SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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 May 14, 1999, there were 22,155,232 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
March 31, 1999
PART I - FINANCIAL INFORMATION Page
----
Item 1 Interim Condensed Consolidated Financial Statements
(unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 1999 and June 30, 1998 3
Condensed Consolidated Statements of Operations
for the three and nine months ended
March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended March 31, 1999
and 1998 5-7
Notes to Interim Condensed Consolidated Financial
Statements 8-12
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-17
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 6 Exhibits and Reports on Form 8-K 19
(a) Exhibits
(b) Reports on Form 8-K
Signatures 20
Exhibit 27 Financial Data Schedule 21
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Interim Condensed Consolidated Financial Statements (unaudited)
------------------------------------------------------------------------
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS March 31, 1999 June 30, 1998
- ------ -------------- -------------
Current assets:
Cash and cash equivalents $ 1,233,037 $ 6,234,981
Accounts receivable billed, net of
allowance for doubtful accounts of
$381,764 and $421,861 as of
March 31, 1999 and June 30, 1998,
respectively 20,779,699 12,606,468
Accounts receivable unbilled 3,045,378 3,259,437
Note receivable 500,000 -
Other current assets 898,049 724,032
------------ ------------
Total current assets 26,456,163 22,824,918
Property and equipment at cost, net 1,108,412 1,645,957
Intangible assets at cost, net 30,609,233 24,771,045
Note receivable 760,000 -
Other assets 1,453,496 539,507
------------ ------------
Total assets $ 60,387,304 $49,781,427
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short-term borrowings $ 4,548,553 $ 2,522,306
Trade accounts payable 22,610,350 11,420,386
Accrued expenses and other current liabilities 2,773,474 2,433,871
Current portion of long-term obligations 477,017 1,435,451
------------ ------------
Total current liabilities 30,409,394 17,812,014
Long-term obligations 1,519,464 203,917
Other liabilities 587,099 72,937
------------ ------------
Total liabilities $ 32,515,957 $ 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 15,987,198 14,367,301
---------- ----------
Stockholders' equity:
Common Stock - $.01 par value; 75,000,000
authorized; 13,591,224 and 13,098,510 shares
issued as of March 31, 1999 and June 30, 1998,
respectively 135,912 130,985
Additional paid-in capital 29,204,340 29,612,816
Accumulated deficit (16,062,393) (12,283,074)
Less: 428,894 and 11,800 shares of
common stock in treasury, at cost
as of March 31, 1999 and June 30, 1998,
respectively (1,393,710) (135,469)
----------- ----------
Total stockholders' equity 11,884,149 17,325,258
----------- ----------
Total liabilities and stockholders' equity $60,387,304 $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 NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $22,563,283 $14,968,585 $56,356,724 $32,896,974
----------- ----------- ----------- -----------
Operating costs and expenses:
Direct costs 15,406,554 9,101,746 35,815,236 16,563,303
Salaries and benefits 6,510,024 4,562,032 18,359,995 13,218,148
Selling, general and administrative 1,844,411 1,060,796 4,485,344 3,094,653
Depreciation and amortization 498,754 398,943 1,405,062 1,065,960
------- ------- --------- ---------
Total operating costs and expenses 24,259,743 15,123,517 60,065,637 33,942,064
---------- ---------- ---------- ----------
Loss from operations (1,696,460) (154,932) (3,708,913) (1,045,090)
Interest income (expense), net (99,407) 12,840 (169,690) (188,410)
Gain on sale of Metro Fulfillment, Inc. 40,810 - 40,810 -
------ ------ ------ ------
Loss before income taxes (1,755,057) (142,092) (3,837,793) (1,233,500)
Benefit (provision) for income taxes (1,410) (7,598) 58,473 102,648
Net loss $(1,756,467) $ (149,690) $(3,779,320) $(1,130,852)
=========== =========== =========== ===========
Net loss attributable to common stockholders $(2,799,214)* $(428,834)** $(5,399,217)* $(4,795,177)**
=========== ========= =========== ===========
Net loss per common share, basic and diluted $(0.22) $(0.03) $(0.42) $(0.37)
====== ====== ====== ======
Weighted average common shares outstanding 12,765,852 13,085,627 12,914,756 12,827,618
========== ========== ========== ==========
</TABLE>
* The three and nine months ended March 31, 1999 include the impact of dividends
on stock for (a) adjustment of the conversion ratio for $748,571 for exercises
of stock options and warrants; (b) $239,082 and $706,697 in cumulative
undeclared Preferred Stock dividends, respectively; and (c) $55,094 and $164,629
of periodic non-cash accretions on preferred stock, respectively.
