SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 Registrant as Specified in Its Charter)
Nevada 88-0085608
------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
333 Seventh Avenue, 20th Floor
New York, New York 10001
------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(212) 594-7688
-----------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
State number of shares outstanding of each of the issuer's classes of common
equity as of the latest practical date:
As of February 10, 1999, there were 12,702,359 shares of the Issuer's Common
Stock, par value $.01 per share outstanding.
<PAGE>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
DECEMBER 31, 1998
PART I - FINANCIAL INFORMATION Page
----
Item 1 Interim Condensed Consolidated Financial Statements
(unaudited)
Condensed Consolidated Balance Sheets as of
December 31, 1998 and June 30, 1998 3
Condensed Consolidated Statements of Operations
for the three and six months ended
December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the six months ended December 31, 1998
and 1997 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 14
(a) Exhibits
(b) Reports on Form 8-K
Signatures 15
Exhibit 27 Financial Data Schedule 16
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Interim Condensed Consolidated Financial Statements (unaudited)
------------------------------------------------------------------------
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, 1998 June 30, 1998
----------------- -------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 2,174,929 $ 6,234,981
------------ ------------
Accounts receivable billed, net of
allowance for doubtful accounts of
$202,894 and $421,861 as of
December 31, 1998 and June 30, 1998,
respectively 13,201,813 12,606,468
Accounts receivable unbilled 4,488,469 3,259,437
Other current assets 960,316 724,032
------------ ------------
Total current assets 20,825,527 22,824,918
Property and equipment at cost, net 1,586,113 1,645,957
Intangible assets at cost, net 24,188,434 24,771,045
Other assets 815,587 539,507
------------ ------------
Total assets $47,415,661 $49,781,427
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
Current liabilities:
Short-term borrowings $ 1,953,696 $ 2,522,306
Trade accounts payable 13,752,671 11,420,386
Accrued expenses and other current liabilities 1,993,565 2,433,871
Current portion of long-term obligations 611,493 1,435,451
------------ ------------
Total current liabilities 18,311,425 17,812,014
Long-term obligations 93,609 203,917
Other liabilities 552,638 72,937
------------ ------------
Total liabilities 18,957,672 18,088,868
------------ ------------
Redeemable convertible preferred stock,
$.01 par value; 150,000 shares authorized;
50,000 shares of Series D convertible
preferred stock issued and outstanding 14,944,451 14,367,301
------------ ------------
Stockholders' equity:
Common Stock - $.01 par value;
75,000,000 authorized; 13,114,922 and
13,098,510 shares issued as of
December 31, 1998 and June 30, 1998,
respectively 131,149 130,985
Additional paid-in capital 29,082,026 29,612,816
Accumulated deficit (14,305,927) (12,283,074)
Less: 428,894 and 11,800 shares of
common stock in treasury, at cost as of
December 31, 1998 and June 30, 1998,
respectively (1,393,710) (135,469)
---------- --------
Total stockholders' equity 13,513,538 17,325,258
---------- ----------
Total liabilities and stockholders' equity $47,415,661 $49,781,427
=========== ===========
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $16,640,513 $10,673,770 $33,793,441 $17,928,389
----------- ----------- ----------- -----------
Operating costs and expenses:
Direct costs 10,894,520 5,854,550 20,408,682 7,461,557
Salaries and benefits 5,563,149 4,217,802 11,849,971 8,656,116
Selling, general and administrative 1,305,308 1,108,750 2,640,933 2,033,857
Depreciation and amortization 451,010 346,669 906,308 667,017
------- ------- ------- -------
Total operating costs and expenses 18,213,987 11,527,771 35,805,894 18,818,547
---------- ---------- ---------- ----------
Loss from operations (1,573,474) (854,001) (2,012,453) (890,158)
Interest expense, net (39,556) (93,726) (70,283) (201,250)
------- ------- ------- --------
Loss before income taxes (1,613,030) (947,727) (2,082,736) (1,091,408)
Benefit for income taxes 87,188 63,243 59,883 110,246
------ ------ ------ -------
Net loss $(1,525,842) $(884,484) $(2,022,853) $(981,162)
=========== ========= =========== =========
Net loss attributable to common stockholders $(1,816,266)* $(4,269,665)** $(2,600,003)* $(4,366,343)**
=========== =========== =========== ===========
Net loss per common share $(0.14) $(0.33) $(0.20) $(0.34)
======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding 12,886,265 12,934,993 12,988,203 12,698,613
========== ========== ========== ==========
</TABLE>
* The three and six months ended December 31, 1998 include the impact of
dividends on stock for (a) $235,548 and $467,615 in cumulative undeclared
Preferred Stock dividends, respectively; and (b) $54,876 and $109,535 of
periodic non-cash accretions on preferred stock, respectively.
