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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
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.
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(Name of small business issuer in its charter)
Nevada 88-0085608
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
333 Seventh Avenue, 20th Floor
New York, New York 10001
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (917) 339-7100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: ____
Common Stock, par value $.01 per share
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(Title of class)
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.
X Yes __ No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of September 15, 2000, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $133,000,000.
As of September 15, 2000, there were 30,018,832 shares of the Registrant's
common stock outstanding.
Documents incorporated by reference: Portions of the Company's definitive proxy
statement expected to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 have been incorporated by reference into Part III of this
report.
PART I
Special Note Regarding Forward-Looking Statements
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Some of the statements contained in this Annual Report on Form 10-K discuss our
plans and strategies for our business or state other forward-looking statements,
as this term is defined in the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company, or industry results to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; industry capacity; direct marketing
and other industry trends; demographic changes; competition; the loss of any
significant customers; changes in business strategy or development plans;
availability and successful integration of acquisition candidates; availability,
terms and deployment of capital; advances in technology; retention of clients
not under long-term contract; quality of management; business abilities and
judgment of personnel; availability of qualified personnel; changes in, or the
failure to comply with, government regulations; and technology,
telecommunication and postal costs.
Item 1 - Business
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General
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Marketing Services Group, Inc. (the "Company" or "MSGi") through its
subsidiaries, is a leading provider of vertically integrated marketing
solutions. The Company provides seamless and cohesive traditional and
interactive marketing programs to leading companies around the world, including
American Express, Chase Manhattan, Columbia House, General Electric, Lincoln
Center for the Performing Arts, Madison Square Garden, Salvation Army, Sierra
Club, Verizon and Walt Disney.
The Company is a dominant player in the entertainment, publishing, fundraising
and financial service sectors as well as other key vertical markets.
MSGi provides marketing solutions to approximately 5,000 clients worldwide with
pro forma revenues for the fiscal year 2000 of approximately $195 million. The
Company has over 1,000 employees with material offices in New York, Boston,
Philadelphia, Atlanta, Houston, Los Angeles and San Francisco.
MSGi provides a wide range of services including strategic planning, creative,
direct marketing, database marketing, database management, telemarketing,
telefundraising, print production and mailing, media planning and buying,
e-commerce applications, Web development and hosting, and online ad sales and
consulting.
The Company's Strategy
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MSGi's strategy to enhance its position as a value-added premium provider of
integrated marketing services is to:
o Focus on our integrated marketing services business which include
comprehensive direct marketing services, including Internet related
services;
o Deepen market penetration in new industries and market segments as well as
those currently served by the Company;
o Develop existing and create new proprietary databases, proprietary database
software and database management applications; and
o Pursue strategic acquisitions, joint ventures and marketing alliances to
expand the services offered and industries served.
Background
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The Company was originally incorporated in Nevada in 1919. The current business
of MSGi, previously known as All-Comm Media Corporation and prior to that as
Sports-Tech, Inc., began operations in 1995.
Through the years, the Company has acquired and formed direct marketing
companies . The Company's acquisitions are summarized as follows:
Date Name of Company Acquired Service Performed
- ---- ------------------------ -----------------
May 1995 Stephen Dunn & Associates, Inc. Telemarketing and
telefundraising,
specializing in the arts,
educational and other
institutional tax exempt
organizations.
October 1996 Metro Direct, Inc. Develops and markets a
variety of database
marketing and direct
marketing products.
July 1997 Pegasus Internet, Inc. Provides a full suite of
Internet services including
content development and
planning, marketing strategy,
on-line ticketing system
development, technical site
hosting, graphic design,
multimedia production and
electronic commerce.
December 1997 Media Marketplace, Inc. Specializes in providing list
Media Marketplace management, list brokerage
Media Division, Inc. and media planning and buying
services.
May 1998 Formed Metro Fulfillment, Inc. Performed services such as
on-line commerce, real-time
database management inbound/
outbound customer service,
custom packaging, assembling,
product warehousing, shipping,
payment processing and retail
distribution.
January 1999 Stevens-Knox & Associates, Inc. Specializes in providing list
Stevens-Knox List Brokerage, Inc. management, list brokerage and
Stevens-Knox International, Inc. database management services
March 1999 Sold 85% of Metro Fulfillment, Inc.
May 1999 CMG Direct Corporation Specializes in database
services
September 1999 Sold remaining 15% of
Metro Fulfillment, Inc.
March 2000 Grizzard Advertising, Inc. Specializes in strategic
planning, creative services,
database management,
print-production, mailing and
Internet marketing
March 2000 The Coolidge Company Specializes in list management
and list brokerage services
Developments During Fiscal 2000
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On October 1, 1999, the Company completed an acquisition of approximately 87% of
the outstanding common stock of Cambridge Intelligence Agency for a total
purchase price of $2.4 million which consisted of $1.6 million in common stock
of the Company an interest in the Company's Permission Plus software and related
operations valued at $.8 million, subject to certain adjustments. Concurrently
with this acquisition, the Company formed WiredEmpire, a licensor of email
marketing tools. Effective with the acquisition, Cambridge Intelligence Agency
and the Permission Plus asset was merged into WiredEmpire. In January 2000, the
Company contributed its Pegasus subsidiary to WiredEmpire for additional shares
of common stock.
In March 2000, the Company completed a private placement of 3,120,001 shares of
Convertible Preferred Stock of its WiredEmpire subsidiary for proceeds of
approximately $18.7 million, net of placement fees and expenses of $1.3 million.
In connection with the discontinued operation of WiredEmpire, the Company has
offered to redeem the preferred shares in exchange for MSGi common shares. The
redemption is expected to occur in the second quarter of fiscal year 2001.
On September 21, 2000, the Company's Board of Directors approved a plan to
discontinue the operation of its WiredEmpire subsidiary. The Company will shut
down the operations anticipated to be completed by the end of January 2001. The
estimated losses associated with WiredEmpire are approximately $35 million.
These losses include approximately $20 million in losses from operations through
the measurement date and approximately $15 million of loss on disposal which
includes approximately $2 million in losses from operations from the measurement
date through the estimated date of disposal. The liability of $18.7 million for
the preferred shareholders is currently included in the net liability of
discontinued operations and it is anticipated that this will be settled in MSGi
stock. The Company has offered to redeem the preferred shares in exchange for
MSGi common shares. The redemption is expected to occur in the second quarter of
fiscal year 2001.
On March 22, 2000, the Company acquired Grizzard Advertising, Inc. for $104.0
million consisting of $47.8 million cash, $5 million for certain hold back
provisions, and aggregate of 2,545,799 shares of common stock of MSGi valued at
$19.04 per share and acquisition costs in the amount of $2.7 million. Grizzard
Advertising, Inc. was founded in 1919 and is ranked the 6th largest Direct
Response Agency in the country (with internal production capabilities) in
reported capitalized billings by the Direct Marketing Association ("DMA").
Grizzard's services include strategic planning, creative services, 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.
On March 31, 2000, the Company acquired The Coolidge Company for $1.6 million
consisting of $.2 million cash, a $.5 million note payable, 22,251 shares of
common stock valued at $16.42 a share and other costs of a nominal amount.
Coolidge provides list management and brokerage services.
In December 1999, the Company acquired a 10% interest in Fusion Networks, Inc.
for $27.5 million in common stock. Fusion Networks became a public entity in
April 2000. At the time, such investment for Fusion Networks stock had a pro
forma value in excess of $50 million. Fusion Networks, Inc. operates the website
www.latinfusion.com. The website is an interactive, multimedia and entertainment
Latin American based portal featuring television, music and e-commerce
capabilities. In June 2000, the Company wrote its investment in Fusion Networks'
down by approximately $20.3 million to the fair value as determined by the
quoted market price. The charge was recorded through the statement of operations
due to the fact that the Company believes the impairment in market value is
other than temporary.
In July 1999, the Company invested $1.6 million to acquire a 10% interest in
Screenzone Media Network, LLC ("Screenzone"). Screenzone is a new interactive
broadcast gateway that was developed to advertise and promote movies, music,
live events and other entertainment at shopping malls and over the Internet. In
June 2000, the Company believed that the carrying value of its investment was
impaired and wrote off its investment in Screenzone.
In October 1999, the Company acquired a 10% interest in Mazescape.com for $.2
million. Mazescape.com is an innovative Internet technology company that
delivers customized, automated recruiting software and services that improve the
performance of corporate recruiters. In June 2000, the Company believed that the
carrying value of its investment was impaired and wrote off its investment.
In September 1999, the Company completed an investment of $5 million to acquire
convertible preferred stock of GreaterGood.com. The Company owns approximately
11% of the outstanding shares of GreaterGood.com. GreaterGood.com builds,
co-markets and manages online shopping villages for not-for-profit organization
web sites. In June 2000, the Company believed that the carrying value of its
investment was impaired and wrote off its investment in Greatergood.com.
As detailed above, the Company has taken a fourth quarter charge of
approximately $27 million for unrealized losses on Internet investments made
during the fiscal year based on all available information. The Company believes
such losses are a result of significant changes in Wall Street valuations of
Internet companies. The Company has suspended its Internet investment strategy
and will focus all efforts on its core direct marketing operations.
The Company's shares are traded on the NASDAQ National Market under the symbol
"MSGI". The Company's principal executive offices are located at 333 Seventh
Avenue, 20th Floor, New York, NY 10001. Its telephone number is (917) 339-7100.
Additional information is available on the Company's website: www.msginet.com.
Capital Stock and Financing Transactions
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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 had
certain registration rights which were fulfilled by the Company. The proceeds of
the private placement were used in connection with certain Internet investments,
to repay certain short-term debt and for working capital purposes.
