UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________to___________________
Commission file number 0-16730
MARKETING SERVICES GROUP,INC.
-----------------------------
(Name of small business issuer in its charter)
Nevada 88-0085608
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Seventh Avenue, 20th Floor
New York, New York 10001
------------------ -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (212) 594-7688
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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.
Yes X No __
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its fiscal year ended June 30, 1998 are $51,174,063.
As of September 18, 1998, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $23,985,441.
As of September 18, 1998, there were 13,103,305 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.
Transitional Small Business Disclosure Format (check one): Yes __ No X
<PAGE>
PART I
Special Note Regarding Forward-Looking Statements
- -------------------------------------------------
Certain statements in this Annual Report on Form 10-KSB under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). 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; year 2000 issues; 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 provides direct marketing and database marketing, custom
telemarketing/telefundraising, media planning and buying, online consulting and
commerce, Web design, interactive fulfillment, and other direct marketing
services to a diverse group of nearly 1,000 clients located throughout the
United States and Canada. These services include customer and market data
analysis, database creation and analysis, data warehousing, merge/purge,
predictive behavioral modeling, list processing, brokerage and management, data
enhancement, other direct marketing information services, Web site design and
hosting, on-line ticketing, product warehousing and fulfillment, and custom
outbound telemarketing/telefundraising services. The Company believes its
expertise in applying these marketing tools increases the productivity of its
clients' marketing expenditures.
The Company's services have enabled it to become a leading provider of direct
marketing services to nonprofit and commercial businesses throughout the United
States and Canada. The Company's nonprofit clients include: Art Institute of
Chicago, Chicago Symphony Orchestra, Kennedy Center, Lincoln Center, Nature
Conservancy, New York Philharmonic, Paralyzed Veterans of America, Planned
Parenthood Affiliates, Shubert Organization, Sierra Club and numerous public
broadcasting stations. The Company's commercial clients include: Avery Dennison,
Cisco Systems, Citicorp, General Electric Capital, Gymboree, LIVENT, Madison
Square Garden, MBNA America, TOSCO/Unocal, Walt Disney Company and numerous
business publishing clients including Crains Communications. The Company seeks
to become an integral part of its clients' marketing programs and to foster
long-term client relationships thereby providing recurring revenue
opportunities.
<PAGE>
The Company's Strategy
- ----------------------
MSGI's strategy to enhance its position as a value-added premium provider of
marketing services is to:
Increase revenues by expanding the range of marketing services offered and
by selling additional services to existing clients;
Deepen market penetration in new industries and market segments as
well as those currently served by the Company;
Develop existing and creating new proprietary database software and
database management applications; and
Pursue strategic acquisitions, joint ventures and marketing alliances to
expand marketing services offered and industries served.
Other than as described in this Annual Report on Form 10-KSB (this "Form
10-KSB") the Company has no agreements to acquire any companies and there can be
no assurance that the Company will be able to acquire such companies.
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., arose out of a 1995 merger and concurrent acquisition of
Stephen Dunn & Associates, Inc. ("SD&A"), a leading telemarketing and
telefundraising company specializing in direct marketing services for the arts,
educational and other institutional tax-exempt organizations.
SD&A was formed in 1983. Clients of SD&A include many of the larger performing
arts and cultural institutions, such as major symphonies, theatres and musical
arts companies, along with public broadcasting stations, advocacy groups and
educational institutions. SD&A's clients include over 150 of the nation's
leading institutions and universities. SD&A has its headquarters in Los Angeles,
California, where it manages telemarketing/telefundraising services which are
conducted both on-site at client-provided facilities and also at its calling
center in Berkeley, California.
Effective October 1, 1996, the Company acquired Metro Direct, Inc. ("Metro").
Metro was formed in 1987. Clients include many of the same performing arts and
cultural institutions, public broadcasting, advocacy groups and educational
institutions as SD&A, as well as a variety of commercial organizations. Metro is
headquartered in New York City, with satellite offices in Michigan, Illinois,
California, Georgia and Texas.
Metro develops and markets a variety of database and direct marketing products
and services to a wide range of commercial clients and nonprofit organizations.
Metro vertically integrates the three elements needed for most direct marketing
campaigns; strategy, information and technology. Most of their account managers
came from the client side and that experience has resulted in very high client
retention rates. Services include: Consulting and campaign strategy, market
penetration mapping, database marketing, demographic/psychographic data overlay,
Carrier Route coding, CASS/PAVE certification, list brokerage, sub-minimum list
rentals, response analysis, merge/purge, predictive modeling, response
enhancement modeling, telemarketing lead generation, telephone appendage, list
maintenance, data entry, label generation and laser letters.
<PAGE>
The Company's shares are traded on the NASDAQ Small Cap MarketSM 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 (212)
594-7688.
Developments During Fiscal 1998
- -------------------------------
Pegasus Internet, Inc. ("Pegasus"):
Pegasus was formed in 1994 and was acquired by the Company effective July 1,
1997. Pegasus 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.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the operating results of Pegasus are included in the consolidated
results of operations of the Company starting July 1, 1997.
Media Marketplace, Inc. ("MMI"):
Effective December 1, 1997, MSGI acquired Media Marketplace, Inc. and Media
Marketplace Media Division, Inc. (collectively "MMI"). MMI was founded in 1973
and specializes in providing list management, list brokerage and media planning
services to national publishing and fundraising clients in the direct marketing
industry, including magazines, continuity clubs, membership groups and catalog
buyers.
As the MMI acquisition was accounted for as a purchase, its operating results
are included in the Company's consolidated results of operations starting
December 1, 1997.
Formation of Metro Fulfillment, Inc. ("MFI"):
In May 1998, the Company formed Metro Fulfillment, Inc. ("MFI"), a new operating
subsidiary. MFI provides clients with services such as online commerce,
real-time database management, inbound/ outbound customer service, custom
packaging, assembling, product warehousing, shipping, payment processing and
retail distribution.
Capital Stock and Financing Transactions
- ----------------------------------------
Issuance of Redeemable Convertible Preferred Stock:
On December 24, 1997, the Company and General Electric Capital Corporation ("GE
Capital") entered into a purchase agreement (the "Purchase Agreement") providing
for the purchase by GE Capital of (i) 50,000 shares of Series D redeemable
convertible preferred stock, par value $0.01 per share, (the "Convertible
Preferred Stock"), and (ii) warrants to purchase up to 10,670,000 shares of
Common Stock (the "Warrants"), all for an aggregate purchase price of
$15,000,000. The Convertible Preferred Stock is convertible into shares of
Common Stock at a conversion rate, subject to antidilution adjustments. As of
June 30, 1998, the conversion rate was approximately 89.02, resulting in the
beneficial ownership by GE Capital of 4,451,117 shares of Common Stock. On an
as-converted basis, the Convertible Preferred Stock represents approximately 24%
of the issued and outstanding shares of Common Stock. The Warrants are
exercisable in November 2001 and are subject to reduction or cancellation based
on the Company's meeting certain financial goals set forth in the Warrants or
upon occurrence of a qualified secondary offering, as defined.
The Company recorded the Convertible Preferred Stock at a discount of
approximately $1,362,000, to reflect an allocation of the proceeds to the
estimated value of the warrants and is being amortized into dividends using the
"interest method" over the redemption period. In addition, the Company recorded
a non-cash, non-recurring
<PAGE>
dividend of approximately $3,200,000 representing the difference between the
conversion price of the Convertible Preferred Stock and the fair market value of
the common stock as of the date of the agreement.
The Convertible Preferred Stock is convertible at the option of the holder at
any time and at the option of the Company (a) at any time the current market
price, as defined, equals or exceeds $8.75 per share, subject to adjustments,
for at least 20 days during a period of 30 consecutive business days or (b) upon
the occurrence of a qualified secondary offering, as defined.
Dividends are cumulative and accrue at the rate of 6% per annum, adjusted upon
event of default. The Convertible Preferred Stock is mandatorily redeemable for
$300 per share, if not previously converted, on the sixth anniversary of the
original issue date and is redeemable at the option of the holder upon the
occurrence of an organic change in the Company, as defined in the Purchase
Agreement.
The Purchase Agreement contains, among other provisions, requirements for
maintaining certain minimum tangible net worth, as defined, and other financial
ratios and restrictions on payment of dividends.
Change in Authorized Shares:
On April 3, 1998, the stockholders voted to increase the number of authorized
common shares from 36,250,000 to 75,000,000, and the number of authorized
preferred shares from 50,000 to 150,000, to facilitate the Company's corporate
strategy and growth plans.
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
<PAGE>
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 a study commissioned by the Direct Marketing Association ("DMA"),
expenditures for direct marketing services in 1997 reached $153 billion. The
study estimated that annual direct marketing advertising expenditures may grow
to $205 billion by the year 2001, including $84.4 billion on telemarketing.
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 service
and database service businesses 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, fulfillment 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.
Contribution to total revenue for the two most recent fiscal years by type of
service is as follows:
Fiscal Year Ended June 30,
----------------------------
1998 1997
---- ----
Marketing and Internet services 67% 34%
Telemarketing and telefundraising 32% 66%
Fulfillment 1% -
Marketing Services
- ------------------
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
<PAGE>
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 center, all or a portion of a client's marketing
information processing needs. After migrating a client's raw data to the
Company's data center, 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.
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 center in New York City 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.
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
<PAGE>
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.
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, 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.
In addition, the Company offers Internet fulfillment, which allows a customer to
order products and services directly via the Internet. The Company's interactive
customer service provides for on-line follow-up on the status of orders. Our
on-line inventory management system provides the customer with real-time
information from any location at any time.
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.
An important feature of the custom telemarketing/telefundraising campaign is
that it can be implemented either on-site at a client-provided facility or at
the Company's calling center in Berkeley, California. On-site campaigns are
generally based on what is called a "relationship" or "affinity" sale.
Telemarketing campaigns often require multiple calls whereby a caller must be
knowledgeable about the organization and the subject matter and will seek to
engage a prospect selected from the client's database in an extended
conversation which serves to: (i) gather information; (ii) convey the offer,
describe its merits and cost, and solicit gifts or donations; and (iii) conclude
with a purchase, donation or pledge. Telefundraising from the Company's calling
center usually involves campaigns that do not use the multiple call format, but
instead use computer driven predictive dialing systems which are designed to
maximize
<PAGE>
the usage rate for all telephones as the system works through the calling
database.
Fulfillment Services
- --------------------
The Company offers its clients contract packaging and direct response
fulfillment. These services include product warehousing and shipping, custom
packaging, assembly and labeling, inbound/outbound customer service, payment
processing, retail and end user distribution, package design and Internet based
fulfillment solutions. Customer services representatives are trained to provide
customer support during regular working hours and the Company's automated call
center application is accessible 24 hours a day, 365 days of the 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. Additionally, if the level of up-front customization is
high, the Company charges a one-time development fee. 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.
Fulfillment fees are based on materials and shipping requirements, as well as
complexity of product assemblage. Customer service fees are charged on a per
call basis.
<PAGE>
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 1,000 clients who utilize its various marketing
services. These clients are comprised of leading commercial business and
nonprofit institutions in the publishing, entertainment marketing, public
broadcasting, 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 such total revenue in
fiscal 1998.
