-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FkX3vuSDJdqp/X9keY79cRhp4ej4P5FLO9CKru4IAZkTIoqMHvsHCEsk/3XNRs1A 4Pz2O8Ta95dKtfjNv8ztXA== 0000014280-97-000019.txt : 19970930 0000014280-97-000019.hdr.sgml : 19970930 ACCESSION NUMBER: 0000014280-97-000019 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970929 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARKETING SERVICES GROUP INC CENTRAL INDEX KEY: 0000014280 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 880085608 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-01768 FILM NUMBER: 97687501 BUSINESS ADDRESS: STREET 1: 400 CORPORATE POINTE STREET 2: STE 780 CITY: CULVER CITY STATE: CA ZIP: 90230 BUSINESS PHONE: 3103422800 MAIL ADDRESS: STREET 1: 400 CORPORATE POINTE SUITE 780 CITY: CULVER CITY STATE: CA ZIP: 90280 FORMER COMPANY: FORMER CONFORMED NAME: ALL-COMM MEDIA CORP DATE OF NAME CHANGE: 19950823 FORMER COMPANY: FORMER CONFORMED NAME: SPORTS TECH INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BRISTOL HOLDINGS INC DATE OF NAME CHANGE: 19920518 10KSB 1 FORM 10-KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ______________ to___________________ Commission file number 0-16730 MARKETING SERVICES GROUP, INC. (Exact name of small business issuer as specified in its charter) Nevada 88-0085608 ------------------------------ ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 333 Seventh Avenue, 20th Floor New York, New York 10001 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 594-7688 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Common Stock, par value $.01 per share -------------------------------------- (Title of class) Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer's revenues for its fiscal year ended June 30, 1997 are $24,144,874. As of September 25, 1997, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $44,305,000. As of September 25, 1997, there were 12,690,357 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 - ------------------------------------------------- Certain statements in this Annual Report on Form 10-KSB under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this Report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; industry capacity; direct marketing and other industry trends; demographic changes; competition; the loss of any significant customers; changes in business strategy or development plans; availability and successful integration of acquisition candidates; availability, terms and deployment of capital; advances in technology; quality of management; business abilities and judgment of personnel; availability of qualified personnel; changes in, or the failure to comply with, government regulations; and computer, telephone and postal costs. Item 1 - Business - ----------------- General - ------- Marketing Services Group, Inc. (the "Company" or "MSGI") provides database management, custom telemarketing/telefundraising and other direct marketing services to a diverse group of over 600 clients located throughout the United States and Canada. These services include customer and market data analysis, database creation and analysis, data warehousing, merge/purge, predictive behavioral modeling, list processing, brokerage and management, data enhancement, other direct marketing information services and custom outbound telemarketing/telefundraising services. The Company believes its expertise in applying these direct marketing tools increases the productivity of its clients' marketing expenditures. The Company's services have enabled it to become a leading provider of direct marketing services to performing arts and cultural institutions in the United States. The Company's clients include Lincoln Center for the Performing Arts, Kennedy center for the Performing Arts, Art Institute of Chicago, New York Philharmonic, Los Angeles Philharmonic, Boston Symphony, UCLA and numerous public broadcasting stations. In addition, the Company renders database management and direct marketing services to such commercial clients as Crain Communications, the CIT Group, 3Com Corporation, Citicorp, UNOCAL, Walt Disney Company, Avery Dennison and Gymboree. The Company utilizes industry specific knowledge and proprietary database software applications to produce customized data management and direct marketing solutions. The Company's telemarketing/ telefundraising services are conducted both on-site at client-provided facilities and also at the Company's calling center in Berkeley, California. The Company seeks to become an integral part of its clients' marketing programs and foster long-term client relationships thereby providing recurring revenue opportunities. The business of MSGI, previously known as All-Comm Media Corporation and prior to that as Sports-Tech, Inc., arises out of an April 25, 1995 merger between Alliance Media Corporation ("Alliance") and the Company, and the 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. Simultaneously, the former management and directors of the Company resigned in favor of the merger with Alliance and its plan to build a specialized marketing services company with a focus on providing direct marketing, information and media services. The change in the Company's name was approved at a special stockholders meeting held on August 22, 1995 to reflect a new direction originating from the change in management and board of directors associated with the merger with Alliance. Subsequent to another management change, on June 30, 1997, the stockholders approved the current name of the Company. Effective as of October 1, 1996, the Company acquired Metro Services Group, Inc. (to be renamed Metro Direct, Inc.) ("Metro") pursuant to a merger agreement. Metro