Preferred Stock:
In February 2000, the Company completed a private placement of 30,000 shares of
Series E Convertible Preferred Stock and Warrants for proceeds of approximately
$29.5 million, net of placement fees and expenses. The shares are convertible at
any time at $24.473, per share, subject to reset on August 18, 2000. On August
18, 2000, the conversion price was reset to $12.24 per share. The warrants are
exercisable for a period of two years at an exercise price of $28.551. The
proceeds were used to repay certain debt and for working capital purposes.
Debt:
In March 2000, the Company entered into a credit agreement (the "Credit
Agreement") for $58 million senior secured facility in connection with the
acquisition of Grizzard. The Credit Agreement is comprised of a $13 million
revolving line of credit, $40 million term loan and $5 million standby letter of
credit. The Credit Agreement expires on March 31, 2005 and bears interest at
either prime rate or LIBOR plus an applicable margin ranging from 1.5% to 2.5%,
for prime and 2.5% to 3.5% for LIBOR based on a financial ratio. The loans are
collaterialized by substantially all of the assets of the Company and are
guaranteed by all of the Company's non-internet subsidiaries.
The Direct Marketing Industry
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Overview. Direct marketing is used for a variety of purposes including
lead-generation and prospecting for new customers, enhancing existing customer
relationships, exploring the potential for new products and services and
establishing new products. Unlike traditional mass marketing aimed at a broad
audience and focused on creating image and general brand or product awareness,
successful direct marketing requires the identification and analysis of
customers and purchasing patterns. Such patterns enable businesses to more
easily identify and create a customized message aimed at a highly defined
audience. Previous direct marketing activity consisted principally of direct
mail, but now has expanded into the use of multiple mediums including
telemarketing, print, television, radio, video, CD-ROM, on-line services, the
Internet and a variety of other interactive marketing formats.
The success of a direct marketing program is the result of the analysis of
customer information and related marketing data. Database management
capabilities allow for the creation of customer lists with specific,
identifiable attributes. Direct marketers use these lists to customize messages
and marketing programs to generate new customers whose purchasing patterns can
be statistically analyzed to isolate key determinants. In turn, this enables
direct marketers to continually evaluate and adjust their marketing programs, to
measure customer response rates in order to assess returns on marketing
expenditures, and to increase the effectiveness of such marketing programs.
Database management covers a range of services, including general marketing
consultation, execution of marketing programs and the creation and development
of customer databases and sales tracking and data analysis software. Data
analysis software consolidates and analyzes customer profile information to find
common characteristics among buyers of certain products. The results of such
tracking and analysis are used to define and match customer and product
attributes from millions of available database files for future direct marketing
applications. The process is one of continual refinement, as the number of
points of contact with customers increases, together with the proliferation of
mediums available to reach customers.
Telemarketing/telefundraising projects generally require significant amounts of
customer information supplied by the client or third party sources. Custom
telemarketing/telefundraising programs seek to maximize a client's direct
marketing results by utilizing appropriate databases to communicate with a
specific audience. This customization is often achieved through sophisticated
and comprehensive data analysis which identifies psychographic, cultural and
behavioral patterns in specific geographic markets.
Industry Growth. The use of direct marketing has increased over the last few
years due in part to the relative cost efficiency of direct marketing compared
to mass marketing, as well as the rapid development of more powerful and more
cost-effective information technology and data capture capabilities. According
to industry sources, over the next decade, demographic shifts and changes in
lifestyle, combined with new marketing mediums, are expected to create higher
demand by businesses for marketing information and services to provide
businesses with direct access to their customers and a more efficient means of
targeting specific audiences and developing long-term customer relationships.
According to the most recently available information from the DMA, the
industries' largest trade association, total U.S. direct marketing advertising
expenditures was projected to reach $176.5 billion during 1999, a 7.2% increase
over 1998. The 1999 direct marketing advertising expenditure figure is inclusive
of all direct marketing through various mediums including direct mail, telephone
marketing, newspaper, magazine, TV, radio and internet marketing. Direct
marketing advertising expenditures were projected to represent 57.1% of all US
advertising expenditures, estimated to be $308.9 billion, in 1999. Direct mail
accounts for approximately 25% of total direct marketing expenditures
nationwide.
Additionally, consumer direct marketing advertising expenditures via telephone
marketing were projected to be $24.4 billion in 1999, growing to $31.2 billion
in 2004. The compounded annual growth in this segment was estimated to be 6.4%
from 1994 through 1999 and is projected to be 5.0% from 1999 through 2004.
Corporate marketing departments often lack the technical expertise to create,
manage and control highly technical aspects of the direct marketing process. As
a result, the Company believes that there is a growing trend among direct
marketers to outsource direct marketing programs.
Industry Consolidation. The direct marketing industry is extremely fragmented.
According to industry sources, there are almost 11,000 direct marketing services
and database services firms in the United States. The Company believes that most
of such businesses are small, specialized companies which offer limited
services. However, industry consolidation has increased in the last few years
resulting in a greater number of large companies providing services similar to
those provided by the Company. See "Competition." The Company believes that much
of this consolidation is due to: (i) economies of scale in hardware, software
and other marketing resources; (ii) cross-selling of services; and (iii)
coordinating various components of direct marketing and media programs within a
single, reliable environment. The Company believes these trends are likely to
continue due in part to client demand for more cost-effective service to perform
increasingly complex functions.
Services
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The Company's operating businesses provide comprehensive database management,
Internet marketing, custom telemarketing/telefundraising, print production,
mailing capabilities, marketing communications and other direct marketing
services. The principal advantages of customized services include: (i) the
ability to expand and adapt a database to the client's changing business needs;
(ii) the ability to have services operate on a flexible basis consistent with
the client's goals; and (iii) the integration with other direct marketing,
Internet, database management and list processing functions, which are necessary
to keep a given database current. Some services offered by the Company are
described below.
Database Management Services. The Company's database management services begin
with database creation and development, which include the planning stages and
analytical processes to review all of the client's customer and operational
files. Utilizing both proprietary and commercial software, the Company
consolidates all of the separate information and relationships across multiple
files and converts the client's raw information into a consolidated format. Once
the client's customer data is consolidated and the database created, the data is
enhanced using a wide selection of demographic, geographic, census and lifestyle
information for over 95 million households and 153 million individuals to
identify patterns and probabilities of behavior. The Company licenses this
information from a variety of leading data compilers.
The combination of each client's proprietary customer information with external
data files provides a customized profile of a client's customer base, enabling
the client, through the use of the Company's behavior modeling and analysis
services, to design a direct marketing program for its customers. Through the
development of a scoring model, the client can segment its database and
determine its best customers and prospects in each marketplace. The entire
process results in a customized direct marketing program that can be targeted to
distinct audiences with a high propensity to buy the client's products or
services. Because of the dynamic nature and complexity of these databases,
clients frequently request that the Company update such databases with the
results of recent marketing programs and periodically perform list processing
services as part of the client's ongoing direct marketing efforts.
Data Processing. The Company's primary data processing service is to manage from
the Company's data centers, all or a portion of a client's marketing information
processing needs. After migrating a client's raw data to one of the Company's
data centers, the Company's technology allows the client to continue to request
and access all available information from remote sites. The database can also be
verified for accuracy and overlaid with external data elements to further
identify specific consumer behavior.
Other data processing services provided include migration (takeover and
turnover) support for database maintenance or creation, merge/purge, data
overlay and postal qualification. The Company also offers on-line and batch
processing capacity, technical support, and data back-up and recovery.
Strategic Planning and Creative Services. The Company offers its clients
end-to-end business solutions. The process begins with strategic planning and
development. Through consultative approach, each client is taken step by step in
campaign management, including positioning development, integration of
communication strategies and creative services. Some of the capabilities include
copy development, design and art production.
List Services. List processing includes the preparation and generation of
comprehensive name and address lists which are used in direct marketing
promotions. The Company's state-of-the-art data centers and large volume
processing capabilities allow the Company to meet the list processing needs of
its clients through its advanced list processing software applications, list
brokerage and list management operations. The Company customizes list processing
solutions by utilizing a variety of licensed software products and services,
such as Address Conversion and Reformat, Address Standardization and Enhanced
Merge/Purge, in addition to services provided by third parties, including;
National Change of Address (NCOA), Delivery Sequence File and Locatable Address
Conversion System. Other licensed products include databases used for
suppressions such as the DMA Mail Preference File and the American Correctional
Association Prison Suppress File.
The Company also offers an array of list acquisition techniques. Approximately
12,000 lists are available for rental in the list industry. The Company's
account managers, many of whom are recruited from existing Company accounts, use
their industry experience as well as sophisticated computer profiles to
recommend particular lists for customer acquisition campaigns. The Company
acquires hundreds of millions of records annually for customer acquisition
campaigns. The Company also manages several hundred lists for rental purposes on
behalf of list owners.
Database Product Development. To further leverage its database management and
list processing services, the Company has participated in the development of a
new product using client/server technology. The product is a scaleable,
three-tiered client/server data warehouse system that provides desktop,
real-time decision support and marketing analysis to a non-technical user. This
application is an intuitive, graphical user interface tool that offers both
flexibility and the ability to access and analyze large customer files exceeding
100 million records. The incorporation of third-party software, relational and
multidimensional database technology in an open system environment is intended
to allow the Company's clients to take advantage of the latest developments in
high-speed computing, utilizing both single and multi-processor hardware.
