-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VPJXCPdGTV4bHOKcJoFeLDx1Al7Rz+VLg+TVBoy1LbBugN2QqJP4aXBfxvEJ4Vqj iHwgF/PRenj8m8ZUnkFETQ== /in/edgar/work/0000014280-00-000049/0000014280-00-000049.txt : 20001016 0000014280-00-000049.hdr.sgml : 20001016 ACCESSION NUMBER: 0000014280-00-000049 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20001013 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARKETING SERVICES GROUP INC CENTRAL INDEX KEY: 0000014280 STANDARD INDUSTRIAL CLASSIFICATION: [7389 ] IRS NUMBER: 880085608 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-01768 FILM NUMBER: 739943 BUSINESS ADDRESS: STREET 1: 333 SEVENTH AVENUE STREET 2: 20TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 2125947688 MAIL ADDRESS: STREET 1: 333 SEVENTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10001 FORMER COMPANY: FORMER CONFORMED NAME: ALL-COMM MEDIA CORP DATE OF NAME CHANGE: 19950823 FORMER COMPANY: FORMER CONFORMED NAME: SPORTS TECH INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BRISTOL HOLDINGS INC DATE OF NAME CHANGE: 19920518 10-K 1 0001.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to_____________________ Commission file number 0-16730 MARKETING SERVICES GROUP, INC. ------------------------------ (Name of small business issuer in its charter) Nevada 88-0085608 ------ ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 333 Seventh Avenue, 20th Floor New York, New York 10001 ------------------ ----- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (917) 339-7100 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: ____ Common Stock, par value $.01 per share -------------------------------------- (Title of class) Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes __ No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of September 15, 2000, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $133,000,000. As of September 15, 2000, there were 30,018,832 shares of the Registrant's common stock outstanding. Documents incorporated by reference: Portions of the Company's definitive proxy statement expected to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 have been incorporated by reference into Part III of this report. PART I Special Note Regarding Forward-Looking Statements - ------------------------------------------------- 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 - ----------------- General - ------- Marketing Services Group, Inc. (the "Company" or "MSGi") through its subsidiaries, is a leading provider of vertically integrated marketing solutions. The Company provides seamless and cohesive traditional and interactive marketing programs to leading companies around the world, including American Express, Chase Manhattan, Columbia House, General Electric, Lincoln Center for the Performing Arts, Madison Square Garden, Salvation Army, Sierra Club, Verizon and Walt Disney. The Company is a dominant player in the entertainment, publishing, fundraising and financial service sectors as well as other key vertical markets. MSGi provides marketing solutions to approximately 5,000 clients worldwide with pro forma revenues for the fiscal year 2000 of approximately $195 million. The Company has over 1,000 employees with material offices in New York, Boston, Philadelphia, Atlanta, Houston, Los Angeles and San Francisco. MSGi provides a wide range of services including strategic planning, creative, direct marketing, database marketing, database management, telemarketing, telefundraising, print production and mailing, media planning and buying, e-commerce applications, Web development and hosting, and online ad sales and consulting. The Company's Strategy - ---------------------- MSGi's strategy to enhance its position as a value-added premium provider of integrated marketing services is to: o Focus on our integrated marketing services business which include comprehensive direct marketing services, including Internet related services; o Deepen market penetration in new industries and market segments as well as those currently served by the Company; o Develop existing and create new proprietary databases, proprietary database software and database management applications; and o Pursue strategic acquisitions, joint ventures and marketing alliances to expand the services offered and industries served. Background - ---------- The Company was originally incorporated in Nevada in 1919. The current business of MSGi, previously known as All-Comm Media Corporation and prior to that as Sports-Tech, Inc., began operations in 1995. Through the years, the Company has acquired and formed direct marketing companies . The Company's acquisitions are summarized as follows: Date Name of Company Acquired Service Performed - ---- ------------------------ ----------------- May 1995 Stephen Dunn & Associates, Inc. Telemarketing and telefundraising, specializing in the arts, educational and other institutional tax exempt organizations. October 1996 Metro Direct, Inc. Develops and markets a variety of database marketing and direct marketing products. July 1997 Pegasus Internet, Inc. Provides a full suite of Internet services including content development and planning, marketing strategy, on-line ticketing system development, technical site hosting, graphic design, multimedia production and electronic commerce. December 1997 Media Marketplace, Inc. Specializes in providing list Media Marketplace management, list brokerage Media Division, Inc. and media planning and buying services. May 1998 Formed Metro Fulfillment, Inc. Performed services such as on-line commerce, real-time database management inbound/ outbound customer service, custom packaging, assembling, product warehousing, shipping, payment processing and retail distribution. January 1999 Stevens-Knox & Associates, Inc. Specializes in providing list Stevens-Knox List Brokerage, Inc. management, list brokerage and Stevens-Knox International, Inc. database management services March 1999 Sold 85% of Metro Fulfillment, Inc. May 1999 CMG Direct Corporation Specializes in database services September 1999 Sold remaining 15% of Metro Fulfillment, Inc. March 2000 Grizzard Advertising, Inc. Specializes in strategic planning, creative services, database management, print-production, mailing and Internet marketing March 2000 The Coolidge Company Specializes in list management and list brokerage services Developments During Fiscal 2000 - ------------------------------- On October 1, 1999, the Company completed an acquisition of approximately 87% of the outstanding common stock of Cambridge Intelligence Agency for a total purchase price of $2.4 million which consisted of $1.6 million in common stock of the Company an interest in the Company's Permission Plus software and related operations valued at $.8 million, subject to certain adjustments. Concurrently with this acquisition, the Company formed WiredEmpire, a licensor of email marketing tools. Effective with the acquisition, Cambridge Intelligence Agency and the Permission Plus asset was merged into WiredEmpire. In January 2000, the Company contributed its Pegasus subsidiary to WiredEmpire for additional shares of common stock. In March 2000, the Company completed a private placement of 3,120,001 shares of Convertible Preferred Stock of its WiredEmpire subsidiary for proceeds of approximately $18.7 million, net of placement fees and expenses of $1.3 million. In connection with the discontinued operation of WiredEmpire, the Company has offered to redeem the preferred shares in exchange for MSGi common shares. The redemption is expected to occur in the second quarter of fiscal year 2001. On September 21, 2000, the Company's Board of Directors approved a plan to discontinue the operation of its WiredEmpire subsidiary. The Company will shut down the operations anticipated to be completed by the end of January 2001. The estimated losses associated with WiredEmpire are approximately $35 million. These losses include approximately $20 million in losses from operations through the measurement date and approximately $15 million of loss on disposal which includes approximately $2 million in losses from operations from the measurement date through the estimated date of disposal. The liability of $18.7 million for the preferred shareholders is currently included in the net liability of discontinued operations and it is anticipated that this will be settled in MSGi stock. The Company has offered to redeem the preferred shares in exchange for MSGi common shares. The redemption is expected to occur in the second quarter of fiscal year 2001. On March 22, 2000, the Company acquired Grizzard Advertising, Inc. for $104.0 million consisting of $47.8 million cash, $5 million for certain hold back provisions, and aggregate of 2,545,799 shares of common stock of MSGi valued at $19.04 per share and acquisition costs in the amount of $2.7 million. Grizzard Advertising, Inc. was founded in 1919 and is ranked the 6th largest Direct Response Agency in the country (with internal production capabilities) in reported capitalized billings by the Direct Marketing Association ("DMA"). Grizzard's services include strategic planning, creative services, database management, print-production, mailing and Internet marketing. Grizzard's client base includes retail, consumer and business-to-business companies as well as many premier not-for-profit clients. On March 31, 2000, the Company acquired The Coolidge Company for $1.6 million consisting of $.2 million cash, a $.5 million note payable, 22,251 shares of common stock valued at $16.42 a share and other costs of a nominal amount. Coolidge provides list management and brokerage services. In December 1999, the Company acquired a 10% interest in Fusion Networks, Inc. for $27.5 million in common stock. Fusion Networks became a public entity in April 2000. At the time, such investment for Fusion Networks stock had a pro forma value in excess of $50 million. Fusion Networks, Inc. operates the website www.latinfusion.com. The website is an interactive, multimedia and entertainment Latin American based portal featuring television, music and e-commerce capabilities. In June 2000, the Company wrote its investment in Fusion Networks' down by approximately $20.3 million to the fair value as determined by the quoted market price. The charge was recorded through the statement of operations due to the fact that the Company believes the impairment in market value is other than temporary. In July 1999, the Company invested $1.6 million to acquire a 10% interest in Screenzone Media Network, LLC ("Screenzone"). Screenzone is a new interactive broadcast gateway that was developed to advertise and promote movies, music, live events and other entertainment at shopping malls and over the Internet. In June 2000, the Company believed that the carrying value of its investment was impaired and wrote off its investment in Screenzone. In October 1999, the Company acquired a 10% interest in Mazescape.com for $.2 million. Mazescape.com is an innovative Internet technology company that delivers customized, automated recruiting software and services that improve the performance of corporate recruiters. In June 2000, the Company believed that the carrying value of its investment was impaired and wrote off its investment. In September 1999, the Company completed an investment of $5 million to acquire convertible preferred stock of GreaterGood.com. The Company owns approximately 11% of the outstanding shares of GreaterGood.com. GreaterGood.com builds, co-markets and manages online shopping villages for not-for-profit organization web sites. In June 2000, the Company believed that the carrying value of its investment was impaired and wrote off its investment in Greatergood.com. As detailed above, the Company has taken a fourth quarter charge of approximately $27 million for unrealized losses on Internet investments made during the fiscal year based on all available information. The Company believes such losses are a result of significant changes in Wall Street valuations of Internet companies. The Company has suspended its Internet investment strategy and will focus all efforts on its core direct marketing operations. The Company's shares are traded on the NASDAQ National Market under the symbol "MSGI". The Company's principal executive offices are located at 333 Seventh Avenue, 20th Floor, New York, NY 10001. Its telephone number is (917) 339-7100. Additional information is available on the Company's website: www.msginet.com. Capital Stock and Financing Transactions - ---------------------------------------- Private Placement of Common Stock: In September 1999, the Company completed a private placement of 3,130,586 shares of common stock for proceeds of approximately $30.5 million, net of approximately $2.3 million of placement fees and expenses. The shares had certain registration rights which were fulfilled by the Company. The proceeds of the private placement were used in connection with certain Internet investments, to repay certain short-term debt and for working capital purposes. Preferred Stock: In February 2000, the Company completed a private placement of 30,000 shares of Series E Convertible Preferred Stock and Warrants for proceeds of approximately $29.5 million, net of placement fees and expenses. The shares are convertible at any time at $24.473, per share, subject to reset on August 18, 2000. On August 18, 2000, the conversion price was reset to $12.24 per share. The warrants are exercisable for a period of two years at an exercise price of $28.551. The proceeds were used to repay certain debt and for working capital purposes. Debt: In March 2000, the Company entered into a credit agreement (the "Credit Agreement") for $58 million senior secured facility in connection with the acquisition of Grizzard. The Credit Agreement is comprised of a $13 million revolving line of credit, $40 million term loan and $5 million standby letter of credit. The Credit Agreement expires on March 31, 2005 and bears interest at either prime rate or LIBOR plus an applicable margin ranging from 1.5% to 2.5%, for prime and 2.5% to 3.5% for LIBOR based on a financial ratio. The loans are collaterialized by substantially all of the assets of the Company and are guaranteed by all of the Company's non-internet subsidiaries. The Direct Marketing Industry - ----------------------------- Overview. Direct marketing is used for a variety of purposes including lead-generation and prospecting for new customers, enhancing existing customer relationships, exploring the potential for new products and services and establishing new products. Unlike traditional mass marketing aimed at a broad audience and focused on creating image and general brand or product awareness, successful direct marketing requires the identification and analysis of customers and purchasing patterns. Such patterns enable businesses to more easily identify and create a customized message aimed at a highly defined audience. Previous direct marketing activity consisted principally of direct mail, but now has expanded into the use of multiple mediums including telemarketing, print, television, radio, video, CD-ROM, on-line services, the Internet and a variety of other interactive marketing formats. The success of a direct marketing program is the result of the analysis of customer information and related marketing data. Database management capabilities allow for the creation of customer lists with specific, identifiable attributes. Direct marketers use these lists to customize messages and marketing programs to generate new customers whose purchasing patterns can be statistically analyzed to isolate key determinants. In turn, this enables direct marketers to continually evaluate and adjust their marketing programs, to measure customer response rates in order to assess returns on marketing expenditures, and to increase the effectiveness of such marketing programs. Database management covers a range of services, including general marketing consultation, execution of marketing programs and the creation and development of customer databases and sales tracking and data analysis software. Data analysis software consolidates and analyzes customer profile information to find common characteristics among buyers of certain products. The results of such tracking and analysis are used to define and match customer and product attributes from millions of available database files for future direct marketing applications. The process is one of continual refinement, as the number of points of contact with customers increases, together with the proliferation of mediums available to reach customers. Telemarketing/telefundraising projects generally require significant amounts of customer information supplied by the client or third party sources. Custom telemarketing/telefundraising programs seek to maximize a client's direct marketing results by utilizing appropriate databases to communicate with a specific audience. This customization is often achieved through sophisticated and comprehensive data analysis which identifies psychographic, cultural and behavioral patterns in specific geographic markets. Industry Growth. The use of direct marketing has increased over the last few years due in part to the relative cost efficiency of direct marketing compared to mass marketing, as well as the rapid development of more powerful and more cost-effective information technology and data capture capabilities. According to industry sources, over the next decade, demographic shifts and changes in lifestyle, combined with new marketing mediums, are expected to create higher demand by businesses for marketing information and services to provide businesses with direct access to their customers and a more efficient means of targeting specific audiences and developing long-term customer relationships. According to the most recently available information from the DMA, the industries' largest trade association, total U.S. direct marketing advertising expenditures was projected to reach $176.5 billion during 1999, a 7.2% increase over 1998. The 1999 direct marketing advertising expenditure figure is inclusive of all direct marketing through various mediums including direct mail, telephone marketing, newspaper, magazine, TV, radio and internet marketing. Direct marketing advertising expenditures were projected to represent 57.1% of all US advertising expenditures, estimated to be $308.9 billion, in 1999. Direct mail accounts for approximately 25% of total direct marketing expenditures nationwide. Additionally, consumer direct marketing advertising expenditures via telephone marketing were projected to be $24.4 billion in 1999, growing to $31.2 billion in 2004. The compounded annual growth in this segment was estimated to be 6.4% from 1994 through 1999 and is projected to be 5.0% from 1999 through 2004. Corporate marketing departments often lack the technical expertise to create, manage and control highly technical aspects of the direct marketing process. As a result, the Company believes that there is a growing trend among direct marketers to outsource direct marketing programs. Industry Consolidation. The direct marketing industry is extremely fragmented. According to industry sources, there are almost 11,000 direct marketing services and database services firms in the United States. The Company believes that most of such businesses are small, specialized companies which offer limited services. However, industry consolidation has increased in the last few years resulting in a greater number of large companies providing services similar to those provided by the Company. See "Competition." The Company believes that much of this consolidation is due to: (i) economies of scale in hardware, software and other marketing resources; (ii) cross-selling of services; and (iii) coordinating various components of direct marketing and media programs within a single, reliable environment. The Company believes these trends are likely to continue due in part to client demand for more cost-effective service to perform increasingly complex functions. Services - -------- The Company's operating businesses provide comprehensive database management, Internet marketing, custom telemarketing/telefundraising, print production, mailing capabilities, marketing communications and other direct marketing services. The principal advantages of customized services include: (i) the ability to expand and adapt a database to the client's changing business needs; (ii) the ability to have services operate on a flexible basis consistent with the client's goals; and (iii) the integration with other direct marketing, Internet, database management and list processing functions, which are necessary to keep a given database current. Some services offered by the Company are described below. Database Management Services. The Company's database management services begin with database creation and development, which include the planning stages and analytical processes to review all of the client's customer and operational files. Utilizing both proprietary and commercial software, the Company consolidates all of the separate information and relationships across multiple files and converts the client's raw information into a consolidated format. Once the client's customer data is consolidated and the database created, the data is enhanced using a wide selection of demographic, geographic, census and lifestyle information for over 95 million households and 153 million individuals to identify patterns and probabilities of behavior. The Company licenses this information from a variety of leading data compilers. The combination of each client's proprietary customer information with external data files provides a customized profile of a client's customer base, enabling the client, through the use of the Company's behavior modeling and analysis services, to design a direct marketing program for its customers. Through the development of a scoring model, the client can segment its database and determine its best customers and prospects in each marketplace. The entire process results in a customized direct marketing program that can be targeted to distinct audiences with a high propensity to buy the client's products or services. Because of the dynamic nature and complexity of these databases, clients frequently request that the Company update such databases with the results of recent marketing programs and periodically perform list processing services as part of the client's ongoing direct marketing efforts. Data Processing. The Company's primary data processing service is to manage from the Company's data centers, all or a portion of a client's marketing information processing needs. After migrating a client's raw data to one of the Company's data centers, the Company's technology allows the client to continue to request and access all available information from remote sites. The database can also be verified for accuracy and overlaid with external data elements to further identify specific consumer behavior. Other data processing services provided include migration (takeover and turnover) support for database maintenance or creation, merge/purge, data overlay and postal qualification. The Company also offers on-line and batch processing capacity, technical support, and data back-up and recovery. Strategic Planning and Creative Services. The Company offers its clients end-to-end business solutions. The process begins with strategic planning and development. Through consultative approach, each client is taken step by step in campaign management, including positioning development, integration of communication strategies and creative services. Some of the capabilities include copy development, design and art production. List Services. List processing includes the preparation and generation of comprehensive name and address lists which are used in direct marketing promotions. The Company's state-of-the-art data centers and large volume processing capabilities allow the Company to meet the list processing needs of its clients through its advanced list processing software applications, list brokerage and list management operations. The Company customizes list processing solutions by utilizing a variety of licensed software products and services, such as Address Conversion and Reformat, Address Standardization and Enhanced Merge/Purge, in addition to services provided by third parties, including; National Change of Address (NCOA), Delivery Sequence File and Locatable Address Conversion System. Other licensed products include databases used for suppressions such as the DMA Mail Preference File and the American Correctional Association Prison Suppress File. The Company also offers an array of list acquisition techniques. Approximately 12,000 lists are available for rental in the list industry. The Company's account managers, many of whom are recruited from existing Company accounts, use their industry experience as well as sophisticated computer profiles to recommend particular lists for customer acquisition campaigns. The Company acquires hundreds of millions of records annually for customer acquisition campaigns. The Company also manages several hundred lists for rental purposes on behalf of list owners. Database Product Development. To further leverage its database management and list processing services, the Company has participated in the development of a new product using client/server technology. The product is a scaleable, three-tiered client/server data warehouse system that provides desktop, real-time decision support and marketing analysis to a non-technical user. This application is an intuitive, graphical user interface tool that offers both flexibility and the ability to access and analyze large customer files exceeding 100 million records. The incorporation of third-party software, relational and multidimensional database technology in an open system environment is intended to allow the Company's clients to take advantage of the latest developments in high-speed computing, utilizing both single and multi-processor hardware. Response Analysis, Predictive Muclelling and Testing Services. Response analysis of direct mail respondents, including age, demographic and lifestyle attributes, to determine which particular attributes of the responding universe played a part in increasing the recipients' propensity to respond to the offer. This service is provided to improve direct marketing response rates. Market Analysis. The Company's market research services include problem conceptualization, program design, data gathering and results analysis. These services are conducted through telephone, mail and focus groups. Through the use of data capture technology, the Company is also able to obtain data from a statistically predictable sample of market survey contacts. The Company then tabulates and analyzes fielded data using multi-variate statistical techniques, and produces detailed reports to answer clients' marketing questions and suggest further marketing opportunities. Production and Mailing Services. Full range of complex / lasering, insertion and mailing services. The Company provides many of its commercial customers production and mailing services that are customized for each recipient, requiring highly sophisticated systems and capabilities. The Company is one of a limited number of companies capable of performing these services on a fully automated basis, resulting in high volume, accuracy, efficiency and customer service. Due to its highly automated facilities, the Company is also capable of producing and mailing up to 1 million pieces of mail over a single 24-hour period. Direct Mail Support Services. The Company's direct mail support services include preparing and coordinating database services and custom telemarketing/telefundraising services for use in addressing and mailing materials to current and potential customers. The Company obtains name and address data from clients and other external sources, processes the data to eliminate duplicates, corrects errors, sorts for postal discounts and electronically prepares the data for other vendors who will address pre-printed materials. Media Planning and Buying. The Company's Media Division is a multifaceted direct response media broker specializing in direct advertising such as: traditional print advertising; cooperative direct mail programs; Sunday supplements; card decks and more. Internet Services. The Company provides a full suite of Internet services such as content planning to market strategy, from technical site hosting to graphic design and multimedia production. The Company has developed Web sites from the perspective of both client and presence provider, resulting in an intimate knowledge of the issues encountered by both entities in a Web development project. From the initial planning sessions and identification of an organization's promotional objectives to the live cutover of the finished site, the Company takes a proactive role in ensuring the most efficient development process for the client and the most rewarding experience for their online clientele. Once the site is up and running, the Company provides technical maintenance and ongoing consulting to keep Web resource current, technologically up-to-date and graphically ahead of the curve. The Company generates usage reports, complete with optional analysis and feedback features. Custom Telemarketing/Telefundraising Services. Custom telemarketing/telefundraising services are designed according to the client's existing database and any other databases which may be purchased or rented on behalf of the client to create a direct marketing program or fundraising campaign to achieve specific objectives. After designing the program according to the marketing information derived from the database analysis, it is conceptualized in terms of the message content of the offer or solicitation, and an assessment is made of other supporting elements, such as the use of a direct mail letter campaign. Typically, a campaign is designed in collaboration with a client, tested for accuracy and responsiveness and adjusted accordingly, after which the full campaign is commenced. The full campaign runs for a mutually agreed period, which can be shortened or extended depending on the results achieved. The Company maintains a state-of-the-art outbound telemarketing/telefundraising calling center in Berkeley, California. The Berkeley calling center increases the efficiency of its outbound calling by using a computerized predictive dialing system supported by a UNIX-based call processing server system and networked computers. The predictive dialing system, using relational database software, supports 72 outbound telemarketers and maximizes calling efficiency by reducing the time between calls for each calling station and reducing the number of calls connected to wrong numbers, answering machines and electronic devices. The system provides on-line real time reporting of caller efficiency and client program efficiency as well as flexible and sophisticated reports analyzing caller sales results and client program results against Company and client selected