** 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.
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(unaudited)
1999 1998
---- ----
Operating activities:
Net loss $(3,779,320) $(1,130,852)
Adjustments to reconcile loss to net cash
used in operating activities:
Depreciation 444,879 281,545
Amortization 960,183 784,415
Warrant issuances to consultants - 16,072
Accrued interest on convertible securities 27,310 57,142
Provision for bad debts 118,594 -
Changes in assets and liabilities, net of
acquisitions and dispositions
Accounts receivable 2,659,333 1,064,360
Other current assets (279,716) (231,552)
Other assets (169,003) 5,530
Trade accounts payable (765,387) (437,920)
Accrued expenses and other current liabilities (557,874) (616,945)
-------- --------
Net cash used in operating activities (1,341,001) (208,205)
---------- --------
Investing activities:
Purchase of property and equipment (388,834) (252,271)
Acquisition of SK&A, net of cash acquired
of $290,946 (3,599,276) -
Disposition of MFI, net of cash disposed
of $24,206 (16,604) -
Deposit for future acquisition (1,045,000) -
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 (5,049,714) (6,221,135)
----------- -----------
Financing activities:
Proceeds from sale of convertible preferred
stock, net of issue costs of $1,094,138 - 13,905,862
Proceeds from exercises of stock options 1,216,348 7,458
Net proceeds from credit facilities 2,026,247 44,920
Repayment of capital lease obligation (69,709) (28,288)
Repayments of notes payable other (117,540) (253,751)
Repayment of acquisition debt (408,334) (2,119,240)
Purchase of treasury stock (1,258,241) -
---------- ----------
Net cash provided by financing activities 1,388,771 11,556,961
--------- ----------
Net decrease in cash and cash equivalents (5,001,944) 5,127,621
Cash and cash equivalents at beginning of period 6,234,981 2,929,012
--------- ---------
Cash and cash equivalents at end of period $1,233,037 $8,056,633
========== ==========
See Notes to Interim Condensed Consolidated Financial Statements.
<PAGE>
Supplemental schedule of non cash investing and financing activities:
- ---------------------------------------------------------------------
During the nine months ended March 31, 1999, the Company recorded non-cash
preferred dividends in the amount of $871,326 of which $706,697 was in
connection with cumulative undeclared dividends and $164,629 was for periodic,
non-cash accretions on preferred stock.
On March 31, 1999, the Company increased intangible assets by $70,000 upon
finalization of its computation of the final earn out payment due to the former
owner of SD&A.
Effective January 1, 1999, the Company paid $3,254,417 in cash to acquire 100%
of the outstanding capital stock of Stevens-Knox & Associates, Stevens-Knox List
Brokerage, and Stevens-Knox International (collectively, "SK&A"). At
acquisition, assets acquired and liabilities assumed, less payments made for the
acquisition, were:
Working capital, other than cash $ 1,938,779
Property and equipment (78,115)
Costs in excess of net assets of acquired companies (6,698,409)
Non-current assets (63,725)
Non-current liabilities 1,302,194
---------
$ (3,599,276)
============
Effective March 1, 1999, the Company sold 85% of the common stock of its
subsidiary Metro Fulfillment, Inc. for $1,260,000. The purchase price consisted
of $100,000 cash and a promissory note of $1,160,000. The $100,000 cash was
received in April 1999.
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 March 31, 1998: (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 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 31, 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 $ 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 consolidated financial statements include all adjustments, consisting
of only normal recurring accruals, necessary to present fairly the condensed
consolidated financial position, results of operations and cash flows of the
Company. Certain information and footnote disclosure normally included in
financial statements prepared in conformity with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations. Operating results for the three and
nine month periods ended March 31, 1999 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.
The weighted average common shares outstanding excluded stock options and
warrants of 4,298,964 and the impact of the conversion of outstanding Redeemable
Convertible Preferred Stock because the addition of these shares would be
anti-dilutive.
