-----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, BX/XKyzdRCsLaT9yiSG61U42DW+/MLm/THEeayi/ClsDJyA+jKOtg2A9FkTMrf60 0b7X7OscVGE46OZAdbWzbw== 0000014280-98-000028.txt : 19980518 0000014280-98-000028.hdr.sgml : 19980518 ACCESSION NUMBER: 0000014280-98-000028 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARKETING SERVICES GROUP INC CENTRAL INDEX KEY: 0000014280 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 880085608 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-01768 FILM NUMBER: 98625510 BUSINESS ADDRESS: STREET 1: 400 CORPORATE POINTE STREET 2: STE 780 CITY: CULVER CITY STATE: CA ZIP: 90230 BUSINESS PHONE: 3103422800 MAIL ADDRESS: STREET 1: 400 CORPORATE POINTE SUITE 780 CITY: CULVER CITY STATE: CA ZIP: 90280 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 10QSB 1 FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-16730 MARKETING SERVICES GROUP, INC. ------------------------------ (Exact name of small business issuer as specified in its charter) Nevada 88-0085608 ------ ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 333 Seventh Avenue, 20th Floor New York, New York 10001 ------------------------------ ----- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (212) 594-7688 ----------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS State number of shares outstanding of each of the issuer's classes of common equity as of the latest practical date: As of May 15, 1998, there were 13,086,305 shares of the Issuer's Common Stock, par value $.01 per share outstanding. Traditional Small Business Disclosure Format (check one): Yes: X No: --- --- MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES TABLE OF CONTENTS FORM 10-QSB REPORT MARCH 31, 1998 PART I - FINANCIAL INFORMATION Page - ------------------------------ ---- Item 1 Interim Condensed Consolidated Financial Statements (unaudited) Condensed Consolidated Balance Sheet - March 31, 1998 3 Condensed Consolidated Statements of Operations Three and nine months ended March 31, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows Nine months ended March 31, 1998 and 1997 5-6 Notes to Interim Condensed Consolidated Financial Statements 7-11 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 12-17 PART II - OTHER INFORMATION - --------------------------- Item 4 Submission of Matters to a Vote of Security Holders Item 6 Exhibits and Reports on Form 8-K Signatures PART I - FINANCIAL INFORMATION Item 1 - Interim Condensed Consolidated Financial Statements (unaudited) MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (unaudited) March 31, 1998 -------------- ASSETS Current assets: Cash and cash equivalents $ 8,056,633 Accounts receivable billed, net of allowance for doubtful accounts of $336,141 11,622,392 Accounts receivable unbilled 2,761,807 Other current assets 560,599 ----------- Total current assets 23,001,431 Property and equipment at cost, net 1,048,376 Intangible assets at cost, net 24,277,757 Other assets 176,433 ----------- Total assets $48,503,997 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 1,706,630 Trade accounts payable 12,135,117 Accrued salaries and wages 564,328 Other accrued expenses 869,349 Current portion of long-term obligations 903,171 ----------- Total current liabilities 16,178,595 Long-term obligations 791,667 Other liabilities 579,687 ----------- Total liabilities 17,549,949 ----------- Commitments and contingencies Redeemable convertible preferred stock, $.01 par value; 50,000 shares authorized at March 31, 1998, increased to 150,000 on April 3, 1998, consisting of 50,000 shares of Series D Convertible Preferred Stock issued and outstanding 13,696,000 ----------- Stockholders' equity: Common stock - authorized 36,250,000 shares at March 31, 1998, increased to 75,000,000 shares on April 3, 1998, of $.01 par value, 13,098,105 shares issued 130,981 Additional paid-in capital 29,895,984 Accumulated deficit (12,633,448) Less 11,800 shares of common stock in treasury, at cost (135,469) ----------- Total stockholders' equity 17,258,048 ----------- Total liabilities and stockholders' equity $48,503,997 =========== See Notes to Condensed Consolidated Financial Statements. MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 1998 AND 1997 (unaudited)
Three Months Ended Nine Months Ended March 31, March 31, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Revenues $14,968,585 $ 6,300,538 $32,896,974 $16,146,217 ----------- ----------- ----------- ----------- Operating costs and expenses: Salaries and benefits 4,562,032 3,660,568 13,218,148 10,487,878 Non-recurring compensation expense on option grants 1,650,000 Direct costs 9,101,746 1,847,493 16,563,303 3,789,313 Restructuring costs 1,019,474 1,019,474 Selling, general and administrative 1,060,796 954,874 3,094,653 2,544,092 Depreciation and amortization 398,943 280,947 1,065,960 690,821 ----------- ----------- ----------- ----------- Total operating costs and expenses 15,123,517 7,763,356 33,942,064 20,181,578 ----------- ----------- ----------- ----------- Loss from operations (154,932) (1,462,818) (1,045,090) (4,035,361) ----------- ----------- ----------- ----------- Other income (expense): Discounts on warrant exercises (113,203) (113,203) Withdrawn public offering costs (1,307,472) (1,307,472) Interest income (expense) and other, net 12,840 (104,645) (188,410) (248,253) ----------- ----------- ----------- ----------- Sub total 12,840 (1,525,320) (188,410) (1,668,928) ----------- ----------- ----------- ----------- Loss before income taxes (142,092) (2,988,138) (1,233,500) (5,704,289) Benefit (provision) for income taxes (7,598) (8,083) 102,648 (32,022) ----------- ----------- ----------- ----------- Net loss $ (149,690) $(2,996,221) $(1,130,852) $(5,736,311) =========== =========== =========== =========== Net loss attributable to common stockholders* $ (428,834) $(7,971,721) $(4,795,177) $(20,538,331) =========== =========== =========== =========== Net loss per common share, basic and diluted $(.03) $(.96) $(.37) $(3.64) ===== ===== ===== ====== Weighted average common shares outstanding 13,085,627 8,291,764 12,827,618 5,639,573 =========== =========== =========== ===========