Response Analysis, Predictive Muclelling and Testing Services. Response analysis
of direct mail respondents, including age, demographic and lifestyle attributes,
to determine which particular attributes of the responding universe played a
part in increasing the recipients' propensity to respond to the offer. This
service is provided to improve direct marketing response rates.
Market Analysis. The Company's market research services include problem
conceptualization, program design, data gathering and results analysis. These
services are conducted through telephone, mail and focus groups. Through the use
of data capture technology, the Company is also able to obtain data from a
statistically predictable sample of market survey contacts. The Company then
tabulates and analyzes fielded data using multi-variate statistical techniques,
and produces detailed reports to answer clients' marketing questions and suggest
further marketing opportunities.
Production and Mailing Services. Full range of complex / lasering, insertion and
mailing services. The Company provides many of its commercial customers
production and mailing services that are customized for each recipient,
requiring highly sophisticated systems and capabilities. The Company is one of a
limited number of companies capable of performing these services on a fully
automated basis, resulting in high volume, accuracy, efficiency and customer
service. Due to its highly automated facilities, the Company is also capable of
producing and mailing up to 1 million pieces of mail over a single 24-hour
period.
Direct Mail Support Services. The Company's direct mail support services include
preparing and coordinating database services and custom
telemarketing/telefundraising services for use in addressing and mailing
materials to current and potential customers. The Company obtains name and
address data from clients and other external sources, processes the data to
eliminate duplicates, corrects errors, sorts for postal discounts and
electronically prepares the data for other vendors who will address pre-printed
materials.
Media Planning and Buying. The Company's Media Division is a multifaceted direct
response media broker specializing in direct advertising such as: traditional
print advertising; cooperative direct mail programs; Sunday supplements; card
decks and more.
Internet Services. The Company provides a full suite of Internet services such
as content planning to market strategy, from technical site hosting to graphic
design and multimedia production. The Company has developed Web sites from the
perspective of both client and presence provider, resulting in an intimate
knowledge of the issues encountered by both entities in a Web development
project. From the initial planning sessions and identification of an
organization's promotional objectives to the live cutover of the finished site,
the Company takes a proactive role in ensuring the most efficient development
process for the client and the most rewarding experience for their online
clientele. Once the site is up and running, the Company provides technical
maintenance and ongoing consulting to keep Web resource current, technologically
up-to-date and graphically ahead of the curve. The Company generates usage
reports, complete with optional analysis and feedback features.
Custom Telemarketing/Telefundraising Services. Custom
telemarketing/telefundraising services are designed according to the client's
existing database and any other databases which may be purchased or rented on
behalf of the client to create a direct marketing program or fundraising
campaign to achieve specific objectives. After designing the program according
to the marketing information derived from the database analysis, it is
conceptualized in terms of the message content of the offer or solicitation, and
an assessment is made of other supporting elements, such as the use of a direct
mail letter campaign.
Typically, a campaign is designed in collaboration with a client, tested for
accuracy and responsiveness and adjusted accordingly, after which the full
campaign is commenced. The full campaign runs for a mutually agreed period,
which can be shortened or extended depending on the results achieved.
The Company maintains a state-of-the-art outbound telemarketing/telefundraising
calling center in Berkeley, California. The Berkeley calling center increases
the efficiency of its outbound calling by using a computerized predictive
dialing system supported by a UNIX-based call processing server system and
networked computers. The predictive dialing system, using relational database
software, supports 72 outbound telemarketers and maximizes calling efficiency by
reducing the time between calls for each calling station and reducing the number
of calls connected to wrong numbers, answering machines and electronic devices.
The system provides on-line real time reporting of caller efficiency and client
program efficiency as well as flexible and sophisticated reports analyzing
caller sales results and client program results against Company and client
selected parameters. The Berkeley calling center has the capacity to serve up to
15 separate clients or projects simultaneously and can produce 27,000 valid
contacts per week (1,400,000 per year) or 3,400 calling hours per week (176,800
per year) on a single shift basis. A valid contact occurs when the caller speaks
with the intended person and receives a "yes," "no" or "will consider" response.
The existing platform can be expanded to accommodate 100 predictive dialing
stations with a single shift capacity of approximately 1,900,000 valid contacts
per year.
Marketing and Sales
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The Company's marketing strategy is to offer customized solutions to clients'
database management, Internet, telemarketing/telefundraising, fulfillment and
other direct marketing requirements. Historically, the Company's operating
businesses have acquired new clients and marketed their services by attending
trade shows, advertising in industry publications, responding to requests for
proposals, pursuing client referrals and cross-selling to existing clients. The
Company targets those companies that have a high probability of generating
recurring revenues because of their ongoing direct marketing needs, as well as
companies which have large customer bases that can benefit from targeted direct
marketing database and fulfillment services and customized
telemarketing/telefundraising services.
The Company markets its marketing services through a sales force consisting of
both salaried and commissioned sales persons. In some instances, account
representatives, will coordinate a client's database management, Internet,
custom telemarketing/telefundraising, fulfillment and/or other direct marketing
needs to identify cross-selling opportunities.
Account representatives are responsible for keeping existing and potential
clients informed of the results of recent marketing campaigns, industry trends
and new developments in the Company's technical database resources. Often, the
Company develops an initial pilot program for new or potential clients to
demonstrate the effectiveness of its services. Access to data captured during
such pilot programs allows the Company and its clients to identify previously
unrecognized target market opportunities and to modify or enhance the client's
marketing effort on the basis of such information. Additionally, the Company is
able to provide its clients with current updates on the progress of ongoing
direct marketing programs.
Pricing for direct marketing services is dependent upon the complexity of the
services required. In general, the Company establishes pricing for clients by
detailing a broad range of service options and quotation proposals for specific
components of a direct marketing program. These quotes are based in part on the
volume of records to be processed, complexity of assembly, and the level of
customization required. Pricing for data processing services is dependent upon
the anticipated range of computer resource consumption. Typically, clients are
charged a flat or stepped-up rate for data processing services provided under
multi-year contracts. If the processing time, data storage, retrieval
requirements and output volume exceed the budgeted amounts, the client may be
subject to an additional charge. Minimum charges and early termination charges
are typically included in contracts or other arrangements between the Company
and the client.
On-site telemarketing and telefundraising fees are generally based on a mutually
agreed percentage of amounts received by the Company's clients from a campaign.
Off-site fees are typically based on a mutually agreed amount per contact with a
potential donor.
Client Base
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The Company believes that its large and diversified client base is a primary
asset which contributes to stability and the opportunity for growth in revenues.
The Company has approximately 5,000 clients who utilize its various marketing
services. These clients are comprised of leading commercial businesses and
nonprofit institutions in the publishing, entertainment marketing, public
broadcasting, education, retail, financial services (including credit card, home
mortgage and home equity services), education, travel and leisure and healthcare
industries. No single client accounted for more than 5% of total revenue in
fiscal 2000.
Competition
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The direct marketing services industry is highly competitive and fragmented,
with no single dominant competitor. The Company competes with companies that
have more extensive financial, marketing and other resources and substantially
greater assets than those of the Company, thereby enabling such competitors to
have an advantage in obtaining client contracts where sizable asset purchases or
investments are required. The Company also competes with in-house database
management, telemarketing/telefundraising and direct mail operations of certain
of its clients or potential clients.
Competition is based on quality and reliability of products and services,
technological expertise, historical experience, ability to develop customized
solutions for clients, technological capabilities and price. The Company
believes that it competes favorably, especially in the arts and entertainment,
publishing, financial services and fundraising sectors. The Company's principal
competitors include: Acxiom Corporation, Harte-Hanks Communications, Experian
North America, Fair-Isaac, Epsilon and Abacus Direct, a DoubleClick subsidiary.
The current market is highly competitive and the Company anticipates that new
competitors will continue to enter the market.
Facilities
- ----------
The Company leases all of its real property, except for certain properties in
Atlanta and Houston which are owned. Facilities for its headquarters are in New
York City; it's sales and service offices are located in New York City; Newtown,
Pennsylvania, Berkeley and Los Angeles, California; Wilmington and Burlington,
Massachusetts; Atlanta, Georgia; Houston, Texas; and London; its data centers
are located in New York City, Houston and Boston; its telemarketing calling
center in Berkeley and production facility in Houston. The Company's
administrative office for its telemarketing/telefundraising operations in Los
Angeles is located in office space leased from the former owner of the
telemarketing business, which lease the Company believes is on terms no less
favorable than those that would be available from independent third parties. The
Company believes that all of its facilities are in good condition and are
adequate for its current needs through fiscal 2001. The Company believes such
space is readily available at commercially reasonable rates and terms. The
Company also believes that its technological resources, including the mainframe
computer and other data processing and data storage computers and electronic
machinery at its data centers in New York City, Houston and Boston, as well as
its related operating, processing and database software, are all adequate for
its needs through fiscal 2001. Nevertheless, the Company intends to expand its
technological resources, including computer systems, software, telemarketing
equipment and technical support. Any such expansion may require the leasing of
additional operating office space.
Intellectual Property Rights
- ----------------------------
The Company relies upon its trade secret protection program and non-disclosure
safeguards to protect its proprietary computer technologies, software
applications and systems know-how. In the ordinary course of business, the
Company enters into license agreements and contracts which specify terms and
conditions prohibiting unauthorized reproduction or usage of the Company's
proprietary technologies and software applications. In addition, the Company
generally enters into confidentiality agreements with its employees, clients,
potential clients and suppliers with access to sensitive information and limits
the access to and distribution of its software documentation and other
proprietary information. No assurance can be given that steps taken by the
Company will be adequate to deter misuse or misappropriation of its proprietary
rights or trade secret know-how. The Company believes that there is rapid
technological change in its business and, as a result, legal protections
generally afforded through patent protection for its products are less
significant than the knowledge, experience and know-how of its employees, the
frequency of product enhancements and the timeliness and quality of customer
support in the usage of such products.