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 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 March 31, 1999, the Company bought back 417,094 shares at a cost of
$1,258,241.
3. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June 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 and there was no effect on the financial statements.
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
("Statement of Position") 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. As a result of the sale of 85% of Metro Fulfillment, Inc.,
approximately $173,000 was expensed in the statement of operations for the three
and nine months ended March 31, 1999 and is included in the gain on sale of
Metro Fulfillment, Inc. Management believes that the implementation of SOP 98-5
will not have any further significant impact on the Company's financial
statements.
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
March 31, 1999, the conversion rate was 91.623, resulting in the beneficial
ownership by GE Capital of 4,581,175 shares of Common Stock. On an as-converted
basis, the Convertible Preferred Stock represents approximately 26% 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 in the Purchase
Agreement.
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 $55,094 and $164,629
was included as dividends for the three and nine month period ended March 31,
1999, respectively. Approximately $54,226 and $58,301 of such discount was
included as dividends for the three and nine month period ended March 31, 1998,
respectively. 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 March 31, 1999 and June 30, 1998, the Company has
recorded $1,324,025 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. As of March 31, 1999, $1,171,513 was accrued for dividends in
arrears.
The Purchase Agreement contains, among other provisions, requirements for
maintaining certain minimum tangible net worth, as defined therein, 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
Company's money market fund. Principal and interest are payable in full in a
lump sum. As of March 31, 1999 the interest rate was 4.77%. As of March 31,
1999, this amount, including accrued interest, is included in other current
assets on the balance sheet.
In April 1999, the promissory note, including all accrued interest, was paid in
full.
7. ACQUISITIONS
------------
Effective January 1, 1999, Marketing Services Group, Inc. ("MSGI") entered into
a stock purchase agreement to acquire all of the issued and outstanding capital
stock (the "Shares") of Stevens-Knox and Associates, Inc., Stevens-Knox List
Brokerage, Inc. and Stevens-Knox International, Inc. (collectively "SK&A"). The
total cost of the acquisition was $3,890,222, consisting of a cash purchase
price of $3,254,417, assumption and payment of notes and loans payable of
$385,445 and transaction and other costs of $250,360. The cost of the
acquisition was estimated to be allocated to the assets acquired and liabilities
assumed, based upon their estimated fair values, as follows:
Working deficit $(1,647,833)
Property and equipment 78,115
Non-current assets 63,725
Non-current liabilities (1,302,194)
Intangible assets 6,698,409
---------
$3,890,222
==========
The estimated fair value of the intangible assets are being amortized by the
straight-line method over their estimated useful life of thirty years.
The agreement includes an earnout payment 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 earn out payment
is due for one such year. The earn out payments are contingent upon (a) SK&A
meeting targeted earnings before interest and taxes and (b) targeted billings of
MSGI subsidiaries and affiliates for electronic data processing services for
clients originally introduced by SK&A. The earnout payments shall be paid in
shares of MSGI Common Stock, provided, however, that Seller may elect to receive
up to twenty-five (25) percent of each earnout payment in cash, or, with the
written consent of the Chief Executive Officer of MSGI, Seller may elect to
receive up to fifty (50) percent of earnout payment 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
electronic data processing services for clients originally introduced by SK&A
exceeds targeted billings for the period February 1, 1999 through January 31,
2000. SK&A provides list management, brokerage and database management services.
This acquisition was accounted for using the purchase method of accounting.
Accordingly, the operating results of this acquisition are included in the
results of operations from the date of acquisition.
The following summary, prepared on a pro forma basis, combines the consolidated
results of operations as if SK&A 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,
1999 1998
---- ----
Revenues $74,768,295 $75,565,331
Net loss $(3,757,113) $(1,078,112)
Net loss to common $(4,799,860) $(2,234,419)
Loss per common share,
Basic and diluted $(0.37) $(0.17)
The unaudited pro forma information is provided for informational purposes only.
It is based on historic information and is not necessarily indicative of future
results of operations of the combined entities.