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 in the database management services field are: Acxiom Corporation,
Dimac Corporation, Direct Marketing Technology, Fair-Isaac, Inc., Harte-Hanks
Communications, Inc. and May & Speh, Inc. The Company's principal competitors in
the custom telemarketing/telefundraising field are Arts Marketing, Inc.,
Ruffalo, Cody & Associates and The Share Group. Principal competitors in the
fulfillment industry are Guthy Renker, Promotional Distribution Services,
Fosdick, Tylie Jones and National Fulfillment. There are relatively low barriers
to entering the Internet marketing services industry. The current market is
highly competitive and the Company anticipates that new competitors will
continue to enter the market.
Technological Resources and Facilities
- --------------------------------------
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.
The Company leases all of its real property: facilities for its headquarters are
in New York City; its sales and service offices are located in New York City;
Newtown, Pennsylvania; Valencia and Los Angeles, California; its data center is
located in New York City; and its telemarketing calling center in Berkeley,
California. To accommodate its rapid growth, the Company is currently expanding
its data center and administrative offices in New York.
<PAGE>
The Company's administrative office for its telemarketing/telefundraising
operations in Los Angeles is located in office space leased from the former
owner of SD&A, 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 1999, except for potential additional space
which may be required for product warehousing. 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 center in New York City, as well as its related operating, processing
and database software, are all adequate for its needs through fiscal 1999.
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 during the past five years. The federal Telephone Consumer
Protection Act of 1991 (the "TCPA") limits the hours during which telemarketers
may call consumers and prohibits the use of automated telephone dialing
equipment to call certain telephone numbers. The federal Telemarketing and
Consumer Fraud and Abuse Prevention Act of 1994 (the "TCFAPA") broadly
authorizes the Federal Trade Commission (the "FTC") to issue regulations
prohibiting misrepresentations in telemarketing sales. The FTC's new
telemarketing sales rules prohibit misrepresentations of the cost, terms,
restrictions, performance or duration of products or services offered by
telephone solicitation, prohibit a telemarketer from calling a consumer when
that consumer has instructed the telemarketer not to contact him or her,
prohibit a telemarketer from calling prior to 8:00 a.m. or after 9:00 p.m. and
specifically address other perceived telemarketing abuses in the offering of
prizes and the sale of business opportunities or investments. 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 FTC's new rules have not 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.
<PAGE>
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.
Currently the Company trains its service representatives and other personnel to
comply with the regulations of the TCPA, the TCFAPA and the FTC and the Company
believes that it is in compliance with all such regulations, in all material
respects.
The Year 2000
- -------------
The Company has taken actions to make its systems, products and infrastructure
Year 2000 compliant. With respect to the database marketing subsidiary,
databases maintained for clients include a four digit year code and one
subsequently not exposed to year 2000 issues. The Company is also beginning to
inquire as to the status of its key suppliers and vendors with respect to the
Year 2000. The Company believes it is taking the necessary steps to resolve Year
2000 issues; however, there can be no assurance that a failure to resolve any
such issue would not have a material adverse effect on the Company. Management
believes, based on available information, that it will be able to manage its
total Year 2000 transition without any material adverse effect on its business
operations, products or financial prospects.
Employees
- ---------
At September 1, 1998, the Company employed 1,265 persons, of whom 284 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.
Executive Officers and Directors of the Registrant and Significant Employees
- ----------------------------------------------------------------------------
The Company's executive officers, directors and significant employees
and their positions with MSGI are as follows:
Name Age Position
- ---- --- --------
J. Jeremy Barbera 42 Chairman of the Board of Directors,
Chief Executive Officer, President
and Chief Operating Officer
Cindy H. Hill 29 Chief Financial Officer
Scott Anderson 41 Vice President, Finance
Alan I. Annex 36 Director and Secretary
James Brown 33 Director
S. James Coppersmith 65 Director
John T. Gerlach 65 Director
Seymour Jones 67 Director
Michael E. Pralle 42 Director
C. Anthony Wainwright 65 Director
Robert M. Budlow 37 Vice President of MSGI and President of Metro
Direct
Janet Sautkulis 42 Chief Operating Officer, Metro Direct
Krista Mooradian 32 President, SD&A
<PAGE>
Thomas Scheir 45 Chief Operating Officer, SD&A
Stephen M. Reustle 43 President and Chief Executive Office,
Media Marketplace, Inc.
Brian Coughlan 30 President, Pegasus Internet, Inc.
Mr. Barbera has been Chairman, Chief Executive and Operating Officer and
President of the Company since April 1997 and was a Director and Vice President
of the Company from October 1996 to April 1997. He has been Chief Executive
Officer of Metro since its formation in 1987. Mr. Barbera has eighteen years of
experience in data management services, and over twenty years of experience in
the entertainment marketing area.
Ms. Hill has been Chief Financial Officer of the Company since June 1, 1998, and
was Corporate Controller of the Company from January to May 1998. Prior thereto,
she was a manager in the Business Assurance Division of Coopers & Lybrand, LLP,
where she was employed for the previous six years. Ms. Hill is a Certified
Public Accountant.
Mr. Anderson has been Vice President, Finance since June 1, 1998, Treasurer
since May 1997 and was Chief Financial Officer from May 1996 to May 1998,
Controller from May 1995 to May 1996 and a Director of the Company from May 1996
to August 1996. Prior thereto, from December 1994 to April 1995, he was
associated with the accounting firm of Coopers & Lybrand L.L.P. and, from 1998
to 1994, he was manager in the assurance department of an affiliate of the
accounting firm of Deloitte & Touche LLP. Mr. Anderson is a Certified Public
Accountant.
Mr. Annex has been a Director and Secretary of the Company since May 1997. He
has been a partner in the law firm of Camhy Karlinsky & Stein LLP since July
1995, where he practices corporate and securities law. Camhy Karlinsky & Stein
LLP is the Company's legal counsel. From July 1994 to June 1995, Mr. Annex was
Of Counsel to said firm. Prior thereto he was associated with Proskauer Rose,
LLP. Mr. Annex is also a director of Pacific Coast Apparel, Inc.
Mr. Brown has been a Director of the Company since February 1998. Mr. Brown is
currently Vice President and Industry Leader in GE Capital's Equity Capital
Group, where he is responsible for making strategic private equity investments.
From 1994 to 1995, Mr. Brown joined Lehman Brothers in its Corporate Planning
area to restructure the firm. From 1992 to 1994, Mr. Brown was with Bain & Co.
where he consulted with Fortune 500 clients on strategic, operational and
financial issues. Prior thereto, he was an analyst for CBS and AC Nielsen.
Mr. Coppersmith has been a Director of the Company since June 1996. He was
Chairman of the Board of Trustees of Boston's Emerson College from 1994 until
his term expired in December 1997. Until his retirement in 1994, Mr. Coppersmith
held various senior executive positions with Metromedia Broadcasting where he
managed its television operations in Los Angeles, New York, and Boston and
served as President and General Manager of Boston's WCVB-TV, an ABC affiliate
owned by The Hearst Corporation. Mr. Coppersmith also serves as a director for
B.J.'s Wholesale Club, Sun America Asset Management Corporation, Uno Restaurant
Corp., Kushner-Locke, Inc., and The Boston Stock Exchange.
Mr.Gerlach has been a Director of the Company since December 1997. He is
presently Director of the graduate business program and an associate professor
of finance at Sacred Heart University in Fairfield, CT. Previously, Mr. Gerlach
was an Associate Director in Bear Stearns' corporate finance department, with
responsibility for mergers and financial restructuring projects; he was
President and Chief Operating Officer of Horn & Hardart, supervising restaurant
and mail order subsidiaries, including Hanover Direct; and he was the Founder
and President of Consumer Growth Capital, a venture capital firm. Mr. Gerlach
also serves as a director for Uno Restaurant Co.; SAFE Inc.; LB USA (subsidiary
of a French company); Akona Corp.; the Board of Regents at St. John's University
in Collegeville, MN; and is a member of an advisory board for the College of
Business & Administration at Drexel University.
<PAGE>
Mr. Jones has been a Director of the Company since June 1996. Since September
1995, Mr. Jones has been a professor of accounting at New York University. Prior
thereto, from April 1974 to September 1995, Mr. Jones was a senior partner of
the accounting firm of Coopers & Lybrand, L.L.P. Mr. Jones has over 35 years of
accounting experience and over ten years of experience as an arbitrator and as
an expert witness, particularly in the area of mergers and acquisitions.
Mr. Pralle has been a Director of the Company since May 1998. Mr. Pralle is
currently the President of GE Capital's Equity Capital Group, with
responsibility for making common equity, convertible preferred stock and debt
investments in private and public companies in the US, Europe and Asia. He
joined GE Capital in 1989 and, prior to his current appointment in 1996, was
most recently President, GE Capital Asia Pacific. Before joining GE Capital, Mr.
Pralle spent six years with management consultants, McKinsey & Co. in their
London and Hong Kong offices.
Mr. Wainwright has been a Director of the Company since August 1996 and was also
a Director of the Company from the acquisition of SD&A until May 1996. Mr.
Wainwright is currently Vice Chairman of the advertising agency McKinney &
Silver and was Chairman and Chief Executive Officer of the advertising firm
Harris Drury Cohen, Inc., from 1995 to 1996. From 1994 to 1995, he served as a
senior executive with Cordient PLC's Compton Partners, a unit of the advertising
firm Saatchi & Saatchi World Advertising, and, from 1989 to 1994, as Chairman
and Chief Executive Officer of Campbell Mithun Esty, a unit of Saatchi & Saatchi
in New York. Mr. Wainwright also serves as a director of Caribiner
International, Gibson Greetings, Inc., Del Webb Corporation and American
Woodmark Corporation.
Mr. Budlow has been Vice President of the Company since October 1996 and
President of Metro since April 1997. Prior thereto, he was Executive Vice
President and Chief Operating Officer of Metro since 1990. He has twelve years
of experience in database management services and subscription, membership and
donor renewal programs.
Ms. Sautkulis serves as Chief Operating Officer of Metro Direct, having
previously served as Executive Vice President. Prior to joining Metro Direct,
she held various positions at Jetson Direct Mail and Belth Associates. Ms.
Sautkulis has more than twenty years experience in database management, list
brokerage and lettershop services specializing in the business-to-business
sector.
Ms. Mooradian has been President of SD&A since 1997. For the past five years,
she has held various positions of increasing responsibility within SD&A
Mr. Scheir has been Vice President and Chief Operating Officer of SD&A since
September 1996. Prior thereto, from 1990 to September 1996, he was Chief
Financial Officer of SD&A, and from 1983 to 1990, he served as Business Manager
of SD&A.
Mr. Reustle has been President and Chief Executive Officer of MMI since December
1997, Managing Partner from June 1980 to December 1997 and Vice President of
Finance from 1978 to 1980. Prior thereto, Mr. Reustle was a Certified Public
Accountant at Arthur Andersen LLP, where he was employed from 1976 to 1978.
Mr. Coughlan has been President of Pegasus Internet since June 1998. Having
previously served as Creative Director, he brings over ten years of interactive
design and project management experience to Pegasus.
<PAGE>
Item 2 - Properties
- -------------------
The Company and its subsidiaries lease facilities for office and warehouse space
summarized as follows and in Note 9 of Notes to Consolidated Financial
Statements.
Location Square Feet
-------- -----------
Patterson, New York 250
Venice, California 5,500
Berkley, California 6,600
Newtown, Pennsylvania 10,270
New York, New York 20,000
Valencia, California 36,000
Item 3 - Legal Proceedings
- --------------------------
The Company has been party to certain legal proceedings in the ordinary course
of its business. The outcome of these legal proceedings are not expected to have
a material adverse effect on the consolidated financial condition, liquidity or
expectations of the Company, based on the Company's current understanding of the
relevant facts and law.
