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, 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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (917) 339-7100
-----------------------------------------------------
(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 11, 2000, there were 27,547,438 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, 1999
PART I - FINANCIAL INFORMATION Page
----
Item 1 Interim Condensed Consolidated Financial Statements
(unaudited)
Condensed Consolidated Balance Sheets as of
December 31, 1999 and June 30, 1999 (unaudited) 3
Condensed Consolidated Statements of Operations
for the three and six months ended December 31, 1999
and 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the six months ended December 31, 1999
and 1998 (unaudited) 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6-9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
PART II - OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
Signatures
Exhibit 27 Financial Data Schedule
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Interim Condensed Consolidated Financial Statements (unaudited)
------------------------------------------------------------------------
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, 1999 June 30, 1999
----------------- -------------
ASSETS
- - ------
Current assets:
Cash and cash equivalents $5,861,434 $ 3,285,217
Accounts receivable billed, net
of allowance for doubtful accounts of
$604,963 and $551,043 as of
December 31, 1999 and June 30, 1999,
respectively 25,754,505 23,527,798
Accounts receivable unbilled 4,485,181 3,862,907
Note receivable-current portion 173,359 685,873
Other current assets 889,902 1,168,653
----------- ---------
Total current assets 37,164,381 32,530,448
Investments at cost 34,354,700 -
Property and equipment, net 2,567,532 1,504,826
Intangible assets, net 62,327,600 62,493,949
Note receivable 652,010 474,127
Other assets 1,047,570 623,599
----------- ----------
Total assets $138,113,793 $97,626,949
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
Current liabilities:
Lines of credit $1,067,328 $5,316,775
Accounts payable-trade 24,057,255 23,214,278
Accrued expenses and other
current liabilities 4,559,445 8,151,764
Current portion of note payable-related party 4,935,875 4,871,750
Current portion of capital lease obligations 36,823 52,099
Current portion of long-term obligations 337,320 570,653
--------- ---------
Total current liabilities 34,994,046 42,177,319
Capital lease obligations,
net of current portion 106,537 67,407
Long-term obligations,
net of current portion 843,778 997,890
Note payable-related party,
net of current portion - 4,871,750
Other liabilities 24,841 584,954
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Total liabilities 35,969,202 48,699,320
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Stockholders' equity:
Common Stock - $.01 par value; 75,000,000
authorized; 27,369,517 and 22,513,772
shares issued as of December 31, 1999
and June 30, 1999, respectively 273,695 225,138
Additional paid-in capital 131,251,246 70,812,973
Accumulated deficit (27,213,458) (19,928,677)
Deferred compensation (773,182) (788,095)
Less: 423,894 shares of common stock
in treasury, at cost (1,393,710) (1,393,710)
---------- ----------
Total stockholders' equity 102,144,591 48,927,629
----------- ----------
Total liabilities and stockholders' equity $138,113,793 $97,626,949
============ ===========
See Notes to Condensed Consolidated Financial Statements.
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $27,874,979 $16,640,513 $55,048,602 $33,793,441
Operating costs and expenses:
Direct costs 18,536,676 10,894,520 36,355,854 20,408,682
Salaries and benefits 8,557,145 5,563,149 16,862,360 11,849,971
Compensation expense on option grants 126,569 - 292,224 -
Selling, general and administrative 3,847,734 1,305,308 5,971,994 2,640,933
Depreciation and amortization 1,129,946 451,010 2,245,084 906,308
--------- ------- --------- -------
Total operating costs and expenses 32,198,070 18,213,987 61,727,516 35,805,894
---------- ---------- ---------- ----------
Loss from operations (4,323,091) (1,573,474) (6,678,914) (2,012,453)
Interest expense, net (65,035) (39,556) (589,261) (70,283)
Gain on sale of minority investment - - 45,163 -
------ ------ ------ ------
Loss before income taxes (4,388,126) (1,613,030) (7,223,012) (2,082,736)
Income tax (expense)benefit (48,485) 87,188 (61,769) 59,883
------- ------ ------- ------
Net loss $(4,436,611) $(1,525,842) $(7,284,781) $(2,022,853)
=========== =========== =========== ===========
Net loss attributable to common stockholders $(4,436,611) $(1,816,266)* $(7,284,781) $(2,600,003)*
=========== =========== =========== ===========
Net loss per common share $(.17) $(0.14) $(.30) $(0.20)
===== ====== ===== ======
Weighted average common and common
equivalent shares outstanding 25,609,980 12,886,265 24,291,248 12,988,203
========== ========== ========== ==========
</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.
