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, 2002
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
MKTG SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada
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(State or other jurisdiction of incorporation or organization)
88-0085608
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(I.R.S. Employer Identification No.)
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
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Securities registered pursuant to Section 12(g) of the Act: ____
Common Stock, par value $.01 per share
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(Title of class)
Indicate be check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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. [ X ]
As of October 11, 2002, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $1,183,469.
As of October 11, 2002, there were 7,159,210 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.
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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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MKTG Services, Inc. (the "Company" or "MKTG") is a leading relationship
marketing company focused on assisting corporations with customer acquisition
and retention strategies and solutions. Its customized marketing capabilities
combine comprehensive traditional marketing tactics with an aggressive
integration of sophisticated new media applications encompassing direct
marketing, database management, analytics, interactive marketing services,
telemarketing and media buying. Operating in four major cities in the United
States, the Company provides strategic services to Fortune 1000 and other
prominent organizations in key industries including: Entertainment, Publishing,
Fundraising, Business-to-Business, Education and Financial Services.
MKTG provides marketing solutions to approximately 2,000 clients worldwide with
revenues for the fiscal year ended June 30, 2002 of $39.0 million. The Company
currently has over 290 full-time employees with significant offices in the New
York, Boston, Philadelphia and Los Angeles areas.
The Company's Strategy
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MKTG'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 includes
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 MKTG, most recently known as Marketing Services Group, Inc., began operations
in 1995.
Through the years, the Company has acquired and formed direct marketing
companies. The Company's acquisitions and dispositions are summarized as
follows:
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Date Name of Company Acquired Service Performed
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May 1995 Stephen Dunn & Associates, Inc. Provides 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 & Specializes in providing list
Associates, Inc. management, list brokerage and
Stevens-Knox List database management services.
Brokerage, Inc.
Stevens-Knox International, Inc.
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.
October 1999 Acquired 87% of Cambridge A licensor of email marketing
Intelligence Agency and tools.
formed WiredEmpire, Inc.
March 2000 Grizzard Advertising, Inc. Specialized 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.
September 2000 Board of Directors approve plan to
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discontinue the operation of
WiredEmpire, Inc.
January 2001 Shut down of operations for
WiredEmpire, Inc. completed
July 2001 Sold Grizzard Communications Group, Inc.
Capital Stock and Certain Financing Transactions
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On October 9, 2001, the Board of Directors approved a six-for-one reverse split
of the common stock. Par value of the common stock remains $.01 per share and
the number of authorized shares of common stock remains at 75,000,000. The stock
split was effective October 15, 2001. All stock prices, per share and share
amounts have been retroactively restated to reflect the reverse split and are
reflected in this document.
The Company did not meet certain financial goals for the fiscal year ended June
30, 2001 as set forth in the warrant issued in connection with a 1997 sale of
Series D preferred stock. Accordingly, the warrant in the amount of 1,778,334
shares with an exercise price of $.06 per share was issued in October 2001. As a
result of the issuance of the warrant, certain antidilultive provisions of the
Company's Series E preferred stock were triggered. The conversion price of such
shares was reset to a fixed price of $2.346 based on an amount equal to the
average closing bid price of the Company's common stock for ten consecutive
trading days beginning on the first trading day of the exercise period of the
aforementioned warrant. No further adjustments will be made to the conversion
price other than for stock splits, stock dividends or other organic changes. The
preferred shareholders converted 1,799 shares of preferred stock to 903,866
shares of common stock during the year ended June 30, 2002. The preferred
shareholders are precluded from converting any additional shares into shares of
common stock pursuant to the current conditions of the agreement of February 24,
2000.
On February 19, 2002, the Company entered into standstill agreements, as
amended, with the Series E preferred shareholders in order for the Company to
continue to discuss with multiple parties regarding the possibility of either
restructuring or refinancing the remainder of the preferred stock. The Company
is also reviewing other options, including replacing the existing Preferred
Stockholders with an alternative strategic investor or selling certain assets to
gain funds to attempt to repurchase the Series E preferred stock at a discount.
Under the terms of the standstill agreements, and subject to the conditions
specified therein, each preferred shareholder had agreed that it would not
acquire, hedge (short), proxy, tender, sell, transfer or take any action with
regard to its holdings during the standstill period, which was extended until
August 15, 2002. Since the Company did not obtain refinancing or an alternative
investor by August 15, 2002, the Company was obligated under such agreement to
seek stockholder approval to convert the preferred stock to common stock, by
October 2, 2002, based upon the 19.99% NASDAQ stock issuance limitations and the
terms of the preferred stock itself due to the change in conversion price and
increase in the number of exercisable shares. The Company's commitments as a
result of the standstill agreements included a partial redemption of 5,000 of
the Series E preferred shares for $5,000,000, thereby reducing the number of
Series E preferred shares to 23,201 at June 30, 2002. The value of the preferred
stock was initially recorded at a discount allocating a portion of the proceeds
to a warrant. The redemption of such preferred shares for $5,000,000, less the
carrying value of the preferred shares including the beneficial conversion
feature previously recorded in equity on the balance sheet resulted in a deemed
dividend of $412,634 which was recorded to additional paid-in capital and
included in the calculation of net loss attributable to common stockholders for
the year ended June 30, 2002.
On October 2, 2002, the common stockholders approved the right of the Series E
preferred shareholders to convert their preferred stock to common stock.
Subsequently, the preferred shareholders converted 951.44 shares of preferred
stock to 508,829 shares of common stock. The redemption value of preferred
stock, including interest and penalties, at October 15, 2002 is $35,308,982.
In June 2002, the Company received notification from The Nasdaq Stock Market
("Nasdaq") that the Company's common stock has closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4).
If the Company cannot meet compliance under the Nasdaq rules by December 24,
2002, Nasdaq will determine whether the Company meets the initial listing
criteria for The Nasdaq SmallCap Market under Marketplace Rule 4310(c)(2)(a). If
the Company meets the initial listing criteria, the Company will be granted an
additional 180 calendar day grace period to demonstrate compliance. Otherwise
the securities may be delisted. An event of default under the Series E
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preferred stock includes failing to maintain the listing of the Company's common
stock on Nasdaq or other such similar exchange. Such default would trigger a
mandatory redemption in cash under the terms of the Series E preferred stock
agreement. The Company does not have sufficient cash to satisfy such redemption.
The Company has explored and is continuing to explore alternatives to remain
listed on Nasdaq. The Company believes it has sufficient alternatives and will
execute on any one or more of these alternatives to remain listed. The Company
believes a potential delisting is not probable.
In 1999, a lawsuit under Section 16(b) of the Securities Exchange Act of 1934
was commenced against General Electric Capital Corporation ("GECC") by Mark
Levy, derivatively on behalf of the Company, to recover short swing profits
allegedly obtained by GECC in connection with the purchase and sale of MKTG
securities. The case was filed in the name of Mark Levy v. General Electric
Capital Corporation, in the United States District Court for the Southern
District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002,
a settlement was reached among the parties. The settlement provided for a
$1,250,000 payment to be made to MKTG by GECC and for GECC to reimburse MKTG for
the reasonable cost of mailing a notice to stockholders up to $30,000. On April
29, 2002, the court approved the settlement for $1,250,000, net of attorney fees
plus reimbursement of mailing costs. In July 2002, the court ruling became final
and the Company received and recorded the net settlement payment of $965,486
plus reimbursement of mailing costs (see Item 3 - Legal Proceedings).
On October 4, 2002, the Company repaid approximately $.8 million balance of one
credit facility and agreed with the lender to cease future advances of this
facility.
The Company has limited capital resources and has incurred significant recurring
losses and negative cash flows from operations. In addition, certain contingent
liabilities may require significant resources. The Company may be required to
redeem the Series E preferred stock and repay its outstanding lines of credit
depending on future events. The Company does not believe its cash on hand along
with existing sources of cash are sufficient to fund its cash needs over the
next twelve months under the current capital structure. In order to address this
situation, the Company has had and continues to have discussions with multiple
parties regarding the possibility of either restructuring or refinancing the
remainder of the Series E preferred stock. The Company is also reviewing
options, which include replacing the existing Preferred Stockholders with an
alternative strategic investor or selling certain assets to gain funds to
attempt to repurchase the Series E preferred stock at a discount. The Company
will also need to raise additional equity financing or obtain other sources of
liquidity (including debt or other resources). The Company has instituted cost
reduction measures, including the reduction of workforce. In addition, the
Company is reviewing its present operations with the view towards further
reducing its cost structure and workforce and to find alternative means of
increasing revenue. There can be no assurance that the Company will be
successful in restructuring its preferred stock or obtaining additional
financing. Additionally, there can be no assurances that the Company's cost
reduction efforts will be successful or that the Company will achieve a level of
revenue that will allow it to return to profitability. In the event the Company
is unable to raise needed financing and achieve profitability, operations will
need to be scaled back or discontinued. These circumstances raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result should the Company be unable to continue as a
going concern.
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
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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 psycho graphic, cultural and
behavioral patterns in specific geographic markets.
Industry Growth. According to industry sources, the direct marketing industry
has experienced significant downturns due to the economic recession, the events
of September 11th and the subsequent anthrax scare. Many companies within the
direct marketing industry have felt the impact of these events as growth for
both sales and ad spending has slowed down industry-wide. According to research
from the Direct Marketing Association, the industry's largest trade association,
in spite of the poor economy, Americans spent nearly $197 billion dollars on
direct response advertising last year - a 3.6 percent increase over spending in
2000. This modest growth is only about half of the 6.8 percent annual growth
that was experienced over the preceding five-year period. Projections for the
next four years state that, from 2001-2006 direct marketing is forecast to
bounce back with ad spending and return to a more normal annual rate of 6.5
percent per year. In general, the U.S. economy is expected to recover slowly
throughout this year - direct marketing is also expecting a slow recovery and
then a return to accelerated growth in subsequent years.
According to the most recently available information from the Direct Marketing
Association, total U.S. direct marketing advertising expenditures are projected
to reach $206.1 billion during 2002, a 4.7% increase over 2001. The 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 at the end of 2001 represented 55.2% of all U.S. advertising
expenditures which were $356.7 billion. Direct mail accounts for approximately
24% of total direct marketing expenditures nationwide. Annual growth rates for
direct marketing expenditures from 2001-2006 will be highest for "other" media,
which includes interactive marketing and radio, telephone, and television. Three
years ago the "other" media category was forecast to have the slowest five-year
growth. Additionally, consumer direct marketing advertising expenditures via
telephone marketing are expected to grow to $80.3 billion in 2002 and will
comprise close to 39% of all direct marketing expenditures.
In addition, annual direct marketing employment growth rates are also slowing.
From 1996-2001 direct marketing employment grew at a rate of 5.7 percent per
year. For the next four years, employment growth is forecast at 4.3 percent per
year. These trends should lead to higher gross profit margins for most direct
marketers. Moreover, direct marketing growth is expected to outpace total U.S
economic growth.
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.
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Services
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The Company's operating businesses provide comprehensive database management,
Internet marketing, custom telemarketing/telefundraising 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 Marketing
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 114 million households and 200 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.
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 Modeling 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.
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List Sales and Services
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. 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.
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, publisher's representation and more.
Interactive Marketing
Website Development and Design. 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.
Online Community Marketing. Through online community marketing we enable the
client to build long-term relationships with enthusiastic audiences, facilitate
a lifestyle dialog, provide useful information without interrupting the
integrity of consumers' online activity, develop direct-to-customer
relationships and implement a broad range of consumer calls-to-action. The
grassroots community marketing team monitors a detailed set of relevant Internet
locations, including affinity consumer homepages, message boards, newsgroups,
chat rooms, clubs, and lists. Within these communities, MKTG seeks to forge
relationships between our clients and those consumers who, by virtue of their
online activity, seem particularly influential and active; who grant permission
for extended communication; and who agree to "spread the word" in exchange for
the advance and/or exclusive information and offers included in the grassroots
vehicles above. This form of targeting is designed to produce a subset of
dynamic consumers who lead opinion, and who will be particularly excited by the
prospect of intimacy with, and support of, our clients. The result is a wave of
credible advocacy across the Internet, which will result in critical "buzz"
while it bolsters the success of "awareness" of initiatives taking place on- and
offline.
E-mail Deployment. E-mail campaigns provide the avenue to reach a qualified
audience and deliver a very targeted message. We create and maximize the three
elements of an email campaign: the desired audience, the design of the message
and delivery. We have the capability to send out mass quantities of e-mail
through HTML, text or FastStream e-mail promotions FastStream is a proprietary
MKTG technology that automatically plays full motion video and audio directly
within an email, to provide for high user interactivity. There are no links to
click on, no special plug-ins (FastStream runs with Flash, a technology which is
virtually ubiquitous today with 97% market penetration), and no time wasted
waiting for a download.
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Telemarketing / Telefundraising
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 El Segundo, California. The El Segundo 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 64 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 El Segundo calling center has the
capacity to serve up to 20 separate clients or projects simultaneously and can
produce 36,864 or more valid contacts per week, depending on the nature of the
lead base or 3,072 calling hours per week (159,744 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.
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.
9
On-site telemarketing and telefundraising fees are generally based on hourly
billing rates and 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 telephone contact with a potential donor without
regard to amounts raised for the client.
Client Base
- -----------
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 2,000 clients who utilize its various
marketing
services. Its customized marketing capabilities combine comprehensive
traditional marketing tactics with an aggressive integration of sophisticated
new media applications encompassing direct marketing, database management,
analytics, interactive marketing services, telemarketing and media buying.
Operating in four major cities in the United States, the Company provides
strategic services to Fortune 1000 and other prominent organizations in key
industries including: Entertainment, Publishing, Fundraising,
Business-to-Business, Education and Financial Services. No single client
accounted for more than 5% of total revenue for the fiscal years ended June 30,
2002, 2001 and 2000.
Competition
- -----------
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 media and entertainment,
publishing, fundraising, business-to-business, education and financial services
sectors. The Company's principal competitors include: Acxiom Corporation,
Harte-Hanks Communications, Experian North America, InfoUSA, Fair-Isaac, Epsilon
and Triplex. The current market is highly competitive and the Company
anticipates that new competitors will continue to enter the market. These
competitors tend to have greater financial, technical and marketing resources
than the Company.
Facilities
- ----------
The Company leases all of its real property. Facilities for its headquarters are
in New York City; its sales and service offices are located in New York City,
New York; Newtown, Pennsylvania; El Segundo, California; and Wilmington,
Massachusetts; its data centers are located in New York City and Massachusetts;
its telemarketing calling center is located in El Segundo, California. The
Company believes that its remaining facilities are in good condition and are
adequate for its current needs through fiscal 2003. 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 and Massachusetts, as well as its
related operating, processing and database software, are all adequate for its
needs through fiscal 2003.
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.
10
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 generally applicable to businesses, 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. federal and state 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, 2002, the Company employed approximately 1,300 persons, of whom 290
were employed on a full-time basis. As of June 30, 2002, approximately 70
employees of the El Segundo calling center were covered under union contracts
with the International Longshore and Warehouse Union.
Item 2 - Properties
- -------------------
The Company had owned land and buildings in Houston and Atlanta, which were
included in the sale of Grizzard (see Note 19 to the Company's consolidated
financial statements included in this Form 10-K). In addition, the Company and
certain subsidiaries lease facilities for office space summarized as follows and
in Note 11 of Notes to the Company's consolidated financial statements included
in this Form 10-K.
Location Square Feet
-------- -----------
New York, New York 36,500
Wilmington, Massachusetts 20,058
El Segundo, California 12,800
Newtown, Pennsylvania 10,268
In addition, the Company is currently leasing approximately 40,000 square feet
in New York, California, Pennsylvania and Massachusetts which is not being
currently utilized. Accordingly, the Company has provided for the future
estimated cost of these leases.
11
Item 3 - Legal Proceedings
- ----------------------------
In December 2000, an action was filed by Red Mountain, LLP in the United States
Court for the Northern District of Alabama, Southern Division against J. Jeremy
Barbera, Chairman of the Board and Chief Executive Officer of MKTG, MKTG and
WiredEmpire, Inc. Red Mountains' complaint alleges, among other things,
violations of Section 12(2) of the Securities Act of 1933, Section 10(b) of the
Securities Act of 1934 and Rule 10(b)(5) promulgated there under, and various
provisions of Alabama state law and common law, arising from Red Mountain's
acquisition of WiredEmpire Preferred Series
A stock in a private placement. Red Mountain invested $225,000 in WiredEmpire's
preferred stock and it seeks that amount, attorney's fees and punitive damages.
The Company believes that the allegations in the complaint are without merit.
The Company intends to vigorously defend against the lawsuit.
In December 2001, an action was filed by a number of purchasers of preferred
stock of WiredEmpire, Inc., a discontinued subsidiary, in the Alabama State
Court (Circuit Court of Jefferson County, Alabama, 10 Judicial Circuit of
Alabama, Birmingham Division), against J. Jeremy Barbera, Chairman of the Board
and Chief Executive Officer of MKTG, MKTG and WiredEmpire, Inc. The plaintiff's
complaint alleges, among other things, violation of sections 8-6-19(a)(2) and
8-6-19(c) of the Alabama Securities Act and various other provisions of Alabama
state law and common law, arising for the plaintiffs' acquisition of WiredEmpire
Preferred Series A stock in a private placement. The plaintiffs invested
approximately $1,650,000 in WiredEmpire's preferred stock and it seeks that
amount, attorney's fees and punitive damages. On February 8, 2002, the
defendants filed a petition to remove the action to federal court on the grounds
of diversity of citizenship. The Company believes that the allegations in the
complaint are without merit. The Company intends to vigorously defend against
the lawsuit.
In June 2002, the Company entered into a tolling agreement with various
claimants who acquired WiredEmpire Preferred Series A stock in a private
placement. The agreement states that the passage of time from June 15, 2002
through August 31, 2002 shall not be counted toward the limit as set out by any
applicable statute of limitations. In addition, the claimants agree that none of
them shall initiate or file a legal action against Mr. Barbera, MKTG or
WiredEmpire prior to the termination of the agreement. The claimants invested
approximately $1,200,000 in WiredEmpire's preferred stock.
In 1999, a lawsuit under Section 16(b) of the Securities Exchange Act of 1934
was commenced against General Electric Capital Corporation ("GECC") by Mark
Levy, derivatively on behalf of the Company, to recover short swing profits
allegedly obtained by GECC in connection with the purchase and sale of MKTG
securities. The case was filed in the name of Mark Levy v. General Electric
Capital Corporation, in the United States District Court for the Southern
District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002,
a settlement was reached among the parties. The settlement provided for a
$1,250,000 payment to be made to MKTG by GECC and for GECC to reimburse MKTG for
the reasonable cost of mailing a notice to stockholders up to $30,000. On April
29, 2002, the court approved the settlement for $1,250,000, net of attorney fees
plus reimbursement of mailing costs. In July 2002, the court ruling became final
and the Company received and recorded the net settlement payment of $965,486
plus reimbursement of mailing costs.