Item 4 - Submission of Matters to a Vote of Security-Holders
- ------------------------------------------------------------
On April 3, 1998, the Company held an annual meeting of stockholders to vote on
election of directors, ratification of independent auditors and increases in
authorized shares of the Company's common and preferred stock. Of the 17,534,674
shares of the Company's common stock, par value $.01 per share, ("Common Stock")
entitled to vote at the meeting, holders of 15,834,716 shares were present in
person or were represented by proxy at the meeting. Of the 50,000 shares of the
Company's preferred stock, par value $.01 per share, ("Preferred Stock")
entitled to vote at the meeting, all were represented.
The directors elected at the meeting and the results of the voting were as
follows:
For Against
--- -------
General nominees:
Alan I. Annex 15,622,625 212,091
J. Jeremy Barbera 15,623,350 211,366
S. James Coppersmith 15,622,625 212,091
John T. Gerlach 15,591,925 242,791
Seymour Jones 15,620,625 214,091
C. Anthony Wainwright 15,622,625 212,091
Preferred nominee:
James Brown 50,000 0
The above represented all of the directors of the Company on April 3, 1998.
There were no abstentions or broker non-votes on the election of directors.
The shares voted regarding the Board of Directors' proposal to amend to
Company's Amended and Restated Articles of Incorporation to increase the number
of shares of Common Stock authorized for issuance from 36,250,000 shares to
75,000,000 were as follows:
For 15,211,407
Against 580,292
Abstentions 43,017
Broker non-votes 0
<PAGE>
The shares voted regarding the Board of Directors' proposal to select the
accounting firm of Coopers and Lybrand, LLP, to serve as independent auditors of
the Company were as follows:
For 15,748,777
Against 47,682
Abstain 38,257
Broker non-votes 0
The shares voted regarding the Board of Directors' proposal to amend the
Company's Amended and Restated Articles of Incorporation to increase the number
of shares of Preferred Stock authorized for issuance from 50,000 shares to
150,000 shares were as follows:
For 10,452,521
Against 607,963
Abstain 168,250
Broker non-votes 4,605,982
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The common stock of the Company trades on the NASDAQ Small-Cap MarketSM under
the symbol "MSGI". Prior to July 1997 it traded under the symbol "ALCM". 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 1998
Fourth Quarter $3.00 $4.19
Third Quarter 3.50 5.56
Second Quarter 3.88 5.50
First Quarter 2.75 5.25
Fiscal 1997
Fourth Quarter $1.69 $3.56
Third Quarter 2.00 5.25
Second Quarter 3.19 5.63
First Quarter 4.63 6.13
As of June 30, 1998, there were approximately 800 registered holders of record
of the Company's common stock. (This number does not include 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.
<PAGE>
Item 6 - Management's Discussion and Analysis
- ---------------------------------------------
Introduction :
- --------------
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity/cash flows of the Company
for the two year period ended June 30, 1998. This should be read in conjunction
with the financial statements, and notes thereto, included in this Annual
Report.
From April 25, 1995 through September 30, 1996, the Company operated as a direct
marketing services provider with its initial concentration as a telemarketing
and telefundraising company that specialized in direct marketing services for
the arts, educational and other cultural organizations. As more fully described
in Note 3 to the consolidated financial statements included herein, effective
October 1, 1996 the Company purchased 100% of the stock of Metro Services Group,
Inc., subsequently renamed Metro Direct ("Metro"). This acquisition is reflected
in the consolidated financial statements using the purchase method of accounting
starting October 1, 1996. Metro develops and markets information-based services
used primarily in direct marketing by a variety of commercial and tax-exempt
organizations.
As more fully described in Note 3 to the consolidated financial statements
included herein, effective December 1, 1997, the Company acquired all of the
outstanding capital stock of Media Marketplace, Inc. and Media Marketplace Media
Division, Inc. (collectively "MMI"). The results of operations of MMI are
reflected in the consolidated financial statements using the purchase method of
accounting from the date of acquisition. MMI provides list management, list
brokerage and media planning services.
As more fully described in Note 3 to the consolidated financial statements
included herein, effective July 1, 1997, the Company acquired all of the
outstanding common shares of Pegasus Internet, Inc. ("Pegasus"). The results of
operations of Pegasus are reflected in the consolidated financial statements
using the purchase method of accounting from the date of acquisition. Pegasus
provides Internet services, including web site planning and development, site
hosting, on-line ticketing, system development, graphic design and electronic
commerce.
In May 1998, the Company formed Metro Fulfillment, Inc. ("MFI"), a new operating
subsidiary providing online commerce, real-time database management,
inbound/outbound customer service, custom packaging, assembling, product
warehousing, shipping, payment processing and retail distribution.
Results of Operations Fiscal 1998 Compared to Fiscal 1997
- ---------------------------------------------------------
Revenues of $51.2 million for the year ended June 30, 1998 ("Fiscal 1998")
increased by $27.1 million over revenues of $24.1 million during the year ended
June 30, 1997 ("Fiscal 1997"). Of the increase, $22.4 million was due to
acquisitions and start-up operations during Fiscal 1998. Revenues from on-site
telemarketing and telefundraising campaigns increased $0.9 million from $12.9
million in Fiscal 1997 to $13.8 in Fiscal 1998 offset by a decrease in calling
center revenues of $0.3 million. Revenues from marketing services totaled $12.2
million and $8.2 million in Fiscal 1998 and Fiscal 1997, respectively, or an
increase of $4.0 million. The increase was principally due to the inclusion of
twelve months of operations in the current year versus nine months in the prior
year, combined with continued sales growth.
Salaries and benefits of $19.2 million in Fiscal 1998 increased by $4.2 million
over salaries and benefits of $15.0 million in Fiscal 1997, principally due to
the inclusion of $2.4 million from acquisitions and start-up operations during
Fiscal 1998. Salaries and benefits from telemarketing activities increased by
$0.4 million or 3%, consistent with its overall increase in revenues. Salaries
and benefits from marketing services activities increased by $1.4 million from
$1.8 million in Fiscal 1997 to $3.2 million in Fiscal 1998. This was due to a
full year of
<PAGE>
expenses in Fiscal 1998, against nine months in Fiscal 1997, as well as an
increase in head count to manage current and anticipated future growth.
Direct costs of $26.8 million in Fiscal 1998 increased by $21.2 million over
direct costs of $5.6 million in Fiscal 1997. $19.2 of the increase is
principally due to acquisitions during Fiscal 1998. Direct costs for marketing
services increased by $2.0 million principally due to the inclusion of the full
year of expenses in the current year, as well as an increase in revenue. The
Company's direct costs consist principally of commissions paid to use marketing
lists.
Selling, general and administrative expenses of $4.3 million in Fiscal 1998
increased by $0.7 million over comparable expenses of $3.6 million in Fiscal
1997. Acquisitions and start-up operations accounted for $0.7 million of such
expenses. Administrative expenses for marketing services increased by $0.2
million, principally due to the inclusion of the full year of expenses in Fiscal
1998. Corporate administration decreased by $0.2 generally due to cost reduction
measures implemented upon the change in the Company's management at the end of
Fiscal 1997.
In Fiscal 1997, the Company incurred a non-recurring, non-cash charge of
$1,650,000 to compensation expense relating to options granted to two former
principal executive officers. Such charge was incurred because the exercise
price of each such option, which was based upon the market price of the common
stock on May 30, 1996 (the date which the Company intended as the effective day
of the grant) rather than the market price on September 26, 1996 (the actual
effective date of the grant), was lower than the market price of the common
stock on September 26, 1996.
Restructuring costs of $1.0 million were incurred in Fiscal 1997, as the Company
effected certain corporate restructuring steps, including reducing corporate
staff and related corporate office expenses, as well as making two executive
management changes.
Depreciation and amortization of $1.5 million in Fiscal 1998 increased by $0.5
million over comparable expenses of $1.0 million in Fiscal 1997. Of the
increase, $0.4 million is due to acquisitions and start-up operations entered
into during Fiscal 1998. The remaining increase was principally due to inclusion
of a full year of expenses for marketing services.
Discounts on warrant exercises of $113,000 were incurred in Fiscal 1997. To
reduce the overhang associated with the existence of such warrants and to obtain
working capital subsequent to the withdrawal of its proposed underwritten public
offering, the Company accepted offers from certain warrant-holders to exercise
their warrants for shares of Common Stock at discounted exercise prices. For the
warrants which arose from a previous financing transaction, the Company
recognized the dates of acceptances as new measurement dates and, accordingly,
recorded the non-cash charges to reflect the market value of the discounts.
Withdrawn public offering costs of $1.2 million were recorded in Fiscal 1997.
In October 1996, the Company filed a registration statement on Form SB-2 with
the Securities and Exchange Commission relating to an underwritten public
offering of 2.1 million shares. In February 1996 the Company withdrew the
registration statement and costs incurred in the process were expensed.
Interest expense and other, net, of $186,000 in Fiscal 1998 decreased by
$215,000 over expenses of $401,000 in Fiscal 1997. Such expenses decreased by
$407,000 principally due to conversions of convertible securities and debt
repayments, interest income earned on invested surplus cash and interest and
other miscellaneous income provided by certain acquisitions during Fiscal 1998.
These changes were offset by increased interest expense at certain subsidiaries
of $192,000 due to a change in borrowing relationship in August 1997 and
increase in current
<PAGE>
year borrowings on lines of credit for working capital to support internal
growth.
The provision for income taxes of $15,000 in Fiscal 1998 decreased by $94,000
over the provision of $109,000 in Fiscal 1997. During Fiscal 1998, the Company
determined that it qualified to file as a combined entity in a certain state for
the fiscal years beginning July 1, 1996. The Company had estimated its state
income tax for such state on a stand-alone basis for each subsidiary for the
year ended June 30, 1997. The impact on the current year for this change in
estimate resulted in a benefit of approximately $70,000. The Company records
provisions for state and local taxes incurred on taxable income at the operating
subsidiary level, which can not be offset by losses incurred at the parent
company level.
Capital Resources and Liquidity:
Historically, the Company has funded its operations, capital expenditures and
acquisitions primarily through cash flow from operations, private placements of
common and preferred stock, and its credit facilities. At June 30, 1998, the
Company had cash and cash equivalents of $6,234,981 and accounts receivable net
of allowances of $15,865,905.
The Company generated losses from operations of $579,807 in the current period
and used net cash in operating activities of $1,886,489. The usage was
principally due to final payments made on the Company's withdrawn public
offering liabilities and an increase in accounts receivable.
In the current period, net cash of $7,281,393 was used in investing activities.
The Company paid $5,691,172 as part of the purchase price for the acquisition of
MMI and $277,692 as part of the purchase price for the acquisition of Pegasus,
net of cash acquired. Purchases of property and equipment of $287,529 were
principally comprised of computer equipment. The Company intends to continue to
invest in technology and telecommunications hardware and software.
In the current period, financing activities provided $12,473,851. On December
24, 1997, the Company sold 50,000 shares of convertible preferred stock for
$15,000,000, less $1,101,719 of placement fees and related costs. During the
period, a subsidiary entered into a two-year renewable credit facility with a
lender for a line of credit commitment of up to a maximum of $2,000,000
collateralized by its accounts receivable. In August, the subsidiary drew upon
the facility to fully pay down the outstanding balance of $746,000 on its
previous bank line and the $104,000 remaining on its bank note. At June 30,
1998, the Company had amounts outstanding of $2,522,306 on its lines of credit.