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(unaudited)
1999 1998
---- ----
Operating activities:
Net loss $(7,284,781) $(2,022,853)
Adjustments to reconcile loss to net cash
provided by (used in)operating activities:
Depreciation 407,441 301,849
Amortization 1,837,643 604,459
Accrued interest on convertible securities - 29,122
Provision for bad debts 53,920 68,594
Gain on sale of minority interest (45,163) -
Settlement of litigation 315,000 -
Compensation expense on stock option grants 292,224 -
Amortization of discount on note receivable 192,375 -
Changes in assets and liabilities:
Accounts receivable (2,902,901) (1,892,971)
Other current assets 278,751 (236,281)
Other assets (598,666) (306,754)
Trade accounts payable 757,138 2,332,285
Accrued expenses and other current liabilities (4,148,523) (480,904)
Net cash used in operating activities (10,845,542) (1,603,454)
----------- ----------
Investing activities:
Purchase of property and equipment (1,447,044) (232,598)
Proceeds from sale of Metro Fulfillment, Inc. 556,984 -
Investments at cost (6,848,300) -
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Net cash used in investing activities (7,738,360) (232,598)
---------- --------
Financing activities:
Proceeds from exercises of stock options 315,630 46,524
Proceeds from private placement of
common stock, net 30,531,827 -
Repayments of credit facilities (4,249,447) (568,610)
Repayment of capital lease obligation (50,446) (34,466)
Repayment of short term note payable (5,000,000) -
Repayments of notes payable, other (154,112) (117,540)
Repayment of acquisition debt (233,333) (291,667)
Purchase of treasury stock - (1,258,241)
---------- ----------
Net cash provided by (used in)
financing activities 21,160,119 (2,224,000)
Net increase (decrease) in cash and cash equivalents 2,576,217 (4,060,052)
Cash and cash equivalents at beginning of period 3,285,217 6,234,981
--------- ---------
Cash and cash equivalents at end of period $5,861,434 $2,174,929
========== ==========
See Notes to Condensed Consolidated Financial Statements.
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements include
the accounts of Marketing Services Group, Inc. and Subsidiaries (the "Company").
These condensed consolidated financial statements are unaudited and should be
read in conjunction with the Company's Form 10-K for the year ended June 30,
1999 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 period ended December 31, 1999 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 2000. Certain
reclassifications have been made in the fiscal 1999 financial statements to
conform with the fiscal 2000 presentation.
In May 1998, the Company formed Metro Fulfillment, Inc. ("MFI"), a subsidiary
providing online commerce, real-time database management, inbound/outbound
customer service, custom packaging, assembling, product warehousing, shipping,
payment processing and retail distribution. Effective March 1, 1999, the Company
sold 85% of the common stock of MFI for $1,260,000 consisting of a cash payment
of $100,000 and a promissory note of $1,160,000. Accordingly, effective March 1,
1999 the results of operations of MFI were no longer consolidated in the
Company's statement of operations. In September 1999, the Company sold the
remaining 15% for a Note Receivable in the amount of $222,353. The investment in
MFI was accounted for by the cost method of accounting. In July 1999, the
Company received an early payment on the Note Receivable in the amount of
$556,985 which represents principal and interest.
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.