Item 4 - Control Procedures
- ---------------------------
Not applicable.
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 "MKTG." Prior to July 30, 2001, the Company traded 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
NASDAQ:
12
Low High
--- ----
Fiscal 2002
Fourth Quarter $0.25 $2.34
Third Quarter .90 3.25
Second Quarter 2.04 5.05
First Quarter 2.10 7.50
Fiscal 2001
Fourth Quarter $4.26 $ 10.02
Third Quarter 6.18 16.86
Second Quarter 6.18 16.86
First Quarter 14.28 39.00
On October 9, 2001, the Board of Directors approved a six-for-one reverse split
of the common stock. Par value of the common stock remains $.01 per share and
the number of authorized shares of common stock remains at 75,000,000. The stock
split was effective October 15, 2001. All stock prices, per share and share
amounts have been retroactively restated to reflect the reverse split.
As of June 30, 2002, there were approximately 990 registered holders of record
of the Company's common stock. (This number does not include approximately 7,300
investors whose accounts are maintained by securities firms in "street name".)
The Company received notification from The Nasdaq Stock Market ("Nasdaq") that
the Company's common stock has closed below the minimum $1.00 per share
requirement for continued inclusion under Marketplace Rule 4310(c)(4). If the
Company cannot meet compliance under the Nasdaq rules by December 24, 2002,
Nasdaq will determine whether the Company meets the initial listing criteria for
The Nasdaq SmallCap Market under Marketplace Rule 4310(c)(2)(a). If the Company
meets the initial listing criteria, the Company will be granted an additional
180 calendar day grace period to demonstrate compliance. Otherwise the
securities may be delisted. The Company has explored and is continuing to
explore alternatives to remain listed on Nasdaq. The Company believes it has
sufficient alternatives and will execute on any one or more these alternatives
to remain listed. The Company believes a potential delisting is not probable.
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.
13
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, 2002 have been derived
from the Company's audited consolidated financial statements. This financial
information should be read in conjunction with management's discussion and
analysis (Item 7) and the notes to the Company's consolidated financial
statements (Item 14).
Historical
Years ended June 30,
--------------------
(In thousands, except per share data)
1998 (1) 1999 (2) 2000 (3) 2001 2002 (17)
-------- -------- -------- -------- ---------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues (13) $26,792 $ 33,489 $ 62,488 $127,723 $ 38,972
Amortization and depreciation $ 1,486 $ 2,282 $ 6,028 $ 11,730 $ 3,324
Loss from operations $ (580) $ (7,072) $(11,292) $(50,645) $(59,622) (14)
Loss from continuing operations $ (780) $ (7,646)(5) $(41,130)(8) $(67,091)(10) $(60,824)
(Loss) gain from discontinued operations - - $(34,543)(9) $ 1,252 (11) -
Net loss $ (780) $ (7,646) $(75,673) $(65,839) $(65,683) (15)
Net loss available to common stockholders $(4,724)(4) $(20,181)(6) $(75,673) $(66,492) (12) $(66,096) (16)
Loss per common share (18):
Continuing operations $ (2.20) $ (8.32) $ (9.28) $ (12.61) $ (10.02)
Discontinued operations - - $ (7.80) $ 2.76 -
Extraordinary item - - - - (.79)
Cumulative efffect of change in accounting - - - $ (2.64) -
------- ------- -------- -------- --------
$(2.20) $ (8.32) $ (17.08) $ (12.49) $ (10.81)
Weighted average common shares
Outstanding 2,149 2,426 4,430 5,320 6,115
OTHER DATA:
EBITDA (7) $ 906 $(4,346) $ (4,844) $ 1,499 $ (14,388)
Net cash used in operating activities: $(1,886) $ (45) $(11,357) $ (5,663) $ (15,254)
Net cash (used in) provided by investing
activities: $(7,281) $(18,939) $(60,116) $ (3,365) $ 70,555
Net cash provided by (used in) financing
activities: $12,474 $ 16,035 $ 78,904 $ (3,407) $ (51,929)
Net cash (used in) provided by discontinued
operations - - $ (812) $ 4,256 $ (682)
Historical
As of June 30,
(In thousands)
CONSOLIDATED BALANCE SHEETS DATA: 1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Cash and cash equivalents $ 6,235 $ 3,285 $ 9,904 $ 1,725 $ 4,416
Working capital (deficit) $ 5,013 $(9,647) $ 813 $ 29,146 $(2,583)
Total intangible assets $24,771 $56,978 $154,016 $ 54,363 $ 16,075
Total assets $49,781 $97,627 $245,567 $170,390 $ 50,545
Total long term debt, net of current portion $ 204 $ 5,937 $ 36,157 $ 4,429 $ 176
Total stockholders' equity $17,325 $48,928 $113,957 $ 68,778 $ 1,390
(1) 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 are included in the consolidated statements of operations
beginning December 1, 1997. In May 1998, MKTG formed Metro Fulfillment, Inc., a
new operating subsidiary.
(2) 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
14
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 are
included in the consolidated statements of operations beginning May 14, 1999.
(3) 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 for these acquisitions are
included in the consolidated statements of operations from the date of the
respective acquisition.
(4) Net loss available to common shareholders includes the impact of dividends
on preferred stock for a non-cash beneficial conversion feature of $3,214.
(5) Loss from continuing operations includes a severance charge of $1,125 and a
compensation expense on option grants of $444 which were granted at exercise
prices below market value.
(6) Net loss available 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.
(7) EBITDA is defined as earnings from continuing operations before interest,
income tax, depreciation, amortization and other non-recurring and 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 MKTG'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. MKTG's definition of
EBITDA may not be the same as that of similarly captioned measures used by other
companies.
EBITDA Reconciliation: 1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Loss from operations $ (580) $ (7,072) $(11,292) $(50,645) $(59,622)
Depreciation and amortization $ 1,486 $2,282 $ 6,027 $ 11,730 $ 3,324
Goodwill write-down - - - - $ 35,900
Loss (gain) on sale of subsidiary - - - $ 36,697 $ (1,748)
Compensation expense on option grants and
severance - $ 444 $ 106 $ 2,001 $ 480
Abandoned lease reserve - - - - $ 7,032
Legal settlements and legal fees $ 315 $ 1,716 $ 246
-------- -------- ------ ------ -------
EBITDA $ 906 $ (4,346) $ (4,844) $ 1,499 $(14,388)
====== ======== ======= ======== ========
(8) Loss from continuing operations includes a charge for $27,216 for
write-downs of certain Internet investments.
(9) On September 21, 2000, the Company's Board of Directors approved a plan to
discontinue the operation of its WiredEmpire subsidiary, which at the time
included the assets of Pegasus Internet, Inc. The Company shut down operations,
which was completed by the end of January 2001. The estimated losses associated
with WiredEmpire are $34,543 and are reported as discontinued operations. All
prior period results have been classified as discontinued operations.
(10) Loss from operations includes a loss on Grizzard assets held for sale of
$36,697, severance costs of $2,001, write-down of Internet investments of $7,578
and expenses associated with settlement of litigation of $1,298.
(11) In January 2001, the company sold certain assets of WiredEmpire for a gain
of $1,252.
(12) Net loss available to common stockholders includes a cumulative effect of a
change in accounting of $14,064 in connection with the adoption of EITF 00-27.
(13) Pursuant to the Securities and Exchange Commission's Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," ("SAB
101") the Company has reviewed its accounting policies for the recognition of
revenue. SAB 101 was required to be implemented in fourth quarter 2001. SAB 101
provides guidance on applying generally accepted accounting principles to
revenue recognition in financial statements. The Company's policies for revenue
recognition are consistent with the views expressed within SAB 101. See Note 2,
"Significant Accounting Policies," for a description of the Company's policies
for revenue recognition. The adoption of SAB 101 did not have a material effect
on the Company's consolidated financial position, cash flows, or results of
operations. Although net income was not materially affected, the adoption did
have an impact on the amount of revenue recorded as the revenue associated with
the Company's list sales and services product line are now required to be shown
net of certain costs. The Company believes this presentation is consistent with
the guidance in Emerging Issues Task Force ("EITF") 99-19, "Reporting Revenue
Gross as a Principal Versus Net as an Agent." All prior periods presented have
been restated.
(14) Loss from operations includes an impairment write-down of goodwill of
$35,900, a write-down of abandoned leased property of $7,000 and
15
severance costs of $480, net of $1,748 gain on sale of Grizzard.
(15) Net loss includes an extraordinary item of $4,859 for a loss on early
extinguishments of debt.
(16) Net loss available to common stockholders includes a deemed dividend in the
amount of $413 in connection with the redemption of preferred stock.
(17) Effective July 31, 2001, the Company sold Grizzard Communications Group,
Inc. The results of operations for Grizzard are no longer included in the
Company's results from the date of sale.
(18) On October 9, 2001, the Board of Directors approved a six-for-one reverse
split of the common stock. Par value of the common stock remains $.01 per share
and the number of authorized shares of common stock remains at 75,000,000. The
stock split was effective October 15, 2001. All stock prices and per share
amounts have been retroactively restated to reflect the reverse split.
The following is a summary of the quarterly operations for the years ended June
30, 2001 and 2002.
Historical
Quarter ended June 30,
(In thousands, except per share data)
(unaudited)
9/30/2000 12/31/2000 3/31/2001 6/30/2001
--------- ---------- --------- ---------
Revenues (1) $29,182 $ 40,588 $ 31,115 $ 26,838
(Loss) income from operations $(2,964) $ 537 $ (4,957) $(43,261) (2)
Loss from continuing operations $(5,072) $ (1,434) $(14,239) (3) $(46,346)
Income from discontinued operation - - $ 1,252 (4) -
Net loss $(5,072) $ (1,434) $(12,987) $(46,346)
Net income (loss) attributable to common stockholders
before cumulative effect of change in accounting $ 3,522 $ 3,383 $(12,987) $(46,346)
Net income (loss) available to common stockholders $ 3,522 $(10,681) (5) $(12,987) $(46,346)
Basic and diluted earnings (loss) per share (11):
Continuing operations $ (1.01) $ (0.27) $ (2.66) $ (8.25)
Discontinued operations 1.71 $ 0.91 $ .23 -
Cumulative effect of change in accounting - $ (2.66) - -
---------------------------------------------------------
Basic and diluted earnings (loss) per share $ 0.70 $ (2.02) $ (2.43) $ (8.25)
=========================================================
Historical
Quarter ended June 30,
(In thousands, except per share data)
(unaudited)
9/30/2001 12/31/2001 3/31/2002 6/30/2002
--------- ---------- --------- ---------
Revenues (1) $ 11,682 $ 8,179 $ 8,696 $ 10,415
Loss from operations $ (4,907) (6) $ (4,266) $(39,287) (7) $(11,162) (8)
Net loss $(10,314) (9) $ (4,177) $(39,439) $(11,753)
Net loss available to common stockholders $(10,314) $ (4,177) $(42,202)(10) $ (9,403) (10)
Basic and diluted loss per share (11):
Continuing operations before extraordinary item $ (0.96) $ (0.74) $ (6.47) $ (1.41)
Extraordinary item $ (0.87) - - -
---------------------------------------------------------
Basic and diluted loss per share $ (1.83) $ (0.74) $ (6.47) $ (1.41)
=========================================================
(1) Prior periods presented have been restated in accordance with SAB
101. See Note 2, "Significant Accounting Policies," of the Company's
consolidated financial statements included in this Form 10-K.
(2) Includes loss on assets held for sale of $36,697.
(3) Includes severance costs of $2,001, write-down of Internet investments
of $7,578 and expenses associated with settlement of litigation of
$1,298.
(4) In January 2001, the Company sold certain assets of WiredEmpire for a gain
of $1,252.
(5) Includes a cumulative effect of a change in accounting of $14,064 in
connection with the adoption of EITF 00-27.
(6) Includes gain on sale of Grizzard of $1,723.
16
(7) Includes a write-off due to goodwill impairment of $35,900.
(8) Includes a write-down of abandoned leased property of $7,000 and severance
costs of $480.
(9) Includes extraordinary loss on early extinguishments not for the quarters
ended March 31, 2002 and June 30, 2002, of debt of $4,859.
(10) Includes a deemed dividend in the amount of $413 net, for the quarters
ended March 31,2002 and June 30, 2002, in connection with the redemption of
preferred stock.
(11) On October 9, 2001, the Board of Directors approved a six-for-one reverse
split of the common stock. Par value of the common stock remains $.01 per
share and the number of authorized shares of common stock remains at
75,000,000. The stock split was effective October 15, 2001. All stock
prices and per share amounts have been retroactively restated to reflect
the reverse split.
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, 2002. This should be read in
conjunction with the financial statements, and notes thereto, included in this
Form 10-K.
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The following is a brief description of the more
significant accounting policies and methods used by the Company.
Revenue Recognition:
Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements," ("SAB 101") the
Company has reviewed its accounting policies for the recognition of revenue. SAB
101 was implemented in fourth quarter 2001. SAB 101 provides guidance on
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company's policies for revenue recognition are
consistent with the views expressed within SAB 101. The adoption of SAB 101, did
not have a material effect on the Company's consolidated financial position,
cash flows, or results of operations. Although net income was not materially
affected, the adoption did have an impact on the amount of revenue recorded as
the revenue associated with the Company's list sales and services product line
are now required to be shown net of certain costs. The Company believes this
presentation is consistent with the guidance in Emerging Issues Task Force
("EITF") 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent."
All prior periods presented have been restated.
Revenues derived from list sales and services and database marketing are
recognized when the lists are shipped or the services have been performed and
completed. For all list sales and services, the Company serves as broker between
unrelated parties who wish to purchase a certain list and unrelated parties who
have the desired list for sale. Accordingly, the Company recognizes trade
accounts receivable and trade accounts payable, reflecting a "gross-up" of the
two concurrent transactions. The transactions are not structured providing for
the right of offset. List sales and services are reflected net of costs on the
accompanying statement of operations.
Revenues derived from on-site telemarketing and telefundraising are generally
based on hourly billing rates and a mutually agreed percentage of amounts
received by the Company's client from a campaign. These services are performed
on-site at the clients' location. These revenues are earned and recognized when
the cash is received by the respective client. Revenues derived from off-site
telemarketing and telefundraising are generally based on a mutually agreed
amount per telephone contact with a potential donor without regard to amounts
raised for the client. These services are performed at the Company's calling
center. These revenues are earned and recognized when the services are
performed.
Revenues derived from marketing communications are recognized when the campaign
is mailed provided that the Company has no remaining performance commitments
under marketing communications arrangements. The Company's revenue is not
dependent on the number of respondents to the direct mailing. Due to the sale of
Grizzard in July 2002, the Company no longer provides marketing communications
services.
Prior to January 2001, revenues and costs derived from interactive marketing
were deferred until services were completed and recognized using a straight-line
method over the remaining life of the contract. In January 2001, due to the
installation of
17
a time management system, which allows for the gathering of hours by project,
all new contracts utilize the percentage of completion method preferred by
Statement of Position 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts." The contract lives are generally three
months to one year. The impact of changing revenue recognition methods did not
have a material impact on the Company's financial results.
Intangible Assets:
Intangible assets consist of covenants not to compete, capitalized software,
customer base, list databases, assembled work force, present value of favorable
leases and the remaining excess purchase price paid over identified intangible
and tangible net assets of acquired companies. Intangible assets are amortized
under the straight-line method over the period of expected benefit of 3 to 40
years.
The development costs of software are capitalized in accordance with Statement
of Position 98-1, "Accounting for Costs of Computer Software Developed or
Obtained for Internal Use" and once completed, are amortized using the
straight-line method over three to five years. The Company capitalizes labor and
related costs incurred for the development of software after management
authorizes the funding of the project and it is probable that the project will
be completed and the software will be used to perform the function intended.
At each balance sheet date, the Company reviews the recoverability of goodwill,
not identified with long-lived assets, based on estimated undiscounted future
cash flows from operating activities compared with the carrying value of
goodwill, and recognizes any impairment on the basis of discounted cash flows.
Due to the weakened economy and lower than expected results, based on current
information, the Company has determined that there will not be sufficient cash
flows to recover all of the remaining book value of goodwill. As a result, the
Company has recognized an impairment charge of approximately $35.9 million,
which is included in the loss from operations for the year ended June 30, 2002.
Long-Lived Assets:
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," the Company reviews for
impairment of long-lived assets and certain identifiable intangibles whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In general, the Company will recognize impairment when
the sum of undiscounted future cash flows (without interest charges) is less
than the carrying amount of such assets. The measurement for such impairment
loss is based on the fair value of the asset.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. The most significant estimates and assumptions made in the
preparation of the consolidated financial statements relate to the carrying
amount and amortization of intangible assets, deferred tax valuation allowance,
abandoned lease reserves and the allowance for doubtful accounts. Actual results
could differ from those estimates.
To facilitate an analysis of MKTG 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 3,200,000 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.
On September 21, 2000, the Company's Board of Directors approved a plan to
discontinue the operation of its WiredEmpire subsidiary. The Company shut down
the operations by the end of January 2001. In the fiscal year ended June 30,
2000, the
18
Company recorded losses associated with WiredEmpire of approximately $34.5
million. These losses included approximately $19.5 million in losses from
operations through the measurement date and approximately $15.0 million of loss
on disposal which included approximately $2.0 million in losses from operations
from the measurement date through the estimated date of disposal. It also
included provisions for vested compensation expense of $2.0 million, write down
of assets to net realizable value of $8.8 million, lease termination costs of
$1.9 million, employee severance and benefits of $1.8 million and other
contractual commitments of $.5 million. As of June 30, 2002, approximately $1.7
million remains accrued representing payments expected to be made related to
legal and lease obligations.
The assets and liabilities of WiredEmpire have been separately classified on the
consolidated balance sheets as "Net current liabilities of discontinued
operations." Results of these operations have been classified as discontinued
operations and all prior period results have been restated.
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.
On June 13, 2001, the board of directors and management of the Company approved
a formal plan to sell Grizzard. In July 2001, the Company completed its sale of
all the outstanding capital stock of its Grizzard subsidiary to Omnicom Group,
Inc. The purchase price of the transaction was $89.8 million payable in cash,
net of a working capital adjustment. As a result of the sale agreement, the
Company fully paid the term loan of $35.5 million and $12.0 million line of
credit. The Company recorded an extraordinary loss of approximately $4.9 million
in the year ended June 30, 2002 as a result of the early extinguishment of debt.