* The nine months ended March 31, 1998 include the impact of dividends on stock for a non-cash, non-recurring beneficial conversion feature of $3,214,400. The three and nine months ended March 31, 1998 also include the impact of dividends on stock for (a) $3,000 and $152,446, respectively, from adjustment of the conversion ratio for certain issuances of common stock and exercises of stock options; (b) $221,918 and $239,178, respectively, in cumulative undeclared dividends; and (c) $54,226 and $58,301, respectively, of periodic non-cash accretions on preferred stock. The nine months ended March 31, 1997 includes the impact of non-recurring dividends on preferred stock for (a) $8.5 million non-cash dividend on conversion of Series B Preferred Stock; (b) $573,000 on repurchase of Series C Preferred Stock; and (c) periodic non-cash accretions on preferred stock. The three and nine months ended March 31, 1997 also include the impact of non-recurring dividends on preferred stock for $5.0 million in discounts on warrant exercises. See Notes to Condensed Consolidated Financial Statements. MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997 (unaudited)
1998 1997 ------------ ------------ (as restated) Operating activities: Net loss $(1,130,852) $(5,736,311) Adjustments to reconcile loss to net cash provided by (used in) operating activities: Gain from sale of land (90,021) Depreciation 281,545 178,876 Amortization 784,415 511,945 Option issuances to former executive officers 1,650,000 Promissory notes issued for settlement agreements and offering cost obligations 707,474 Discounts on exercises of warrants 113,203 Warrant and option issuances to consultants 16,072 76,000 Accrued interest on convertible securities 57,142 128,264 Accretion of discounts on convertible securities 22,857 Changes in assets and liabilities, net of acquisitions: Accounts receivable 1,064,360 (89,118) Other current assets (231,552) (35,871) Other assets 5,530 (20,949) Trade accounts payable (437,920) 986,913 Accrued expenses and other liabilities (616,945) 62,456 ----------- ---------- Net cash used in operating activities (208,205) (1,534,282) ----------- ---------- Investing activities: Net proceeds from sale of land 860,443 Purchase of property and equipment (252,271) (406,388) Acquisition of MMI, net of cash acquired of $340,550 (5,691,172) Acquisition of Metro, net of cash acquired of $349,446 207,335 Acquisition of Pegasus, net of cash acquired of $43,811 (277,692) ----------- ---------- Net cash provided by (used in) investing activities (6,221,135) 661,390 ----------- ---------- Financing activities: Proceeds from sale of convertible preferred stock, net of issue costs of $1,094,138 13,905,862 Net proceeds from credit facilities 44,920 360,576 Repayment of land option (150,000) Repayment of capital lease obligations (28,288) (27,026) Repayments of notes payable other (253,751) Proceeds from issuances of warrants and option exercises 7,458 70,625 Repayment of acquisition debt (2,119,240) (291,667) ----------- ---------- Net cash provided by (used in) financing activities 11,556,961 (37,492) ----------- ---------- Net increase (decrease) in cash and cash equivalents 5,127,621 (910,384) Cash and cash equivalents at beginning of period 2,929,012 1,393,044 ----------- ---------- Cash and cash equivalents at end of period $8,056,633 $ 482,660 =========== ==========
See Notes to Condensed Consolidated Financial Statements. Supplemental schedule of non cash investing and financing activities: As a result of the sale of $15,000,000 of redeemable convertible preferred stock and warrants to General Electric Capital Corporation, as more fully described in Note 6, the Company has recorded the following non-cash preferred dividends as of December 31, 1997: (a) non-cash, non-recurring beneficial conversion feature of $3,214,400; (b) $152,446 from adjustment of the conversion ratio for certain issuances of common stock and exercises of stock options; (c) $239,178 in cumulative undeclared dividends; and (d) $58,301 of period non-cash accretions on preferred stock. Effective December 1, 1997, the Company issued 222,222 shares of its common stock and paid $6,000,000 in cash to acquire 100% of the outstanding capital stock of Media Marketplace, Inc. and Media Marketplace Media Division, Inc. At acquisition, assets acquired and liabilities assumed, less payments made for the acquisition, were: Working capital, other than cash $ 85,928 Liabilities incurred for acquisition 87,475 Property and equipment (204,436) Costs in excess of net assets of acquired companies (6,691,964) Non-current liabilities 31,825 Common stock issued 1,000,000 ----------- $(5,691,172) =========== During the nine months ended March 31, 1998, the Company recognized $33,192 of non-cash accretion on discounts of convertible securities and $23,949 of accrued interest. During December 1997, the Company entered into a capital lease agreement for computer equipment totaling $73,505. On November 21, 1997, the Company increased intangible assets by $91,112 upon finalizing its computation of an earn-out payment due to the former owner of SD&A for SD&A's achievement of defined results of operations for the fiscal year ended June 30, 1997. The earn-out was paid in full in January 1998. During the nine months ended March 1998, the Company issued options and warrants to acquire 22,500 shares of common stock for consulting services valued at $19,500, of which $16,072 had been earned by March 31, 1998. On July 1, 1997, the Company issued 600,000 shares of its common stock and paid $200,000 in cash to acquire 100% of the outstanding stock of Pegasus Internet, Inc. At acquisition, assets acquired and liabilities assumed, less payments made for the acquisition, were: Working capital, other than cash $ 117,214 Property and equipment (53,834) Costs in excess of net assets of acquired company (2,141,072) Common stock issued 1,800,000 ---------- $ (277,692) ========== In August 1996, 7,925 net additional shares of common stock were issued upon exercise of stock options for 15,000 shares, using 7,075 outstanding shares as payment of the exercise price. In September 1996, the Company issued 96,748 shares of common stock, valued at $425,000, as an earn out payment to the former owner of SD&A for achieving certain targeted earnings for the fiscal year ended June 30, 1996. In October 1996, the Company issued 1,814,000 shares of its common stock and $1,000,000 face value in debt to acquire 100% of the outstanding stock of Metro Services Group, Inc. The debt was discounted to $920,000. On December 23, 1996, the Company issued 3,168,857 shares of its common stock and $1,000,000 face value in debt as part of a recapitalization. 