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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________________ to________________________
Commission file number 0-16730
MARKETING SERVICES GROUP, INC.
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(Name of small business issuer in its charter)
Nevada 88-0085608
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
333 Seventh Avenue, 20th Floor
New York, New York 10001
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (917) 339-7100
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: ____
Common Stock, par value $.01 per share
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(Title of class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of September 24, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $202,152,613.
As of September 24, 1999, there were 25,288,239 shares of the Registrant's
common stock outstanding.
Documents incorporated by reference: Portions of the Company's definitive proxy
statement expected to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 have been incorporated by reference into Part III of this
report.
PART I
Special Note Regarding Forward-Looking Statements
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Some of the statements contained in this Annual Report on Form 10-K discuss our
plans and strategies for our business or state other forward-looking statements,
as this term is defined in the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company, or industry results to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; industry capacity; direct marketing
and other industry trends; demographic changes; competition; the loss of any
significant customers; changes in business strategy or development plans;
availability and successful integration of acquisition candidates; availability,
terms and deployment of capital; advances in technology; 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
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General
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Marketing Services Group, Inc. (the "Company" or "MSGI") through its
subsidiaries is a vertically integrated provider of direct and Internet
marketing services to large and medium sized companies. Through internal growth
and a series of acquisitions, MSGI's revenues have grown from $16 million in
fiscal 1996 to over $110 million in fiscal 1999 on a pro forma basis. MSGI's
operating subsidiaries consist of two business segments, the Direct Group and
the Internet Group.
The MSGI Direct Group assists clients to acquire new customers, promote their
products and develop strategies for customer retention. Customer acquisition and
maintenance services include strategic planning, direct and database marketing,
telemarketing and telefundraising and media planning and buying. The MSGI Direct
Group expects to continue to leverage its client base and services with those of
its recent acquisitions, offering a one-stop integrated shopping approach to its
thousands of clients worldwide.
The MSGI Internet Group provides Internet marketing, e-commerce applications,
Web development and hosting, online advertising sales and consulting services.
Currently, the Internet Group's primary focus is on an automated Internet
marketing application known as Permission Plus(TM). Permission Plus(TM) enables
companies to conduct customer surveys online and utilize an interactive database
to market goods via e-mail. Permission Plus(TM) is an innovative suite of tools
which captures detailed user information, including product preferences,
interests and demographics, provides powerful marketing research information,
and enables companies to proactively communicate with their customers through
one-on-one e-mail communications. This information allows the Internet Group's
clients to conduct and measure the results of Internet marketing campaigns
quickly and efficiently in order to reduce cycle time and improve performance.
Additionally, the MSGI Internet Group will continue to acquire, invest in,
partner with and incubate Internet companies. MSGI's acquisition of CMG Direct's
Permission Plus(TM) and its investments in GreaterGood.com and Screenzone Media
Network LLC illustrate MSGI's Internet investment strategy.
MSGI's major clients include GE Capital, MBNA Bank, N.A., Walt Disney Company,
American Express Publishing Corp., Gymboree, Madison Square Garden, Carnegie
Hall, New York Philharmonic, Levi Strauss & Co., Federal Express Corporation,
McGraw-Hill Companies, Sierra Club, and the World Wildlife Fund. MSGI's
institutional investors include GE Capital and CMGI, Inc. each of whom have a
history of successfully investing in rapidly growing Internet and high
technology companies.
The Company's Strategy
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MSGI's strategy to enhance its position as a value-added premium provider of
direct and internet and marketing services is to:
o Increase revenues by expanding the range of Internet and marketing services
offered and selling additional services to existing clients;
o Deepen market penetration in new industries and market segments as well as
those currently served by the Company;
o Develop existing and creating new proprietary databases, proprietary
database software and database management applications; and
o Pursue strategic acquisitions, joint ventures and marketing alliances to
expand the services offered and industries served.
The Company has no agreements to acquire any companies other than as described
in this Annual Report on Form 10-K (this "Form 10-K"). There can be no assurance
that the Company will be able to acquire such companies.
Background
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The Company was originally incorporated in Nevada in 1919. The current business
of MSGI, previously known as All-Comm Media Corporation and prior to that as
Sports-Tech, Inc., 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. The refocus of the
Company in the Marketing services and Internet space began on July 1, 1997.
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 in the
publishing, financial services and retail industries. Metro is headquartered in
New York City, with satellite offices in Illinois, California, and Georgia.
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
were recruited 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, 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.
Pegasus Internet, Inc. ("Pegasus") was formed in 1994 by former executives of
BMG 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
Company had a strategic alliance with Pegasus dating back to 1995.
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.
In May 1998, the Company formed Metro Fulfillment, Inc. ("MFI"). 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.
Developments During Fiscal 1999
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Effective January 1, 1999, MSGI acquired all of the issued and outstanding
capital stock of Stevens-Knox and Associates, Inc., Stevens-Knox List Brokerage,
Inc. and Stevens-Knox International, Inc. (collectively "SK&A"). SK&A provides
list management, brokerage and database management services. SK&A is widely
considered to be the first list management firm in the United States.
Effective March 1, 1999, the Company sold 85% of the common stock of MFI to the
then chief executive officer of MFI. The investment in MFI is being accounted
for under the cost method of accounting. Accordingly, effective March 1, 1999
the results of operations of MFI are no longer consolidated in the Company's
statement of operations.
On May 13, 1999, MSGI acquired all of the outstanding capital stock CMG Direct
Corporation, from CMGI, Inc., including its business unit known as
PermissionPlus(TM). CMG Direct provides database services to the direct
marketing and internet industries. PermissionPlus(TM), a Web application,
enables companies to automate Web site customer acquisition and increase
customer lifetime value. It combines the power of market research, database
management, e-mail service bureau, campaign management tool, Web site navigation
system and a real-time response tracking and analysis system into one integrated
internet application.
Subsequent Events
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In July 1999, MSGI entered into an agreement to acquire all of the outstanding
common stock of Atlanta-based Grizzard Communications Group. The purchase price
is $50 million cash and $50 million dollars in MSGI common stock. The
acquisition is targeted to close by the end of calendar year 1999 and is subject
to certain conditions, including approval of the stockholders of Grizzard.
Grizzard Communications Group was founded in 1919 and is ranked the 6th largest
Direct Response Agencies in the country (with internal production capabilities)
in reported capitalized billings by the Direct Marketing Association. Grizzard's
services include strategic planning, creative, database management,
print-production, mailing and Internet marketing. Grizzard's client base
includes retail, consumer and business-to-business companies as well as many
premier not-for-profit clients.
In July 1999, the Company invested $1,555,000 to acquire a 10% interest in
Screenzone Media Network, LLC ("Screenzone"). Screenzone is a new interactive
broadcast gateway that was developed to advertise and promote movies, music,
live events and other entertainment at shopping malls and over the Internet. The
investment will be accounted for under the cost method of accounting.
In September 1999, the Company completed an investment of $5,000,000 to acquire
convertible preferred stock of GreaterGood.com. The Company owns 18% of the
outstanding shares of GreaterGood.com on a fully diluted basis. GreaterGood.com
builds, co-markets and manages online shopping villages for not-for-profit
organization web sites. The investment will be accounted for under the cost
method of accounting.
In September 1999, the Company completed a private placement of 3,130,586 shares
of common stock for proceeds of approximately $30.8 million, net of
approximately $2,000,000 of placement fees and expenses. The shares have certain
registration rights. The proceeds of the private placement will be used in
connection with the investments described in the preceding paragraphs, to repay
certain short-term debt and for working capital purposes.