At June 30, 2001, the assets and liabilities of Grizzard were classified as net
assets held for sale in the amount of $80.9 million. In the year ended June 30,
2001, the Company recognized a loss on assets held for sale in the amount of
$36.7 million representing a write-down of the amount of assets held for sale to
net realizable value. Grizzard's revenues included in the Company's statement of
operations for the fiscal years ended June 30, 2002, 2001 and 2000 were $2.8
million, $82.8 million and $19.6 million, respectively. Grizzard's net loss
included in the Company's statement of operations for the fiscal years ended
June 30, 2002, 2001 and 2000 were $8.5 million, $41.0 million and $3.8 million,
respectively.
Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements," ("SAB 101") the
Company has reviewed its accounting policies for the recognition of revenue. SAB
101 was implemented in fourth quarter 2001. SAB 101 provides guidance on
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company's policies for revenue recognition are
consistent with the views expressed within SAB 101. See Note 2, "Significant
Accounting Policies," for a description of the Company's policies for revenue
recognition. The adoption of SAB 101 did not have a material effect on the
Company's consolidated financial position, cash flows, or results of operations.
Although net income was not materially affected, the adoption did have an impact
on the amount of revenue recorded as the revenue associated with the Company's
list sales and services product line are now required to be shown net of certain
costs. The Company believes this presentation is consistent with the guidance in
Emerging Issues Task Force ("EITF") 99-19, "Reporting Revenue Gross as a
Principal Versus Net as an Agent." All prior periods presented have been
restated.
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 springtime and continue
during the summer months.
19
Results of Operations Fiscal 2002 Compared to Fiscal 2001
- ---------------------------------------------------------
Revenues of approximately $39.0 million for the year ended June 30, 2002 (the
"Current Period") decreased by $88.7 million or 69% over revenues of $127.7
million during the year ended June 30, 2001 (the "Prior Period"). Of the
decrease, approximately $80.0 million is attributable to the sale of Grizzard in
July 2001. Revenue excluding the effects of the disposition of Grizzard
decreased by approximately $8.7 million, due primarily to decreased list
services and database marketing billing and the move of the telemarketing call
center. The decrease in such billing is a direct result of the impact of a
weaker economy resulting in a reduction in our clients' marketing campaigns. In
addition, since September 11 unexpected client cancellations, postponed
fundraising campaigns and lost clients contributed to the decrease. Furthermore,
for a period of time following September 11 our telemarketing call center was
closed and all campaigns for such period were cancelled.
Salaries and benefits of approximately $35.9 million in the Current Period
decreased by approximately $34.4 million or 49% over salaries and benefits of
approximately $70.3 million in the Prior Period. Of the decrease, approximately
$31.0 million is attributable to the sale of Grizzard in July 2001. Salaries and
benefits, excluding the effects of the disposition of Grizzard, decreased by
approximately $3.4 million or 9% due to decreased headcount in several areas of
the Company in the Current Period.
Severance of approximately $.5 million in the Current Period is due to amounts
paid and accrued in connection with reductions in the work force completed in
both the December and June quarters. Severance of approximately $2.0 million in
the Prior Period is due to the severance of an executive officer and
restructuring of certain businesses in the Northeast.
Direct costs of approximately $5.8 million in the Current Period decreased by
$30.2 million or 84% over direct costs of $36.0 million in the Prior Period. Of
the decrease, approximately $29.9 million is attributable to the sale of
Grizzard in July 2001. Direct costs excluding the effects of the disposition of
Grizzard decreased by $.3 million or 6% due to the lower costs associated with
the Database marketing business.
Selling, general and administrative expenses of approximately $18.7 million in
the Current Period decreased by approximately $1.7 million or 8% over comparable
expenses of $20.4 million in the Prior Period. Of the decrease, approximately
$4.5 million is attributable to the sale of Grizzard in July 2001. Selling,
general and administrative expenses, excluding the effects of the disposition of
Grizzard, increased by $2.8 million, principally due to abandoned lease reserves
of $7.0 million, offset by $4.2 million decrease in professional fees, travel
and other expenses due to consolidation of certain office spaces and the
reduction of headcount in the Current Period.
Gain on sale of subsidiary of approximately $1.7 million in the Current Period
represents an adjustment to the previous estimate based on the actual sale price
of Grizzard as compared to its actual book value at the closing date. The
difference predominantly occurred due to the operational losses incurred by
Grizzard since the end of the Prior Period. The loss on sale of subsidiary of
approximately $36.7 million in the Prior Period is attributable to the write
down of assets held for sale in connection with the sale of Grizzard.
Settlement of litigation of approximately $.3 million and $1.3 million in the
Current and Prior Periods, respectively, was due to the settlement of lawsuits
with a previously owned subsidiary and one of their employees.
Goodwill impairment of $35.9 million in the Current Period represents an
impairment charge for the write down of goodwill. Due to the weakened economy
and lower than expected results, based on current information, the Company has
determined that there will not be sufficient cash flows to recover all of the
remaining book value of goodwill.
Depreciation and amortization expense of approximately $3.3 million in the
Current Period decreased by approximately $8.4 million over expense of $11.7
million in the Prior Period. Of the decrease, approximately $8.0 million is
attributable to the sale of Grizzard in July 2001. Depreciation and amortization
expense excluding the effects of the disposition of Grizzard decreased by $.4
million due to lower amortization expense on goodwill in the Current Period due
to the aforementioned write down.
Unrealized loss on investments of approximately $7.6 million in the Prior Period
is attributable to the write-off of internet
20
investments whose decline in value was deemed to be other than temporary.
Interest expense and other, net of approximately $.7 million in the Current
Period decreased by approximately $8.1 million over interest expense and other,
net of approximately $8.8 million in the Prior Period. Of the decrease,
approximately $7.3 million is attributable to the sale of Grizzard in July 2001
and the repayment of the related debt. Interest expense and other net, excluding
the effects of the disposition of Grizzard decreased by $.8 million due to
interest income on excess cash.
The net provision for income taxes of approximately $.5 million in the Current
Period increased by approximately $.4 million over net provision for income
taxes of approximately $.1 million from the Prior Period. The increase relates
to state taxes on the gain on sale of Grizzard which could not be offset by
losses incurred at the parent company level or other operating subsidiaries. In
addition, the Company records provisions for state and local taxes incurred on
taxable income or equity at the operating subsidiary level, which cannot be
offset by losses incurred at the parent company level or other operating
subsidiaries. The Company has recognized a full valuation allowance against the
deferred tax assets because it is more likely than not that sufficient taxable
income will not be generated during the carry forward period to utilize the
deferred tax assets.
As a result of the above, loss before extraordinary item of $60.8 million in the
Current Period decreased by $5.0 million over comparable net loss of $65.8 in
the Prior Period. The Company's results include Grizzard's net losses of $8.5
million in the Current Period and $41.0 million in the Prior Period.
In the Prior Period, the Company sold certain assets of WiredEmpire for a gain
of $1.3 million, which is included in income from discontinued operations.
In connection with the sale of Grizzard, the Company fully paid the term loan of
$35.5 million and $12.0 million line of credit. As a result, the Company
recorded an extraordinary loss of approximately $4.9 million in the Current
Period as a result of the early extinguishments of debt.
In the Current Period, the redemption of 5,000 preferred shares for $5.0
million, less the carrying value of the preferred shares, including the
beneficial conversion feature previously recorded in equity on the balance
sheet, resulted in a deemed dividend of $412,634 which was recorded to
additional paid-in capital and included in the calculation of net loss
attributable to common stockholders.
In the Prior Period, the Company exchanged 328,334 shares of unregistered MKTG
common stock for WiredEmpire preferred stock. The exchange resulted in a gain of
$13.4 million for the year ended June 30, 2001, which was recorded through
equity and is included in net loss attributable to common stockholders and
earnings per share - discontinued operations.
In September 2000, the EITF issued EITF 00-27 "Application of EITF 98-5 to
Certain Convertible Instruments." EITF 00-27 addresses the accounting for
convertible preferred stock issued since May 1999 that contain nondetachable
conversion options that are in the money at the commitment date. EITF 00-27
changed the approach of calculating the conversion price used in determining the
value of the beneficial conversion feature from using the conversion price
stated in the preferred stock certificate to using the accounting conversion
price. The adoption of this EITF increased the original value of the beneficial
conversion feature from zero to $14.1 million. MKTG adopted EITF 00-27 in
December 2000 and as a result has recorded a cumulative effect of a change in
accounting of approximately $14.1 million in the year ended June 30, 2001
related to the March 2000 issuance of MKTG convertible preferred stock. The
cumulative effect was recorded to additional paid-in capital and treated as a
deemed dividend in the calculation of net loss attributable to common
stockholders.
Results of Operations Fiscal 2001 Compared to Fiscal 2000
- ---------------------------------------------------------
Revenues of approximately $127.7 million for the year ended June 30, 2001 (the
"Current Period") increased by $65.2 million or 104% over revenues of $62.5
million during the year ended June 30, 2000 (the "Prior Period"). Of the
increase, approximately $64.0 million is attributable to acquisitions completed
at the end of the third quarter in the Prior Period. Revenue excluding the
effects of acquisitions increased by approximately $1.2 million, due primarily
to increased telemarketing and website development revenue volume. The revenue
increases for database marketing were partially offset by elimination of certain
lower margin list service contracts.
21
Direct costs of approximately $36.0 million in the Current Period increased by
$24.2 million or 205% over direct costs of $11.8 million in the Prior Period. Of
the increase, approximately $23.7 million is attributable to acquisitions
completed at the end of the third quarter in the Prior Period. Direct costs
excluding the effects of acquisitions increased by $.5 million or 4% resulting
from the increased operating cost of the database marketing centers which
generated increased revenue volume. Direct costs as a percentage of revenue
increased from 19% in the Prior Period to 28% in the Current Period. The
increase in the direct costs as a percentage of revenues results from the
acquisition in March 2000 of Grizzard, which has a higher direct cost percentage
of revenues.
Salaries and benefits of approximately $70.3 million in the Current Period
increased by approximately $27.6 million or 65% over salaries and benefits of
approximately $42.7 million in the Prior Period. Of the increase, approximately
$24.6 million is attributable to acquisitions completed at the end of the third
quarter in the Prior Period. Salaries and benefits, excluding acquisitions,
increased by approximately $3.0 million or 7% due to an increase in corporate
headcount and salary increases.
Severance of approximately $2.0 million in the Current Period is due to the
severance of an executive officer and restructuring of certain businesses in the
Northeast. There are no further amounts to be incurred under these contracts.
Selling, general and administrative expenses of approximately $20.4 million in
the Current Period increased by approximately $7.4 million or 57% over
comparable expenses of $13.0 million in the Prior Period. Of the increase,
approximately $5.6 million is attributable to acquisitions completed at the end
of the third quarter in the Prior Period. Selling, general and administrative
expenses, excluding the effects of acquisitions, increased by $1.8 million,
principally due to legal fees associated with a terminated acquisition of $.4
million, increased rent expense due to expansion of certain office space and
increased corporate expenses due to merger and acquisition activity.
Loss on assets held for sale of approximately $36.7 million in the Current
Period represents a write-down of the amount of Grizzard assets held for sale to
net realizable value.
Settlement of litigation of approximately $1.3 million in the Current Period
increased by approximately $1.0 million over $.3 million in the Prior Period.
The increase is due to the settlement of a lawsuit with a previously owned
subsidiary and one of their employees of $1.3 million in the Current Period. In
the Prior Period, an unrelated lawsuit was settled at $.3 million.
Depreciation and amortization expense of approximately $11.7 million in the
Current Period increased by approximately $5.7 million over expense of $6.0
million in the Prior Period. This is primarily attributable to an increase in
depreciation and amortization expense resulting from acquisitions.
Unrealized loss on investments of approximately $7.6 million in the Current
Period and $27.2 million in the Prior Period is attributable to the write-off of
internet investments whose decline in value was deemed to be other than
temporary.
Interest expense and other, net of approximately $8.8 million in the Current
Period increased by approximately $6.4 million over interest expense and other,
net of approximately $2.4 million in the Prior Period, principally due to
interest expense on outstanding borrowings relating to the acquisition of
Grizzard, less interest expense in the Prior Period on related party debt, which
was fully paid in July 2000. Approximately $1.6 million of interest expense in
the current period resulted from the amortization of a discount on debt in
connection with the financing for the Grizzard acquisition.
The net provision for income taxes of approximately $.1 million in the Current
Period decreased by approximately $.2 million over the provision of
approximately $.3 million in the Prior Period. The Company records provisions
for state and local taxes incurred on taxable income or equity at the operating
subsidiary level, which cannot be offset by losses incurred at the parent
company level or other operating subsidiaries. The Company has recognized a full
valuation allowance against the deferred tax assets because it is more likely
than not that sufficient taxable income will not be generated during the carry
forward period to utilize the deferred tax assets.
As a result of the above, loss from continuing operations of $67.1 million in
the Current Period increased by $26.0 million over comparable net loss of $41.1
million in the Prior Period.
22
In the Current Period, the Company sold certain assets of WiredEmpire for a gain
of $1.3 million, which is included in income from discontinued operations.
In the year ended June 30, 2001, the Company exchanged 328,334 shares of
unregistered MKTG common stock for WiredEmpire preferred stock. The exchange
resulted in a gain of $13.4 million for the year ended June 30, 2001, which was
recorded through equity and is included in net loss attributable to common
stockholders and earnings per share - discontinued operations.
In September 2000, the EITF issued EITF 00-27 "Application of EITF 98-5 to
Certain Convertible Instruments." EITF 00-27 addresses the accounting for
convertible preferred stock issued since May 1999 that contain nondetachable
conversion options that are in the money at the commitment date. EITF 00-27
changed the approach of calculating the conversion price used in determining the
value of the beneficial conversion feature from using the conversion price
stated in the preferred stock certificate to using the accounting conversion
price. The adoption of this EITF increased the original value of the beneficial
conversion feature from zero to $14.1 million. MKTG adopted EITF 00-27 in
December 2000 and as a result has recorded a cumulative effect of a change in
accounting of approximately $14.1 million in the year ended June 30, 2001
related to the March 2000 issuance of MKTG convertible preferred stock. The
cumulative effect was recorded to additional paid-in capital and treated as a
deemed dividend in the calculation of net loss attributable to common
stockholders.
Capital Resources and Liquidity
- -------------------------------
Financial Reporting Release No. 61, which was recently released by the SEC,
requires all companies to include a discussion to address, among other things,
liquidity, off-balance sheet arrangements, contractual obligations and
commercial commitments. The Company currently does not maintain any off-balance
sheet arrangements.
Leases:
The Company leases various office space and equipment under non-cancelable
long-term leases. The Company incurs all costs of insurance, maintenance and
utilities.
Future minimum rental commitments under all non-cancelable leases, as of June
30, 2002 are as follows:
Operating Leases Capital Leases
---------------- --------------
2003 $ 2,893,259 $ 88,535
2004 2,776,100 33,050
2005 2,391,773 -
2006 1,890,870 -
2007 1,743,862 -
Thereafter 4,973,110 -
----------- -------
$16,668,974 121,585
Less interest (7,008)
-------
Present value of
capital lease obligations $114,577
========
Debt: In August 2001, the Company entered into a stand-by letter of credit with
a bank in the amount of $4,945,874 to support the remaining obligations under a
certain holdback agreement with the former shareholders of Grizzard
Communications Group, Inc. ("Grizzard"). The letter of credit is collateralized
by cash, which has been classified as restricted cash in the current asset
section of the balance sheet as of June 30, 2002. The Company has a remaining
obligation of $4,548,061 under the holdback agreement. The remaining obligation
is included in current portion of long-term obligations and is payable in March
2003. In connection with an acquisition, the Company incurred promissory notes
payable to former shareholders, payable monthly at 5.59% interest through
January 2004. The remaining obligation is $465,594 in aggregate with $176,336
included in long-term obligations, net of current portion.
23
Preferred Stock: The Company did not meet certain financial goals for the fiscal
year ended June 30, 2001 as set forth in the warrant issued in connection with a
1997 sale of Series D preferred stock. Accordingly, the warrant in the amount of
1,778,334 shares with an exercise price of $.06 per share was issued in October
2001. As a result of the issuance of the warrant, certain antidilultive
provisions of the Company's Series E preferred stock were triggered. The
conversion price of such shares was reset to a fixed price of $2.346 based on an
amount equal to the average closing bid price of the Company's common stock for
ten consecutive trading days beginning on the first trading day of the exercise
period of the aforementioned warrant. No further adjustments will be made to the
conversion price other than for stock splits, stock dividends or other organic
changes. The preferred shareholders converted 1,799 shares of preferred stock to
903,866 shares of common stock during the year ended June 30, 2002. The
preferred shareholders are precluded from converting any additional shares into
common stock pursuant to the current conditions of the agreement of February 24,
2000.
On February 19, 2002, the Company entered into standstill agreements, as
amended, with the Series E preferred shareholders in order for the Company to
continue to discuss with multiple parties regarding the possibility of either
restructuring or refinancing the remainder of the preferred stock. The Company
is also reviewing other options, including replacing the existing Preferred
Stockholders with an alternative strategic investor or selling certain assets to
obtain funds to attempt to repurchase the Series E preferred stock at a
discount. Under the terms of the standstill agreements, and subject to the
conditions specified therein, each preferred shareholder had agreed that it
would not acquire, hedge (short), proxy, tender, sell, transfer or take any
action with regard to its holdings during the standstill period, which was
extended until August 15, 2002. Since the Company did not obtain refinancing or
an alternative investor by August 15, 2002, the Company was obligated under such
agreement to seek stockholder approval to convert the preferred stock to common
stock, by October 2, 2002, based upon the 19.99% NASDAQ stock issuance
limitations and the terms of the preferred stock itself due to the change in
conversion price and increase in the number of exercisable shares. The Company's
commitments as a result of the standstill agreements included a partial
redemption of 5,000 of the Series E preferred shares for $5,000,000, thereby
reducing the number of Series E preferred shares to 23,201 at June 30, 2002. The
value of the preferred stock was initially recorded at a discount allocating a
portion of the proceeds to a warrant. The redemption of such preferred shares
for $5,000,000, less the carrying value of the preferred shares, including the
beneficial conversion feature previously recorded in equity on the balance
sheet, resulted in a deemed dividend of $412,634 which was recorded to
additional paid-in capital and included in the calculation of net loss
attributable to common stockholders for the year ended June 30, 2002.
On October 2, 2002, the common stockholders approved the right of the Series E
preferred shareholders to convert their preferred stock to common stock.
Subsequently, the preferred shareholders converted 951.44 shares of preferred
stock to 508,829 shares of common stock. The redemption value of preferred
stock, including interest and penalties, at October 15, 2002 is $35,308,982.
In June 2002, the Company received notification from The Nasdaq Stock Market
("Nasdaq") that the Company's common stock has closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4).