develops and markets information-based services, used primarily in direct marketing by a variety of commercial and not-for-profit organizations, principally in the United States. The Company's shares are traded on the NASDAQ Small Cap MarketSM under the symbol "MSGI". The Company's principal executive offices are located at 333 Seventh Avenue, 20th Floor, New York, NY 10001. Its telephone number is (212) 594-7688. The Company's Strategy - ---------------------- MSGI's strategy to enhance its position as a value-added premium provider of database management, custom telemarketing/telefundraising services and other direct marketing services is to: Increase revenues by expanding the range of direct marketing services offered and by cross-selling; Deepen market penetration in new industries and market segments as well as those currently served by the Company; Develop existing and create new proprietary database software and database management applications; Increase capacity for telemarketing/telefundraising services and enhance on-site data and calling systems; and Pursue strategic acquisitions, joint ventures and marketing alliances to expand direct marketing services offered and industries served. Other than as described in this Annual Report on Form 10-KSB (this "Form 10-KSB") the Company has no agreements to acquire any companies and there can be no assurance that the Company will be able to acquire such companies. History and Prior Activities - ---------------------------- The Company was originally incorporated in Nevada in 1919. During 1991, under prior management, the Company acquired a 100% interest in Sports-Tech International, Inc. ("STI") and changed its name to Sports-Tech, Inc. In 1993, the Company acquired the business of High School Gridiron Report ("HSGR"). STI and HSGR supplied information services and technology as well as academic, athletic and video data to high school, college and professional coaches and student athletes. In November, 1994, after a failed business strategy, the prior management of the Company discontinued these operations through the sale of STI and the cessation of the HSGR operation. Prior to, and as a condition of the merger with Alliance, the Company was required to divest its investments, except for an undeveloped parcel of land in Laughlin, Nevada. In August, 1996 the land was sold. (See All-Comm Holdings, Inc. herein for a description of this investment and the terms of its sale.) Merger with Alliance Media Corporation: On April 25, 1995, STI Merger Corporation ("Merger Sub"), a wholly owned subsidiary of the Company, was merged (the "Merger") with and into Alliance. The assets of Alliance acquired by the Company consisted primarily of: (i) all of the issued and outstanding stock of SD&A, which Alliance had acquired effective April 25, 1995 pursuant to a Stock Purchase Agreement, dated as of January 31, 1995, between Alliance and Mr. Stephen Dunn (the "Dunn Agreement"); (ii) a five-year covenant not to compete with the former owner of SD&A; and (iii) the cash proceeds (net of certain payments, including the payment of $1.5 million required pursuant to the terms of the Dunn Agreement) of a private placement of equity securities by Alliance, which securities, upon consummation of the Merger, were converted into shares of the Company's common stock. Stephen Dunn & Associates, Inc. ("SD&A"): SD&A was formed in 1983 and was acquired by the Company in the merger with Alliance. For the twelve month period ended June 30, 1997 ("Fiscal 1997"), SD&A had revenues of more than $15.9 million. 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 and operates a telemarketing calling center in Berkeley, California. Stock Split - Change in Authorized Common Shares: Effective August 22, 1995, the Company's Board of Directors approved a one-for-four reverse stock split of the Company's authorized and issued common stock. Fractional shares were rounded up to whole shares. After the reverse stock split, approximately 3,016,000 shares were outstanding. All share and per share data in this Annual Report reflect the effect of the reverse stock split. Effective August 14, 1996, the Company's shareholders approved an increase in the number of authorized shares of common stock from 6,250,000 to 36,250,000, to facilitate its corporate strategy and growth plans. Current Activities - ------------------ Acquisition of Metro Direct: Metro was formed in 1987 and was acquired by the Company effective October 1, 1996, pursuant to a merger agreement. For the nine month period ended June 30, 1997, Metro had revenues of more than $8.1 million. Clients include many of the same performing arts and cultural institutions, public broadcasting, advocacy groups and educational institutions as SD&A, as well as a variety of commercial organizations. Metro has its headquarters in New York City, with satellite offices in Michigan, Illinois, California and Georgia. Metro develops and markets a variety of database direct marketing products and services to a wide range of commercial clients and tax-exempt organizations. Metro provides information-based products and services to the direct marketing industry through its four divisions: Metro Direct Marketing, which provides full service direct marketing programs for consumers and business to business clients, particularly in the financial services and publishing areas; MSGI Computer Services which utilizes a combination of mainframe, PC platforms and Internet servers for database development, data enhancement, response analysis and predictive modeling capabilities; MetroArts develops and executes customer acquisition campaigns for the performing arts, entertainment