Effective May 13, 1999, the Company acquired all of the outstanding common
shares of CMG Direct Corporation ("CMG Direct"). The results of operations of
CMG Direct are reflected in the consolidated financial statements using the
purchase method of accounting from the date of acquisition. CMG Direct provides
database services to the direct marketing and internet industries.
2. EARNINGS PER SHARE
In October 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("EPS"). This statement
requires the presentation of basic and diluted earnings per share. Basic EPS
does not give effect to common stock equivalents whereas the presentation of
diluted EPS gives effect to all dilutive common shares that were outstanding
during the period. Stock options and warrants in the amount of 3,257,958 were
not included in the computation of diluted EPS as they are antidilutive as a
result of net losses during the periods presented.
3. SHORT TERM BORROWINGS
At December 31, 1999, the Company was in violation of certain financial
covenants with regard to its lines of credit at certain subsidiaries. The
Company has obtained a waiver of such violations.
4. CONTINGENCIES AND LITIGATION
In June 1999, certain employees of SD&A voted against representation by the
International Longshore and Warehouse Union ("ILWU"). The ILWU has filed unfair
labor practices with the National Labor Relations Board ("NLRB") alleging that
the Company engaged in unlawful conduct prior to the vote. The NLRB has issued a
complaint seeking a bargaining order and injunctive relief compelling the
Company to recognize and bargain with the ILWU. The Company intends to
vigorously defend against these charges. An unfavorable finding will not have
any direct financial impact on the Company.
In September, 1999, an action was commenced against the Company in the Supreme
Court of New York, Kings County alleging damages of $4.3 million in connection
with the Company's alleged failure to deliver warrants due the plaintiff.
Although the Company denies all liability, the suit was settled in January 2000
with 18,000 warrants with an exercise price of $1.00. Accordingly, the Company
recognized $315,000 of expense based on the fair market value of the warrants
granted as determined by the Black-Scholes model. The expense is included in
selling, general and administrative expenses for the three and six months ended
December 31, 1999.
In addition to the above, certain other legal actions are pending to which the
Company is a party. The Company does not expect that the ultimate resolution of
pending legal matters in future periods will have a material effect on the
financial condition, results of operations or cash flows.
5. SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITITES
During the quarter ended December 31, 1999 and 1998, the Company entered into
capital lease obligations for approximately $75,000 and $9,400, respectively,
for certain computer equipment. During the quarter ended September 30, 1999, the
Company sold its investment in Metro Fulfillment, Inc. for a Note Receivable in
the amount of $222,353. During the quarter ended September 30, 1998, the Company
recorded non-cash preferred dividends in the amount of $286,726 of which
$232,067 was in connection with cumulative undeclared dividends and $54,659 was
for periodic, non-cash accretions on preferred stock.
In October 1999, the Company completed an acquisition of approximately 85% of
the outstanding common stock of Cambridge Intelligence Agency for a total
purchase price of $1.6 million in common stock of the Company, subject to
certain adjustments. The acquisition will be accounted for under the purchase
method of accounting.
In December 1999, the Company acquired a 10% interest in Fusion Networks, Inc.
for $27,506,400 in common stock. The Company also has an additional option to
acquire up to 19% of Fusion Networks based on the same per share price as the
original investment. Fusion Networks, Inc. operates the website
www.Latinfusion.com. The web site is an interactive, multimedia, and
entertainment Latin American based portal featuring television, music, and
e-commerce capability. The investment will be accounted for under the cost
method of accounting.
6. 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 subject to and in compliance with the provisions and limitations of
Rule 10b-18 of the Securities Exchange Act of 1934. Purchases were permitted to
be made from time to time at prevailing market prices during the one-year period
ended September 28, 1999. As of September 30, 1999, the Company bought back
412,094 shares valued at $1,258,241. All shares are held in treasury.