The Company had approximately $980,000 available on its lines of credit as of
June 30, 1998.
During the current period the Company repaid $2,291,666 of its acquisition debt,
comprised of $900,000 to the former principals of Metro, $1,241,666 to the
former principal of SD&A and $150,000 to the former principal of MMI.
The Company believes that funds on hand, funds available from its operations and
from its unused lines of credit, should be adequate to finance its operations
and capital expenditure requirements, and enable the Company to meet interest
and debt obligations, for the next twelve months. In conjunction with the
Company's acquisition and growth strategy, additional financing may be required
to complete any such acquisitions and to meet potential contingent acquisition
payments.
The Year 2000
- -------------
The Company has taken actions to make its systems, products and infrastructure
Year 2000 compliant. With respect to the database marketing subsidiary,
databases maintained for clients include a four digit year code and
<PAGE>
are subsequently not exposed to Year 2000 issues. The Company is also beginning
to inquire as to the status of its key suppliers and vendors with respect to the
Year 2000. The Company believes it is taking the necessary steps to resolve Year
2000 issues; however, there can be no assurance that a failure to resolve any
such issue would not have a material adverse effect on the Company. Management
believes, based on available information, that it will be able to manage its
total Year 2000 transition without any material adverse effect on its business
operations, products or financial prospects.
Seasonality and Cyclicality: The businesses of telemarketing and marketing
services tend to be seasonal. Telemarketing has higher revenues and profits
occurring in the fourth fiscal quarter, followed by the first fiscal quarter.
This is due to subscription renewal campaigns for tax exempt clients, which
generally begin in the spring time and continue during the summer months.
Marketing services tend to have higher revenues and profits occurring in the
second fiscal quarter, based on the seasonality of its clients' mail dates.
New Accounting Pronouncements:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. An enterprise that has no items of other comprehensive
income in any period presented is not required to report comprehensive income.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
Management does not believe that the adoption of SFAS 130 will have a material
impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 is effective for fiscal years beginning after December 15, 1997.
Management has not yet assessed the impact that the adoption of SFAS 131 will
have on the Company's financial statements.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5 Reporting on the Costs of Start-Up Activities (SOP 98-5), which is
required to be adopted by the Company in fiscal 1999, SOP 98-5 provides guidance
on the financial reporting of start-up costs and organization costs. It requires
costs of start-up activities and organization costs to be expensed as incurred.
Management believes that the implementation of SOP 98-5 will result in a
one-time charge of approximately $120,000 on the date of adoption which will be
reported as a cumulative effect of a change in accounting principle.
Item 7 - Financial Statements
- -----------------------------
The Consolidated Financial Statements required by this Item 7 are set forth as
indicated in the index following Item 13(a)(1).
Item 8 - Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure
-------------------------------------------------------
None.
<PAGE>
PART III
The information required by this Part III (items 9, 10, 11 and 12) 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. Certain information, with respect to the Company's executive officers,
is set forth in Part I, under the caption "Executive Officers and Directors of
the Registrant and Significant Employees."
<PAGE>
Item 13 - Exhibits and Reports on Form 8-K
- ------------------------------------------
(A)(1) Financial statements - see "Index to Financial Statements" on page 28.
(2) Exhibits:
3(i) Amended and Restated Articles of Incorporation (b)
3(ii) Certificate of Amendment to the Amended and Restated
Articles of Incorporation of the Company (b)
3(iii)Certificate of Amendment to the Articles of Incorporation
for change of name to All-Comm Media Corporation (e)
3(iv) By-Laws (b)
3(v) Certificate of Amendment of Articles of Incorporation for
increase in number of authorized shares to 36,300,000 total (h)
3(vi) Certificate of Amendment of Articles of Incorporation for
change of name to Marketing Services Group, Inc. (k)
3(vii)Certificate of Amendment of Articles of Incorporation for
increase in number of authorized shares to 75,150,000
total (a)
10.1 1991 Stock Option Plan (c)
10.2 Memorandums of Understanding (f)
10.3 Letter from Seller of SD&A agreeing to long-term obligation payment
and restructuring (g)
10.4 Agreement and Plan of Merger between All-Comm Media
Corporation and Metro Services Group, Inc. (i)
10.5 Security Agreement between Milberg Factors, Inc. and Metro
Services Group, Inc. (j)
10.6 Security Agreement between Milberg Factors, Inc. and
Stephen Dunn & Associates, Inc. (k)
10.7 Agreement and Plan of Merger between Marketing Services
Group, Inc. and Pegasus Internet, Inc. (k)
10.8 J. Jeremy Barbera Employment Agreement (c)
10.9 Robert M. Budlow Employment Agreement (i)
10.10 Janet Sautkulis Employment Agreement (i)
10.11 Scott Anderson Employment Agreement (k)
10.12 Robert Bourne Employment Agreement (k)
10.13 Thomas Scheir Employment Agreement (k)
10.14 Krista Mooradian Employment Agreement (k)
10.15 Stephen Dun Employment Agreement (d)
10.16 Severance Agreement with Barry Peters (j)
10.17 Severance Agreement with E. William Savage (j)
10.18 Form of Private Placement Agreement (j)
10.19 Fourth Memorandum of Understanding (a)
10.20 Stock Purchase Agreement among Marketing Services
Group,Inc., Stephen M. Reustle and Thomas R. Kellogg (m)
10.21 Purchase agreement dated as of December 24, 1997, by and between
the Company and GE Capital (l)
10.22 Stockholders Agreement by and among the Company, GE Capital and
certain existing stockholders of the Company, dated as of December
24, 1997 (l)
10.23 Registration Rights Agreement by and among the Company and GE
Capital, dated as of December 24, 1997 (l)
<PAGE>
10.24 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)
10.25 Warrant, dated as of December 24, 1997, to purchase shares of
Common Stock of the Company (l)
10.26 Form of Employment Agreement by and among Marketing
Services Group, Inc. and Stephen M. Reustle (m)
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's Report 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
(B)Reports on Form 8-K.
None.
<PAGE>
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: September 25, 1998
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 September 25, 1998
- --------------------- Chief Executive
J. Jeremy Barbera Officer (Principal Executive Officer)
/s/ Cindy H. Hill Chief Financial Officer(Principal September 25, 1998
- ----------------- Financial and Accounting Officer)
Cindy H. Hill
/s/ Alan I. Annex Director and Secretary September 25, 1998
- -----------------
Alan I. Annex
/s/ James G. Brown Director September 25, 1998
- ------------------
James G. Brown
/s/ S. James Coppersmith Director September 25, 1998
- ------------------------
S. James Coppersmith
/s/ John T. Gerlach Director September 25, 1998
- -------------------
John T. Gerlach
/s/ Seymour Jones Director September 25, 1998
- -----------------
Seymour Jones
<PAGE>
/s/ Michael E. Pralle Director September 25, 1998
- ---------------------
Michael E. Pralle
/s/ C. Anthony Wainwright Director September 25, 1998
- -------------------------
C. Anthony Wainwright
The foregoing constitute all of the Board of Directors.
<PAGE>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
[Items 7 and 13(a)]
(1)FINANCIAL STATEMENTS: Page
------------------------ ----
Report of Independent Accountants 26
Consolidated Balance Sheet as of June 30, 1998 27
Consolidated Statements of Operations
Years Ended June 30, 1998 and 1997 28
Consolidated Statement of Stockholders' Equity
Years Ended June 30, 1998 and 1997 29
Consolidated Statements of Cash Flows
Years Ended June 30, 1998 and 1997 30-32
Notes to Consolidated Financial Statements 33-45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
September 9, 1998
To the Board of Directors and
Stockholders of Marketing Services Group, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Marketing
Services Group, Inc. and its Subsidiaries at June 30, 1998, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended June 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards 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 expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
<PAGE>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998
ASSETS
Current assets:
Cash and cash equivalents $ 6,234,981
Accounts receivable billed,
net of allowance
for doubtful accounts of $421,861 12,606,468
Accounts receivable unbilled 3,259,437
Other current assets 724,032
-----------
Total current assets 22,824,918
Property and equipment at cost, net 1,645,957
Intangible assets at cost, net 24,771,045
Other assets 539,507
-------
Total assets $49,781,427
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 2,522,306
Accounts payable-trade 11,420,386
Accrued expenses and other current liabilities 1,653,871
Current portion of capital lease obligations 117,911
Current portion of long term obligations 1,317,540
Related party payable 780,000
-------
Total current liabilities 17,812,014
==========
Capital lease obligations, net of current portion 87,250
Long-term obligations, net of current portion 116,667
Preferred dividends payable 617,328
Other liabilities 72,937
------
Total liabilities 18,706,196
----------
Redeemable convertible preferred stock -
$.01 par value; 150,000 shares authorized;
50,000 shares of Series D convertible preferred
stock issued and outstanding 13,749,973
----------
Commitments
Stockholders' equity:
Common stock - $.01 par value; 75,000,000
authorized; 13,098,510 shares issued 130,985
Additional paid-in capital 29,612,816
Accumulated deficit (12,283,074)
Less 11,800 shares of common stock
in treasury, at cost (135,469)
--------
Total stockholders' equity 17,325,258
----------
Total liabilities and stockholders' equity $49,781,427
===========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
1998 1997
---- ----
Revenues $51,174,063 $24,144,874
----------- -----------
Operating costs and expenses:
Salaries and benefits 19,255,348 14,967,420
Direct costs 26,771,611 5,587,343
Selling, general and administrative 4,240,805 3,585,972
Compensation expense on option grants - 1,650,000
Restructuring costs - 958,376
Depreciation and amortization 1,486,106 969,594
--------- -------
Total operating costs and expenses 51,753,870 27,718,705
Loss from operations (579,807) (3,573,831)
Other expense:
Discounts on warrant exercises - (113,137)
Withdrawn public offering costs - (1,179,571)
Interest expense and other, net (185,967) (401,184)
-------- --------
Total (185,967) (1,693,892)
-------- ----------
Loss before income taxes (765,774) (5,267,723)
Provision for income taxes (14,704) (109,373)
------- --------
Net loss $ (780,478) $ (5,377,096)
=========== =============
Net loss attributable to
common stockholders* $(4,724,480) $ (20,199,038)
=========== =============
Net loss per common share,
basic and fully diluted $ (.37) $ (2.85)
======= ========
Weighted average common shares outstanding 12,892,323 7,089,321
========== =========
* The twelve months ended June 30, 1998 include the impact of dividends on 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.
The twelve months ended June 30, 1997 include the impact of non-recurring
dividends on preferred stock for (a) $8.5 million non-cash dividend on
conversion of Series B Preferred Stock; (b) $573,000 on repurchase of Series C
Preferred Stock; (c) periodic non-cash accretions on preferred stock; and (d) $5
million in discounts on warrant exercises.