The Company's shares are traded on the NASDAQ National Market under the symbol
"MSGI". The Company's principal executive offices are located at 333 Seventh
Avenue, 20th Floor, New York, NY 10001. Its telephone number is (917) 339-7100.
Capital Stock and Financing Transactions
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Conversion of Redeemable Convertible Preferred Stock:
On April 21, 1999, the Company exercised its right to convert all 50,000 shares
of General Electric Capital Corporation's Series D Convertible Preferred Stock
into approximately 4.8 million shares of common stock. In conjunction with the
conversion, all preferred shareholder rights, including quarterly dividends,
financial covenants, acquisition approvals and board seats, were cancelled. As
of June 30, 1999, GE Capital owned approximately 22% of the issued and
outstanding shares of the Company's Common Stock.
Change in warrant issued in connection with Redeemable Convertible Preferred
Stock:
In connection with the acquisition of CMG Direct, the Company borrowed
$10,000,000 from GE Capital under a short term promissory note due November 17,
1999 which bears interest at 12% per annum. (See Footnote 9 of the Notes to the
Consolidated Financial statements for details on the terms of the promissory
note). Concurrent with the execution of the promissory note, the warrant issued
on December 24, 1997 in connection with GE Capital's purchase of Series D
Convertible Preferred Stock was amended. The first amendment provided that upon
completion of a secondary offering on or before December 31, 1999 permitting GE
Capital to sell 1,766,245 shares of the Company's common stock at a price of at
least $8.75 per share, as adjusted, the warrant to purchase 200,000 shares of
common stock at $.01 per share would be replaced with a warrant to purchase
300,000 shares of common stock at one-third of the per share price of such
secondary offering. The amendment did not change the original term of the
warrant which included a clause that if a public secondary offering is not
completed by December 31, 1999, GE Capital would be entitled to purchase up to
10,670,000 shares of the Company's common stock if the Company's did not meet
certain financial goals as set forth in the agreement.
Subsequent to June 30, 1999, the Company and GE Capital entered into a second
amendment to the warrant. The new amendment permitted a private offering in
addition to a public offering of common stock to satisfy its obligations with
respect to the secondary offering for such portion of GE Capital's holdings of
the Company's common stock. In addition, the deadline for the Company to
complete a public or private secondary offering was changed to the period
commencing on December 20, 1999 and ending on April 30, 2000. The effect of the
second amendment allows more time for the Company to complete a secondary
offering thereby reducing the number of shares GE Capital may acquire.
1999 Stock Option Plan:
In March 1999, the stockholders voted to establish the 1999 Stock Option Plan
which authorized up to 1,000,000 shares of common stock under qualified and
nonqualified stock options.
The Direct Marketing Industry
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Overview. Direct marketing is used for a variety of purposes including
lead-generation and prospecting for new customers, enhancing existing customer
relationships, exploring the potential for new products and services and
establishing new products. Unlike traditional mass marketing aimed at a broad
audience and focused on creating image and general brand or product awareness,
successful direct marketing requires the identification and analysis of
customers and purchasing patterns. Such patterns enable businesses to more
easily identify and create a customized message aimed at a highly defined
audience. Previous direct marketing activity consisted principally of direct
mail, but now has expanded into the use of multiple mediums including
telemarketing, print, television, radio, video, CD-ROM, on-line services, the
Internet and a variety of other interactive marketing formats.
The success of a direct marketing program is the result of the analysis of
customer information and related marketing data. Database management
capabilities allow for the creation of customer lists with specific,
identifiable attributes. Direct marketers use these lists to customize messages
and marketing programs to generate new customers whose purchasing patterns can
be statistically analyzed to isolate key determinants. In turn, this enables
direct marketers to continually evaluate and adjust their marketing programs, to
measure customer response rates in order to assess returns on marketing
expenditures, and to increase the effectiveness of such marketing programs.
Database management covers a range of services, including general marketing
consultation, execution of marketing programs and the creation and development
of customer databases and sales tracking and data analysis software. Data
analysis software consolidates and analyzes customer profile information to find
common characteristics among buyers of certain products. The results of such
tracking and analysis are used to define and match customer and product
attributes from millions of available database files for future direct marketing
applications. The process is one of continual refinement, as the number of
points of contact with customers increases, together with the proliferation of
mediums available to reach customers.
Telemarketing/telefundraising projects generally require significant amounts of
customer information supplied by the client or third party sources. Custom
telemarketing/telefundraising programs seek to maximize a client's direct
marketing results by utilizing appropriate databases to communicate with a
specific audience. This customization is often achieved through sophisticated
and comprehensive data analysis which identifies psychographic, cultural and
behavioral patterns in specific geographic markets.
Industry Growth. The use of direct marketing has increased over the last few
years due in part to the relative cost efficiency of direct marketing compared
to mass marketing, as well as the rapid development of more powerful and more
cost-effective information technology and data capture capabilities. According
to industry sources, over the next decade, demographic shifts and changes in
lifestyle, combined with new marketing mediums, are expected to create higher
demand by businesses for marketing information and services to provide
businesses with direct access to their customers and a more efficient means of
targeting specific audiences and developing long-term customer relationships.
According to a study commissioned by the Direct Marketing Association ("DMA"),
expenditures for direct marketing services in 1998 reached $163 billion.
Expenditures for interactive/internet marketing reached $603 million in 1998.
This number is expected to grow to $5.3 billion by 2003.
Corporate marketing departments often lack the technical expertise to create,
manage and control highly technical aspects of the direct marketing process. As
a result, the Company believes that there is a growing trend among direct
marketers to outsource direct marketing programs.
Industry Consolidation. The direct marketing industry is extremely fragmented.
According to industry sources, there are almost 11,000 direct marketing services
and database services firms in the United States. The Company believes that most
of such businesses are small, specialized companies which offer limited
services. However, industry consolidation has increased in the last few years
resulting in a greater number of large companies providing services similar to
those provided by the Company. See "Competition." The Company believes that much
of this consolidation is due to: (i) economies of scale in hardware, software
and other marketing resources; (ii) cross-selling of services; and (iii)
coordinating various components of direct marketing and media programs within a
single, reliable environment. The Company believes these trends are likely to
continue due in part to client demand for more cost-effective service to perform
increasingly complex functions.
Services
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The Company's operating businesses provide comprehensive database management,
Internet marketing, custom telemarketing/telefundraising, 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.
Marketing Services
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Database Management Services. The Company's database management services begin
with database creation and development, which include the planning stages and
analytical processes to review all of the client's customer and operational
files. Utilizing both proprietary and commercial software, the Company
consolidates all of the separate information and relationships across multiple
files and converts the client's raw information into a consolidated format. Once
the client's customer data is consolidated and the database created, the data is
enhanced using a wide selection of demographic, geographic, census and lifestyle
information for over 95 million households and 153 million individuals to
identify patterns and probabilities of behavior. The Company licenses this
information from a variety of leading data compilers.
The combination of each client's proprietary customer information with external
data files provides a customized profile of a client's customer base, enabling
the client, through the use of the Company's behavior modeling and analysis
services, to design a direct marketing program for its customers. Through the
development of a scoring model, the client can segment its database and
determine its best customers and prospects in each marketplace. The entire
process results in a customized direct marketing program that can be targeted to
distinct audiences with a high propensity to buy the client's products or
services. Because of the dynamic nature and complexity of these databases,
clients frequently request that the Company update such databases with the
results of recent marketing programs and periodically perform list processing
services as part of the client's ongoing direct marketing efforts.
Data Processing. The Company's primary data processing service is to manage from
the Company's data centers, all or a portion of a client's marketing information
processing needs. After migrating a client's raw data to one of the Company's
data centers, the Company's technology allows the client to continue to request
and access all available information from remote sites. The database can also be
verified for accuracy and overlaid with external data elements to further
identify specific consumer behavior.