6,200 shares of Redeemable Series B Preferred Stock were converted into 2,480,000 common shares; 2,000 shares of Redeemable Series C Preferred Stock were repurchased for $1,000,000; warrants for 3,000,000 shares were exchanged for 600,000 common shares and $145,753 in accrued interest was converted into 88,857 common shares. In February 1997, the Company entered into a promissory note payable for legal services totaling $207,950. In March 1997, the Company entered into promissory notes payable for executive management settlement agreements totaling $499,000. At March 31, 1997, $1,999,500 was receivable from stockholders on warrant exercises. MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited Interim Condensed Consolidated Financial Statements include the accounts of Marketing Services Group, Inc. and Subsidiaries ("MSGI" or the "Company"). They have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended March 31, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB/A for the fiscal year ended June 30, 1997. Certain reclassifications have been made in the fiscal 1997 interim financial statements to conform with the fiscal 1998 presentation. 2. ACQUISITIONS Effective December 1, 1997, MSGI entered into a stock purchase agreement to acquire all of the issued and outstanding capital stock (the "Shares") of Media Marketplace, Inc. and Media Marketplace Media Division, Inc. (collectively "MMI"). The total cost of the acquisition was $7,294,197, consisting of a cash purchase price of $6,000,000, an aggregate of 222,222 restricted shares of common stock of MSGI, par value $.01 per share, at an agreed upon price of $4.50 per share, assumption of a note payable of $150,000 and transaction and other costs aggregating $144,197. The cost of the acquisition was allocated to the assets acquired and liabilities assumed, based upon their estimated fair values, as follows: Working capital $ 429,622 Property and equipment 204,436 Non-current liabilities (31,825) Intangible assets 6,691,964 ---------- $7,294,197 ========== The estimated fair value of the intangible assets are being amortized by the straight-line method over their estimated useful lives ranging from three to forty years. As part of the acquisition, the agreement includes an earn-out payment of up to $1,000,000 a year for each year beginning January 1st and ending December 31st for the years of 1998, 1999 and 2000, adjustable forward to apply to the next calendar year if no earn out payment is due for one such year. The earn out payments are contingent upon MMI meeting (a) targeted earnings as defined in the agreement and (b) targeted billings of MSGI subsidiaries and affiliates for electronic data processing services for clients originally introduced by MMI. MMI was founded in 1973 and specializes in providing list management, list brokerage and media planning services to national publishing and fundraising clients in the direct marketing industry, including magazines, continuity clubs, membership groups and catalog buyers. Effective July 1, 1997, MSGI acquired all of the outstanding common shares of Pegasus Internet, Inc. ("Pegasus"). In exchange for all of the then outstanding shares of Pegasus, the Company issued 600,000 shares of its Common Stock valued at $1,800,000 plus cash of $200,000. The Company's Chief Executive Officer owned 25% of Pegasus, for which he received 25% of the consideration paid. Pegasus provides Internet services including web site planning and development, site hosting, on-line ticketing, system development, graphic design and electronic commerce. Effective October 1, 1996, the Company acquired all of the outstanding common shares of Metro Services Group, Inc., to be renamed Metro Direct, Inc. ("Metro"). These acquisitions were accounted for using the purchase method of accounting. Accordingly, the operating results of these acquisitions are included in the results of operations from the date of acquisition. The purchase prices were allocated to assets acquired based on their estimated fair value. For Pegasus, this treatment resulted in approximately $2.0 million of costs in excess of net assets acquired, after recording proprietary software of $100,000. Such excess is being amortized over the expected period of benefit of ten years. The software is amortized over its expected benefit period of three years. Effective July 1, 1997, the Company entered into agreements to extend the covenants-not-to-compete with the former Metro principals from three years to six years. Accordingly, the amortization period was extended prospectively. The impact of the extended amortization was a reduction of $93,000 of expense in the nine months ended March 31, 1998. The following summary, prepared on a pro forma basis, combines the consolidated results of operations as if Metro and MMI had been acquired as of the beginning of the periods presented, after including the impact of certain adjustments, such as amortization of intangibles, dividends on preferred stock and increased interest on acquisition debt. Unaudited For the nine months ended March 31, 1998 1997 ----------- ------------ (as restated) Revenues $50,228,002 $ 43,413,640 Net loss $ (948,514) $ (5,519,114) Net loss to common $(2,104,821) $(21,352,977) Loss per common share, basic and diluted $(.16) $(3.30) The unaudited pro forma information is provided for information purposes only. It is based on historic information and is not necessarily indicative of future results of operation of the combined entities. 3. CREDIT FACILITIES In August 1997, the Company's subsidiary, Stephen Dunn & Associates, Inc. ("SD&A") entered into a two-year renewable credit facility with a lender for a line of credit commitment of up to a maximum of $2,000,000 collateralized by its accounts receivable. Interest is payable monthly at the Chase Manhattan reference rate (8 1/2% at March 31, 1998), plus 1 1/2% with a minimum annual interest requirement of $80,000. The facility has an annual fee of 1% of the available line. It has tangible net worth and working capital covenants. In August 1997, the outstanding balances on SD&A's previous bank line and note payable were fully paid from borrowings on the new facility. At March 31, 1998, the amount outstanding on the line totaled $702,846. 