7. INTERNET INVESTMENTS
In July 1999, the Company invested $1,555,000 to acquire a 10% interest in
Screenzone Media Network, LLC ("Screenzone"). Screenzone is an interactive
broadcast gateway that was developed to advertise and promote movies, music,
live events and other entertainment at shopping malls and over the Internet. The
investment will be accounted for under the cost method of accounting.
In September 1999, the Company acquired a 14% interest in Greatergood.com for
$5,000,000. GreaterGood.com builds, co-markets and manages online shopping
villages for not-for-profit organization web sites. The investment will be
accounted for under the cost method of accounting.
In October 1999, the Company completed an acquisition of approximately 85% of
the outstanding common stock of Cambridge Intelligence Agency for $1.6 million
in common stock of the Company, subject to certain adjustments. The acquisition
will be accounted for under the purchase method of accounting.
In October 1999, the Company acquired a 10% interest in Mazescape.com for a
$200,000. Mazescape.com is an innovative internet technology company that
delivers customized, automated recruiting software and services that improve the
performance of corporate recruiters. The acquisition will be accounted for under
the cost method of accounting.
In December 1999, the Company acquired a 10% interest in Fusion Networks, Inc.
for $27,506,400 in common stock. The Company also has an additional option to
acquire up to 19% of Fusion Networks based on the same per share price as the
original investment. Fusion Networks, Inc. operates the website
www.Latinfusion.com. The web site is an interactive, multimedia, and
entertainment Latin American based portal featuring television, music, and
e-commerce capability. The investment will be accounted for under the cost
method of accounting.
8. PENDING ACQUISITION
In July 1999, MSGI entered into an agreement to acquire all of the outstanding
common stock of Atlanta-based Grizzard Communications Group. The purchase price
is $50 million cash and $50 million dollars in MSGI common stock. The
acquisition is targeted to close by the end of February 2000. The Company has
received the financing commitment for the cash portion of the purchase price.
Grizzard's services include strategic planning, creative, database management,
print-production, mailing and Internet marketing. Grizzard's client base
includes retail, consumer and business-to-business companies as well as many
premier not-for-profit clients. The acquisition will be accounted for under the
purchase method of accounting.
9. PRIVATE PLACEMENT OF COMMON STOCK
In September 1999, the Company completed a private placement of 3,130,586 shares
of common stock for proceeds of approximately $30.5 million, net of
approximately $2,3 million of placement fees and expenses. The shares have
certain registration rights. The proceeds of the private placement will be used
in connection with certain Internet investments, to repay certain short-term
debt and for working capital purposes. The shares were registered on October 29,
1999.
10. RELATED PARTY TRANSACTION
During July and August 1999, the Company entered into a promissory note
agreement with a venture fund in the amount of $4,500,000. The principal and all
accrued interest was payable in full on December 10, 1999 and bore interest at
the greater of 10% or prime plus 2%. An officer of the Company is a partner in
the venture fund. The principal amount and all accrued interest was prepaid in
September 1999 with the proceeds of the private placement.
<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 six month periods ended December 31, 1999 and 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-K for the year
ended June 30, 1999.
In May 1998, the Company formed Metro Fulfillment, Inc. ("MFI"), a subsidiary
providing online commerce, real-time database management, inbound/outbound
customer service, custom packaging, assembling, product warehousing, shipping,
payment processing and retail distribution. Effective March 1, 1999, the Company
sold 85% of the common stock of MFI. Accordingly, effective March 1, 1999 the
results of operations of MFI are no longer consolidated in the Company's
statement of operations. The investment in MFI was being accounted for by the
cost method of accounting. In September 1999, the Company sold the remaining 15%
for a Note Receivable in the amount of $222,353.
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.
Effective May 13, 1999, the Company acquired all of the outstanding common
shares of CMG Direct Corporation ("CMG Direct"). The results of operations of
CMG Direct are reflected in the consolidated financial statements using the
purchase method of accounting from the date of acquisition. CMG Direct provides
database services to the direct marketing and internet industries.