parameters. The Berkeley calling center has the capacity to serve up to 15 separate clients or projects simultaneously and can produce 27,000 valid contacts per week (1,400,000 per year) or 3,400 calling hours per week (176,800 per year) on a single shift basis. A valid contact occurs when the caller speaks with the intended person and receives a "yes," "no" or "will consider" response. The existing platform can be expanded to accommodate 100 predictive dialing stations with a single shift capacity of approximately 1,900,000 valid contacts per year. Marketing and Sales - ------------------- The Company's marketing strategy is to offer customized solutions to clients' database management, Internet, telemarketing/telefundraising, fulfillment and other direct marketing requirements. Historically, the Company's operating businesses have acquired new clients and marketed their services by attending trade shows, advertising in industry publications, responding to requests for proposals, pursuing client referrals and cross-selling to existing clients. The Company targets those companies that have a high probability of generating recurring revenues because of their ongoing direct marketing needs, as well as companies which have large customer bases that can benefit from targeted direct marketing database and fulfillment services and customized telemarketing/telefundraising services. The Company markets its marketing services through a sales force consisting of both salaried and commissioned sales persons. In some instances, account representatives, will coordinate a client's database management, Internet, custom telemarketing/telefundraising, fulfillment and/or other direct marketing needs to identify cross-selling opportunities. Account representatives are responsible for keeping existing and potential clients informed of the results of recent marketing campaigns, industry trends and new developments in the Company's technical database resources. Often, the Company develops an initial pilot program for new or potential clients to demonstrate the effectiveness of its services. Access to data captured during such pilot programs allows the Company and its clients to identify previously unrecognized target market opportunities and to modify or enhance the client's marketing effort on the basis of such information. Additionally, the Company is able to provide its clients with current updates on the progress of ongoing direct marketing programs. Pricing for direct marketing services is dependent upon the complexity of the services required. In general, the Company establishes pricing for clients by detailing a broad range of service options and quotation proposals for specific components of a direct marketing program. These quotes are based in part on the volume of records to be processed, complexity of assembly, and the level of customization required. Pricing for data processing services is dependent upon the anticipated range of computer resource consumption. Typically, clients are charged a flat or stepped-up rate for data processing services provided under multi-year contracts. If the processing time, data storage, retrieval requirements and output volume exceed the budgeted amounts, the client may be subject to an additional charge. Minimum charges and early termination charges are typically included in contracts or other arrangements between the Company and the client. On-site telemarketing and telefundraising fees are generally based on a mutually agreed percentage of amounts received by the Company's clients from a campaign. Off-site fees are typically based on a mutually agreed amount per contact with a potential donor. Client Base - ----------- The Company believes that its large and diversified client base is a primary asset which contributes to stability and the opportunity for growth in revenues. The Company has approximately 5,000 clients who utilize its various marketing services. These clients are comprised of leading commercial businesses and nonprofit institutions in the publishing, entertainment marketing, public broadcasting, education, retail, financial services (including credit card, home mortgage and home equity services), education, travel and leisure and healthcare industries. No single client accounted for more than 5% of total revenue in fiscal 2000. Competition - ----------- The direct marketing services industry is highly competitive and fragmented, with no single dominant competitor. The Company competes with companies that have more extensive financial, marketing and other resources and substantially greater assets than those of the Company, thereby enabling such competitors to have an advantage in obtaining client contracts where sizable asset purchases or investments are required. The Company also competes with in-house database management, telemarketing/telefundraising and direct mail operations of certain of its clients or potential clients. Competition is based on quality and reliability of products and services, technological expertise, historical experience, ability to develop customized solutions for clients, technological capabilities and price. The Company believes that it competes favorably, especially in the arts and entertainment, publishing, financial services and fundraising sectors. The Company's principal competitors include: Acxiom Corporation, Harte-Hanks Communications, Experian North America, Fair-Isaac, Epsilon and Abacus Direct, a DoubleClick subsidiary. The current market is highly competitive and the Company anticipates that new competitors will continue to enter the market. Facilities - ---------- The Company leases all of its real property, except for certain properties in Atlanta and Houston which are owned. Facilities for its headquarters are in New York City; it's sales and service offices are located in New York City; Newtown, Pennsylvania, Berkeley and Los Angeles, California; Wilmington and Burlington, Massachusetts; Atlanta, Georgia; Houston, Texas; and London; its data centers are located in New York City, Houston and Boston; its telemarketing calling center in Berkeley and production facility in Houston. The Company's administrative office for its telemarketing/telefundraising operations in Los Angeles is located in office space leased from the former owner of the telemarketing business, which lease the Company believes is on terms no less favorable than those that would be available from independent third parties. The Company believes that all of its facilities are in good condition and are adequate for its current needs through fiscal 2001. The Company believes such space is readily available at commercially reasonable rates and terms. The Company also believes that its technological resources, including the mainframe computer and other data processing and data storage computers and electronic machinery at its data centers in New York City, Houston and Boston, as well as its related operating, processing and database software, are all adequate for its needs through fiscal 2001. Nevertheless, the Company intends to expand its technological resources, including computer systems, software, telemarketing equipment and technical support. Any such expansion may require the leasing of additional operating office space. Intellectual Property Rights - ---------------------------- The Company relies upon its trade secret protection program and non-disclosure safeguards to protect its proprietary computer technologies, software applications and systems know-how. In the ordinary course of business, the Company enters into license agreements and contracts which specify terms and conditions prohibiting unauthorized reproduction or usage of the Company's proprietary technologies and software applications. In addition, the Company generally enters into confidentiality agreements with its employees, clients, potential clients and suppliers with access to sensitive information and limits the access to and distribution of its software documentation and other proprietary information. No assurance can be given that steps taken by the Company will be adequate to deter misuse or misappropriation of its proprietary rights or trade secret know-how. The Company believes that there is rapid technological change in its business and, as a result, legal protections generally afforded through patent protection for its products are less significant than the knowledge, experience and know-how of its employees, the frequency of product enhancements and the timeliness and quality of customer support in the usage of such products. Government Regulation and Privacy Issues - ---------------------------------------- The telemarketing industry has become subject to an increasing amount of federal and state regulation. Violation of these rules may result in injunctive relief, monetary penalties or disgorgement of profits and can give rise to private actions for damages. While the Federal Trade Commission's new rules have not required or caused the Company to alter its operating procedures, additional federal or state consumer-oriented legislation could limit the telemarketing activities of the Company or its clients or significantly increase the Company's costs of regulatory compliance. Several of the industries which the Company intends to serve, including the financial services, and healthcare industries, are subject to varying degrees of government regulation. Although compliance with these regulations is generally the responsibility of the Company's clients, the Company could be subject to a variety of enforcement or private actions for its failure or the failure of its clients to comply with such regulations. In addition, the growth of information and communications technology has produced a proliferation of information of various types and has raised many new issues concerning the privacy of such information. Congress and various state legislatures have considered legislation which would restrict access to, and the use of, credit and other personal information for direct marketing purposes. The direct marketing services industry, including the Company, could be negatively impacted in the event any of these or similar types of legislation are enacted. With the exception of regulations applicable to business generally, with respect to the Company's Internet products and services, the Company is not currently subject to direct regulation by any government agency. Due to increasing popularity and use of the Internet, however, it is possible that a number of laws may be adopted with respect to the Internet in the future, covering such issues as: user privacy; pricing of goods and services offered; and types of products and service offered.. If the government adopts any additional laws or regulations covering use of the Internet, such actions could decrease the growth of the Internet. Any such reduction in the growth of the Internet may reduce demand for the Company's goods and services and raise the cost to the Company of producing such goods and services. Finally, the sales of services may be reduced and the costs to produce such services may be increased if existing U.S state and federal laws and foreign laws governing issues such as commerce, taxation, property ownership, defamation and personal privacy are increasingly applied to the Internet. Employees - --------- At June 30, 2000, the Company employed approximately 2,780 persons, of whom 1,100 were employed on a full-time basis. None of the Company's employees are covered by collective bargaining agreements and the Company believes that its relations with its employees are good. Item 2 - Properties - ------------------- The Company and certain subsidiaries own land and buildings in Houston and Atlanta. In addition, the Company and certain subsidiaries lease facilities for office space summarized as follows and in Note 13 of Notes to Consolidated Financial Statements. Location Square Feet -------- ----------- New York, New York 40,900 Atlanta, Georgia 30,500 Burlington, Massachusetts 21,000 Wilmington, Massachusetts 20,000 Los Angeles, California 17,100 Newtown, Pennsylvania 10,270 Houston, Texas 6,130 Berkeley, California 6,600 Venice, California 5,500 Altamonte Springs, Florida 2,400 Stamford, Connecticut 1,000 Lincoln, Nebraska 910 Patterson, New York 250 Toronto, Canada 860 London, England 460 Item 3 - Legal Proceedings - -------------------------- In June 1999, certain employees of MSGi Direct, Inc.'s telemarketing subsidiary voted against representation by the International Longshore and Warehouse Union ("ILWU"). The ILWU has filed unfair practices with the National Labor Relations Board ("NLRB") alleging that MSGi Direct, Inc.'s telemarketing subsidiary engaged in unlawful conduct prior to the vote. The NLRB has issued a complaint seeking a bargaining order and injunctive relief against these charges. An unfavorable finding will not have any direct financial impact on the Company. In September 1999, an action was commenced against the Company in the Supreme Court of New York, Kings County alleging damages of $4.3 million in connection with the Company's alleged failure to deliver warrants due the plaintiff in June 1996. Although the Company denied all liability, the suit was settled in January 2000 in consideration for the issuance of warrants to acquire 18,000 shares of common stock of the Company at an exercise price of $1.00 per share. Accordingly, the Company recognized $315,000 of expense based on the fair market value of the warrants granted as determined by the Black-Scholes model. The expense is included in selling general and administrative expenses for the year ended June 30, 2000. An employee of Metro Fulfillment, Inc. ("MFI"), which, until March 1999, was a subsidiary of the Company, filed a complaint in the Superior Court of the State of California for the County of Los Angeles, Central District, against MSGI and current and former officers of MSGI. The complaint seeks compensatory and punitive damages in connection with the individual's employment at MFI. The Company believes that the allegations in the complaint are without merit and, the Company has asserted numerous defenses, including that the complaint fails to state a claim upon which relief can be granted. The Company intends to vigorously defend against the lawsuit. An estimate of the possible loss cannot be determined at this time. In addition to the above, certain other legal actions in the normal course of business are pending to which the Company is a party. The Company does not expect that the ultimate resolution of pending legal matters in future periods will have a material effect on the financial condition, results of operations or cash flows. PART II Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters - ------------------------------------------------------------------------------ The common stock of the Company trades on the NASDAQ National Market under the symbol "MSGi". The following table reflects the high and low sales prices for the Company's common stock for the fiscal quarters indicated, as furnished by the NASD: Common Stock ------------ Low Sales Price High Sales Price --------------- ---------------- Fiscal 2000 Fourth Quarter $4.06 $15.00 Third Quarter 15.06 28.75 Second Quarter 11.00 21.13 First Quarter 11.19 29.50 Fiscal 1999 Fourth Quarter $15.93 $51.25 Third Quarter 3.25 14.50 Second Quarter 2.18 3.87 First Quarter 2.03 3.87 As of June 30, 2000, there were approximately 800 registered holders of record of the Company's common stock. (This number does not include approximately 16,000 investors whose accounts are maintained by securities firms in "street name".) The Company has not paid any cash dividends on any of its capital stock in at least the last five years. The Company intends to retain future earnings, if any, to finance the growth and development of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. Item 6 - Selected Financial Data - -------------------------------- The selected historical consolidated financial data for the Company presented below as of and for the five fiscal years ended June 30, 2000 have been derived from the Company's audited consolidated financial statements. Amounts are in thousands, except per share data.
Historical ---------------------------------------------------------------- Years ended June 30, ---------------------------------------------------------------- In thousands 1996 1997(1) 1998(2) 1999(3) 2000(4) -------- -------- --------- --------- --------- OPERATING DATA: Revenue $15,889 $24,145 $51,174 $82,242 $128,607 Amortization and depreciation $501 $970 $1,486 $2,282 $6,028 Loss from operations $(460) $(3,574)(5) $(580) $(7,072) $(11,292) Loss from continuing operations $(1,094) $(5,377) $(780) $(7,646) $(41,130)(11) Loss from discontinued operations - - - - (34,543)(12) Net loss $(1,094) $(5,377)(6) $(780) $(7,646)(8) $(75,673) Net loss attributable to common shareholders $(1,094) $(20,199) $(4,724)(7) $(20,181)(9) $(75,673) Loss per common share: From continuing operations $(0.36) $(2.85) $(0.37) $(1.39) $(1.55) From discontinued operations - - - - $(1.30) ------- ------- -------- -------- -------- $(0.36) $(2.85) $(0.37) $(1.39) $(2.85) Weighted average common shares oustanding 3,068 7,089 12,892 14,552 26,582 OTHER DATA: EBITDA (10) $41 $4 $906 $(4,346) $(5,159) Net cash used in operating activities $(884) $(2,664) $(1,886) $(45) $(11,357) Net cash provided by (used in) investing activities: $(572) $578 $(7,281) $(18,939) $(60,116) Net cash provided by financing activities $1,631 $3,622 $12,474 $16,035 $ 78,904 Net cash used in discontinued operations - - - - $(812) Historical ---------------------------------------------------------------- Years ended June 30, ---------------------------------------------------------------- 1996 1997(1) 1998(2) 1999(3) 2000(4) -------- -------- --------- --------- --------- BALANCE SHEET DATA: Cash $1,393 $2,929 $6,235 $3,285 $9,904 Working capital (deficit) $1,651 $189 $5,013 $(9,647) $430 Total intangible assets $7,851 $16,127 $24,771 $56,978 $154,016 Net assets of discontinued operatons - - - $5,516 - Total assets $13,301 $25,391 $49,781 $97,627 245,184 Total long term debt, net of current portion $1,517 $3,205 $204 $5,937 $36,157 Net liabilities of discontinued operations - - - - $18,347 Convertible preferred stock $1,306 - $14,367 - 29,417 Total stockholders' equity $6,945 $13,686 $17,325 $48,928 98,021
(1)Effective October 1, 1996, the Company acquired all of the outstanding common shares of Metro Services Group, Inc., renamed Metro Direct, Inc. The results of operations for Metro Direct are included in the consolidated statements of operations beginning October 1, 1996. (2)Effective July 1, 1997, the Company acquired all of the outstanding common shares of Pegasus Internet, Inc. The results of operations for Pegasus are included in the consolidated statements of operations beginning July 1, 1997. Effective December 1, 1997, the Company acquired all of the outstanding common shares of Media Marketplace, Inc. and Media Marketplace Media Division, Inc. The results of operations for Media Marketplace are included in the consolidated statements of operations beginning December 1, 1997. In May 1998, MSGi formed Metro Fulfillment, Inc., a new operating subsidiary.. (3)Effective January 1, 1999, the Company acquired all of the outstanding common shares of Stevens-Knox List Brokerage, Inc., Stevens-Knox List Management, Inc. and Stevens-Knox International, Inc. (collectively, "SKA"). The results of operations for SK&A are included in the consolidated statements of operations beginning January 1, 1999. Effective March 1, 1999 the Company sold 85% of its subsidiary Metro Fulfillment. Accordingly, effective March 1, 1999 the results of operations of MFI are no longer consolidated in the Company's statement of operations. On May 13, 1999, the Company acquired all of the outstanding common shares of CMG Direct, Inc. The results of operations for CMGD Direct, Inc. are included in the consolidated statements of operations beginning May 14, 1999. (4)On March 31, 2000, the Company acquired all of the outstanding common shares of The Coolidge Company. On March 22, 2000 the Company acquired all of the outstanding common shares of Grizzard Advertising, Inc. Effective October 1, 1999, the Company acquired 87% of the outstanding common shares of The Cambridge Intelligence Agency. The results of operations are included in the consolidated statements of operations from the date of the respective acquisition. (5)Loss from operations includes compensation expense on option grants of $1,650 which were granted at exercise prices below market value and approximately $958 for restructuring costs. (6)Net loss includes a charge for approximately $113 for discounts on warrant exercises and approximately $1,180 for the costs associated with a withdrawn public offering. (7)Net loss attributable to common shareholders includes the impact of dividends on preferred stock for a non-cash beneficial conversion feature of $3,214. (8)Loss from continuing operations and net loss include a one-time severance charge of $1,125 and a compensation expense on option grants of $444 which were granted at exercise prices below market value. (9)Net loss attributable to common shareholders includes the impact of dividends on preferred stock for (a) adjustment of the conversion ratio of $11,366 for exercises of stock options and warrants; (b) $949 in cumulative undeclared preferred stock dividends; and (c) $220 of periodic non-cash accretions of preferred stock. (10)EBITDA is defined as earnings from continuing operations before interest, income tax, depreciation, amortization and other non-cash items. EBITDA should not be construed as an alternative to operating income or net income (as determined in accordance with generally accepted accounting principles), as an indicator of MSGi's operating performance, as an alternative to cash flows provided by operating activities (as determined in accordance with generally accepted accounting principles), or as a measure of liquidity. EBITDA is presented solely as a supplemental disclosure because management believes that it enhances the understanding of the financial performance of a company with substantial amortization and depreciation expense. MSGi's definition of EBITDA may not be the same as that of similarly captioned measures used by other companies. (11)Loss from continuing operations includes a charge for approximately $27,216 for write-downs of certain Internet Investments. (12)On September 21, 2000, the Company's Board of Directors approved a plan to discontinue the operation of its WiredEmpire subsidiary. The Company will shut down the operations anticipated to be completed by the end of January 2001. The estimated losses associated with WiredEmpire are approximately $35 million and are reported as discontinued operations. Item 7 - Management's Discussion and Analysis - --------------------------------------------- Overview - -------- This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flows of the Company for the twelve month period ended June 30, 2000. This should be read in conjunction with the financial statements, and notes thereto, included in this Form 10-K. To facilitate an analysis of MSGi operating results, certain significant events should be considered. On October 1, 1999, the Company completed an acquisition of approximately 87% of the outstanding common stock of Cambridge Intelligence Agency for a total purchase price of $2.4 million which consisted of $1.6 million in common stock of the Company and an interest in the Company's Permission Plus software and related operations valued at $.8 million, subject to certain adjustments. Concurrently with this acquisition, the Company formed WiredEmpire, a licensor of email marketing tools. Effective with the acquisition, Cambridge Intelligence Agency and the Permission Plus asset was merged into WiredEmpire. In March 2000, the Company completed a private placement of 3,120,001 shares of Convertible Preferred Stock of its WiredEmpire subsidiary for proceeds of approximately $18.7 million, net of placement fees and expenses of $1.3 million. In connection with the discontinued operation of WiredEmpire, the Company has offered to redeem the preferred shares in exchange for MSGi common shares. The redemption is expected to occur in the second quarter of fiscal year 2001. On September 21, 2000, the Company's Board of Directors approved a plan to discontinue the operation of its WiredEmpire subsidiary. The Company will shut down the operations anticipated to be completed by the end of January 2001. The estimated losses associated with WiredEmpire are approximately $35 million. These losses for WiredEmpire include approximately $20 million in losses from operations through the measurement date and approximately $15 million of loss on disposal which includes approximately $2 million in losses from operations from the measurement date through the estimated date of disposal. Pursuant to Accounting Principles Board Opinion ("APB") No. 30, "Reporting the Results of Operations - Reporting the Effects of a Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occuring Events and Transactions," the consolidated financial statements of MSGi have been reclassified to reflect the discontinued operations of WiredEmpire. Accordingly, revenues, costs and expenses, and cash flows of WiredEmpire have been excluded from the respective captions in the Consolidated Statement of Operations and Consolidated Cash Flows of MSGi. The net operating results of WiredEmpire have been reported as "Loss from Discontinued Operations", and the net cash flows of WiredEmpire have been reported as "Net Cash (Used In) Provided By Discontinued Operations". The assets and liabilities of WiredEmpire have been excluded from the respective captions in the Consolidated Balance Sheets of MSGi and have been reported as "Net Assets/Liabilities of Discontinued Operations". In May 1998, the Company formed Metro Fulfillment, Inc. ("MFI"), a subsidiary providing online commerce, real-time database management, inbound/outbound customer service, custom packaging, assembling, product warehousing, shipping, payment processing and retail distribution Effective March 1, 1999, the Company sold 85% of the common stock of MFI. Accordingly, effective March 1, 1999 the results of operations of MFI are no longer consolidated in the Company's statement of operations. In September 1999, the Company sold the remaining 15% interest. The sale resulted in an immaterial gain. Effective January 1, 1999, the Company acquired all of the outstanding common shares of Stevens-Knox & Associates, Inc., Stevens-Knox List Brokerage, Inc., and Stevens-Knox International, Inc. The results of operations are reflected in the consolidated financial statements using the purchase method of accounting from the date of acquisition. Effective May 13, 1999, the Company acquired all of the outstanding common shares of CMG Direct Corporation. The results of operations of are reflected in the consolidated financial statements using the purchase method of accounting from the date of acquisition. On March 22, 2000, the Company acquired all of the outstanding common shares of Grizzard Advertising, Inc. ("Grizzard"). The results of operations of Grizzard are reflected in the consolidated financial statements using the purchase method of accounting from the date of acquisition. On March 31, 2000, the Company acquired all of the outstanding common shares of The Coolidge Company ("Coolidge"). The results of operations of Coolidge are reflected in the consolidated financial statements using the purchase method of accounting from the date of acquisition. The Company's business tends to be seasonal. Certain marketing services have higher revenues and profits occurring in the second fiscal quarter, followed by the first fiscal quarter based on the seasonality of its clients' mail dates to coordinate with the Thanksgiving and Holiday season. Telemarketing services have higher revenues and profits occurring in the fourth fiscal quarter, followed by the first fiscal quarter. This is due to subscription renewal campaigns for its performing arts clients, which generally begin in the spring time and continue during the summer months. Results of Operations Fiscal 2000 Compared to Fiscal 1999. - ---------------------------------------------------------- Revenues of approximately $128.6 million for the year ended June 30, 2000 ("Current Period") increased by $46.5 million or 56% over revenues of $82.2 million during the year ended June 30, 1999 (the "Prior Period"). Of the increase, approximately $49.7 million is attributable to acquisitions completed in the current period and including a full year of operations of acquisitions completed in the Prior Period. This increase in revenues was partially offset by the divestiture of MFI representing a $1.5 million revenue reduction in the Current Period. Revenue, not including the effects of acquisitions and divestitures, decreased $1.7 million mainly due to the reduction in brokerage revenue due to lower campaign activity. Direct costs of approximately $77.9 million for the Current Period increased by $25.4 million or 48% over direct costs of $52.5 million during the Prior Period. Of the increase, approximately $28.8 million is attributable to acquisitions in the Current Period and a full year of operations for acquisitions completed during the Prior Period. The increase cost was partially offset by the divestiture of MFI representing a $.5 million direct cost reduction in the Current Period. Direct costs, not including the effects of acquisitions or divestitures, decreased $2.9 million due to the reduction in revenue as well as a change in the mix of services sold to more profitable lines of business. Direct costs as a percentage of revenue decreased from 64% in the Prior Period to 61% in the Current Period, reflecting the change in the mix of services sold. Salaries and benefits of approximately $42.7 million in the Current Period increased by $14.9 million or 54% over salaries and benefits of approximately $27.8 million in the Prior Period. Of the increase, approximately $16.7 million is attributable to acquisitions in the Current Period and a full year of operations for acquisitions completed during the Prior Period. Salaries and benefits associated with the divestiture of MFI resulted in a reduction of $1.8 million in the Current Period. Salaries and benefits excluding acquisitions increased by approximately $1.1 million due to normal wage increases of 7%, as well as an increase in head count to manage current and anticipated growth, offset by $1.1 million reduction of severance and compensation expense on option grants the Current Period. There are no further amounts to be paid in connection with the termination of these employment contracts. Selling, general and administrative expenses of approximately $13.3 million in the Current Period increased by approximately $6.5 million or 96% over comparable expenses of $6.8 million in the Prior Period. Of the increase, approximately $4.1 million is attributable to acquisitions in the