4. 6% CONVERTIBLE NOTES In April 1997, the Company obtained $2,046,000, net of fees from the private placement of 6% convertible notes, with a face value of $2,200,000. The notes are payable with interest on April 15, 1999, if not previously converted. The notes are convertible into shares of the Company's Common Stock at the lesser of $2.50 per share or 83% of the average closing bid price of the Common Stock during the last five trading days prior to conversion. During the nine months ended March 31, 1998, $1,700,000 face value of the notes, plus interest, were converted into 694,412 shares of Common Stock. 5. INCOME TAXES In each of the three months ended March 31, 1998 and 1997, the net income tax provision totaled $8,000. In the nine month periods ended March 31, 1998 and 1997, the income tax provision (benefit) totaled ($102,000) and $32,000, respectively. The Company recognizes provisions resulting from state and local taxes incurred on taxable income at the operating subsidiary level which can not be offset by losses incurred at the corporate level and benefits during periods of operating company losses expected to be recovered in future periods. In September 1997, the Company determined that it qualified to file as a combined entity in a certain state for the fiscal years beginning July 1, 1996. The Company had estimated its state income tax for such state on a standalone basis for the year ended June 30, 1997. The impact on the quarter ended September 30, 1997, due to the change in tax reporting status created a benefit of approximately $70,000. 6. REDEEMABLE CONVERTIBLE PREFERRED STOCK On December 24, 1997, the Company and General Electric Capital Corporation ("GE Capital") entered into a purchase agreement (the "Purchase Agreement") providing for the purchase by GE Capital of (i) 50,000 shares of Series D redeemable convertible preferred stock, par value $0.01 per share, (the "Convertible Preferred Stock"), and (ii) warrants to purchase up to 10,670,000 shares of Common Stock (the "Warrants"), all for an aggregate purchase price of $15,000,000. The Convertible Preferred Stock is convertible into shares of Common Stock at a conversion rate, subject to antidilution adjustments. As of March 31, 1998, the conversion rate was 89.02, resulting in the beneficial ownership by GE Capital of 4,451,018 shares of Common Stock. On an as-converted basis, the Convertible Preferred Stock represents approximately 24% of the issued and outstanding shares of Common Stock. The Warrants are exercisable in November 2001 and are subject to reduction or cancellation based on the Company's meeting certain financial goals set forth in the Warrants or upon occurrence of a qualified secondary offering, as defined. The Company has recorded the Convertible Preferred Stock at a discount of approximately $1,362,000, to reflect an allocation of the proceeds to the estimated value of the warrants and is being amortized into dividends using the "interest method" over the redemption period. Approximately $54,000 and $58,000 of such discount were included as dividends for the three and nine month period ended March 31, 1998. In addition, the Company recorded a non-cash, non-recurring dividend of approximately $3,200,000 representing the difference between the conversion price of the Convertible Preferred Stock and the fair market value of the common stock as of the date of the agreement. The Convertible Preferred Stock is convertible at the option of the holder at any time and at the option of the Company (a) at any time the current market price, as defined, equals or exceeds $8.75 per share, subject to adjustments, for at least 20 days during a period of 30 consecutive business days or (b) upon the occurrence of a qualified secondary offering, as defined. Dividends are cumulative and accrue at the rate of 6% per annum, adjusted upon event of default. The Convertible Preferred Stock is mandatorily redeemable for $300 per share, if not previously converted, on the sixth anniversary of the original issue date and is redeemable at the option of the holder upon the occurrence of an organic change in the Company, as defined in the Purchase Agreement. As of March 31, 1998 approximately $395,000 were accrued for dividends in arrears. The Purchase Agreement contains, among other provisions, requirements for maintaining certain minimum tangible net worth, as defined, and other financial ratios and restrictions on payment of dividends. 7. RELATED PARTY TRANSACTIONS In July 1997, the Company paid $300,000 and $100,000 face value of notes payable to the President of Metro and the Chief Operating Officer of Metro, respectively. In January 1998, the Company paid $500,000 face value of notes payable to its Chief Executive Officer. During the current period, the Chief Executive Officer of the Company forgave all interest due him on notes payable from July 1, 1997 through December 31, 1997, and forgave an increase in his annual salary from May 27, 1997 to December 31, 1997. The impact on the quarters ended September 30, 1997 and December 31, 1997, is approximately $41,000 per quarter. In consideration for this, on November 6, 1997, the Board of Directors granted the Chief Executive Officer options to acquire 50,000 shares of Common Stock at the then current fair market price. 8. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 establishes standards for computing and presenting earnings per share ("EPS") and is effective for financial statements issued for periods ending after December 15, 1997. This statement eliminates the presentation of primary EPS and requires the presentation of basic EPS (the principal difference being that common stock equivalents will not be considered in the computation of basic EPS). It also requires the presentation of diluted EPS which will give effect to all dilutive potential common shares that were outstanding during the period. The Company adopted the provisions of SFAS 128 as of October 1, 1997, and earnings per share for all prior periods presented have been restated. The following schedule lists the effect of securities that could potentially dilute basic EPS in the future. Such securities were not included in the computation of diluted EPS, as they are antidilutive as a result of net losses during the periods presented.