Other data processing services provided include migration (takeover and
turnover) support for database maintenance or creation, merge/purge, data
overlay and postal qualification. The Company also offers on-line and batch
processing capacity, technical support, and data back-up and recovery.
List Services. List processing includes the preparation and generation of
comprehensive name and address lists which are used in direct marketing
promotions. The Company's state-of-the-art data centers and large volume
processing capabilities allow the Company to meet the list processing needs of
its clients through its advanced list processing software applications, list
brokerage and list management operations. The Company customizes list processing
solutions by utilizing a variety of licensed software products and services,
such as Address Conversion and Reformat, Address Standardization and Enhanced
Merge/Purge, in addition to services provided by third parties, including;
National Change of Address (NCOA), Delivery Sequence File and Locatable Address
Conversion System. Other licensed products include databases used for
suppressions such as the DMA Mail Preference File and the American Correctional
Association Prison Suppress File.
The Company also offers an array of list acquisition techniques. Approximately
12,000 lists are available for rental in the list industry. The Company's
account managers, many of whom are recruited from existing Company accounts, use
their industry experience as well as sophisticated computer profiles to
recommend particular lists for customer acquisition campaigns. The Company
acquires hundreds of millions of records annually for customer acquisition
campaigns. The Company also manages several hundred lists for rental purposes on
behalf of list owners.
Database Product Development. To further leverage its database management and
list processing services, the Company has participated in the development of a
new product using client/server technology. The product is a scaleable,
three-tiered client/server data warehouse system that provides desktop,
real-time decision support and marketing analysis to a non-technical user. This
application is an intuitive, graphical user interface tool that offers both
flexibility and the ability to access and analyze large customer files exceeding
100 million records. The incorporation of third-party software, relational and
multidimensional database technology in an open system environment is intended
to allow the Company's clients to take advantage of the latest developments in
high-speed computing, utilizing both single and multi-processor hardware.
Market Analysis. The Company's market research services include problem
conceptualization, program design, data gathering and results analysis. These
services are conducted through telephone, mail and focus groups. Through the use
of data capture technology, the Company is also able to obtain data from a
statistically predictable sample of market survey contacts. The Company then
tabulates and analyzes fielded data using multi-variate statistical techniques,
and produces detailed reports to answer clients' marketing questions and suggest
further marketing opportunities.
Direct Mail Support Services. The Company's direct mail support services include
preparing and coordinating database services and custom
telemarketing/telefundraising services for use in addressing and mailing
materials to current and potential customers. The Company obtains name and
address data from clients and other external sources, processes the data to
eliminate duplicates, corrects errors, sorts for postal discounts and
electronically prepares the data for other vendors who will address pre-printed
materials.
Media Planning and Buying. The Company's Media Division is a multifaceted direct
response media broker specializing in direct advertising such as: traditional
print advertising; cooperative direct mail programs; Sunday supplements; card
decks and more.
Internet Services. The Company provides a full suite of Internet services such
as content planning to market strategy, from technical site hosting to graphic
design and multimedia production. The Company has developed Web sites from the
perspective of both client and presence provider, resulting in an intimate
knowledge of the issues encountered by both entities in a Web development
project. From the initial planning sessions and identification of an
organization's promotional objectives to the live cutover of the finished site,
the Company takes a proactive role in ensuring the most efficient development
process for the client and the most rewarding experience for their online
clientele. Once the site is up and running, the Company provides technical
maintenance and ongoing consulting to keep Web resource current, technologically
up-to-date and graphically ahead of the curve. The Company generates usage
reports, complete with optional analysis and feedback features.
Automated Internet Marketing. The Company's primary Internet marketing
application is Permission Plus(TM). Permission Plus(TM) enables companies to
conduct customer surveys online and utilize an interactive database to market
goods via e-mail. Permission Plus(TM) is an innovative suite of tools which
captures detailed user information, including product preferences, interests and
demographics, provides powerful marketing research information, and enables
companies to proactively communicate with their customers through one-on-one
e-mail communications. This information allows the Internet Group's clients to
conduct and measure the results of Internet marketing campaigns quickly and
efficiently in order to reduce cycle time and improve performance.
Custom Telemarketing/Telefundraising Services
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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 the usage rate for all telephones as the system works through the
calling database.
The Company maintains a state-of-the-art outbound telemarketing/telefundraising
calling center in Berkeley, California. The Berkeley calling center increases
the efficiency of its outbound calling by using a computerized predictive
dialing system supported by a UNIX-based call processing server system and
networked computers. The predictive dialing system, using relational database
software, supports 72 outbound telemarketers and maximizes calling efficiency by
reducing the time between calls for each calling station and reducing the number
of calls connected to wrong numbers, answering machines and electronic devices.
The system provides on-line real time reporting of caller efficiency and client
program efficiency as well as flexible and sophisticated reports analyzing
caller sales results and client program results against Company and client
selected parameters. The Berkeley calling center has the capacity to serve up to
15 separate clients or projects simultaneously and can produce 27,000 valid
contacts per week (1,400,000 per year) or 3,400 calling hours per week (176,800
per year) on a single shift basis. A valid contact occurs when the caller speaks
with the intended person and receives a "yes," "no" or "will consider" response.
The existing platform can be expanded to accommodate 100 predictive dialing
stations with a single shift capacity of approximately 1,900,000 valid contacts
per year.
Marketing and Sales
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The Company's marketing strategy is to offer customized solutions to clients'
database management, Internet, telemarketing/telefundraising, fulfillment and
other direct marketing requirements. Historically, the Company's operating
businesses have acquired new clients and marketed their services by attending
trade shows, advertising in industry publications, responding to requests for
proposals, pursuing client referrals and cross-selling to existing clients. The
Company targets those companies that have a high probability of generating
recurring revenues because of their ongoing direct marketing needs, as well as
companies which have large customer bases that can benefit from targeted direct
marketing database and fulfillment services and customized
telemarketing/telefundraising services.
The Company markets its marketing services through a sales force consisting of
both salaried and commissioned sales persons. In some instances, account
representatives, will coordinate a client's database management, Internet,
custom telemarketing/telefundraising, fulfillment and/or other direct marketing
needs to identify cross-selling opportunities.
Account representatives are responsible for keeping existing and potential
clients informed of the results of recent marketing campaigns, industry trends
and new developments in the Company's technical database resources. Often, the
Company develops an initial pilot program for new or potential clients to
demonstrate the effectiveness of its services. Access to data captured during
such pilot programs allows the Company and its clients to identify previously
unrecognized target market opportunities and to modify or enhance the client's
marketing effort on the basis of such information. Additionally, the Company is
able to provide its clients with current updates on the progress of ongoing
direct marketing programs.
Pricing for direct marketing services is dependent upon the complexity of the
services required. In general, the Company establishes pricing for clients by
detailing a broad range of service options and quotation proposals for specific
components of a direct marketing program. These quotes are based in part on the
volume of records to be processed, complexity of assembly, and the level of
customization required. 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.
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 over 2,000 clients who utilize its various marketing services.
These clients are comprised of leading commercial businesses and nonprofit
institutions in the publishing, entertainment marketing, public broadcasting,
education, retail, financial services (including credit card, home mortgage and
home equity services), education, travel and leisure and healthcare industries.
No single client accounted for more than 5% of total revenue in fiscal 1999.
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,
Abacus Direct, Experian, Fair-Isaac, Inc. and Harte-Hanks Communications, Inc.
The Company's principal competitors in the custom telemarketing/telefundraising
field are Arts Marketing, Inc., Ruffalo, Cody & Associates and The Share Group.