Current Period and a full year of operations for acquisitions completed during the Prior Period. Selling, general and administrative expenses associated with the divestiture of MFI resulted in a reduction of $.4 million in the Current Period. Selling, general and administrative expenses excluding acquisitions increased by approximately $2.8 million principally due to increased professional fees associated with an unsuccessful attempt by third parties to unionize the calling center, increases in rent, professional fees (principally legal and accounting), travel and entertainment and reporting fees associated with the increase in merger and acquisition activity and becoming a larger company. Depreciation and amortization expense of approximately $6.0 million in the Current Period increased by approximately $3.7 million over expense of $2.3 million in the Prior Period. Of the increase, approximately $2.5 million is attributable to acquisitions in the Current Period and including a full year of operations for acquisitions completed during the Prior Period. Depreciation and amortization expenses associated with the divestiture of MFI resulted in a reduction of $.1 million in the Current Period. The Company has taken a fourth quarter charge of approximately $27 million for unrealized losses on Internet investments made during the fiscal year based on all available information. The Company believes such losses are a result of significant changes in Wall Street valuations of Internet stocks. The Company has suspended its Internet investment strategy and will focus all efforts on the profitability of its core direct marketing operations. Net interest expense of approximately $2.5 million in the Current Period increased by approximately $1.9 million over net interest expense of approximately $.6 million in the Prior Period. Such expenses increased principally due to interest expense on outstanding borrowings relating to the Grizzard acquisition. The net provision for income taxes of approximately $265,000 in the Current Period increased by approximately $208,000 over the provision of approximately $57,000 in the Prior Period. The Company records provisions for state and local taxes incurred on taxable income at the operating subsidiary level, which cannot be offset by losses incurred at the parent company level or other operating subsidiaries. As a result of the above, loss from continuing operations of $41.1 million in the Current Period increased $33.5 million over comparable net loss of $7.6 in the Prior Period. Net loss attributable to common shareholders in the Prior Period includes the impact of dividends on preferred stock for (a) adjustment of the conversion ratio of $11,366,022 for exercises of stock options and warrants; (b) $949,365 in cumulative undeclared preferred stock dividends; and (c) $219,943 of periodic non-cash accretions on preferred stock. Results of Operations Fiscal 1999 Compared to Fiscal 1998. - ---------------------------------------------------------- Revenues of approximately $82.2 million for the year ended June 30, 1999 (the "Fiscal 1999") increased by $31.0 million or 61% over revenues of $51.2 million during the year ended June 30, 1998 (the "Fiscal 1998"). Of the increase, approximately $27.8 million is attributable acquisitions completed during Fiscal 1999 and including a full year of operations for acquisitions completed Fiscal 1998. Revenues, not including the effects of acquisitions and telemarketing and telefundraising revenue, increased by $3.4 million or 10% over the Fiscal 1998. These increases were partially offset by a decrease in telemarketing and telefundraising revenues of approximately $1.3 million or 8%. In addition, fulfillment revenue for Fiscal 1999 increased by approximately $1.1 million due to inclusion of eight months of operations in the Fiscal 1999 as compared to a month and a half in the Fiscal 1998. The decrease in telemarketing and telefundraising primarily resulted from a loss of revenue due to an unsuccessful attempt by third parties to unionize the calling center. New management has been put in place at the start of the 1999 fiscal year and have refocused its priorities. Direct costs of approximately $52.5 million in Fiscal 1999 increased by $25.7 million or 96% over direct costs of $26.8 million in Fiscal 1998. Of the increase, approximately $24.4 million is attributable to acquisitions for a full year of operations for acquisitions completed during Fiscal 1998. Direct costs for direct and internet marketing not including the effects of acquisitions increased by $.9 million or 4% which is due to the increase in revenue. The remaining increase is primarily due to fulfillment direct costs of approximately $.4 million which is consistent with the growth in revenue. The Company's direct costs consist principally of commissions paid to use marketing lists. Direct costs as a percentage of revenue increased from 52% in Fiscal 1998 to 64% in Fiscal 1999. The increase in the direct costs as a percentage of revenue results from the mix in services sold. Most of the acquisitions made in the past two years resulted in a substantial increase to the list management and list brokerage services. These services have a high direct cost percentage. As MSGi acquires new companies and internet revenues become a higher percentage of overall revenue, management expects the direct cost percentage of revenue to begin to decrease. Salaries and benefits of approximately $27.8 million in Fiscal 1999 increased by $8.5 million or 44% over salaries and benefits of approximately $19.3 million in Fiscal 1998. Of the increase, approximately $3.5 million is attributable to acquisitions completed during Fiscal 1999 and including a full year of operation for acquisitions completed during Fiscal 1998. Salaries and benefits excluding acquisitions increased by approximately $1.8 million due to increase in head count to manage current and anticipated future growth of 10% and $1.6 million in severance costs in connection with the termination of two employment contracts and compensation expense on option grants. Salaries and benefits relating to fulfillment increased by approximately $1.4 million due to inclusion of eight months of operations in Fiscal 1999 as compared to a month and a half in Fiscal 1998. Salaries and benefits associated with corporate overhead increased approximately $.2 million in the Fiscal 1999 principally due to an increase in head count to manage current and anticipated future growth. Selling, general and administrative expenses of approximately $6.8 million in Fiscal 1999 increased by approximately $2.5 million or 62% over comparable expenses of $4.2 million in Fiscal 1998. Of the increase, approximately $1.4 million is attributable to acquisitions completed during Fiscal 1999 and including a full year of operations for acquisitions completed during Fiscal 1998. Selling, general and administrative expenses excluding acquisitions increased by approximately $.3 million principally due to increased professional fees associated with an unsuccessful attempt by third parties to unionize the calling center and increased rent expense due to expansion of certain office space. Selling general and administrative expenses relating to fulfillment increased by approximately $.4 million due to inclusion of eight months of operations in Fiscal 1999 as compared to a month and a half in Fiscal 1998. The remaining increase is primarily due to an increase in corporate expenses of approximately $.4 million due to merger and acquisition activity. Depreciation and amortization expense of approximately $2.2 million in Fiscal 1999 increased by approximately $.7 million over expense of $1.5 million in Fiscal 1998. Of the increase, approximately $.6 million is attributable to acquisitions completed during Fiscal 1999 and including a full year of operations for acquisitions completed during Fiscal 1998. Net interest expense of approximately $516,000 in Fiscal 1999 increased by approximately $330,000 over net interest expense of approximately $186,000 in Fiscal 1998. Such expenses increased principally due to accrued interest on outstanding borrowings relating to the acquisitions of SK&A and CMGD. In addition, interest income from cash invested decreased due to cash used for stock buyback and to fund the fulfillment operations. The net provision for income taxes of approximately $57,000 in Fiscal 1999 increased by approximately $42,000 over the provision of approximately $15,000 in Fiscal 1998. The Company records provisions for state and local taxes incurred on taxable income at the operating subsidiary level which cannot be offset by losses incurred at the parent company level or other operating subsidiaries. As a result of the above, loss from continuing operations of $7.6 million in Fiscal 1999 increased $6.8 million over comparable net loss of $.8 in Fiscal 1998. Net loss attributable to common shareholders in Fiscal 1999 includes the impact of dividends on preferred stock for (a) adjustment of the conversion ratio of $11,366,022 for exercises of stock options and warrants; (b) $949,365 in cumulative undeclared preferred stock dividends; and (c) $219,943 of periodic non-cash accretions of preferred stock. Net loss attributable to common shareholders in Fiscal 1998 includes the impact of dividends on preferred stock for (a) a non-cash, beneficial conversion feature of $3,214,400 (b) adjustment of the conversion ratio of $152,512 for exercises of stock options and warrants and issuances of common stock; (c) $464,816 in cumulative undeclared preferred stock dividends; and (c) $112,274 of periodic non-cash accretions on preferred stock. Capital Resources and Liquidity - ------------------------------- Historically, the Company has funded its operations, capital expenditures and acquisitions primarily through cash flows from operations, private placements of equity transactions, and its credit facilities. At June 30, 2000, the Company had cash and cash equivalents of $9.9 million and accounts receivable net of allowances of $42.2 million. The Company incurred losses from continuing operations of $41.1 million in the Current Period. Cash used in operating activities from continuing operations was approximately $11.4 million. Net cash used in operating activities principally resulted from the loss from continuing operations, an increase in inventory balances and a decrease in accrued expenses and other liabilities offset by unrealized loss on investments and loss from discontinued operations. In the Prior Period, the Company incurred losses from continuing operations of $7.6 million. Cash used in operating activities was approximately $45,000. Net cash used in operating activities principally resulted from the net loss offset by the decreases in accounts receivable and the increase in accrued expenses and other liabilities. In the Current Period, net cash of $60.1 million was used in investing activities consisting of: $50.2 million for the acquisitions of CIA, Grizzard and Coolidge, $1.9 million for the purchases of property and equipment, $1.6 million for purchases of intangible assets and $6.9 million for purchases of Internet investments. In the Prior Period, net cash used in investing activities of $18.9 million consisted of $17.7 million for the acquisitions of SK&A and CMG Direct, $.9 million for a contingent payment for the acquisition of SD&A, $.5 million for the purchases of property and equipment . In the Current Period, net cash of $78.9 million was provided by financing activities. Net cash provided by financing activities consisted primarily of $30.5 million in proceeds from the issuance of common stock, $29.4 million in proceeds from the issuance of convertible preferred stock, and $23.0 million in net proceeds from bank financing. In the Prior Period, net cash of $16.0 million was provided by financing activities. Net cash provided by financing activities consisted of $10.0 million proceeds from a promissory note issued in connection with the CMG Direct acquisition, $5.5 million in proceeds from the exercise of stock options and warrants, $2.8 million in net proceeds from lines of credit offset by $1.3 million used for the purchase of treasury stock and $.8 million for repayments on debt, other notes payable and capital leases. At June 30, 2000, the Company had amounts outstanding of $9.7 million on its lines of credit. As of June 30, 2000 the Company was in violation of certain covenants at certain of its subsidiaries. The Company has obtained a waiver of such violations. The Company had approximately $4.2 million of additional availability on its lines of credit as of June 30, 2000. On April 21, 1999, the Company exercised its right to convert all 50,000 shares of General Electric Capital Corporation's Series D Convertible Preferred Stock to approximately 4.8 million shares of common stock. In conjunction with the conversion, all preferred shareholder rights, including quarterly dividends, financial covenants, acquisition approvals and board seats, were immediately cancelled. On February 24, 2000 the Company entered into a private placement with RGC International Investors LDC and Marshall Capital Management, Inc., an affiliate of Credit Suisse First Boston, in which the Company sold an aggregate of 30,000 shares of Series E Convertible Preferred Stock, par value $.01 ("Series E Preferred Stock"), and warrants to acquire 1,471,074 shares of common stock for proceeds of approximately $29.5 million, net of approximately $520,000 of placement fees and expenses. The preferred stock provides for liquidation preference under certain circumstances and accordingly has been classified in the mezzanine section of the balance sheet. The preferred stock has no dividend requirements. The Series E Preferred Stock is convertible at any time at $24.473 per share, subject to reset on August 18, 2000 if the market price of our Common Stock is lower and subject to certain anti-dilution adjustments. On August 18, 2000, the conversion price was reset to $12.24 per share, the market price on that date. The warrants are exercisable for a period of two years at an exercise price of $28.551, subject to certain anti-dilution adjustments. In March 2000, the Company entered into a credit agreement (the "Credit Agreement") with a $58,000,000 senior secured facility. The Credit Agreement is comprised of a $13 million revolving line of credit, $40 million term loan and $5 million standby letter of credit. The Credit Agreement expires on March 31, 2005 and bears interest at prime rate or LIBOR plus an applicable margin ranging from 1.5% to 2.5%, for prime and 2.5% to 3.5% for LIBOR based on a financial ratio. The term loan is payable in quarterly installments through March 2005. The loans are collaterialized by substantially all of the assets of the Company and are guaranteed by all of the Company's non-internet subsidiaries. The revolving line of credit is classified under short term borrowings (See Note 9). As of June 30, 2000, the interest rates were 11.5% for borrowings under the prime rate and 10.4% for borrowings under LIBOR. In connection with the Credit Agreement, the Company issued a warrant to purchase 298,541 shares of the Company's common stock at an exercise price of $.01 per share. The $40 million term loan was recorded at a discount of approximately $5 million to reflect an allocation of the proceeds to the estimated value of the warrant and is being amortized as interest expense over the life of the loan using the interest method of accounting. Approximately $453,000 was recorded as interest expense for the year ended June 30, 2000. Under the terms of the Credit Agreement, the Company is required to maintain certain financial covenants related to consolidated EBITDA and consolidated debt to capital, among others. The Company believes that funds on hand, funds available from its operations and its unused lines of credit, should be adequate to finance its operations and capital expenditure requirements, and enable the Company to meet interest and debt obligations for the next twelve months. In conjunction with the Company's acquisition and growth strategy, additional financing may be required to complete any such acquisitions and to meet potential contingent acquisition payments. In connection with the discontinued operations of WiredEmpire, the Company has offered to redeem the preferred shares in exchange for MSGi common shares. The redemption is expected to occur in the second quarter of fiscal year 2001. The liability of $18.8 million for the preferred shareholders is currently included in the net liability of discontinued operations and it is anticipated that this will be settled in MSGi stock. The Company believes that the cash on hand at WiredEmpire will be sufficient to satisfy the remaining obligations to be incurred as a result of the decision to discontinue operations. Summary of Recent Accounting Pronouncements - ------------------------------------------- In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25" (FIN 44). The interpretation provides guidance for certain issues relating to stock compensation involving employees that arose in applying Opinion 25. Among other issues, FIN No. 44 clarifies (a) the definition of an employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. The provisions of FIN No. 44 are effective July 1, 2000, except for the provisions regarding modifications to fixed stock option awards which reduce the exercise price of an award, which apply to modifications made after December 15, 1998. Provisions regarding modifications to fixed stock option awards to add reload features apply to modifications made after January 12,2000. The Company believes that it is in compliance with this guidance. In December 1999, the staff of the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 summarizes some of the staff's interpretations of the application of generally accepted accounting principles to revenue recognition, including presentation in the financial statements. The staff provided guidance due, in part, to the large number of revenue-recognition issues that it has encountered in registrant filings. In June 2000, SAB101B, "Second Amendment: Revenue Recognition in Financial Statements", was issued, which defers the effective date of SAB 101 until no later than the fourth quarter of fiscal years beginning after December 15, 1999. The Company is currently evaluating the impact that SAB 101 will have on it's financial statements and will adopt SAB 101 in fiscal 2001. In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities"("SFAS No. 133"). This statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires recognition of all derivatives as either assets or liabilities on the balance sheet and measurement of those instruments at fair value. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137 delaying the effective date of SFAS No. 133. The provisions of SFAS No. 133 are effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The effect of adopting SFAS No. 133 is not expected to have any impact on the Company as it current does not engage in derivative or hedging activities. Item 8 - Financial Statements and Supplementary Data - ---------------------------------------------------- The Consolidated Financial Statements required by this Item 8 are set forth as indicated in the index following Item 13(a)(1). Item 9 - Changes in and Disagreements with Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure - -------------------- None. PART III The information required by this Part III (items 10, 11, 12, and 13) is hereby incorporated by reference from the Company's definitive proxy statement which is expected to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 not later than 120 days after the end of the fiscal year covered by this report. Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Financial statements - see "Index to Financial Statements" on page 29. (2) Financial statement schedules - see "Index to Financial Statements" on page 29. (3) Exhibits: 2.1 Stock Purchase Agreement between Marketing Services Group, Inc. and Ralph Stevens (n) 2.2 Stock Purchase Agreement between Marketing Services Group, Inc. and CMGI, Inc. (o) 2.3 Agreement and Plan of Merger By and Among Marketing Services Group, Inc., GCG Merger Corp., and Grizzard Advertising, Inc.(p) 3.1 Amended and Restated Articles of Incorporation (b)3.2 Certificate of Amendment to the Amended and Restated Articles of Incorporation of the Company (b) 3.3 Certificate of Amendment to the Articles of Incorporation for change of name to All-Comm Media Corporation (e) 3.4 By-Laws (b) 3.5 Certificate of Amendment of Articles of Incorporation for increase in number of authorized shares to 36,300,000 total (h) 3.6 Certificate of Amendment of Articles of Incorporation for change of name to Marketing Services Group, Inc. (k) 3.7 Certificate of Amendment of Articles of Incorporation for increase in number of authorized shares to 75,150,000 total (q) 3.8 The Amended Certificate of Designation, Preferences and Relative, Participating and Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof for the Series D Convertible Preferred Stock (l) 3.9 Certificate of Designation, Preferences, and Rights of Series E Convertible Preferred Stock of Marketing Services Group, Inc. (t) 3.10 Certificate of Amendment to Certificate of Designation, Preferences, and Rights of Series E Convertible Preferred Stock of Marketing Services Group, Inc. (u) 10.1 1991 Stock Option Plan (c) 10.2 Agreement and Plan of Merger between All-Comm Media Corporation and Metro Services Group, Inc. (i) 10.3 Security Agreement between Milberg Factors, Inc. and Metro Services Group, Inc. (j) 10.4 Security Agreement between Milberg Factors, Inc. and Stephen Dunn & Associates, Inc. (k) 10.5 Agreement and Plan of Merger between Marketing Services Group, Inc. and Pegasus Internet, Inc. (k) 10.6 J. Jeremy Barbera Employment Agreement (a) 10.7 Rudy Howard Employment Agreement (a) 10.8 Stephen Killeen Employment Agreement (a) 10.9 Mike Dzvonik Employment Agreement (a) 10.10 Robert M. Budlow Employment Agreement (i) 10.11 Form of Private Placement Agreement (j) 10.12 Fourth Memorandum of Understanding (q) 10.13 Stock Purchase Agreement among Marketing Services Group, Inc., Stephen M. Reustle and Thomas R. Kellogg (m) 10.14 Purchase agreement dated as of December 24, 1997, by and between the Company and GE Capital (l) 10.15 Stockholders Agreement by and among the Company, GE Capital and certain existing stockholders of the Company, dated as of December 24, 1997 (l) 10.16 Registration Rights Agreement by and among the Company and GE Capital, dated as of December 24, 1997 (l) 10.17 Warrant, dated as of December 24, 1997, to purchase shares of Common Stock of the Company (l) 10.18 Form of Employment Agreement by and among Marketing Services Group, Inc. and Ralph Stevens (n) 10.19 Form of Employment Agreement by and among Marketing Services Group, Inc. and Edward Mullen (a) 10.20 First Amendment to Preferred Stock Purchase Agreement Between General Electric Capital Corporation and Marketing Services Group, Inc. (r) 10.21 Promissory note (r) 10.22 Warrant Agreement (r) 10.23 Second Amendment (s) 10.24 Warrant Agreement between Marketing Services Group, Inc. and Marshall Capital Management, Inc. (t) 10.25 Warrant Agreement between Marketing Services Group, Inc. and RCG International Investors, LDC. (t) 10.26 Registration Rights Agreement by and Among The Company, RCG International Investors, LDC and Marshall Capital Management, Inc. (t) 10.27 Securities Purchase Agreement by and Among The Company, RCG International Investors, LDC and Marshall Capital Management, Inc. (t) 10.28 Credit Agreement Among Grizzard Communications, Inc. and Paribas (v) 21 List of Company's subsidiaries (a) 23 Consent of PricewaterhouseCoopers, LLP (a) 27 Financial Data Schedule (a) (a) Incorporated herein (b) Incorporated by reference from the Company's Registration Statement on Form S-4, Registration Statement No. 33-45192 (c) Incorporated by reference to the Company's Registration Statement on Form S-8, Registration Statement 333-30839 (d) Incorporated herein by reference to the Company's Report on Form 8-K dated April 25, 1995 (e) Incorporated by reference to the Company's Report on Form 10-K for the fiscal year ended June 30, 1995 (f) Incorporated by reference to the Company's Report on Form 10-Q for the quarter ended March 31, 1996 (g) Incorporated by reference to the Company's Report on Form 8-K dated June 7, 1996 (h) Incorporated by reference to the Company's Report on Form 10-K dated June 30, 1996 (i) Incorporated by reference to the Company'sReport on Form 8-K dated October 11, 1996 (j) Incorporated by reference to the Company's Report on Form 10-Q for the quarter ended March 31, 1997 (k) Incorporated by reference to the Company's Report on Form 10-KSB for the fiscal year ended June 30, 1997 (l) Incorporated by reference to the Company's Report on Form 8-K dated January 13, 1998 (m) Incorporated by reference to the Company's Report on Form 8-K dated March 16,1998 (n) Incorporated by reference to the Company's Report on Form 8-K dated February 1, 1999 (o) Incorporated by reference to the Company's Report on Form 8-K dated March 24, 1999 (p) Incorporated by reference from the Company's Registration Statement on Form S-4, Registration Statement No. 33-85233. (q) Incorporated by reference to the Company's Report on Form 10-KSB dated June 30, 1998. (r) Incorporated by reference to the Company's Report on Form 8-K dated May 13, 1999. (s) Incorporated by reference to the Company's Report on Form 8-K dated August 30, 1999. (t) Incorporated by reference to the Company's Report on Form 8-K dated February 29, 2000. (u) Incorporated by reference to the Company's Report on Form 8-K/A dated March 23, 2000. (v) Incorporated by reference to the Company's Report on Form 10-Q dated May 16, 2000. (b) Reports on Form 8-K. During the fourth quarter 2000, Form 8-K dated April 6, 2000 was filed pursuant to Item 2 (Acquisition or Disposition of Assets) and Item 7 (Financial Statements and Exhibits). On June 5, 2000 Form 8-K/A was filed pursuant to Item 2 (Acquisition or Disposition of Assets) and Item 7 (Financial Statements and Exhibits). SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MARKETING SERVICES GROUP, INC. ------------------------------ (Registrant) By:/s/ J. Jeremy Barbera --------------------- J. Jeremy Barbera Chairman of the Board and Chief Executive Officer Date: October 13, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ J. Jeremy Barbera Chairman of the Board and October 13, 2000 - --------------------- Chief Executive Officer J. Jeremy Barbera (Principal Executive Officer) /s/ Stephen Killeen President and Director October 13, 2000 - ------------------- Stephen Killeen /s/ Michael Dzvonik Chief Operating Officer October 13, 2000 - ------------------- Michael Dzvonik /s/ Rudy Howard Chief Financial Officer October 13, 2000 - --------------- (Principal Financial Officer) Rudy Howard /s/ Cindy H. Hill Chief Accounting Officer October 13, 2000 - ----------------- (Principal Accounting Officer) Cindy H. Hill /s/ Alan I. Annex Director and Secretary October 13, 2000 - ----------------- Alan I. Annex /s/ S. James Coppersmith Director October 13, 2000 - ------------------------ S. James Coppersmith /s/ John T. Gerlach Director October 13, 2000 - --------------------- John T. Gerlach /s/ Seymour Jones Director October 13, 2000 Seymour Jones /s/ C. Anthony Wainwright Director October 13, 2000 - ------------------------- C. Anthony Wainwright MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS [Items 14] (1) FINANCIAL STATEMENTS: Page --------------------- ---- Report of Independent Accountants 30 Consolidated Balance Sheets as of June 30, 2000 and June 30, 1999 31 Consolidated Statements of Operations Years Ended June 30, 2000, 1999, and 1998 32 Consolidated Statement of Stockholders' Equity Years Ended June 30, 2000, 1999, and 1998 33-35 Consolidated Statements of Cash Flows Years Ended June 30, 2000, 1999, and 1998 36 Notes to Consolidated Financial Statements 37-55 (2) FINANCIAL STATEMENT SCHEDULES: Schedule II - Valuation and Qualifying Accounts 56 Schedules other than those listed above are omitted because they are not required or are not applicable or the information is shown in the audited financial statements or related notes. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Marketing Services Group, Inc.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Marketing Services Group, Inc. and Subsidiaries at June 30, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PRICEWATERHOUSECOOPERS LLP October 12, 2000
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2000 AND 1999 ASSETS 2000 1999 - ------ ---- ---- Current assets: Cash and cash equivalents $ 9,903,799 $ 3,285,217 Accounts receivable, billed, net of allowance for doubtful accounts of $2,287,857 and $551,043, respectively 38,324,777 23,527,798 Accounts receivable, unbilled 3,834,057 3,862,907 Inventories 4,574,046 - Note receivable- current portion 173,359 685,873 Other current assets 4,428,673 1,168,653 --------- ----------- Total current assets 61,238,711 32,530,448 Investments 7,445,500 - Property and equipment, net 18,690,478 1,504,826 Intangible assets, net 154,016,073 56,977,949 Note receivable 652,010 474,127 Other assets 3,141,343 623,599 Net assets of discontinued operations - 5,516,000 -------- --------- Total assets $245,184,115 $97,626,949 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Short - term borrowing 9,745,053 $5,316,775 Accounts payable-trade 30,098,401 23,214,278 Related party payable 5,000,000 - Accrued expenses and other current liabilities 9,531,728 8,151,764 Current portion of note payable-related party - 4,871,750 Current portion of capital lease obligations 234,032 52,099 Current portion of long term obligations 6,199,820 570,653 --------- ----------- Total current liabilities 60,809,034 42,177,319 Capital lease obligations, net of current portion 543,517 67,407 Long-term obligations, net of current portion 35,613,194 997,890 Note payable- related party, net of current portion - 4,871,750 Other liabilities 2,433,450 584,954 Net liabilities of discontinued operations 18,346,721 - ---------- ---------- Total liabilities 117,745,916 48,699,320 ----------- ---------- Convertible preferred stock - $.01 par value; 150,000 shares authorized; 30,000 shares of Series E issued and outstanding 29,417,279 - Commitments and contingencies (Note 13) Stockholders' equity: Common stock - $.01 par value; 75,000,000 authorized; 30,442,488 and 22,513,772 shares issued as of June 30, 2000 and 1999, respectively 304,425 225,138 Additional paid-in capital 194,712,085 70,812,973 Accumulated deficit (95,601,880) (19,928,677) Deferred compensation - (788,095) Less: 423,894 shares of common stock in treasury, at cost (1,393,710) (1,393,710) Total stockholders' equity 98,020,920 48,927,629 ---------- ------------ Total liabilities and stockholders' equity $245,184,115 $97,626,949 =========== ===========
The accompanying notes are an integral part of the Consolidated Financial Statements.