Government Regulation and Privacy Issues
- ----------------------------------------
The telemarketing industry has become subject to an increasing amount of federal
and state regulation. Violation of these rules may result in injunctive relief,
monetary penalties or disgorgement of profits and can give rise to private
actions for damages. While the Federal Trade Commission's new rules have not
required or caused the Company to alter its operating procedures, additional
federal or state consumer-oriented legislation could limit the telemarketing
activities of the Company or its clients or significantly increase the Company's
costs of regulatory compliance. Several of the industries which the Company
intends to serve, including the financial services, and healthcare industries,
are subject to varying degrees of government regulation. Although compliance
with these regulations is generally the responsibility of the Company's clients,
the Company could be subject to a variety of enforcement or private actions for
its failure or the failure of its clients to comply with such regulations.
In addition, the growth of information and communications technology has
produced a proliferation of information of various types and has raised many new
issues concerning the privacy of such information. Congress and various state
legislatures have considered legislation which would restrict access to, and the
use of, credit and other personal information for direct marketing purposes. The
direct marketing services industry, including the Company, could be negatively
impacted in the event any of these or similar types of legislation are enacted.
With the exception of regulations applicable to business generally, with respect
to the Company's Internet products and services, the Company is not currently
subject to direct regulation by any government agency. Due to increasing
popularity and use of the Internet, however, it is possible that a number of
laws may be adopted with respect to the Internet in the future, covering such
issues as: user privacy; pricing of goods and services offered; and types of
products and service offered..
If the government adopts any additional laws or regulations covering use of the
Internet, such actions could decrease the growth of the Internet. Any such
reduction in the growth of the Internet may reduce demand for the Company's
goods and services and raise the cost to the Company of producing such goods and
services. Finally, the sales of services may be reduced and the costs to produce
such services may be increased if existing U.S state and federal laws and
foreign laws governing issues such as commerce, taxation, property ownership,
defamation and personal privacy are increasingly applied to the Internet.
Employees
- ---------
At June 30, 2000, the Company employed approximately 2,780 persons, of whom
1,100 were employed on a full-time basis. None of the Company's employees are
covered by collective bargaining agreements and the Company believes that its
relations with its employees are good.
Item 2 - Properties
- -------------------
The Company and certain subsidiaries own land and buildings in Houston and
Atlanta. In addition, the Company and certain subsidiaries lease facilities for
office space summarized as follows and in Note 13 of Notes to Consolidated
Financial Statements.
Location Square Feet
-------- -----------
New York, New York 40,900
Atlanta, Georgia 30,500
Burlington, Massachusetts 21,000
Wilmington, Massachusetts 20,000
Los Angeles, California 17,100
Newtown, Pennsylvania 10,270
Houston, Texas 6,130
Berkeley, California 6,600
Venice, California 5,500
Altamonte Springs, Florida 2,400
Stamford, Connecticut 1,000
Lincoln, Nebraska 910
Patterson, New York 250
Toronto, Canada 860
London, England 460
Item 3 - Legal Proceedings
- --------------------------
In June 1999, certain employees of MSGi Direct, Inc.'s telemarketing subsidiary
voted against representation by the International Longshore and Warehouse Union
("ILWU"). The ILWU has filed unfair practices with the National Labor Relations
Board ("NLRB") alleging that MSGi Direct, Inc.'s telemarketing subsidiary
engaged in unlawful conduct prior to the vote. The NLRB has issued a complaint
seeking a bargaining order and injunctive relief 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 in June
1996. Although the Company denied all liability, the suit was settled in January
2000 in consideration for the issuance of warrants to acquire 18,000 shares of
common stock of the Company at an exercise price of $1.00 per share.
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 year
ended June 30, 2000.
An employee of Metro Fulfillment, Inc. ("MFI"), which, until March 1999, was a
subsidiary of the Company, filed a complaint in the Superior Court of the State
of California for the County of Los Angeles, Central District, against MSGI and
current and former officers of MSGI. The complaint seeks compensatory and
punitive damages in connection with the individual's employment at MFI. The
Company believes that the allegations in the complaint are without merit and,
the Company has asserted numerous defenses, including that the complaint fails
to state a claim upon which relief can be granted. The Company intends to
vigorously defend against the lawsuit. An estimate of the possible loss cannot
be determined at this time.
In addition to the above, certain other legal actions in the normal course of
business 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.
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The common stock of the Company trades on the NASDAQ National Market under the
symbol "MSGi". The following table reflects the high and low sales prices for
the Company's common stock for the fiscal quarters indicated, as furnished by
the NASD:
Common Stock
------------
Low Sales Price High Sales Price
--------------- ----------------
Fiscal 2000
Fourth Quarter $4.06 $15.00
Third Quarter 15.06 28.75
Second Quarter 11.00 21.13
First Quarter 11.19 29.50
Fiscal 1999
Fourth Quarter $15.93 $51.25
Third Quarter 3.25 14.50
Second Quarter 2.18 3.87
First Quarter 2.03 3.87
As of June 30, 2000, there were approximately 800 registered holders of record
of the Company's common stock. (This number does not include approximately
16,000 investors whose accounts are maintained by securities firms in "street
name".) The Company has not paid any cash dividends on any of its capital stock
in at least the last five years. The Company intends to retain future earnings,
if any, to finance the growth and development of its business and, therefore,
does not anticipate paying any cash dividends in the foreseeable future.
Item 6 - Selected Financial Data
- --------------------------------
The selected historical consolidated financial data for the Company presented
below as of and for the five fiscal years ended June 30, 2000 have been derived
from the Company's audited consolidated financial statements. Amounts are in
thousands, except per share data.
Historical
----------------------------------------------------------------
Years ended June 30,
----------------------------------------------------------------
In thousands
1996 1997(1) 1998(2) 1999(3) 2000(4)
-------- -------- --------- --------- ---------
OPERATING DATA:
Revenue $15,889 $24,145 $51,174 $82,242 $128,607
Amortization and
depreciation $501 $970 $1,486 $2,282 $6,028
Loss from operations $(460) $(3,574)(5) $(580) $(7,072) $(11,292)
Loss from
continuing operations $(1,094) $(5,377) $(780) $(7,646) $(41,130)(11)
Loss from
discontinued operations - - - - (34,543)(12)
Net loss $(1,094) $(5,377)(6) $(780) $(7,646)(8) $(75,673)
Net loss attributable
to common
shareholders $(1,094) $(20,199) $(4,724)(7) $(20,181)(9) $(75,673)
Loss per common share:
From continuing
operations $(0.36) $(2.85) $(0.37) $(1.39) $(1.55)
From discontinued
operations - - - - $(1.30)
------- ------- -------- -------- --------
$(0.36) $(2.85) $(0.37) $(1.39) $(2.85)
Weighted average
common shares
oustanding 3,068 7,089 12,892 14,552 26,582
OTHER DATA:
EBITDA (10) $41 $4 $906 $(4,346) $(5,159)
Net cash used in
operating activities $(884) $(2,664) $(1,886) $(45) $(11,357)
Net cash provided by
(used in) investing
activities: $(572) $578 $(7,281) $(18,939) $(60,116)
Net cash provided by
financing activities $1,631 $3,622 $12,474 $16,035 $ 78,904
Net cash used in
discontinued operations - - - - $(812)
Historical
----------------------------------------------------------------
Years ended June 30,
----------------------------------------------------------------
1996 1997(1) 1998(2) 1999(3) 2000(4)
-------- -------- --------- --------- ---------
BALANCE SHEET DATA:
Cash $1,393 $2,929 $6,235 $3,285 $9,904
Working capital (deficit) $1,651 $189 $5,013 $(9,647) $430
Total intangible assets $7,851 $16,127 $24,771 $56,978 $154,016
Net assets of
discontinued operatons - - - $5,516 -
Total assets $13,301 $25,391 $49,781 $97,627 245,184
Total long term debt,
net of current portion $1,517 $3,205 $204 $5,937 $36,157
Net liabilities of
discontinued operations - - - - $18,347
Convertible preferred
stock $1,306 - $14,367 - 29,417
Total stockholders'
equity $6,945 $13,686 $17,325 $48,928 98,021
(1)Effective October 1, 1996, the Company acquired all of the outstanding common
shares of Metro Services Group, Inc., renamed Metro Direct, Inc. The results
of operations for Metro Direct are included in the consolidated statements of
operations beginning October 1, 1996.
(2)Effective July 1, 1997, the Company acquired all of the outstanding common
shares of Pegasus Internet, Inc. The results of operations for Pegasus are
included in the consolidated statements of operations beginning July 1, 1997.
Effective December 1, 1997, the Company acquired all of the outstanding
common shares of Media Marketplace, Inc. and Media Marketplace Media
Division, Inc. The results of operations for Media Marketplace are included
in the consolidated statements of operations beginning December 1, 1997. In
May 1998, MSGi formed Metro Fulfillment, Inc., a new operating subsidiary..
(3)Effective January 1, 1999, the Company acquired all of the outstanding common
shares of Stevens-Knox List Brokerage, Inc., Stevens-Knox List Management,
Inc. and Stevens-Knox International, Inc. (collectively, "SKA"). The results
of operations for SK&A are included in the consolidated statements of
operations beginning January 1, 1999. Effective March 1, 1999 the Company
sold 85% of its subsidiary Metro Fulfillment. Accordingly, effective March 1,
1999 the results of operations of MFI are no longer consolidated in the
Company's statement of operations. On May 13, 1999, the Company acquired all
of the outstanding common shares of CMG Direct, Inc. The results of
operations for CMGD Direct, Inc. are included in the consolidated statements
of operations beginning May 14, 1999.