The Company's principal competitors in the Internet marketing services industry
are Kana, Egain, and Message Media. 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.
Facilities
- ----------
The Company leases all of its real property: facilities for its headquarters are
in New York City; its sales and service offices are located in New York City;
Newtown, Pennsylvania; Valencia and Los Angeles, California; Wilmington
Massachusetts; and London; its data centers are located in New York City and
Boston; 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. 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 2000. The
Company believes such space is readily available at commercially reasonable
rates and terms. The Company also believes that its technological resources,
including the mainframe computer and other data processing and data storage
computers and electronic machinery at its data centers in New York City and
Boston, as well as its related operating, processing and database software, are
all adequate for its needs through fiscal 2000. Nevertheless, the Company
intends to expand its technological resources, including computer systems,
software, telemarketing equipment and technical support. Any such expansion may
require the leasing of additional operating office space.
Intellectual Property Rights
- ----------------------------
The Company relies upon its trade secret protection program and non-disclosure
safeguards to protect its proprietary computer technologies, software
applications and systems know-how. In the ordinary course of business, the
Company enters into license agreements and contracts which specify terms and
conditions prohibiting unauthorized reproduction or usage of the Company's
proprietary technologies and software applications. In addition, the Company
generally enters into confidentiality agreements with its employees, clients,
potential clients and suppliers with access to sensitive information and limits
the access to and distribution of its software documentation and other
proprietary information. No assurance can be given that steps taken by the
Company will be adequate to deter misuse or misappropriation of its proprietary
rights or trade secret know-how. The Company believes that there is rapid
technological change in its business and, as a result, legal protections
generally afforded through patent protection for its products are less
significant than the knowledge, experience and know-how of its employees, the
frequency of product enhancements and the timeliness and quality of customer
support in the usage of such products.
Government Regulation and Privacy Issues
- ----------------------------------------
The telemarketing industry has become subject to an increasing amount of federal
and state regulation. Violation of these rules may result in injunctive relief,
monetary penalties or disgorgement of profits and can give rise to private
actions for damages. While the Federal Trade Commission's new rules have not
required or caused the Company to alter its operating procedures, additional
federal or state consumer-oriented legislation could limit the telemarketing
activities of the Company or its clients or significantly increase the Company's
costs of regulatory compliance. Several of the industries which the Company
intends to serve, including the financial services, and healthcare industries,
are subject to varying degrees of government regulation. Although compliance
with these regulations is generally the responsibility of the Company's clients,
the Company could be subject to a variety of enforcement or private actions for
its failure or the failure of its clients to comply with such regulations.
In addition, the growth of information and communications technology has
produced a proliferation of information of various types and has raised many new
issues concerning the privacy of such information. Congress and various state
legislatures have considered legislation which would restrict access to, and the
use of, credit and other personal information for direct marketing purposes. The
direct marketing services industry, including the Company, could be negatively
impacted in the event any of these or similar types of legislation are enacted.
With the exception of regulations applicable to business generally, with respect
to the Company's Internet products and services, we are not currently subject to
direct regulation by any government agency. Due to increasing popularity and use
of the Internet, however, it is possible that a number of laws may be adopted
with respect to the Internet in the future, covering such issues as: user
privacy; pricing of goods and services offered; and types of products and
service offered.
If the government adopts any additional laws or regulations covering use of the
Internet, such actions could decrease the growth of the Internet. Any such
reduction in the growth of the Internet may reduce demand for the Company's
goods and services and raise the cost to the Company of producing such goods and
services. Finally, the sales of goods and services may be reduced and the costs
to produce such goods and services may be increased if existing U.S state and
federal laws and foreign laws governing issues such as commerce, taxation,
property ownership, defamation and personal privacy are increasingly applied to
the Internet.
Employees
- ---------
At September 1, 1999, the Company employed approximately 1,450 persons, of whom
410 were employed on a full-time basis. None of the Company's employees are
covered by collective bargaining agreements and the Company believes that its
relations with its employees are good.
Item 2 - Properties
- -------------------
The Company and its subsidiaries lease facilities for office space summarized as
follows and in Note 11 of Notes to Consolidated Financial Statements.
Location Square Feet
-------- -----------
Patterson, New York 250
Venice, California 5,500
Berkeley, California 6,600
Newtown, Pennsylvania 10,270
New York, New York 31,500
Wilmington, Massachusetts 20,000
London, England 460
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.
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The common stock of the Company trades on the NASDAQ National Market under the
symbol "MSGI. Prior to July 26, 1999 the Company's common stock was traded on
the NASDAQ Small Cap Market. 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 1999
Fourth Quarter $15.93 $51.25
Third Quarter 3.25 14.50
Second Quarter 2.18 3.87
First Quarter 2.03 3.87
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
As of June 30, 1999, there were approximately 794 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.
Item 6 - Selected Financial Data
- --------------------------------
The selected historical consolidated financial data for the Company presented
below as of and for the five fiscal years ended June 30, 1999 have been derived
from the Company's audited consolidated financial statements.
Historical
------------------------------------------------------------
Years ended June 30,
------------------------------------------------------------
1995(1) 1996 1997(2) 1998(3) 1999(4)
---- ---- ---- ---- ----
OPERATING DATA:
Revenue $3,630 $15,889 $24,145 $51,174 $82,242
Amortization and depreciation $117 $501 $970 $1,486 $2,282
Income (loss) from continuing
operations $(1,255) $(460) $(3,574)(5) $(580) $(7,072)
Net income (loss) $110(6) $(1,094) $(5,377)(7) $(780) $(7,646)
Net income (loss) attributable to
common shareholders $110 $(1,094) $(20,199) $(4,724)(8) $(20,181)(9)
Income (loss) per common share:
From continuing operations $(0.07) $(0.36) $(2.85) $(0.37) $(1.39)
From discontinued operations $0.13 $0.00 $0.00 $0.00 $0.00
------ ------ ------ ------ ------
$0.06 $(0.36) $(2.85) $(0.37) $(1.39)
Weighted average common shares
outstanding 1,808 3,068 7,089 12,892 14,552
OTHER DATA:
EBITDA(10) $(1,138) $41 $4 $906 $(4,346)
Net cash used in
operating activities $(2,128) $(884) $(2,664) $(1,886) $(45)
Net cash provided by (used in)
investing activities $2,635 $(572) $578 $(7,281) $(18,939)
Net cash provided by
financing activities $292 $1,631 $3,622 $12,474 $16,035
Historical
------------------------------------------------------------
As of June 30,
------------------------------------------------------------
1995(2) 1996 1997(3) 1998 1999
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash $1,218 $1,393 $2,929 $6,235 $3,285
Working capital (deficit) $578 $1,651 $189 $5,013 $(9,647)
Total intangible assets $7,273 $7,851 $16,127 $24,771 $62,494
Total assets $11,824 $13,301 $25,391 $49,781 $97,627
Total long term debt, net of
current portion $3,000 $1,517 $3,205 $204 $5,937
Redeemable convertible
preferred stock - $1,306 - $14,367 -
Total stockholders' equity $5,165 $6,945 $13,686 $17,325 $48,928
(1)On April 25, 1995, the Company acquired all of the outstanding common shares
of Alliance Media Corporation. The assets of Alliance consisted primarily of
all the issued and outstanding shares of Stephen Dunn & Associates, Inc.
("SD&A"). The results of operations for Alliance and SD&A are included in the
consolidated statements of operations beginning April 25, 1995.
(2)Effective October 1, 1996, the Company acquired all of the outstanding
common shares of Metro Services Group, Inc., renamed Metro Direct, Inc. The
results of operations for Metro Direct are included in the consolidated
statements of operations beginning October 1, 1996.