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998 2000 1999 1998 ---- ---- ---- Revenues $128,606,882 $82,241,894 $51,174,063 ------------ ----------- ----------- Operating costs and expenses: Direct costs 77,906,758 52,510,154 26,771,611 Salaries and benefits 42,657,063 27,757,246 19,255,348 Selling, general and administrative 13,307,682 6,764,488 4,240,805 Depreciation and amortization 6,027,871 2,282,251 1,486,106 --------- --------- ---------- Total operating costs and expenses 139,899,374 89,314,139 51,753,870 ----------- ---------- ---------- Loss from operations (11,292,492) (7,072,245) (579,807) ----------- ---------- ---------- Unrealized loss on investments (27,216,200) - - Interest expense and other, net (2,355,848) (516,099) (185,967) ----------- -------- --------- Loss from continuing operations before income taxes (40,864,540) (7,588,344) (765,774) Provision for income taxes 265,683 57,259 14,704 ------- ------ ------ Loss from continuing operations (41,130,223) (7,645,603) (780,478) Discontinued operations (Note 18): Loss from discontinued operations (19,488,943) - - Loss from disposal of discontinued operations (15,054,037) - - ---------- -------- ------- (34,542,980) - - ---------- -------- ------- Net loss $(75,673,203) $(7,645,603) $(780,478) ============= ============ ========== Net loss attributable to common stockholders (Note 15) $(75,673,203) $(20,180,933) $(4,724,480) ============= ============= ============ Net loss per common share: Continuing operations $(1.55) $(1.39) $(0.37) Discontinued operations $(1.30) - - ------- ----- ---- Net loss per common share, basic and diluted $(2.85) $(1.39) $(0.37) ======= ======= ======= Weighted average common shares outstanding 26,582,218 14,552,444 12,892,323 ========== ========== ==========
The accompanying notes are an integral part of the Consolidated Financial Statements.
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998 Common Stock Additional Treasury Stock ------------ Paid-in Accumulated -------------- Shares Amount Capital Deficit Shares Amount Totals ------------------------------------------------------------------------------------------------ Balance July 1, 1997 11,438,564 $114,386 $25,209,493 $(11,502,596) (11,800) $(135,469) $13,685,814 Shares issued upon exercise of options 4,135 41 8,229 8,270 Issuance of warrants to consultants 19,500 19,500 Issuance of restricted shares for SD&A earn-out 139,178 1,392 423,608 425,000 Issuance of common stock for acquisition of Pegasus Internet 600,000 6,000 1,794,000 1,800,000 Conversion of $1.7 million of convertible debt to common stock, net of discount and stock issuance costs 694,411 6,944 1,629,228 1,636,172 Sale of Series D Preferred Stock, net of stock issuance costs 3,474,982 3,474,982 Dividend for non-cash, non-recurring beneficial conversion feature (3,214,400) (3,214,400) Issuance of common stock for acquisition of Media Marketplace, Inc. 222,222 2,222 997,778 1,000,000 Adjustment to conversion ratio for redeemable convertible preferred stock (152,512) (152,512) Cumulative undeclared dividends for redeemable convertible preferred stock (464,816) (464,816) Accretion of redeemable convertible preferred stock (112,274) (112,274) Net and comprehensive loss (780,478) (780,478) ------------------------------------------------------------------------------------------------ Balance June 30,1998 13,098,510 130,985 29,612,816 (12,283,074) (11,800) (135,469) 17,325,258
Common Stock Additional Treasury Stock ------------ Paid-in Deferred Accumulated -------------- Shares Amount Capital Compensation Deficit Shares Amount Totals ------------------------------------------------------------------------------------------------ Balance July 1,1998 13,098,510 130,985 29,612,816 - (12,283,074) (11,800) (135,469) 17,325,258 Purchase of common stock held in treasury (412,094) (1,258,241) (1,258,241) Shares issued upon exercise of stock options 1,590,101 15,901 4,352,241 4,368,142 Shares issued upon exercise of warrants 439,455 4,395 1,087,085 1,091,480 Conversion of $558,765 of convertible debt and interest to common stock 224,000 2,240 556,525 558,765 Issuance of common stock for acquisition of CMG Direct Corporation 2,321,084 23,211 19,311,411 19,334,622 Warrants issued in connection with debt 342,000 342,000 Adjustment to conversion ratio for redeemable convertible preferred stock (11,366,022) (11,366,022) Cumulative undeclared dividends for redeemable convertible preferred stock (949,365) (949,365) Accretion of redeemable convertible preferred stock (219,943) (219,943) Conversion of Series D Preferred Stock 4,840,622 48,406 26,854,225 26,902,631 Issuance of below market stock options 1,232,000 (1,232,000) - Recognition of stock based compensation expense 443,905 443,905 Net and comprehensive loss (7,645,603) (7,645,603) ------------------------------------------------------------------------------------------------ Balance June 30,1999 22,513,772 $225,138 $70,812,973 $(788,095) $(19,928,677) (423,894) $(1,393,710) $48,927,629
The accompanying notes are an integral part of the Consolidated Financial Statements.
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998 Common Stock Additional Treasury Stock ------------ Paid-in Deferred Accumulated -------------- Shares Amount Capital Compensation Deficit Shares Amount Totals ------------------------------------------------------------------------------------------------ Balance July 1, 1999 22,513,772 $225,138 $70,812,973 $(788,095) $(19,928,677) (423,894)$(1,393,710) $48,927,629 Shares issued upon exercise of stock options 475,282 4,753 1,948,467 1,953,220 Shares issued upon exercise of warrants 129,218 1,292 385,695 386,987 Issuance of common stock for Acquisition of Grizzard Communications, Inc. 2,545,799 25,458 48,446,555 48,472,013 Issuance of common stock for acquisition of The Coolidge Company 22,251 222 365,139 365,361 Issuance of common stock for acquisition of Cambridge Intelligence Agency, Inc. 121,469 1,215 1,556,477 1,557,692 Issuance of common stock for Investment in Latin Fusion, Inc. 1,500,000 15,000 27,491,400 27,506,400 Shares issued in connection with Private placement of common stock, net of stock issuance costs 3,130,586 31,306 30,500,523 30,531,829 Issuance of shares for executive bonus 4,111 41 64,959 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 Discount on debt incurred 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 Net and comprehensive loss (75,673,203) (75,673,203) ------------------------------------------------------------------------------------------------- Balance June 30, 2000 30,442,488 $304,425 $194,712,085 $ - $(95,601,880) (423,894)$(1,393,710) $98,020,920 =================================================================================================
The accompanying notes are an integral part of the Consolidated Financial Statements.
MARKETING SERVICES GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2000, 1999, AND 1998 2000 1999 1998 ---- ---- ---- > OPERATING ACTIVITIES: Net loss $(75,673,203) $(7,645,603) $(780,478) Add: Loss from discontinued operations 34,542,980 - - ---------- --------- ------- Loss from continuing operations (41,130,223) (7,645,603) (780,478) Adjustments to reconcile net loss to net cash used in operating activities: Gain on sale of minority interest (45,163) (16,604) - Depreciation 1,826,792 673,154 412,212 Amortization 4,210,487 1,609,097 1,073,894 Unrealized loss on investments 27,216,200 - - Compensation expense on option and stock grants 105,800 443,905 - Accretion on note payable and redeemable stock - 85,500 37,555 Warrant Issuances to consultants and creditors - - 19,500 Amortization of debt issuance costs 830,185 - - Loss on disposal of assets 87,813 - - Settlement of litigation 315,000 - - Bad debt expense 427,578 162,715 70,170 Changes in assets and liabilities net of effects from acquisitions: Accounts receivable 990,092 1,211,918 (487,516) Inventory (2,701,359) - - Other current assets 1,231,867 29,716 (398,413) Other assets (614,971) (341,006) (362,671) Trade accounts payable 299,605 (482,908) (1,240,126) Accrued expenses and other liabilities (4,406,582) 4,224,861 (230,616) ---------- --------- --------- Net cash used in operating activities (11,356,879) (45,255) (1,886,489) INVESTING ACTIVITIES: Acquisitions in fiscal year 2000, net of cash acquired of $580,468 (50,187,882) - - Acquisitions in fiscal year 1999, net of cash acquired of $290,946 - (17,665,884) - Acquisitions in fiscal year 1998, net of cash acquired of $384,361 - - (5,968,864) Earn-out relating to acquisition of SD&A - (850,000) (425,000) Purchases of capitalized software (1,612,776) - - Purchases of property and equipment (1,942,312) (523,437) (287,529) Proceeds from sale of MFI 556,984 100,000 - Purchase of note receivable - - (600,000) Investment in internet companies (6,930,300) - - ---------- ---------- --------- Net cash used in investing activities: (60,116,286) (18,939,321) (7,281,393) FINANCING ACTIVITIES: Proceeds from issuance of common stock 30,531,829 - - Proceeds from sale of Series E convertible preferred stock 29,417,279 - - Proceeds from sale of Series D convertible preferred stock - - 13,898,280 Net proceeds from (repayments on) credit facilities (571,722) 2,794,467 860,598 Net proceeds from bank financing 22,965,716 - - Proceeds from exercise of stock options and warrants 2,342,706 5,459,624 8,271 Proceeds from related party note payable - 10,000,000 - Payments on promissory notes - (134,385) - Repayment of note payable - (117,540) (330,095) Principal payments under capital lease obligation (58,176) (125,779) (96,537) Repayment of related party notes payable (5,000,000) - - Purchase of treasury stock - (1,258,241) - Repayments of long term debt (723,578) (583,334) (1,866,666) ---------- ---------- ---------- Net cash provided by financing activities: 78,904,054 16,034,812 12,473,851 Net cash used in discontinued operations (812,307) - - ------- --------- --------- Net increase (decrease) in cash and cash equivalents 6,618,582 (2,949,764) 3,305,969 Cash and cash equivalents at beginning of year 3,285,217 6,234,981 2,929,012 Cash and cash equivalents at end of year $9,903,799 $3,285,217 $6,234,981 ========== ========== ==========
The accompanying notes are an integral part of the Consolidated Financial Statements MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. COMPANY OVERVIEW AND PRINCIPLES OF CONSOLIDATION: Marketing Services Group, Inc. ("MSGi" or the "Company") provides direct and database marketing, telemarketing and telefundraising, marketing communications, media planning and buying, online consulting and commerce, and Web design services. Substantially all of the Company's business activity is conducted with customers located within the United States and Canada. The consolidated financial statements include the accounts of MSGi 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 discussed in Note 18, WiredEmpire is presented as a discontinued operation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Cash and Cash Equivalents: The Company considers investments with an original maturity of three months or less to be cash equivalents. Inventory: Inventory is stated at the lower of cost (specific identification method) or market. Work in process includes job related costs which have not yet been billed to the customer. 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 costs 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 new software applications, which will be utilized in customer service, are capitalized, and once completed are amortized over three to five years. 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. 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 such comparison. 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 such investments at each balance sheet date. The Company's marketable security investments are classified as available-for-sale as of the balance sheet date and 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. Non-marketable security investments are recorded at the lower of cost or market. Unrealized losses that are other than temporary are recognized in the statement of operations. Revenue Recognition: Revenues derived from direct and database marketing are recognized when services have been fully performed and completed (the "Service Date"), but does not bill for such services, in accordance with industry practices, until all services relating to a client's campaign, including services to be performed by unrelated third parties, have been completed. The client's obligation to pay for its completed services is not contingent upon completion of the services to be performed by these unrelated third parties. In any event, clients are billed no later than a predetermined mailing date for their respective campaigns, which date is generally not more than thirty days after the Service Date. Unbilled receivables represent the portion of revenues recognized in excess of revenues billed in accordance with this practice. Revenues derived from telemarketing and telefundraising are recognized when pledged cash is received for on-site campaigns and when services are provided for off-site campaigns. Revenues and costs derived from Website development are deferred until services are completed and recognized using a straight line method over the remaining life of the contract. Revenues derived from marketing communications are recognized when the campaign is mailed. 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 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 and the allowance for doubtful accounts. Actual results could differ from those estimates. Liquidity: The Company has continued to experience operating losses and negative cash flows. To date, the Company has funded its operations with public and private equity offerings, and external financing through debt issuance. However, management believes that the Company's current cash resources and credit facility together with expected revenue growth and planned cost reductions will be sufficient to fund the Company's operations for the next twelve months. Failure to generate sufficient revenue or achieve planned cost reductions could have a material adverse effect on the Company's ability to continue as a going concern and to achieve its intended business objectives. 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. The Company restricts investment of temporary cash to financial institutions with high credit standings. A significant portion of cash balances are 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: 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 7,166,563, 3,354,238, and 1,138,264 shares for the years ended June 30, 2000, 1999 and 1998, 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. The year ended June 30, 1999 includes the impact of dividends on preferred stock for (a) adjustment of the conversion ratio for $11,366,022 for exercises of stock options and warrants; (b) $949,365 in cumulative undeclared preferred stock dividends; and (c) $219,943 of periodic non-cash accretions of preferred stock. The year ended June 30, 1998 includes the impact of dividends on preferred stock for (a) a non-cash, non-recurring beneficial conversion feature of $3,214,400; (b) $152,512 from adjustment of the conversion ratio for certain issuances of common stock and exercises of stock options; (c) $464,816 in cumulative undeclared dividends; and (d) $112,274 of periodic non-cash accretions on preferred stock. 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 as defined. The Company has elected the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Pro forma operating results had the Company prepared its financial statements in accordance with the fair-value-based method of accounting under SFAS 123 have been included in Note 15. Comprehensive Income: The Company adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") during the current fiscal year. 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 March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25" (FIN 44). The interpretation provides guidance for certain issues relating to stock compensation involving employees that arose in applying Opinion 25. Among other issues, FIN No. 44 clarifies (a) the definition of an employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. The provisions of FIN No. 44 are effective July 1, 2000, except for the provisions regarding modifications to fixed stock option awards which reduce the exercise price of an award, which apply to modifications made after December 15, 1998. Provisions regarding modifications to fixed stock option awards to add reload features apply to modifications made after January 12, 2000. The Company believes that it is in compliance with this guidance. In December 1999, the staff of the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 summarizes some of the staff's interpretations of the application of generally accepted accounting principles to revenue recognition, including presentation in the financial statements. The staff provided guidance due, in part, to the large number of revenue-recognition issues that it has encountered in registrant filings. In June 2000, SAB101B, "Second Amendment: Revenue Recognition in Financial Statements", was issued, which defers the effective date of SAB 101 until no later than the fourth quarter of fiscal years beginning after December 15, 1999. The Company is currently evaluating the impact that SAB 101 will have on it's financial statements and will adopt SAB 101 in fiscal 2001. In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities"("SFAS No. 133"). This statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires recognition of all derivatives as either assets or liabilities on the balance sheet and measurement of those instruments at fair value. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137 delaying the effective date of SFAS No. 133. The provisions of SFAS No. 133 are effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The effect of adopting SFAS No. 133 is not expected to have any impact on the Company as it current does not engage in derivative or hedging activities. 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, 2000, 1999 and 1998. Reclassifications: Certain reclassifications have been made to the prior years' financial statements to conform with 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 $104.0 million consisting of $47.8 million cash, a $5 million Letter of Credit for certain hold back provisions, an aggregate of 2,545,799 shares of common stock of MSGi, valued at $19.04 per share and acquisition costs in the amount of $2.7 million. A portion of the cash purchase price was financed through a $58 million senior secured credit facility. See Note 12. 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 ============ 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. Working capital $295,843 Property and equipment 19,095 Intangible assets 1,317,441 --------- $1,632,379 ========== CMG Direct Corporation: On May 13, 1999, MSGi acquired all of the outstanding capital stock of CMG Direct Corporation, a wholly-owned subsidiary of CMGI, Inc. Total cost of the acquisition was $33,029,237 which included $13,464,857 in cash, net of a purchase price adjustment of $371,992 received in fiscal 2000, an aggregate of 2,321,084 shares of common stock of MSGi valued at $19,334,621 and acquisition costs of $229,759. The cost of the acquisition has been allocated to the assets acquired and liabilities assumed, based on their estimated fair value, as follows: Working capital $39,274 Property and equipment 433,063 Intangible assets 32,556,900 ---------- $33,029,237 =========== CMG Direct provides database services to the direct marketing and internet industries. PermissionPlus, a Web application developed by CMGD Direct that enables companies to automate Web site customer acquisition and increase customer lifetime value, was included in discontinued operations (see Note 18). Stevens-Knox & Associates: Effective January 1, 1999, MSGi acquired all of the issued and outstanding capital stock (the "Shares") of Stevens-Knox and Associates, Inc., Stevens-Knox List Brokerage, Inc. and Stevens-Knox International, Inc. (collectively "SK&A"). The total cost of the acquisition was $3,890,222, consisting of $3,254,417 cash purchase price , assumption and payment of notes and loans payable of $385,445 and transaction and other costs of $250,360. The cost of the acquisition has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values, as follows: Working deficit $(1,647,833) Property and equipment 78,115 Other assets 63,725 Other liabilities (1,302,194) Intangible assets 6,698,409 ---------- $3,890,222 ========== The agreement includes a contingent payment of up to $1,000,000 a year for each of the next three fiscal years, adjustable forward to apply to the next fiscal year if no contingent payment is due for one such year. The payments are contingent upon (a) SK&A meeting targeted earnings before interest and taxes and (b) certain targeted billings of MSGi subsidiaries and affiliates, as defined. No amounts have been earned under the agreement. SK&A provides list management, brokerage and database management services. 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 MSGi as if, Grizzard, Coolidge, CMG Direct, and SKA, 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 1999. The summary also includes the conversion of the redeemable preferred stock (see Note 14) as if the conversion occurred prior to July 1, 1998. Supplemental Pro forma information For the year ended June 30, Unaudited 2000 1999 ---- ---- Revenues $195,181,000 $195,128,000 Loss from continuing operations $(39,602,000) $(11,051,000) Net Loss per common share Continuing operations, Basic and diluted $(1.39) $(.54) ======= ====== 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. DISPOSITION OF SUBSIDIARY In May 1998, the Company formed Metro Fulfillment, Inc, ("MFI"), an operating subsidiary providing on-line commerce, real-time database management, inbound/outbound customer service, custom packaging, assembling, product warehousing, shipping, payment processing and retail distribution. Effective March 1, 1999, the Company sold 85% of the issued and outstanding common stock of MFI for $1,260,000 consisting of a cash payment of $100,000 and a promissory note of $1,160,000. The promissory note is payable in nine annual installments and bears interest at prime plus 1%. The note receivable is collateralized by certain stock options held by the purchaser of MFI. The transaction resulted in an immaterial gain. The purchaser of MFI has retained the right to acquire the remaining shares under the same terms and conditions as the original agreement. In September 1999, the purchaser elected to acquire the remaining 15% for $222,353 which consisted of a promissory note. The note is payable $22,235 on October 1, 1999 and the remainder in nine equal annual installments and bears interest at prime plus 1%. The note receivable is collateralized by certain stock options held by the purchaser. 5. INTERNET INVESTMENTS In July 1999, the Company invested $1.6 million to acquire a 10% interest in Screenzone Media Network, LLC ("Screenzone"). Screenzone is a new interactive broadcast gateway that was developed to advertise and promote movies, music, live events and other entertainment at shopping malls and over the Internet. In June 2000, the Company believed that the carrying value of its investment was impaired and wrote off its investment in Screenzone. In October 1999, the Company acquired approximately a 10% interest in Mazescape.com for $.2 million. Mazescape.com is an innovative Internet technology company that delivers customized, automated recruiting software and services that improve the performance of corporate recruiters. In June 2000, the Company believed that the carrying value of its investment was impaired and wrote off its investment. In September 1999, the Company completed an investment of $5 million to acquire convertible preferred stock of GreaterGood.com. The Company owns approximately 11% of the outstanding shares of GreaterGood.com. GreaterGood.com builds, co-markets and manages online shopping villages for not-for-profit organization web sites. In June 2000, the Company believed that the carrying value of its investment was impaired and wrote off its investment in Greatergood.com. In December 1999, the Company acquired a 10% interest in Fusion Networks, Inc. for $27.5 million in common stock. Fusion Networks became a public entity in April 2000. Fusion Networks, Inc. operates the website www.latinfusion.com. The website is an interactive, multimedia and entertainment Latin American based portal featuring television, music and e-commerce capabilities. In June 2000, the Company wrote its investment in Fusion Networks down by approximately $20.3 million to the fair value as determined by the quoted market price. The charge was recorded through the statement of operations due to the fact that the Company believes the impairment in market value is other than temporary. As detailed above, the Company has taken a fourth quarter charge of approximately $27 million for unrealized losses on Internet investments made during the fiscal year based on all available information. The Company believes such losses are a result of significant changes in Wall Street valuations of Internet stocks. The Company has suspended its Internet investment strategy and will focus all efforts on the profitability of its core direct marketing operations. 6. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment at June 30, 2000 and 1999 consist of the following: 2000 1999 ---- ---- Land, building and improvements $7,355,082 $ - Office furniture and equipment 11,466,068 2,048,252 Assets under capital leases 1,066,194 342,590 Leasehold improvements 1,797,587 355,502 Construction in progress - 84,492 --------- ---------- 21,684,931 2,830,836 Less accumulated depreciation and Amortization (2,994,453) (1,326,010) --------- --------- $18,690,478 $ 1,504,826 =========== =========== Assets under capital leases as of June 30, 2000 and 1999, consist primarily of computer and related equipment. Accumulated amortization for such assets amounted to $602,900 and $260,399 as of June 30, 2000 and 1999, respectively. 7. INTANGIBLE ASSETS: Intangible assets at June 30, 2000 and 1999, consist of the following: Lives 2000 1999 ----- ---- ---- Covenants not to compete 5 years 1,650,000 $ 1,650,000 Capitalized software 3-7 years 9,197,974 350,000 Customer base 15-20 years 25,578,125 3,361,573 List databases 3-10 years 966,748 966,748 Assembled workforce 5 years 3,337,953 472,184 Present value of favorable lease 53 months 1,187,982 347,920 Goodwill 10-40 years 120,124,615 53,655,970 ---------- ---------- 162,043,397 60,804,395 Less accumulated amortization (8,027,324) (3,826,446) ----------- ----------- $154,016,073 $56,977,949 The increase in intangible assets during 2000 was due to the identified intangible assets and costs in excess of net assets acquired in Grizzard and Coolidge. The increase in intangible assets during 1999 was due primarily to the identified intangible assets and costs in excess of net assets acquired in the SK&A and CMG Direct acquisitions. As of June 30, 2000 and 1999 the unamortized balance of capitalized software was $8,601,808 and $205,833, respectively. Amortization expense for software was $380,740 and $56,667 and $50,000 for the years end June 30, 2000, 1999 and 1998 respectively. 8. INVENTORIES: Inventory consists of the following at June 30, 2000: 2000 ---- Work in process $4,076,417 Raw materials and supplies 497,629 --------- Total $4,574,046 ========== 9. SHORT TERM BORROWINGS: Certain of the Company's subsidiaries have 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 (9.5 % and 8 1/2% at June 30, 2000 and June 30, 1999, respectively) plus 1 1/2% with a minimum annual interest requirement of $155,000. 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, 2000, the Company was in violation of certain net worth covenants and had received the applicable waivers of violation from the lendor. A certain subsidiary has a revolving credit facility with a bank for $13,000,000 which expires in March 2005. Borrowings are limited to the lesser of the maximum availability or a percentage of eligible receivables. Interest is 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 12. As of June 30, 2000, there was an aggregate of approximately $4.2 million available under all lines of credit. 10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES: Accrued expenses as of June 30, 2000 and 1999 consisted of the following: 2000 1999 ---- ---- Salaries and benefits $2,512,158 $1,134,987 Severance cost 157,814 1,000,000 Stock option withholding taxes - 2,977,088 Other 6,861,756 3,039,689 --------- --------- Total $9,531,728 $8,151,764 ========== ========== 11. RELATED PARTY TRANSACTIONS: During July and August 1999, the Company entered into a promissory note agreement with a venture fund in the amount of $4,500,000. The principal and all accrued interest was payable in full on December 10, 1999 and bore interest at the greater of 10% or prime plus 2%. An officer of the Company is a partner in the venture fund. The principal amount and all accrued interest was prepaid in September 1999 with proceeds of a private placement. (See Note 15). In connection with the acquisition of CMGD, 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 accrues 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 14). 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 is being 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 year 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 remains 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 15). 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, 2000 GE Capital owned approximately 14.5% of the outstanding common stock of the Company. In December 1998, MSGi loaned an officer of the Company $100,000 pursuant to a promissory note. The note bore interest at the rate earned on the Company's money market fund. Principal and interest were payable in full in a lump sum. In April 1999, the promissory note, including accrued interest was repaid. 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 $1,272,000, $94,000 and $176,000 during fiscal 2000, 1999 and 1998, respectively. 