** The three and six months ended December 31, 1997 includes the impact of
dividends on stock for (a) non-cash, non-recurring beneficial conversion feature
of $3,214,400; (b) $149,446 from adjustment of the conversion ratio for certain
issuances of common stock and exercises of stock options; (c) $17,260 in
cumulative undeclared dividends; and (d) $4,075 of period non-cash accretions on
preferred stock.
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(unaudited)
1998 1997
---- ----
Operating activities:
Net loss $(2,022,853) $(981,162)
Adjustments to reconcile loss to net cash
provided by (used in)operating activities:
Depreciation 301,849 168,597
Amortization 604,459 498,420
Warrant issuances to consultants - 12,643
Accrued interest on convertible securities 29,122 -
Provision for bad debts 68,594 -
Accretion of discounts on convertible securities - 45,430
Changes in assets and liabilities:
Accounts receivable (1,892,971) (919,335)
Other current assets (236,281) (98,767)
Other assets (306,754) (58,384)
Trade accounts payable 2,332,285 854,436
Accrued expenses and other current liabilities (480,904) (640,995)
-------- --------
Net cash used in operating activities (1,603,454) (1,119,117)
---------- ----------
Investing activities:
Purchase of property and equipment (232,598) (204,421)
Acquisition of Pegasus, net of cash
acquired of $43,811 - (277,692)
Acquisition of MMI, net of cash acquired
of $340,550 - (5,691,172)
---------- ----------
Net cash used in investing activities (232,598) (6,173,285)
Financing activities:
Proceeds from sale of convertible preferred
stock, net of issue costs of $936,307 - 14,063,693
Proceeds from exercises of stock options 46,524 3,390
Net proceeds from (repayments of) credit
facilities (568,610) 80,618
Repayment of capital lease obligation (34,466) (11,062)
Repayments of notes payable other (117,540) (163,397)
Repayment of acquisition debt (291,667) (808,333)
Purchase of treasury stock (1,258,241) -
---------- ---------
Net cash (used in) provided by financing
activities (2,224,000) 13,164,909
---------- ----------
Net decrease in cash and cash equivalents (4,060,052) 5,872,507
Cash and cash equivalents at beginning of period 6,234,981 2,929,012
--------- ---------
Cash and cash equivalents at end of period $2,174,929 $8,801,519
========== ==========
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE>
Supplemental schedule of non cash investing and financing activities:
- ---------------------------------------------------------------------
During the six months ended December 31, 1998, the Company entered into capital
lease obligations for approximately $9,407 for certain computer equipment.
During the six months ended December 31, 1998, the Company recorded non-cash
preferred dividends in the amount of $577,150 of which $467,615 was in
connection with cumulative undeclared dividends and $109,535 was for periodic,
non-cash accretions on preferred stock.
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 4, 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) $149,446 from adjustment of the conversion ratio for certain
issuances of common stock and exercises of stock options; (c) $17,260 in
cumulative undeclared dividends; and (d) $4,075 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 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.