Effective October 1, 1999, the Company acquired 85% of the outstanding common
stock of Cambridge Intelligence Agency ("CIA") for $1.8 million in common stock
of the Company. The results of operations of CIA are reflected in the
consolidated financial statements using the purchase method of accounting from
the date of acquisition.
Results of Operations for the Three Months Ended December 31, 1999, Compared to
- - --------------------------------------------------------------------------------
the Three Months Ended December 31, 1998.
- - -----------------------------------------
Revenues of approximately $27.9 million for the three months ended December 31,
1999 (the "current period") increased by $11.3 million or 68% over revenues of
$16.6 million during the three months ended December 31, 1998 (the "prior
period"). Of the increase, approximately $12.2 million is attributable to an
increase in direct marketing revenue resulting from the acquisitions of SK&A,
CMG Direct and CIA. Direct and Interent marketing revenue excluding the effects
of acquisitions decreased by approximately $328,000 due to a decrease in
telemarketing and telefundraising revenues of approximately 7%. Fulfillment
revenue decreased in the current period by approximately $.6 million due to the
sale of MFI. The decrease in telemarketing and telefundraising primarily
resulted from a loss of revenue due to an unsuccessful attempt by third parties
to unionize the calling center. New management has been put in place at the
start of the new fiscal year and have refocused its priorities. The Company is
still in the process of opposing certain issues with the union but expects to be
successful in its efforts.
Direct costs of approximately $18.5 million in the current period increased by
$7.6 million or 70% over direct costs of $10.9 million in the prior period. Of
the increase, approximately $8.6 million is attributable to the acquisitions of
SK&A, CMG Direct and CIA. Direct costs for direct and internet marketing
excluding the effects of acquisitions decreased by $.7 million which is due to
the decrease in revenue. Direct costs from fulfillment decreased by
approximately $200,000 due to the sale of MFI. The Company's direct costs
consist principally of commissions paid to use marketing lists. Direct costs as
a percentage of revenue decreased from 67% in the prior period to 64% in the
current period. The decrease in the direct costs as a percentage of revenue
results from the mix in services sold. As MSGI acquires new companies and
internet revenues become a higher percentage of overall revenue, management
expects the direct cost percentage of revenue to decrease further.
Salaries and benefits of approximately $8.6 million in the current period
increased by approximately $3.0 million or 54% over salaries and benefits of
approximately $5.6 million in the prior period. Of the increase, approximately
$3.3 million is attributable to the acquisitions of SK&A, CMG Direct and CIA.
Fulfillment salaries and benefits decreased by approximately $.6 million due to
sale of MFI.
General and administrative expenses of approximately $3.8 million in the current
period increased by approximately $2.5 million or 193% over comparable expenses
of $1.3 million in the prior period. Of the increase approximately $1.5 million
is attributable to the acquisitions of SK&A, CMG Direct and CIA. The remaining
increase is due to an increase in corporate expenses primarily due to an
increase in legal fees associated with the opposition of the unionization of the
call center, an increase in consulting fees associated with the Company's
integration efforts of its acquisitions, a non-cash settlement of litigation and
an increase in expenses associated with the Company's expansion of internet
operations.
Depreciation and amortization expense of approximately $1.1 million in the
current period increased by approximately $.6 million over expense of $.5
million in the prior period. This is primarily attributable to an increase in
direct and internet marketing depreciation and amortization expense resulting
from the acquisitions of SK&A, CMG Direct and CIA.
Net interest expense of approximately $65,000 in the current period increased by
approximately $15,000 over net interest expense of approximately $40,000 in the
prior period principally due to accrued interest on outstanding borrowings
relating to the acquisitions of SK&A and CMG Direct.
Results of Operations for the Six Months Ended December 31, 1999, Compared to
- - --------------------------------------------------------------------------------
the Six Months Ended December 31, 1998.