If the Company cannot meet compliance under the Nasdaq rules by December 24,
2002, Nasdaq will determine whether the Company meets the initial listing
criteria for The Nasdaq SmallCap Market under Marketplace Rule 4310(c)(2)(a). If
the Company meets the initial listing criteria, the Company will be granted an
additional 180 calendar day grace period to demonstrate compliance. Otherwise
the securities may be delisted. An event of default under the Series E preferred
stock includes failing to maintain the listing of the Company's common stock on
Nasdaq or other such similar exchange. Such default would trigger a mandatory
redemption in cash under the terms of the Series E preferred stock agreement.
The Company does not have sufficient cash to satisfy such redemption. The
Company has explored and is continuing to explore alternatives to remain listed
on Nasdaq. The Company believes it has sufficient alternatives and will execute
on any one or more these alternatives to remain listed. The Company believes a
potential delisting is not probable.
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, 2002, the Company
had cash and cash equivalents of $4.4 million and accounts receivable net of
allowances of $18.9 million.
The Company incurred losses from continuing operations of $60.8 million in the
Current Period. Cash used in operating activities from continuing operations was
approximately $15.3 million. Net cash used in operating activities principally
resulted from the loss from continuing operations offset by goodwill impairment,
early extinguishments of debt and other non-cash items in the Current Period.
The Company incurred losses from continuing operations of $67.1 million in the
Prior
24
Period. Cash used in operating activities from continuing operations was
approximately $5.7 million. Net cash used in operating activities principally
resulted from the loss from continuing operations offset by an increase in
accrued expenses and other liabilities, unrealized loss on investments, loss on
assets held for sale and other non-cash items in the Prior Period.
In the Current Period, net cash of $70.6 million was provided by investing
activities consisting of net proceeds from the sale of Grizzard of $78.6
million, offset by the increase in restricted cash of $4.9 million, issuance of
related party note of $1.0 million and purchases of property and equipment of
$2.1 million. In the Prior Period, net cash of $3.4 million was used in
investing activities consisting of $1.8 million purchases of property and
equipment and $1.6 million of capitalized software.
In the Current Period, net cash of $51.9 million was used in financing
activities. Net cash used in financing activities consisted of $46.6 million
repayments of debt and capital leases, redemption of a portion of preferred
stock of $5.0 million and repayment of related party notes payable of $.3
million. In the Prior Period, net cash of $3.4 million was used in financing
activities. Net cash used in financing activities consisted primarily of $11.3
million in repayments of debt and capital leases, net of $1.8 million in
proceeds, net of fees from private placement of common stock, $2.0 million cash
overdrafts and $4.1 million increase in lines of credit and related party note
payable.
In the Current Period net cash of $.7 million was used in discontinued
operations. In the prior period, net cash of $4.3 million was provided by
discontinued operations.
At June 30, 2002, the Company had amounts outstanding of $2.3 million on its
three lines of credit. The Company had $1.2 million available on its lines of
credit at June 30, 2002. On October 4, 2002, the Company repaid approximately
$.8 million of one credit facility and agreed with the lender to cease future
advances of this facility. Currently, availability under the two remaining
facilities is approximately $.9 million. As of June 30, 2002, certain
subsidiaries of the Company are in violation of certain working capital and net
worth covenants of their credit agreements for which the Company has received
waivers from the lender. The Company may be out of compliance in a future period
and unable to obtain waivers from the lender, who may call the debt, which could
have a material adverse effect on the Company's liquidity and ability to
continue as a going concern.
On June 13, 2001, the board of directors and management of the Company approved
a formal plan to sell Grizzard. In July 2001, the Company completed its sale of
all the outstanding capital stock of its Grizzard subsidiary to Omnicom Group,
Inc. The purchase price of the transaction was $89.8 million payable in cash,
net of a working capital adjustment. As a result of the sale agreement, the
Company fully paid the term loan of $35.5 million and $12.0 million line of
credit. The Company recorded an extraordinary loss of approximately $4.9 million
in the September 2001 quarter as a result of the early extinguishment of debt.
In February 2001, the Company entered into a strategic partnership agreement
(the "Agreement") with Paris based Firstream. Firstream paid the Company $3.0
million and in April 2001 received 1.5 million restricted shares of common
stock, plus a two-year warrant for 400,000 shares priced at $3.00 per share. The
warrant is exercisable over a two year period. The warrant is valued at $.9
million as determined by the Black-Scholes option pricing model and was recorded
to equity. In accordance with the Agreement, the Company recorded proceeds of
$1.8 million; net of fees and expenses, as equity and $1.0 million was
designated as deferred revenue to provide for new initiatives. As part of the
strategic partnership, MKTG will launch several new Firstream products and
services in the areas of wireless communications, online music and consumer
marketing programs for early adopters of new products. The remaining balance is
$.8 million at June 30, 2002. In July 2002, the Company received a letter from
Firstream canceling the strategic partnership agreement and requesting payment
of the remaining $.8 million, which has been categorized as a liability at June
30, 2002. The Company is having discussions with Firstream regarding the
remaining liability.
The Company has limited capital resources and has incurred significant recurring
losses and negative cash flows from operations. In addition, certain contingent
liabilities may require significant resources. The Company may be required to
redeem the Series E preferred stock and repay its outstanding lines of credit
depending on future events. The Company does not believe its cash on hand along
with existing sources of cash are sufficient to fund its cash needs over the
next twelve months under the current capital structure. In order to address this
situation, the Company has had and continues to have discussions with multiple
parties regarding the possibility of either restructuring or refinancing the
remainder of the Series E preferred stock. The Company is also reviewing
options, which include replacing the existing Preferred Stockholders with an
25
alternative strategic investor or selling certain assets to obtain funds to
attempt to repurchase the Series E preferred stock at a discount. The Company
will also need to raise additional equity financing or obtain other sources of
liquidity (including debt or other resources). The Company has instituted cost
reduction measures, including the reduction of workforce. In addition, the
Company is reviewing its present operations with the view towards further
reducing its cost structure and workforce and to find alternative means of
increasing revenue. There can be no assurance that the Company will be
successful in restructuring its preferred stock or obtaining additional
financing. Additionally, there can be no assurances that the Company's cost
reduction efforts will be successful or that the Company will achieve a level of
revenue that will allow it to return to profitability. In the event the Company
is unable to raise needed financing and achieve profitability, operations will
need to be scaled back or discontinued. These circumstances raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result should the Company be unable to continue as a
going concern.
Summary of Recent Accounting Pronouncements
- -------------------------------------------
In June 2001, the FASB approved two new pronouncements: SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 applies to all business combinations with a closing date after June 30,
2001. This Statement eliminates the pooling-of-interests method of accounting
and further clarifies the criteria for recognition of intangible assets
separately from goodwill. SFAS No. 142 eliminates the amortization of goodwill
and indefinite-lived intangible assets and initiates an annual review for
impairment. Identifiable intangible assets with a determinable useful life will
continue to be amortized. The amortization provisions apply to goodwill and
other intangible assets acquired after June 30, 2001. Goodwill and other
intangible assets acquired prior to June 30, 2001 will be affected upon
adoption. The adoption will require the Company to cease amortization of its
remaining net goodwill balance and to perform an impairment test of its existing
goodwill based on a fair value concept. The provisions of SFAS No. 142 will be
effective as of July 1, 2002. The Company is still in the process of
reallocating previously identifiable intangibles that do not meet the criteria
of SFAS No. 141 into goodwill and evaluating the useful lives of our remaining
identifiable intangibles. The Company is in the process of completing the step
one transitional assessment of goodwill. As of June 30, 2002, the Company has
net unamortized goodwill and other intangibles and of $16,075,132, after the
goodwill impairment of $35,900,000 and amortization expense of $2,400,450 and
$7,590,848 for the years ended June 30, 2002 and 2001, respectively. Net loss
from continuing operations and the respective basic and fully diluted loss per
share from continuing operations would have been $58,423,848 and $9.55,
respectively, if the new pronouncements were effective as of the beginning of
the fiscal year.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the disposal of long-lived assets. SFAS No. 144 becomes effective
for financial statements issued for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. The Company does not expect
the adoption of this statement to have a material impact on the Company's
results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections as of April 2002." SFAS No.
145 becomes effective for financial statements issued for fiscal years beginning
after May 15, 2002. The adoption will not have a material impact on the
Company's financial position and results of operations. However, the loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods will be reclassified to operating expense as the loss does not meet the
criteria in APB Opinion No. 30 "Reporting the Results of Operations Reporting
the Effects of Disposal of a Segment of a Business," for classification as an
extraordinary item.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a restructuring)." Under Issue No.
94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at
the date of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair market value only when the liability is incurred
and not when management has completed the plan. The provisions of this Statement
are effective for exit or disposal activities that are initiated after December
31, 2002. The Company is currently reviewing the provisions of SFAS No. 146.
26
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 14(a)(1).
Item 9 - Changes in and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
27
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 28.
(2) Financial statement schedules - see "Index to Financial Statements"
on page 28.
(3) Exhibits:
2.1 Agreement and Plan of Merger By and Among MKTG Services, Inc., GCG Merger
Corp., and Grizzard Advertising, Inc. (m)
2.2 Stock Purchase Agreement by and between Omnicom Group Inc. and
MKTG Services, Inc.
3.1 Amended and Restated Articles of Incorporation (c)
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 (f)
3.4 By-Laws (c)
3.5 Certificate of Amendment of Articles of Incorporation for increase
in number of authorized shares to 36,300,000 total (i)
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 (n)
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. (q)
3.10 Certificate of Amendment to Certificate of Designation, Preferences,
and Rights of Series E Convertible Preferred Stock of
Marketing Services Group, Inc. (r)
3.11 Certificate of Amendment of Articles of Incorporation for change of name
to MKTG Services, Inc. (a)
10.1 1991 Stock Option Plan (d)
10.2 Security Agreement between Milberg Factors, Inc. and Metro Services
Group, Inc. (j)
10.3 Security Agreement between Milberg Factors, Inc. and Stephen Dunn &
Associates, Inc. (k)
10.4 J. Jeremy Barbera Employment Agreement (t)
10.5 Rudy Howard Employment Agreement (t)
10.6 Stephen Killeen Employment Agreement (t)
10.7 Form of Private Placement Agreement (j)
10.8 Purchase agreement dated as of December 24, 1997, by and between the
Company and GE Capital (l)
10.9 Stockholders Agreement by and among the Company, GE Capital and certain
existing stockholders of the Company, dated as of December 24, 1997 (l)
10.10 Registration Rights Agreement by and among the Company and GE Capital,
dated as of December 24, 1997 (l)
10.11 Warrant, dated as of December 24, 1997,
to purchase shares of Common Stock of the Company (l)
10.12 First Amendment to
Preferred Stock Purchase Agreement Between General Electric Capital
Corporation and Marketing Services Group, Inc. (o)
10.13 Promissory note (o)
10.14 Warrant Agreement (o)
10.15 Second Amendment (p)
10.16 Warrant Agreement between Marketing Services Group, Inc. and Marshall
Capital Management, Inc. (q)
10.17 Warrant Agreement between Marketing Services Group, Inc. and RCG
International Investors, LDC. (q)
28
10.18 Registration Rights Agreement by and Among The Company, RCG International
Investors, LDC and Marshall Capital Management, Inc. (q)
10.19 Securities Purchase Agreement by and Among The Company, RCG International
Investors, LDC and Marshall Capital Management, Inc. (q)
10.20 Credit Agreement Among Grizzard Communications, Inc. and Paribas (s)
10.21 Firstream Letter Agreement (b)
10.22 Steven Killeen Termination Agreement (b)
10.23 Standstill Agreement between MKTG Services, Inc. and Castle Creek
Technology Partners LLC (u)
10.24 Standstill Agreement between MKTG Services, Inc. and RCG International
Investors, LDS (u)
10.25 Letter Amendment to Standstill Agreement between MKTG Services, Inc. and
Castle Creek Technology Partners LLC(v)
10.26 Letter Amendment Standstill Agreement between MKTG Services, Inc. and RCG
International Investors, LDS(v)
21 List of Company's subsidiaries (a)
23 Consent of PricewaterhouseCoopers LLP (a)
24 Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002(a)
(a) Included herein in the Company's Report on Form 10K- for the fiscal year
ended June 30, 2002
(b) Incorporated by reference to the Company's Report on Form 10K- for the
fiscal year ended June 30, 2001
(c) Incorporated by reference from the Company's Registration Statement on
Form S-4, Registration Statement No. 33-45192
(d) Incorporated by reference to the Company's Registration Statement on
Form S-8, Registration Statement 333-30839
(e) Incorporated herein by reference to the Company's Report on Form 8-K
dated April 25, 1995
(f) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended June 30, 1995
(g) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended March 31, 1996
(h) Incorporated by reference to the Company's Report on Form 8-K dated
June 7, 1996
(i) Incorporated by reference to the Company's Report on Form 10-K dated June
30, 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 from the Company's Registration Statement on
Form S-4, Registration Statement No. 33-85233.
(n) Incorporated by reference to the Company's Report on Form 10-KSB dated
June 30, 1998
(o) Incorporated by reference to the Company's Report on Form 8-K dated
May 13, 1999
(p) Incorporated by reference to the Company's Report on Form 8-K dated
August 30, 1999
(q) Incorporated by reference to the Company's Report on Form 8-K dated
February 29, 2000
(r) Incorporated by reference to the Company's Report on Form 8-K/A dated
March 23, 2000
(s) Incorporated by reference to the Company's Report on Form 10-Q dated
May 16, 2000
(t) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal year ended June 30, 2000
(u) Incorporated by reference to the Company's Report on Form 8-K dated
February 19, 2002
(v) Incorporated by reference to the Company's Report on Form 8-K dated
July 30, 2002
(b) Reports on Form 8-K.
None
29
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.
MKTG SERVICES, INC.
-------------------
(Registrant)
By: /s/ J. Jeremy Barbera
---------------------
J. Jeremy Barbera
Chairman of the Board and Chief Executive Officer
Date: October 15, 2002
- -----------------------
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 Chief Executive October 15, 2002
- -------------------------------
J. Jeremy Barbera Officer (Principal Executive Officer)
/s/ Cindy H. Hill Chief Accounting Officer October 15, 2002
- ------------------------------------
Cindy H. Hill (Principal Accounting Officer)
/s/ Alan I. Annex Director and Secretary October 15, 2002
- -------------------------------
Alan I. Annex
/s/ John T. Gerlach Director October 15, 2002
- -------------------------------
John T. Gerlach
/s/ Seymour Jones Director October 15, 2002
- -------------------------------
Seymour Jones
/s/ C. Anthony Wainwright Director October 15, 2002
- -------------------------------
C. Anthony Wainwright
30
CERTIFICATIONS
I, Cindy H. Hill, certify that:
1. I have reviewed the annual report on this Form 10-K of MKTG Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered in this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
/s/ Cindy H. Hill
-----------------
Cindy H. Hill
Chief Accounting Officer
EXPLANATORY NOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 of the
Certification as set forth in Form 10-K have been omitted, consistent with the
Transition Provisions of SEC Exchange Act Release No. 34-46427, because this
Annual Report on Form 10-K covers a period ending before the Effective Date of
Rules 13a-14 and 15d-14.
I, J. Jeremy Barbera, certify that:
1. I have reviewed the annual report on this Form 10-K of MKTG Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered in this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
/s/ J. Jeremy Barbera
---------------------
J. Jeremy Barbera
Chairman of the Board and Chief Executive Officer
EXPLANATORY NOTE REGARDING CERTIFICATION: Representations 4, 5 and 6 of the
Certification as set forth in Form 10-K have been omitted, consistent with the
Transition Provisions of SEC Exchange Act Release No. 34-46427, because this
Annual Report on Form 10-K covers a period ending before the Effective Date of
Rules 13a-14 and 15d-14.
31
MKTG SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
[Items 14]
(1) FINANCIAL STATEMENTS: Page
--------------------- ----
Report of Independent Accountants 33
Consolidated Balance Sheets as of June 30, 2002 and
June 30, 2001 34
Consolidated Statements of Operations
Years Ended June 30, 2002, 2001, and 2000 35
Consolidated Statement of Stockholders' Equity
Years Ended June 30, 2002, 2001, and 2000 36-37
Consolidated Statements of Cash Flows
Years Ended June 30, 2002, 2001, and 2000 38
Notes to Consolidated Financial Statements 39-62
(2) FINANCIAL STATEMENT SCHEDULES:
------------------------------
Schedule II - Valuation and Qualifying Accounts 63
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.
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of MKTG Services, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of MKTG
Services, Inc. and Subsidiaries at June 30, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2002, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has limited capital resources and has incurred
significant recurring losses and negative cash flows from operations, in
addition to certain contingencies that may require significant resources, all of
which raise substantial doubt about its ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty. Management's plan with respect to this matter
is set forth as discussed in Note 2.
As discussed in Note 2 to the consolidated financial statements, during the year
ended June 30, 2001, the Company changed its method of accounting for securities
with beneficial conversion features as a result of the issuance of Emerging
Issues Task Force Issue No. 00-27, "Application of Issue No. 98-5 to Certain
Convertible Instruments."