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 (2,126,072)
Common stock issued 1,800,000
---------
$ (277,692)
==========
See Notes to Interim 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"). These condensed consolidated financial statements should be read in
conjunction with the Company's Form 10-KSB for the fiscal year ended June 30,
1998 and the historical consolidated financial statements and related notes
included therein. In the opinion of management, the accompanying unaudited
condensed financial statements include all adjustments, consisting of only
normal recurring accruals, necessary to present fairly the condensed
consolidated financial position, results of operations and cash flows of the
Company. Certain information and footnote disclosure normally included in
financial statements prepared in conformity with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations. Operating results for the three and
six month periods ended December 31, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 1999. Certain
reclassifications have been made in the fiscal 1998 interim financial statements
to conform with the fiscal 1999 presentation.
2. TREASURY STOCK
--------------
On September 23, 1998, the Company announced its intention to acquire, in open
market transactions, up to 1,000,000 shares of its Common Stock, par value, $.01
per share (the "Common Stock"), subject to and in compliance with the provisions
and limitations of Rule 10b-18 of the Securities Exchange Act of 1934.
Purchases, if any, may be made from time to time at prevailing market prices
during the one-year period commencing on September 28, 1998. Purchases may
commence at any time after such date and may be discontinued at any time during
the one-year period without purchasing all of the 1,000,000 shares. The Company
will not solicit the purchase of any of its Common Stock or otherwise tender for
the purchase of any of its Common Stock. The source of funds for the purchase of
any shares will be from the Company's general corporate funds, and any shares
purchased will be held in treasury. As of December 31, 1998, the Company bought
back 417,094 shares at a cost of $1,258,241.
3. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income,
which prescribes standards for reporting comprehensive income and its
components. Comprehensive income consists of net income or loss for the current
period and other comprehensive income (income, expenses, gains and losses that
currently bypass the income statement and are reported directly in a separate
component of equity). SFAS 130 is effective for financial statements issued for
periods beginning after December 15, 1997, and accordingly has been adopted by
the Company as presented on the balance sheets and statements of operations.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information", which requires publicly-held companies to
report financial and descriptive information about its operating segments in
financial statements issued to shareholders for interim and annual periods. The
statement also requires additional disclosures with respect to products and
services, geographical areas of operations and major customers. SFAS 131 is
effective for financial statements issued for periods beginning after December
15, 1997 and for the interim periods beginning in the second year of
application, and requires restatement of earlier periods presented. The Company
is reviewing the effects of the disclosure requirements of this new standard.
In addition, Accounting Standards Executive Committee ("AcSEC") issued SOP 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use," to address diversity in practice regarding whether and under what
conditions the costs of internal-use software should be capitalized. SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998.
Management believes that the implementation of SOP 98-1 will not have a
significant impact on the Company's financial statements.
In April 1998, the AcSEC issued SOP 98-5 "Reporting on the Costs of Start-Up
Activities," to provide guidance on the financial reporting of start-up costs
and organization costs. SOP 98-5 requires these costs to be expensed as
incurred. Management believes that the implementation of SOP 98-5 in fiscal year
ended June 30, 2000 will result in a one-time charge of approximately $120,000
on the date of adoption, which will be reported as a cumulative effect of a
change in accounting principle.
4. 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 on that day 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
December 31, 1998, the conversion rate was 93.76003, resulting in the beneficial
ownership by GE Capital of 4,688,002 shares of Common Stock. On an as-converted
basis, the Convertible Preferred Stock represents approximately 27% 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 $4,000 of such
discount was included as dividends for the three and six month period ended
December 31, 1997. 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 in the Purchase
Agreement.
Dividends are cumulative and accrue at the rate of 6% per annum, adjusted upon
event of default. As of December 31, 1998 and June 30, 1998, the Company has
recorded $1,084,943 and $617,328, respectively, in cumulative accrued dividends
which is included under the caption Redeemable convertible preferred stock on
the Balance Sheet. 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.
The Purchase Agreement contains, among other provisions, requirements for
maintaining certain minimum tangible net worth, as defined there in, and other
financial ratios and restrictions on payment of dividends.
