Management's Discussions: 10-Q, MARKETING SERVICES GROUP INC
Unknown Comtex Source - May 18, 1999 12:45
(Edgar Online via COMTEX) Company Name: MARKETING SERVICES GROUP INC (SYMBOL:MSGI)
- Management's Discussion and Analysis of Financial Condition and
Results of Operations - Introduction
This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flows of the Company for the three and nine month periods ended March 31, 1999. This should be read in conjunction with the financial statements, and notes thereto, included in this Report on Form 10-Q and the Company's financial statements and notes thereto, included in the Company's Annual Report on Form 10-KSB for the year ended June 30, 1998.
Effective December 1, 1997, the Company acquired all of the outstanding capital stock of Media Marketplace, Inc. and Media Marketplace Media Division, Inc. (collectively "MMI"). The results of operations of MMI are reflected in the consolidated financial statements using the purchase method of accounting from the date of acquisition. MMI provides list management, list brokerage and media planning services.
In May 1998, the Company formed Metro Fulfillment, Inc. ("MFI"), a new operating subsidiary providing online commerce, real-time database management, inbound/outbound customer service, custom packaging, assembling, product warehousing, shipping, payment processing and retail distribution. As more fully described in Note 8 to the interim condensed consolidated financial statements included in this Form 10-Q, effective March 1, 1999, the Company sold 85% of the issued and outstanding common shares of MFI.
As more fully described in Note 7 to the condensed consolidated financial statements included in this Form 10-Q, effective January 1, 1999, the Company acquired all of the outstanding common shares of Stevens-Knox & Associates, Inc., Stevens-Knox List Brokerage, Inc. and Stevens-Knox International, Inc. (collectively "SK&A"). The results of operations of SK&A are reflected in the consolidated financial statements using the purchase method of accounting from the date of acquisition. SK&A provides list management, brokerage and database management services.
Results of Operations for the Three Months Ended March 31, 1999, Compared to the
Three Months Ended March 31, 1998.
Revenues of $22,563,283 in the three months ended March 31, 1999 (the "current period") increased by $7,594,698 over revenues of $14,968, 585 in the three months ended March 31, 1998 (the "prior period"). Of the increase, $7,729,944 is attributable to an increase in direct and internet marketing resulting mainly from the acquisition of SK&A. The remaining decrease is primarily due to a decrease in telemarketing and telefundraising revenues of $439,741 offset by fulfillment revenue for the current period of $304,495.
Direct costs of $15,406,554 in the current period increased by $6,304, 808 over direct costs of $9,101,746 in the prior period. Of the increase, $6,146,695 is attributable to direct and internet marketing services primarily due to the acquisition of SK&A. The remaining increase is primarily due to fulfillment direct costs of $150,205. The Company's direct costs consist principally of commissions paid to use marketing lists.
Salaries and benefits of $6,510,024 in the current period increased by $1,947,992 over salaries and benefits of $4,562,032 in the prior period. Of the increase, $1,436,105 is due to an increase in head count for internet and direct marketing services as well as the inclusion of SK&A. Salaries and benefits relating to fulfillment were $451,195. Salaries and benefits associated with corporate overhead increased $13, 422 in the current period principally due to an increase in head count to manage current and anticipated future growth. Telemarketing and telefundraising salaries and benefits increased $47,270.
General and administrative expenses of $1,844,411 in the current period increased by $783,615 over comparable expenses of $1,060,796 in the prior period. Direct and internet marketing services general and administrative expenses increased $629,341 principally due to the inclusion of SK&A. The remaining increase is primarily due to an increase in corporate and telemarketing and telefundraising expenses of $123,766 as well as fulfillment expenses of $30,508.
Depreciation and amortization expense of $498,754 in the current period increased by $99,811 over expense of $398,943 in the prior period. Of the increase, $66,759 is attributable to the inclusion of SK&A. The remaining increase is primarily due to fixed asset depreciation and amortization from MFI.
Loss from operations of $1,696,460 in the current period increased by $1,541,528 over the prior period. Fulfillment services accounted for $414,747 of the loss. Telemarketing and telefundraising incurred a loss from operations of $572,082, which is consistent with the seasonality of the business. In addition, corporate overhead contributed $742,612 to the loss from operations which consists mainly of amortization and administration expenses. Direct and internet marketing services provided income from operations of $32,981.
Net interest expense of $99,407 in the current period decreased by $112,247 over income of $12,840 in the prior period. Such expenses increased principally due to accrued interest on an outstanding earnout payment. In addition, interest income from cash invested decreased due to cash used for stock buyback and to fund fulfillment operations.
The net provision for income taxes of $1,410 in the current period decreased by $6,188 over the provision of $7,598 in the prior period. The Company records provisions for state and local taxes incurred on taxable income at the operating subsidiary level which cannot be offset by losses incurred at the parent company level or other operating subsidiaries.