/s/ PRICEWATERHOUSECOOPERS LLP
September 26, 2002
Except for Note 20 as to which the date is October 15, 2002
New York, New York
33
MKTG SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2002 AND 2001
ASSETS 2002 2001
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 4,416,289 $ 1,725,412
Accounts receivable, net of allowance for doubtful
accounts of $4,408,985 and $2,423,610, respectively 18,900,889 27,507,629
Restricted cash 4,945,874 -
Net assets held for sale - 80,882,272
Other current assets 1,292,167 990,741
------------ --------------
Total current assets 29,555,219 111,106,054
Property and equipment, net 3,259,545 2,346,152
Intangible assets, net 16,075,132 54,362,534
Related party note receivable 978,534 -
Other assets 676,348 2,574,762
-------------- --------------
Total assets $ 50,544,778 $ 170,389,502
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowing $ 2,280,384 $ 13,021,966
Accounts payable-trade 17,360,764 27,119,339
Related party payable - 400,000
Accrued expenses and other current liabilities 5,860,112 6,074,222
Net current liabilities of discontinued operations 1,714,406 2,396,171
Current portion of capital lease obligations 85,315 115,598
Current portion of long-term obligations 4,837,321 32,833,101
--------- ----------
Total current liabilities 32,138,302 81,960,397
Capital lease obligations, net of current portion 29,262 89,913
Long-term obligations, net of current portion 176,336 4,339,078
Other liabilities 6,145,848 1,516,976
----------- ---------
Total liabilities 38,489,748 87,906,364
---------- ----------
Minority interest in preferred stock of discontinued subsidiary 280,946 280,946
Convertible preferred stock - $.01 par value; 150,000 shares authorized; 10,384,064 13,424,198
23,201 and 30,000 shares of Series E issued and outstanding
as of June 30, 2002 and 2001, respectively
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock - $.01 par value; 75,000,000 authorized; 6,721,030 and
5,691,250 shares issued as of June 30, 2002 and 2001, respectively 67,210 56,912
Additional paid-in capital 229,840,379 231,555,514
Accumulated deficit (227,123,859) (161,440,722)
Less: 70,649 shares of common stock in treasury, at cost (1,393,710) (1,393,710)
-------------- -----------
Total stockholders' equity 1,390,020 68,777,994
-------------- ----------
Total liabilities and stockholders' equity $ 50,544,778 $ 170,389,502
============= ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
34
MKTG SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2002, 2001, AND 2000
2002 2001 2000
---- ---- ----
Revenues $ 38,972,109 $127,722,689 $62,487,934
------------ ------------ -----------
Operating costs and expenses:
Salaries and benefits 35,881,241 70,295,543 42,657,063
Severance 479,922 2,000,545 -
Direct costs 5,832,214 35,970,726 11,787,810
Selling, general and administrative 18,678,722 20,375,812 12,992,682
(Gain) loss on sale of subsidiary (1,747,830) 36,696,523 -
Settlement of litigation 246,000 1,297,970 315,000
Goodwill impairment 35,900,000 - -
Depreciation and amortization 3,323,748 11,730,313 6,027,871
------------ ------------ ---------
Total operating costs and expenses 98,594,017 178,367,432 73,780,426
------------ ----------- ----------
Loss from operations (59,621,908) (50,644,743) (11,292,492)
------------ ------------ ------------
Unrealized loss on investments - (7,577,560) (27,216,200)
Interest expense and other, net (686,454) (8,786,334) (2,355,848)
------------ ------------- ----------
Loss from continuing operations
before provision for income taxes (60,308,362) (67,008,637) (40,864,540)
Provision for income taxes 515,936 81,930 265,683
----------- -------------- ------------
Loss from continuing operations (60,824,298) (67,090,567) (41,130,223)
Discontinued operations (Note 16):
Loss from discontinued operations - - (19,488,943)
Gain (loss) from disposal of discontinued operations - 1,251,725 (15,054,037)
------------ ----------- -----------
Income (loss) from discontinued operations - 1,251,725 (34,542,980)
------------ ----------- -----------
Loss before extraordinary item (60,824,298) (65,838,842) (75,673,203)
Extraordinary item:
Loss on early extinguishments of debt (4,858,839) - -
------------ ----------- -----------
Net loss (65,683,137) (65,838,842) (75,673,203)
Gain on redemption of preferred stock of discontinued
subsidiary (Note 16) - 13,410,273 -
Deemed dividend - preferred redemption (Note 12) (412,634) - -
------------ ------------ -----------
Net loss attributable to common stockholders before
cumulative effect of change in accounting (66,095,771) (52,428,569) (75,673,203)
Cumulative effect of change in accounting (Note 2) - (14,063,897) -
------------ ------------ -----------
Net loss attributable to common stockholders $(66,095,771) $(66,492,466) $(75,673,203)
============ ============ ===========
Basic and diluted earnings (loss) share:
Continuing operations $(10.02) $(12.61) $(9.28)
Discontinued operations - 2.76 (7.80)
Extraordinary item (.79) - -
Deemed dividend and change in accounting - (2.64) -
------------- -------- ------------
Basic and diluted loss per share $(10.81) $(12.49) $(17.08)
============ ============ ===========
Weighted average common shares outstanding 6,114,877 5,319,597 4,430,370
============ ============ ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
35
MKTG SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001, AND 2000
Common Stock Additional Treasury Stock
------------------ Paid-in Deferred Accumulated ----------------
Shares Amount Capital Compensation Deficit Shares Amount Totals
----------------------------------------------------------------------------------------
Balance July 1, 1999 3,752,294 $37,523 $71,000,588 $(788,095) $(19,928,677) (70,649) $(1,393,710) $48,927,629
Shares issued upon exercise of
stock options 79,214 792 1,952,428 1,953,220
Shares issued upon exercise of warrants 21,536 215 386,772 386,987
Issuance of common stock for
acquisition of Grizzard
Communications, Inc. 424,300 4,243 48,467,770 48,472,013
Issuance of common stock for
acquisition of The Coolidge Company 3,709 37 365,324 365,361
Issuance of common stock for
acquisition of Cambridge
Intelligence Agency, Inc. 20,245 202 1,557,490 1,557,692
Issuance of common stock for
investment in Latin Fusion, Inc. 250,000 2,500 27,503,900 27,506,400
Shares issued in connection with
private placement of common
stock, net of stock issuance costs 521,764 5,218 30,526,611 30,531,829
Issuance of shares for executive bonus 685 7 64,993 65,000
Purchase of warrants by Directors 2,500 2,500
Warrants issued in connection with the
settlement of a lawsuit 315,000 315,000
Warrants issued in connection
with bank financing 5,023,500 ` 5,023,500
Recognition of stock based
compensation expense 7,798,897 788,095 8,586,992
Warrants issued in connection with
Series E Preferred Stock 15,936,103 15,936,103
Net and comprehensive loss (75,673,203) (75,673,203)
------------------------------------------------------------------------------------------
Balance June 30, 2000 5,073,747 $50,737 $210,901,876 - $(95,601,880) (70,649) $(1,393,710)$113,957,023
Shares issued upon exercise of
stock options 456 5 8,138 8,143
Issuance of common stock for
exchange of preferred stock
of discontinued subsidiary 328,334 3,283 5,035,197 5,038,480
Gain on redemption of
WiredEmpire preferred stock 13,410,273 13,410,273
Issuance of common stock for
settlement of earn-out provision 22,046 220 249,876 250,096
Issuance of common stock in
connection with settlement
of lawsuit 16,667 167 141,016 141,183
Issuance of common stock for
Firstream strategic partnership 250,000 2,500 863,601 866,101
Issuance of warrants in connection
with Firstream stock issuance 945,537 945,537
Beneficial conversion feature
associated with Series E
Preferred Stock 14,063,897 14,063,897
Accretion of beneficial
conversion feature - Series E
Preferred Stock (14,063,897) (14,063,897)
Net and comprehensive loss (65,838,842) (65,838,842)
------------------------------------------------------------------------------------------
Balance June 30, 2001 5,691,250 $56,912 $231,555,514 - $ (161,440,722) (70,649) $(1,393,710) $68,777,994
==========================================================================================
The accompanying notes are an integral part of these Consolidated Financial
Statements.
36
MKTG SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001, AND 2000
Common Stock Additional Treasury Stock
---------------- Paid-in Deferred Accumulated ----------------
Shares Amount Capital Compensation Deficit Shares Amount Totals
--------------------------------------------------------------------------------------
Balance July 1, 2001 5,691,250 $56,912 $231,555,514 - $(161,440,722) (70,649) $(1,393,710) $68,777,994
Shares issued upon conversion of
Series E Preferred Stock 903,866 9,039 748,758 757,797
Issuance of common stock for
settlement of earn-out provision 125,914 1,259 298,741 300,000
Redemption of Series E Preferred
Stock redemption (2,762,634) (2,762,634)
Net and comprehensive loss (65,683,137) (65,683,137)
----------------------------------------------------------------------------------------------
Balance June 30, 2002 6,721,030 $67,210 $229,840,379 - $ (227,123,859) (70,649) $(1,393,710) $1,390,020
================================================================================================
The accompanying notes are an integral part of these Consolidated Financial
Statements.
37
MKTG SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2002, 2001, AND 2000
2002 2001 2000
---- ---- ----
OPERATING ACTIVITIES:
Net loss $(65,683,137) $(65,838,842) $(75,673,203)
(Income) loss from discontinued operations - (1,251,725) 34,542,980
----------- ----------- ----------
Loss from continuing operations (65,683,137) (67,090,567) (41,130,223)
Adjustments to reconcile net loss to net cash used in operating
activities:
Goodwill impairment 35,900,000 - -
Extraordinary loss on early extinguishments of debt 4,858,839 - -
Gain on sale of minority interest - - (45,163)
Depreciation 923,298 4,139,465 1,826,792
Amortization 2,400,450 7,590,848 4,210,487
Unrealized loss on investments - 7,522,846 27,216,200
Compensation expense on option and stock grants - - 105,800
Amortization of debt issuance costs 266,900 2,215,014 830,185
Loss on disposal of assets - 41,941 87,813
(Gain) loss on sale of subsidiary (1,747,830) 36,696,523 -
Settlement of litigation - 1,072,970 315,000
Bad debt expense 1,268,692 1,802,727 427,578
Net cash included in assets held for sale - (206,139) -
Changes in assets and liabilities (including assets
held for sale), net of effects from acquisitions:
Accounts receivable 10,060,349 (991,275) 990,092
Inventory (697,908) 633,035 (2,701,359)
Other current assets (290,366) 679,371 1,231,867
Other assets (215,401) (496,954) (614,971)
Trade accounts payable (8,785,114) (1,986,682) 299,605
Accrued expenses and other liabilities 6,487,700 2,713,964 (4,406,582)
------------ --------- -----------
Net cash used in operating activities (15,253,528) (5,662,913) (11,356,879)
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired of $580,468 - - (50,187,882)
Purchases of capitalized software - (1,549,558) (1,612,776)
Purchases of property and equipment (2,108,278) (1,815,023) (1,942,312)
Increase in restricted cash (4,945,874) - -
Issuance of related party note receivable (1,000,000) - -
Proceeds from sale of Grizzard 78,609,258 - -
Proceeds from sale of MFI - - 556,984
Investment in internet companies - - (6,930,300)
----------- ------------ ------------
Net cash provided by (used in) investing activities 70,555,106 (3,364,581) (60,116,286)
FINANCING ACTIVITIES:
Redemption of preferred stock (5,044,971) - -
Cash overdrafts - 1,952,136 -
Proceeds from issuance of common stock, net - 1,811,638 30,531,829
Proceeds from sale of Series E convertible preferred stock, net - (56,978) 29,417,279
Proceeds from exercise of stock options and warrants - 8,143 2,342,706
Net (repayments on) proceeds from credit facilities (10,741,582) 3,276,913 (571,722)
Proceeds from bank financing, net of closing costs - - 45,672,644
Proceeds from related party notes payable - 900,000 -
Principal payments under capital lease obligations (96,847) (347,359) (58,176)
Repayment of related party notes payable (250,000) (5,650,000) (5,000,000)
Repayments of long-term debt (35,795,534) (5,301,260) (23,430,506)
------------ ----------- ------------
Net cash (used in) provided by financing activities (51,928,934) (3,406,767) 78,904,054
Net cash (used in) provided by discontinued operations (681,767) 4,255,874 (812,307)
------------ --------- ---------
Net increase (decrease) in cash and cash equivalents 2,690,877 (8,178,387) 6,618,582
Cash and cash equivalents at beginning of year 1,725,412 9,903,799 3,285,217
--------- ----------- -----------
Cash and cash equivalents at end of year $4,416,289 $1,725,412 $9,903,799
========== ========== =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
38
MKTG SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY OVERVIEW AND PRINCIPLES OF CONSOLIDATION:
MKTG Services, Inc. ("MKTG" or the "Company") provides direct marketing,
database marketing, database management, analytics, interactive marketing
services, telemarketing and telefundraising, and media planning and buying.
Substantially all of the Company's business activity is conducted with customers
located within the United States.
The consolidated financial statements include the accounts of MKTG and its
wholly owned and majority owned subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation. Subsidiaries acquired
during the year are recorded from the date of the respective acquisition. As
more fully described in Note 16, WiredEmpire is presented as a discontinued
operation.
On June 13, 2001, the board of directors and management of the Company approved
a formal plan to sell Grizzard. At June 30, 2001, the assets and liabilities of
Grizzard have been classified as net assets held for sale in the amount of $80.9
million. On July 18, 2001, the Company entered into a definitive agreement to
sell Grizzard. On July 31, 2001, the Company completed its sale of all the
outstanding capital stock of its Grizzard subsidiary to Omnicom Group, Inc. (see
Note 19).
Effective April 1, 2002, the Company changed its legal name from Marketing
Services Group, Inc. to MKTG Services, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Liquidity:
The Company has limited capital resources and has incurred significant recurring
losses and negative cash flows from operations. In addition, certain
contingencies may require significant resources. The Company may be required to
redeem the Series E preferred stock (see Note 12 and Note 20) and repay its
outstanding lines of credit depending on future events (see Note 7 and Note 20).
The Company does not believe its cash on hand along with existing sources of
cash are sufficient to fund its cash needs over the next twelve months under the
current capital structure. In order to address this situation, the Company has
had and continues to have discussions with multiple parties regarding the
possibility of either restructuring or refinancing the remainder of the Series E
preferred stock. The Company is also reviewing options, which include replacing
the existing Preferred Stockholders with an alternative strategic investor or
selling certain assets to gain funds to attempt to repurchase the Series E
preferred stock at a discount. The Company will also need to raise additional
equity financing or obtain other sources of liquidity (including debt or other
resources). The Company has instituted cost reduction measures, including the
reduction of workforce. In addition, the Company is reviewing its present
operations with the view towards further reducing its cost structure and
workforce and to find alternative means of increasing revenue. There can be no
assurance that the Company will be successful in restructuring its preferred
stock or obtaining additional financing. Additionally, there can be no
assurances that the Company's cost reduction efforts will be successful or that
the Company will achieve a level of revenue that will allow it to return to
profitability. In the event the Company is unable to raise needed financing and
achieve profitability, operations will need to be scaled back or discontinued.
These circumstances raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments relating to the recoverability of the carrying amount of
recorded assets or the amount of liabilities that might result should the
Company be unable to continue as a going concern.
39
Cash and Cash Equivalents:
The Company considers investments with an original maturity of three months or
less to be cash equivalents.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the respective assets. Estimated useful lives are as follows:
Buildings ............................................... 20 years
Furniture and fixtures...................................2 to 7 years
Computer equipment and software..........................3 to 5 years
Leasehold improvements are amortized, using the straight-line method, over the
shorter of the estimated useful life of the asset or the term of the lease.
The cost of additions and betterments are capitalized, and repairs and
maintenance are expensed as incurred. The cost and related accumulated
depreciation and amortization of property and equipment sold or retired are
removed from the accounts and resulting gains or losses are recognized in
current operations.
Intangible Assets:
Intangible assets consist of covenants not to compete, capitalized software,
customer base, list databases, assembled work force, present value of favorable
leases and the remaining excess purchase price paid over identified intangible
and tangible net assets of acquired companies. Intangible assets are amortized
under the straight-line method over the period of expected benefit of 3 to 40
years.
The development costs of software are capitalized in accordance with Statement
of Position 98-1, "Accounting for Costs of Computer Software Developed or
Obtained for Internal Use" and once completed, are amortized using the
straight-line method over three to five years. The Company capitalizes labor and
related costs incurred for the development of software after management
authorizes the funding of the project and it is probable that the project will
be completed and the software will be used to perform the function intended.
At each balance sheet date, the Company reviews the recoverability of goodwill,
not identified with long-lived assets, based on estimated undiscounted future
cash flows from operating activities compared with the carrying value of
goodwill, and recognizes any impairment on the basis of discounted cash flows.
Due to the weakened economy and lower than expected results based, on available
information, the Company has determined that there will not be sufficient cash
flows to recover all of the remaining book value of goodwill. As a result, the
Company has recognized an impairment charge of approximately $35.9 million,
which is included in the loss from operations for the year ended June 30, 2002.
Long-Lived Assets:
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", the Company reviews for
impairment of long-lived assets and certain identifiable intangibles whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In general, the Company will recognize an impairment
when the sum of undiscounted future cash flows (without interest charges) is
less than the carrying amount of such assets. The measurement for such
impairment loss is based on the fair value of the asset.
Investments:
The Company makes investments for the promotion of business and strategic
purposes. Management determines the appropriate classification of its
investments in marketable securities at the time of purchase and evaluates
40
such investments at each balance sheet date.
The Company's marketable security investments are carried at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity until realized, unless the unrealized loss is deemed to be
other than temporary whereby the loss is recognized in the statement of
operations. An investment's unrealized loss is deemed to be other than temporary
when the marketable value has deteriorated and economic or other estimates of
fair value have deemed the recovery unlikely.
Non-marketable security investments are recorded at cost.
Revenue Recognition:
Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements," ("SAB 101") the
Company has reviewed its accounting policies for the recognition of revenue. SAB
101 was implemented in fourth quarter 2001. SAB 101 provides guidance on
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company's policies for revenue recognition are
consistent with the views expressed within SAB 101. The adoption of SAB 101 did
not have a material effect on the Company's consolidated financial position,
cash flows, or results of operations. Although net income was not materially
affected, the adoption did have an impact on the amount of revenue recorded as
the revenue associated with the Company's list sales and services product line
are now required to be shown net of certain costs. The Company believes this
presentation is consistent with the guidance in Emerging Issues Task Force
("EITF") 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent."
All prior periods presented have been restated.
Revenues derived from list sales and services and database marketing are
recognized when the lists are shipped or the services have been performed and
completed. For all list sales and services, the Company serves as broker between
unrelated parties who wish to purchase a certain list and unrelated parties who
have the desired list for sale. Accordingly, the Company recognizes trade
accounts receivable and trade accounts payable, reflecting a "gross-up" of the
two concurrent transactions. The transactions are not structured providing for
the right of offset. List sales and services are reflected net of costs on the
accompanying statement of operations.
Revenues derived from on-site telemarketing and telefundraising are generally
based on hourly billing rates and a mutually agreed percentage of amounts
received by the Company's client from a campaign. These services are performed
on-site at the clients' location. These revenues are earned and recognized when
the cash is received by the respective client. Revenues derived from off-site
telemarketing and telefundraising are generally based on a mutually agreed
amount per telephone contact with a potential donor without regard to amounts
raised for the client. These services are performed at the Company's calling
center. These revenues are earned and recognized when the services are
performed.
Revenues derived from marketing communications are recognized when the campaign
is mailed provided that the Company has no remaining performance commitments
under marketing communications arrangements. The Company's revenue is not
dependent on the number of respondents to the direct mailing. Due to the sale of
Grizzard in July 2001, the Company no longer provides marketing communications
services.
Prior to January 2001, revenues and costs derived from interactive marketing
were deferred until services were completed and recognized using a straight-line
method over the remaining life of the contract. In January 2001, due to the
installation of a time management system, which allows for the gathering of
hours by project, all new contracts utilize the percentage of completion method
preferred by Statement of Position 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts". The contract lives are
generally three months to one year. The impact of changing revenue recognition
methods did not have a material impact on the Company's financial results.