5. REPRICING OF STOCK OPTIONS
--------------------------
On November 16, 1998, the compensation committee of the Board of Directors
agreed to reprice certain stock options of employees of the Company. All
employee stock options with an exercise price greater than $3.11 were repriced
to $3.11. As a result, stock options in the amount of 950,458 were repriced. On
November 16, 1998, the closing price of the Company's stock was $2.189.
6. RELATED PARTY TRANSACTION
-------------------------
On December 2, 1998, MSGI loaned an officer of the Company $100,000 pursuant to
a promissory note. The note bears interest at the current rate earned on the
MSGI's money market fund and principal and interest are payable in full on or
before March 31, 1999. As of December 31, 1998 the interest rate was 4.77%. As
of December 31, 1998, this amount is included in other current assets on the
balance sheet.
7. SUBSEQUENT EVENTS
-----------------
The Company entered into a stock purchase agreement effective January 1, 1999 to
acquire all of the issued and outstanding capital stock (the "Shares") of
Stevens-Knox & Associates, Inc., Stevens-Knox List Brokerage, Inc. and
Stevens-Knox International, Inc. (collectively "SKA"). In consideration of the
purchase of the Shares and other transactions contemplated in the agreement,
MSGI paid the sum of $3,000,000 subject to the adjustment set forth below. The
agreement includes payments of additional consideration of up to $1,000,000 a
year for each year beginning July 1st and ending June 30th for the years of
2000, 2001 and 2002, adjustable forward to apply to the next fiscal year if no
additional consideration is due for one such year. The additional consideration
is contingent upon SKA meeting (a) targeted earnings before interest and taxes
and (b) targeted billings of MSGI subsidiaries and affiliates for services for
clients originally introduced by SKA. The additional consideration shall be paid
in shares of MSGI Common Stock, provided, however, that seller may elect to
receive up to twenty-five (25%) percent in cash, or, with the written consent of
the Chief Executive Officer of MSGI, seller may elect to receive up to fifty
(50%) percent in cash. In addition, the seller is entitled to receive $500,000
in stock as consideration for the Shares, in the event that actual billings of
MSGI Subsidiaries and affiliates for services for clients originally introduced
by SKA exceeds targeted billings for the period February 1, 1999 through January
31, 2000.
SKA is a leading list management and brokerage firm based in New York and
London. Its clientele are segmented into four main areas: catalog marketing
(40%), publishing (30%), business-to-business (12%) and general consumer (8%).
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 liquidity/cash flows of the Company
for the three and six month periods ended December 31, 1998. This should be read
in conjunction with the financial statements, and notes thereto, included in
this Report on Form 10-Q and the Company's financial statements and notes
thereto, included in the Company's Annual Report on Form 10-KSB for the year
ended June 30, 1998.
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.
In May 1998, the Company formed Metro Fulfillment, Inc. ("MFI" or the "Start-Up
Operations"), a new operating subsidiary providing online commerce, real-time
database management, inbound/outbound customer service, custom packaging,
assembling, product warehousing, shipping, payment processing and retail
distribution.
Results of Operations for the Three Months Ended December 31, 1998, Compared
to the Three Months Ended December 31, 1997.
Revenues of $16,640,513 in the three months ended December 31, 1998 (the
"current period") increased by $5,966,743 over revenues of $10,673,770 in the
three months ended December 31, 1997 (the "prior period"). The increase is
primarily due to an increase in revenue in direct and internet marketing
services of $5,577,686 due to the inclusion of MMI for three months in the
current period as compared to one month in the prior period. Fulfillment revenue
for the current period was $590,411. These increases were offset by a decrease
of $201,354 in telemarketing and telefundraising revenues.
Direct costs of $10,894,520 in the current period increased by $5,039,970 over
direct costs of $5,854,550 in the prior period. Of the increase $4,699,752 is
due to direct and internet marketing services resulting from the inclusion of
MMI for three months in the current period as compared to one month in the prior
period. Direct costs associated with the Start-Up Operations were $196,613.
Direct costs for telemarketing and telefundraising increased in the current
period by $143,605 due to postage and other direct costs relating to additional
pre-call mailing campaigns which were not conducted in the prior period. The
Company's direct costs consist principally of commissions paid to use marketing
lists.