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated Treasury Stock
Shares Amount Capital Deficit Shares Amount Totals
------ ------ ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance July 1, 1996 3,198,534 $31,985 $13,173,520 $(6,125,500) (11,800) $(135,469) $6,944,536
Shares issued upon exercise of options 7,925 79 (79)
Purchase of warrants by consultants 81,000 81,000
Accretion of redeemable convertible
preferred stock (806,425) (806,425)
Issuance of restricted shares for
SD&A earn-out 96,748 967 424,033 425,000
Non-recurring issuance of options for
compensation of executive officers 1,650,000 1,650,000
Issuance of common stock for acquisition
of Metro Services Group 1,814,000 18,140 7,237,860 7,256,000
Recapitalization:
Conversion of 6,200 shares of Series B
redeemable convertible preferred stock
into common 2,480,000 24,800 1,661,288 1,686,088
Accretion on repurchase of 2,000 shares
of Series C redeemable preferred stock (573,305) (573,305)
Issuances of restricted stock in exchange
for warrants 600,000 6,000 (6,000)
Issuances of restricted stock for accrued
interest on Series B&C redeemable
convertible preferred stock 88,857 889 144,864 145,753
Issuances of restricted shares upon exercise
of discounted warrants 3,152,500 31,526 2,033,600 2,065,126
Discounts granted on exercise of warrants 113,137 113,137
Issuances of warrants to consultants 76,000 76,000
Net loss (5,377,096) (5,377,096)
---------- ------- ---------- ------------ ------- -------- ----------
Balance June 30, 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
Issuances of warrants to consultants 19,500 19,500
Issuances of common stock 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 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
========== ======== =========== ============ ======= ========= ===========
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE>
MARKETING SERVICES GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997
1998 1997
---- ----
Operating activities:
Net loss $(780,478) $(5,377,096)
Adjustments to reconcile loss to net cash
used in operating activities:
Gain on sale of land - (90,021)
Depreciation 412,212 250,194
Amortization 1,073,894 719,400
Loss on disposal of assets - 35,640
Discounts on exercise of warrants - 113,137
Compensation expense on option grants - 1,650,000
Accretion on note payable and
redeemable stock 37,555 161,597
Warrant issuances to consultants
and creditors 19,500 152,000
Promissory notes issued for settlement
agreements - 499,524
Bad debt expense 70,170 -
Changes in assets and liabilities net of
effects from acquisitions:
Accounts receivable (487,516) (483,959)
Other current assets (398,413) (119,263)
Other assets (362,671) (144,237)
Trade accounts payable (1,240,126) (312,493)
Accrued expenses and other liabilities (230,616) 281,539
--------- -------
Net cash used in operating activities (1,886,489) (2,664,038)
---------- ----------
Investing activities:
Proceeds from sale of land - 860,443
Acquisition of MMI, net of cash acquired
of $340,550 (5,691,172) -
Acquisition of Metro, net of cash acquired
of $349,446 - 207,327
Acquisition of Pegasus, net of cash acquired
of $43,811 (277,692) -
Earn-out relating to acquisition of SD&A (425,000) -
Purchases of property and equipment (287,529) (489,846)
Purchase of note receivable (600,000) -
-------- --------
Net cash provided by (used in)
investing activities (7,281,393) 577,924
----------- -------
Financing activities:
Proceeds from sale of convertible preferred
stock, net of issue costs of $1,101,719 13,898,280 -
Net proceeds from credit facilities 860,598 -
Proceeds from exercise of stock options 8,271 2,065,125
Proceeds from convertible notes payable - 2,200,000
Proceeds from issuances of warrants - 5,000
Repayment of land option - (150,000)
Proceeds from bank loans and credit facilities - 1,686,546
Repayments of bank loans and credit facilities - (524,838)
Payment on promissory notes - (51,889)
Repayments of note payable (330,095) (1,000,000)
Principal payments under capital lease obligation (96,537) (41,195)
Repayments of acquisition debt (1,866,666) (566,667)
---------- --------
Net cash provided by financing activities 12,473,851 3,622,082
---------- ---------
Net increase in cash and cash equivalents 3,305,969 1,535,968
Cash and cash equivalents at beginning of year 2,929,012 1,393,044
--------- ---------
Cash and cash equivalents at end of year $6,234,981 $2,929,012
========== ==========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE>
Supplemental disclosures of cash flow data: 1998 1997
- ------------------------------------------- ---- ----
Cash paid during the year for:
Interest $ 439,264 $ 243,482
Financing charge $1,101,719 $ 154,000
Income tax paid $ 45,019 $ 45,154
Supplemental schedule of non cash investing and financing activities
- -----------------------------------------------------------------------
For the year ended June 30, 1998:
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 10, 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.
Effective December 1, 1997, the Company issued 222,222 shares of its common
stock and paid $6,000,000 in cash to acquire 100% of the outstanding capital
stock of Media Marketplace, Inc. and Media Marketplace Media Division, Inc. At
acquisition, assets acquired and liabilities assumed, less payments made for the
acquisition, were:
Working capital, other than cash $ 85,928
Costs incurred for acquisition 87,475
Property and equipment (204,436)
Costs in excess of net assets of acquired companies (6,691,964)
Non-current liabilities 31,825
Common stock issued 1,000,000
---------
$(5,691,172)
===========
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.
Capital lease obligations of $142,231 were incurred for the leasing of certain
equipment and automobiles.
Property and equipment in the amount of $626,356 were acquired through the
foreclosure on a note receivable.
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.
On July 1, 1997, the Company issued 600,000 shares of its common stock and paid
$200,000 in cash to acquire 100% of the outstanding stock of Pegasus Internet,
Inc. At acquisition, assets acquired and liabilities assumed, less payments made
for the acquisition, were:
Working capital, other than cash $ 117,214
Property and equipment (53,834)
Costs in excess of net assets of acquired company (2,141,072)
Common stock issued 1,800,000
---------
$ (277,692)
==========
For the year ended June 30, 1997:
Additional shares of common stock for the amount of 7,925 were issued upon
exercise of stock options for 15,000 shares, using 7,075 outstanding shares as
payment of the exercise price.
The Company issued 96,748 shares of common stock, valued at $425,000, as an
earn-out payment to the former owner of SD&A for achieving certain targeted
earnings for the fiscal year ended June 30, 1996.
Two former members of executive management were granted stock options for
600,000 shares of common stock as part of their employment agreements.
Compensation expense of $1,650,000 was recognized for the difference between the
exercise price and the fair market value at date of grant.
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE>
The Company issued 1,814,000 shares of its common stock and $1,000,000 face
value in 6% convertible notes to acquire 100% of the outstanding stock of Metro
Services Group, Inc. The debt was originally discounted to $920,000 to reflect
an effective interest rate of 10%, increased to $943,806 in April, 1997, as a
result of a $100,000 prepayment. At acquisition, assets acquired and liabilities
assumed, less payments made for acquisition, were:
Working capital, other than cash $ 389,310
Property and equipment (242,726)
Other assets (50,000)
Costs in excess of net assets of acquired company (8,236,046)
Long-term debt, discounted 943,806
Other liabilities 146,983
Common stock issued 7,256,000
---------
$ 207,327
==========
The Company issued 3,168,857 shares of its common stock and $1,000,000 face
value in debt as part of a recapitalization. 6,200 shares of Redeemable Series B
Preferred Stock were converted into 2,480,000 common shares; 2,000 shares of
Redeemable Series C Preferred Stock were repurchased for $1,000,000 in notes;
warrants for 3,000,000 shares were exchanged for 600,000 common shares and
$145,753 in accrued interest was converted into 88,857 common shares. Interest
expense for fiscal 1997 was $128,264 (see Note 11).
The Company entered into promissory notes payable for executive management
settlement agreements at a discounted value of $499,524, of which $447,635 was
unpaid at June 30, 1997.
To raise $2.1 million in cash, the Company accepted offers from warrant holders
to discount their exercise prices as an inducement to exercise. The non-cash
value of the discounts totaled $5,088,637, of which $113,137 was expensed in
fiscal 1997 and $4,975,500 was charged directly to paid in capital.
The Company made prepayments on a portion of discounted long-term debt to a
former owner of Metro Services Group, Inc., in non-cash accretion of $23,810 on
the discounted debt and goodwill. Accretion of the discount on the unpaid notes
was $33,333.
Intangible assets were increased by $758,888, payable half in common stock and
half in cash to the former owner of SD&A as additional consideration resulting
from SD&A's achievement of defined results of operations, during fiscal 1997.
The Company issued warrants to acquire common stock for consulting services
valued at $152,000.
On July 1, 1997, the Company consummated an agreement to purchase Pegasus
Internet, Inc. At June 30, 1997, the Company had accrued $80,000 in unpaid
acquisition costs.
The accompanying notes are an integral part of the Consolidated Financial
Statements.
<PAGE>
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
- --------------------------
The consolidated financial statements include the accounts of Marketing Services
Group, Inc. and its wholly-owned subsidiaries. ("MSGI" or the "Company").
Operating Subsidiaries include: Alliance Media Corporation; Stephen Dunn &
Associates ("SD&A"); Metro Direct, Inc.; Pegasus Internet, Inc.; Media
Marketplace, Inc.; Media Marketplace Media Division Inc.; Metro Fulfillment,
Inc. All material intercompany accounts and transactions have been eliminated in
consolidation.
The Company provides direct marketing and database marketing, telemarketing and
telefundraising, media planning and buying, online consulting and commerce, Web
design and interactive fulfillment services. Substantially all of the Company's
business activity is conducted with customers located within the United States
and Canada.
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
value of intangible assets, deferred tax valuation allowance and the allowance
for doubtful accounts. Actual results could differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES:
- ------------------------------------
Cash and Cash Equivalents:
Highly liquid investments with an original maturity of three months or less are
considered to be cash equivalents.
Property and Equipment:
Property and equipment are stated at cost. Depreciation and amortization, which
includes the amortization of assets recorded under capital leases, are computed
using the straight-line method over the estimated useful lives of the respective
assets. Estimated useful lives are as follows:
Equipment........................5 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, proprietary software, 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- 40 years.
<PAGE>
The Company assesses the recoverability of its intangible assets by determining
whether the amortization of the unamortized balance over its remaining life can
be recovered through projected future cash flows (undiscounted and without
interest charges). If projected future cash flows indicate that the unamortized
amounts will not be recovered, an adjustment will be made to reduce the net
amounts to an amount consistent with projected future cash flows discounted at
the Company's incremental borrowing rate. Cash flow projections are based on
trends of historical performance and management's estimate of future
performance, giving consideration to existing and anticipated competitive and
economic conditions. No impairment has been recognized in the accompanying
financial statements.
Amortization expense during the years ended June 30, 1998 and 1997 was
approximately $1,074,000, and $719,000, respectively. Accumulated amortization
as of June 30, 1998 was approximately $2,217,000.
Revenue recognition:
Revenues derived from direct marketing 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 derived from media planning and buying is
recognized when services are performed. Revenues derived from online consulting
and commerce and Web design products are recognized when services are performed.
Revenues derived from fulfillment services are recognized when products are
shipped. Deferred revenue represents billings in excess of revenue recognized.
Income taxes:
The Company recognizes deferred taxes under the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized 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.
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 investments to
financial institutions with high credit standing. A significant portion of cash
balances are maintained with one financial institution and may, at time, exceed
insurable amounts. 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 October 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). This statement
eliminates the presentation of primary EPS and requires the presentation of
basic EPS (the principal difference being that common stock equivalents are not
considered in the
<PAGE>
computation of basic EPS). It also requires the presentation of diluted EPS
which gives effect to all dilutive common shares that were outstanding during
the period. Earnings per share for all prior periods presented have been
restated.
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, all terms associated with 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.
Disclosures required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), including pro forma
operating results had the Company prepared its financial statements in
accordance with the fair-value-based method of accounting for stock-based
compensation, have been included in Note 12.
Reclassifications:
Certain reclassifications have been made to the 1997 financial statements to
conform with the 1998 presentation.