Three months ended Nine months ended March 31 March 31 1998 1997 1998 1997 ---- ---- ---- ---- Convertible preferred stock 4,451,018 4,451,018 Options and warrants with exercise prices below average market price computed using the treasury stock method 1,290,385 3,047,543 1,230,148 3,027,624 Convertible notes and interest 211,506 211,506
Options and warrants outstanding to purchase 437,432 shares of common stock at exercise prices above the average market price of the common stock during the three and nine months ended March 31, 1998 were not included in the above table, as the effect would be antidilutive. 9. RESTATEMENT FOR CORRECTION OF ERROR The financial statements for the three and nine months ended March 31, 1997, were restated for correction of an error. In March 1997, to obtain $2.1 million in working capital, the Company accepted offers from certain warrant holders to exercise their warrants for 3,152,500 shares of common stock at discounted exercised prices. Of the 3,152,500 total warrants exercised, warrants for 3,100,000 shares of Common Stock arose from a June 6, 1996 sale of redeemable convertible preferred stock with attached warrants. As originally filed in the financial statements for the three and nine months ended March 31, 1997, the discount of $4,975,500 on these warrants was originally classified as a charge to expense as the underlying redeemable convertible preferred stock was classified as mezzanine financing for financial reporting. Subsequently, it was determined that the warrants and the redeemable convertible preferred stock are equity instruments and accordingly, the charge was reclassified from an expense transaction to an equity transaction. There is no change to the net worth of the Company or to its earnings per share as the charge affects net loss attributable to common stockholders in the earnings per share calculation in the same manner as an expense transaction. 10. SUBSEQUENT EVENTS On April 3, 1998, the stockholders of the Company voted to increase the number of authorized common shares from 36,250,000 to 75,000,000, and the number of authorized preferred shares from 50,000 to 150,000. In May 1998, the Company formed Metro Fulfillment, Inc. ("MFI"), a new operating subsidiary. MFI provides clients with services such as online commerce, real-time database management, inbound/ outbound customer service, custom packaging, assembling, product warehousing, shipping, payment processing and retail distribution. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations ----------------------------------------------------------------------- Introduction - ------------ Except for historical information contained herein, the matters discussed in this report contain certain forward-looking information that involves risks and uncertainties that could cause results to differ materially, including changing market conditions and other risks detailed in this report, the Company's Annual Report on Form 10-KSB/A and other documents filed by the Company with the Securities and Exchange Commission from time to time. This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and cash flows of the Company for the three and nine month periods ended March 31, 1998. This should be read in conjunction with the financial statements and notes thereto, included in this Report on Form 10-QSB and the Company's financial statements and notes thereto, included in the Company's Annual Report on Form 10-KSB/A for the year ended June 30, 1997 (the "1997 10-KSB/A"). From April 25, 1995, through September 30, 1996, the Company operated as a direct marketing services provider with its initial concentration in a telemarketing and telefundraising company that specializes in direct marketing services for the arts, educational and other cultural organizations. As more fully described in Note 3 to the consolidated financial statements included in the Company's 1997 10-KSB/A, in October 1996 the Company purchased 100% of the stock of Metro Services Group, Inc. ("Metro"). The results of operations of Metro are reflected in the consolidated financial statements using the purchase method of accounting from the date of acquisition. Metro develops and markets information-based services used primarily in direct marketing by a variety of commercial and not-for-profit organizations. As more fully dscribed in Note 2 to the condensed consolidated financial statements included in this Form 10-QSB, effective December 1, 1997, the Company acquired all of the outstanding capital stock of Media Marketplace, Inc. and Media Marketplace Media Division, Inc. (collectively "MMI"). The results of operations of MMI are reflected in the consolidated financial statements using the purchase method of accounting from the date of acquisition. MMI provides list management, list brokerage and media planning services. As more fully described in Note 2 to the condensed consolidated financial statements included in this Form 10-QSB, effective July 1, 1997, the Company acquired all of the outstanding common shares of Pegasus Internet, Inc. ("Pegasus"). The results of operations of Pegasus are reflected in the consolidated financial statements using the purchase method of accounting from the date of acquisition. Pegasus provides Internet services, including web site planning and development, site hosting, on-line ticketing, system development, graphic design and electronic commerce. Results of Operations for the Three Months Ended March 31, 1998, Compared to the Three Months Ended March 31, 1997 - -------------------------------------------------------------------------------- Revenues of $14,969,000 in the three months ended March 31, 1998 (the "current period") increased by $8,668,000 over revenues of $6,301,000 in the three months ended March 31, 1997 (the "prior period"). Of the increase, $7,834,000 and $127,000 are attributable to the inclusion of MMI and Pegasus, respectively. The remaining increase in revenues of approximately $707,000 is due to an increase in revenues derived from direct marketing and database marketing of approximately $942,000 offset by a decrease in revenue derived from telemarketing of approximately $234,000. Direct marketing and database marketing revenue increased due to an increase in the number of clients. Revenues from telemarketing decreased due to fewer contacts on large fundraising contracts at the calling center. Salaries and benefits of $4,562,000 in the current period increased by $901,000 over the prior period total of $3,661,000. Of the increase, $644,000 and $119,000 are attributable to the inclusion of MMI and Pegasus, respectively. Telemarketing sales labor expense decreased by $104,000, consistent with the decrease in