(3)Effective July 1, 1997, the Company acquired all of the outstanding common
shares of Pegasus Internet, Inc. The results of operations for Pegasus are
included in the consolidated statements of operations beginning July 1, 1997.
Effective December 1, 1997, the Company acquired all of the outstanding
common shares of Media Marketplace, Inc. and Media Marketplace Media
Division, Inc. The results of operations for Media Marketplace are included
in the consolidated statements of operations beginning December 1, 1997. In
May 1998, MSGI formed Metro Fulfillment, Inc., a new operating subsidiary
providing on-line commerce, real time database management, inbound/outbound
customer service, custom packaging, assembling, product warehousing,
shipping, payment processing and retail distribution.
(4)Effective January 1, 1999, the Company acquired all of the outstanding
common shares of Stevens-Knox List Brokerage, Inc., Stevens-Knox List
Management, Inc. and Stevens-Knox International, Inc. (collectively, "SKA").
The results of operations for SK&A are included in the consolidated
statements of operations beginning January 1, 1999. Effective March 1, 1999
the Company sold 85% of its subsidiary Metro Fulfillment. Accordingly,
effective March 1, 1999 the results of operations of MFI are no longer
consolidated in the Company's statement of operations. On May 13, 1999, the
Company acquired all of the outstanding common shares of CMG Direct, Inc. The
results of operations for CMGD Direct, Inc. are included in the consolidated
statements of operations beginning May 14, 1999.
(5)Loss from operations includes compensation expense on option grants of
$1,650 which were granted at exercise prices below market value and
approximately $958 for restructuring costs.
(6) Net loss includes a gain from sale of securities of approximately $1,580.
(7)Net loss includes a charge for approximately $113 for discounts on warrant
exercises and approximately $1,180 for the costs associated with a withdrawn
public offering.
(8)Net loss attributable to common shareholders include the impact of dividends
on preferred stock for a non-cash, non-recurring beneficial conversion
feature of $3,214.
(9)Net loss from continuing operations and net loss include a one-time
severance charge of $1,125 and a compensation expense on option grants of
$444 which were granted at exercise prices below market value.
(10) EBITDA is defined as earnings before interest expense, income tax,
depreciation, amortization and other non-cash items. EBITDA should not be
construed as an alternative to operating income or net income (as determined
in accordance with generally accepted accounting principles), as an indicator
of MSGI's operating performance, as an alternative to cash flows provided by
operating activities (as determined in accordance with generally accepted
accounting principles), or as a measure of liquidity. EBITDA is presented
solely as a supplemental disclosure because management believes that it
enhances the understanding of the financial performance of a company with
substantial amortization and depreciation expense. MSGI's definition of
EBITDA may not be the same as that of similarly captioned measures used by
other companies.
Item 7 - 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 twelve month period ended June 30, 1999. This should be read in
conjunction with the financial statements, and notes thereto, included in this
Form 10-K.
Effective December 1, 1997, the Company acquired all of the outstanding capital
stock of Media Marketplace, Inc. and Media Marketplace Media Division, Inc.
(collectively "MMI"). The results of operations of MMI are reflected in the
consolidated financial statements using the purchase method of accounting from
the date of acquisition. MMI provides list management, list brokerage and media
planning services.
In May 1998, the Company formed Metro Fulfillment, Inc. ("MFI"), a subsidiary
providing online commerce, real-time database management, inbound/outbound
customer service, custom packaging, assembling, product warehousing, shipping,
payment processing and retail distribution. As more fully described in Note 4 to
the consolidated financial statements included in this Form 10-K, effective
March 1, 1999, the Company sold 85% of the common stock of MFI. The investment
in MFI is being accounted for by the cost method of accounting. Accordingly,
effective March 1, 1999 the results of operations of MFI are no longer
consolidated in the Company's statement of operations.
As more fully described in Note 3 to the consolidated financial statements
included in this Form 10-K, effective January 1, 1999, the Company acquired all
of the outstanding common shares of Stevens-Knox & Associates, Inc.,
Stevens-Knox List Brokerage, Inc. and Stevens-Knox International, Inc.
(collectively "SK&A"). The results of operations of SK&A are reflected in the
consolidated financial statements using the purchase method of accounting from
the date of acquisition. SK&A provides list management, brokerage and database
management services.
As more fully described in Note 3 to the consolidated financial statements
included in this Form 10-K, effective May 13, 1999, the Company acquired all of
the outstanding common shares of CMG Direct Corporation ("CMGD"). The results of
operations of CMGD are reflected in the consolidated financial statements using
the purchase method of accounting from the date of acquisition. CMGD provides
database services to the direct marketing and internet industries.
Results of Operations Fiscal 1999 Compared to Fiscal 1998
- ---------------------------------------------------------
Revenues of approximately $82.2 million for the year ended June 30, 1999 (the
"current period") increased by $31.0 million or 61% over revenues of $51.2
million during the year ended June 30, 1998 (the "prior period"). Of the
increase, approximately $27.8 million is attributable to an increase in direct
and internet marketing resulting from the acquisitions of SK&A and CMGD and
including the acquisition of MMI for a full year as compared to seven months in
the prior period. Direct and internet marketing revenue, not including the
effects of acquisitions and telemarketing and telefundraising revenue, increased
by $3.4 million or 10% over the prior period. These increases were partially
offset by a decrease in telemarketing and telefundraising revenues of
approximately $1.3 million or 8%. In addition, fulfillment revenue for the
current period increased by approximately $1.1 million due to inclusion of eight
months of operations in the current period as compared to a month and a half in
the prior period. The decrease in telemarketing and telefundraising primarily
resulted from a loss of revenue due to an unsuccessful attempt by third parties
to unionize the calling center. New management has been put in place at the
start of the new fiscal year and have refocused its priorities. The Company is
still in the process of opposing certain issues with the union but expects to be
successful in its efforts.
Direct costs of approximately $52.5 million in the current period increased by
$25.7 million or 96% over direct costs of $26.8 million in the prior period. Of
the increase, approximately $24.4 million is attributable to an increase in
direct and internet marketing direct costs resulting from the acquisitions of
SK&A and CMGD and including the acquisition of MMI for a full year as compared
to seven months in the prior period. Direct costs for direct and internet
marketing not including the effects of acquisitions increased by $.9 million or
4% which is due to the increase in revenue. The remaining increase is primarily
due to fulfillment direct costs of approximately $.4 million which is consistent
with the growth in revenue. The Company's direct costs consist principally of
commissions paid to use marketing lists. Direct costs as a percentage of revenue
increased from 52% in the prior period to 64% in the current period. The
increase in the direct costs as a percentage of revenue results from the mix in
services sold. Most of the acquisitions made in the past two years resulted in a
substantial increase to the list management and list brokerage services. These
services have a high direct cost percentage. As MSGI acquires new companies and
internet revenues become a higher percentage of overall revenue, management
expects the direct cost percentage of revenue to begin to decrease.
Salaries and benefits of approximately $26.2 million in the current period
increased by $6.9 million or 36% over salaries and benefits of approximately
$19.3 million in the prior period. Of the increase, approximately $3.5 million
is attributable to an increase in direct and internet marketing salaries and
benefits resulting from the acquisitions of SK&A and CMGD and including the
acquisition of MMI for a full year as compared to seven months in the prior
period. Salaries and benefits relating to direct and internet marketing
excluding acquisitions increased by approximately $1.8 million or 10% due to
increase in head count to manage current and anticipated future growth. Salaries
and benefits relating to fulfillment increased by approximately $1.4 million due
to inclusion of eight months of operations in the current period as compared to
a month and a half in the prior period. Salaries and benefits associated with
corporate overhead increased approximately $.2 million in the current period
principally due to an increase in head count to manage current and anticipated
future growth.
