock are equity instruments
and accordingly, the charge was reclassified from an expense transaction to an
equity transaction. There is no change to the net worth of the Company or to its
earnings per share as the charge affects net loss attributable to common
stockholders in the earnings per share calculation in the same manner as an
expense transaction.
10. SUBSEQUENT EVENTS
On April 3, 1998, the stockholders of the Company voted to increase the number
of authorized common shares from 36,250,000 to 75,000,000, and the number of
authorized preferred shares from 50,000 to 150,000.
In May 1998, the Company formed Metro Fulfillment, Inc. ("MFI"), a new operating
subsidiary. MFI provides clients with services such as online commerce,
real-time database management, inbound/ outbound customer service, custom
packaging, assembling, product warehousing, shipping, payment processing and
retail distribution.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
-----------------------------------------------------------------------
Introduction
- ------------
Except for historical information contained herein, the matters discussed in
this report contain certain forward-looking information that involves risks and
uncertainties that could cause results to differ materially, including changing
market conditions and other risks detailed in this report, the Company's Annual
Report on Form 10-KSB/A and other documents filed by the Company with the
Securities and Exchange Commission from time to time.
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and cash flows of the Company for the
three and nine month periods ended March 31, 1998. 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/A for the year ended June
30, 1997 (the "1997 10-KSB/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 1997 10-KSB/A, in October 1996 the Company purchased 100% of the
stock of Metro Services Group, Inc. ("Metro"). The results of operations of
Metro are reflected in the consolidated financial statements using the purchase
method of accounting from the date of acquisition. 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 dscribed in Note 2 to the condensed consolidated financial
statements included in this Form 10-QSB, effective December 1, 1997, the Company
acquired all of the outstanding capital stock of Media Marketplace, Inc. and
Media Marketplace Media Division, Inc. (collectively "MMI"). The results of
operations of MMI are reflected in the consolidated financial statements using
the purchase method of accounting from the date of acquisition.
MMI provides list management, list brokerage and media planning services.
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"). The results of operations of Pegasus are reflected in the
consolidated financial statements using the purchase method of accounting from
the date of acquisition. 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 March 31, 1998, Compared to the
Three Months Ended March 31, 1997
- --------------------------------------------------------------------------------
Revenues of $14,969,000 in the three months ended March 31, 1998 (the "current
period") increased by $8,668,000 over revenues of $6,301,000 in the three months
ended March 31, 1997 (the "prior period"). Of the increase, $7,834,000 and
$127,000 are attributable to the inclusion of MMI and Pegasus, respectively. The
remaining increase in revenues of approximately $707,000 is due to an increase
in revenues derived from direct marketing and database marketing of
approximately $942,000 offset by a decrease in revenue derived from
telemarketing of approximately $234,000. Direct marketing and database marketing
revenue increased due to an increase in the number of clients. Revenues from
telemarketing decreased due to fewer contacts on large fundraising contracts at
the calling center.
Salaries and benefits of $4,562,000 in the current period increased by $901,000
over the prior period total of $3,661,000. Of the increase, $644,000 and
$119,000 are attributable to the inclusion of MMI and Pegasus, respectively.
Telemarketing sales labor expense decreased by $104,000, consistent with the
decrease in telemarketing revenues. In addition, administrative and sales
salaries at Metro increased by $264,000, the majority of which was attributable
to the hiring of additional staff to manage the increasing growth of the
Company. These increases were partially offset by a $20,000 reduction in parent
company administrative salaries in the current period as compared to the prior
period due to reductions in head count.
Direct costs of $9,102,000 in the current period increased by $7,255,000 over
direct costs of $1,847,000 in the prior period. Of the increase, $6,919,000 and
$15,000 are attributable to the inclusion of MMI and Pegasus, respectively.
Consistent with its revenue increase, direct costs for direct marketing and
database marketing increased by $348,000 and consist principally of list
commissions paid to use marketing lists. Direct costs for telemarketing
decreased by $27,000, principally due to cost controls implemented for
advertising for sales agents. Direct costs as a percentage of sales were 61% and
29% for the current and prior periods, respectively. The increase in direct cost
as a percentage of sales has increased from the prior year due to the change in
the revenue mixture. Revenue consisted of 23% telemarketing, 76% direct
marketing and database marketing and 1% Internet marketing for the three months
ended March 31, 1998, as compared to 58% telemarketing and 42% direct marketing
and database marketing for the three months ended March 31, 1997.
Restructuring costs of $1,019,000 were incurred in the prior period, as the
Company effected certain corporate restructuring steps, including reducing
corporate staff and closing its Culver City corporate office, as well as making
two executive management changes. In this connection, executive management and
other settlement costs of $954,000 and estimated office closing costs of $65,000
were recorded in March 1997.