12. LONG TERM OBLIGATIONS: Long term obligations as of June 30, 2000 and 1999 consist of the following: 2000 1999 ---- ---- Promissory notes payable - maturity October 1999 (a) - $233,333 Promissory notes payable - maturity January 2004 (b) 997,876 1,242,585 Promissory notes payable - maturity March 2000 (c) 23,305 92,625 Promissory note payable - maturity July 25, 2000 (d) 362,500 - Term loan payable - maturity March 2005 (e) 40,000,000 - Contingent purchase price for Grizzard acquisition 5,000,000 - --------- ------- Total debt 46,383,681 1,568,543 Less: Current portion of long-term debt (6,199,820) (570,653) Discount on notes payable to bank (4,570,667) - ---------- ------- Long-term debt $35,613,194 $997,890 =========== ======== (a) In connection with the acquisition of SD&A, the Company incurred promissory notes payable to former shareholders, payable monthly at 8% interest through October 1999. (b) In connection with the acquisition of SK&A, the Company incurred promissory notes payable to former shareholders, payable monthly at 5.59% interest through January 2004. (c) In connection with the acquisition of SK&A, the Company incurred promissory notes payable to former shareholders, payable monthly at 12% interest through March 2000. (d) In connection with the acquisition of Coolidge, the Company incurred promissory note payable to a former shareholder, payable monthly at 10% interest through July 25, 2000. (e) In March 2000, the Company entered into a credit agreement (the "Credit Agreement") with a $58,000,000 senior secured facility. The Credit Agreement is comprised of a $13 million revolving line of credit, $40 million term loan and $5 million standby letter of credit. The Credit Agreement expires on March 31, 2005 and bears interest at prime rate or LIBOR plus an applicable margin ranging from 1.5% to 2.5%, for prime and 2.5% to 3.5% for LIBOR based on a financial ratio. The term loan is payable in quarterly installments through March 2005. The loans are collaterialized by substantially all of the assets of the Company and are guaranteed by all of the Company's non-internet subsidiaries. The revolving line of credit is classified under short term borrowings (See Note 9). As of June 30, 2000, the interest rates were 11.5% for borrowings under the prime rate and 10.4% for borrowings under LIBOR. In connection with the Credit Agreement, the Company issued a warrant to purchase 298,541 shares of the Company's common stock at an exercise price of $.01 per share. The $40 million term loan was recorded at a discount of approximately $5 million to reflect an allocation of the proceeds to the estimated value of the warrant and is being amortized as interest expense over the life of the loan using the interest method of accounting. Approximately $453,000 was recorded as interest expense for the year ended June 30, 2000. Under the terms of the Credit Agreement, the Company is required to maintain certain financial covenants related to consolidated EBITDA and consolidated debt to capital, among others. 13. 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, 2000 are as follows: Operating Leases Capital Leases ---------------- -------------- 2001 $5,802,392 $256,499 2002 5,244,574 202,013 2003 4,352,684 170,107 2004 3,667,107 122,015 2005 3,273,090 7,548 Thereafter 8,896,016 71,931 --------- ------ $31,235,863 830,113 =========== Less interest (52,564) Present value of capital lease ------- obligation $777,549 ======== Rent expense was approximately $2,921,739, $840,000, and $646,00 for fiscal years ended 2000, 1999, and1998 respectively. Contingencies: In June 1999, certain employees of SD&A voted against representation by the International Longshore and Warehouse Union ("ILWU"). The ILWU has filed unfair labor practices with the National Labor Relations Board ("NLRB") alleging that the Company engaged in unlawful conduct prior to the vote. The NLRB has issued a complaint seeking a bargaining order and injunctive relief compelling the Company to recognize and bargain with the ILWU. The Company intends to vigorously defend against these charges. An unfavorable finding will not have any direct financial impact on the Company. Litigation: In September, 1999, an action was commenced against the Company in the Supreme Court of New York, Kings County alleging damages of $4.3 million in connection with the Company's alleged failure to deliver warrants due the plaintiff, in June 1996. Although the Company denied all liability, the suit was settled in January 2000 in consideration for the issuance of warrants to acquire 18,000 shares of common stock of the Company at an exercise price of $1.00 per share. Accordingly, the Company recognized $315,000 of expense based on the fair market value of the warrants granted as determined by the Black Scholes model. The expense is included in selling general and administrative expenses for the year ended June 30, 2000. An employee of Metro Fulfillment, Inc. ("MFI"), which, until March 1999, was a subsidiary of the Company, filed a complaint in the Superior Court of the State of California for the County of Los Angeles, Central District, against MSGi and current and former officers of MSGi. The complaint seeks compensatory and punitive damages in connection with the individual's employment at MFI. The Company believes that the allegations in the complaint are without merit and, the Company has asserted numerous defenses, including that the complaint fails to state a claim upon which relief can be granted. The Company intends to vigorously defend against the lawsuit. An estimate of the possible loss cannot be determined. In addition to the above, certain other legal actions in the normal course of business are pending to which the Company is a party. The Company does not expect that the ultimate resolution of pending legal matters will have a material effect on the financial condition, results of operations or cash flows. 14. 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 1,471,074 shares of common stock for proceeds of approximately $29.5 million, net of approximately $520,000 of placement fees and expenses. The preferred stock provides for liquidation preference under certain circumstances and accordingly has been classified in the mezzanine section of the balance sheet. The preferred stock has no dividend requirements. The Series E Preferred Stock is convertible at any time at $24.473 per share, subject to reset on August 18, 2000 if the market price of our Common Stock is lower and subject to certain anti-dilution adjustments. On August 18, 2000, the conversion price was reset to $12.24 per share, the market price on that date. The warrants are exercisable for a period of two years at an exercise price of $28.551, subject to certain anti-dilution adjustments. 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 10,670,000 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 exercisable in November 2001 and 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. Approximately $219,000 and $112,000 of such discount has been included as a dividend for the years ended June 30, 1999 and 1998, respectively. In addition, the Company recorded a non-cash, non-recurring deemed dividend of $3,214,400 for the year ended June 30, 1998 representing the difference between the conversion price of the Convertible Preferred Stock and the fair market value of the common stock as of the date of the agreement. 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 4.8 million shares of common stock. In conjunction with the conversion, all preferred shareholder rights, including quarterly dividends, financial covenants, acquisition approvals and board seats, were cancelled effective immediately. In May 1999, the Original Warrant was amended in connection with the issuance of a promissory note (See Note 11). Upon an occurrence of a Qualified Secondary Offering, as defined in the agreement, the Original Warrant was fixed at 200,000 shares with an exercise price of $.01 per share. The amendment changed the amount and exercise price per share to 300,000 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 10,670,000 shares subject to reduction or cancellation based on the Company's meeting certain financial goals for fiscal year 2001. 15. COMMON STOCK, STOCK OPTIONS, AND WARRANTS: Common Stock: In September 1999, the Company completed a private placement of 3,130,586 shares of common stock for proceeds of approximately $30.5 million, net of approximately $2.3 million of placement fees and expenses. The shares have certain registration rights. The proceeds of the private placement 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. On September 23, 1998, the Company announced its intention to acquire, in open market transactions, up to 1,000,000 shares of its Common Stock, par value, $.01 per share (the "Common Stock"), subject to and in compliance with the provisions and limitations of Rule 10b-18 of the Securities Exchange Act of 1934. Purchases were made from time to time at prevailing market prices during the one-year period which commenced on September 28, 1998. The source of funds for the purchase of the shares was the Company's general corporate funds, and all shares purchased are held in treasury. During 1999, the Company bought back 412,094 shares at a cost of $1,258,241. During fiscal years ended 1998 and 1997, the Company issued 139,178 and 96,748 shares of common stock, respectively, as additional contingent purchase price resulting from SD&A's achievement of defined results of operations for fiscal 1997 and 1996. Stock Options: The Company maintains a non-qualified stock option plan (the "1991 Plan") for key employees, officers, directors and consultants to purchase 3,150,000 shares of common stock. The Company also maintains a qualified stock option plan (the "1999 Plan") for the issuance of up to an additional 3,000,000 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. On November 16, 1998, the compensation committee of the Board of Directors agreed to reprice certain stock options of employees of the Company. All employee stock options with an exercise price greater than $3.11 were repriced to $3.11. As a result, stock options in the amount of 950,458 were repriced. On November 16, 1998, the closing price of the Company's stock was $2.189. The following summarizes the stock option transactions under the 1991 Plan for the three years ended June 30, 2000: Number Option Price of Shares Per Share --------- --------- Outstanding at June 30, 1997 1,586,747 Granted 1,302,100 $2.825 to $6.00 Exercised (4,135) $2.00 Canceled (93,132) $2.00 to $16.00 -------- Outstanding at June 30, 1998 2,791,580 Granted 379,200 $3.00 to $8.50 Exercised (1,590,101) $2.00 to $4.1875 Canceled (20,626) $2.00 to $3.00 -------- Outstanding at June 30, 1999 1,560,053 Granted - Excercised (235,282) $2.00 to $5.00 Canceled (17,479) $2.00 to $3.11 -------- Outstanding at June 30, 2000 1,307,292 The following summarizes the stock option transactions under the 1999 Plan for the years ended June, 30 1999 and June 30, 2000: Granted 190,000 $5.17 to $8.50 ------- Outstanding at June 30, 1999 190,000 ======= Granted 2,332,906 $1.54 to $15.125 Excercised - Canceled - --------- Outstanding at June 30, 2000 2,522,906 ========= During Fiscal 1999, 400,000 stock options were granted with a below market exercise price on the date of employment to a then executive of the Company. 133,000 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, 2000: Number Option Price of Shares Per Share --------- --------- Outstanding at June 30, 1997 1,002,250 Canceled (2,250) $16.00 ------- Outstanding at June 30, 1998 1,000,000 Granted 400,000 $5.17 --------- Outstanding at June 30, 1999 1,400,000 ========= Granted 375,000 $4.4375 Exercised (240,000) $5.17 -------- Outstanding at June 30, 2000 1,535,000 ========= As of June 30, 2000, 2,349,191 options are exercisable. The weighted average exercise price of all outstanding options is $4.84 and the weighted average remaining contractual life is 6.04 years. Except as noted above, all options granted in fiscal years 2000, 1999 and 1998 were issued at fair market value. At June 30, 2000, 477,094 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: Years ended June 30, --------------------------------- 2000 1999 1998 ---- ---- ---- Loss from continuing operations as reported $(41,130,223) $(7,645,603) $(780,478) pro forma $(46,731,147) $(9,913,855) $(2,798,152) Net loss attributable to common stockholders as reported $(41,130,223) $(20,180,933) $(4,724,480) pro forma $(46,731,147) $(22,449,185) $(6,742,154) Earnings per share as reported $(1.55) $(1.39) $(.37) pro forma $(1.76) $(1.54) $(.52) Pro forma net loss reflects only options granted in fiscal 1996 through 2000. 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 with the following weighted average assumptions: an expected life of vesting plus two years, expected volatility of 90%, no dividend yield and a risk-free interest rate ranging from 4.5% to 6%. As of June 30, 2000, the Company has 1,801,365 warrants outstanding to purchase shares of common stock at prices ranging from $0.01 to $8.00. All outstanding warrants are currently exercisable. 16. INCOME TAXES: As of June 30, -------------- 2000 1999 ---- ---- Deferred tax assets: Net operating loss carryforwards: Continuing operations $36,082,076 $21,909,217 Discontinued operations 7,948,549 - Compensation on option grants 3,486,775 150,928 Unrealized loss on investments 11,659,420 - Other - 352,415 ---------- ---------- Total assets 59,176,820 22,412,560 Deferred tax liabilities: Amortization of intangible assets (15,114,470) - Other (982,478) - ---------- ---------- Total liabilities (16,096,948) - ---------- ---------- Net deferred tax assets 43,079,872 22,412,560 Valuation allowance (43,079,872) (22,412,560) ----------- ----------- Net deferred tax assets $ - $ - =========== =========== The Company has a net operating loss carryforward of approximately $84,700,000 available which expires from 2010 through 2020. Of these net operating loss carryforwards approximately $50 million is the result of windfall deductions related to the exercise of non-qualified stock options. The realization of these net operating loss carryforwards would result in a credit to equity. These loss carryforwards are subject to annual limitations. 17. EMPLOYEE RETIREMENT SAVINGS PLAN (401K): 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. Certain subsidiaries match employees' contributions to a maximum of 2% of the employee's salary. Matching contributions charged to expense were $274,951, $ 63,523 and $48,822 for the fiscal years ended June 30, 2000, 1999 and 1998, respectively. Certain subsidiaries also provide for discretionary company contributions. Discretionary contributions charged to expense for the fiscal years end June 30, 2000, 1999 and 1998 were $64,024, $63,391 and $24,959, respectively. 18. 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 January 2000, the Company contributed its Pegasus subsidiary to WiredEmpire for additional shares of common stock. In March 2000, the Company completed a private placement of 3,120,001 shares of Convertible Preferred Stock of its WiredEmpire subsidiary for proceeds of approximately $18.7 million, net of placement fees and expenses of $1.3 million. In connection with the discontinued operation of WiredEmpire, the Company has offered to redeem the preferred shares in exchange for MSGi common shares. The redemption is expected to occur in the second quarter of fiscal year 2001. On September 21, 2000, the Company's Board of Directors approved a plan to discontinue the operation of its WiredEmpire subsidiary. The Company will shut down the operations anticipated to be completed by the end of January 2001. The estimated losses associated with WiredEmpire are approximately $35 million. These losses for WiredEmpire include approximately $20 million in losses from operations through the measurement date and approximately $15 million of loss on disposal which includes approximately $2 million in losses from operations from the measurement date through the estimated date of disposal. It also includes provisions for vested compensation expense, write down of assets to net realizable value, lease termination costs, employee severance and benefits and other contractual commitments. The assets and liabilities of WiredEmpire have been separately classified on the consolidated balance sheets as "Net assets(liabilities) of discontinued operations." A summary of these assets and liabilities at June 30, 2000 and 1999 were as follows: 2000 1999 ---- ---- Current assets $9,970,510 - Non current assets 606,086 5,516,000 Current liabilities (10,193,618) - Preferred stock (18,729,699) - Net assets (liabilities) of ---------- --------- discontinued operations $(18,346,721) $5,516,000 ========== ========= In connection with the discontinued operations of WiredEmpire, the Company has offered to redeem the preferred shares in exchange for MSGi common shares. The redemption is expected to occur in the second quarter of fiscal year 2001. The liability of $18.7 million for the preferred shareholders is currently included in the net liability of discontinued operations and it is anticipated that this will be settled in MSGi stock. 19. SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES: 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 footnotes 3 and 5). For the year ended June 30, 1999: o The Company recorded the following non-cash preferred dividends as of June 30, 1999: (a) $11,366,022 adjustment of the conversion ratio for exercises of stock options and warrants; (b)$949,365 cumulative undeclared dividends; and (d) $219,943 of periodic, non-cash accretions on preferred stock. On April 21, 1999, the Company exercised its right to convert all 50,000 shares of General Electric Capital Corporation's Series D Convertible Preferred Stock into approximately 4.8 million shares of common stock. In conjunction with the conversion, all preferred shareholder rights, including quarterly dividends, financial covenants, acquisition approvals and board seats were cancelled. o Convertible debt and accrued interest with an aggregate amount of $558,765 was converted into 224,000 shares of common stock. o Capital lease obligations of $47,934 were incurred for the leasing of certain equipment. o The Company sold 85% of the issued and outstanding common stock of MFI for $1,260,000 consisting of a cash payment of $100,000 and a promissory note of $1,160,000. o 145,000 outstanding warrants were converted into 116,406 shares of common stock in a cashless exercise. For the year ended June 30, 1998: o As a result of the sale of $15,000,000 of redeemable convertible preferred stock and warrants to General Electric Capital Corporation, more fully described in Note 12, the Company has recorded the following non-cash preferred dividends as of June 30, 1998: (a) $3,214,400 non-cash, non-recurring beneficial conversion feature; (b) $152,512 adjustment of the conversion ratio for certain issuances of common stock and exercises of stock options; (c) $464,816 cumulative undeclared dividends; and (d) $112,274 of period, non-cash accretions on preferred stock. o Convertible debt and accrued interest with an aggregate principal amount of $1,700,000 was converted into 694,411 shares of common stock. Unamortized deferred financing costs relating to the convertible debt in the amount of $99,857 were written off to paid in capital upon conversion. o Capital lease obligations of $142,231 were incurred for the leasing of certain equipment and automobiles. o Property and equipment in the amount of $626,356 were acquired through the foreclosure on a note receivable. o The Company issued 139,178 shares of common stock, valued at $425,000, as an earn-out payment to the former owner of SD&A for achieving certain targeted earnings for the fiscal year ended June 30, 1997. The Company increased intangible assets by $780,000 and $91,112 due to an earn-out payment paid to the former owner of SD&A for the achievement of defined results of operations for the fiscal year ended June 30, 1998 and 1997, respectively. Supplemental disclosures of cash flow data: 2000 1999 1998 ---- ---- ---- Cash paid during the year for: Interest 1,510,937 $547,209 $ 439,264 Financing charge 90,741 $75,000 $1,101,719 Income tax paid 48,429 $162,107 $ 45,019 Supplemental schedule of non cash investing and financing activities o Details of businesses acquired in purchase transactions: 2000 1999 1998 ---- ---- ---- Working capital deficit, other than cash acquired $11,627,717 $(1,527,513) $(203,142) Fair value of other assets acquired $117,702,990 $39,830,212 $9,091,306 Liabilities assumed or incurred $30,303,214 $1,302,194 $119,300 Fair value of stock issued for acquisitions $48,837,375 $19,334,621 $2,800,000 Cash paid for acquisitions (including related expenses) $50,770,586 $17,956,830 $6,353,225 Cash acquired $580,468 $290,946 $384,361 Net cash paid for (provided by) ---------- ---------- --------- acquisitions $50,190,118 $17,665,884 $5,968,864 20. 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. MSGi is organized primarily on the basis of products broken down into separate subsidiaries. Based on the nature of the services provided and class of customers, as well as the similar economic characteristics, MSGi's subsidiaries have been aggregated. The accounting policies of the segments are the same as those described in Note 2, Summary of Significant Accounting Policies. No single customer accounted for 10% or more of total revenues. MSGi earns 100% of its revenue in the United States. Supplemental product line information: 2000 1999 1998 ---- ---- ---- List services $74,699,861 $56,201,456 $28,998,882 Database/computer processing 16,371,657 8,389,500 4,643,024 Telemarketing/telefundraising 15,204,985 15,210,562 16,505,516 Marketing communications 20,458,691 - - Internet 1,720,076 946,973 618,084 Other 151,612 1,493,403 408,557 ------- --------- ------- Consolidated total $128,606,882 $82,241,894 $51,174,063 ============ =========== =========== Schedule II Marketing Services Group, Inc. Valuation and Qualifying Accounts For the Years Ended June 30, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- 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 2000 $551,043 $427,578 $1,642,442(2) $333,206 2,287,857 Fiscal 1999 $421,861 $162,715 $361,3772(2) $394,910 $551,043 Fiscal 1998 $32,329 $70,170 $319,3622(2) - $421,861 - ------------------ (1) Represents accounts written off during the period. (2) Represents allowance for doubtful account balance on the opening balance sheets for acquisitions made during the year. EX-21 2 0002.txt EXHIBIT 21 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT All-Comm Acquisition Corporation* (100%) All-Comm Holdings, Inc* (100%) Alliance Media Corporation (100%) MSGi Direct - New York, Inc. (100%) MSGi Direct, Inc. (100%) MSGi Direct - Philadelphia, Inc. (100%) Media Marketplace Media Division** (100%) MSGi Direct - SKA, Inc. (100%) MSGi Direct - SKLB, Inc. (100%) MSGi Direct - International, Inc. (100%) MSGi Direct - Boston, Inc. (100%) WiredEmpire.com Corp. ( 87%) The Coolidge Company, Inc. (100%) Grizzard Communications Group, Inc. (100%) * Dissolved in June 1997 **Dissolved in August 1998 EX-23 3 0003.txt EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors Marketing Services Group, 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 Marketing Services Group, Inc. and Subsidiaries, of our report dated October 12, 2000, 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 12, 2000 EX-27 4 0004.txt EXHIBIT 27
5 Financial Data Schedule THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF MARKETING SERVICES GROUP, INC. AS OF AND FOR THE YEAR ENDED JUNE 30, 2000 INCLUDED IN THIS REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS U.S. Dollars 12-Mos Jun-30-2000 Jul-01-1999 Jun-30-2000 1 9,903,799 0 44,446,691 (2,287,867) 4,574,046 61,238,711 21,684,931 (2,994,453) 245,184,115 60,809,034 0 0 29,417,279 304,425 97,716,495 245,184,115 128,606,882 128,606,882 77,906,758 77,906,758 61,992,616 0 2,355,848 (40,864,540) 265,683 (41,130,223) (34,542,980) 0 0 (75,673,203) (2.85) (2.85)
EX-10 5 0005.txt EXHIBIT 10.6 EMPLOYMENT AGREEMENT THIS AGREEMENT (this "Agreement") is being made as of the 30th day of June 2000 between MARKETING SERVICES GROUP, INC., a Nevada corporation (the "Company"), having its principal offices at 333 Seventh Avenue, New York, New York 10001, and JEREMY BARBERA ("Employee"), an individual residing at: 225 Central Park West, New York, New York 10024. W I T N E S S E T H: WHEREAS, the Board of Directors of the Company (the "Board") desires the Company to continue to employ the Employee as Chairman and Chief Executive Officer of the Company and to compensate him therefor; and WHEREAS, the Employee desires to continue to serve as Chairman and Chief Executive Officer of the Company, on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual premises and agreements contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Nature of Employment; Term of Employment. The Company hereby employs Employee and Employee agrees to serve the Company upon the terms and conditions contained herein, for a term, subject to the provisions of Section 7, commencing effective as of January 1, 2000 and continuing until December 31, 2002 (the "Initial Term"). This Agreement shall be automatically renewed annually for an additional term of three (3) years, unless either party hereto shall provide ninety (90) days notice to the other party hereto, of their intent not to renew this Agreement. 2. Duties and Powers as Employee. (a) During the Term, the Employee shall serve as Chairman and Chief Executive Officer of the Company and shall have the authority, functions, duties, powers and responsibilities normally associated with such position and as from time to time may be prescribed by the Board. The Employee agrees, subject to his election as Chairman and Chief Executive Officer and without additional compensation, to serve during the Employment Term in such additional offices of comparable stature and responsibility to which he may be elected from time to time in the Company's Subsidiaries (as defined in Section 10 below) and to serve as a director and as a member of any committee of the Board and/or any of the Company's Subsidiaries. (b) During the Employment Term and subject to the provisions of Section 2(e), (i) the Employee's services shall be rendered on a full-time, exclusive basis, (ii) he will apply on a full-time basis all of his skill and experience to the performance of his duties in such employment, and shall report only to the Board of Directors, (iii) he shall have no other employment or outside business activities and (iv) unless the Employee otherwise consents, the location for the performance of his services shall be at the discretion of the Board of Directors, subject to such reasonable travel as the performance of his duties in the business of the Company may require. (c) Employee agrees that the Company may obtain a life insurance policy on the life of Employee naming the Company as the beneficiary thereof. The Company will also purchase a life insurance policy for Employee equal to 2X the Base Salary whereby the family of the Employee will serve as beneficiary. (d) During the Employment Term, the Employee shall not, directly or indirectly, without the prior written consent of the Board, render any services to any Person (as defined in Section 10 below), other than the Company and its Subsidiaries and other Persons in which the Company may have an interest, or acquire any interest of any type in any such other Person that is in competition with the Company or any of its Subsidiaries or in conflict with his full-time, exclusive position as a senior executive officer of the Company; provided, however, that the foregoing shall not be deemed to prohibit the Employee from (i) acquiring, solely as an investment, securities of any person which are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and which are publicly traded, so long as he is not part of any group required to make any filing under Section 13(d) of the Exchange Act in respect of such person and such securities do not constitute two (2%) percent or more of any class of outstanding securities of such person, (ii) acquiring, solely as an investment, any securities of any person (other than a person that has outstanding securities covered by the preceding clause (i)) so long as he remains a passive investor in such person and does not become part of any control group thereof and so long as such person is not, directly or indirectly, in competition with the Company or any of its Subsidiaries, or (iii)(A) serving on the boards of directors of a reasonable number of other corporations (none of which are in competition with the Company or its Subsidiaries) or the boards of a reasonable number of trade associations and/or charitable organizations or, with the prior written consent of the Board, to provide consulting services for any such corporation, trade association and/or charitable organization, (B) engaging in charitable activities and community affairs and (C) managing his personal investments and affairs; provided that the activities referred to in this clause (iii) do not in the aggregate interfere in any material respect with the proper performance of his duties and responsibilities as the Company's Chairman and Chief Executive Officer. For purposes of the foregoing, a person shall be deemed to be in competition with the Company or any of its Subsidiaries if it (or its Subsidiaries or Affiliates (as defined in Section 10 below)) is then engaged in any line of business that is substantially the same as any line of business in which the Company or any of its Subsidiaries is engaged. 