telemarketing revenues. In addition, administrative and sales salaries at Metro increased by $264,000, the majority of which was attributable to the hiring of additional staff to manage the increasing growth of the Company. These increases were partially offset by a $20,000 reduction in parent company administrative salaries in the current period as compared to the prior period due to reductions in head count. Direct costs of $9,102,000 in the current period increased by $7,255,000 over direct costs of $1,847,000 in the prior period. Of the increase, $6,919,000 and $15,000 are attributable to the inclusion of MMI and Pegasus, respectively. Consistent with its revenue increase, direct costs for direct marketing and database marketing increased by $348,000 and consist principally of list commissions paid to use marketing lists. Direct costs for telemarketing decreased by $27,000, principally due to cost controls implemented for advertising for sales agents. Direct costs as a percentage of sales were 61% and 29% for the current and prior periods, respectively. The increase in direct cost as a percentage of sales has increased from the prior year due to the change in the revenue mixture. Revenue consisted of 23% telemarketing, 76% direct marketing and database marketing and 1% Internet marketing for the three months ended March 31, 1998, as compared to 58% telemarketing and 42% direct marketing and database marketing for the three months ended March 31, 1997. Restructuring costs of $1,019,000 were incurred in the prior period, as the Company effected certain corporate restructuring steps, including reducing corporate staff and closing its Culver City corporate office, as well as making two executive management changes. In this connection, executive management and other settlement costs of $954,000 and estimated office closing costs of $65,000 were recorded in March 1997. Selling, general and administrative expenses of $1,061,000 in the current period increased by $106,000 over comparable expenses of $955,000 in the prior period. Administrative expenses decreased by $103,000, primarily due to cancellation of certain prior year consulting contracts not required in the current period due to increased in-house capabilities as well as decreases of approximately $50,000, primarily due to cost reductions implemented upon the change in management. These decreases were offset by increases in selling, general and administrative due to the inclusion of MMI and Pegasus, resulting in increases of $225,000 and $34,000, respectively Depreciation and amortization of $399,000 in the current period increased by $118,000 over expenses of $281,000 in the prior period. The inclusion in the current period of MMI and Pegasus resulted in increases of $44,000 and $59,000 of amortization and $19,000 and $9,000 of depreciation, respectively. These increases were offset by a decrease in amortization of intangibles of $31,000 due to extensions of covenants not to compete with the former Metro principals. The remaining net increase of $18,000 was principally attributable to increased depreciation due to computer upgrades and other fixed asset purchases. Discounts on warrant exercises of $113,000 were incurred in the prior period. To reduce the overhang associated with the existence of such warrants and to obtain working capital subsequent to the withdrawal of its proposed underwritten public offering, the Company accepted offers from certain warrant-holders to exercise their warrants for shares of Common Stock at discounted exercise prices. For the warrants which arose from a previous financing transaction, the Company recognized the dates of acceptances as new measurement dates and, accordingly, recorded the non-cash charges to reflect the market value of the discounts. Withdrawn public offering costs of $1,307,000 were recorded in the prior period. In October 1996, the Company filed a registration statement on Form SB-2 with the Securities and Exchange Commission relating to a proposed underwritten public offering. In the prior period, the Company withdrew the registration statement and expensed all such costs. Interest income (expense) and other, net of $13,000 in the current period decreased by $118,000 compared to $105,000 in the prior period. Interest expense increased by $53,000, due to increased borrowings on credit lines to pay down seller debt and for working capital. Interest expense decreased by $47,000, principally due to repayments of corporate debt and principal payments on seller debt. MMI and Pegasus contributed miscellaneous income and interest income of $124,000 in the current period due to invested surplus cash. The provision for income taxes of $8,000 in the current period is consistent with the prior period. The Company recognizes net provisions resulting from state and local taxes incurred on taxable income at the operating subsidiary level, which cannot be offset by losses incurred at the parent company level. Results of Operations for the Nine Months Ended March 31, 1998, Compared to the Nine Months Ended March 31, 1997 - ------------------------------------------------------------------------------- Revenues of $32,897,000 in the nine months ended March 31, 1998 (the "current period") increased by $16,751,000 over revenues of $16,146,000 in the nine months ended March 31, 1997 (the "prior period"). Of the increase, $12,127,000 and $438,000 are attributable to the inclusion of MMI and Pegasus, respectively. Revenues from on-site telemarketing and telefundraising campaigns at SD&A totaled $9,297,000 and $8,665,000, respectively, or 83% and 80% of SD&A revenues in the current and prior periods, respectively. Revenues from off-site campaigns totaled $1,869,000 and $2,122,000, respectively, or 17% and 20% of revenues, respectively, in the current and prior periods. During the nine months ended March 31, 1998 and 1997, the Company's margins relating to off-site campaigns were generally higher than margins relating to on-site campaigns. Revenues from Metro totaled $9,165,000 and $5,359,000 in the current and prior periods, respectively, with the increase principally due to the inclusion of nine months of operations in the current period versus six months in the prior period, combined with Metro's continued sales growth. Metro was acquired effective October 1, 1996. Salaries and benefits of $13,219,000 in the current period increased by $2,731,000 over the prior period total of $10,488,000. Of the increase, $887,000 and $340,000 are attributable to the inclusion of MMI and Pegasus, respectively. On-site telemarketing sales labor expense at SD&A increased by $287,000, or 4%, in the current period, but decreased as a percent of on-site revenues, from 75% in