- - ---------------------------------------
Revenues of approximately $55.0 million for the six months ended December 31,
1999 (the "current period") increased by $21.2 million or 63% over revenues of
$33.8 million during the six months ended December 31, 1998 (the "prior
period"). Of the increase, approximately $24.2 million is attributable to an
increase in direct marketing resulting from the acquisitions of SK&A, CMG Direct
and CIA. Direct and Internet revenue excluding the effects of acquisitions
decreased by approximately $1.8 million due primarily to a decrease in
telemarketing and telefundraising revenues of approximately 14%. Fulfillment
revenue decreased in the current period by approximately $1.2 million due to the
sale of MFI. The decrease in telemarketing and telefundraising primarily
resulted from a loss of revenue due to an unsuccessful attempt by third parties
to unionize the calling center. New management has been put in place at the
start of the new fiscal year and have refocused its priorities. The Company is
still in the process of opposing certain issues with the union but expects to be
successful in its efforts.
Direct costs of approximately $36.4 million in the current period increased by
$16 million or 78% over direct costs of $20.4 million in the prior period. Of
the increase, approximately $17.8 million is attributable to the acquisitions of
SK&A and CMG Direct. Direct costs for direct and internet marketing excluding
the effects of acquisitions decreased by $1.5 million which is due to the
decrease in revenue. In addition direct costs from fulfillment decreased by $.4
million due to the sale of MFI. The Company's direct costs consist principally
of commissions paid to use marketing lists. Direct costs as a percentage of
revenue decreased from 61% in the prior period to 60% in the current period. The
decrease in the direct costs as a percentage of revenue results from the mix in
services sold. As MSGI acquires new companies and internet revenues become a
higher percentage of overall revenue, management expects the direct cost
percentage of revenue to decrease further.
Salaries and benefits of approximately $16.9 million in the current period
increased by approximately $5.1 million or 43% over salaries and benefits of
approximately $11.8 million in the prior period. Of the increase, approximately
$6 million is attributable to the acquisitions of SK&A and CMG Direct. Salaries
and benefits relating to direct and internet marketing increased by
approximately $370,000 due to an increase in head count for the Company's
internet operations as well as its corporate functions to accommodate the growth
. Fulfillment salaries and benefits decreased by approximately $1.3 million due
to the sale of MFI.
Selling, general and administrative expenses of approximately $6.0 million in
the current period increased by approximately $3.4 million or 131% over
comparable expenses of $2.6 million in the prior period. Of the increase,
approximately $2.1 million is attributable to the acquisitions of SK&A and CMG
Direct. The remaining increase is primarily due to an increase in corporate
expenses associated with the increase in merger and acquisition activity, an
increase in legal fees associated with the opposition of the unionization of the
call center, an increase in consulting fees associated with the Company's
integration efforts of its acquisitions, a non-cash settlement of litigation and
an increase in expenses associated with the Company's expansion of internet
operations.
Depreciation and amortization expense of approximately $2.2 million in the
current period increased by approximately $1.3 million over expense of $.9
million in the prior period. This is primarily attributable to an increase in
direct and internet marketing depreciation and amortization expense resulting
from the acquisitions of SK&A, CMG Direct and CIA.
Net interest expense of approximately $.6 million in the current period
increased by approximately $.5 million over net interest expense of
approximately $70,000 in the prior period principally due to accrued interest on
outstanding borrowings relating to the acquisitions of SK&A and CMG Direct.
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, 1999, the
Company had cash and cash equivalents of $5.9 million and accounts receivable
net of allowances of $30.2 million.
The Company generated losses from operations of $6.7 million in the current
period. Cash used in operating activities was $10.8 million. Cash used by
operating activities principally consists of the net loss, an increase in trade
accounts receivable and a decrease in accrued expenses.
In the current period, net cash of $7.7 million was used in investing activities
consisting primarily of investments in internet companies. In the prior period,
net cash used in investing activities of approximately $230,000 consisted of
purchases of property and equipment. The Company intends to continue to invest
in technology and telecommunications hardware and software.