41
Income Taxes:
The Company recognizes deferred taxes for differences between the financial
statement and tax bases of assets and liabilities at currently enacted statutory
tax rates and laws for the years in which the differences are expected to
reverse. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The most significant
estimates and assumptions made in the preparation of the consolidated financial
statements relate to the carrying amount and amortization of intangible assets,
deferred tax valuation allowance, abandoned lease reserves and the allowance for
doubtful accounts. Actual results could differ from those estimates.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of temporary cash investments and trade
receivables. A significant portion of cash balances is maintained with one
financial institution and may, at time, exceed federally insurable amounts.
Collateral is generally not required on trade accounts receivable. Credit risk
on trade receivables is minimized as a result of the large and diverse nature of
the Company's customer base.
Earnings (Loss) Per Share:
On October 9, 2001, the Board of Directors approved a six-for-one reverse split
of the common stock. Par value of the common stock remained $.01 per share and
the number of authorized shares of common stock remained at 75,000,000. The
stock split was effective October 15, 2001. The effect of the stock split has
been reflected in the balance sheets and in all share and per share data in the
accompanying consolidated financial statements and Notes to Financial
Statements. Stockholders' equity accounts have been retroactively restated to
reflect the reclassification of an amount equal to the par value of the decrease
in issued common shares from the common stock account to the paid in capital
account.
In accordance with SFAS No. 128, "Earnings Per Share," basic earnings per share
is calculated based on the weighted average number of shares of common stock
outstanding during the reporting period. Diluted earnings per share gives effect
to all potentially dilutive common shares that were outstanding during the
reporting period. Stock options and warrants with exercise prices below average
market price in the amount of 1,778,334, 80,635, and 1,199,427 shares for the
years ended June 30, 2002, 2001 and 2000, respectively, were not included in the
computation of diluted earnings per share as they are antidilutive as a result
of net losses during the periods presented.
Convertible preferred stock in the amount of 12,677,284 shares for the year
ended June 30, 2002 were not included in the computation of diluted earnings per
share as they were antidilutive as a result of net losses during the periods
presented. Contingent warrants in the amount of 1,778,334 shares, as well as,
convertible preferred stock in the amount of 2,450,980 shares for the years
ended June 30, 2001 and 2000, were not included in the computation of diluted
earnings per share as they were antidilutive as a result of net losses during
the periods presented.
Change in Accounting:
42
In September 2000, the FASB Emerging Issues Task Force issued EITF 00-27
"Application of EITF 98-5 to Certain Convertible Instruments." EITF 00-27
addresses the accounting for convertible preferred stock issued since May 1999
that contain non-detachable conversion options that are in the money at the
commitment date. EITF 00-27 changed the approach of calculating the conversion
price used in determining the value of the beneficial conversion feature from
using the conversion price stated in the preferred stock certificate to using
the accounting conversion price. The adoption of this EITF increased the
original value of the beneficial conversion feature from zero to $14.1 million.
MKTG adopted EITF 00-27 in December 2000 and as a result has recorded a
cumulative effect of a change in accounting of approximately $14.1 million in
the year ended June 30, 2001 related to the March 2000 issuance of the Series E
Convertible Preferred Stock. The cumulative effect has been recorded to
additional paid-in capital and treated as a deemed dividend in the calculation
of net loss attributable to common stockholders.
Employee Stock-Based Compensation:
The accompanying financial position and results of operations for the Company
have been prepared in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"). Under APB No. 25, generally, no
compensation expense is recognized in the financial statements in connection
with the awarding of stock option grants to employees provided that, as of the
grant date, the number of shares and the exercise price of the award are fixed
and the fair value of the Company's stock, as of the grant date, is equal to or
less than the amount an employee must pay to acquire the stock.
The Company has elected the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). Stock based awards to
non-employees are accounted for under the provisions of SFAS 123.
Comprehensive Income:
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") establishes
standards for the reporting and display of comprehensive income and its
components. The Company has no items of other comprehensive income in any period
presented.
Summary of Recent Accounting Pronouncements:
In June 2001, the FASB approved two new pronouncements: SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 applies to all business combinations with a closing date after June 30,
2001. This Statement eliminates the pooling-of-interests method of accounting
and further clarifies the criteria for recognition of intangible assets
separately from goodwill. SFAS No. 142 eliminates the amortization of goodwill
and indefinite-lived intangible assets and initiates an annual review for
impairment. Identifiable intangible assets with a determinable useful life will
continue to be amortized. The amortization provisions apply to goodwill and
other intangible assets acquired after June 30, 2001. Goodwill and other
intangible assets acquired prior to June 30, 2001 will be affected upon
adoption. The adoption will require the Company to cease amortization of its
remaining net goodwill balance and to perform an impairment test of its existing
goodwill based on a fair value concept. The provisions of SFAS No. 142 will be
effective as of July 1, 2002. The Company is still in the process of
reallocating previously identifiable intangibles that do not meet the criteria
of SFAS No. 141 into goodwill and evaluating the useful lives of our remaining
identifiable intangibles. The Company is in the process of completing the step
one transitional assessment of goodwill. As of June 30, 2002, the Company has
net unamortized goodwill and other intangibles and of $16,075,132, after the
goodwill impairment of $35,900,000 and amortization expense of $2,400,450 and
$7,590,848 for the years ended June 30, 2002 and 2001, respectively. Net loss
from continuing operations and the respective basic and fully diluted loss per
share from continuing operations would have been $58,423,848 and $9.95,
respectively, if the new pronouncements
43
were effective as of the beginning of the fiscal year.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the disposal of long-lived assets. SFAS No. 144 becomes effective
for financial statements issued for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. The Company does not expect
the adoption of this statement to have a material impact on the Company's
results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections as of April 2002." SFAS No.
145 becomes effective for financial statements issued for fiscal years beginning
after May 15, 2002. The adoption will not have a material impact on the
Company's financial position and results of operations. However, the loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods will be reclassified to operating expense as the loss does not meet the
criteria in APB Opinion No. 30 "Reporting the Results of Operations Reporting
the Effects of Disposal of a Segment of a Business", for classification as an
extraordinary item.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a restructuring)." Under Issue No.
94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at
the date of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair market value only when the liability is incurred
and not when management has completed the plan. The provisions of this Statement
are effective for exit or disposal activities that are initiated after December
31, 2002. The Company is currently reviewing the provisions of SFAS No. 146.
Fair Value of Financial Instruments:
The carrying amounts of the Company's financial instruments, including cash,
accounts receivable, accounts payable and accrued liabilities, approximate fair
value because of their short maturities. The carrying amount of the Company's
lines of credit and long-term debt approximates the fair value of such
instruments based upon management's best estimate of interest rates that would
be available to the Company for similar debt obligations at June 30, 2002, 2001
and 2000.
Reclassifications:
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year's presentation.
3. ACQUISITIONS
Grizzard Communications Group, Inc:
On March 22, 2000, the Company acquired all of the outstanding capital stock of
Grizzard Advertising, Inc. and its subsidiaries, ("Grizzard"). Grizzard operates
a vertically integrated network of marketing communications companies. Total
cost of the acquisition was $104,032,415, consisting of $47,819,755 cash, a
$5,000,000 payable for certain hold back provisions, an aggregate of 2,545,799
shares of common stock of MKTG, valued at $19.04 per share and acquisition costs
in the amount of $2,739,535.
In accordance with the Grizzard purchase agreement, the $5,000,000 payable was
to be held for a period of three
44
years pending claims and other pre-acquisition matters which may arise. In the
year ended June 30, 2001, $1,126,516 of claims and other matters were identified
and recorded as a purchase price adjustment. Accordingly, goodwill and the
payable were reduced.
A portion of the cash purchase price was financed through a $58,000,000 senior
secured credit facility (see Note 10).
The purchase price has been allocated to the assets acquired and liabilities
assumed based on their estimated fair value as follows:
Working deficit $ (9,902,262)
Property and equipment 16,631,724
Intangible assets 97,302,953
-------------
$104,032,415
=============
In July 2001, the Company completed its sale of Grizzard (see Note 19).
Coolidge:
On March 31, 2000, the Company acquired all of the outstanding common shares of
The Coolidge Company ("Coolidge"). The total cost of the acquisition was
$1,632,379, consisting of $207,946 of cash and a $538,715 note payable, 22,251
shares of common stock valued at $16.42 per share and transaction and other
costs of $51,356. The purchase price has been allocated to the assets acquired
and liabilities assumed based on their estimated fair value as follows:
Working capital $295,843
Property and equipment 19,095
Intangible assets 1,317,441
----------
$1,632,379
==========
These acquisitions have been accounted for using the purchase method of
accounting. Accordingly, the operating results of these acquisitions are
included in the results of operations from the date of acquisition. The
following summary pro forma information presents the consolidated results of
operations of MKTG as if, Grizzard, and Coolidge, after including the impact of
certain adjustments, such as amortization of intangibles, adjustments in
salaries and increased interest on acquisition debt, had been acquired as of the
beginning of fiscal year 2000.
Supplemental
Pro forma information
For the year ended June 30,
Unaudited
---------
2000
----
Revenues $117,016,000
Loss from continuing operations $(39,602,000)
Net loss per common share
continuing operations,
basic and diluted $(1.39)
=======
45
The unaudited pro forma information is provided for informational purposes only.
It is based on historical information and is not necessarily indicative of
future results of operations of the consolidated entities.
4. INTERNET INVESTMENTS
During the fiscal years ended June 30, 2001 and 2000, the Company acquired
investments of approximately $34.8 million in certain internet companies. The
Company has taken charges of approximately $7.6 million and $27.2 million for
unrealized losses on Internet investments made during the fiscal years ended
June 30, 2001 and June 30, 2000, respectively, based on all available
information. The Company believes such losses are a result of significant
changes in valuations of Internet stocks and the performance of those companies.
The Company has suspended its Internet investment strategy and will focus all
efforts on the profitability of its core direct marketing operations. There are
no remaining internet investments recorded on the balance sheets as of June 30,
2002 and 2001.
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at June 30, 2002 and 2001 consist of the
following:
2002 2001
---- ----
Office furniture and equipment $ 4,898,171 $ 3,726,368
Assets under capital leases 658,579 658,579
Leasehold improvements 1,462,571 797,684
---------- -----------
7,019,321 5,182,631
Less accumulated depreciation and
amortization (3,759,777) (2,836,479)
----------- -----------
$ 3,259,545 $ 2,346,152
=========== ===========
Assets under capital leases as of June 30, 2002 and 2001 consist primarily of
computer and related equipment. Accumulated amortization for such assets
amounted to $658,579 and $605,394 as of June 30, 2002 and 2001, respectively.
6. INTANGIBLE ASSETS:
Intangible assets at June 30, 2002 and 2001 consist of the following:
Lives 2002 2001
----- ---- ----
Covenants not to compete 5 years $ 64,306 $ 1,650,000
Capitalized software 3-7 years 324,917 462,092
Customer base 15-20 years 850,388 3,461,573
List databases 3-10 years 451,978 966,748
Assembled workforce 5 years 58,096 472,184
Present value of favorable lease 53 months 28,287 347,920
Goodwill 10-40 years 14,789,374 57,576,600
---------- ---------- ----------
16,567,345 64,937,117
Less accumulated amortization (492,213) (10,574,583)
------------ ------------
$16,075,132 $54,362,534
=========== ===========
46
The decrease in intangible assets during 2002 was primarily due to an impairment
charge of approximately $35.9 million which is included in the loss from
operations for the year ended June 30, 2002.
As of June 30, 2002 and 2001 the unamortized balance of capitalized software was
$135,666 and $126,859, respectively. Amortization expense for software was
$46,550, $225,128 and $122,506 the years end June 30, 2002, 2001 and 2000,
respectively.
7. SHORT TERM BORROWINGS:
The Company has three renewable two-year credit facilities with a lender for
lines of credit aggregating $4,500,000, collateralized by certain tangible
assets of the Company. Borrowings are limited to the lesser of the maximum
availability or a percentage of eligible receivables. Interest is payable
monthly at the Chase Manhattan reference rate (4.75% and 9.5 % at June 30, 2002
and June 30, 2001, respectively) plus 1 1/2% with a minimum annual interest
requirement of $150,000. The facility requires an annual fee of 1% of the
maximum available line and has tangible net worth and working capital covenants.
As of June 30, 2002, there was an aggregate of approximately $1.2 million
available under these lines of credit (see Note 20).
As of June 30, 2002, certain subsidiaries of the Company are in violation of
certain working capital and net worth covenants of their credit agreements. The
Company may be unable to obtain waivers from the lender, who may call the debt,
which could have a material adverse effect on the Company's liquidity and
ability to continue as a going concern (see Note 2 and Note 20).
The Company had a revolving credit facility with a bank for up to $13,000,000
which expired in March 2005. Borrowings were limited to the lesser of the
maximum availability or a percentage of eligible receivables. Interest was
payable quarterly 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 (See Note 10). The Company was required to maintain certain
financial covenants related to consolidated EBITDA and consolidated debt to
capital, among others. In July 2001, the Company fully paid the amounts due (see
Note 19).
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses as of June 30, 2002 and 2001 consist of the following:
2002 2001
---- ----
Salaries and benefits $1,692,377 $1,621,988
Severance cost 628,477 1,830,000
Due to Firstream (see Note 13) 893,459 1,094,478
Abandoned lease reserves (see Note 11) 960,000 -
Other 1,685,799 1,527,756
--------- ---------
Total $5,860,112 $6,074,222
========== ==========
9. RELATED PARTY TRANSACTIONS:
On December 31, 2001, the Company advanced $1,000,000 pursuant to a promissory
note receivable agreement with an officer due and payable to the Company at
maturity, October 15, 2006. The Company recorded the note receivable at a
discount of approximately $57,955 to reflect the incremental borrowing rate of
the officer and is
47
being amortized as interest income over the term of the note using the
straight-line method. The note receivable is collateralized by current and
future holdings of MKTG common stock owned by the officer and bears interest at
prime. Interest is due and payable yearly on October 15th. The Company
recognized interest income of $36,488 for the year ended June 30, 2002. The note
will be forgiven in the event of a change in control.
During the year-ended June 30, 2001, the Company entered into a promissory note
payable agreement with an officer for up to $1,000,000, due and payable at
maturity, January 1, 2002. The promissory note bore interest at 15% per annum
and included certain prepayment penalties. During the year ended June 30, 2001,
the Company received advances of $900,000 and made repayments of $650,000. As of
June 30, 2001, there was approximately $250,000 of principal outstanding and
$150,000 of accrued interest and penalties, which was included in related party
payable. The remaining $250,000 was paid in the year ended June 30, 2002.
During July and August 1999, the Company entered into a promissory note
agreement with a venture fund in the amount of $4,500,000. The principal and all
accrued interest was payable in full on December 10, 1999 and bore interest at
the greater of 10% or prime plus 2%. An officer of the Company is a partner in
the venture fund. The principal amount and all accrued interest were prepaid in
September 1999 with proceeds from a private placement (see Note 13).
In connection with an acquisition, the Company entered into a promissory note
agreement with GE Capital in the amount of $10,000,000. The note was payable in
full on November 17, 1999 and accrued interest at 12% per annum. Interest was
payable in arrears on August 17, 1999 and on the maturity date. Concurrent with
issuance of the promissory note, the original outstanding warrant which was
issued in connection with GE Capital's purchase of redeemable convertible
preferred stock, was amended (see Note 12).
The Company recorded the GE Capital promissory note at a discount of $342,000 to
reflect an allocation of the proceeds to the estimated value of the amended
warrant. The discount was amortized into interest expense using the interest
method over the term of the debt. Approximately $256,500 and $85,500 of such
discount was included as interest expense for the years ended June 30, 2000 and
1999, respectively.
In August 1999, the GE Capital note was amended to extend the maturity date to
October 15, 2000 with interest to be paid quarterly and provided for certain
increases in the interest rate based on the time the principal remained
outstanding. In addition, in the event the Company completed a private placement
as defined on or before December 20, 1999 the maturity date was subject to
acceleration. During September 1999, the Company completed a private placement
of common stock for net proceeds of approximately $30.8 million (See Note 13).
In accordance with the amendment, $5,000,000, was immediately paid and the
remaining balance, included in current liabilities, was due and paid on July 1,
2000. As of June 30, 2002, GE Capital beneficially owned approximately 30% of
the outstanding common stock of the Company (see Note 12).
A member of the Board of Directors is a partner in a law firm which provides
legal services for which the Company incurred expenses aggregating approximately
$921,901, $1,014,524 and $1,272,000 for the years ended June 30, 2002, 2001 and
2000, respectively.
48
10. LONG TERM OBLIGATIONS:
Long-term obligations as of June 30, 2002 and 2001 consist of the following:
2002 2001
------ ------
Promissory notes payable - maturity
January 2004 (a) $ 465,596 $739,163
Term loan payable - maturity
March 2005 (b) - 35,500,000
Hold back provision for
Grizzard acquisition (c) 4,548,061 3,873,483
--------- ---------
Total long-term obligations 5,013,657 40,112,646
Less: Current portion of long-term obligations (4,837,321) (32,833,101)
Discount on notes payable to bank - (2,940,467)
---------- ------------
Long-term obligations, net of current portion $ 176,336 $ 4,339,078
============= ============
(a) In connection with an acquisition, the Company incurred
promissory notes payable to former shareholders, payable
monthly at 5.59% interest per year through January 2004.
(b) In March 2000, the Company entered into a $58,000,000 senior
secured credit agreement (the "Credit Agreement").
In connection with the sale of Grizzard, the Company fully
paid its term loan and line of credit. In connection with the
pay down, the Company recorded an extraordinary loss from
early extinguishments of debt of $4,858,839 due to a write-off
of unamortized debt discount and prepaid finance costs.
The Credit Agreement was comprised of a $13,000,000 revolving
line of credit, $40,000,000 term loan and $5,000,000 standby
letter of credit. The Credit Agreement was to expire on March
31, 2005 and bore 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 term
loan plus interest was payable in quarterly installments
through March 2005. The loans were collateralized by
substantially all of the assets of the Company and were
guaranteed by all of the Company's non-internet subsidiaries.
As of June 30, 2001, the interest rates were 9.5% for
borrowings under the prime rate and 7.6% for borrowings under
LIBOR. In October 2000, the stand by letter of credit was
cancelled.
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 warrant was
immediately exercisable for a period of ten years. The
$40,000,000 term loan was recorded at a discount of
approximately $5,000,000 to reflect an allocation of the
proceeds to the estimated value of the warrant as determined
by the Black-Scholes option pricing model and has been
amortized as interest expense over the life of the loan using
the interest method of accounting. Approximately $133,850,
$1,630,200 and $453,000 were recorded as interest expense for
the years ended June 30, 2002, 2001 and June 30, 2000,
respectively.