Results of Operations for the Nine Months Ended March 31, 1999, Compared to the
Nine Months Ended March 31, 1998. -
Revenues of $56,356,724 in the nine months ended March 31, 1999 (the "current period") increased by $23,459,750 over revenues of $32,896,974 in the nine months ended March 31, 1998 (the "prior period"). Of the increase, $22,358,840 attributable to direct and internet marketing services resulting mainly from the acquisitions of MMI and SK&A. A decrease in telemarketing and telefundraising revenues of $363,914 were offset by fulfillment revenues of $1,464,824.
Direct costs of $35,815,236 in the current period increased by $19,251,933 over direct costs of $16,563,303 in the prior period. Of the increase, $18,396,011 is attributable to direct and internet marketing services resulting mainly from the inclusion of MMI for nine months in the current period compared to four months in the prior period as well as the inclusion SK&A. The remaining increase is due to an increase in telemarketing and telefundraising direct costs of $314,221, and fulfillment direct costs of $541,701. The increase in telemarketing and telefundraising direct costs is primarily due to postage and other direct costs relating to additional pre-call mailing campaigns which were not conducted in the prior period. The Company's direct costs consist principally of commissions paid to use marketing lists.
Salaries and benefits of $18,359,995 in the current period increased by $5,141,847 over salaries and benefits of $13,218,148 in the prior period. Of the increase, $3,182,077 is due to an increase in head count for internet and direct marketing services as well as the inclusion of MMI for nine months in the current period compared to four months in the prior period as well as the inclusion of SK&A. Salaries and benefits related to fulfillment were $1,780,019. Salaries and benefits associated with corporate overhead increased $243,381 in the current period principally due to an increase in head count to manage current and anticipated future growth. These increases were offset by a decrease in telemarketing and telefundraising salaries and benefits of $63,630.
General and administrative expenses of $4,485,344 in the current period increased by $1,390,691 over comparable expenses of $3,094,653 in the prior period. Internet and direct marketing expenses increased $940,909 principally due to the inclusion of MMI for nine months in the current period compared to four months in the prior period as well as the inclusion of SK&A. The remaining increase is primarily due to fulfillment expenses of $416,842 and an increase in corporate overhead expenses of $118,157 offset by a decrease in telemarketing and telefundraising expenses of $85,217.
Depreciation and amortization expense of $1,405,062 in the current period increased by $339,102 over expense of $1,065,960 in the prior period. Of the increase, $236,165 is attributable to the inclusion of MMI for a full nine months as well as the inclusion of SK&A. The remaining increase is primarily due to fixed asset depreciation and amortization from MFI.
Loss from operations of $3,708,913 in the current period increased by $2,663,823 over the prior period. Fulfillment accounted for $1,399,333 of the loss. Telemarketing and telefundraising incurred a loss from operations of $791,062 for the current period, which is consistent with the seasonality of the business. Corporate overhead contributed $1,961, 383 to the loss from operations which consists mainly of amortization and administration expenses. Direct and internet marketing services provided income from operations of $442,867.
Net interest expense of $169,690 in the current period decreased by $18,720 over expenses of $188,410 in the prior period. Such expenses decreased principally due to conversions of convertible securities and debt repayments, interest income earned on invested surplus cash and lower borrowings on lines of credit.
The net benefit for income taxes of $58,473 in the current period decreased by $44,175 over the benefit of $102,648 in the prior period. The Company records provisions for state and local taxes incurred on taxable income at the operating subsidiary level which can not be offset by losses incurred at the parent company level or other subsidiaries.
Capital Resources and Liquidity -
Historically, the Company has funded its operations, capital expenditures and acquisitions primarily through cash flows from operations, private placements of equity transactions, and its credit facilities. At March 31, 1999, the Company had cash and cash equivalents of $1,233,037 and accounts receivable net of allowances of $23,875,077.
The Company generated losses from operations of $3,708,913 in the current period. Cash used in operating activities was $1,341,001. Net cash used in operating activities principally resulted from the net loss and an increase in accounts receivable offset by an increase in accounts payable and accrued expenses.
In the current period, net cash of $5,049,714 was used in investing activities consisting of the acquisition of SK&A and cash deposited for future acquisitions. Purchases of property and equipment principally comprised of computer equipment. In the prior period, net cash used in investing activities of $6,221,135 consisted of $252,271 for the purchases of property and equipment and $5,968,864 for the acquisitions of Pegasus Internet and Media Marketplace, Inc. The Company intends to continue to invest in technology and telecommunications hardware and software.
In the current period, net cash of $1,388,771 was provided by financing activities. Net cash provided by financing activities consisted of $2,026,247 drawn on lines of credit and $1,216,348 received from the exercise of stock options. This was partially offset by $1,258,241 used for the purchase of treasury stock and $408,344 for repayments on acquisition debt and other notes payable.
At March 31, 1999, the Company had amounts outstanding of $4,548,553 on its lines of credit. The Company had approximately $191,891 available on its lines of credit as of March 31, 1999.
On April 21, 1999, the Company exercised its right to convert all 50, 000 shares of General Electric Capital Corporation's Series D Convertible Preferred Stock to approximately 4.8 million shares of common stock. In conjunction with the conversion, all preferred shareholder rights, including quarterly dividends, financial covenants, acquisition approvals and board seats, were cancelled effective immediately. In connection with the conversion, Michael Pralle and James Brown resigned from the Company's Board of Directors.