3. Compensation. (a) As base compensation for his services hereunder, the Company shall pay Employee a base salary (the "Base Salary"), payable in weekly installments, at the annual rate of Five Hundred Thousand ($500,000) Dollars for the first full year of the Employment Term and an amount, not less than the Base Salary, for each other full year of the Employment Term. (b) In addition to the Base Salary, Employee shall receive for his services hereunder options (the "Options") under the Company's 1991 Stock Option Plan (the "Plan") to purchase eight hundred twenty five thousand (825,000) shares of the common stock, $.01 par value per share, of the Company at a per share exercise price equal to the fair market value of the Company's common stock on June 30, 2000, which Options shall vest and become exercisable as follows: 50% shall vest on December 31, 2000, 25% shall vest on December 31, 2001 and , 25% shall vest on December 31, 2002, in accordance with the Company's current practice and the standard terms and conditions of the Plan. In the event of a termination of this Agreement pursuant to Section 7(d) or Section 8, any option in the Company held by the Employee (including but not limited to the options described herein) shall to the extent then unvested become immediately vested and exercisable and shall remain so exercisable for a period of eighteen months following such termination. (c) During the Employment Term, the Employee shall be entitled to participate in all employee pension and welfare benefit plans and programs made available to the Company's senior level executives or its employees generally, as such plans or programs may be in effect from time to time, including without limitation, pension, savings, 401(k) and other retirement plans or programs, medical, dental, hospitalization, short-term and long-term disability and life insurance plans, and any other employee benefit plans or programs that may be sponsored by the Company from time to time, whether funded or unfunded. Employee will continue to be entitled to receive automobile, parking and health club benefits at the expense of the Company. (d) Employee shall be eligible to receive bonuses, in a maximum amount equal to up to one hundred percent (100%) of the Base Salary, for each year of the Employment Term if and as determined by the Board of Directors of the Company, subject to the approval of the Compensation Committee of the Company (the "Compensation Committee"). Such bonuses, if any, shall be based upon the Company meeting certain goals as established by the Compensation Committee, as customized to the Employee's performance hereunder. 4. Expenses; Vacations. Employee shall be entitled to reimbursement for reasonable travel and other out-of-pocket expenses reasonably incurred in the performance of his duties hereunder, upon submission and approval of written statements and bills in accordance with the then regular procedures of the Company. Employee shall be entitled to twenty (20) days paid vacation time in accordance with the then regular procedures of the Company governing executives as determined from time to time by the Company's Board of Directors and communicated, in writing, to Employee. Up to a maximum of five (5) days of unused vacation from any one year of the Employment Term may be carried over into the subsequent year; provided, however, that Employee may not use more than twenty-five (25) vacation days in any single year. In consideration for Employee's right to carry over unused vacation, Employee hereby waives his right to be paid for any unused vacation time. 5. Representations and Warranties of Employee. Employee represents and warrants to the Company that (a) Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder; (b) Employee's execution of this Agreement does not require the consent of any person; (c) Employee is under no physical or mental disability that would hinder his performance of duties under this Agreement; and (d) this Agreement constitutes the valid and binding obligation of the Employee enforceable against the Employee in accordance with its terms. 6. Restrictive Covenants. During the three (3) years following the end of the Employee's employment by the Company (the "Covenant Period"): (a) (i) The Employee agrees that he will not, directly or indirectly, during the Covenant Period, for his own benefit or for the benefit of any other Person, knowingly solicit the professional services of any Person employed by the Company, any Subsidiary or any Affiliate thereof or any Person who had been employed within three (3) months prior thereto, or otherwise interfere with the relationship between the Company, any Subsidiary or any Affiliate thereof and any of such Persons. (ii) The Employee agrees that he will not, directly or indirectly, solicit or encourage any Person who was a customer of the Company, any Subsidiary or any Affiliate thereof during the three (3) years prior to the date of such termination to cease doing business with the Company or to do business with any other Person that is engaged in the same or similar business to that of the Company. (iii) If this Agreement shall be terminated other than pursuant to Section 7(a), then Employee, for a period of one (1) year from the date of termination, shall not, directly or indirectly, solicit or encourage any Person who was a customer of the Company, any Subsidiary or any Affiliate thereof during the three (3) years prior to the date of such termination to cease doing business with the Company or to do business with any other Person that is engaged in the same or similar business to that of the Company. (b) The Employee recognizes and acknowledges that, in connection with his employment with the Company, he will have access to valuable trade secrets and confidential information of the Company and its Subsidiaries and Affiliates including, but not limited to, customer and supplier lists, business methods and processes, marketing, promotional, pricing and financial information and data relating to employees and agents (collectively, "Confidential Information") and that such Confidential Information is being made available to the Employee only in connection with the furtherance of his employment with the Company. The Employee agrees that during the Employment Term and thereafter, he will not use or disclose any of such Confidential Information to any Person, except that disclosure of Confidential Information by the Employee will be permitted: (i) to the Company, its Subsidiaries and Affiliates and their respective advisors; (ii) if such Confidential Information has previously become available to the public through no fault of the Employee; (iii) if required by any court or governmental agency or body or is otherwise required by law; or (iv) if expressly consented to by the Company. (c) The parties agree that a violation of any provision of any of the foregoing agreements not to compete or disclose, or any provision thereof, will cause irreparable damage to the Company, and the Company shall be entitled (without any requirement of posting a bond or other security), in addition to any other rights and remedies which it may have, at law or in equity, to an injunction enjoining and restraining the Employee from doing or continuing to do any such act or any other violations or threatened violations of this Section 6. (d) Any interest in patents, patent applications, inventions, copyrights, developments, and processes ("Such Inventions") which Employee now or hereafter during any period he is employed by the Company may, directly or indirectly, own or develop relating to the fields in which the Company may then be engaged shall belong to the Company; and, forthwith upon request of the Company, Employee hereby agrees that he shall execute all such assignments and other documents and take all such other action as the Company may reasonably request in order to vest in the Company all of his right, title, and interest in and to Such Inventions, free and clear of all liens, charges, and encumbrances. (e) The Employee acknowledges and agrees that the restrictive covenants set forth in this Section 6 (the "Restrictive Covenants") are reasonable and valid in geographical and temporal scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full force and effect, without regard to the invalid or unenforceable parts. (f) If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable for any reason, such court shall have the power to modify such Restrictive Covenant, or any part thereof, and, in its modified form, such Restrictive Covenant shall then be valid and enforceable. 7. Termination. (a) Notwithstanding anything herein contained, if on or after the date hereof and prior to the end of the Employment Term, Employee is terminated For Cause (as defined below), then the Company shall have the right to give notice of termination of Employee's services hereunder as of a date to be specified in such notice (which may not be less than fourteen (14) days following the mailing of such notice), and this Agreement shall terminate on the date so specified. Termination "For Cause" shall mean Employee shall (i) be convicted of a felony crime, (ii) commit any act, or omit to take any action, in bad faith and to the material detriment of the Company, (iii) commit an act of moral turpitude to the material detriment of the Company, (iv) commit an act of fraud against the Company, (v) refuse to implement, or adhere to, reasonable policies or directives of the Board, or (vi) materially breach any term of this Agreement (including Employee's voluntary resignation or termination of this Agreement prior to the end of the Employment Term) and fail to correct such breach within ten (10) business days after written notice thereof; provided, that in the case of a termination pursuant to (ii), (iii), (iv), (v) or (vi), such determination must be made by the Board after a meeting at which Employee was given an opportunity to explain such actions. In the event this Agreement is terminated For Cause, then Employee shall be entitled to receive only his salary at the rate provided in Section 3 to the date on which termination shall take effect plus any compensation which is accrued but unpaid on the date of termination. (b) In the event that Employee shall be physically or mentally incapacitated or disabled or otherwise unable fully to discharge his duties hereunder for a period of sixty (60) consecutive or non-consecutive days during the Employment Term, then this Agreement shall terminate upon notice in writing to Employee, and no further compensation (other than accrued but unpaid salary or bonus through the date of termination) shall be payable to Employee, except as may otherwise be provided under any disability insurance policy or similar instrument. (c) In the event that Employee shall die during the Employment Term, then this Agreement shall terminate on the date of Employee's death, and no further compensation (other than accrued but unpaid salary or bonus through the date of death) shall be payable to Employee, except as may otherwise be provided under any insurance policy or similar instrument. (d) In the event that this Agreement is terminated Without Cause, Employee shall receive severance pay consisting of a single lump sum distribution (with no present value adjustment) equal to 2.99 times the compensation paid during the preceding 12 months, and all outstanding stock options shall fully vest and become immediately exercisable. 8. Merger, Etc. In the event of a future disposition of the properties and business of the Company, substantially as an entirety, by merger, consolidation, sale of assets, sale of stock, or otherwise, then the Company may elect to assign this Agreement and all of its rights and obligations hereunder to the acquiring or surviving corporation. Employee shall have the right to terminate this Agreement by written notice given within three (3) months of the date of such acquisition. Upon such termination, Employee shall receive severance pay consisting of a single lump sum distribution (with no present value adjustment) equal to 2.99 times the sum of the employee's annual base salary plus the maximum annual bonus as outlined in section 3(d)), and all outstanding stock options shall fully vest and become immediately exercisable. 9. Certain Additional Payments by the Company. Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up" Payment) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up payment equal to the Excise Tax imposed upon the Payments. (a) Subject to the provisions of Section 9 (c), all determination required to be made under this Section 9, including whether and when a Gross-Up payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the certified public accounting firm which serves as the Company's auditor immediately prior to the Change of Control (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company or the Executive. In the event that such Accounting Firm declines to act, the Company shall appoint another nationally recognized accounting firm (which is acceptable to the Executive) to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9 (c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (b) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than fifteen days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall ear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall defend, indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of expenses. Without limitation on the foregoing provisions of this Section 9 (c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearing and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall defend, indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9 (c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9 (c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9 (c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Certain Definitions. As used herein, the following terms shall have the following meanings: "Affiliate" of a person shall mean any other person that directly or indirectly controls, is controlled by, or is under common control with the person specified. For the purposes of this Agreement, "control," when used with respect to any person, shall mean the power to direct the management and policies of such person, whether through the ownership of securities, by contract or otherwise. "Person" shall mean any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, government or any other entity. "Subsidiary" shall mean, in respect of any person, any corporation, association, partnership or other business entity of which more than fifty (50%) percent of the total voting power of shares of capital stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such person, (ii) such person and one or more Subsidiaries or Affiliates of such person or (iii) one or more Subsidiaries or Affiliates of such person. 11. Survival. The covenants, agreements, representations, and warranties contained in or made pursuant to this Agreement (unless otherwise stated therein) shall survive the termination of this Agreement, irrespective of any investigation made by or on behalf of any party. 12. Modification. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 13. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given, at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 13). In the case of a notice to the Company, a copy of such notice (which copy shall not constitute notice) shall be delivered to Camhy Karlinsky & Stein LLP, 1740 Broadway, 16th Floor, New York, New York 10019, Attention: Alan I. Annex, Esq. Notice to the estate of Employee shall be sufficient if addressed to Employee as provided in this Section 13. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address, which notice shall be deemed given at the time of receipt thereof. 14. Waiver. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing and signed by the party against whose waiver is asserted. 15. Withholding. All payments required to be made by the Company to the Employee under this Agreement shall be subject to withholding taxes, Social Security and other payroll deductions in accordance with the Company's policies applicable to senior executives of the Company and the provisions of any applicable employee benefit plan or program of the Company. 16. Binding Effect. Employee's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives, and shall be binding upon and inure to the benefit of the Company and its successors and those who are its assigns under Section 8. 17. Headings. The headings in this Agreement are solely for the convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 18. Counterparts; Governing Law. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by, and construed in accordance with, the laws of the State of New York, without given effect to the rules governing the conflicts of laws. Each of the parties hereto hereby irrevocably submits to the jurisdiction of the courts of the State of New York, County of New York, and of any federal court located in the State of New York, County of New York, in connection with any action or proceeding arising out of or relating to, or a breach of, this Agreement. Each of the parties hereto agrees that such court may award reasonable legal fees and expenses to the prevailing party. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first written above. MARKETING SERVICES GROUP, INC. By: /s/ Alan Annex -------------- Alan Annex, Secretary By: /s/ Jeremy Barbera ------------------ Jeremy Barbera, Chairman & CEO EX-10 6 0006.txt EXHIBIT 10.7 EMPLOYMENT AGREEMENT THIS AGREEMENT (this "Agreement") is being made as of the 1st day of January 2000 between MARKETING SERVICES GROUP, INC., a Nevada corporation (the "Company"), having its principal offices at 333 Seventh Avenue, New York, New York 10001, and RUDY HOWARD ("Employee"), an individual residing at: 322 Windchase Lane, Wilmington, North Carolina 28409. W I T N E S S E T H: WHEREAS, the Board of Directors of the Company (the "Board") desires the Company to employ the Employee as the Chief Financial Officer of the Company and to compensate him therefor; and WHEREAS, the Employee desires to serve as Chief Financial Officer of the Company, on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual premises and agreements contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Nature of Employment; Term of Employment. The Company hereby employs Employee and Employee agrees to serve the Company upon the terms and conditions contained herein, for a term, subject to the provisions of Section 7, commencing as of the date hereof and continuing until December 31, 2003 (the "Initial Term"). This Agreement shall be automatically renewed annually for an additional term of four (4) years, unless either party hereto shall provide ninety (90) days notice to the other party hereto, of their intent not to renew this Agreement. 2. Duties and Powers as Employee. (a) During the Term, the Employee shall serve as the Chief Financial Officer of the Company and shall have the authority, functions, duties, powers and responsibilities normally associated with such position and as from time to time may be prescribed by the Board. The Employee agrees, subject to his election as Chief Financial Officer and without additional compensation, to serve during the Employment Term in such additional offices of comparable stature and responsibility to which he may be elected from time to time in the Company's Subsidiaries (as defined in Section 10 below) and to serve as a director and as a member of any committee of the Board and/or any of the Company's Subsidiaries. (b) During the Employment Term and subject to the provisions of Section 2(e), (i) the Employee's services shall be rendered on a full-time, exclusive basis, (ii) he will apply on a full-time basis all of his skill and experience to the performance of his duties in such employment, and shall report only to the Chairman of the Board or any designate appointed by the Chairman of the Board, (iii) he shall have no other employment or outside business activities and (iv) unless the Employee otherwise consents, the location for the performance of his services shall be at the discretion of the Chairman of the Board, subject to such reasonable travel as the performance of his duties in the business of the Company may require. (c) Employee agrees that the Company may obtain a life insurance policy on the life of Employee naming the Company as the beneficiary thereof. The Company will also purchase a life insurance policy for Employee equal to 2X the Base Salary whereby the family of the Employee will serve as beneficiary. (d) During the Employment Term, the Employee shall not, directly or indirectly, without the prior written consent of the Board, render any services to any Person (as defined in Section 10 below), other than the Company and its Subsidiaries and other Persons in which the Company may have an interest, or acquire any interest of any type in any such other Person that is in competition with the Company or any of its Subsidiaries or in conflict with his full-time, exclusive position as a senior executive officer of the Company; provided, however, that the foregoing shall not be deemed to prohibit the Employee from (i) acquiring, solely as an investment, securities of any person which are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and which are publicly traded, so long as he is not part of any group required to make any filing under Section 13(d) of the Exchange Act in respect of such person and such securities do not constitute two (2%) percent or more of any class of outstanding securities of such person, (ii) acquiring, solely as an investment, any securities of any person (other than a person that has outstanding securities covered by the preceding clause (i)) so long as he remains a passive investor in such person and does not become part of any control group thereof and so long as such person is not, directly or indirectly, in competition with the Company or any of its Subsidiaries, or (iii)(A) serving on the boards of directors of a reasonable number of other corporations (none of which are in competition with the Company or its Subsidiaries) or the boards of a reasonable number of trade associations and/or charitable organizations or, with the prior written consent of the Board, to provide consulting services for any such corporation, trade association and/or charitable organization, (B) engaging in charitable activities and community affairs and (C) managing his personal investments and affairs; provided that the activities referred to in this clause (iii) do not in the aggregate interfere in any material respect with the proper performance of his duties and responsibilities as the Company's Chief Financial Officer. For purposes of the foregoing, a person shall be deemed to be in competition with the Company or any of its Subsidiaries if it (or its Subsidiaries or Affiliates (as defined in Section 10 below)) is then engaged in any line of business that is substantially the same as any line of business in which the Company or any of its Subsidiaries is engaged. 3. Compensation. (a) As base compensation for his services hereunder, the Company shall pay Employee a base salary (the "Base Salary"), payable in weekly installments, at the annual rate of Three Hundred Thousand ($300,000) Dollars for the first full year of the Employment Term and an amount, not less than the Base Salary, for each other full year of the Employment Term. (b) In addition to the Base Salary, Employee shall receive for his services hereunder options (the "Options") under the Company's 1991 Stock Option Plan (the "Plan") to purchase two hundred fifty thousand (250,000) shares of the common stock, $.01 par value per share, of the Company at a per share exercise price equal to the fair market value of the Company's common stock on January 13, 2000, which Options shall vest and become exercisable over a two (2)-year period, beginning as of the date hereof, in accordance with the Company's current practice and the standard terms and conditions of the Plan. (c) During the Employment Term, the Employee shall be entitled to participate in all employee pension and welfare benefit plans and programs made available to the Company's senior level executives or its employees generally, as such plans or programs may be in effect from time to time, including without limitation, pension, savings, 401(k) and other retirement plans or programs, medical, dental, hospitalization, short-term and long-term disability and life insurance plans, and any other employee benefit plans or programs that may be sponsored by the Company from time to time, whether funded or unfunded. (d) Employee shall be eligible to receive bonuses, in a maximum amount equal to up to fifty percent (50%) of the Base Salary, for each year of the Employment Term if and as determined by the Board of Directors of the Company, subject to the approval of the audit committee of the Company (the "Audit Committee"). Such bonuses, if any, shall be based upon the Company meeting certain goals as established by the Audit Committee, as customized to the Employee's performance hereunder. Notwithstanding, unless this Agreement is terminated prior to December 31, 2000 by the Employee, the Employee shall receive a bonus in an amount equal to One Hundred Fifty Thousand ($150,000) Dollars for his services provided to the Company during the first full year of the Employment Term. 4. Expenses; Vacations. Employee shall be entitled to reimbursement for reasonable travel and other out-of-pocket expenses reasonably incurred in the performance of his duties hereunder, upon submission and approval of written statements and bills in accordance with the then regular procedures of the Company. Employee shall be entitled to twenty (20) days paid vacation time in accordance with the then regular procedures of the Company governing executives as determined from time to time by the Company's Board of Directors and communicated, in writing, to Employee. Up to a maximum of five (5) days of unused vacation from any one year of the Employment Term may be carried over into the subsequent year; provided, however, that Employee may not use more than twenty-five (25) vacation days in any single year. In consideration for Employee's right to carry over unused vacation, Employee hereby waives his right to be paid for any unused vacation time. 5. Representations and Warranties of Employee. Employee represents and warrants to the Company that (a) Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder; (b) Employee's execution of this Agreement does not require the consent of any person; (c) Employee is under no physical or mental disability that would hinder his performance of duties under this Agreement; and (d) this Agreement constitutes the valid and binding obligation of the Employee enforceable against the Employee in accordance with its terms. 6. Restrictive Covenants. During the three (3) years following the end of the Employee's employment by the Company (the "Covenant Period"): (a) The Employee agrees that he will not, directly or indirectly, as a partner, officer, employee, director, stockholder, proprietor, consultant, representative, agent or otherwise become, be interested in, associate with or render assistance to any Person: (i) engaged in the ownership, operation and/or management of any direct marketing and/or Internet marketing business; or (ii) engaged in such other line of business within a 250 mile radius of any location at which the Company is then engaged therein if during the last full fiscal year of the Company preceding the date of the termination of the Employee's employment, such other line of business accounted for at least 5% of the Company's revenue during such year. The foregoing provisions shall not, however, prohibit the ownership by any Employee of securities in accordance with Section 2(e). (b) (i) The Employee agrees that he will not, directly or indirectly, during the Covenant Period, for his own benefit or for the benefit of any other Person, knowingly solicit the professional services of any Person employed by the Company, any Subsidiary or any Affiliate thereof or any Person who had been employed within three (3) months prior thereto, or otherwise interfere with the relationship between the Company, any Subsidiary or any Affiliate thereof and any of such Persons. (ii) If this Agreement is terminated pursuant to Section 7(a), then Employee, for a period of three (3) years from the date of termination, shall not, directly or indirectly, solicit or encourage any Person who was a customer of the Company, any Subsidiary or any Affiliate thereof during the three (3) years prior to the date of such termination to cease doing business with the Company or to do business with any other Person that is engaged in the same or similar business to that of the Company. (iii) If this Agreement shall be terminated other than pursuant to Section 7(a), then Employee, for a period of one (1) year from the date of termination, shall not, directly or indirectly, solicit or encourage any Person who was a customer of the Company, any Subsidiary or any Affiliate thereof during the three (3) years prior to the date of such termination to cease doing business with the Company or to do business with any other Person that is engaged in the same or similar business to that of the Company. (c) The Employee recognizes and acknowledges that, in connection with his employment with the Company, he will have access to valuable trade secrets and confidential information of the Company and its Subsidiaries and Affiliates including, but not limited to, customer and supplier lists, business methods and processes, marketing, promotional, pricing and financial information and data relating to employees and agents (collectively, "Confidential Information") and that such Confidential Information is being made available to the Employee only in connection with the furtherance of his employment with the Company. The Employee agrees that during the Employment Term and thereafter, he will not use or disclose any of such Confidential Information to any Person, except that disclosure of Confidential Information by the Employee will be permitted: (i) to the Company, its Subsidiaries and Affiliates and their respective advisors; (ii) if such Confidential Information has previously become available to the public through no fault of the Employee; (iii) if required by any court or governmental agency or body or is otherwise required by law; or (iv) if expressly consented to by the Company. (d) The parties agree that a violation of any provision of any of the foregoing agreements not to compete or disclose, or any provision thereof, will cause irreparable damage to the Company, and the Company shall be entitled (without any requirement of posting a bond or other security), in addition to any other rights and remedies which it may have, at law or in equity, to an injunction enjoining and restraining the Employee from doing or continuing to do any such act or any other violations or threatened violations of this Section 6. (e) Any interest in patents, patent applications, inventions, copyrights, developments, and processes ("Such Inventions") which Employee now or hereafter during any period he is employed by the Company may, directly or indirectly, own or develop relating to the fields in which the Company may then be engaged shall belong to the Company; and, forthwith upon request of the Company, Employee hereby agrees that he shall execute all such assignments and other documents and take all such other action as the Company may reasonably request in order to vest in the Company all of his right, title, and interest in and to Such Inventions, free and clear of all liens, charges, and encumbrances. (f) The Employee acknowledges and agrees that the restrictive covenants set forth in this Section 6 (the "Restrictive Covenants") are reasonable and valid in geographical and temporal scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full force and effect, without regard to the invalid or unenforceable parts. (g) If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable for any reason, such court shall have the power to modify such Restrictive Covenant, or any part thereof, and, in its modified form, such Restrictive Covenant shall then be valid and enforceable. 