3. ACQUISITIONS
- ----------------
Media Marketplace, Inc:
Effective December 1, 1997, the Company entered into a stock purchase agreement
to acquire all of the issued and outstanding capital stock (the "Shares") of
Media Marketplace, Inc. and Media Marketplace Media Division, Inc. (collectively
"MMI"). The total cost of the acquisition was $7,294,197, consisting of a cash
purchase price of $6,000,000, an aggregate of 222,222 restricted shares of
common stock of MSGI, par value $.01 per share, at an agreed upon price of $4.50
per share, assumption of a note payable of $150,000 and transaction and other
costs aggregating $144,197. The cost of the acquisition was allocated to the
assets acquired and liabilities assumed, based upon their estimated fair values,
as follows:
Working capital $ 429,622
Property and equipment 204,436
Non-current liabilities (31,825)
Intangible assets 6,691,964
-----------
$7,294,197
==========
The estimated fair value of the intangible assets are being amortized by the
straight-line method over their estimated useful lives ranging from three to
forty years.
As part of the acquisition, the agreement includes an earn-out payment of up to
$1,000,000 a year for each fiscal year ending June 30, 1999, 2000 and 2001,
adjustable forward to apply to the next fiscal year if no earn-out payment is
due for one such year. The earn-out payments are contingent upon MMI meeting (a)
targeted earnings as defined in the agreement and (b) targeted billings of MSGI
subsidiaries and affiliates for electronic data processing services for clients
originally introduced by MMI.
<PAGE>
MMI was founded in 1973 and specializes in providing list management, list
brokerage and media planning and buying services to national publishing and
fundraising clients in the direct marketing industry, including magazines,
continuity clubs, membership groups and catalog buyers.
Pegasus Internet, Inc:
Effective July 1, 1997, MSGI acquired all of the outstanding common shares of
Pegasus Internet, Inc. ("Pegasus"). In exchange for all of the then outstanding
shares of Pegasus, the Company issued 600,000 shares of its Common Stock valued
at $1,800,000 plus cash of $200,000. The Company's Chief Executive Officer owned
25% of Pegasus, for which he received 25% of the consideration paid. Pegasus
provides Internet services including web site planning and development, site
hosting, on-line ticketing, system development, graphic design and electronic
commerce. The purchase price was allocated to assets acquired based on their
estimated fair value. This treatment resulted in approximately $2.0 million of
costs in excess of net assets acquired, after recording proprietary software of
$100,000. Such excess is being amortized over the expected period of benefit of
ten years. The software is amortized over its expected benefit period of three
years.
Metro Direct, Inc.:
Effective October 1, 1996, the Company acquired all of the outstanding common
shares of Metro Services Group, Inc., renamed Metro Direct, Inc. ("Metro"). In
exchange for all of the then outstanding shares of Metro, the Company issued
1,814,000 shares of its common stock valued at $7,256,000 and promissory notes
(the "Notes") totaling $1,000,000. The Notes, which have a stated interest rate
of 6%, were discounted to $920,000, (adjusted to $944,000 as of June 30, 1997,
subsequent to an April payment) to reflect an estimated effective interest rate
of 10%. The Notes were due and payable, together with interest thereon, on June
30, 1998, and were convertible on or before maturity, at the option of the
holder, into shares of common stock at a conversion rate of $5.38 per share. In
April 1997, $100,000 of the Notes were repaid, in July 1997, $400,000 were
repaid, and in January 1998, the remaining $500,000 of principal was repaid.
These early repayments resulted in an increase to intangible assets of
approximately $11,000 for the unamortized premium.
The purchase price was allocated to assets acquired based on their estimated
fair value. This treatment resulted in approximately $7.3 million of costs in
excess of net assets acquired, after recording covenants not to compete of
$650,000 and proprietary software of $250,000. Such excess is being amortized
over the expected period of benefit of forty years. The covenants and software
are amortized over their expected benefit periods of three and five years,
respectively.
Effective July 1, 1997, the Company entered into agreements to extend the
covenants-not-to-compete with the former Metro principals from three years to
six years. Accordingly, the amortization period was extended prospectively. The
impact of the extended amortization was a reduction of $124,000 of expense in
the year ended June 30, 1998.
These acquisitions were accounted for using the purchase method of accounting.
Accordingly, the operating results of these acquisitions are included in the
results of operations from the date of acquisition. The following summary,
prepared on a pro forma basis, combines the consolidated results of operations
as if Metro and MMI had been acquired as of the beginning of the periods
presented, after including the impact of certain adjustments, such as
amortization of intangibles, dividends on preferred stock and increased interest
on acquisition debt. The pro forma net loss for the year ended June 30, 1997,
does not include the non-cash compensation expense of $1.7 million recorded on
the grant of options in September, 1996, as well as the $1.2 million in
withdrawn offering costs and $1.0 million in restructuring costs, as discussed
in notes 12, 15 and 16, respectively.
<PAGE>
Supplemental
Pro forma information
For the year ended June 30,
Unaudited
1998 1997
---- ----
Revenues $68,505,000 $ 58,003,000
Net loss $ (598,000) $ (1,349,986)
Net loss to common $(2,016,000) $(17,460,480)
Loss per common share,
basic and fully diluted $(.16) $(2.25)
The unaudited pro forma information is provided for information purposes only.
It is based on historic information and is not necessarily indicative of future
results of operations of the combined entities.
4. PROPERTY AND EQUIPMENT:
- ---------------------------
Property and equipment at June 30, 1998 consist of the following:
Office furnishings and equipment 1,937,144
Assets under capital leases 303,723
Leasehold improvements 208,879
-------
2,449,746
Less accumulated depreciation and
amortization (803,789)
--------
$1,645,957
==========
Assets under capital leases as of June 30, 1998, consist of $26,243 for
automobiles and $277,480 for computer and related equipment. Accumulated
amortization for assets under capital leases was $127,583 as of June 30, 1998.
Depreciation expense was $412,212 and $250,194 for the years ended June 30, 1998
and 1997, respectively.
5. INTANGIBLE ASSETS:
- ----------------------
Intangible assets at June 30, 1998, consist of the following:
Covenants not to compete $ 1,650,000
Proprietary software 350,000
Goodwill 24,208,394
----------
26,208,394
Less accumulated amortization (2,217,349)
----------
$23,991,045
===========
The increase in intangible assets during 1998 was due to the costs in excess of
net assets acquired in the Media Marketplace, Inc. and Pegasus acquisitions, as
well as recording a contingent payment of $780,000 and $91,112
<PAGE>
due to the former owner of SD&A subsequent to the achievement of defined results
of operations of SD&A during the years ended June 30, 1998 and 1997,
respectively. In addition, certain loans to former owners were prepaid during
the year ended June 30, 1998 and goodwill was increased for $29,712 due to the
unamortized discount.
6. SHORT TERM BORROWINGS:
- --------------------------
In August 1997, SD&A entered into a two-year renewable credit facility with a
lender for a line of credit commitment of up to a maximum of $2,000,000,
collateralized by its accounts receivable. Interest is payable monthly at the
Chase Manhattan reference rate (8 1/2% at June 30, 1998) plus 1 1/2% with a
minimum annual interest requirement of $80,000. The facility has an annual fee
of 1% of the available line. The facility has tangible net worth and working
capital covenants. The proceeds of the credit facility were used to fully pay
the prior outstanding bank line and SD&A seller note payable. As of June 30,
1998, SD&A had drawn $1,517,182 on the line.
In April 1997, Metro entered into a two-year renewable revolving credit facility
with a lender for a line of credit commitment of up to a maximum of $1,500,000,
collateralized by its accounts receivable. Interest is payable monthly at the
Chase Manhattan reference rate (8 1/2% at June 30, 1998) plus 1 1/2%, with a
minimum annual interest requirement of $60,000. The facility has an annual fee
of 1% of the available line. As of June 30, 1998, Metro had drawn $1,005,124 on
the line. The facility has tangible net worth and working capital covenants.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
- ---------------------------------------------------
Accrued expenses as of June 30, 1998 consisted of the following:
Salaries and benefits $962,048
Professional fees $236,703
Other 455,120
-------
Total $1,653,871
==========
8. LONG TERM OBLIGATIONS:
- --------------------------
Long term obligations as of June 30, 1998 consist of the following:
6% Convertible notes (a) $ 500,000
Promissory notes to former shareholder
of SD&A (b) 816,667
Promissory notes to former executives,
net of unamortized discount (c) 117,540
-------
Total 1,434,207
Less: Current portion (1,317,540)
----------
Total long term obligations $ 116,667
===========
(a)In April 1997, the Company obtained $2,046,000, net of fees, from the
private placement of 6% convertible notes, with a face value of $2,200,000.
The notes are payable with interest on April 15, 1999, if not previously
converted. The notes are convertible at the option of the holder, into shares
of the Company's Common Stock at the lesser of $2.50 per share or 83% of the
average closing bid price of the Common
<PAGE>
Stock during the last five trading days prior to conversion. During fiscal
1998, $1,700,000 face value of the notes, plus interest, was converted into
694,412 shares.
(b)Payable at $58,333 per month, plus interest at 8%.
(c)The notes are payable in equal monthly installments of $30,000 (see note 16).
Aggregate future annual maturities for all long-term debt are as follows:
$1,359,667 in fiscal year 1999 and $117,833 in fiscal year 2000.
9. COMMITMENTS AND CONTINGENCIES:
- ----------------------------------
Leases: The Company leases its corporate office space and equipment under
non-cancelable long term leases. The lease requires monthly rental payments of
$11,805 through January 1, 1999, with an option to renew. The Company incurs all
costs of insurance, maintenance and utilities.
Future minimum rental commitments under all non-cancelable leases, as of June
30, 1998 are as follows:
Operating Leases Capital Leases
---------------- --------------
1999 $ 782,856 $129,378
2000 724,360 61,560
2001 731,288 25,270
2002 618,827 5,615
2003 222,369 -
------- -------
$3,079,700 221,823
==========
Less interest 16,662
------
Present value of capital lease obligation $ 205,161
=========
Rent expense was approximately $646,000 and $445,000, for fiscal years ended
1998 and 1997, respectively. Total rent paid to a former subsidiary owner during
1998 and 1997 was approximately $142,100, and $138,000, respectively.
10. PREFERRED STOCK:
- ---------------------
On December 24, 1997, the Company and General Electric Capital Corporation ("GE
Capital") entered into a purchase agreement (the "Purchase Agreement") providing
for the purchase by GE Capital of (i) 50,000 shares of Series D redeemable
convertible preferred stock, par value $0.01 per share, (the "Convertible
Preferred Stock"), and (ii) warrants to purchase up to 10,670,000 shares of
Common Stock (the "Warrants"), all for an aggregate purchase price of
$15,000,000. The Convertible Preferred Stock is convertible into shares of
Common Stock at a conversion rate, subject to antidilution adjustments. As of
March 31, 1998, the conversion rate was approximately 89.02, resulting in the
beneficial ownership by GE Capital of 4,451,177 shares of Common Stock. On an
as-converted basis, the Convertible Preferred Stock represents approximately 24%
of the issued and outstanding shares of Common Stock. The Warrants are
exercisable in November 2001 and are subject to reduction or cancellation based
on the Company's meeting certain financial goals set forth in the Warrants or
upon occurrence of a qualified secondary offering, as defined.