Selling, general and administrative expenses of $1,061,000 in the current period
increased by $106,000 over comparable expenses of $955,000 in the prior period.
Administrative expenses decreased by $103,000, primarily due to cancellation of
certain prior year consulting contracts not required in the current period due
to increased in-house capabilities as well as decreases of approximately
$50,000, primarily due to cost reductions implemented upon the change in
management. These decreases were offset by increases in selling, general and
administrative due to the inclusion of MMI and Pegasus, resulting in increases
of $225,000 and $34,000, respectively
Depreciation and amortization of $399,000 in the current period increased by
$118,000 over expenses of $281,000 in the prior period. The inclusion in the
current period of MMI and Pegasus resulted in increases of $44,000 and $59,000
of amortization and $19,000 and $9,000 of depreciation, respectively. These
increases were offset by a decrease in amortization of intangibles of $31,000
due to extensions of covenants not to compete with the former Metro principals.
The remaining net increase of $18,000 was principally attributable to increased
depreciation due to computer upgrades and other fixed asset purchases.
Discounts on warrant exercises of $113,000 were incurred in the prior period. To
reduce the overhang associated with the existence of such warrants and to obtain
working capital subsequent to the withdrawal of its proposed underwritten public
offering, the Company accepted offers from certain warrant-holders to exercise
their warrants for shares of Common Stock at discounted exercise prices. For the
warrants which arose from a previous financing transaction, the Company
recognized the dates of acceptances as new measurement dates and, accordingly,
recorded the non-cash charges to reflect the market value of the discounts.
Withdrawn public offering costs of $1,307,000 were recorded in the prior period.
In October 1996, the Company filed a registration statement on Form SB-2 with
the Securities and Exchange Commission relating to a proposed underwritten
public offering. In the prior period, the Company withdrew the registration
statement and expensed all such costs.
Interest income (expense) and other, net of $13,000 in the current period
decreased by $118,000 compared to $105,000 in the prior period. Interest expense
increased by $53,000, due to increased borrowings on credit lines to pay down
seller debt and for working capital. Interest expense decreased by $47,000,
principally due to repayments of corporate debt and principal payments on seller
debt. MMI and Pegasus contributed miscellaneous income and interest income of
$124,000 in the current period due to invested surplus cash.
The provision for income taxes of $8,000 in the current period is consistent
with the prior period. The Company recognizes net provisions resulting from
state and local taxes incurred on taxable income at the operating subsidiary
level, which cannot be offset by losses incurred at the parent company level.
Results of Operations for the Nine Months Ended March 31, 1998, Compared to the
Nine Months Ended March 31, 1997
- -------------------------------------------------------------------------------
Revenues of $32,897,000 in the nine months ended March 31, 1998 (the "current
period") increased by $16,751,000 over revenues of $16,146,000 in the nine
months ended March 31, 1997 (the "prior period"). Of the increase, $12,127,000
and $438,000 are attributable to the inclusion of MMI and Pegasus, respectively.
Revenues from on-site telemarketing and telefundraising campaigns at SD&A
totaled $9,297,000 and $8,665,000, respectively, or 83% and 80% of SD&A revenues
in the current and prior periods, respectively. Revenues from off-site campaigns
totaled $1,869,000 and $2,122,000, respectively, or 17% and 20% of revenues,
respectively, in the current and prior periods. During the nine months ended
March 31, 1998 and 1997, the Company's margins relating to off-site campaigns
were generally higher than margins relating to on-site campaigns. Revenues from
Metro totaled $9,165,000 and $5,359,000 in the current and prior periods,
respectively, with the increase principally due to the inclusion of nine months
of operations in the current period versus six months in the prior period,
combined with Metro's continued sales growth. Metro was acquired effective
October 1, 1996.
Salaries and benefits of $13,219,000 in the current period increased by
$2,731,000 over the prior period total of $10,488,000. Of the increase, $887,000
and $340,000 are attributable to the inclusion of MMI and Pegasus, respectively.
On-site telemarketing sales labor expense at SD&A increased by $287,000, or 4%,
in the current period, but decreased as a percent of on-site revenues, from 75%
in the prior period to 73% in the current period, primarily due to improved
contract pricing. Off-site and administrative salaries at SD&A increased by a
net of $157,000, the majority of which was attributable to the hiring of
additional administrative staff to manage the increasing on-site growth.
Salaries and benefits at Metro increased by $1,273,000 in the current period,
from $1,107,000 to $2,380,000, due to the full nine months of expenses in the
current period, against six months in the prior period, as well as an increase
in head count to manage current and anticipated future growth. These increases
were partially offset by a $213,000 reduction in parent company administrative
salaries in the current period as compared to the prior period due to reductions
in head count.