and cultural institutions and Metro Non-Profit provides strategic planning, membership and direct mail fundraising campaigns for non-profit institutions. The majority of Metro's revenues are derived from a commercially driven client base. In exchange for all of the then outstanding shares of Metro, the Company issued 1,814,000 shares of its common stock valued at $7,256,000 and promissory notes (the "Notes") totaling $1,000,000. The Notes, which have a stated interest rate of 6%, were discounted to $920,000 to reflect an estimated effective interest rate of 10%. The Notes are due and payable, together with interest thereon, on June 30, 1998, subject to earlier repayment, at the option of the holder, upon completion by the Company of a public offering of its equity securities. The Notes are convertible on or before maturity, at the option of the holder, into shares of common stock at a conversion rate of $5.38 per share. $100,000 of the principal amount of the Notes was paid by the Company as of June 30, 1997 and $400,000 was paid in July, 1997. The acquisition was accounted for using the purchase method of accounting. The purchase price was allocated to assets acquired based on their estimated fair value. This treatment resulted in approximately $7.3 million of costs in excess of net assets acquired, after recording covenants not to compete of $650,000 and proprietary software of $250,000. Such excess is being amortized over the expected period of benefit of forty years. The covenants and software are amortized over their expected benefit periods of three and five years respectively. The operating results of this acquisition are included in the consolidated results of operations from the date of acquisition. Acquisition of Pegasus Internet, Inc. ("Pegasus"): Effective July 1, 1997, MSGI announced the acquisition of Pegasus. Pegasus was formed in 1994 and is incorporated in New York. For the year ended June 30, 1997, Pegasus had unaudited revenues of approximately $445,000. In exchange for all of the then outstanding shares of Pegasus, the Company issued 600,000 shares of its common stock, valued at $1,800,000, and $200,000 in cash. 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. Pegasus' clients include Lincoln Center, Boston Symphony, Chicago Symphony and Metropolitan Opera Guild. The acquisition will be accounted for using the purchase method of accounting. Accordingly, the operating results of Pegasus will be included in the consolidated results of operations of the Company starting on July 1, 1997. Recapitalization: On December 23, 1996, the Company and certain of its securityholders effected a recapitalization of the Company's capital stock, whereby: (i) the Company's Series B Convertible Preferred Stock, par value $.01 per share (the "Series B Preferred Stock"), was converted, in accordance with its terms without the payment of additional consideration, into 2,480,000 shares of Common Stock; (ii) the Company's Series C Convertible Preferred Stock, par value $.01 per share (the "Series C Preferred Stock"), was repurchased for promissory notes in an aggregate principal amount of $1.0 million, which promissory notes bore interest at a rate of 8% per annum and were repayable on demand at any time from and after the date of the consummation of a proposed underwritten public offering by the Company of Common Stock, but in any event such notes originally matured June 7, 1998 but were paid in full in April, 1997; (iii) all accrued interest on the Series B Preferred Stock and the Series C Preferred Stock was converted into 88,857 shares of Common Stock; (iv) warrants related to the Series C Preferred Stock, currently exercisable for 3,000,000 shares of Common Stock, were exchanged for 600,000 shares of Common Stock; and (v) options held by two of the Company's principal executive officers to purchase 300,000 shares of common stock were to be canceled at no cost to the Company, subject to successful completion of an underwritten offering. The public offering was not consummated and, accordingly, the options were not canceled. Upon conversion of the Series B Preferred Stock and accumulated interest thereon into Common Stock on December 23, 1996, the Company incurred a non-cash, non-recurring dividend for the difference between the conversion price and the market price of the Common Stock, totaling $8.5 million. Upon repurchase of the Series C Preferred Stock, the Company incurred a non-recurring dividend of $573,000 for the difference between the repurchase price and the accreted book value of the stock at December 23, 1996. These dividends do not impact net income (loss), but do impact net income (loss) attributable to common stockholders in the calculation of earnings per share. Withdrawal of Registration Statement: On October 17, 1996, the Company filed a Form SB-2 registration statement (the "Registration Statement") with the Securities and Exchange Commission. The Registration Statement related to a proposed underwritten public offering (the "Proposed Offering") of 2,100,000 shares of Common Stock, of which 1,750,000 shares were being offered by the Company and 350,000 were being offered by certain stockholders of the Company. It also related to the sale of 1,381,056 shares of Common Stock by certain selling stockholders on a delayed basis. Due to market conditions, on February 11, 1997, the Company withdrew the Registration Statement and pursued other sources of financing. As such, in the year ended June 30, 1997, the Company expensed $1.2 million in Proposed Offering costs. Restructuring Costs: During the year ended June 30, 1997, the Company effected certain corporate restructuring steps, including