General and administrative expenses of approximately $6.8 million in the current
period increased by approximately $2.5 million or 62% over comparable expenses
of $4.2 million in the prior period. Of the increase, approximately $1.4 million
is attributable to an increase in direct and internet marketing general and
administrative expenses resulting from the acquisitions of SK&A and CMGD and
including the acquisition of MMI for a full year as compared to seven months in
the prior period. Direct and internet marketing services general and
administrative expenses excluding acquisitions increased by approximately $.3
million principally due to increased professional fees associated with an
unsuccessful attempt by third parties to unionize the calling center and
increased rent expense due to expansion of certain office space. General and
administrative expenses relating to fulfillment increased by approximately $.4
million due to inclusion of eight months of operations in the current period as
compared to a month and a half in the prior period. The remaining increase is
primarily due to an increase in corporate expenses of approximately $.4 million
due to an increase in professional fees, travel and entertainment, board fees
and reporting fees associated with the increase in merger and acquisition
activity and becoming a larger company.
Depreciation and amortization expense of approximately $2.2 million in the
current period increased by approximately $.7 million over expense of $1.5
million in the prior period. Of the increase, approximately $.6 million is
attributable to an increase in direct and internet marketing depreciation and
amortization expense resulting from the acquisitions of SK&A and CMGD and
including the acquisition of MMI for a full year as compared to seven months in
the prior period.
In the current period the Company incurred $1.1 million in severance costs in
connection with the termination of two employment contracts. There are no
further amounts to be paid under such contracts.
In the current period 400,000 stock options were granted with a below market
exercise price on the date of the employment agreement to a key executive of the
Company. The pricing of such options was part of a negotiation of an
acquisition. 133,000 of the options vest immediately and 11,125 per month for
the next two years. Accordingly, the aggregate difference of $1.2 million
between the exercise price and the market price has been recorded as deferred
compensation and included in stockholders' equity. The deferred compensation is
being amortized into compensation expense over the vesting period of the
options. The Company recognized compensation expense of approximately $.4
million during the current period.
Net interest expense of approximately $516,000 in the current period increased
by approximately $330,000 over net interest expense of approximately $186,000 in
the prior period. Such expenses increased principally due to accrued interest on
outstanding borrowings relating to the acquisitions of SK&A and CMGD. In
addition, interest income from cash invested decreased due to cash used for
stock buyback and to fund the fulfillment operations.
The net provision for income taxes of approximately $57,000 in the current
period increased by approximately $42,000 over the provision of approximately
$15,000 in the prior period. The Company records provisions for state and local
taxes incurred on taxable income at the operating subsidiary level which cannot
be offset by losses incurred at the parent company level or other operating
subsidiaries.
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.
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.
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 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.
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 $1.7
million 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 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 flows from operations, private placements of
equity transactions, and its credit facilities. At June 30, 1999, the Company
had cash and cash equivalents of $3.3 million and accounts receivable net of
allowances of $27.4 million.
The Company incurred losses from operations of $7.1 million in the current
period. Cash used in operating activities was approximately $45,000. Net used in
operating activities principally resulted from decrease in accounts receivable,
increase in accrued expenses and other liabilities and the non-cash effect of
depreciation and amortization.
In the current period, net cash of $18.9 million was used in investing
activities consisting of: $17.7 million for the acquisitions of SK&A and CMG
Direct, $.5 million for the purchases of property and equipment and $.9 for the
final contingent payment for the acquisition of SD&A. In the prior period, net
cash used in investing activities of $7.3 million consisted of $6.0 million for
the acquisitions of Pegasus Internet and Media Marketplace, Inc, $.4 million for
a contingent payment for the acquisition of SD&A, $.3 million for the purchases
of property and equipment and $.6 million for the purchase of a note receivable.
In the current period, net cash of $16.0 million was provided by financing
activities. Net cash provided by financing activities consisted of $10.0 million
proceeds from a promissory note issued in connection with the CMG Direct
acquisition, $5.5 million in proceeds from the exercise of stock options and
warrants, $2.8 million in net proceeds from lines of credit offset by $1.3
million used for the purchase of treasury stock and $.8 million for repayments
on acquisition debt, other notes payable and capital leases.
At June 30, 1999, the Company had amounts outstanding of $5.3 million on its
lines of credit. As of June 30, 1999 the Company was in violation of certain
financial covenants. The Company has obtained a waiver of such violations. The
Company had approximately $1.4 million available on its lines of credit as of
June 30, 1999.
On April 21, 1999, the Company exercised its right to convert all 50,000 shares
of General Electric Capital Corporation's Series D Convertible Preferred Stock
to approximately 4.8 million shares of common stock. In conjunction with the
conversion, all preferred shareholder rights, including quarterly dividends,
financial covenants, acquisition approvals and board seats, were immediately
cancelled.
The Company believes that funds on hand, funds available from its operations,
its unused lines of credit, and funds received subsequent to year end in
connection with a private placement 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 Year 2000 issue could result in system failures or miscalculations causing
disruption of operations of the companies. To date, MSGI has experienced very
few problems related to the Year 2000 issue, and MSGI does not believe that it
has a material exposure problem.
MSGI has conducted a review of its computer systems and other systems for the
purpose of assessing its readiness for Year 2000, and is in the process of
modifying or replacing those systems which are not Year 2000 compliant. Based
upon this review, management believes such systems will be compliant by November
1999 for its existing business-critical systems. However, if modifications are
not made or completed timely, there could be a significant adverse impact on
MSGI's operations.
In addition, MSGI has communicated with its major vendors and suppliers to
determine their state of readiness relative to the Year 2000 compliance and
MSGI's possible exposure to Year 2000 issues of such third parties. However,
there can be no guarantee that the systems of other companies, which MSGI's
systems may rely upon, will be timely converted or representations made to MSGI
by these parties are accurate. As a result, the failure of a major vendor or
supplier to adequately address their Year 2000 compliance could have a
significant adverse impact on MSGI's operations.
As of the date hereof, MSGI has incurred insignificant costs (primarily for
internal labor) related to the identification and evaluation of MSGI's Year 2000
issues related to the system applications. Primarily as a result of the
acquisition of CMG Direct, the Company anticipates spending an additional
$520,000 to become Year 2000 compliant for its business-critical systems prior
to the end of November 1999. The estimated completion date and remaining costs
are based upon management's best estimates, as well as third party modification
plans and other factors. However, there can be no guarantee that such estimates
are accurate and actual results could differ from these estimates.
Item 8 - Financial Statements and Supplementary Data
- ----------------------------------------------------
The Consolidated Financial Statements required by this Item 8 are set forth as
indicated in the index following Item 13(a)(1).
Item 9 - Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
PART III
The information required by this Part III (items 10, 11, 12, and 13) is hereby
incorporated by reference from the Company's definitive proxy statement which is
expected to be filed pursuant to Regulation 14A of the Securities Exchange Act
of 1934 not later than 120 days after the end of the fiscal year covered by this
report.
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) (1) Financial statements - see "Index to Financial Statements" on page 28.
(2) Financial statement schedules - see "Index to Financial Statements"
on page 28.