the prior period to 73% in the current period, primarily due to improved contract pricing. Off-site and administrative salaries at SD&A increased by a net of $157,000, the majority of which was attributable to the hiring of additional administrative staff to manage the increasing on-site growth. Salaries and benefits at Metro increased by $1,273,000 in the current period, from $1,107,000 to $2,380,000, due to the full nine months of expenses in the current period, against six months in the prior period, as well as an increase in head count to manage current and anticipated future growth. These increases were partially offset by a $213,000 reduction in parent company administrative salaries in the current period as compared to the prior period due to reductions in head count. In the prior period, the Company incurred a non-recurring, non-cash charge of $1,650,000 to compensation expense relating to options granted to two former principal executive officers. Such charge was incurred because the exercise price of each such option, which was based upon the market price of the common stock on May 30, 1996 (the date which the Company intended as the effective day of the grant) rather than the market price on September 26, 1996 (the actual effective date of the grant), was lower than the market price of the common stock on September 26, 1996. Direct costs of $16,563,000 in the current period increased by $12,774,000 over direct costs of $3,789,000 in the prior period. Of the increase, $10,757,000 and $61,000 are attributable to the inclusion of MMI and Pegasus, respectively. Direct costs at Metro, which consist principally of list commissions paid to use marketing lists, increased by $1,897,000, principally due to the inclusion of the full nine months of expense in the current period, as well as list brokerage sales growth. Direct costs at SD&A increased by $59,000, principally due to increased advertising for sales agents to fulfill on-site growth requirements. Selling, general and administrative expenses of $3,095,000 in the current period increased by $551,000 over comparable expenses of $2,544,000 in the prior period. The inclusion of MMI and Pegasus resulted in increases of $282,000 and $100,000, respectively. Administrative expenses at SD&A increased by $107,000 and at Metro by $291,000. Corporate administration decreased by $229,000. At SD&A, the net increase in the current period generally resulted from $72,000 of administrative cost increases incurred in developing and managing the growth in on-site business. This included relocation costs for a senior executive, increases in payroll and related tax processing fees and printing of marketing brochures, as well as increased property taxes as a result of the move and expansion of the Berkeley Calling Center during the prior fiscal year. Additionally, $35,000 was incurred to settle a labor dispute at SD&A. The increase at Metro was primarily due to the inclusion of the full nine months of expense in the current period. At the parent company, the net decrease of $229,000 generally resulted from cost reduction steps implemented upon the change in management of the Company in April 1997. Professional fees decreased by $59,000, principally due to the value ascribed to warrants issued to consultants in the prior period. Public relations expenses increased by $12,000 due to efforts to increase market visibility. Parent company travel and meal expenses decreased by $27,000 as a result of the management change. Directors fees decreased by $25,000, as the Board was not compensated in cash during the current period. Further net decreases of $130,000 resulted from reductions in director and officer insurance premiums, telephone charges, office expenses, auto expense, dues, fees and rent associated with the change in management and resulting headcount reductions. Depreciation and amortization of $1,066,000 in the current period increased by $375,000 over expenses of $691,000 in the prior period. The inclusion in the current period of MMI and Pegasus resulted in increases of $80,000 and $201,000 of amortization and depreciation, respectively. Amortization of the goodwill associated with the SD&A acquisition increased by $17,000 in the current period due to an increase in goodwill for payments due to the former owner of SD&A resulting from achievement of defined results of operations of SD&A for the year ended June 30, 1997. Metro depreciation and amortization increased by $135,000 due to inclusion of six months of expense in the current period. This was offset by a decrease of $62,000 reduction in amortization due to extensions of covenants not to compete with the former principals of Metro. Prior period expenses incurred for discounts on warrant exercises of $113,000 and withdrawn public offering costs of $1,307,000 were discussed previously. Interest expense and other, net of $188,000 in the current period decreased by $60,000 compared to $248,000 in the prior period. Interest expense at SD&A increased by $71,000 due to a change in borrowing relationship in August 1997, resulting in expansion of their credit line from $875,000 to $2,000,000 and increased draw-downs to pay down the SD&A seller debt. Interest expense at Metro increased by $100,000 due to current period borrowings on its line of credit which was obtained in April 1997. Interest expense at the parent company level decreased by $41,000, principally due to conversions of convertible securities and debt repayments. MMI and Pegasus contributed miscellaneous income of $36,000, net, and interest income of $126,000 was earned in the current period due to invested surplus cash. The provision for income taxes of $32,000 in the prior period decreased by $135,000 compared to a benefit of $103,000 in the current period. During the current period, the Company determined that it qualified to file as a combined entity in a certain state for the fiscal years beginning July 1, 1996. The Company had estimated its state income tax for such state on a stand alone basis for each subsidiary for the year ended June 30, 1997. The impact on the current period for this change in estimate resulted in a benefit of approximately $70,000. The remaining benefit resulted principally from state and local taxes on net losses at SD&A, which are expected to be recovered by June 30, 1998. In the prior year, the Company recognized net provisions resulting from state and local taxes incurred on taxable income at the operating subsidiary level, which could not be offset by losses incurred at the parent company level. Capital Resources and Liquidity - ------------------------------- At March 31, 1998, the Company had cash and cash equivalents of $8,057,000 and accounts