(4)On March 31, 2000, the Company acquired all of the outstanding common shares
of The Coolidge Company. On March 22, 2000 the Company acquired all of the
outstanding common shares of Grizzard Advertising, Inc. Effective October 1,
1999, the Company acquired 87% of the outstanding common shares of The
Cambridge Intelligence Agency. The results of operations are included in the
consolidated statements of operations from the date of the respective
acquisition.
(5)Loss from operations includes compensation expense on option grants of $1,650
which were granted at exercise prices below market value and approximately
$958 for restructuring costs.
(6)Net loss includes a charge for approximately $113 for discounts on warrant
exercises and approximately $1,180 for the costs associated with a withdrawn
public offering.
(7)Net loss attributable to common shareholders includes the impact of dividends
on preferred stock for a non-cash beneficial conversion feature of $3,214.
(8)Loss from continuing operations and net loss include a one-time severance
charge of $1,125 and a compensation expense on option grants of $444 which
were granted at exercise prices below market value.
(9)Net loss attributable to common shareholders includes the impact of dividends
on preferred stock for (a) adjustment of the conversion ratio of $11,366 for
exercises of stock options and warrants; (b) $949 in cumulative undeclared
preferred stock dividends; and (c) $220 of periodic non-cash accretions of
preferred stock.
(10)EBITDA is defined as earnings from continuing operations before interest,
income tax, depreciation, amortization and other non-cash items. EBITDA
should not be construed as an alternative to operating income or net income
(as determined in accordance with generally accepted accounting principles),
as an indicator of MSGi's operating performance, as an alternative to cash
flows provided by operating activities (as determined in accordance with
generally accepted accounting principles), or as a measure of liquidity.
EBITDA is presented solely as a supplemental disclosure because management
believes that it enhances the understanding of the financial performance of
a company with substantial amortization and depreciation expense. MSGi's
definition of EBITDA may not be the same as that of similarly captioned
measures used by other companies.
(11)Loss from continuing operations includes a charge for approximately $27,216
for write-downs of certain Internet Investments.
(12)On September 21, 2000, the Company's Board of Directors approved a plan to
discontinue the operation of its WiredEmpire subsidiary. The Company will
shut down the operations anticipated to be completed by the end of January
2001. The estimated losses associated with WiredEmpire are approximately $35
million and are reported as discontinued operations.
Item 7 - Management's Discussion and Analysis
- ---------------------------------------------
Overview
- --------
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity/cash flows of the Company
for the twelve month period ended June 30, 2000. This should be read in
conjunction with the financial statements, and notes thereto, included in this
Form 10-K.
To facilitate an analysis of MSGi operating results, certain significant events
should be considered.
On October 1, 1999, the Company completed an acquisition of approximately 87% of
the outstanding common stock of Cambridge Intelligence Agency for a total
purchase price of $2.4 million which consisted of $1.6 million in common stock
of the Company and an interest in the Company's Permission Plus software and
related operations valued at $.8 million, subject to certain adjustments.
Concurrently with this acquisition, the Company formed WiredEmpire, a licensor
of email marketing tools. Effective with the acquisition, Cambridge Intelligence
Agency and the Permission Plus asset was merged into WiredEmpire.
In March 2000, the Company completed a private placement of 3,120,001 shares of
Convertible Preferred Stock of its WiredEmpire subsidiary for proceeds of
approximately $18.7 million, net of placement fees and expenses of $1.3 million.
In connection with the discontinued operation of WiredEmpire, the Company has
offered to redeem the preferred shares in exchange for MSGi common shares. The
redemption is expected to occur in the second quarter of fiscal year 2001.
On September 21, 2000, the Company's Board of Directors approved a plan to
discontinue the operation of its WiredEmpire subsidiary. The Company will shut
down the operations anticipated to be completed by the end of January 2001. The
estimated losses associated with WiredEmpire are approximately $35 million.
These losses for WiredEmpire include approximately $20 million in losses from
operations through the measurement date and approximately $15 million of loss on
disposal which includes approximately $2 million in losses from operations from
the measurement date through the estimated date of disposal.
Pursuant to Accounting Principles Board Opinion ("APB") No. 30, "Reporting the
Results of Operations - Reporting the Effects of a Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occuring Events and
Transactions," the consolidated financial statements of MSGi have been
reclassified to reflect the discontinued operations of WiredEmpire. Accordingly,
revenues, costs and expenses, and cash flows of WiredEmpire have been excluded
from the respective captions in the Consolidated Statement of Operations and
Consolidated Cash Flows of MSGi. The net operating results of WiredEmpire have
been reported as "Loss from Discontinued Operations", and the net cash flows of
WiredEmpire have been reported as "Net Cash (Used In) Provided By Discontinued
Operations". The assets and liabilities of WiredEmpire have been excluded from
the respective captions in the Consolidated Balance Sheets of MSGi and have been
reported as "Net Assets/Liabilities of Discontinued Operations".
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. In September 1999, the Company sold the remaining 15%
interest. The sale resulted in an immaterial gain.
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. The results of operations are reflected in
the consolidated financial statements using the purchase method of accounting
from the date of acquisition.
Effective May 13, 1999, the Company acquired all of the outstanding common
shares of CMG Direct Corporation. The results of operations of are reflected in
the consolidated financial statements using the purchase method of accounting
from the date of acquisition.
On March 22, 2000, the Company acquired all of the outstanding common shares of
Grizzard Advertising, Inc. ("Grizzard"). The results of operations of Grizzard
are reflected in the consolidated financial statements using the purchase method
of accounting from the date of acquisition.
On March 31, 2000, the Company acquired all of the outstanding common shares of
The Coolidge Company ("Coolidge"). The results of operations of Coolidge are
reflected in the consolidated financial statements using the purchase method of
accounting from the date of acquisition.
The Company's business tends to be seasonal. Certain marketing services have
higher revenues and profits occurring in the second fiscal quarter, followed by
the first fiscal quarter based on the seasonality of its clients' mail dates to
coordinate with the Thanksgiving and Holiday season. Telemarketing services have
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.
Results of Operations Fiscal 2000 Compared to Fiscal 1999.
- ----------------------------------------------------------
Revenues of approximately $128.6 million for the year ended June 30, 2000
("Current Period") increased by $46.5 million or 56% over revenues of $82.2
million during the year ended June 30, 1999 (the "Prior Period"). Of the
increase, approximately $49.7 million is attributable to acquisitions completed
in the current period and including a full year of operations of acquisitions
completed in the Prior Period. This increase in revenues was partially offset by
the divestiture of MFI representing a $1.5 million revenue reduction in the
Current Period. Revenue, not including the effects of acquisitions and
divestitures, decreased $1.7 million mainly due to the reduction in brokerage
revenue due to lower campaign activity.
Direct costs of approximately $77.9 million for the Current Period increased by
$25.4 million or 48% over direct costs of $52.5 million during the Prior Period.
Of the increase, approximately $28.8 million is attributable to acquisitions in
the Current Period and a full year of operations for acquisitions completed
during the Prior Period. The increase cost was partially offset by the
divestiture of MFI representing a $.5 million direct cost reduction in the
Current Period. Direct costs, not including the effects of acquisitions or
divestitures, decreased $2.9 million due to the reduction in revenue as well as
a change in the mix of services sold to more profitable lines of business.
Direct costs as a percentage of revenue decreased from 64% in the Prior Period
to 61% in the Current Period, reflecting the change in the mix of services sold.
Salaries and benefits of approximately $42.7 million in the Current Period
increased by $14.9 million or 54% over salaries and benefits of approximately
$27.8 million in the Prior Period. Of the increase, approximately $16.7 million
is attributable to acquisitions in the Current Period and a full year of
operations for acquisitions completed during the Prior Period. Salaries and
benefits associated with the divestiture of MFI resulted in a reduction of $1.8
million in the Current Period. Salaries and benefits excluding acquisitions
increased by approximately $1.1 million due to normal wage increases of 7%, as
well as an increase in head count to manage current and anticipated growth,
offset by $1.1 million reduction of severance and compensation expense on option
grants the Current Period. There are no further amounts to be paid in connection
with the termination of these employment contracts.
Selling, general and administrative expenses of approximately $13.3 million in
the Current Period increased by approximately $6.5 million or 96% over
comparable expenses of $6.8 million in the Prior Period. Of the increase,
approximately $4.1 million is attributable to acquisitions in the Current Period
and a full year of operations for acquisitions completed during the Prior
Period. Selling, general and administrative expenses associated with the
divestiture of MFI resulted in a reduction of $.4 million in the Current Period.
Selling, general and administrative expenses excluding acquisitions increased by
approximately $2.8 million principally due to increased professional fees
associated with an unsuccessful attempt by third parties to unionize the calling
center, increases in rent, professional fees (principally legal and accounting),
travel and entertainment and reporting fees associated with the increase in
merger and acquisition activity and becoming a larger company.
Depreciation and amortization expense of approximately $6.0 million in the
Current Period increased by approximately $3.7 million over expense of $2.3
million in the Prior Period. Of the increase, approximately $2.5 million is
attributable to acquisitions in the Current Period and including a full year of
operations for acquisitions completed during the Prior Period. Depreciation and
amortization expenses associated with the divestiture of MFI resulted in a
reduction of $.1 million in the Current Period.