8. DISPOSITIONS
------------
Effective March 1, 1999, the Company sold 85% of the issued and outstanding
common stock of its wholly owned subsidiary Metro Fulfillment, Inc. for
$1,260,000. The purchase price consisted of $100,000 cash and a promissory note
of $1,160,000. The promissory note is payable in nine annual payments and bears
interest at 1% above the Prime Rate. The $100,000 cash was received in April
1999. In connection with the disposition, the Company recognized a gain on sale
of $40,810.
9. SUBSEQUENT EVENTS
-----------------
On April 21, 1999, the Company exercised its right to convert all 50,000 shares
of General Electric Capital Corporation's Series D Convertible Preferred Stock
into approximately 4.8 million shares of common stock. In conjunction with the
conversion, all preferred shareholder rights, including quarterly dividends,
financial covenants, acquisition approvals and board seats, were cancelled
effective immediately. In connection with the conversion, Michael Pralle and
James Brown resigned from the Company's Board of Directors.
In May 1999, the Company completed an acquisition of all the outstanding common
stock of CMG Direct Corporation, a subsidiary of CMG, Inc. The purchase price of
the acquisition was $26,000,000 which consisted of $12,000,000 in stock
(2,321,084 shares) and $14,000,000 in cash, subject to certain purchase price
adjustments. In March 1999, $1,000,000 of the purchase price was paid as a
deposit and is included in other assets on the Balance Sheet.
<PAGE>
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 nine month periods ended March 31, 1999. 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"), 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. As more fully
described in Note 8 to the interim condensed consolidated financial statements
included in this Form 10-Q, effective March 1, 1999, the Company sold 85% of the
issued and outstanding common shares of MFI.
As more fully described in Note 7 to the condensed consolidated financial
statements included in this Form 10-Q, effective January 1, 1999, the Company
acquired all of the outstanding common shares of Stevens-Knox & Associates,
Inc., Stevens-Knox List Brokerage, Inc. and Stevens-Knox International, Inc.
(collectively "SK&A"). The results of operations of SK&A are reflected in the
consolidated financial statements using the purchase method of accounting from
the date of acquisition. SK&A provides list management, brokerage and database
management services.
Results of Operations for the Three Months Ended March 31, 1999, Compared to the
- --------------------------------------------------------------------------------
Three Months Ended March 31, 1998.
- ----------------------------------
Revenues of $22,563,283 in the three months ended March 31, 1999 (the "current
period") increased by $7,594,698 over revenues of $14,968,585 in the three
months ended March 31, 1998 (the "prior period"). Of the increase, $7,729,944 is
attributable to an increase in direct and internet marketing resulting mainly
from the acquisition of SK&A. The remaining decrease is primarily due to a
decrease in telemarketing and telefundraising revenues of $439,741 offset by
fulfillment revenue for the current period of $304,495.
Direct costs of $15,406,554 in the current period increased by $6,304,808 over
direct costs of $9,101,746 in the prior period. Of the increase, $6,146,695 is
attributable to direct and internet marketing services primarily due to the
acquisition of SK&A. The remaining increase is primarily due to fulfillment
direct costs of $150,205. The Company's direct costs consist principally of
commissions paid to use marketing lists.
Salaries and benefits of $6,510,024 in the current period increased by
$1,947,992 over salaries and benefits of $4,562,032 in the prior period. Of the
increase, $1,436,105 is due to an increase in head count for internet and direct
marketing services as well as the inclusion of SK&A. Salaries and benefits
relating to fulfillment were $451,195. Salaries and benefits associated with
corporate overhead increased $13,422 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 increased $47,270.
General and administrative expenses of $1,844,411 in the current period
increased by $783,615 over comparable expenses of $1,060,796 in the prior
period. Direct and internet marketing services general and administrative
expenses increased $629,341 principally due to the inclusion of SK&A. The
remaining increase is primarily due to an increase in corporate and
telemarketing and telefundraising expenses of $123,766 as well as fulfillment
expenses of $30,508.
Depreciation and amortization expense of $498,754 in the current period
increased by $99,811 over expense of $398,943 in the prior period. Of the
increase, $66,759 is attributable to the inclusion of SK&A. The remaining
increase is primarily due to fixed asset depreciation and amortization from MFI.
Loss from operations of $1,696,460 in the current period increased by $1,541,528
over the prior period. Fulfillment services accounted for $414,747 of the loss.