The Company has recorded the Convertible Preferred Stock at a discount of
approximately $1,362,000, to reflect an allocation of the proceeds to the
estimated value of the warrants and is being amortized into dividends using the
"interest method" over the redemption period. Approximately $112,000 of such
<PAGE>
discount was included as a dividend for the year ended June 30, 1998. In
addition, the Company recorded a non-cash, non-recurring dividend of $3,214,400
representing the difference between the conversion price of the Convertible
Preferred Stock and the fair market value of the common stock as of the date of
the agreement.
The Convertible Preferred Stock is convertible at the option of the holder at
any time and at the option of the Company (a) at any time the current market
price, as defined, equals or exceeds $8.75 per share, subject to adjustments,
for at least 20 days during a period of 30 consecutive business days or (b) upon
the occurrence of a qualified secondary offering, as defined.
Dividends are cumulative and accrue at the rate of 6% per annum, adjusted upon
event of default. The Convertible Preferred Stock is mandatorily redeemable for
$300 per share, if not previously converted, on the sixth anniversary of the
original issue date and is redeemable at the option of the holder upon the
occurrence of an organic change in the Company, as defined in the Purchase
Agreement. As of June 30, 1998, approximately $620,000 was accrued for dividends
in arrears.
The Purchase Agreement contains, among other provisions, requirements for
maintaining certain minimum tangible net worth, as defined, and other financial
ratios and restrictions on payment of dividends.
11. RECAPITALIZATION:
- ----------------------
On December 23, 1996 the Company and certain of its security holders effected a
recapitalization of the Company's capital stock, whereby: (i) the Company's
Series B Convertible Preferred Stock, par value $.01 per share (the "Series B
Preferred Stock"), was converted into 2,480,000 shares of Common Stock; (ii) the
Company's Series C Convertible Preferred Stock, par value $.01 per share (the
"Series C Preferred Stock"), was repurchased for promissory notes in an
aggregate principal amount of $1.0 million, which promissory notes bore interest
at a rate of 8% per annum were paid in full in April, 1997; (iii) all accrued
interest on the Series B Preferred Stock and the Series C Preferred Stock was
converted into 88,857 shares of Common Stock; (iv) warrants related to the
Series C Preferred Stock were exchanged for 600,000 shares of Common Stock. Upon
conversion of the Series B Preferred Stock and accumulated interest thereon into
Common Stock, the Company incurred a non-cash, non-recurring dividend for the
difference between the conversion price and the market price of the Common
Stock, totaling $8.5 million. Upon repurchase of the Series C Preferred Stock,
the Company incurred a non-recurring dividend of $573,000 for the difference
between the repurchase price and the accreted book value of the stock at
December 23, 1996.
Prior to the recapitalization, the Company recorded dividends in fiscal 1997 of
$806,425 to its preferred stockholders to accrete the value assigned to the
stock at June 6, 1996 (date of sale) up to its convertible value at June 6, 1998
(date of automatic conversion prior to the recapitalization).
12. STOCKHOLDERS' EQUITY:
- --------------------------
Effective February 8, 1998, the shareholders and Board of Directors approved an
increase in the number of authorized shares of common stock, from 36,250,000 to
75,000,000 and the number of preferred shares from 50,000 to 150,000.
In August 1996, consultants paid $5,000 for warrants valued at $81,000, as per
consulting agreements.
During fiscal year end 1998 and 1997, the Company issued 139,178 and 96,748
shares of common stock, respectively as additional earn-out payments resulting
from SD&A's achievement of defined results of operations for fiscal 1997 and
1996.
<PAGE>
In March 1997, the Company accepted offers from certain warrant-holders to
exercise their warrants for 3,152,500 shares of common stock at discounted
exercise prices. The Company recognized the dates of acceptance as new
measurement dates and, accordingly, recorded non-cash charges totaling $5.1
million in March 1997, to reflect the market value of the discounts. Of the
total, $113,000 was charged directly to expense as the underlying transaction
was debt related, and the remainder was charged directly to stockholders'
equity.
In May and June 1997, the Company issued warrants for 240,000 shares of common
stock valued at $76,000 to three consultants for financial advisory services.
As of June 30, 1998, the Company has 597,234 warrants outstanding to purchase
shares of common stock at prices ranging from $2.50 to $8.00. All outstanding
warrants are currently exercisable.
Stock Options: The Company has a non-qualified stock option plan for key
employees, officers, directors and consultants to purchase 3,150,000 shares of
common stock. The Plan is administered by 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 exercisability of the options. In no event
shall an option expire more than ten years after the date of grant.
The following summarizes the stock option transactions under the 1991 Plan for
the two years ended June 30, 1998:
Number Option Price
of Shares Per Share
--------- ---------
Outstanding at July 1, 1996 524,807
Granted 1,117,000 $2.50 to $3.00
Exercised (15,000) $2.625
Canceled (40,060) $2.00 to $2.50
--------
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
=========
In fiscal year end June 30, 1997, the Company recorded a non-cash charge of
$1,650,000 to compensation expense for the difference between market price and
exercise price for options granted to certain members of company management.
In addition to the Plan, the Company has other option agreements with current
and former officers, directors, employees and owners of an acquired Company. The
following summarizes transactions outside the 1991 Plan for the two fiscal years
ended June 30, 1998:
<PAGE>
Number Option Price
of Shares Per Share
--------- ---------
Outstanding at July 1, 1996 2,250
Granted 1,000,000 $2.625 to $3.50
---------
Outstanding at June 30, 1997 1,002,250
Canceled (2,250) $16.00
------
Outstanding at June 30, 1998 1,000,000
=========
As of June 30, 1998, 2,568,999 options are exercisable. The weighted average
exercise price of all outstanding options is $3.04 and the weighted average
remaining contractual life is 5.77 years. Except as noted below, all options
granted in fiscal years 1998 and 1997 were issued at fair market value. At June
30, 1998, 358,420 options were available for grant.
Under SFAS No. 123, had the Company determined compensation cost based on the
fair value at the grant date for its stock options, the Company's net loss and
earnings per share would have been adjusted to the pro forma amounts indicated
below:
Years ended June 30,
--------------------
1998 1997
---- ----
Net loss as reported $(780,478) $(5,377,096)
pro forma $(2,798,152) $(7,822,901)
Net loss attributable to
common stockholders as reported $(4,724,480) $(20,199,038)
pro forma $(6,742,154) $(22,644,843)
Earnings per share as reported $(.37) $(2.85)
pro forma $(.52) $(3.19)
Pro forma net loss reflects only options granted in fiscal 1996 through 1998.
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, is not 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 four years, expected
volatility of 50%, no dividend yield and a risk-free interest rate ranging from
5.23% to 6.61%.
13. INCOME TAXES:
- ------------------
Income tax expense from continuing operations is as follows:
Years Ended June 30,
--------------------
1998 1997
---- ----
Current state and local $14,704 $109,373
======= ========
<PAGE>
A reconciliation of the Federal statutory income tax rate to the effective
income tax rate based on pre-tax loss from continuing operations follows:
1998 1997
---- ----
Statutory rate (34)% (34)%
Change in valuation allowance 13 % 34 %
State income taxes, net of
Federal benefit 9 % 2 %
Non-deductible expenses 36 %
Non-taxable income (10)%
Prior year tax benefit (11)%
Other (1)%
----- ----
Effective rate 2 % 2 %
=== ===
<PAGE>
As of June 30,
1998
----
Deferred tax assets:
Net operating loss carryforwards 1,810,178
Compensation on option grants 619,310
Amortization of intangibles 121,423
Other 119,034
-------
Total deferred tax assets 2,669,945
Valuation allowance (2,669,945)
----------
Net deferred tax assets $ -
==========
The Company has a net operating loss of approximately $5,320,000 available which
expires from 2008 through 2013. These losses can only be offset with future
income and are subject to annual limitations.
14. RELATED PARTY TRANSACTIONS:
- --------------------------------
A director and the secretary of the Company, is a partner in a law firm which
provides legal services for which the Company incurred expenses aggregating
approximately $176,000 and $110,000 during fiscal 1998 and 1997, respectively.
During fiscal 1997, two directors purchased warrants for 50,000 common shares
each, for $2,500 each pursuant to consulting agreements entered into prior to
their appointments.
15. WITHDRAWAL OF REGISTRATION STATEMENT:
- ------------------------------------------
On October 17, 1996, the Company filed a Form SB-2 registration statement (the
"Registration Statement") with the Securities and Exchange Commission. The
Registration Statement related to a proposed underwritten public offering of
2,100,000 shares of Common Stock, of which 1,750,000 shares were being offered
by the Company and 350,000 were being offered by certain stockholders of the
Company. It also related to the sale of 1,381,056 shares of Common Stock by
certain selling stockholders on a delayed basis. Due to market conditions, on
February 11, 1997, the Company withdrew the Registration Statement and expensed
$1.2 million in proposed offering costs in fiscal 1997.
16. RESTRUCTURING COSTS:
- -------------------------
During the year ended June 30, 1997, the Company effected certain corporate
restructuring steps, including the decision to reduce corporate staffing and
related administrative costs, as well as making two executive management
changes. In this connection, restructuring expenses of $986,000 were recorded,
including $44,000 in estimated office restructuring costs and $942,000 in
executive management and other settlement costs. The executive management
settlement agreements include two non-interest bearing promissory notes with
face values of $290,000 and $250,000, respectively, payable in equal
installments over eighteen months starting in May 1997. These notes have been
discounted to $268,000 and $231,000, respectively, to reflect effective interest
rates of 10%.
<PAGE>
17. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
- --------------------------------------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. An enterprise that has no items of other comprehensive
income in any period presented is not required to report comprehensive income.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
Management does not believe that the adoption of SFAS 130 will have a material
impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 is effective for fiscal years beginning after December 15, 1997.
Management has not yet assessed the impact that the adoption of SFAS 131 will
have on the Company's financial statements.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5 Reporting on the Costs of Start-Up Activities (SOP 98-5), which is
required to be adopted by the Company in fiscal 1999, SOP 98-5 provides guidance
on the financial reporting of start-up costs and organization costs. It requires
costs of start-up activities and organization costs to be expensed as incurred.
Management believes that the implementation of SOP 98-5 will result in a
one-time charge of $120,000 on the date of adoption which will be reported as a
cumulative effect of a change in accounting principle.
18. EARNINGS PER SHARE:
- ------------------------
The following schedule lists the effect of securities that could potentially
dilute basic EPS in the future. Such securities were not included in the
computation of diluted EPS, as they are antidilutive as a result of net losses
during the periods presented.
Year ended
June 30,
--------
1998 1997
---- ----
Convertible preferred stock ............... 4,451,117
Options and warrants with exercise prices
below average market price computed
using the treasury stock method ......... 1,138,264 3,027,624
Convertible notes and interest ............ 211,506 896,338
Options and warrants outstanding to purchase 697,037 shares of common stock at
exercise prices above the average market price of the common stock during the
year ended June 30, 1998 were not included in the above table, as the effect
would be antidilutive.
19. EMPLOYEE RETIREMENT SAVINGS PLAN (401K):
- ---------------------------------------------
Certain subsidiaries sponsor a tax deferred retirement savings plan ("401(k)
plan") which permits eligible employees to contribute varying percentages of
their compensation up to the limit allowed by the Internal Revenue Service.
Certain subsidiaries matches employees' contributions to a maximum of 2% of the
employee's salary. Matching contributions charged to expense were $ 48,822 and
$23,353 for the fiscal years ended June 30, 1998 and 1997, respectively.