The Company has taken a fourth quarter charge of approximately $27 million for
unrealized losses on Internet investments made during the fiscal year based on
all available information. The Company believes such losses are a result of
significant changes in Wall Street valuations of Internet stocks. The Company
has suspended its Internet investment strategy and will focus all efforts on the
profitability of its core direct marketing operations.
Net interest expense of approximately $2.5 million in the Current Period
increased by approximately $1.9 million over net interest expense of
approximately $.6 million in the Prior Period. Such expenses increased
principally due to interest expense on outstanding borrowings relating to the
Grizzard acquisition.
The net provision for income taxes of approximately $265,000 in the Current
Period increased by approximately $208,000 over the provision of approximately
$57,000 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.
As a result of the above, loss from continuing operations of $41.1 million in
the Current Period increased $33.5 million over comparable net loss of $7.6 in
the Prior Period.
Net loss attributable to common shareholders in the Prior Period includes the
impact of dividends on preferred stock for (a) adjustment of the conversion
ratio of $11,366,022 for exercises of stock options and warrants; (b) $949,365
in cumulative undeclared preferred stock dividends; and (c) $219,943 of periodic
non-cash accretions on preferred stock.
Results of Operations Fiscal 1999 Compared to Fiscal 1998.
- ----------------------------------------------------------
Revenues of approximately $82.2 million for the year ended June 30, 1999 (the
"Fiscal 1999") increased by $31.0 million or 61% over revenues of $51.2 million
during the year ended June 30, 1998 (the "Fiscal 1998"). Of the increase,
approximately $27.8 million is attributable acquisitions completed during Fiscal
1999 and including a full year of operations for acquisitions completed Fiscal
1998. Revenues, not including the effects of acquisitions and telemarketing and
telefundraising revenue, increased by $3.4 million or 10% over the Fiscal 1998.
These increases were partially offset by a decrease in telemarketing and
telefundraising revenues of approximately $1.3 million or 8%. In addition,
fulfillment revenue for Fiscal 1999 increased by approximately $1.1 million due
to inclusion of eight months of operations in the Fiscal 1999 as compared to a
month and a half in the Fiscal 1998. 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 1999 fiscal year and have refocused its
priorities.
Direct costs of approximately $52.5 million in Fiscal 1999 increased by $25.7
million or 96% over direct costs of $26.8 million in Fiscal 1998. Of the
increase, approximately $24.4 million is attributable to acquisitions for a full
year of operations for acquisitions completed during Fiscal 1998. Direct costs
for direct and internet marketing not including the effects of acquisitions
increased by $.9 million or 4% which is due to the increase in revenue. The
remaining increase is primarily due to fulfillment direct costs of approximately
$.4 million which is consistent with the growth in revenue. The Company's direct
costs consist principally of commissions paid to use marketing lists. Direct
costs as a percentage of revenue increased from 52% in Fiscal 1998 to 64% in
Fiscal 1999. The increase in the direct costs as a percentage of revenue results
from the mix in services sold. Most of the acquisitions made in the past two
years resulted in a substantial increase to the list management and list
brokerage services. These services have a high direct cost percentage. As MSGi
acquires new companies and internet revenues become a higher percentage of
overall revenue, management expects the direct cost percentage of revenue to
begin to decrease.
Salaries and benefits of approximately $27.8 million in Fiscal 1999 increased by
$8.5 million or 44% over salaries and benefits of approximately $19.3 million in
Fiscal 1998. Of the increase, approximately $3.5 million is attributable to
acquisitions completed during Fiscal 1999 and including a full year of operation
for acquisitions completed during Fiscal 1998. Salaries and benefits excluding
acquisitions increased by approximately $1.8 million due to increase in head
count to manage current and anticipated future growth of 10% and $1.6 million in
severance costs in connection with the termination of two employment contracts
and compensation expense on option grants. Salaries and benefits relating to
fulfillment increased by approximately $1.4 million due to inclusion of eight
months of operations in Fiscal 1999 as compared to a month and a half in Fiscal
1998. Salaries and benefits associated with corporate overhead increased
approximately $.2 million in the Fiscal 1999 principally due to an increase in
head count to manage current and anticipated future growth.
Selling, general and administrative expenses of approximately $6.8 million in
Fiscal 1999 increased by approximately $2.5 million or 62% over comparable
expenses of $4.2 million in Fiscal 1998. Of the increase, approximately $1.4
million is attributable to acquisitions completed during Fiscal 1999 and
including a full year of operations for acquisitions completed during Fiscal
1998. Selling, general and administrative expenses excluding acquisitions
increased by approximately $.3 million principally due to increased professional
fees associated with an unsuccessful attempt by third parties to unionize the
calling center and increased rent expense due to expansion of certain office
space. Selling general and administrative expenses relating to fulfillment
increased by approximately $.4 million due to inclusion of eight months of
operations in Fiscal 1999 as compared to a month and a half in Fiscal 1998. The
remaining increase is primarily due to an increase in corporate expenses of
approximately $.4 million due to merger and acquisition activity.
Depreciation and amortization expense of approximately $2.2 million in Fiscal
1999 increased by approximately $.7 million over expense of $1.5 million in
Fiscal 1998. Of the increase, approximately $.6 million is attributable to
acquisitions completed during Fiscal 1999 and including a full year of
operations for acquisitions completed during Fiscal 1998.
Net interest expense of approximately $516,000 in Fiscal 1999 increased by
approximately $330,000 over net interest expense of approximately $186,000 in
Fiscal 1998. Such expenses increased principally due to accrued interest on
outstanding borrowings relating to the acquisitions of SK&A and CMGD. In
addition, interest income from cash invested decreased due to cash used for
stock buyback and to fund the fulfillment operations.
The net provision for income taxes of approximately $57,000 in Fiscal 1999
increased by approximately $42,000 over the provision of approximately $15,000
in Fiscal 1998. 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.
As a result of the above, loss from continuing operations of $7.6 million in
Fiscal 1999 increased $6.8 million over comparable net loss of $.8 in Fiscal
1998.
Net loss attributable to common shareholders in Fiscal 1999 includes the impact
of dividends on preferred stock for (a) adjustment of the conversion ratio of
$11,366,022 for exercises of stock options and warrants; (b) $949,365 in
cumulative undeclared preferred stock dividends; and (c) $219,943 of periodic
non-cash accretions of preferred stock.
Net loss attributable to common shareholders in Fiscal 1998 includes the impact
of dividends on preferred stock for (a) a non-cash, beneficial conversion
feature of $3,214,400 (b) adjustment of the conversion ratio of $152,512 for
exercises of stock options and warrants and issuances of common stock; (c)
$464,816 in cumulative undeclared preferred stock dividends; and (c) $112,274 of
periodic non-cash accretions on preferred stock.
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 June 30, 2000, the Company
had cash and cash equivalents of $9.9 million and accounts receivable net of
allowances of $42.2 million.
The Company incurred losses from continuing operations of $41.1 million in the
Current Period. Cash used in operating activities from continuing operations was
approximately $11.4 million. Net cash used in operating activities principally
resulted from the loss from continuing operations, an increase in inventory
balances and a decrease in accrued expenses and other liabilities offset by
unrealized loss on investments and loss from discontinued operations. In the
Prior Period, the Company incurred losses from continuing operations of $7.6
million. Cash used in operating activities was approximately $45,000. Net cash
used in operating activities principally resulted from the net loss offset by
the decreases in accounts receivable and the increase in accrued expenses and
other liabilities.
In the Current Period, net cash of $60.1 million was used in investing
activities consisting of: $50.2 million for the acquisitions of CIA, Grizzard
and Coolidge, $1.9 million for the purchases of property and equipment, $1.6
million for purchases of intangible assets and $6.9 million for purchases of
Internet investments. In the Prior Period, net cash used in investing activities
of $18.9 million consisted of $17.7 million for the acquisitions of SK&A and CMG
Direct, $.9 million for a contingent payment for the acquisition of SD&A, $.5
million for the purchases of property and equipment .
In the Current Period, net cash of $78.9 million was provided by financing
activities. Net cash provided by financing activities consisted primarily of
$30.5 million in proceeds from the issuance of common stock, $29.4 million in
proceeds from the issuance of convertible preferred stock, and $23.0 million in
net proceeds from bank financing.
In the Prior Period, net cash of $16.0 million was provided by financing
activities. Net cash provided by financing activities consisted of $10.0 million
proceeds from a promissory note issued in connection with the CMG Direct
acquisition, $5.5 million in proceeds from the exercise of stock options and
warrants, $2.8 million in net proceeds from lines of credit offset by $1.3
million used for the purchase of treasury stock and $.8 million for repayments
on debt, other notes payable and capital leases.
At June 30, 2000, the Company had amounts outstanding of $9.7 million on its
lines of credit. As of June 30, 2000 the Company was in violation of certain
covenants at certain of its subsidiaries. The Company has obtained a waiver of
such violations. The Company had approximately $4.2 million of additional
availability on its lines of credit as of June 30, 2000.
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 immediately
cancelled.
On February 24, 2000 the Company entered into a private placement with RGC
International Investors LDC and Marshall Capital Management, Inc., an affiliate
of Credit Suisse First Boston, in which the Company sold an aggregate of 30,000
shares of Series E Convertible Preferred Stock, par value $.01 ("Series E
Preferred Stock"), and warrants to acquire 1,471,074 shares of common stock for
proceeds of approximately $29.5 million, net of approximately $520,000 of
placement fees and expenses. The preferred stock provides for liquidation
preference under certain circumstances and accordingly has been classified in
the mezzanine section of the balance sheet. The preferred stock has no dividend
requirements.