Telemarketing and telefundraising incurred a loss from operations of $572,082,
which is consistent with the seasonality of the business. In addition, corporate
overhead contributed $742,612 to the loss from operations which consists mainly
of amortization and administration expenses. Direct and internet marketing
services provided income from operations of $32,981.
Net interest expense of $99,407 in the current period decreased by $112,247 over
income of $12,840 in the prior period. Such expenses increased principally due
to accrued interest on an outstanding earnout payment. In addition, interest
income from cash invested decreased due to cash used for stock buyback and to
fund fulfillment operations.
The net provision for income taxes of $1,410 in the current period decreased by
$6,188 over the provision of $7,598 in the prior period. The Company records
provisions for 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 or other operating subsidiaries.
Results of Operations for the Nine Months Ended March 31, 1999, Compared to the
- --------------------------------------------------------------------------------
Nine Months Ended March 31, 1998.
- ---------------------------------
Revenues of $56,356,724 in the nine months ended March 31, 1999 (the "current
period") increased by $23,459,750 over revenues of $32,896,974 in the nine
months ended March 31, 1998 (the "prior period"). Of the increase, $22,358,840
attributable to direct and internet marketing services resulting mainly from the
acquisitions of MMI and SK&A. A decrease in telemarketing and telefundraising
revenues of $363,914 were offset by fulfillment revenues of $1,464,824.
Direct costs of $35,815,236 in the current period increased by $19,251,933 over
direct costs of $16,563,303 in the prior period. Of the increase, $18,396,011 is
attributable to direct and internet marketing services resulting mainly from the
inclusion of MMI for nine months in the current period compared to four months
in the prior period as well as the inclusion SK&A. The remaining increase is due
to an increase in telemarketing and telefundraising direct costs of $314,221,
and fulfillment direct costs of $541,701. The increase in telemarketing and
telefundraising direct costs is primarily 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 $18,359,995 in the current period increased by
$5,141,847 over salaries and benefits of $13,218,148 in the prior period. Of the
increase, $3,182,077 is due to an increase in head count for internet and direct
marketing services as well as the inclusion of MMI for nine months in the
current period compared to four months in the prior period as well as the
inclusion of SK&A. Salaries and benefits related to fulfillment were $1,780,019.
Salaries and benefits associated with corporate overhead increased $243,381 in
the current period principally due to an increase in head count to manage
current and anticipated future growth. These increases were offset by a decrease
in telemarketing and telefundraising salaries and benefits of $63,630.
General and administrative expenses of $4,485,344 in the current period
increased by $1,390,691 over comparable expenses of $3,094,653 in the prior
period. Internet and direct marketing expenses increased $940,909 principally
due to the inclusion of MMI for nine months in the current period compared to
four months in the prior period as well as the inclusion of SK&A. The remaining
increase is primarily due to fulfillment expenses of $416,842 and an increase in
corporate overhead expenses of $118,157 offset by a decrease in telemarketing
and telefundraising expenses of $85,217.
Depreciation and amortization expense of $1,405,062 in the current period
increased by $339,102 over expense of $1,065,960 in the prior period. Of the
increase, $236,165 is attributable to the inclusion of MMI for a full nine
months as well as the inclusion of SK&A. The remaining increase is primarily due
to fixed asset depreciation and amortization from MFI.
Loss from operations of $3,708,913 in the current period increased by $2,663,823
over the prior period. Fulfillment accounted for $1,399,333 of the loss.
Telemarketing and telefundraising incurred a loss from operations of $791,062
for the current period, which is consistent with the seasonality of the
business. Corporate overhead contributed $1,961,383 to the loss from operations
which consists mainly of amortization and administration expenses. Direct and
internet marketing services provided income from operations of $442,867.
Net interest expense of $169,690 in the current period decreased by $18,720 over
expenses of $188,410 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 $58,473 in the current period decreased by
$44,175 over the benefit of $102,648 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
equity transactions, and its credit facilities. At March 31, 1999, the Company
had cash and cash equivalents of $1,233,037 and accounts receivable net of
allowances of $23,875,077.