Salaries and benefits of $5,563,149 in the current period increased by
$1,345,347 over salaries and benefits of $4,217,802 in the prior period. Of the
increase $809,728 is due to direct and internet marketing services resulting
from the inclusion of MMI for three months in the current period as compared to
one month in the prior period as well as an increase in head count to manage
current and anticipated future growth. Salaries and benefits related to the
Start-Up Operations were $599,119. Salaries and benefits associated with
corporate overhead increased $62,164 in the current period principally due to an
increase in head count to manage current and anticipated future growth.
Telemarketing and telefundraising salaries and benefits decreased $125,664 as a
result of the decrease in revenue and reduction of part-time callers and
administrative staff.
General and administrative expenses of $1,305,308 in the current period
increased by $196,558 over comparable expenses of $1,108,750 in the prior
period. The inclusion of MMI for three months in the current period as compared
to one month in the prior period and the Start-Up Operations accounted for
$307,329 of such increase in expenses. General and administrative expenses for
the remainder of the Company decreased by $110,771 principally due to the
consolidation of offices and cost reduction initiatives.
Depreciation and amortization expense of $451,010 in the current period
increased by $104,341 over expense of $346,669 in the prior period. The increase
consists principally of an increase in goodwill amortization due to the
inclusion of three months of amortization expense in the current period as
compared to one month of expense in the prior period for the MMI acquisition.
Loss from operations of $1,573,474 in the current period increased by $719,473
over the prior period. The Start-Up Operation accounted for $392,272 of the
loss. The quarter ended December 31, 1998 was the second full quarter of
operations for this subsidiary. The Company is currently assessing different
strategic opportunities to reduce the loss of the Start-Up Operation and future
negative impact on the operations of the Company. Telemarketing and
telefundraising incurred a loss from operations of $610,966, which is consistent
with the seasonality of the business. In addition, corporate overhead
contributed $610,752 to the loss from operations which consists mainly of
amortization and administration expenses. Direct and internet marketing services
provided income from operations of $40,516.
Net interest expense of $39,556 in the current period decreased by $54,170 over
expenses of $93,726 in the prior period. Such expenses decreased principally due
to conversions of convertible securities and debt repayments, interest income
earned on invested surplus cash and lower borrowings on lines of credit.
The net benefit for income taxes of $87,188 in the current period increased by
$23,945 over the benefit of $63,243 in the prior period. This increase is due to
the increase in the loss before income taxes. The Company records provisions for
state and local taxes incurred on taxable income at the operating subsidiary
level which can not be offset by losses incurred at the parent company level or
other operating subsidiaries.
Results of Operations for the Six Months Ended December 31, 1998, Compared
- --------------------------------------------------------------------------
to the Six Months Ended December 31, 1997.
- ------------------------------------------
Revenues of $33,793,441 in the six months ended December 31, 1998 (the "current
period") increased by $15,865,052 over revenues of $17,928,389 in the six months
ended December 31, 1997 (the "prior period"). The increase is primarily due to
an increase in revenue in direct and internet marketing services of $14,628,895
due to the inclusion of MMI for three months in the current period as compared
to one month in the prior period. Excluding the additional revenue from MMI,
direct and internet marketing services revenue increased 10% over the prior
period. Fulfillment revenue for the current period was $1,160,329. Revenue from
telemarketing and telefundraising increased by $75,828 in the current period as
compared to the prior period.
Direct costs of $20,408,682 in the current period increased by $12,947,125 over
direct costs of $7,461,557 in the prior period. Of the increase $12,249,316 is
due to direct and internet marketing services resulting from the inclusion of
MMI for three months in the current period as compared to one month in the prior
period and the increase in revenue from the existing subsidiaries. Direct costs
associated with Start-Up Operations were $391,496. Direct costs for
telemarketing and telefundraising increased in the current period by $306,313
due to postage and other direct costs relating to additional pre-call mailing
campaigns which were not conducted in the prior period. The Company's direct
costs consist principally of commissions paid to use marketing lists.