49
Under the terms of the Credit Agreement, the Company was
required to maintain certain financial covenants related to
consolidated EBITDA and consolidated debt to capital, among
others. The Company was in violation of certain covenants and
accordingly, the debt was classified as a current liability as
of June 30, 2001; however, in July 2001 the Company fully paid
the amounts due under the Credit Agreement (see Note 19).
(c) In August 2001, the Company entered into a stand-by letter of
credit with a bank in the amount of $4,945,874 to support the
remaining obligations under a certain holdback agreement with
the former shareholders of Grizzard Communications Group, Inc.
("Grizzard"). The letter of credit is collateralized by cash,
which has been classified as restricted cash in the current
asset section of the balance sheet as of June 30, 2002. The
Company has a remaining obligation of $4,548,061 under the
holdback agreement as of June 30, 2002. The remaining
obligation is payable in March 2003.
11. COMMITMENTS AND CONTINGENCIES:
Leases: The Company leases various office space and equipment under
non-cancelable long-term leases. The Company incurs all costs of insurance,
maintenance and utilities.
Future minimum rental commitments under all non-cancelable leases, as of June
30, 2002 are as follows:
Operating Leases Capital Leases
---------------- --------------
2003 $ 2,893,259 $ 88,535
2004 2,776,100 33,050
2005 2,391,773 -
2006 1,890,870 -
2007 1,743,862 -
Thereafter 4,973,110 -
------------ --------
$16,668,974 121,585
Less: Interest (7,008)
--------
Present value of
capital lease obligations $114,577
========
Rent expense was approximately $2,692,084, $3,853,006 and $2,921,739 for fiscal
years ended June 30, 2002, 2001 and 2000, respectively.
In fiscal year 2002, the Company incurred an estimated loss in connection with
the abandonment of certain leased office space of $7,031,630 which is recorded
in accrued expenses and other current liabilities and other liabilities. (see
Note 8).
Contingencies and Litigation: In June 1999, certain employees of the Company's
wholly owned subsidiary, MKTG TeleServices, Inc. voted against representation by
the International Longshore and Warehouse Union ("ILWU"). The ILWU has filed
unfair labor practice charges with the National Labor Relations Board ("NLRB")
alleging that the Company engaged in unlawful conduct prior to the vote. The
NLRB has issued a complaint seeking a bargaining order and injunctive relief
compelling the Company to recognize and bargain with the ILWU. A hearing on the
complaint was conducted before an NLRB Administrative Law Judge ("Judge") and
the record was closed in September 2000. In April 2001, the United States
District Court for the Northern District of California ("District Court") issued
an interim bargaining order pending the final ruling from the NLRB. The Company
thereafter began bargaining with the ILWU. On May 31, 2001, the Judge issued a
decision finding that the Company had engaged in certain unfair labor practices,
but dismissed other charges.
50
The Judge recommended among other things, that the Company recognize and bargain
with the union. The Company chose not to appeal this decision and on July 27,
2001, the NLRB adopted the Judge's findings and conclusions and ordered the
Company to take action recommended by the Judge. The Company is complying with
the order.
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 MKTG and
current and former officers of MKTG. The complaint sought compensatory and
punitive damages of $10,000,000 in connection with the individual's employment
at MFI. In March 2001, although admitting no liability, the Company entered into
a settlement agreement. The total cost of the settlement, recorded as of March
31, 2001, was $1,297,970 which included cash payments aggregating $225,000,
forgiveness of a note receivable over eight years and related interest of
$931,787 and the issuance of 100,000 shares of the Company's unregistered common
stock valued at $141,183.
In December 2001, an action was filed by a number of purchasers of preferred
stock of WiredEmpire, Inc., a discontinued subsidiary, in the Alabama State
Court (Circuit Court of Jefferson County, Alabama, 10 Judicial Circuit of
Alabama, Birmingham Division), against J. Jeremy Barbera, Chairman of the Board
and Chief Executive Officer of MKTG, MKTG and WiredEmpire, Inc. The plaintiffs'
complaint alleges, among other things, violation of sections 8-6-19(a)(2) and
8-6-19(c) of the Alabama Securities Act and various other provisions of Alabama
state law and common law, arising for the plaintiffs' acquisition of WiredEmpire
Preferred Series A stock in a private placement. The plaintiffs invested
approximately $1,650,000 in WiredEmpire's preferred stock and it seeks that
amount, attorney's fees and punitive damages. On February 8, 2002, the
defendants filed a petition to remove the action to federal court on the grounds
of diversity of citizenship. The Company believes that the allegations in the
complaint are without merit. The Company intends to vigorously defend against
the lawsuit.
In December 2000, an action was filed by Red Mountain, LLP in the United States
Court for the Northern District of Alabama, Southern Division against J. Jeremy
Barbera, Chairman of the Board and Chief Executive Officer of Marketing Services
Group, Inc., and WiredEmpire, Inc. Red Mountains' complaint alleges, among other
things, violations of Section 12(2) of the Securities Act of 1933, Section 10(b)
of the Securities Act of 1934 and Rule 10(b)(5) promulgated there under, and
various provisions of Alabama state law and common law, arising from Red
Mountain's acquisition of WiredEmpire Preferred Series A stock in a private
placement. Red Mountain invested $225,000 in WiredEmpire's preferred stock and
it seeks that amount, attorney's fees and punitive damages. The Company believes
that the allegations in the complaint are without merit. The Company intends to
vigorously defend against the lawsuit.
In June 2002, the Company entered into a tolling agreement with various
claimants who acquired WiredEmpire Preferred Series A stock in a private
placement. The agreement states that the passage of time from June 15, 2002
through August 31, 2002 shall not be counted toward the limit as set out by any
applicable statute of limitations. In addition, the claimants agree that none of
them shall initiate or file a legal action against Mr. Barbera, MKTG or
WiredEmpire prior to the termination of the agreement. The claimants invested
approximately $1,200,000 in WiredEmpire's preferred stock.
A demand letter was received from counsel for Pennstone LLC seeking rescission
of its purchase of 64,000 shares of WiredEmpire Series A Preferred Stock. That
demand was rejected in January 2001. To date, no action has commenced.
In 1999 a lawsuit under Section 16(b) of the Securities Exchange Act of 1934 was
commenced against General Electric Capital Corporation ("GECC") by Mark Levy,
derivatively on behalf of the Company, to recover short swing profits allegedly
obtained by GECC in connection with the purchase and sale of MKTG securities.
The case was filed in the name of Mark Levy v. General Electric Capital
Corporation, in the United States District
51
Court for the Southern District of New York, Civil Action Number 99 Civ.
10560(AKH). In February 2002, a settlement was reached among the parties. The
settlement provided for a $1,250,000 payment to be made to MKTG by GECC and for
GECC to reimburse MKTG for the reasonable cost of mailing a notice to
stockholders up to $30,000. On April 29, 2002, the court approved the settlement
for $1,250,000, net of attorney fees plus reimbursement of mailing costs. In
July 2002, the court ruling became final and the Company received and recorded
the net settlement payment of $965,486 plus reimbursement of mailing costs.
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 the above matters and other pending legal
matters will have a material effect on the financial condition, results of
operations or cash flows of the Company.
12. PREFERRED STOCK:
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 245,180 shares of common stock for
proceeds of approximately $29.5 million, net of approximately $520,000 of
placement fees and expenses. The preferred stock is convertible into cash or
shares of common stock on February 18, 2004 at the option of the Company. 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 was convertible at any time at $146.838 per share,
subject to reset on August 18, 2000 if the market price of the Company's common
stock was lower and subject to certain anti-dilution adjustments. On August 18,
2000, the conversion price was reset to $73.44 per share, the market price on
that date. As a result of the issuance of a certain warrant, certain
antidilultive provisions of the Company's Series E preferred stock were
triggered. The conversion price of such shares was reset to a fixed price of
$2.346 based on an amount equal to the average closing bid price of the
Company's common stock for ten consecutive trading days beginning on the first
trading day of the exercise period of the aforementioned warrant. No further
adjustments will be made to the conversion price other than for stock splits,
stock dividends or other organic changes. The warrant was exercisable for a
period of two years at an exercise price of $171.306, subject to certain
anti-dilution adjustments. The warrant expired in February 2002. The fair value
of the warrant of $15,936,103, as determined by the Black Scholes option pricing
model, was recorded as additional paid in capital and a corresponding decrease
to preferred stock (see Note 2). The preferred shareholders converted 1,799
shares of preferred stock to 903,866 shares of common stock during the year
ended June 30, 2002. The preferred shareholders are precluded from converting
any additional shares into common stock pursuant to the current conditions of
the agreement of February 24, 2000 (see Note 20).
On February 19, 2002, the Company entered into standstill agreements, as
amended, with the Series E preferred shareholders in order for the Company to
continue to discuss with multiple parties regarding the possibility of either
restructuring or refinancing the remainder of the preferred stock. The Company
is also reviewing other options, including replacing the existing Preferred
Stockholders with an alternative strategic investor or selling certain assets to
obtain funds to attempt to repurchase the Series E preferred stock at a
discount. Under the terms of the standstill agreements, and subject to the
conditions specified therein, each preferred shareholder had agreed that it
would not acquire, hedge (short), proxy, tender, sell, transfer or take any
action with regard to its holdings during the standstill period, which was
extended until August 15, 2002. Since the Company did not obtain refinancing or
an alternative investor by August 15, 2002, the Company was obligated under such
agreement to seek stockholder approval to convert the preferred stock to common
stock, by October 2, 2002, based upon the 19.99% NASDAQ stock issuance
limitations and the terms of the preferred stock itself due to the change in
conversion price and increase in the number of exercisable shares. In the event
the stockholders of the
52
Company do not approve the conversion of the additional shares by October 2,
2002, the Company may be required to redeem the Series E preferred stock (see
Note 20). The Company's commitments as a result of the standstill agreements
included a partial redemption of 5,000 of the Series E preferred shares for
$5,000,000, thereby reducing the number of Series E preferred shares to 23,201
at June 30, 2002. The value of the preferred stock was initially recorded at a
discount allocating a portion of the proceeds to a warrant. The redemption of
such preferred shares for $5,000,000, less the carrying value of the preferred
shares, including the beneficial conversion feature previously recorded to
equity on the balance sheet, resulted in a deemed dividend of $412,634 which was
recorded to additional paid-in capital and included in the calculation of net
loss attributable to common stockholders for the year ended June 30, 2002.
In June 2002, the Company received notification from The Nasdaq Stock Market
("Nasdaq") that the Company's common stock has closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4).
If the Company cannot meet compliance under the Nasdaq rules by December 24,
2002, Nasdaq will determine whether the Company meets the initial listing
criteria for The Nasdaq SmallCap Market under Marketplace Rule 4310(c)(2)(a). If
the Company meets the initial listing criteria, the Company will be granted an
additional 180 calendar day grace period to demonstrate compliance. Otherwise
the securities may be delisted(see Note 20). An event of default under the
Series E preferred stock includes failing to maintain the listing of the
Company's common stock on Nasdaq or other such similar exchange. Such default
would trigger a mandatory redemption in cash under the terms of the Series E
preferred stock agreement. The Company does not have sufficient cash to satisfy
such redemption.
On December 24, 1997, the Company and General Electric Capital Corporation ("GE
Capital") entered into a stock purchase agreement (the "Purchase Agreement")
providing for the purchase by GE Capital of (i) 50,000 shares of Series D
redeemable convertible preferred stock, par value $0.01 per share, (the
"Convertible Preferred Stock"), and (ii) a warrant to purchase up to 1,778,334
shares of common stock (the "Original Warrant"), all for an aggregate purchase
price of $15,000,000. The Convertible Preferred Stock was convertible into
shares of common stock at a conversion rate, subject to anti-dilution
adjustments. The Original Warrant is subject to reduction or cancellation based
on the Company's meeting certain financial goals set forth in the Original
Warrant or upon the occurrence of a qualified secondary offering within a
certain time period, as defined.
The Company recorded the Convertible Preferred Stock at a discount of
approximately $1,362,000, to reflect an allocation of the proceeds to the
estimated value of the Original Warrant and was being amortized as a dividend
using the interest method over the redemption period.
Dividends were cumulative and accrued at the rate of 6% per annum. The
convertible preferred stock was mandatorily redeemable for $300 per share, if
not previously converted, on the sixth anniversary of the original issue date
and was redeemable at the option of the holder upon the occurrence of an organic
change in the Company, as defined in the purchase agreement.
On April 21, 1999, the Company exercised its right to convert all 50,000 shares
of GE Capital's Series D redeemable convertible preferred stock into
approximately 800,000 shares of common stock. In conjunction with the
conversion, all preferred shareholder rights, including quarterly dividends,
financial covenants, acquisition approvals and board seats, were cancelled
effective immediately.
53
In May 1999, the Original Warrant was amended in connection with the issuance of
a promissory note. Upon an occurrence of a Qualified Secondary Offering, as
defined in the agreement, the Original Warrant was fixed at 33,334 shares with
an exercise price of $.01 per share. The amendment changed the amount and
exercise price per share to 50,000 shares with an exercise price of one-third of
the offering price in a Qualified Secondary Offering. In August 1999, the
warrant was amended a second time to amend the definition of a Qualified
Secondary Offering to include a Qualified Private Placement, as defined, and to
change the time frame for the completion of a Qualified Secondary Offering or
Private Placement from December 31, 1999 to on or after December 20, 1999
through April 30, 2000. The Company has not completed a Qualified Secondary
Offering or Private Placement during the specified period, accordingly the
Original Warrant remains exercisable for up to 1,778,334 shares subject to
reduction or cancellation based on the Company's meeting certain financial goals
for fiscal year 2001. The Company did not meet certain financial goals for the
fiscal year ended June 30, 2001 as set forth in the warrant. Accordingly, the
warrant in the amount of 1,778,334 shares with an exercise price of $.06 was
issued in October 2001.
13. COMMON STOCK, STOCK OPTIONS, AND WARRANTS:
Common Stock: In February 2001, the Company entered into a strategic partnership
agreement (the "Agreement") with Paris based Firstream. Firstream paid the
Company $3.0 million and in April 2001 received 250,000 restricted shares of
common stock, plus a two-year warrant for 66,667 shares priced at $18.00 per
share. The warrants are exercisable over a two year period. The warrants were
valued at $.9 million as determined by the Black-Scholes option pricing model
and were recorded to equity. In accordance with the Agreement, the Company
recorded proceeds of $1.8 million; net of fees and expenses, to equity and $1.0
million was designated as deferred revenue to provide for new initiatives. As
part of the strategic partnership, MKTG will launch several new Firstream
products and services in the areas of wireless communications, online music and
consumer marketing programs for early adopters of new products. The remaining
balance is $.8 million as of June 30, 2002. In July 2002, the Company received a
letter from Firstream canceling the Strategic Partnership Agreement and
requesting payment of the remaining $.8 million, which has been categorized as a
liability at June 30, 2002. The Company is having discussions with Firstream
regarding the remaining liability.
Related to the issuance of Firstream common shares, a warrant was issued to
purchase 50,000 common shares for broker fee compensation. The warrant is
exercisable over a two year period. The warrant was valued at $.3 million as
determined by the Black-Scholes option pricing model.
During the year ended June 30, 2001, the Company exchanged 328,334 shares of
unregistered MKTG common stock for WiredEmpire preferred stock. The exchange
resulted in a gain of $13,410,273, which was recorded through equity and is
included in net loss attributable to common stockholders and earnings per
share - discontinued operations for the year ended June 30, 2001.
In March 2001, the Company entered into a settlement agreement with an employee
of Metro Fulfillment, Inc. ("MFI"), which, until March 1999, was a subsidiary of
the Company. The complaint sought compensatory and punitive damages of
$10,000,000 in connection with the individual's employment at MFI. The Company
admitted no liability. The total cost of the settlement was $1,297,970 which
included cash payments aggregating $225,000, foregiveness of a note receivable
over eight years and related interest of $931,787 and the issuance of 16,667
shares of unregistered MKTG common shares valued at $141,183.
In October 2000, the Company amended the earn-out provision of the purchase
agreement of Stevens Knox and Associates, Inc. In October 2000, the Company
issued 22,046 of unregistered MKTG common shares valued at $250,096 and in
February 2002 the Company issued 125,914 of unregistered MKTG common shares
valued at $300,000. The $550,096 earn-out settlement was considered an addition
to the purchase price and goodwill in the year ended June 30, 2001.
In September 1999, the Company completed a private placement of 521,765 shares
of common stock for
54
proceeds of approximately $30.5 million, net of approximately $2.3 million of
placement fees and expenses. The shares have certain registration rights. The
proceeds of the private placement were used in connection with the Company's
Internet investments, to repay certain short-term debt and for working capital
purposes. The shares were registered on October 29, 1999.
Stock Options: The Company maintains a non-qualified stock option plan (the
"1991 Plan") for key employees, officers, directors and consultants to purchase
525,000 shares of common stock. The Company also maintains a qualified stock
option plan (the "1999 Plan") for the issuance of up to an additional 500,000
shares of common stock under qualified and non-qualified stock options. Both
plans are administered by the compensation committee of the Board of Directors
which has the authority to determine which officers and key employees of the
Company will be granted options, the option price and vesting of the options. In
no event shall an option expire more than ten years after the date of grant.
The following summarizes the stock option transactions under the 1991 Plan for
the three years ended June 30, 2002:
Number Option Price
of Shares Per Share
--------- ------------
Outstanding at June 30, 1999 260,065
Granted -
Exercised (39,214) $12.00 to $30.00
Cancelled (2,914) $12.00 to $18.66
----------
Outstanding at June 30, 2000 217,937
=======
Granted -
Exercised (750) $15.00 to $18.66
Cancelled (31,406) $12.00 to $31.14
--------
Outstanding at June 30, 2001 185,781
=======
Granted -
Exercised -
Cancelled (23,913) $12.00 to $30.00
--------
Outstanding at June 30, 2002 161,868
=======
The following summarizes the stock option transactions under the 1999 Plan for
the three years ended June 30, 2002:
Number Option Price
of Shares Per Share
--------- ------------
Outstanding at June 30, 1999 31,761
Granted 388,818 $9.24 to $90.75
Exercised -
Cancelled -
--------
Outstanding at June 30, 2000 420,579
=======
Granted 39,167 $21.378 to $26.625
Exercised (40) $9.24
Cancelled (28,810) $9.24 to $90.378
--------
Outstanding at June 30, 2001 430,896
=======
55
Granted -
Exercised -
Cancelled (158,278) $9.24 to $90.75
--------
Outstanding at June 30, 2002 272,618
=======
During Fiscal 1999, 66,667 stock options were granted with a below market
exercise price on the date of employment to a then executive of the Company.