(3) Exhibits:
2.1 Stock Purchase Agreement between Marketing Services Group, Inc.
and Ralph Stevens (n)
2.2 Stock Purchase Agreement between Marketing Services Group, Inc.
and CMGI, Inc.(o)
2.3 Agreement and Plan of Merger By and Among Marketing Services
Group, Inc., GCG Merger Corp., and Grizzard Advertising, Inc.(p)
3(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 (q)
3(viii)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)
10.1 1991 Stock Option Plan (c)
10.2 Letter from Seller of SD&A agreeing to long-term obligation
payment and restructuring (g)
10.3 Agreement and Plan of Merger between All-Comm Media Corporation
and Metro Services Group, Inc. (i)
10.4 Security Agreement between Milberg Factors, Inc. and Metro
Services Group, Inc. (j)
10.5 Security Agreement between Milberg Factors, Inc. and Stephen
Dunn & Associates, Inc. (k)
10.6 Agreement and Plan of Merger between Marketing Services Group,
Inc. and Pegasus Internet, Inc. (k)
10.7 J. Jeremy Barbera Employment Agreement (c)
10.8 Robert M. Budlow Employment Agreement (i)
10.9 Janet Sautkulis Employment Agreement (i)
10.10 Robert Bourne Employment Agreement (k)
10.11 Thomas Scheir Employment Agreement (k)
10.12 Form of Private Placement Agreement (j)
10.13 Fourth Memorandum of Understanding (q)
10.14 Stock Purchase Agreement among Marketing Services Group, Inc.,
Stephen M. Reustle and Thomas R. Kellogg (m)
10.15 Purchase agreement dated as of December 24, 1997, by and between
the Company and GE Capital (l)
10.16 Stockholders Agreement by and among the Company, GE Capital and
certain existing stockholders of the Company, dated as of
December 24, 1997 (l)
10.17 Registration Rights Agreement by and among the Company and GE
Capital, dated as of December 24, 1997 (l)
10.18 Warrant, dated as of December 24, 1997, to purchase shares of
Common Stock of the Company (l)
10.19 Form of Employment Agreement by and among Marketing Services
Group, Inc. and Stephen M. Reustle (m)
10.20 Form of Employment Agreement by and among Marketing Services
Group, Inc. and Ralph Stevens (n)
10.21 Form of Employment Agreement by and among Marketing Services
Group, Inc. and Edward Mullen (a)
10.22 First Amendment to Preferred Stock Purchase Agreement Between
General Electric Capital Corporation and Marketing Services
Group, Inc. (r)
10.23 Promissory note (r)
10.24 Warrant agreement (r)
10.25 Second Amendment (s)
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
(n) Incorporated by reference to the Company's Report on Form 8-K dated
February 1, 1999
(o) Incorporated by reference to the Company's Report on Form 8-K dated March
24, 1999
(p) Incorporated by reference from the Company's Registration Statement on Form
S-4, Registration Statement No. 33-85233.
(q) Incorporated by reference to the Company's Report on Form 10-KSB for the
fiscal year ended June 30, 1998.
(r) Incorporated by reference to the Company's Report on Form 8-K dated May, 13
1999.
(s) Incorporated by reference to the Company's Report on Form 8-K dated August,
30, 1999.
(b) Reports on Form 8-K.
During the fourth quarter 1999, Form 8-K/A dated April 5, 1999 was filed
pursuant to Item 2 (Acquisition or Disposition of Assets) and Item 7
(Financial Statements and Exhibits). On May 24, 1999 Form 8-K was filed
pursuant to Item 2 (Acquisition or Disposition of Assets) and Item 7
(Financial Statements and Exhibits).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MARKETING SERVICES GROUP, INC.
------------------------------
(Registrant)
By: /s/ J. Jeremy Barbera
---------------------
J. Jeremy Barbera
Chairman of the Board and Chief Executive Officer
Date: October 7, 1999
---------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ J. Jeremy Barbera Chairman of the Board and Chief October 7, 1999
- --------------------- Executive Officer
J. Jeremy Barbera (Principal Executive Officer)
/s/ Edward E. Mullen President and Director October 7, 1999
- ---------------------
Edward E. Mullen
/s/ Cindy H. Hill Chief Financial Officer (Principal October 7, 1999
- ----------------- Financial and Accounting Officer)
Cindy H. Hill
/s/ Alan I. Annex Director and Secretary October 7, 1999
- ---------------------
Alan I. Annex
/s/ S. James Coppersmith Director October 7, 1999
- ------------------------
S. James Coppersmith
/s/ John T. Gerlach Director October 7, 1999
- ---------------------
John T. Gerlach
/s/ Seymour Jones Director October 7, 1999
- -----------------
Seymour Jones
/s/ C. Anthony Wainwright Director October 7, 1999
- -------------------------
C. Anthony Wainwright
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
[Item 14]
(1) FINANCIAL STATEMENTS: Page
--------------------- ----
Report of Independent Accountants 29
Consolidated Balance Sheets as of June 30,
1999 and June 30, 1998 30
Consolidated Statements of Operations
Years Ended June 30, 1999, 1998, and 1997 31
Consolidated Statement of Stockholders' Equity
Years Ended June 30, 1999, 1998, and 1997 32-33
Consolidated Statements of Cash Flows
Years Ended June 30, 1999, 1998, and 1997 34-36
Notes to Consolidated Financial Statements 37-51
(2) FINANCIAL STATEMENT SCHEDULES
-----------------------------
Schedule II - Valuation and Qualifying Accounts 52
Schedules other than those listed above are omitted
because they are not required or are not applicable
or the information is shown in the audited financial
statements or related notes.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Marketing Services Group, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Marketing Services Group, Inc. and Subsidiaries at June 30, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with 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 the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
September 24, 1999
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1999 AND 1998
June 30,
ASSETS 1999 1998
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 3,285,217 $ 6,234,981
Accounts receivable, billed, net of
allowance for doubtful accounts of
$394,910 and $421,861, respectively 23,527,798 12,606,468
Accounts receivable, unbilled 3,862,907 3,259,437
Note receivable- current portion 685,873 -
Other current assets 1,168,653 724,032
----------- -----------
Total current assets 32,530,448 22,824,918
Property and equipment, net 1,504,826 1,645,957
Intangible assets, net 62,493,949 24,771,045
Note receivable 474,127 -
Other assets 623,599 539,507
------------ ------------
Total assets $97,626,949 $49,781,427
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 5,316,775 $ 2,522,306
Accounts payable-trade 23,214,278 11,420,386
Accrued expenses and other current liabilities 8,151,764 2,433,871
Current potion of note payable-related party 4,871,750 -
Current portion of capital lease obligations 52,099 117,911
Current portion of long term obligations 570,653 1,317,540
----------- ---------
Total current liabilities 42,177,319 17,812,014
Capital lease obligations, net of current portion 67,407 87,250
Long-term obligations, net of current portion 997,890 116,667
Note payable- related party, net of current portion 4,871,750 -
Other liabilities 584,954 72,937
---------- ---------
Total liabilities 48,699,320 18,088,868
----------- -----------
Redeemable convertible preferred stock -
$.01 par value; 150,000 shares authorized;
50,000 shares of Series D convertible preferred
stock issued and outstanding as of June 30, 1998 14,367,301
----------
Commitments and contingencies
Stockholders' equity:
Common stock - $.01 par value; 75,000,000
authorized; 22,513,772 and 13,098,510 shares
issued as of June 30, 1999 and 1998,
respectively 225,138 130,985
Additional paid-in capital 70,812,973 29,612,816
Accumulated deficit (19,928,677) (12,283,074)
Deferred compensation (788,095)
Less: 423,894 and 11,800 shares of common
stock in treasury, at cost as of
June 30, 1999 and 1998, respectively (1,393,710) (135,469)
------------ -----------
Total stockholders' equity 48,927,629 17,325,258
----------- -----------
Total liabilities and stockholders' equity $97,626,949 $49,781,427
=========== ===========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999, 1998, AND 1997
1999 1998 1997
-------- -------- --------
Revenues $82,241,894 $51,174,063 $24,144,874
----------- ----------- -----------
Operating costs and expenses:
Direct costs 52,510,154 26,771,611 5,587,343
Salaries and benefits 26,188,341 19,255,348 14,967,420
Selling, general and administrative 6,764,488 4,240,805 3,585,972
Depreciation and amortization 2,282,251 1,486,106 969,594
Severance costs 1,125,000 - -
Compensation expense on
option grants 443,905 - 1,650,000
Restructuring costs - - 958,376
---------- ---------- ----------
Total operating costs and expenses 89,314,139 51,753,870 27,718,705
---------- ---------- ----------
Loss from operations (7,072,245) (579,807) (3,573,831)
---------- -------- ----------
Other expense:
Withdrawn public offering costs - - (1,179,571)
Interest expense and other, net (516,099) (185,967) (514,321)
-------- -------- --------
Total other expense (516,099) (185,967) (1,693,892)
-------- -------- ----------
Loss before income taxes (7,588,344) (765,774) (5,267,723)
Provision for income taxes (57,259) (14,704) (109,373)
------- ------- --------
Net loss $ (7,645,603) $ (780,478) $(5,377,096)
============ ========== ===========
Net loss attributable to
common stockholders* $(20,180,933) $(4,724,480) $(20,199,038)
============ =========== ============
Net loss per common share,
basic and diluted $ (1.39) $ (.37) $ (2.85)
======= ====== =======
Weighted average common shares
outstanding 14,552,444 12,892,323 7,089,321
========== ========== =========
* The year ended June 30, 1999 includes the impact of dividends on preferred
stock for (a) adjustment of the conversion ratio for $11,366,022 for
exercises of stock options and warrants; (b) $949,365 in cumulative
undeclared preferred stock dividends; and (c) $219,943 of periodic non-cash
accretions of preferred stock.