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 former
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 day
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 $16,563,000 in the current period increased by $12,774,000 over
direct costs of $3,789,000 in the prior period. Of the increase, $10,757,000 and
$61,000 are attributable to the inclusion of MMI and Pegasus, respectively.
Direct costs at Metro, which consist principally of list commissions paid to use
marketing lists, increased by $1,897,000, principally due to the inclusion of
the full nine months of expense in the current period, as well as list brokerage
sales growth. Direct costs at SD&A increased by $59,000, principally due to
increased advertising for sales agents to fulfill on-site growth requirements.
Selling, general and administrative expenses of $3,095,000 in the current period
increased by $551,000 over comparable expenses of $2,544,000 in the prior
period. The inclusion of MMI and Pegasus resulted in increases of $282,000 and
$100,000, respectively. Administrative expenses at SD&A increased by $107,000
and at Metro by $291,000. Corporate administration decreased by $229,000. At
SD&A, the net increase in the current period generally resulted from $72,000 of
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.
Additionally, $35,000 was incurred to settle a labor dispute at SD&A. The
increase at Metro was primarily due to the inclusion of the full nine months of
expense in the current period. At the parent company, the net decrease of
$229,000 generally resulted from cost reduction steps implemented upon the
change in management of the Company in April 1997. Professional fees decreased
by $59,000, principally due to the value ascribed to warrants issued to
consultants in the prior period. Public relations expenses increased by $12,000
due to efforts to increase market visibility. Parent company travel and meal
expenses decreased by $27,000 as a result of the management change. Directors
fees decreased by $25,000, as the Board was not compensated in cash during the
current period. Further net decreases of $130,000 resulted from reductions in
director and officer insurance premiums, telephone charges, office expenses,
auto expense, dues, fees and rent associated with the change in management and
resulting headcount reductions.
Depreciation and amortization of $1,066,000 in the current period increased by
$375,000 over expenses of $691,000 in the prior period. The inclusion in the
current period of MMI and Pegasus resulted in increases of $80,000 and $201,000
of amortization and depreciation, respectively. Amortization of the goodwill
associated with the SD&A acquisition increased by $17,000 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. Metro depreciation and amortization increased by $135,000
due to inclusion of six months of expense in the current period. This was offset
by a decrease of $62,000 reduction in amortization due to extensions of
covenants not to compete with the former principals of Metro.
Prior period expenses incurred for discounts on warrant exercises of $113,000
and withdrawn public offering costs of $1,307,000 were discussed previously.
Interest expense and other, net of $188,000 in the current period decreased by
$60,000 compared to $248,000 in the prior period. Interest expense at SD&A
increased by $71,000 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 draw-downs to pay down the SD&A seller debt. Interest expense at Metro
increased by $100,000 due to current period borrowings on its line of credit
which was obtained in April 1997. Interest expense at the parent company level
decreased by $41,000, principally due to conversions of convertible securities
and debt repayments. MMI and Pegasus contributed miscellaneous income of
$36,000, net, and interest income of $126,000 was earned in the current period
due to invested surplus cash.
The provision for income taxes of $32,000 in the prior period decreased by
$135,000 compared to a benefit of $103,000 in the current period. During the
current period, 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
period for this change in estimate resulted in a benefit of approximately
$70,000. The remaining benefit resulted principally from state and local taxes
on net losses at SD&A, which are expected to be recovered by June 30, 1998. In
the prior year, the Company recognized net 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.
Capital Resources and Liquidity
- -------------------------------
At March 31, 1998, the Company had cash and cash equivalents of $8,057,000 and
accounts receivable net of allowances of $14,362,000.
The Company generated losses from operations of $1,045,000 in the current period
and used net cash in operating activities of $208,000. 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 the current period, net cash of $6,221,000 was used in investing activities.
The Company paid $5,691,000 in the acquisition of MMI and $278,000 in the
acquisition of Pegasus, net of cash acquired. Purchases of property and
equipment of $252,000 were principally comprised of computer equipment. The
Company intends to continue to invest in computer technology.
In the current period, financing activities provided $11,557,000. On December
24, 1997, the Company sold 50,000 shares of convertible preferred stock for
$15,000,000, less $1,094,000 of placement fees and related costs. 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 March 31, 1998, SD&A had amounts
outstanding of $703,000 on the line.
The Company had $1.8 million available on its lines of credit at Metro and SD&A
as of March 31, 1998.
During the current period the Company repaid $2,119,000 of its acquisition debt,
comprised of $900,000 to the former principals of Metro, $1,069,000 to the
former principal of SD&A and $150,000 to the former principal of MMI.
The Company believes that funds on hand, funds available from its operations and
from 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.