22,167 options vested immediately and the balance ratably over the next two
years. The aggregate difference of $1,232,000 between the exercise price and the
market price on the date of grant has been recorded as deferred compensation and
included in stockholders' equity. The deferred compensation was being amortized
into compensation expense over the vesting period of the options. In March 2000,
in connection with a severance agreement, all options became fully vested and
the balance of deferred compensation was expensed. The Company recognized
compensation expense of approximately $444,000 in 1999. Approximately $788,000
was recognized as compensation expense and included in loss from discontinued
operations for the year ended June 30, 2000.
In addition to the 1991 and 1999 Plans, the Company has option agreements with
current and former officers and employees of the Company. The following
summarizes transactions for the three years ended June 30, 2002:
Number Option Price
of Shares Per Share
--------- ------------
Outstanding at June 30, 1999 233,340
Granted 62,500 $26.625
Exercised (40,000) $31.02
Cancelled -
-------
Outstanding at June 30, 2000 255,840
=======
Granted 166,667 $26.625 to $27.00
Exercised -
Cancelled (41,667) $105.75
--------
Outstanding at June 30, 2001 330,840
=======
Granted -
Exercised -
Cancelled (37,501) $26.625
--------
Outstanding at June 30, 2002 293,339
=======
As of June 30, 2002, 661,518 options are exercisable. The weighted average
exercise price of all outstanding options is $25.97 and the weighted average
remaining contractual life is 4.89 years. The weighted average grant date fair
value of all outstanding options is $22.60. At June 30, 2002, 277,755 options
were available for grant.
Had the Company determined compensation cost based on the fair value methodology
of SFAS 123 at the grant date for its stock options, the Company's loss and
earnings per share from continuing operations would have been adjusted to the
pro forma amounts indicated below:
56
Years ended June 30,
---------------------------------------------------------
2002 2001 2000
---- ---- ----
Loss from continuing
operations as reported $(60,824,298) $(67,090,567) $(41,130,223)
pro forma $(65,545,317) $(75,750,739) $(46,731,147)
Net loss attributable to
common stockholders as reported $(66,095,771) $(66,492,466) $(75,673,203)
pro forma $(70,816,790) $(75,152,638) $(81,274,127)
Earnings per share as reported $ (10.81) $ (12.49) $ (17.08)
pro forma $ (11.58) $ (14.13) $ (18.34)
Pro forma net loss reflects only options granted in fiscal 1996 through 2002.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' maximum vesting
period of seven years and compensation cost for options granted prior to July 1,
1995, has not been considered. The fair value of each stock option is estimated
on the date of grant using the Black-Scholes option pricing model. The following
assumptions used for grants in fiscal years ended June 30, 2002, 2001 and 2000
are as follows:
2002 2001 2000
---- ---- ----
Risk -free interest rate 5.9% to 6.2% 5.9% to 6.2% 4.5% to 6.0%
Expected option life Vesting life+ Vesting life+ Vesting life+
two years two years two years
Dividend yield None None None
Volatility 103% 103% 90%
As of June 30, 2002, the Company has 1,947,758 warrants outstanding to purchase
shares of common stock at prices ranging from $0.06 to $171.31. All outstanding
warrants are currently exercisable.
14. INCOME TAXES: As of June 30,
--------------
2002 2001
---- ----
Deferred tax assets:
Net operating loss carryforwards:
Continuing operations $48,645,647 $40,041,097
Abandoned lease reserves 3,012,350 -
Compensation on option grants 1,232,941 1,370,754
Amortization of intangibles 10,104,829 -
Realized/unrealized loss on investments - 14,897,079
Other 272,468 -
------------- ------------
Total assets 63,268,235 56,308,930
Deferred tax liabilities:
Amortization of intangible assets - (1,730,901)
Other - (2,673,495)
------------- -----------
Total liabilities - (4,404,396)
------------- -----------
Net deferred tax assets 63,268,235 51,904,534
Valuation allowance (63,268,235) (51,904,534)
------------ ------------
Net deferred tax assets $ - $ -
============== ===========
57
The difference between the Company's U.S. federal statutory rate of 35%, as well
as its state and local rate net of federal benefit of 5%, when compared to the
effective rate is principally comprised of the valuation allowance and other
permanent disallowable items.
The Company has a U.S. federal net operating loss carry forward of approximately
$139,000,000 available which expires from 2011 through 2021. Of these net
operating loss carry forwards approximately $61,400,000 is the result of
deductions related to the exercise of non-qualified stock options. The
realization of these net operating loss carry forwards would result in a credit
to equity. These loss carry forwards are subject to annual limitations. The
Company has recognized a full valuation allowance against deferred tax assets
because it is more likely than not that sufficient taxable income will not be
generated during the carry forward period available under the tax law to utilize
the deferred tax assets.
15. EMPLOYEE RETIREMENT SAVINGS 401(k) PLANS:
Certain subsidiaries sponsor tax deferred retirement savings plans ("401(k)
plans") which permit eligible employees to contribute varying percentages of
their compensation up to the annual limit allowed by the Internal Revenue
Service.
The Company currently matches the 50% of the first $3,000 of employee
contribution up to a maximum of $1,500 per employee. Matching contributions
charged to expense were $240,432, $535,757 and $274,951 for the fiscal years
ended June 30, 2002, 2001 and 2000, respectively.
Certain subsidiaries also provided for discretionary Company contributions.
Discretionary contributions charged to expense for the fiscal years end June 30,
2001 and 2000 were $27,590 and $64,024, respectively.
16. DISCONTINUED OPERATIONS:
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 3,200,000 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 operations of WiredEmpire, the Company has
offered to redeem the preferred shares in exchange for MKTG common shares.
On September 21, 2000, the Company's Board of Directors approved a plan to
discontinue the operation of its WiredEmpire subsidiary. The Company shut down
the operations by the end of January 2001. The estimated losses associated with
WiredEmpire were approximately $34.5 million. These losses for WiredEmpire
included approximately $19.5 million in losses from operations through the
measurement date and approximately $15.0 million of loss on disposal which
included approximately $2.0 million in losses from operations from the
measurement date through the estimated date of disposal. It also included
provisions for vested compensation expense of $2.0 million, write down of assets
to net realizable value of $8.8 million, lease termination costs of $1.9
million, employee severance and benefits of $1.8 million and other contractual
commitments of $.5 million. As of June 30, 2002, approximately $1.7 million
remains accrued representing payments expected to be made related to legal and
lease obligations.
58
The assets and liabilities of WiredEmpire have been separately classified on the
consolidated balance sheets as "Net current liabilities of discontinued
operations." A summary of these liabilities at June 30, 2002 and 2001 were as
follows:
2002 2001
---- ----
Current assets - -
Current liabilities $(1,714,406) $(2,396,171)
------------- ------------
Net current liabilities of discontinued operations $(1,714,406) $(2,396,171)
============ ============
Minority interest in subsidiary, preferred stock $ (280,946) (280,946)
============ ============
In September 2000 the Company offered to exchange the preferred shares for MKTG
common shares. During the fiscal year end June 30, 2001, the Company exchanged
328,334 shares of unregistered MKTG common stock for WiredEmpire preferred
stock. The exchange resulted in a gain of $13,410,273, which was recorded
through equity and is included in net loss attributable to common stockholders
and earnings per share - discontinued operations for the year ended June 30,
2001. As of June 30, 2002, 48,000 shares of WiredEmpire preferred stock have not
been exchanged.
In January 2001, the Company sold certain assets of WiredEmpire for $1.3
million, consisting of $1.0 million in cash and $.3 million held in escrow,
which was paid in May 2001. This transaction resulted in a gain on sale of
assets of $1.3 million and is included in the statement of operations in income
(loss) from discontinued operations.
Results of these operations have been classified as discontinued operations and
all prior periods have been restated.
17. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the year ended June 30, 2002:
o The Company issued 125,914 of unregistered MKTG common shares in
February 2002 valued at $300,000 in settlement of an earn-out provision
for the acquisition of Stevens Knox and Associates, Inc. entered into
in the previous fiscal year.
o The preferred shareholders converted 1,799 shares of preferred stock to
903,866 shares of common stock during the year ended June 30, 2002.
For the year ended June 30, 2001:
o The Company received $860,762 of uncollateralized financing to acquire
additional capitalized software. The notes bear interest at 9.5% per
annum and are payable in monthly installments over 36 months with
maturity dates ranging from September 30, 2003 and December 30, 2003.
o The Company exchanged 328,334 shares of unregistered MKTG common stock
for WiredEmpire preferred stock. The exchange resulted in a gain of
$13,410,273, which was recorded through equity and is included in net
loss attributable to common stockholders and earnings per share -
discontinued operations.
o The Company issued 22,046 of unregistered MKTG common shares in October
2000 valued at $250,096 in settlement of an earn-out provision for the
acquisition of Stevens Knox and Associates, Inc.
o The Company issued 16,667 unregistered MKTG common shares in March 2001
valued at $141,183 in settlement of a complaint in connection with an
employee of MFI.
59
For the year ended June 30, 2000:
o Capital lease obligations of $708,510 were incurred for the leasing of
certain equipment.
o The Company sold its 15% minority interest in Metro Fulfillment, Inc. for a
Note Receivable in the amount of $222,353.
o In addition, there were certain non-cash transactions related to the
acquisitions of Grizzard, Coolidge and the investment in Fusion Networks,
Inc. (See Notes 3 and 4).
Supplemental disclosures of cash flow data:
- -------------------------------------------
2002 2001 2000
---- ---- ----
Cash paid during the year for:
Interest $588,683 $6,256,346 $1,510,937
Financing charge $ - $128,133 $90,741
Income tax paid $67,824 $75,261 $48,429
Supplemental schedule of non-cash investing and financing activities
- ----------------------------------------------------------------------
o Details of businesses acquired in purchase transactions:
2000
----
Working capital deficit, other than cash acquired $ 11,627,717
Fair value of other assets acquired $117,702,990
Liabilities assumed or incurred $ 30,303,214
Fair value of stock issued for acquisitions $ 48,837,375
Cash paid for acquisitions
(including related expenses) $ 50,770,586
Cash acquired $ 580,468
------------
Net cash paid for acquisitions $ 50,190,118
18. SEGMENT INFORMATION:
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" segment information is being reported consistent with
the Company's method of internal reporting, which excludes discontinued
operations from the segments. In accordance with SFAS No. 131, operating
segments are defined as components of an enterprise for which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. MKTG is organized primarily on the basis of product lines. Based on
the nature of the services provided and class of customers, as well as the
similar economic characteristics, MKTG's product lines have been aggregated. The
accounting policies of the segment are the same as those described in Note 2,
Summary of Significant Accounting Policies. No single customer accounted for 5%
or more of total revenues. MKTG earns 100% of its revenues in the United States.
60
Supplemental disclosure of revenues by product:
2002 2001 2000
---- ---- ----
List sales and services $ 8,082,483 $ 14,042,986 $12,935,003
Database marketing 10,935,112 13,535,405 13,076,455
Telemarketing/telefundraising 16,027,212 16,905,623 15,204,985
Marketing communication services 2,831,004 80,678,673 19,399,802
Website development and design 1,029,705 2,445,241 1,720,076
Other 66,593 114,761 151,613
-------------- -------------- -------------
Consolidated total $38,972,109 $127,722,689 $62,487,934
=========== ============ ===========
The marketing communication services product line was included in the sale of
Grizzard (see Note 19).
19. SALE OF GRIZZARD
On June 13, 2001, the board of directors and management of the Company approved
a formal plan to sell Grizzard. On July 18, 2001, the Company entered into a
definitive agreement to sell Grizzard. On July 31, 2001, the Company completed
its sale of all the outstanding capital stock of its Grizzard subsidiary to
Omnicom Group, Inc. The purchase price of the transaction was $89.8 in cash, net
of a working capital adjustment. As a result of the sale agreement, the Company
fully paid the term loan of $35.5 million and $12.0 million line of credit. The
Company recorded an extraordinary loss of approximately $4.7 million in the
fiscal year ended June 30, 2002 as a result of the early extinguishments of
debt. The Company retained $43.8 million in cash proceeds from the sale before
closing fees and other costs of approximately $8.0 million. The purchase price
was determined through arms-length negotiations between the purchaser and MKTG.
At June 30, 2001, the assets and liabilities of Grizzard have been classified as
net assets held for sale in the amount of $80.9 million. In the year ended June
30, 2001, the Company recognized a loss on assets held for sale in the amount of
$36.7 million representing a write-down of the amount of assets held for sale to
net realizable value. The Company recorded a gain on sale of $1.7 million in the
year ended June 30, 2002. Grizzard's revenues included in the Company's
statement of operations for the fiscal years ended June 30, 2002, 2001 and 2000
were $2.8 million, $82.8 million and $19.6 million, respectively. Grizzard's net
loss included in the Company's statement of operations for the fiscal years
ended June 30, 2002, 2001 and 2000 were $8.5 million, $41.0 million and $3.8
million, respectively.
The major components of net assets held for sale at June 30, 2001 were as
follows:
Intangible assets, net $57,200,067
Property, plant and equipment, net 13,977,943
Accounts receivable, net 12,572,136
Inventory 3,941,011
Other current assets 2,652,142
Other asset and liabilities, net 721,432
Accounts payable (2,944,515)
Accrued expenses and other liabilities (7,237,944)
----------
$80,882,272
===========
61
Supplemental
Pro forma information
For the years ended June 30,
Unaudited
---------
2002 2001
---- ----
Revenues $36,141,000 $44,932,000
Loss from continuing
operations $(59,023,000) $(25,244,000)
Net loss per common share
continuing operations,
basic and diluted $(9.65) $(4.75)
======= =======
The unaudited pro forma information is provided for informational purposes only
and assumes that Grizzard was sold as of the beginning of fiscal year 2001. It
is based on historical information and is not necessarily indicative of future
results of operations of the consolidated entities.
20. SUBSEQUENT EVENTS
On October 2, 2002, the common stockholders approved the right of the Series E
preferred shareholders to convert their preferred stock to common stock.
Subsequently, the preferred shareholders converted 951.44 shares of Series E
preferred stock to 508,829 shares of common stock (see Note 12). The redemption
value of preferred stock at October 15, 2002 including interest and penalties is
$35,308,982.
In connection with the notification received from Nasdaq(see Note 12), the
Company has explored and is continuing to explore alternatives to remain listed
on Nasdaq. The Company believes it has sufficient alternatives and will execute
on any one or more of these alternatives to remain listed. The Company believes
a potential delisting is not probable.
The Company has received waivers from its lender for certain subsidiaries which
were in violation of certain working capital and net worth covenants of their
credit agreements as of June 30, 2002. In consideration for the waivers, the
Company repaid approximately $.8 million balance of one credit facility and
agreed with the lender to cease future advances of this facility. Based on this
repayment, the availability under the two remaining credit facilities is
approximately $.9 million (see Note 7).
62
Schedule II
MKTG Services, Inc.
Valuation and Qualifying Accounts
For the Years Ended June 30, 2002, 2001, and 2000
- ------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------
Additions
-------------------------------
Balance at Charged To Charged To
Description Beginning Costs And Other Deductions- Balance At
Of Period Expenses Accounts- Describe(1) End Of Period
Describe
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts
Fiscal 2002 $2,423,610 $1,268,692 $2,325,816(2) $1,609,133 $4,408,985
Fiscal 2001 $2,287,857 $1,802,727 - $1,666,974(3) $2,423,610
Fiscal 2000 $551,043 $427,578 $1,642,442(4) $333,206 $2,287,857
________________________________________________
(1) Represents accounts written off during the period.
(2) Represents increase to allowance for doubtful account reserve for the
gross portion of the receivable. Only reserve for net commissions earned are
charged to costs and expenses. The reserve is offset by a corresponding
decrease to accounts payable.
(3) Includes accounts written-off during the period and the ending account
balance for Grizzard of $243,000 which is included in assets held for sale.
(4) Represents allowance for doubtful account balance on the opening balance
sheets for acquisitions made during the year.
63
Exhibit 3.11
CERTIFICATE OF AMENDMENT
OF
RESTATED AND AMENDED ARTICLES OF INCORPORATION
Marketing Services Group, Inc., a corporation organized under the laws of the
State of Nevada, by its Chief Executive Officer and assistant secretary does
hereby certify:
1. That the board of directors of said corporation at a meeting duly convened
and held on the 7th day of December, 2001, passed a resolution declaring that
the following change and amendment in the articles of incorporation is
advisable.
RESOLVED that article first of said articles of incorporation be amended to read
as follows:
"The name of the corporation shall be MKTG Services, Inc."
2. That the number of shares of the corporation outstanding and entitled to vote
on an amendment to the article of incorporation is 5,620,603; that said change
and amendment has been consented to and authorized by the written consent of
stockholders holding at least a majority of each class of stock outstanding and
entitled to vote thereon.
IN WITNESS WHEREOF, the said Marketing Services Group, Inc. has caused this
certificate to be signed by its Chief Executive Officer and Assistant Secretary
and its corporate seal to be hereto affixed this 18th day of March, 2002.
------------------------
By: /S/ J.Jeremy Barbera
------------------------
Jeremy Barbera
Chief Executive Officer
By: /S/ Cindy H. Hill
------------------------
Cindy H. Hill
Assistant Secretary
64
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
State of
Incorporation
-------------
Alliance Media Corporation Delaware
MKTG Services - New York, Inc. New York
MKTG TeleServices, Inc. California
MKTG Services - Philly, Inc. New York
MKTG Services - Boston, Inc. Delaware
Pegaus Internet, Inc. New York
WireEmpire, Inc. Deleware
65
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
MKTG Services, Inc.
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-3 (No. 333-33174, No. 333-34822 and No. 333-89973) and
Forms S-8 (No. 333-94603 and No. 333-82541) of MKTG Services, Inc. and
Subsidiaries, of our report dated September 26, 2002, except for Note 20 for
which the date is October 15, 2002, relating to the consolidated financial
statements and financial statement schedule which appears in this Annual Report
on Form 10-K.
/s/ PricewaterhouseCoopers LLP
New York, New York
October 15, 2002
66
Exhibit 24
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of MKTG Services, Inc. (the "Company") on
Form 10-K for the period ended June 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Cindy H. Hill, as
Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. ss.
1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934: and
2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Cindy H. Hill
-----------------
Cindy H. Hill
Chief Accounting Officer
October 15, 2002
In connection with the Annual Report of MKTG Services, Inc. (the "Company") on
Form 10-K for the period ended June 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, J. Jeremy Barbera, as
Chairman of the Board and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934: and
2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ J. Jeremy Barbera
---------------------
J. Jeremy Barbera
Chairman of the Board and Chief Executive Officer
October 15, 2002
67