The year ended June 30, 1998 include the impact of dividends on preferred
stock for (a) a non-cash, non-recurring beneficial conversion feature of
$3,214,400; (b) $152,512 from adjustment of the conversion ratio for certain
issuances of common stock and exercises of stock options; (c) $464,816 in
cumulative undeclared dividends; and (d) $112,274 of periodic non-cash
accretions on preferred stock.
The year 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.
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998, AND 1997
Common Stock Additional Treasury Stock
------------ Paid-in Accumulated --------------
Shares Amount Capital Deficit Shares Amount Totals
------------------ ------- ------- ------------------- ------
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 and comprehensive 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
Issuance of warrants to consultants 19,500 19,500
Issuance of restricted shares for
SD&A earn-out 139,178 1,392 423,608 425,000
Issuance of common stock for acquisition
of Pegasus Internet 600,000 6,000 1,794,000 1,800,000
Conversion of $1.7 million of convertible
debt to common stock, net of discount
and stock issuance costs 694,411 6,944 1,629,228 1,636,172
Sale of Series D Preferred Stock,
net of stock issuance costs 3,474,982 3,474,982
Dividend for non-cash, non-recurring
beneficial conversion feature (3,214,400) (3,214,400)
Issuance of common stock for acquisition
of Media Marketplace, Inc. 222,222 2,222 997,778 1,000,000
Adjustment to conversion ratio for
redeemable convertible preferred stock (152,512) (152,512)
Cumulative undeclared dividends for
redeemable convertible preferred stock (464,816) (464,816)
Accretion of redeemable convertible
preferred stock (112,274) (112,274)
Net and comprehensive loss (780,478) (780,478)
---------- ------- ---------- ---------- ------- ------- ----------
Balance June 30,1998 13,098,510 130,985 29,612,816 (12,283,074) (11,800) (135,469) 17,325,258
The accompanying notes are an integral part of the Consolidated Financial
Statements.
MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999, 1998, AND 1997
(CONTINUED)
Common Stock Additional Treasury Stock
------------ Paid-in Deferred Accumulated --------------
Shares Amount Capital Compensation Deficit Shares Amount Totals
------------------ ------- ------------ ----------- ------------------- ------
Balance July 1,1998 13,098,510 $130,985 $29,612,816 - $(12,283,074) (11,800) $(135,469) $17,325,258
Purchase of common stock
held in treasury (412,094) (1,258,241) (1,258,241)
Shares issued upon
exercise of stock
options 1,590,101 15,901 4,352,241 4,368,142
Shares issued upon
exercise of warrants 439,455 4,395 1,087,085 1,091,480
Conversion of $558,765
of convertible debt and
interest to common stock 224,000 2,240 556,525 558,765
Issuance of common stock
for acquisition of CMG
Direct Corporation 2,321,084 23,211 19,311,411 19,334,622
Warrants issued in
connection with debt 342,000 342,000
Adjustment to conversion
ratio for redeemable
convertible preferred
stock (11,366,022) (11,366,022)
Cumulative undeclared
dividends for redeemable
convertible preferred
stock (949,365) (949,365)
Accretion of redeemable
convertible preferred
stock (219,943) (219,943)
Conversion of Series D
Preferred Stock 4,840,622 48,406 26,854,225 26,902,631
Issuance of below market
stock options 1,232,000 $(1,232,000) -
Recognition of stock
based compensation
expense 443,905 443,905
Net and comprehensive loss (7,645,603) (7,645,603)
---------- -------- ----------- --------- ------------ ------- ----------- -----------
Balance June 30,1999 22,513,772 $225,138 $70,812,973 $(788,095) $(19,928,677) (423,894) $(1,393,710) $48,927,629
The accompanying notes are an integral part of the Consolidated Financial
Statements.
MARKETING SERVICES GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998, AND 1997
1999 1998 1997
---- ---- ----
Operating activities:
Net loss $(7,645,603) $(780,478) $(5,377,096)
Adjustments to reconcile loss to net cash
used in operating activities:
Gain on sale of land - - (90,021)
Gain on sale of MFI (16,604)
Depreciation 673,154 412,212 250,194
Amortization 1,609,097 1,073,894 719,400
Loss on disposal of assets - - 35,640
Discounts on exercise of warrants - - 113,137
Compensation expense on option grants 443,905 - 1,650,000
Accretion on note payable and redeemable stock 85,500 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 162,715 70,170 -
Changes in assets and liabilities net of effects
from acquisitions:
Accounts receivable 1,211,918 (487,516) (483,959)
Other current assets 29,716 (398,413) (119,263)
Other assets (341,006) (362,671) (144,237)
Trade accounts payable (482,908) (1,240,126) (312,493)
Accrued expenses and other liabilities 4,224,861 (230,616) 281,539
--------- -------- -------
Net cash used in operating activities (45,255) (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) -
Acquisition of SK&A, net of cash acquired of $290,946 (3,599,276) - -
Acquisition of CMG Direct, net of zero cash acquired (14,066,608) - -
Earn-out relating to acquisition of SD&A (850,000) (425,000) -
Purchases of property and equipment (523,437) (287,529) (489,846)
Proceeds from sale of MFI 100,000 - -
Purchase of note receivable - (600,000) -
Net cash provided by (used in) investing activities (18,939,321) (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 2,794,467 860,598 -
Proceeds from exercise of stock options and warrants 5,459,624 8,271 2,070,125
Proceeds from convertible notes payable - - 2,200,000
Proceeds from short term note payable 10,000,000 - -
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)
Payments on promissory notes (134,385) - (51,889)
Repayments of note payable (117,540) (330,095) (1,000,000)
Principal payments under capital lease obligation (125,779) (96,537) (41,195)
Purchase of treasury stock (1,258,241) - -
Repayments of acquisition debt (583,334) (1,866,666) (566,667)
-------- ---------- --------
Net cash provided by financing activities 16,034,812 12,473,851 3,622,082
---------- ---------- ---------
Net increase (decrease) in cash an