The Year 2000
- -------------
The Company has taken actions to make its systems, products and infrastructure
Year 2000 compliant. The Company is also beginning to inquire as to the status
of its key suppliers and vendors with respect to the Year 2000. The Company
believes it is taking the necessary steps to resolve Year 2000 issues; however,
there can be no assurance that a failure to resolve any such issue would not
have a material adverse effect on the Company. Management believes, based on
available information, that it will be able to manage its total Year 2000
transition without any material adverse effect on its business operations
products or financial prospects.
Item 4 - Submission of Matters to a Vote of Security-Holders
---------------------------------------------------
On April 3, 1998, the Company held an annual meeting of stockholders to vote on
election of directors, ratification of independent auditors and increases in
authorized shares of the Company's common and preferred stock. Of the 17,534,674
shares of the Company's common stock, par value $.01 per share, ("Common Stock")
entitled to vote at the meeting, holders of 15,834,716 shares were present in
person or were represented by proxy at the meeting. Of the 50,000 shares of the
Company's preferred stock, par value $.01 per share, ("Preferred Stock")
entitled to vote at the meeting, all were represented.
The directors elected at the meeting and the results of the voting were as
follows:
For Against
--- -------
General nominees:
Alan I. Annex 15,622,625 212,091
J. Jeremy Barbera 15,623,350 211,366
S. James Coppersmith 15,622,625 212,091
John T. Gerlach 15,591,925 242,791
Seymour Jones 15,620,625 214,091
C. Anthony Wainwright 15,622,625 212,091
Preferred nominee:
James Brown 50,000 0
The above represent all of the directors of the Company. There were no
abstentions or broker non-votes on the election of directors.
The shares voted regarding the Board of Directors' proposal to amend to
Company's Amended and Restated Articles of Incorporation to increase the number
of shares of Common Stock authorized for issuance from 36,250,000 shares to
75,000,000 were as follows:
For 15,211,407
Against 580,292
Abstentions 43,017
Broker non-votes 0
The shares voted regarding the Board of Directors' proposal to select the
accounting firm of Coopers and Lybrand, LLP, to serve as independent auditors of
the Company were as follows:
For 15,748,777
Against 47,682
Abstain 38,257
Broker non-votes 0
The shares voted regarding the Board of Directors' proposal to amend the
Company's Amended and Restated Articles of Incorporation to increase the number
of shares of Preferred Stock authorized for issuance from 50,000 shares to
150,000 shares were as follows:
For 10,452,521
Against 607,963
Abstain 168,250
Broker non-votes 4,605,982
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
Exhibit # Item
--------- -------------------------------------
27 Financial Data Schedule (filed herein)
b) Reports on Form 8-K
1. On or about January 13, 1998, the Company filed a Current Report on Form
8-K regarding the Purchase Agreement dated as of December 24, 1997, by and
between the Company and GE Capital.
2. On or about January 9, 1998, the Company filed a Current Report on Form
8-K regarding a stock purchase agreement between the Company and Media
Marketplace, Inc. and Media Marketplace Media Division, Inc.
(collectively "MMI").
3. On or about March 16, 1998, the Company filed a Current Report on Form
8-K/A amending the Report filed on or about January 9, 1998, to include
the financial statements of MMI and pro forma information.
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: May 15, 1998 By: /s/ J. Jeremy Barbera
---------------------
Chairman of the Board and Chief Executive
Officer
Date: May 15, 1998 By: /s/ Scott Anderson
------------------
Chief Financial Officer (Principal Financial
and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
Financial Data Schedule
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF MARKETING SERVICES GROUP, INC. AS
OF AND FOR THE NINE MONTHS ENDED MARCH 31, 1998 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-END> Mar-31-1998
<EXCHANGE-RATE> 1
<CASH> 8,056,633
<SECURITIES> 0
<RECEIVABLES> 14,720,340
<ALLOWANCES> (336,141)
<INVENTORY> 0
<CURRENT-ASSETS> 23,001,431
<PP&E> 1,721,496
<DEPRECIATION> (673,120)
<TOTAL-ASSETS> 48,503,997
<CURRENT-LIABILITIES> 16,178,595
<BONDS> 1,371,354
<COMMON> 130,981
13,696,000
0
<OTHER-SE> (17,127,067)
<TOTAL-LIABILITY-AND-EQUITY> 48,503,997
<SALES> 32,896,974
<TOTAL-REVENUES> 32,896,974
<CGS> 16,563,303
<TOTAL-COSTS> 16,563,303
<OTHER-EXPENSES> 17,378,761
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 188,410
<INCOME-PRETAX> (1,233,500)
<INCOME-TAX> (102,648)
<INCOME-CONTINUING> (1,130,852)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,130,852)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
</TABLE>