The Company believes that funds on hand, funds available from its operations and from its unused lines of credit, should be adequate to finance its operations and capital expenditure requirements, and enable the Company to meet interest and debt obligations for the next twelve months. In conjunction with the Company's acquisition and growth strategy, additional financing may be required to complete any such acquisitions and to meet potential contingent acquisition payments.
The Year 2000 -
The Company has taken actions to make its systems, products and infrastructure Year 2000 compliant. With respect to the database marketing and internet subsidiaries, databases maintained for clients include a four digit year code and are accordingly not exposed to Year 2000 issues. Mission critical systems have been reviewed for Year 2000 issues and the Company believes these systems are compliant. The Company is still reviewing non critical systems and expects these systems to be compliant prior to December 31, 1999. The Company is also inquiring as to the status of its key suppliers and vendors with respect to the Year 2000. The Company believes it is taking the necessary steps to resolve Year 2000 issues; however, there can be no assurance that a failure to resolve any such issue would not have a material adverse effect on the Company. Management believes, based on available information, that it will be able to manage its total Year 2000 transition without any material adverse effect on its business operations, products or financial prospects.
New Accounting Pronouncements -
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income", which prescribes standards for reporting comprehensive income and its components. Comprehensive income consists of net income or loss for the current period and other comprehensive income (income, expenses, gains and losses that currently bypass the income statement and are reported directly in a separate component of equity). SFAS 130 is effective for financial statements issued for periods beginning after December 15, 1997, and accordingly has been adopted by the Company as presented on the balance sheets and statements of operations.
Also in June 1997, the FASB issued Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which requires publicly-held companies to report financial and descriptive information about its operating segments in financial statements issued to shareholders for interim and annual periods. The statement also requires additional disclosures with respect to products and services, geographical areas of operations and major customers. SFAS 131 is effective for financial statements issued for periods beginning after December 15, 1997 and for the interim periods beginning in the second year of application, and requires restatement of earlier periods presented. The Company is reviewing the effects of the disclosure requirements of this new standard.
In addition, Accounting Standards Executive Committee ("AcSEC") issued SOP (Statement of Position) 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use, to address diversity in practice regarding whether and under what conditions the costs of internal-use software should be capitalized. SOP 98-1 is effective for financial statements for years beginning after December 15, 1998. Management believes that the implementation of SOP 98-1 will not have a significant impact on the Company's financial statements.
In April 1998, the AcSEC issued SOP 98-5 "Reporting on the Costs of Start-Up Activities," to provide guidance on the financial reporting of start-up costs and organization costs. SOP 98-5 requires these costs to be expensed as incurred. As a result of the sale of 85% of Metro Fulfillment, Inc., approximately $173,000 was expensed in the statement of operations for the three and nine months ended March 31, 1999 and is included in the gain on sale of Metro Fulfillment, Inc. Management believes that the implementation of SOP 98-5 will not have any further significant impact on the Company's financial statements.
Item 4 - Submission of Matters to a Vote of Security Holders
On March 31, 1999, the Company held its annual meeting of stockholders to vote on election of directors, ratification of independent auditors and approval of the Company's 1999 Employee Stock Option Plan. Of the 12,702,359 shares of the Company's common stock, par value $.01 per share, entitled to vote at the meeting, holders of 10,453,214 shares were present in person or were represented by proxy at the meeting. Of the 50,000 shares of the Company's preferred stock, par value $.01 per share, convertible into an aggregate of 4,638,589 shares of Common Stock entitled to vote at the meeting, all were represented.
The directors elected at the meeting and the results of the voting were as follows:
For Withheld --- -------- General nominees: Alan I. Annex 15,082,093 9,710 John T. Gerlach 15,083,493 8,310
The shares voted regarding the Board of Directors' proposal to select the accounting firm of PricewaterhouseCoopers LLP to serve as independent auditors of the Company were as follows:
For 14,903,802 Against 181,485 Abstain 6,516 Broker non-votes 0
The shares voted regarding the Board of Directors' proposal to approve the Company's 1999 Employee Stock Option Plan were as follows:
For 10,361,553 Against 141,487 Abstain 74,342 Not voted 4,514,421
Item 6 - Exhibits and Reports on Form 8-K -
a) Exhibits
Exhibit # Item Notes --------- ---- ----- 27 Financial Data Schedule A
Notes relating to Exhibits: A Filed herewith.
b) Reports on Form 8-K
On or about February 1, 1999, the Company filed a current report on Form 8-K regarding the Company's acquisition of all of the issued and outstanding capital stock of Stevens-Knox and Associates, Inc., Stevens-Knox List Brokerage, Inc. and Stevens-Knox International, Inc. (collectively "SK&A").
On or about March 24, 1999, the Company filed a current report on Form 8-K regarding the Company's intention to acquire all of the issued and outstanding capital stock of CMG Direct Corporation.
(c) 1995-1999 Cybernet Data Systems, Inc. All Rights Reserved.
Received by Edgar Online: May. 17, 1999
CIK Code: 0000014280 SEC Accession Number: 0000014280-99-000019
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