-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EFJx3iwnjG3ZSj0GsbetuLGqAEIG90HsUR8l4q0ejBq9PdgVudrMSDLCNUxQxZyo OSX49wdwaBTDWPEgkgKp1A== 0000014280-00-000011.txt : 20000225 0000014280-00-000011.hdr.sgml : 20000225 ACCESSION NUMBER: 0000014280-00-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 DATE AS OF CHANGE: 20000223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARKETING SERVICES GROUP INC CENTRAL INDEX KEY: 0000014280 STANDARD INDUSTRIAL CLASSIFICATION: 7389 IRS NUMBER: 880085608 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01768 FILM NUMBER: 544563 BUSINESS ADDRESS: STREET 1: 333 SEVENTH AVENUE STREET 2: 20TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 2125947688 MAIL ADDRESS: STREET 1: 333 SEVENTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10001 FORMER COMPANY: FORMER CONFORMED NAME: ALL-COMM MEDIA CORP DATE OF NAME CHANGE: 19950823 FORMER COMPANY: FORMER CONFORMED NAME: SPORTS TECH INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BRISTOL HOLDINGS INC DATE OF NAME CHANGE: 19920518 10-Q 1 FORM 10-Q 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 ------------------ ----- (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. 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 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 -------- --------- Total liabilities 35,969,202 48,699,320 ---------- ---------- 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)
Three Months Ended Six Months Ended December 31, December 31, 1999 1998 1999 1998 ---- ---- ---- ---- 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 ========== ========== ========== ==========
* 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. 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) - ---------- ---------- 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. 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 EX-27 2 EXHIBIT 27
5 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 U.S. Dollars Year Jun-30-1999 Dec-31-1999 1 5,861,434 0 30,844,649 (604,963) 0 37,164,381 9,869,700 (7,302,168) 138,113,793 34,994,046 975,156 273,695 0 0 101,870,896 138,113,793 27,874,979 27,874,979 18,536,676 18,536,676 13,661,394 0 (65,035) (4,388,126) 48,485 (4,436,611) 0 0 0 (4,436,611) (0.17) (0.17)
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