the decision to reduce corporate staffing and other administrative overhead, as well as making two executive management changes. In this connection, restructuring expenses of $986,000 were recorded. Executive management settlement agreements include two non-interest bearing promissory notes with face values of $290,000 and $250,000, respectively, payable in equal installments over eighteen months starting in May, 1997. These notes have been discounted to $268,000 and $231,000, respectively, to reflect effective interest rates of 10%. Financing: In March 1997, to obtain $2.1 million in working capital and reduce the overhang associated with the existence of outstanding warrants, the Company accepted offers from certain warrant-holders to exercise their warrants for 3,152,500 shares of common stock at discounted exercise prices. In the fourth quarter of 1997, the Company obtained $2,046,000, net of fees, from the private placement of 6% convertible notes, with a face value of $2,200,000. The notes are payable with interest on April 15, 1999, if not previously converted. The notes are convertible into shares of the Company's Common Stock at the lesser of $2.50 per share or 83% of the average closing bid price of the Common Stock during the last five trading days prior to conversion. Subsequent to June 30, 1997, through September 23, 1997, $1,675,000 face value of the notes, plus interest, was converted into 684,122 shares. The Direct Marketing Industry - ----------------------------- Overview. Direct marketing is used for a variety of purposes including lead-generation and prospecting for new customers, enhancing existing customer relationships, exploring the potential for new products and services and establishing new products. Unlike traditional mass marketing, aimed at a broad audience and focused on creating image and general brand or product awareness, successful direct marketing requires the identification and analysis of customers and purchasing patterns. Such patterns enable businesses to more easily identify and create a customized message aimed at a highly defined audience. Previous direct marketing activity consisted principally of direct mail, but now has expanded into the use of multiple mediums including telemarketing, print, television, radio, video, CD-ROM, on-line services, the Internet and a variety of other interactive marketing formats. The success of a direct marketing program is the result of the analysis of customer information and related marketing data. Database management capabilities allow for the creation of customer lists with specific, identifiable attributes. Direct marketers use these lists to customize messages and marketing programs to generate new customers whose purchasing patterns can be statistically analyzed to isolate key determinants. In turn, this enables direct marketers to continually evaluate and adjust their marketing programs, to measure customer response rates in order to assess returns on marketing expenditures, and to increase the effectiveness of such marketing programs. Database management covers a range of services, including general marketing consultation, execution of marketing programs and the creation and development of customer databases and sales tracking and data analysis software. Data analysis software consolidates and analyzes customer profile information to find common characteristics among buyers of certain products. The results of such tracking and analysis are used to define and match customer and product attributes from millions of available database files for future direct marketing applications. The process is one of continual refinement, as the number of points of contact with customers increases, together with the proliferation of mediums available to reach customers. Telemarketing/telefundraising projects generally require significant amounts of customer information supplied by the client or third party sources. Custom telemarketing/telefundraising programs seek to maximize a client's direct marketing results by utilizing appropriate databases to communicate with a specific audience. This customization is often achieved through sophisticated and comprehensive data analysis which identifies psychographic, cultural and behavioral patterns in specific geographic markets. Industry Growth: The use of direct marketing has increased over the last few years due in part to the relative cost efficiency of direct marketing compared to mass marketing, as well as the rapid development of more powerful and more cost-effective information technology and data capture capabilities. According to industry sources, over the next decade, demographic shifts and changes in lifestyle, combined with new marketing mediums, are expected to create higher demand by businesses for marketing information and services to provide businesses with direct access to their customers and a more efficient means of targeting specific audiences and developing long-term customer relationships. According to a study commissioned by the Direct Marketing Association ("DMA"), expenditures for direct marketing services in 1996 were estimated to approximate $144.5 billion, the largest component of which, $57.8 billion, was attributable to telemarketing. The study estimated that annual direct marketing advertising expenditures may grow to $205 billion by the year 2001, including $84.4 billion on telemarketing. Corporate marketing departments often lack the technical expertise to create, manage and control highly technical aspects of the direct marketing process. As a result, the Company believes that there is a growing trend among direct marketers to outsource direct marketing programs. Industry