The Company generated losses from operations of $3,708,913 in the current
period. Cash used in operating activities was $1,341,001. 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 $5,049,714 was used in investing activities
consisting of the acquisition of SK&A and cash deposited for future
acquisitions. Purchases of property and equipment principally comprised of
computer equipment. In the prior period, net cash used in investing activities
of $6,221,135 consisted of $252,271 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 $1,388,771 was provided by financing
activities. Net cash provided by financing activities consisted of $2,026,247
drawn on lines of credit and $1,216,348 received from the exercise of stock
options. This was partially offset by $1,258,241 used for the purchase of
treasury stock and $408,344 for repayments on acquisition debt and other notes
payable.
At March 31, 1999, the Company had amounts outstanding of $4,548,553 on its
lines of credit. The Company had approximately $191,891 available on its lines
of credit as of March 31, 1999.
On April 21, 1999, the Company exercised its right to convert all 50,000 shares
of General Electric Capital Corporation's Series D Convertible Preferred Stock
to approximately 4.8 million shares of common stock. In conjunction with the
conversion, all preferred shareholder rights, including quarterly dividends,
financial covenants, acquisition approvals and board seats, were cancelled
effective immediately. In connection with the conversion, Michael Pralle and
James Brown resigned from the Company's Board of Directors.
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 accordingly 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.
New Accounting Pronouncements
- -----------------------------
In June 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
(Statement of Position) 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. As a result of the sale of 85% of Metro Fulfillment, Inc.,
approximately $173,000 was expensed in the statement of operations for the three
and nine months ended March 31, 1999 and is included in the gain on sale of
Metro Fulfillment, Inc. Management believes that the implementation of SOP 98-5
will not have any further significant impact on the Company's financial
statements.
<PAGE>
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
On March 31, 1999, the Company held its annual meeting of stockholders to vote
on election of directors, ratification of independent auditors and approval of
the Company's 1999 Employee Stock Option Plan. Of the 12,702,359 shares of the
Company's common stock, par value $.01 per share, entitled to vote at the
meeting, holders of 10,453,214 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, convertible into an aggregate of 4,638,589 shares of
Common 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 Withheld
--- --------
General nominees:
Alan I. Annex 15,082,093 9,710
John T. Gerlach 15,083,493 8,310
The shares voted regarding the Board of Directors' proposal to select the
accounting firm of PricewaterhouseCoopers LLP to serve as independent auditors
of the Company were as follows:
For 14,903,802
Against 181,485
Abstain 6,516
Broker non-votes 0
The shares voted regarding the Board of Directors' proposal to approve the
Company's 1999 Employee Stock Option Plan were as follows:
For 10,361,553
Against 141,487
Abstain 74,342
Not voted 4,514,421
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 February 1, 1999, the Company filed a current report on Form
8-K regarding the Company's acquisition of all of the issued and outstanding
capital stock of Stevens-Knox and Associates, Inc., Stevens-Knox List Brokerage,
Inc. and Stevens-Knox International, Inc. (collectively "SK&A").
On or about March 24, 1999, the Company filed a current report on Form 8-K
regarding the Company's intention to acquire all of the issued and outstanding
capital stock of CMG Direct Corporation.
<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: May 17, 1999 By: /s/ J. Jeremy Barbera
---------------------
J. Jeremy Barbera
Chairman of the Board and
Chief Executive Officer
Date: May 17, 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 NINE MONTHS ENDED MARCH 31, 1999 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> Year
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-END> Mar-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,233,037
<SECURITIES> 0
<RECEIVABLES> 24,206,841
<ALLOWANCES> (381,764)
<INVENTORY> 0
<CURRENT-ASSETS> 26,456,163
<PP&E> 4,437,458
<DEPRECIATION> (3,329,046)
<TOTAL-ASSETS> 60,387,304
<CURRENT-LIABILITIES> 30,409,394
<BONDS> 2,106,563
<COMMON> 135,912
15,987,198
0
<OTHER-SE> 11,478,237
<TOTAL-LIABILITY-AND-EQUITY> 60,387,304
<SALES> 56,356,724
<TOTAL-REVENUES> 56,356,724
<CGS> 35,815,236
<TOTAL-COSTS> 35,815,236
<OTHER-EXPENSES> 24,250,401
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 169,690
<INCOME-PRETAX> (3,837,793)
<INCOME-TAX> 58,473
<INCOME-CONTINUING> (3,779,320)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,779,320)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