The Series E Preferred Stock is convertible at any time at $24.473 per share,
subject to reset on August 18, 2000 if the market price of our Common Stock is
lower and subject to certain anti-dilution adjustments. On August 18, 2000, the
conversion price was reset to $12.24 per share, the market price on that date.
The warrants are exercisable for a period of two years at an exercise price of
$28.551, subject to certain anti-dilution adjustments.
In March 2000, the Company entered into a credit agreement (the "Credit
Agreement") with a $58,000,000 senior secured facility. The Credit Agreement is
comprised of a $13 million revolving line of credit, $40 million term loan and
$5 million standby letter of credit. The Credit Agreement expires on March 31,
2005 and bears interest at prime rate or LIBOR plus an applicable margin ranging
from 1.5% to 2.5%, for prime and 2.5% to 3.5% for LIBOR based on a financial
ratio. The term loan is payable in quarterly installments through March 2005.
The loans are collaterialized by substantially all of the assets of the Company
and are guaranteed by all of the Company's non-internet subsidiaries. The
revolving line of credit is classified under short term borrowings (See Note 9).
As of June 30, 2000, the interest rates were 11.5% for borrowings under the
prime rate and 10.4% for borrowings under LIBOR.
In connection with the Credit Agreement, the Company issued a warrant to
purchase 298,541 shares of the Company's common stock at an exercise price of
$.01 per share. The $40 million term loan was recorded at a discount of
approximately $5 million to reflect an allocation of the proceeds to the
estimated value of the warrant and is being amortized as interest expense over
the life of the loan using the interest method of accounting. Approximately
$453,000 was recorded as interest expense for the year ended June 30, 2000.
Under the terms of the Credit Agreement, the Company is required to maintain
certain financial covenants related to consolidated EBITDA and consolidated debt
to capital, among others.
The Company believes that funds on hand, funds available from its operations and
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.
In connection with the discontinued operations of WiredEmpire, the Company has
offered to redeem the preferred shares in exchange for MSGi common shares. The
redemption is expected to occur in the second quarter of fiscal year 2001. The
liability of $18.8 million for the preferred shareholders is currently included
in the net liability of discontinued operations and it is anticipated that this
will be settled in MSGi stock. The Company believes that the cash on hand at
WiredEmpire will be sufficient to satisfy the remaining obligations to be
incurred as a result of the decision to discontinue operations.
Summary of Recent Accounting Pronouncements
- -------------------------------------------
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25" (FIN 44). The interpretation provides
guidance for certain issues relating to stock compensation involving employees
that arose in applying Opinion 25. Among other issues, FIN No. 44 clarifies (a)
the definition of an employee for purposes of applying Opinion 25, (b) the
criteria for determining whether a plan qualifies as a noncompensatory plan, (c)
the accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The provisions of FIN No. 44 are
effective July 1, 2000, except for the provisions regarding modifications to
fixed stock option awards which reduce the exercise price of an award, which
apply to modifications made after December 15, 1998. Provisions regarding
modifications to fixed stock option awards to add reload features apply to
modifications made after January 12,2000. The Company believes that it is in
compliance with this guidance.
In December 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" (SAB 101). SAB 101 summarizes some of the staff's interpretations of
the application of generally accepted accounting principles to revenue
recognition, including presentation in the financial statements. The staff
provided guidance due, in part, to the large number of revenue-recognition
issues that it has encountered in registrant filings. In June 2000, SAB101B,
"Second Amendment: Revenue Recognition in Financial Statements", was issued,
which defers the effective date of SAB 101 until no later than the fourth
quarter of fiscal years beginning after December 15, 1999. The Company is
currently evaluating the impact that SAB 101 will have on it's financial
statements and will adopt SAB 101 in fiscal 2001.
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities"("SFAS No. 133").
This statement established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities on the balance sheet and measurement
of those instruments at fair value. In June 1999, the Financial Accounting
Standards Board issued SFAS No. 137 delaying the effective date of SFAS No. 133.
The provisions of SFAS No. 133 are effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. The effect of adopting SFAS No. 133
is not expected to have any impact on the Company as it current does not engage
in derivative or hedging activities.
Item 8 - Financial Statements and Supplementary Data
- ----------------------------------------------------
The Consolidated Financial Statements required by this Item 8 are set forth as
indicated in the index following Item 13(a)(1).
Item 9 - Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
PART III
The information required by this Part III (items 10, 11, 12, and 13) is hereby
incorporated by reference from the Company's definitive proxy statement which is
expected to be filed pursuant to Regulation 14A of the Securities Exchange Act
of 1934 not later than 120 days after the end of the fiscal year covered by this
report.
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial statements - see "Index to Financial Statements" on page 29.
(2) Financial statement schedules - see "Index to Financial Statements" on
page 29.
(3) Exhibits:
2.1 Stock Purchase Agreement between Marketing Services Group, Inc.
and Ralph Stevens (n)
2.2 Stock Purchase Agreement between Marketing Services Group, Inc.
and CMGI, Inc. (o)
2.3 Agreement and Plan of Merger By and Among Marketing Services
Group, Inc., GCG Merger Corp., and Grizzard Advertising, Inc.(p)
3.1 Amended and Restated Articles of Incorporation (b)3.2 Certificate
of Amendment to the Amended and Restated Articles of
Incorporation of the Company (b)
3.3 Certificate of Amendment to the Articles of Incorporation for
change of name to All-Comm Media Corporation (e)
3.4 By-Laws (b)
3.5 Certificate of Amendment of Articles of Incorporation for
increase in number of authorized shares to 36,300,000 total (h)
3.6 Certificate of Amendment of Articles of Incorporation for
change of name to Marketing Services Group, Inc. (k)
3.7 Certificate of Amendment of Articles of Incorporation for
increase in number of authorized shares to 75,150,000 total (q)
3.8 The Amended Certificate of Designation, Preferences and Relative,
Participating and Optional and Other Special Rights of Preferred
Stock and Qualifications, Limitations and Restrictions Thereof
for the Series D Convertible Preferred Stock (l)
3.9 Certificate of Designation, Preferences, and Rights of Series E
Convertible Preferred Stock of Marketing Services Group, Inc. (t)
3.10 Certificate of Amendment to Certificate of Designation,
Preferences, and Rights of Series E Convertible Preferred Stock
of Marketing Services Group, Inc. (u)
10.1 1991 Stock Option Plan (c)
10.2 Agreement and Plan of Merger between All-Comm Media Corporation
and Metro Services Group, Inc. (i)
10.3 Security Agreement between Milberg Factors, Inc. and Metro
Services Group, Inc. (j)
10.4 Security Agreement between Milberg Factors, Inc. and Stephen
Dunn & Associates, Inc. (k)
10.5 Agreement and Plan of Merger between Marketing Services Group,
Inc. and Pegasus Internet, Inc. (k)
10.6 J. Jeremy Barbera Employment Agreement (a)
10.7 Rudy Howard Employment Agreement (a)
10.8 Stephen Killeen Employment Agreement (a)
10.9 Mike Dzvonik Employment Agreement (a)
10.10 Robert M. Budlow Employment Agreement (i)
10.11 Form of Private Placement Agreement (j)
10.12 Fourth Memorandum of Understanding (q)
10.13 Stock Purchase Agreement among Marketing Services Group, Inc.,
Stephen M. Reustle and Thomas R. Kellogg (m)
10.14 Purchase agreement dated as of December 24, 1997, by and between
the Company and GE Capital (l)
10.15 Stockholders Agreement by and among the Company, GE Capital and
certain existing stockholders of the Company, dated as of
December 24, 1997 (l)
10.16 Registration Rights Agreement by and among the Company and GE
Capital, dated as of December 24, 1997 (l)
10.17 Warrant, dated as of December 24, 1997, to purchase shares of
Common Stock of the Company (l)
10.18 Form of Employment Agreement by and among Marketing Services
Group, Inc. and Ralph Stevens (n)
10.19 Form of Employment Agreement by and among Marketing Services
Group, Inc. and Edward Mullen (a)
10.20 First Amendment to Preferred Stock Purchase Agreement
Between General Electric Capital Corporation and Marketing
Services Group, Inc. (r)
10.21 Promissory note (r)
10.22 Warrant Agreement (r)
10.23 Second Amendment (s)
10.24 Warrant Agreement between Marketing Services Group, Inc. and
Marshall Capital Management, Inc. (t)
10.25 Warrant Agreement between Marketing Services Group, Inc.
and RCG International Investors, LDC. (t)
10.26 Registration Rights Agreement by and Among The Company, RCG
International Investors, LDC and Marshall Capital Management,
Inc. (t)
10.27 Securities Purchase Agreement by and Among The Company, RCG
International Investors, LDC and Marshall Capital Management,
Inc. (t)
10.28 Credit Agreement Among Grizzard Communications, Inc. and
Paribas (v)
21 List of Company's subsidiaries (a)
23 Consent of PricewaterhouseCoopers, LLP (a)
27 Financial Data Schedule (a)
(a) Incorporated herein
(b) Incorporated by reference from the Company's Registration Statement on
Form S-4, Registration Statement No. 33-45192
(c) Incorporated by reference to the Company's Registration Statement on
Form S-8, Registration Statement 333-30839
(d) Incorporated herein by reference to the Company's Report on Form 8-K
dated April 25, 1995
(e) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended June 30, 1995
(f) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended March 31, 1996
(g) Incorporated by reference to the Company's Report on Form 8-K dated June
7, 1996
(h) Incorporated by reference to the Company's Report on Form 10-K dated
June 30, 1996
(i) Incorporated by reference to the Company'sReport on Form 8-K dated
October 11, 1996
(j) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended March 31, 1997
(k) Incorporated by reference to the Company's Report on Form 10-KSB for the
fiscal year ended June 30, 1997
(l) Incorporated by reference to the Company's Report on Form 8-K dated
January 13, 1998
(m) Incorporated by reference to the Company's Report on Form 8-K dated
March 16,1998
(n) Incorporated by reference to the Company's Report on Form 8-K dated
February 1, 1999
(o) Incorporated by reference to the Company's Report on Form 8-K dated
March 24, 1999
(p) Incorporated by reference from the Company's Registration Statement on
Form S-4, Registration Statement No. 33-85233.