<PAGE>
Certain subsidiaries also provide for discretionary company contributions.
Discretionary contributions charged to expense for the fiscal year end June 30,
1998 were $24,959. No discretionary contributions were incurred by the fiscal
year ended June 30, 1997.
Exhibit 21
SUBSIDIARIES OF MARKETING SERVICES GROUP, INC.
All-Comm Acquisition Corporation* (100%)
All-Comm Holdings, Inc.* (100%)
Alliance Media Corporation (100%)
Metro Direct, Inc. (100%)
Stephen Dunn & Associates, Inc. (100%)
Media Marketplace, Inc. (100%)
Media Marketplace Media Division (100%)
Pegasus Internet, Inc. (100%)
Metro Fulfillment, Inc. (100%)
*Dissolved in June 1997
Exhibit 23
The Board of Directors
Marketing Services Group, Inc.
We consent to the incorporation by reference in the registration statements
(No. 333-30969 on Form S-3 and No. 333-30839 on Form S-8) of Marketing Services
Group, Inc. and Subsidiaries, of our report dated September 9, 1998, relating to
the consolidated balance sheet of Marketing Services Group, Inc. as of June 30,
1998 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the years in the two year period ended June 30, 1998.
/s/ PricewaterhouseCoopers LLP
New York, NY
September 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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, 1998 INCLUDED IN THIS REPORT ON FORM 10-KSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-START> Jul-1-1997
<PERIOD-END> Jun-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 6,234,981
<SECURITIES> 0
<RECEIVABLES> 16,287,766
<ALLOWANCES> (421,861)
<INVENTORY> 0
<CURRENT-ASSETS> 22,824,918
<PP&E> 2,449,746
<DEPRECIATION> (803,789)
<TOTAL-ASSETS> 49,781,427
<CURRENT-LIABILITIES> 17,812,014
<BONDS> 5,761,584
0
0
<COMMON> 130,985
<OTHER-SE> 17,194,273
<TOTAL-LIABILITY-AND-EQUITY> 49,781,427
<SALES> 51,174,063
<TOTAL-REVENUES> 51,174,063
<CGS> 26,771,611
<TOTAL-COSTS> 26,771,611
<OTHER-EXPENSES> 24,982,259
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 185,967
<INCOME-PRETAX> (765,774)
<INCOME-TAX> (14,704)
<INCOME-CONTINUING> (780,478)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (780,478)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
</TABLE>
Exhibit 3(vii)
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION
(After Issuance of Stock)
MARKETING SERVICES GROUP, INC.
We the undersigned, J. Jeremy Barbera, Chairman and President, and Alan
I. Annex, Secretary, of MARKETING SERVICES GROUP, INC., a Nevada corporation
(the "Company"), do hereby certify that, as of the date hereof:
The Board of Directors of said Company, at a meeting duly convened, held
on the 15th day of December, 1997, adopted a resolution to amend the articles as
follows:
The first paragraph of Article VI is amended to read:
"The total number of shares of all classes of capital stock which the
Company shall have the authority to issue is 75,150,000 shares which shall
be divided into two classes as follows: (i) 150,000 shares of preferred
stock, par value $.01 per share ("Preferred Stock"), and (ii) 75,000,000
shares of common stock, par value $.01 per share ("Common Stock")."
That at an Annual Meeting of Stockholders held on April 3, 1998, the
stockholders voted either in person or by proxy, to adopt the amendment of
Article VI as set forth and recommended by the Board of Directors. The amendment
change to Article VI, pertaining to the increase in the number of shares of
Common Stock was adopted by 15,211,407 shares voting in favor, 580,292 opposed
and 43,017 abstentions. The remainder were non-votes. The amendment change to
Article VI, pertaining to the increase in the number of shares of Preferred
Stock was adopted by 10,452,521 shares voting in favor, 607,693 opposed and
4,774,017 abstentions. The remainder were non-votes. The number of common shares
of the Corporation outstanding and entitled to vote at the Annual Meeting on an
amendment to the Articles of Incorporation was 17,534,674. The preferred
shareholder voted 50,000 shares in favor of the amendment change to Article VI.
The number of preferred shares of the Corporation outstanding and entitled to
vote at the Annual Meeting on an amendment to the Articles of Incorporation was
50,000.
IN WITNESS WHEREOF, the undersigned have executed this Certificate of
Amendment as of April 3, 1998.
By: /s/ J. Jeremy Barbera
J. Jeremy Barbera
Chairman and President
By: /s/ Alan I. Annex
Alan I. Annex
Secretary
State of New York } ss.
County of New York }
On April 3, 1998, personally appeared before me, a Notary Public, J. Jeremy
Barbera, Chairman and President and Alan I. Annex, Secretary of Marketing
Services Group Inc., who acknowledged that they executed the above instrument.
/s/ Robert S. Matlin
Signature of Notary
Exhibit 10
MARKETING SERVICES GROUP, INC.
FOURTH MEMORANDUM OF UNDERSTANDING
- -------------------------------------------------------------------------------
This is to confirm our understanding that we hereby agree to amend for a
fourth time, effective as of November 19, 1997 and in memorialization of the
agreements reached as of such date, certain of the provisions of that certain
Stock Purchase Agreement, dated January 31, 1997 (the "Purchase Agreement"),
between Marketing Services Group, Inc. (formerly All-Comm Media Corporation and
prior thereto Alliance Media Corporation) (hereinafter "MSGI") and Stephen Dunn
(hereinafter "Dunn") in each of the following respects:
1. MSGI and Dunn hereby agree that, for purposes of Section 2(b) of
the Purchase Agreement, the "Pre-Tax Earnings" for Stephen Dunn &
Associates, Inc. ("SDA") for the first "Post-Closing Year" ended
June 30, 1996 and for the second "Post-Closing Year" ended June
30, 1997 shall be deemed to be $1,571,135 and $500,523,
respectively.
2. As a result of the agreements set forth in Section 1 hereof, MSGI
and Dunn hereby agree that Dunn shall be entitled to the full
$850,000 earn out payable in respect of the second "Post-Closing
Year" ending June 30, 1997 and MSGI hereby agrees that such
$850,000 earn out shall be paid $425,000 in cash and $425,000 in
shares of MSGI's common stock as soon as reasonably practicable
after the execution and delivery of this Fourth Memorandum of
Understanding by the parties. MSGI and Dunn hereby further agree
that Dunn shall be entitled to receive the payment of interest on
the $425,000 cash portion of the earn out at the rate of 8% per
annum from October 1, 1997 through the date that such $425,000
cash portion of the earn out is actually paid by MSGI. If the
$425,000 cash portion of the earn out is paid on November 30,
1997, the amount of interest due to Dunn from MSGI will be
$5,567. MSGI and Dunn hereby further agree that the number of
shares of MSGI's common stock to be delivered to Dunn is 139,178
as calculated by Scott Anderson of MSGI in his June 30, 1997
memorandum to Dunn.
3. For purposes of calculating SDA's "Pre-tax Earnings" for purposes
of the earn out due in respect of the third "Post-Closing Year"
ending June 30, 1998, MSGI and Dunn hereby agree that,
notwithstanding any contrary provisions contained in the Purchase
Agreement, as heretofore amended, the following amounts shall be
added to, or subtracted from, SDA's "Pre-Tax Earnings" for such
third "Post-Closing Year":
(a) SDA's "Pre-Tax Earnings" for such third "Post-Closing Year" shall
be adjusted by adding back into SDA's "Pre-Tax Earnings" the sum
of $18,000 representing approximately 50% of the costs paid or
incurred by SDA in respect of the person recently hired by SDA as
a bookkeeper to monitor and handle SDA's accounts receivable
financing arrangement with its institutional lender, which
accounts receivable financing arrangement was instituted at the
behest of MSGI.
(b) SDA's "Pre-Tax Earnings" for such third "Post-Closing Year" shall
be further adjusted by adding back into SDA's "Pre-Tax Earnings"
all interest, fees and other costs in excess of $12,000 paid or
accrued in respect of the accounts receivable financing
arrangement referred to in Section 3(a) above during the third
"Post-Closing Year" ending June 30, 1998.
(c) SDA's "Pre-Tax Earnings" for such third "Post-Closing Year"
ending June 30, 1998 shall also be adjusted as provided in the
second sentence of Section 5 hereof.
(d) SDA's "Pre-Tax Earnings" for such third "Post-Closing Year" shall
be further adjusted by subtracting the amount of $25,000 for the
third "Post-Closing Year" for the accounting and related services
provided by Scott Anderson and his staff at MSGI to SDA in
connection with SDA's preparation of its accounting books and
records for the third "Post-Closing Year" ending June 30, 1998
provided such accounting services are actually rendered by Scott
Anderson and his staff in a manner similar to such services
provided during the first and second "Post-Closing Years" ended
June 30, 1996 and June 30, 1997. Except as provided in this
Section 3(d), MSGI shall not be entitled to any other adjustments
of any kind whatsoever related to allocation of MSGI's overhead
or any other expenses incurred by MSGI to or on behalf of SDA for
the third "Post-Closing Year" ending June 30, 1998.
4. In consideration of MSGI's agreements set forth in Sections 1
through 3 hereof, Dunn hereby agrees that he will cease to serve
as a director, officer and employee of SDA effective on and as of
the close of business on December 31, 1997. Dunn further agrees
that, during the period from January 1, 1998 through April 24,
1998, he will continue to serve SDA as a consultant for up to a
maximum average of 20 hours per week as requested by Krista
Mooradian and/or Tom Scheir at SDA. In consideration of such
consulting services, MSGI hereby agrees that SDA shall be
obligated to pay, and shall pay, Dunn the sum of $125 for each
hour of consulting services actually rendered by Dunn during such
6-month time period. All services rendered by Dunn pursuant to
the foregoing consulting arrangement shall be performed at times
and at places as are reasonably agreed to between SDA and Dunn
and shall be billed to SDA by Dunn in minimum increments of 1/10
of an hour.
5. MSGI and Dunn hereby reaffirm their prior agreement that SDA
shall be responsible for paying Dunn for all legal and accounting
fees and expenses incurred by Dunn which relate to any
calculations, accountings, discussions and/or negotiations
resulting in any amendments or any proposed amendments to the
Purchase Agreement including, but not limited to, the discussions
and/or negotiations relating to this Fourth Memorandum of
Understanding. Moreover, such legal and accounting fees and
expenses shall be added back to SDA's "Pre-Tax Earnings" for
purposes of determining the earn out for the third "Post-Closing
Year" ending June 30, 1998.
6. MSGI represents that this Fourth Memorandum of Understanding has
been duly authorized by all necessary corporate action on its
part.
7. Except as set forth herein, all of the terms and provisions of
the Purchase Agreement, as heretofore amended, between MSGI and
Dunn shall remain in full force and effect. MSGI and Dunn hereby
further agree that, in the event that any of the provisions of
this Fourth Memorandum of Understanding are deemed to be
inconsistent with the provisions of the Purchase Agreement, as
heretofore amended, the provisions of this Fourth Memorandum of
Understanding shall prevail over any such inconsistent provisions
of the Purchase Agreement, as heretofore amended.
"MSGI" "Dunn"
MARKETING SERVICES GROUP, INC.
(formerly All-Comm Media Corporation and
prior thereto Alliance Media Corporation)
By: /s/ Jeremy Barbera /s/ Stephen Dunn
-------------- ------------
Jeremy Barbera, Stephen Dunn
President and
Chief Executive Officer