7. Termination. (a) Notwithstanding anything herein contained, if on or after the date hereof and prior to the end of the Employment Term, Employee is terminated For Cause (as defined below), then the Company shall have the right to give notice of termination of Employee's services hereunder as of a date to be specified in such notice (which may not be less than fourteen (14) days following the mailing of such notice), and this Agreement shall terminate on the date so specified. Termination "For Cause" shall mean Employee shall (i) be convicted of a felony crime, (ii) commit any act, or omit to take any action, in bad faith and to the material detriment of the Company, (iii) commit an act of moral turpitude to the material detriment of the Company, (iv) commit an act of fraud against the Company, (v) refuse to implement, or adhere to, reasonable policies or directives of the Board, or (vi) materially breach any term of this Agreement (including Employee's voluntary resignation or termination of this Agreement prior to the end of the Employment Term) and fail to correct such breach within ten (10) business days after written notice thereof; provided, that in the case of a termination pursuant to (ii), (iii), (iv), (v) or (vi), such determination must be made by the Board after a meeting at which Employee was given an opportunity to explain such actions. In the event this Agreement is terminated For Cause, then Employee shall be entitled to receive only his salary at the rate provided in Section 3 to the date on which termination shall take effect plus any compensation which is accrued but unpaid on the date of termination. (b) In the event that Employee shall be physically or mentally incapacitated or disabled or otherwise unable fully to discharge his duties hereunder for a period of thirty (30) consecutive or non-consecutive days during the Employment Term, then this Agreement shall terminate upon notice in writing to Employee, and no further compensation (other than accrued but unpaid salary or bonus through the date of termination) shall be payable to Employee, except as may otherwise be provided under any disability insurance policy or similar instrument. (c) In the event that Employee shall die during the Employment Term, then this Agreement shall terminate on the date of Employee's death, and no further compensation (other than accrued but unpaid salary or bonus through the date of death) shall be payable to Employee, except as may otherwise be provided under any insurance policy or similar instrument. (d) In the event that this Agreement is terminated Without Cause, Employee shall receive severance pay consisting of a single lump sum distribution (with no present value adjustment) equal to 2.99 times the compensation paid during the preceding 12 months, and all outstanding stock options shall fully vest and become immediately exercisable. 8. Mergers, Etc. In the event of a future disposition of the properties and business of the Company, substantially as an entirety, by merger, consolidation, sale of assets, sale of stock, or otherwise, then the Company may elect to assign this Agreement and all of its rights and obligations hereunder to the acquiring or surviving corporation. Employee shall have the right to terminate this Agreement by written notice given within three (3) months of the date of such acquisition. Upon such termination, Employee shall receive severance pay consisting of a single lump sum distribution (with no present value adjustment) equal to 3.99 times the compensation paid during the preceding 12 months (or, in the case such termination occurs prior to the employee's completion of 12 months of service, the distribution shall equal 3.99 times the sum of the employee's annual base salary plus the first years bonus as outlined in section 3(d)), and all outstanding stock options shall fully vest and become immediately exercisable. 9. Certain Additional Payments by the Company. Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up" Payment) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up payment equal to the Excise Tax imposed upon the Payments. (a)Subject to the provisions of Section 9 (c), all determination required to be made under this Section 9, including whether and when a Gross-Up payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the certified public accounting firm which serves as the Company's auditor immediately prior to the Change of Control (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company or the Executive. In the event that such Accounting Firm declines to act, the Company shall appoint another nationally recognized accounting firm (which is acceptable to the Executive) to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9 (c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (b)The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than fifteen days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii)cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall ear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall defend, indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of expenses. Without limitation on the foregoing provisions of this Section 9 (c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearing and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall defend, indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9 (c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9 (c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9 (c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Certain Definitions. As used herein, the following terms shall have the following meanings: "Affiliate" of a person shall mean any other person that directly or indirectly controls, is controlled by, or is under common control with the person specified. For the purposes of this Agreement, "control," when used with respect to any person, shall mean the power to direct the management and policies of such person, whether through the ownership of securities, by contract or otherwise. "Person" shall mean any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, government or any other entity. "Subsidiary" shall mean, in respect of any person, any corporation, association, partnership or other business entity of which more than fifty (50%) percent of the total voting power of shares of capital stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such person, (ii) such person and one or more Subsidiaries or Affiliates of such person or (iii) one or more Subsidiaries or Affiliates of such person. 11. Survival. The covenants, agreements, representations, and warranties contained in or made pursuant to this Agreement (unless otherwise stated therein) shall survive the termination of this Agreement, irrespective of any investigation made by or on behalf of any party. 12. Modification. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 13. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given, at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 13). In the case of a notice to the Company, a copy of such notice (which copy shall not constitute notice) shall be delivered to Camhy Karlinsky & Stein LLP, 1740 Broadway, 16th Floor, New York, New York 10019, Attention: Alan I. Annex, Esq. Notice to the estate of Employee shall be sufficient if addressed to Employee as provided in this Section 13. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address, which notice shall be deemed given at the time of receipt thereof. 14. Waiver. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing and signed by the party against whose waiver is asserted. 15. Withholding. All payments required to be made by the Company to the Employee under this Agreement shall be subject to withholding taxes, Social Security and other payroll deductions in accordance with the Company's policies applicable to senior executives of the Company and the provisions of any applicable employee benefit plan or program of the Company. 16. Binding Effect. Employee's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives, and shall be binding upon and inure to the benefit of the Company and its successors and those who are its assigns under Section 8. 17. Headings. The headings in this Agreement are solely for the convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 18. Counterparts; Governing Law. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by, and construed in accordance with, the laws of the State of New York, without given effect to the rules governing the conflicts of laws. Each of the parties hereto hereby irrevocably submits to the jurisdiction of the courts of the State of New York, County of New York, and of any federal court located in the State of New York, County of New York, in connection with any action or proceeding arising out of or relating to, or a breach of, this Agreement. Each of the parties hereto agrees that such court may award reasonable legal fees and expenses to the prevailing party. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first written above. MARKETING SERVICES GROUP, INC. By: /s/ Jeremy Barbera ------------------ Jeremy Barbera, Chairman & CEO /s/ Rudy Howard --------------- Rudy Howard EX-10 7 0007.txt EXHIBIT 10.8 EMPLOYMENT AGREEMENT THIS AGREEMENT (this "Agreement") is being made as of the 7th day of July 2000 between MARKETING SERVICES GROUP, INC., a Nevada corporation (the "Company"), having its principal offices at 333 Seventh Avenue, New York, New York 10001, and STEPHEN J. KILLEEN ("Employee"), an individual residing at: 6 Kennedy Lane, Southborough, Massachusetts 01772. W I T N E S S E T H : WHEREAS, the Board of Directors of the Company (the "Board") desires the Company to employ the Employee as the President of the Company, to have Employee continue to serve as a director of Company and, if requested by the Company, Chairman of the Board of Directors of Wired Empire, Inc., the Company's majority owned subsidiary ("Wired") and to compensate him therefor; and WHEREAS, the Employee desires to serve in the above referenced capacity, on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual premises and agreements contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Nature of Employment; Term of Employment. The Company hereby employs Employee and Employee agrees to serve the Company upon the terms and conditions contained herein, for a term, subject to the provisions of Section 7, commencing as of the date hereof and continuing until June 30, 2003 (the "Initial Term"). This Agreement shall be automatically renewed for an additional term of three (3) years, unless either party hereto shall provide ninety (90) days prior written notice to the other party hereto, of their intent not to renew this Agreement. Notwithstanding the Initial Term or any extension thereof, the Company reserves the right to terminate the Employee without cause pursuant to section 7(d). 2. Duties and Powers as Employee. (a) During the Term, the Employee shall serve as the President of the Company and, if requested by the Company, as Chairman the Board of Directors of Wired and as managing partner of any Venture Fund established by the Company. During the Term the Company shall cause the Employee to serve as a member of the Board. The Employee, as President of MSGi shall have the authority, functions, duties, powers and responsibilities normally associated with such position and as from time to time may be prescribed by the Board. The Employee agrees, without additional compensation, to serve during the Employment Term in such additional offices of comparable stature and responsibility to which he may be elected from time to time in the Company's Subsidiaries (as defined in Section 9 below) and to serve as a director and as a member of any committee of the Board and/or any of the Company's Subsidiaries. The Employee shall be indemnified by the Company for his lawful acts serving in any such capacity at the direction of the Company, to the maximum extent permitted by applicable law. (b) During the Employment Term and subject to the provisions of Section 2(d), (i) the Employee's services shall be rendered on a full-time, exclusive basis, (ii) he will apply on a full-time basis all of his skill and experience to the performance of his duties in such employment, and shall report only to the Chairman of the Board and Chief Executive Officer of the Company, (iii) he shall have no other employment or outside business activities and (iv) unless the Employee otherwise consents, the location for the performance of his services shall be as agreed upon between Employee and the Chairman of the Board, (the Employee will be located in the Boston-area 3 days per week and 2 days per week in New York City) subject to such reasonable travel as the performance of his duties in the business of the Company may require. (c) Employee agrees that the Company may obtain a life insurance policy on the life of Employee naming the Company as the beneficiary thereof. The Company will also purchase a life insurance policy for Employee equal to 2X the Base Salary whereby the designee of the Employee will serve as owner and/or beneficiary. (d) During the Employment Term, the Employee shall not, directly or indirectly, without the prior written consent of the Board, render any services to any Person (as defined in Section 9 below), other than the Company and its Subsidiaries and other Persons in which the Company may have an interest, or acquire any interest of any type in any such other Person that is in competition with the Company or any of its Subsidiaries or in conflict with his full-time, exclusive position as a senior executive officer of the Company; provided, however the Employee may continue to serve as a consultant to AltaVista Company pursuant to an Independent Contractor Services Agreement, a copy of which has been provided to the Company, such activities for AltaVista Company do not interfere in any material respect with the proper performance of his duties and responsibilities as previously described and further, that the foregoing shall not be deemed to prohibit the Employee from (i) acquiring, solely as an investment, securities of any person which are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and which are publicly traded, so long as he is not part of any group required to make any filing under Section 13(d) of the Exchange Act in respect of such person and such securities do not constitute two (2%) percent or more of any class of outstanding securities of such person, (ii) acquiring, solely as an investment, any securities of any person (other than a person that has outstanding securities covered by the preceding clause (i)) so long as he remains a passive investor in such person and does not become part of any control group thereof and so long as such person is not, directly or indirectly, in competition with the Company or any of its Subsidiaries, or (iii)(A) serving on the boards of directors of a reasonable number of other corporations (none of which are in competition with the Company or its Subsidiaries) and on the boards of a reasonable number of trade associations and/or charitable organizations or, with the prior written consent of the Board, which shall not be unreasonably withheld to provide consulting services for any such corporation, trade association and/or charitable organization, (B) engaging in charitable activities and community affairs and (C) managing his personal investments and affairs; provided that the activities referred to in this clause (iii) do not in the aggregate interfere in any material respect with the proper performance of his duties and responsibilities as previously described. For purposes of the foregoing, a person shall be deemed to be in competition with the Company or any of its Subsidiaries if it (or its Subsidiaries or Affiliates (as defined in Section 9 below)) is then engaged in any line of business that is substantially the same as any line of business in which the Company or any of its Subsidiaries is engaged. 3. Compensation. (a) As base compensation for his services hereunder, the Company shall pay Employee a base salary (the "Base Salary"), payable in weekly installments, at the annual rate of Four Hundred Thousand ($400,000) Dollars for the first full year of the Employment Term and an amount, not less than the Base Salary, for each other full year of the Employment Term. The Base Salary shall be subject to withholding taxes and any other taxes or similar deductions, as provided in section 14. (b) In addition to the Base Salary, during the Term it is anticipated that Employee will be granted options which shall be to the maximum extent possible qualify as incentive stock options for tax purposes for his services hereunder options under the Company's 1991 Stock Option Plan (the "Plan"). The Compensation Committee of the Board of Directors of the Company (the "Compensation Committee") has initially approved the issuance of options to purchase four hundred thousand (400,000) shares of the common stock, $.01 par value per share, of the Company, at a per share price of the closing share price of the Company as of the date of this Agreement. In addition, the Company shall cause Wired to issue to Employee options to purchase two hundred thousand (200,000) shares of common stock, $.01 par value per share of Wired at an exercise price of $6.25 per share. All such options shall vest as to one third of such underlying shares on the first three anniversaries of the date of issuance. Employee acknowledges that such options constitute Employee's only options in the Company as of the date hereof and that such options are in part consideration of the restrictive covenant provided in Section 6 of this Agreement. (c) During the Employment Term, the Employee shall be entitled to participate in all employee pension and welfare benefit plans and programs made available to the Company's senior level executives or its employees generally, as such plans or programs may be in effect from time to time, including without limitation, pension, savings, 401(k) and other retirement plans or programs, medical, dental, hospitalization, short-term and long-term disability and life insurance plans, and any other employee benefit plans or programs that may be sponsored by the Company from time to time, whether funded or unfunded. (d) Employee shall be eligible to receive bonuses, equal to up to fifty percent (50%) of the Base Salary, for each year of the Employment Term if and as determined by the Board of Directors of the Company, at its sole discretion, subject to the approval of the Compensation Committee of the Company. Such bonuses, if any, shall be based upon the Company meeting certain goals as established by the Compensation Committee, as customized to the Employee's performance hereunder, but shall, at all times, be awarded only in the discretion of the Company. (e) The Company anticipates that it will form one or more venture funds (the "Funds"). The management entity of the fund will have a carried interest of 20-30% of profit after an agreed to return. The Employee will receive no less than fifteen (15%) percent of such carried interest. The carried interest to the Employee will vest as to each investment made in the fund 50% on the day of the closing of the investment (with a follow on investment in a company treated as made as of the date of the original investment) ; 25% one year after such date; and, 25% two years after such date. The Company acknowledges that from time to time employee may participate (using his own funds) in investments made by the Company or the Fund. The Company shall permit such "co-investment", provided it is disclosed to the Company and provided that it does not materially impact the amount of participation by the Company or the Fund, as the case may be. 4. Expenses; Vacations. Employee shall be entitled to reimbursement for reasonable travel and other out-of-pocket expenses reasonably incurred in the performance of his duties hereunder, upon submission and approval of written statements and bills in accordance with the then regular procedures of the Company. Employee shall be entitled to twenty (20) days paid vacation time in accordance with the then regular procedures of the Company governing executives as determined from time to time by the Company's Board of Directors and communicated, in writing, to Employee. Up to a maximum of five (5) days of unused vacation from any one year of the Employment Term may be carried over into the subsequent year; provided, however, that Employee may not use more than twenty-five (25) vacation days in any single year. In consideration for Employee's right to carry over unused vacation, Employee hereby waives his right to be paid for any unused vacation time. 5. Representations and Warranties of Employee. Employee represents and warrants to the Company that as of the date of this Agreement: (a) Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder, it being acknowledged that Company is fully aware of Employee's Consulting arrangement with AltaVista Company; (b) Employee's execution of this Agreement does not require the consent of any person; (c) Employee is under no physical or mental disability that would hinder his performance of duties under this Agreement; and (d) this Agreement constitutes the valid and binding obligation of the Employee enforceable against the Employee in accordance with its terms. 6. Restrictive Covenants. During the two (2) years following the end of the Employee's employment by the Company (the "Covenant Period"): (a) Except as provided with respect to Employee's arrangement with AltaVista Company, the Employee agrees that he will not, directly or indirectly, as a partner, officer, employee, director, stockholder, proprietor, consultant, representative, agent or otherwise become, be interested in, associate with or render assistance to any Person: (i) engaged in the ownership, operation and/or management of any direct marketing and/or Internet marketing business; or (ii) engaged in such other line of business within a 250 mile radius of any location at which the Company is then engaged therein if during the last full fiscal year of the Company preceding the date of the termination of the Employee's employment, such other line of business accounted for at least 5% of the Company's revenue during such year. The foregoing provisions shall not, however, prohibit the ownership by any Employee of securities in accordance with Section 2(d). (b) (i) The Employee agrees that he will not, directly or indirectly, during the Covenant Period, for his own benefit or for the benefit of any other Person, knowingly solicit the professional services of any Person employed by the Company, any Subsidiary or any Affiliate thereof or any Person who had been employed within six (6) months prior thereto, or otherwise interfere with the relationship between the Company, any Subsidiary or any Affiliate thereof and any of such Persons. (ii) If this Agreement is terminated pursuant to Section 7(a), then Employee, for a period of two (2) years from the date of termination, shall not, directly or indirectly, solicit or encourage any Person who was a customer of the Company one (1) year prior to the date of termination, any Subsidiary or any Affiliate thereof during the three (3) years prior to the date of such termination to cease doing business with the Company or to do business with any other Person that is engaged in the same or similar business to that of the Company. (iii) If this Agreement shall be terminated other than pursuant to Section 7(a), then Employee, for a period of one (1) year from the date of termination, shall not, directly or indirectly, solicit or encourage any Person who was a customer of the Company, any Subsidiary or any Affiliate thereof during the three (3) years prior to the date of such termination to cease doing business with the Company or to do business with any other Person that is engaged in the same or similar business to that of the Company. (c) The Employee recognizes and acknowledges that, in connection with his employment with the Company, he will have access to valuable trade secrets and confidential information of the Company and its Subsidiaries and Affiliates including, but not limited to, customer and supplier lists, business methods and processes, marketing, promotional, pricing and financial information and data relating to employees and agents (collectively, "Confidential Information") and that such Confidential Information is being made available to the Employee only in connection with the furtherance of his employment with the Company. The Employee agrees that during the Employment Term and thereafter, he will not use or disclose any of such Confidential Information to any Person, except that disclosure of Confidential Information by the Employee will be permitted: (i) to the Company, its Subsidiaries and Affiliates and their respective advisors; (ii) if such Confidential Information has previously become available to the public through no fault of the Employee; (iii) if required by any court or governmental agency or body or is otherwise required by law; or (iv) if expressly consented to by the Company (v) if Employee knew of information prior to company disclosure; (vi) if information is later disclosed by non-company source(s). (d) The parties agree that a violation of any provision of any of the foregoing agreements not to compete or disclose, or any provision thereof, will cause irreparable damage to the Company, and the Company shall be entitled (without any requirement of posting a bond or other security), in addition to any other rights and remedies which it may have, at law or in equity, to an injunction enjoining and restraining the Employee from doing or continuing to do any such act or any other violations or threatened violations of this Section 6. (e) Any interest in patents, patent applications, inventions, copyrights, developments, and processes ("Such Inventions") which Employee hereafter during any period he is employed by the Company may, directly or indirectly, own or develop relating to the fields in which the Company may then be engaged shall belong to the Company; and, forthwith upon request of the Company, Employee hereby agrees that he shall execute all such assignments and other documents and take all such other action as the Company may reasonably request in order to vest in the Company all of his right, title, and interest in and to Such Inventions, free and clear of all liens, charges, and encumbrances. (f) The Employee acknowledges and agrees that the restrictive covenants set forth in this Section 6 (the "Restrictive Covenants") are reasonable and valid in geographical and temporal scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full force and effect, without regard to the invalid or unenforceable parts. (g) If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable for any reason, such court shall have the power to modify such Restrictive Covenant, or any part thereof, and, in its modified form, such Restrictive Covenant shall then be valid and enforceable. 7. Termination. (a) Notwithstanding anything herein contained, if on or after the date hereof and prior to the end of the Employment Term, Employee is terminated For Cause (as defined below), then the Company shall have the right to give notice of termination of Employee's services hereunder as of a date to be specified in such notice (which may not be less than fourteen (14) days following the mailing of such notice), and this Agreement shall terminate on the date so specified. Termination "For Cause" shall mean Employee shall (i) be convicted of a felony crime which has material detriment to the Company, (ii) commit any act, or omit to take any action, in bad faith and to the material detriment of the Company, (iii) commit an act of moral turpitude to the material detriment of the Company, (iv) commit an act of fraud against the Company, (v) refuse to implement, or adhere to, reasonable policies or directives of the Board, or (vi) materially breach any term of this Agreement (including Employee's voluntary resignation or termination of this Agreement prior to the end of the Employment Term) to the material detriment to the Company and fail to correct such breach within ten (10) business days after written notice thereof; provided, that in the case of a termination pursuant to (ii), (iii), (iv), (v) or (vi), such determination must be made by the Board after a meeting at which Employee was given an opportunity to explain such actions. In the event this Agreement is terminated For Cause, then Employee shall be entitled to receive only his salary at the rate provided in Section 3 to the date on which termination shall take effect plus any compensation which is accrued but unpaid on the date of termination. (b) In the event that Employee shall be physically or mentally incapacitated or disabled or otherwise unable fully to discharge his duties hereunder, with or without reasonable accommodation, for a period of sixty (60) consecutive days during the Employment Term, then this Agreement shall terminate upon notice in writing to Employee, and no further compensation (other than accrued but unpaid salary or bonus through the date of termination) shall be payable to Employee, except as may otherwise be provided under any disability insurance policy or similar instrument, but all outstanding options shall vest and become fully exercisable (c) In the event that Employee shall die during the Employment Term, then this Agreement shall terminate on the date of Employee's death, and no further compensation (other than accrued but unpaid salary or bonus through the date of death) shall be payable to Employee, except as may otherwise be provided under any insurance policy or similar instrument but all outstanding options shall vest and become fully exercisable. (d) In the event that this Agreement is terminated Without Cause by Company, Employee shall receive severance pay consisting of a single lump sum distribution (with no present value adjustment) equal to 2.99 times the Base Salary paid during the preceding 12 months, in an amount not less than the Employee's Base Salary, and all outstanding stock options shall fully vest and become immediately exercisable. In connection with any termination Without Cause hereunder, the Employee and the Company shall execute mutual releases in a form reasonable satisfactory to both parties (e) In the event that this Agreement is terminated Without Cause by Employee, no further compensation (other than accrued but unpaid salary or bonus through the date of death) shall be payable to Employee, except as may otherwise be provided under any insurance policy or similar instrument. (f) Notwithstanding anything herein to the contrary, the Company shall pay no severance by reason of the expiration of the Initial Term, or any renewal thereof. 