Salaries and benefits of $11,849,971 in the current period increased by
$3,193,855 over salaries and benefits of $8,656,116 in the prior period. Of the
increase $1,745,972 is due to direct and internet marketing services resulting
from the inclusion of MMI for three months in the current period as compared to
one month in the prior period as well as an increase in commission associated
with the growth in revenue. Salaries and benefits related to the Start-Up
Operations were $1,328,824. Salaries and benefits associated corporate overhead
increased $229,959 in the current period principally due to an increase in head
count to manage current and anticipated future growth. Telemarketing and
telefundraising salaries and benefits decreased $110,900 as a result of a
reduction of part-time callers and administrative staff.
General and administrative expenses of $2,640,933 in the current period
increased by $607,076 over comparable expenses of $2,033,857 in the prior
period. The inclusion of MMI for three month in the current period as compared
to one month in the prior period and the Start-Up Operation accounted for
$750,214 of such increase in expenses. General and administrative expenses for
the remainder of the Company decreased by $143,138 principally due to the
consolidation of offices and cost reduction initiatives.
Depreciation and amortization expense of $906,308 in the current period
increased by $239,291 over such expense of $667,017 in the prior period. The
increase consists principally of an increase in goodwill amortization due to the
inclusion of three months of amortization expense in the current period as
compared to one month of expense in the prior period for the MMI acquisition.
Loss from operations of $2,012,453 in the current period increased by $1,122,295
over the prior period. The Start-Up Operation accounted for $984,586 of the
loss. The Company is currently assessing different strategic opportunities to
reduce the loss and future negative impact on the operations of the Company.
Telemarketing and telefundraising incurred a loss from operations of $218,980
for the current period which is consistent with the seasonality of the business.
Corporate overhead contributed $1,218,772 to the loss from operations which
consists mainly of amortization and administration expenses. Direct and internet
marketing services provided income from operations of $409,885.
Net interest expense of $70,283 in the current period decreased by $130,967 over
expenses of $201,250 in the prior period. Such expenses decreased principally
due to conversions of convertible securities and debt repayments, interest
income earned on invested surplus cash and lower borrowings on lines of credit.
The net benefit for income taxes of $59,883 in the current period decreased by
$50,363 over the benefit of $110,246 in the prior period. The Company records
provisions for state and local taxes incurred on taxable income at the operating
subsidiary level which can not be offset by losses incurred at the parent
company level or other subsidiaries.
Capital Resources and Liquidity
- -------------------------------
Historically, the Company has funded its operations, capital expenditures and
acquisitions primarily through cash flows from operations, private placements of
common and preferred stock, and its credit facilities. At December 31, 1998, the
Company had cash and cash equivalents of $2,174,929 and accounts receivable net
of allowances of $17,690,282.
The Company generated losses from operations of $2,012,453 in the current
period. Cash used in operating activities was $1,603,454. Net cash used in
operating activities principally resulted from the net loss and an increase in
accounts receivable offset by an increase in accounts payable and accrued
expenses.
In the current period, net cash of $232,598 was used in investing activities
consisting of purchases of property and equipment principally comprised of
computer equipment. In the prior period, net cash used in investing activities
of $6,173,285 consisted of $204,421 for the purchases of property and equipment
and $5,968,864 for the acquisitions of Pegasus Internet and Media Marketplace,
Inc. The Company intends to continue to invest in technology and
telecommunications hardware and software.
In the current period, net cash of $2,224,000 was used in financing activities.
Net cash used in financing activities consists principally of $1,258,241 for the
purchase of treasury stock, $568,610 net repayments of lines of credit, and
$443,673 of repayments on acquisition debt and other notes payable offset by
cash received of $46,524 from the exercise of stock options.
At December 31, 1998, the Company had amounts outstanding of $1,953,696 on its
lines of credit. The Company had approximately $464,000 available on its lines
of credit as of December 31, 1998.