In the current period, net cash of $21.1 million was provided by financing
activities. Net cash provided by financing activities consists principally of
$30.8 million of net fees and expenses for the private placement of the
Company's common stock and the exercise of stock options offset by repayments of
lines of credit of $4.2 million and repayments on acquisition debt and other
notes payable of $5.4 million.
At December 31, 1999, the Company had amounts outstanding of $1.1 million on its
lines of credit. The Company had approximately $5.5 million available on its
lines of credit as of December 31, 1999.
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 its
interest and debt obligations for the next twelve months.
The Year 2000
- - -------------
The Year 2000 issue could result in system failures or miscalculations causing
disruption of operations of the companies. To date, MSGI has experienced very
few problems related to the Year 2000 issue, and MSGI does not believe that it
has a material exposure problem.
MSGI has conducted a review of its computer systems and other systems for the
purpose of assessing its readiness for Year 2000, and is in the process of
modifying or replacing those systems which are not Year 2000 compliant. Based
upon this review, management believes such systems will be compliant by November
1999 for its existing business-critical systems. However, if modifications are
not made or completed timely, there could be a significant adverse impact on
MSGI's operations.
In addition, MSGI has communicated with its major vendors and suppliers to
determine their state of readiness relative to the Year 2000 compliance and
MSGI's possible exposure to Year 2000 issues of such third parties. However,
there can be no guarantee that the systems of other companies, which MSGI's
systems may rely upon, will be timely converted or representations made to MSGI
by these parties are accurate. As a result, the failure of a major vendor or
supplier to adequately address their Year 2000 compliance could have a
significant adverse impact on MSGI's operations.
As of the date hereof, MSGI has incurred insignificant costs (primarily for
internal labor) related to the identification and evaluation of MSGI's Year 2000
issues related to the system applications. Primarily as a result of the
acquisition of CMG Direct, the Company has spent approximately $530,000 through
December 31, 1999. The Company does not anticipate future amounts to be
material. As of December 31, 1999, management believes that the Company's
computer systems are Year 2000 compliant. The estimated completion date and
remaining costs are based upon management's best estimates, as well as third
party modification plans and other factors. However, there can be no guarantee
that such estimates are accurate and actual results could differ from these
estimates.
Seasonality and Cyclicality: The businesses of telemarketing and marketing
services tend to be 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 performing arts clients,
which generally begin in the spring time and continue during the summer months.
Marketing services tend to have higher revenues and profits occurring in the
second fiscal quarter, based on the seasonality of its clients' mail dates.
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
None
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: February 14, 2000 By: /s/ J. Jeremy Barbera
---------------------
J. Jeremy Barbera
Chairman of the Board and
Chief Executive Officer
Date: February 14, 2000 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 THREE MONTHS ENDED DECEMBER 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> Dec-31-1999
<EXCHANGE-RATE> 1
<CASH> 5,861,434
<SECURITIES> 0
<RECEIVABLES> 30,844,649
<ALLOWANCES> (604,963)
<INVENTORY> 0
<CURRENT-ASSETS> 37,164,381
<PP&E> 9,869,700
<DEPRECIATION> (7,302,168)
<TOTAL-ASSETS> 138,113,793
<CURRENT-LIABILITIES> 34,994,046
<BONDS> 975,156
<COMMON> 273,695
0
0
<OTHER-SE> 101,870,896
<TOTAL-LIABILITY-AND-EQUITY> 138,113,793
<SALES> 27,874,979
<TOTAL-REVENUES> 27,874,979
<CGS> 18,536,676
<TOTAL-COSTS> 18,536,676
<OTHER-EXPENSES> 13,661,394
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (65,035)
<INCOME-PRETAX> (4,388,126)
<INCOME-TAX> 48,485
<INCOME-CONTINUING> (4,436,611)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,436,611)
<EPS-BASIC> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