8. Mergers, Etc. In the event of a future disposition of the properties and business of the Company, substantially as an entirety, by merger, consolidation, sale of assets, sale of stock, or otherwise, then the Company may elect to assign this Agreement and all of its rights and obligations hereunder to the acquiring or surviving corporation. Employee shall have the right to terminate this Agreement by written notice given within three (3) months of the date of such acquisition. Upon such termination, Employee shall receive severance pay consisting of a single lump sum distribution (with no present value adjustment) equal to 2.99 times the compensation paid during the preceding 12 months (or, in the case such termination occurs prior to the employee's completion of 12 months of service, the distribution shall equal 2.99 times the sum of the employee's annual base salary plus the first year's bonus as outlined in section 3(d)), and all outstanding stock options shall fully vest and become immediately exercisable. 9. Certain Definitions. As used herein, the following terms shall have the following meanings: "Affiliate" of a person shall mean any other person that directly or indirectly controls, is controlled by, or is under common control with the person specified. For the purposes of this Agreement, "control," when used with respect to any person, shall mean the power to direct the management and policies of such person, whether through the ownership of securities, by contract or otherwise. "Person" shall mean any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, government or any other entity. "Subsidiary" shall mean, in respect of any person, any corporation, association, partnership or other business entity of which more than fifty (50%) percent of the total voting power of shares of capital stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such person, (ii) such person and one or more Subsidiaries or Affiliates of such person or (iii) one or more Subsidiaries or Affiliates of such person. 10. Survival. The covenants, agreements, representations, and warranties contained in or made pursuant to this Agreement (unless otherwise stated therein) shall survive the termination of this Agreement, irrespective of any investigation made by or on behalf of any party. 11. Modification. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter (including discussions with respect to Employee's potential retention as a consultant), and may be modified only by a written instrument duly executed by each party. 12. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given, at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 13). In the case of a notice to the Company, a copy of such notice (which copy shall not constitute notice) shall be delivered to Camhy Karlinsky & Stein LLP, 1740 Broadway, 16th Floor, New York, New York 10019, Attention: Alan I. Annex, Esq. Notice to the estate of Employee shall be sufficient if addressed to Employee as provided in this Section 13. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address, which notice shall be deemed given at the time of receipt thereof. 13. Waiver. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing and signed by the party against whose waiver is asserted. 14. Withholding. All payments required to be made by the Company to the Employee under this Agreement shall be subject to withholding taxes, Social Security and other payroll deductions in accordance with the Company's policies applicable to senior executives of the Company and the provisions of any applicable employee benefit plan or program of the Company. 15. Binding Effect. Employee's rights and benefits under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives, and shall be binding upon and inure to the benefit of the Company and its successors and those who are its assigns under Section 8. 16. Headings. The headings in this Agreement are solely for the convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 17. Counterparts; Governing Law. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by, and construed in accordance with, the laws of the State of New York, without given effect to the rules governing the conflicts of laws. Each of the parties hereto hereby irrevocably submits to the exclusive jurisdiction of the courts of the State of New York, County of New York, and of any federal court located in the State of New York, County of New York, in connection with any action or proceeding arising out of or relating to, or a breach of, this Agreement. Each of the parties hereto agrees that such court may award reasonable legal fees and expenses to the prevailing party. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first written above. MARKETING SERVICES GROUP, INC. /s/ Jeremy Barbera ------------------ Jeremy Barbera, Chairman and CEO /s/ Stephen Killeen ------------------- Stephen Killeen, President EX-10 8 0008.txt EXHIBIT 10.9 EMPLOYMENT AGREEMENT THIS AGREEMENT (this "Agreement") is being made as of this 22nd day of March 2000 among GRIZZARD ADVERTISING INCORPORATED, a Texas corporation ("Grizzard"), having its principal offices at 229 Peachtree Street, N.E., Suite 900, Atlanta, Georgia 30303, GCG Merger Corp., a Delaware corporation (the "Company"), having its principal offices at 333 Seventh Avenue, New York, New York 10001, MARKETING SERVICES GROUP, INC., a Nevada corporation and the parent of the Company ("MSGI"), having its principal offices at 333 Seventh Avenue, New York, New York 10001, and MICHAEL D. DZVONIK, an individual residing at 9435 Devonshire Drive, Huntersville, North Carolina 28078 ("Employee"). W I T N E S S E T H: WHEREAS, Grizzard has entered into an Agreement and Plan of Merger, dated of even date herewith (the "Merger Agreement"), pursuant to which Grizzard will merge into and with the Company (the "Merger"), with the Company being the surviving corporation of the merger; and WHEREAS, on and prior to the date hereof, Employee is and has been an employee of Grizzard; and WHEREAS, this Agreement supersedes any prior employment agreement or arrangement Employee has with Grizzard, and from and after the Effective Time (as that term is defined in the Merger Agreement) any such employment agreement or arrangement shall be null, void and of no further effect; and WHEREAS, the Company desires to continue to employ Employee from and after the Effective Time, and Employee desires to be employed by the Company, as its Chief Executive Officer, upon the terms and conditions contained herein; and WHEREAS, MSGI desires to employ Employee from and after the Effective Time, and Employee desires to be employed by MSGI, as its Chief Operating Officer, upon the terms and conditions contained herein. NOW, THEREFORE, in consideration of the mutual premises and agreements contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Nature of Employment; Term of Employment. The Company and MSGI hereby employ Employee, and Employee agrees to serve the Company and MSGI, upon the terms and conditions contained herein subject to the provisions of Section 9, commencing as of the Effective Time and continuing for a period of three (3) years (the "Initial Term"). Following the Initial Term, this Agreement and Employee's employment hereunder shall renew from year to year (each a "Renewal Term") unless the Company or MSGI, on the one hand, or Employee, on the other hand, shall notify the other in writing not later than one hundred eighty (180) days prior to the end of the Initial Term or not later than ninety (90) days prior to the end of the then current Renewal Term, as the case may be, that such party elects for this Agreement and Employee's employment hereunder to terminate at the end of the Initial Term or the then current Renewal Term, as the case may be. As used herein, "Term" means this Initial Term and any subsequent Renewal Term. 2. Duties and Powers of Employee. During the Term, Employee agrees to devote substantially all of his time, energy and efforts (vacations and reasonable absences due to illness excepted) during regular business hours to the duties of his employment hereunder. In performance of his duties, Employee shall be employed as the Chief Executive Officer of the Company and the Chief Operating Officer of MSGI, shall report to the Chairman and Chief Executive Officer of MSGI, and shall be subject to the reasonable direction of the Board of Directors of MSGI or its designee. Employee shall be available to travel as the needs of the business require. Employee agrees that the Company and/or MSGI may obtain a life insurance policy on the life of Employee naming the Company and/or MSGI as the beneficiary thereof. 3. Compensation and Benefits. (a) As base compensation for his services to MSGI and the Company as set forth hereunder, MSGI shall cause the Company to pay Employee a base salary payable in semi-monthly installments at the annual rate of $300,000 for each full year of the Term ("Base Salary"), which Base Salary will be reviewed no less frequently than annually and may be increased, but not decreased, by the Company from time to time; provided, however, in the event Employee is required to work full time in New York City, MSGI shall cause the Company to increase Employee's Base Salary to cover Employee's increased cost of living in the New York City area, and MSGI and Employee shall negotiate in good faith such increase in Employee's Base Salary. (b) Employee shall be eligible to receive an annual bonus in an amount not to exceed fifty percent (50%) of his Base Salary, which bonus shall be measured by (i) Employee's success in integrating the operations, management, marketing and financial controls of MSGI and the Company and (ii) the overall financial performance of each of MSGI and the Company (the "Performance Bonus"), the performance goals and criteria of which shall be mutually established in writing at the beginning of each year of the Term by Employee, on the one hand, and the Chairman and Chief Executive Officer of MSGI, on the other hand, and approved by the Board of Directors of MSGI. The Performance Bonus may be modified from time to time as determined in good faith by MSGI's Compensation Committee and approved by its Board of Directors and agreed to by Employee. (c) Employee shall be granted an option (the "Option") to purchase 250,000 shares of common stock of MSGI under the terms set forth in MSGI's 1999 Incentive and Nonqualified Stock Option Plan, at an exercise price per share of common stock of MSGI subject to the fair market value on the date the option grant is approved by the Board of Directors of MSGI. The Option shall be evidenced by a separate Stock Option Agreement, dated the date hereof between Employee and MSGI, and the Option will become vested and exercisable as set forth in the Stock Option Agreement. (d) Employee shall have the right to participate in any medical, hospitalization, dental, disability income, life or similar insurance plans maintained by the Company from time to time to the extent Employee's position, tenure, salary, age, health and other qualifications make him/her eligible to participate, and such other fringe benefits as are provided to the other executive officers of the Company; provided, however, prior to the adoption by the Company of its own medical, hospitalization, dental, disability income, life or other similar insurance plans or fringe benefits (collectively, "Benefit Plans"), the benefits provided to Employee pursuant to any benefit plans shall, considered in the aggregate, not be less favorable to Employee and his dependents than the benefits, considered in the aggregate, provided to Employee as an employee of Grizzard on the date hereof. 4. Expenses. (a) Employee shall be entitled to reimbursement for travel and other out-of-pocket expenses reasonably incurred in the performance of his duties hereunder, upon submission and approval of written statements and bills in accordance with the then regular procedures of the Company. If Employee is required to be away from his primary residence on Company or MSGI business for more than five (5) consecutive business days, Employee shall be entitled to travel at the Company's expense to Employee's primary residence during the interim weekend or have Employee's spouse travel at the Company's expense to the location where Employee is conducting business for the Company or MSGI. (b) If Employee's primary residence is outside of the New York City area, the Company will provide at the Company's expense a suitable corporate apartment (with living, sleeping and kitchen facilities) in New York City for Employee's use when working in the Company's New York City office. With prior approval from the Chairman and Chief Executive Officer of MSGI, Employee's spouse shall be entitled to travel to and from New York City at the Company's expense while Employee is working in the Company's New York City office. (c) If the Chairman and Chief Executive Officer of MSGI requires Employee to maintain his primary office in the Company's New York City office, thus necessitating the need for Employee to establish a residence in the New York City area, the Company shall pay for Employee's reasonable moving expenses to Employee's New York City area residence; provided further, if, prior to the time Employee establishes his residence in the New York City area, Employee requests that certain possessions of Employee be placed in storage and/or moved to a secondary residence of Employee outside of the Atlanta metropolitan area, the Company shall pay for Employee's reasonable storage expenses and/or moving expenses to Employee's secondary residence. (d) If Employee is required to maintain his primary office in the Company's New York City office, and thus establish a residence in the New York City area, (i) Employee shall be entitled to travel at the Company's expense each weekend to Employee's secondary residence, whether such secondary residence be in or outside of the metropolitan Atlanta area, or (ii) Employee's spouse shall be entitled to travel at the Company's expense one time per week between the New York City area and Employee's secondary residence, whether such secondary residence be in or outside of the metropolitan Atlanta area. 5. Representations and Warranties of Employee. Employee represents and warrants to MSGI and the Company that (a) Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder or the other rights of MSGI and the Company hereunder, and (b) Employee is under no physical or mental disability, with or without reasonable accommodations, that would hinder his performance of duties under this Agreement. 6. Non-Competition; Non-Solicitation. (a) Employee agrees that during the Employment Term he will not engage in, or otherwise directly or indirectly be employed by, or act as a consultant, or be a director, officer, employee, owner, agent, member or partner of, any other business or organization that is or shall then be competing with the Company, MSGI or any subsidiary of MSGI; provided, however, this provision shall not prohibit Employee (i) from owning less than five percent (5%) of the outstanding common stock of a corporation, if, at the time of its acquisition by Employee, such stock is listed on a national securities exchange, is reported on NASDAQ, or is regularly traded in the over-the-counter market by a member of a national securities exchange, or (ii) from maintaining an ownership interest in and being an employee of Caswell, Zachary and Grizzard, LLC. (b) If this Agreement is terminated by MSGI or the Company for or without Cause (as such term is defined in Section 9) or if Employee voluntarily terminates his employment hereunder, Employee, for a period of three (3) years from the date of such termination, shall not, directly or indirectly, solicit or encourage any person who was a customer of the Company, MSGI or Grizzard during the one (1) year prior to the date of such termination to cease doing business with the Company, MSGI or any subsidiary or affiliate of the Company or MSGI. (c) If this Agreement is terminated by MSGI or the Company for or without Cause or if Employee voluntarily terminates his employment hereunder, Employee agrees that for a period of two (2) years following the termination of employment with the Company, Employee will not directly, or indirectly by assisting others, recruit or hire, or attempt to recruit or hire any other employee of MSGI, the Company or any subsidiary or affiliate of the Company or MSGI. 7. Inventions; Patents; Copyrights. Any interest in patents, patent applications, inventions, copyrights, developments and processes ("Trade Secrets") which Employee during the Term of this Agreement, directly or indirectly, develops relating to the fields in which MSGI or the Company may then be engaged shall belong to the Company; provided, however, Trade Secrets shall not mean any data or information that is a Trade Secret hereunder (i) that has been voluntarily disclosed to the public by the Company or any affiliate thereof or has become generally known to the public (except where such public disclosure has been made by or through Employee or by a third person or entity at the direction of Employee, without authorization from MSGI), (ii) that has been independently developed and disclosed by parties other than Employee or MSGI or the Company or any affiliate thereof to Employee or to the public generally without a breach of any obligation of confidentiality by any such person running directly or indirectly to MSGI or the Company or any affiliate thereof, or (iii) that otherwise enters the public domain through lawful means. Upon request of the Company, Employee shall execute all such assignments and other documents and take all such other action as the Company may reasonably request in order to vest in the Company all of his right, title, and interest in and to such Trade Secrets, free and clear of all liens, charges, and encumbrances. 8. Confidential Information and Non-Disclosure. All confidential information which Employee may now possess, may obtain during the Employment Term, or may create prior to the end of any Term under this Agreement, relating to the businesses of the Company or MSGI, their predecessors and any customer or supplier of the Company, MSGI or their predecessors, shall not be published, disclosed or made accessible by him/her to any other person, firm or corporation during the Term or any time thereafter without the prior written consent of MSGI; provided, however, information shall not be deemed confidential information if such information was generally publicly available prior to the receipt thereof by Employee or subsequently becomes generally available through no fault of Employee. Employee shall return all tangible evidence of such confidential information to the Company or MSGI, as the case may be, prior to or at the termination of his employment. Employee also agrees not to disclose the terms of this Agreement to any third party, except as required by law, other than to Employee's legal counsel, financial advisors or spouse. Termination 8. (a) Notwithstanding anything herein contained, if on or after the date hereof and prior to the end of the Term, Employee is terminated for Cause (as defined below) by either MSGI or the Company, then MSGI or the Company shall have the right to give Employee written notice of termination of Employee's services hereunder as of a date to be specified in such notice (which may not be less than 14 days), and this Agreement shall terminate on the date so specified. Termination for Cause shall mean Employee shall (i) be convicted of a felony crime, (ii) commit any act or omit to take any action in bad faith and to the material detriment of MSGI or the Company or any subsidiary or affiliate of MSGI or the Company, (iii) commit an act of moral turpitude to the material detriment of MSGI or the Company or any subsidiary or affiliate of MSGI or the Company, (iv) commit an act of fraud against MSGI or the Company or any subsidiary or affiliate of MSGI or the Company, (v) materially breach any term of this Agreement and fail to correct such breach within ten (10) business days after written notice thereof, or (vi) materially fail to perform reasonable minimum standards as determined by the Board of Directors of MSGI and communicated in writing to Employee; provided, that in the case of termination pursuant to (ii), (iii), (iv) or (vi) such determination must be made by the Board of Directors of MSGI after a meeting at which Employee was given an opportunity to explain such actions. In the event this Agreement is terminated for Cause pursuant to this Section 9(a) or Employee voluntarily terminates his employment hereunder, then Employee shall be entitled to receive only his Base Salary at the rate provided in Section 3 to the date on which termination shall take effect. (b) In the event that Employee shall be physically or mentally incapacitated or disabled or otherwise unable substantially to discharge his duties hereunder for a period of ninety (90) consecutive days, then this Agreement shall terminate upon notice in writing to Employee, and Employee shall be entitled to receive (i) accrued but unpaid Base Salary through the effective date of termination and (ii) accrued bonus and other compensation through the effective date of termination. In the event of a dispute as to whether Employee is incapacitated or disabled, the determination of such incapacity or disability shall be made reasonably by the Board of Directors of MSGI, and shall consider the advice of a physician, mutually acceptable to both MSGI and Employee, and competent in the area to which such incapacity or disability relates. (c) In the event that Employee shall die during the Term hereof, then this Agreement shall terminate on the date of Employee's death, and Employee shall be entitled to receive (i) accrued but unpaid Base Salary through the effective date of termination and (ii) accrued bonus and other compensation through the effective date of termination. (d) Except as provided in Section 10, in the event that this Agreement is terminated by MSGI or the Company without Cause or by Employee for Good Reason (as defined below), Employee shall receive (i) all accrued but unpaid Base Salary through the effective date of such termination of employment, (ii) accrued bonus and other compensation through the effective date of such termination of employment, and (iii) a severance payment consisting of a single lump sum distribution (with no present value adjustment) equal to two (2) times the then current annual Base Salary. Such lump sum distribution shall be paid to Employee with ten (10) days of any such termination. For purposes hereof, "Good Reason" means (w) the assignment to Employee of duties and responsibilities of his employment that are materially different than the duties and responsibilities normally assigned to and performed by a Chief Executive Officer of the other subsidiaries of MSGI or a Chief Operating Officer of a company like or similar to MSGI, and the assignment to Employee of such duties and responsibilities continues for more than thirty (30) days following written notice by Employee to the Boards of Directors of MSGI and the Company that the Employee does not consent to the assignment to him/her of such duties and responsibilities, (x) in order for Employee to reasonably perform the duties and responsibilities of his employment, Employee must reside at a location other than metropolitan Atlanta, Georgia or within 75 miles of MSGI's executive offices in New York City without Employee's written consent, (y) MSGI's and the Company's continued material breach of any of their obligations set forth in Section 3 of this Agreement for more than thirty (30) days following written notice by Employee to the Board of Directors of MSGI, specifying in reasonable detail such alleged breached by MSGI or the Company, or (z) the material diminution of Employee's duties and responsibilities as Employee has with Grizzard as of the date hereof; provided, however, that for purposes hereof, "Good Reason" shall not mean a good faith determination by the Board of Directors of MSGI that the duties and responsibilities of Chief Executive Officer of the Company and Chief Operating Officer of MSGI should not be held by one person and a majority of directors vote at a meeting with a quorum present that Employee should devote his full time and efforts to either of the positions set forth herein, it being agreed that such determination shall not effect the compensation or benefits granted to Employee during the Term of this Agreement. (e) Notwithstanding anything to the contrary contained in this Section 9, upon any termination of Employee's employment pursuant to Sections 9(a), (b), (c) or (d), in addition to any amounts payable to Employee hereunder upon or with respect to such termination, Employee shall have such rights under the Stock Option Agreement and any other agreements between Employee and the Company or its predecessor as are provided therein, and Employee also shall have such benefits to which Employee may be entitled under benefit plans of MSGI and the Company then in effect and in which Employee participates. 10. Merger, Etc. In the event of a disposition during the Term hereof of the properties and business of MSGI or the Company, substantially as an entirety, by merger, consolidation, sale of assets, sale of stock or otherwise, then immediately prior to such disposition Employee shall be entitled to terminate this Agreement and receive within ten (10) days following the effective date of such termination (i) all accrued but unpaid Base Salary through the effective date of such termination of employment, (ii) accrued bonus and other compensation through the effective date of such termination of employment, and (iii) a severance payment consisting of a lump sum distribution (with no present value adjustment) equal to three (3) times Employee's then current annual Base Salary. 11. Survival. The covenants, agreements, representations, and warranties contained in or made pursuant to this Agreement shall survive Employee's termination of employment, irrespective of any investigation made by or on behalf of any party. 12. Modification. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. Employee acknowledges that no other representations, oral or written, have been made regarding the subject matter hereof. Employee further acknowledges that the Employee has not relied upon any oral or written representations not explicitly contained herein in executing this agreement. 13. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 13). In the case of a notice to MSGI or the Company, a copy of such notice (which copy shall not constitute notice) shall be delivered to Camhy Karlinsky & Stein LLP, 1740 Broadway, 16th Floor, New York, New York 10019, Attn. Alan I. Annex, Esq. Notice to the estate of Employee shall be sufficient if addressed to Employee as provided in this Section 13. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. 14. Waiver. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing and signed by the party against whom such waiver is asserted. 15. Binding Effect. Employee's rights and obligations under this Agreement shall not be transferable by Employee by assignment or otherwise, such rights shall not be subject to encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives, and shall be binding upon and inure to the benefit of MSGI and the Company and their respective successors. 16. Headings. The headings in this Agreement are solely for the convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 17. Counterparts; Governing Law. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by, and construed in accordance with, the laws of the State of New York, without giving effect to the rules and principles governing the conflicts of laws. Each of the parties hereto agrees that such court may award reasonable legal fees and expenses to the prevailing party. Each of the parties hereto hereby irrevocably submits to the exclusive jurisdiction of the courts of the State of New York, County of New York, and of any federal court located in the State of New York, County of New York, in connection with any action or proceeding arising out of or relating to, or a breach of, this Agreement. Employee hereby consents to, and waives any objection to, the personal jurisdiction and venue of such courts, and further waives any objections base upon such jurisdiction, including, without limitation, an objection to the laying of venue or based upon the ground of forum non-conveniens. 18. Effectiveness of Agreement. This Agreement shall not become effective until the Effective Time. In the event that the Merger does not occur on or before March 31, 2000, this Agreement shall be null, void and of no further effect. [Signatures on Next Page] IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first written above. GRIZZARD ADVERTISING INCORPORATED By: /s/ Michael Dzvonik ------------------- Name: Michael D. Dzvonik Title: Chief Executive Officer GCG MERGER CORP. By: /s/ Jeremy Barbera ------------------ Name: J. Jeremy Barbera Title: Chairman and CEO MARKETING SERVICES GROUP, INC. By: /s/ Jeremy Barbera ------------------ Name: J. Jeremy Barbera Title: Chairman and CEO EMPLOYEE By: /s/ Michael Dzvonik ------------------- Michael D. Dzvonik -----END PRIVACY-ENHANCED MESSAGE-----