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. With respect to the database marketing and internet
subsidiaries, databases maintained for clients include a four digit year code
and are subsequently not exposed to Year 2000 issues. Mission critical systems
have been reviewed for Year 2000 issues and the Company believes these systems
are compliant. The Company is still reviewing non critical systems and expects
these systems to be compliant prior to December 31, 1999. The Company is also
inquiring 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.
Seasonality and Cyclicality: The business of telemarketing is highly seasonal.
Telemarketing has higher revenues and profits occurring in the fourth fiscal
quarter, followed by the first fiscal quarter. This is due to subscription
renewal campaigns for its clients, which generally begin in the spring time and
continue during the summer months.
New Accounting Pronouncements
- -----------------------------
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income, which prescribes standards for reporting comprehensive income and its
components. Comprehensive income consists of net income or loss for the current
period and other comprehensive income (income, expenses, gains and losses that
currently bypass the income statement and are reported directly in a separate
component of equity). SFAS 130 is effective for financial statements issued for
periods beginning after December 15, 1997, and accordingly has been adopted by
the Company as presented on the balance sheets and statements of operations.
Also in June 1997, the FASB issued Statement No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"), which requires
publicly-held companies to report financial and descriptive information about
its operating segments in financial statements issued to shareholders for
interim and annual periods. The statement also requires additional disclosures
with respect to products and services, geographical areas of operations and
major customers. SFAS 131 is effective for financial statements issued for
periods beginning after December 15, 1997 and for the interim periods beginning
in the second year of application, and requires restatement of earlier periods
presented. The Company is reviewing the effects of the disclosure requirements
of this new standard.
In addition, accounting Standards Executive Committee ("AcSEC") issued SOP 98-1,
Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use, to address diversity in practice regarding whether and under what
conditions the costs of internal-use software should be capitalized. SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998.
Management believes that the implementation of SOP 98-1 will not have a
significant impact on the Company's financial statements.
In April 1998, the AcSEC issued SOP 98-5. Reporting on the Costs of Start-Up
activities, to provide guidance on the financial reporting of start-up costs and
organization costs. It requires costs to be expensed as incurred. Management
believes that the implementation of SOP 98-5 in fiscal year ended June 30, 2000
will result in a one-time charge of approximately $120,000 on the date of
adoption, which will be reported as a cumulative effect of a change in
accounting principle.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
a) Exhibits
Exhibit # Item Notes
--------- ---- -----
27 Financial Data Schedule A
Notes relating to Exhibits:
a) Filed herewith.
b) Reports on Form 8-K
On or about October 2, 1998, the Company filed a current report on Form 8-K
regarding the Company's intention to acquire up to 1,000,000 shares of its
Common Stock, par value, $.01 per share.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARKETING SERVICES GROUP, INC.
(Registrant)
Date: February 16, 1999 By: /s/ J. Jeremy Barbera
-------------------------
J. Jeremy Barbera
Chairman of the Board and Chief
Executive Officer
Date: February 16, 1999 By: /s/ Cindy H. Hill
-----------------
Cindy H. Hill
Chief Financial 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 SIX MONTHS ENDED DECEMBER 31, 1998 INCLUDED IN THIS REPORT ON
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,174,929
<SECURITIES> 0
<RECEIVABLES> 17,893,176
<ALLOWANCES> (202,894)
<INVENTORY> 0
<CURRENT-ASSETS> 20,825,527
<PP&E> 4,493,723
<DEPRECIATION> (2,907,610)
<TOTAL-ASSETS> 47,415,661
<CURRENT-LIABILITIES> 18,311,425
<BONDS> 646,247
<COMMON> 131,149
14,944,451
0
<OTHER-SE> 13,382,389
<TOTAL-LIABILITY-AND-EQUITY> 47,415,661
<SALES> 33,793,441
<TOTAL-REVENUES> 33,793,441
<CGS> 20,408,682
<TOTAL-COSTS> 20,408,682
<OTHER-EXPENSES> 15,397,212
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,283
<INCOME-PRETAX> (2,082,736)
<INCOME-TAX> 59,883
<INCOME-CONTINUING> (2,022,853)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,022,853)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