(q) Incorporated by reference to the Company's Report on Form 10-KSB dated
June 30, 1998.
(r) Incorporated by reference to the Company's Report on Form 8-K dated May
13, 1999.
(s) Incorporated by reference to the Company's Report on Form 8-K dated
August 30, 1999.
(t) Incorporated by reference to the Company's Report on Form 8-K dated
February 29, 2000.
(u) Incorporated by reference to the Company's Report on Form 8-K/A dated
March 23, 2000.
(v) Incorporated by reference to the Company's Report on Form 10-Q dated May
16, 2000.
(b) Reports on Form 8-K. During the fourth quarter 2000, Form 8-K dated April
6, 2000 was filed pursuant to Item 2 (Acquisition or Disposition of Assets)
and Item 7 (Financial Statements and Exhibits). On June 5, 2000 Form 8-K/A
was filed pursuant to Item 2 (Acquisition or Disposition of Assets) and
Item 7 (Financial Statements and Exhibits).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MARKETING SERVICES GROUP, INC.
------------------------------
(Registrant)
By:/s/ J. Jeremy Barbera
---------------------
J. Jeremy Barbera
Chairman of the Board and
Chief Executive Officer
Date: October 13, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ J. Jeremy Barbera Chairman of the Board and October 13, 2000
- --------------------- Chief Executive Officer
J. Jeremy Barbera (Principal Executive Officer)
/s/ Stephen Killeen President and Director October 13, 2000
- -------------------
Stephen Killeen
/s/ Michael Dzvonik Chief Operating Officer October 13, 2000
- -------------------
Michael Dzvonik
/s/ Rudy Howard Chief Financial Officer October 13, 2000
- --------------- (Principal Financial Officer)
Rudy Howard
/s/ Cindy H. Hill Chief Accounting Officer October 13, 2000
- ----------------- (Principal Accounting Officer)
Cindy H. Hill
/s/ Alan I. Annex Director and Secretary October 13, 2000
- -----------------
Alan I. Annex
/s/ S. James Coppersmith Director October 13, 2000
- ------------------------
S. James Coppersmith
/s/ John T. Gerlach Director October 13, 2000
- ---------------------
John T. Gerlach
/s/ Seymour Jones Director October 13, 2000
Seymour Jones
/s/ C. Anthony Wainwright Director October 13, 2000
- -------------------------
C. Anthony Wainwright
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
[Items 14]
(1) FINANCIAL STATEMENTS: Page
--------------------- ----
Report of Independent Accountants 30
Consolidated Balance Sheets as of June 30, 2000 and
June 30, 1999 31
Consolidated Statements of Operations
Years Ended June 30, 2000, 1999, and 1998 32
Consolidated Statement of Stockholders' Equity
Years Ended June 30, 2000, 1999, and 1998 33-35
Consolidated Statements of Cash Flows
Years Ended June 30, 2000, 1999, and 1998 36
Notes to Consolidated Financial Statements 37-55
(2) FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts 56
Schedules other than those listed above are omitted because they are
not required or are not applicable or the information is shown in the
audited financial statements or related notes.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Marketing Services Group, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Marketing Services Group, Inc. and Subsidiaries at June 30, 2000 and 1999, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
October 12, 2000
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2000 AND 1999
ASSETS 2000 1999
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 9,903,799 $ 3,285,217
Accounts receivable, billed, net of
allowance for doubtful accounts of
$2,287,857 and $551,043, respectively 38,324,777 23,527,798
Accounts receivable, unbilled 3,834,057 3,862,907
Inventories 4,574,046 -
Note receivable- current portion 173,359 685,873
Other current assets 4,428,673 1,168,653
--------- -----------
Total current assets 61,238,711 32,530,448
Investments 7,445,500 -
Property and equipment, net 18,690,478 1,504,826
Intangible assets, net 154,016,073 56,977,949
Note receivable 652,010 474,127
Other assets 3,141,343 623,599
Net assets of discontinued operations - 5,516,000
-------- ---------
Total assets $245,184,115 $97,626,949
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short - term borrowing 9,745,053 $5,316,775
Accounts payable-trade 30,098,401 23,214,278
Related party payable 5,000,000 -
Accrued expenses and other current liabilities 9,531,728 8,151,764
Current portion of note payable-related party - 4,871,750
Current portion of capital lease obligations 234,032 52,099
Current portion of long term obligations 6,199,820 570,653
--------- -----------
Total current liabilities 60,809,034 42,177,319
Capital lease obligations, net of current portion 543,517 67,407
Long-term obligations, net of current portion 35,613,194 997,890
Note payable- related party, net of current portion - 4,871,750
Other liabilities 2,433,450 584,954
Net liabilities of discontinued operations 18,346,721 -
---------- ----------
Total liabilities 117,745,916 48,699,320
----------- ----------
Convertible preferred stock - $.01 par value;
150,000 shares authorized; 30,000 shares of
Series E issued and outstanding 29,417,279 -
Commitments and contingencies (Note 13)
Stockholders' equity:
Common stock - $.01 par value;
75,000,000 authorized; 30,442,488 and
22,513,772 shares issued as of
June 30, 2000 and 1999, respectively 304,425 225,138
Additional paid-in capital 194,712,085 70,812,973
Accumulated deficit (95,601,880) (19,928,677)
Deferred compensation - (788,095)
Less: 423,894 shares of common stock in
treasury, at cost (1,393,710) (1,393,710)
Total stockholders' equity 98,020,920 48,927,629
---------- ------------
Total liabilities and stockholders' equity $245,184,115 $97,626,949
=========== ===========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998
2000 1999 1998
---- ---- ----
Revenues $128,606,882 $82,241,894 $51,174,063
------------ ----------- -----------
Operating costs and expenses:
Direct costs 77,906,758 52,510,154 26,771,611
Salaries and benefits 42,657,063 27,757,246 19,255,348
Selling, general and administrative 13,307,682 6,764,488 4,240,805
Depreciation and amortization 6,027,871 2,282,251 1,486,106
--------- --------- ----------
Total operating costs and expenses 139,899,374 89,314,139 51,753,870
----------- ---------- ----------
Loss from operations (11,292,492) (7,072,245) (579,807)
----------- ---------- ----------
Unrealized loss on investments (27,216,200) - -
Interest expense and other, net (2,355,848) (516,099) (185,967)
----------- -------- ---------
Loss from continuing operations
before income taxes (40,864,540) (7,588,344) (765,774)
Provision for income taxes 265,683 57,259 14,704
------- ------ ------
Loss from continuing operations (41,130,223) (7,645,603) (780,478)
Discontinued operations (Note 18):
Loss from discontinued operations (19,488,943) - -
Loss from disposal of discontinued
operations (15,054,037) - -
---------- -------- -------
(34,542,980) - -
---------- -------- -------
Net loss $(75,673,203) $(7,645,603) $(780,478)
============= ============ ==========
Net loss attributable to
common stockholders (Note 15) $(75,673,203) $(20,180,933) $(4,724,480)
============= ============= ============
Net loss per common share:
Continuing operations $(1.55) $(1.39) $(0.37)
Discontinued operations $(1.30) - -
------- ----- ----
Net loss per common share,
basic and diluted $(2.85) $(1.39) $(0.37)
======= ======= =======
Weighted average common shares
outstanding 26,582,218 14,552,444 12,892,323
========== ========== ==========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998
Common Stock Additional Treasury Stock
------------ Paid-in Accumulated --------------
Shares Amount Capital Deficit Shares Amount Totals
------------------------------------------------------------------------------------------------
Balance July 1, 1997 11,438,564 $114,386 $25,209,493 $(11,502,596) (11,800) $(135,469) $13,685,814
Shares issued upon exercise
of options 4,135 41 8,229 8,270
Issuance of warrants to
consultants 19,500 19,500
Issuance of restricted shares for
SD&A earn-out 139,178 1,392 423,608 425,000
Issuance of common stock for
acquisition of Pegasus Internet 600,000 6,000 1,794,000 1,800,000
Conversion of $1.7 million of
convertible debt to common stock,
net of discount and stock
issuance costs 694,411 6,944 1,629,228 1,636,172
Sale of Series D Preferred Stock,
net of stock issuance costs 3,474,982 3,474,982
Dividend for non-cash, non-recurring
beneficial conversion feature (3,214,400) (3,214,400)
Issuance of common stock
for acquisition of
Media Marketplace, Inc. 222,222 2,222 997,778 1,000,000
Adjustment to conversion ratio
for redeemable convertible
preferred stock (152,512) (152,512)
Cumulative undeclared dividends for
redeemable convertible
preferred stock (464,816) (464,816)
Accretion of redeemable convertible
preferred stock (112,274) (112,274)
Net and comprehensive loss (780,478) (780,478)
------------------------------------------------------------------------------------------------
Balance June 30,1998 13,098,510 130,985 29,612,816 (12,283,074) (11,800) (135,469) 17,325,258
Common Stock Additional Treasury Stock
------------ Paid-in Deferred Accumulated --------------