receivable net of allowances of $14,362,000. The Company generated losses from operations of $1,045,000 in the current period and used net cash in operating activities of $208,000. The usage was principally due to final payments made on the Company's withdrawn public offering liabilities and a seasonal decrease in accrued salaries at SD&A during the current quarter. In the current period, net cash of $6,221,000 was used in investing activities. The Company paid $5,691,000 in the acquisition of MMI and $278,000 in the acquisition of Pegasus, net of cash acquired. Purchases of property and equipment of $252,000 were principally comprised of computer equipment. The Company intends to continue to invest in computer technology. In the current period, financing activities provided $11,557,000. On December 24, 1997, the Company sold 50,000 shares of convertible preferred stock for $15,000,000, less $1,094,000 of placement fees and related costs. During the period, SD&A entered into a two-year renewable credit facility with a lender for a line of credit commitment of up to a maximum of $2,000,000 collateralized by its accounts receivable. In August, SD&A drew upon the facility to fully pay down the outstanding balance of $746,000 on its previous bank line and the $104,000 remaining on its bank note. At March 31, 1998, SD&A had amounts outstanding of $703,000 on the line. The Company had $1.8 million available on its lines of credit at Metro and SD&A as of March 31, 1998. During the current period the Company repaid $2,119,000 of its acquisition debt, comprised of $900,000 to the former principals of Metro, $1,069,000 to the former principal of SD&A and $150,000 to the former principal of MMI. The Company believes that funds on hand, funds available from its operations and from its unused lines of credit, should be adequate to finance its operations and capital expenditure requirements, and enable the Company to meet interest and debt obligations, for the next twelve months. In conjunction with the Company's acquisition and growth strategy, additional financing may be required to complete any such acquisitions and to meet potential contingent acquisition payments. The Year 2000 - ------------- The Company has taken actions to make its systems, products and infrastructure Year 2000 compliant. The Company is also beginning to inquire as to the status of its key suppliers and vendors with respect to the Year 2000. The Company believes it is taking the necessary steps to resolve Year 2000 issues; however, there can be no assurance that a failure to resolve any such issue would not have a material adverse effect on the Company. Management believes, based on available information, that it will be able to manage its total Year 2000 transition without any material adverse effect on its business operations products or financial prospects. Item 4 - Submission of Matters to a Vote of Security-Holders --------------------------------------------------- On April 3, 1998, the Company held an annual meeting of stockholders to vote on election of directors, ratification of independent auditors and increases in authorized shares of the Company's common and preferred stock. Of the 17,534,674 shares of the Company's common stock, par value $.01 per share, ("Common Stock") entitled to vote at the meeting, holders of 15,834,716 shares were present in person or were represented by proxy at the meeting. Of the 50,000 shares of the Company's preferred stock, par value $.01 per share, ("Preferred Stock") entitled to vote at the meeting, all were represented. The directors elected at the meeting and the results of the voting were as follows: For Against --- ------- General nominees: Alan I. Annex 15,622,625 212,091 J. Jeremy Barbera 15,623,350 211,366 S. James Coppersmith 15,622,625 212,091 John T. Gerlach 15,591,925 242,791 Seymour Jones 15,620,625 214,091 C. Anthony Wainwright 15,622,625 212,091 Preferred nominee: James Brown 50,000 0 The above represent all of the directors of the Company. There were no abstentions or broker non-votes on the election of directors. The shares voted regarding the Board of Directors' proposal to amend to Company's Amended and Restated Articles of Incorporation to increase the number of shares of Common Stock authorized for issuance from 36,250,000 shares to 75,000,000 were as follows: For 15,211,407 Against 580,292 Abstentions 43,017 Broker non-votes 0 The shares voted regarding the Board of Directors' proposal to select the accounting firm of Coopers and Lybrand, LLP, to serve as independent auditors of the Company were as follows: For 15,748,777 Against 47,682 Abstain 38,257 Broker non-votes 0 The shares voted regarding the Board of Directors' proposal to amend the Company's Amended and Restated Articles of Incorporation to increase the number of shares of Preferred Stock authorized for issuance from 50,000 shares to 150,000 shares were as follows: For 10,452,521 Against 607,963 Abstain 168,250 Broker non-votes 4,605,982 Item 6 - Exhibits and Reports on Form 8-K -------------------------------- a) Exhibits Exhibit # Item --------- ------------------------------------- 27 Financial Data Schedule (filed herein) b) Reports on Form 8-K 1. On or about January 13, 1998, the Company filed a Current Report on Form 8-K regarding the Purchase Agreement dated as of December 24, 1997, by and between the Company and GE Capital. 2. On or about January 9, 1998, the Company filed a Current Report on Form 8-K regarding a stock purchase agreement between the Company and Media Marketplace, Inc. and Media Marketplace Media Division, Inc. (collectively "MMI"). 3. On or about March 16, 1998, the Company filed a Current Report on Form 8-K/A amending the Report filed on or about January 9, 1998, to include the financial statements of MMI and pro forma information. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MARKETING SERVICES GROUP, INC. (Registrant) Date: May 15, 1998 By: /s/ J. Jeremy Barbera --------------------- Chairman of the Board and Chief Executive Officer Date: May 15, 1998 By: /s/ Scott Anderson ------------------ Chief Financial Officer (Principal Financial and Accounting Officer) EX-27 2 FINANCIAL DATA SCHEDULE
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 NINE MONTHS ENDED MARCH 31, 1998 INCLUDED IN THIS REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1 U.S. Dollars Year Jun-30-1998 Mar-31-1998 1 8,056,633 0 14,720,340 (336,141) 0 23,001,431 1,721,496 (673,120) 48,503,997 16,178,595 1,371,354 130,981 13,696,000 0 (17,127,067) 48,503,997 32,896,974 32,896,974 16,563,303 16,563,303 17,378,761 0 188,410 (1,233,500) (102,648) (1,130,852) 0 0 0 (1,130,852) (.37) (.37)
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