Consolidation: The direct marketing industry is extremely fragmented. According to industry sources, there are almost 11,000 direct marketing service and database service businesses in the United States. The Company believes that most of such businesses are small, specialized companies which offer limited services. However, industry consolidation has increased in the last few years resulting in a greater number of large companies providing services similar to those provided by the Company. See "Competition." The Company believes that much of this consolidation is due to: (i) economies of scale in hardware, software and other marketing resources; (ii) cross-selling of services; and (iii) coordinating various components of direct marketing and media programs within a single, reliable environment. The Company believes these trends are likely to continue due in part to client demand for more cost-effective service to perform increasingly complex functions. Growth Strategy - --------------- As clients for the Company's services demand more sophisticated database management services, custom telemarketing/telefundraising services and other direct marketing services, the Company believes that there are significant growth opportunities to expand its business. Accordingly, the key elements of the Company's growth strategy are as follows: Expand the Range of Services Offered and Cross-Selling: The Company intends to offer a wider range of direct marketing services while maintaining its current level of quality and performance. To effect this strategy, the Company will focus on assembling a spectrum of direct marketing services, including expanding outbound custom telemarketing/telefundraising services, market research, training, marketing, consulting, and database management services as well as an array of ancillary services. These services include electronic and other multimedia mediums, including the Internet, for inclusion within a client's marketing programs. The Company intends to utilize its technological and industry expertise to provide flexible integrated solutions to meet clients' specialized requirements and to improve coordination between database capabilities and value-added premium telemarketing services. Expand Market Penetration: The Company intends to capitalize on core competencies and industry specific expertise, particularly in the performing arts and cultural markets, which it believes will enable it to maintain a competitive advantage. For example, the live entertainment and events marketing industry spends substantial amounts on advertising and direct marketing programs which utilize many of the Company's services, such as audience analysis, customer profiling, database creation and management, list processing services, telemarketing and direct marketing support. The Company believes its expertise in database management and custom telemarketing will permit it, over time, to gain a larger market share. In addition, the Company believes that its developed expertise and experience, as well as its broad and well-known client base and quality service, will enable it to gain further acceptance in such industries as publishing, live entertainment and events marketing, public broadcasting, financial services (including credit card, home mortgage and home equity services), education, travel and leisure and healthcare. Develop Existing and Create New Proprietary Software and Database Management Applications: The Company intends to continue to develop existing and new proprietary customized data processing software products and services that allow enhancement of a client's direct marketing databases. These software products and services also improve the effectiveness of telemarketing programs and the management of client information. The Company intends to continue to expand its direct marketing service offerings, particularly with software designed to create and manage large relational and/or multidimensional databases, and its ability to integrate such data with different marketing programs developed in collaboration with its clients. Increase Capacity for Telemarketing/Telefundraising Services: Enhance On-Site Data and Calling Systems. The Company has recently expanded its calling center in Berkeley, California to accommodate more calling stations and upgraded technology in order to increase revenues, improve margins and increase efficiency in client direct marketing programs. The Company intends to implement similar technological improvements at on-site locations through new technology configurations and software systems that link information with client databases and direct marketing programs and to further upgrade both the Berkeley calling center and other on-site locations as needed. Pursue Strategic Acquisitions, Joint Ventures and Marketing Alliances: The Company believes that as the direct marketing industry consolidates, breadth of skills, industry knowledge and size will become. As a result, the Company intends to expand its capabilities to increase industry knowledge and help clients to improve returns on marketing expenditures. Although the Company has not specifically identified any particular geographic market, the Company believes it can enter new geographic markets and increase penetration of targeted industries by acquiring companies with clients in such new geographic markets whose business focus will complement and/or expand the Company's current range of services. As a result, the Company seeks and is considering acquisitions in order to enlarge its core competencies in database management and custom telemarketing/telefundraising services and to increase its potential for cross-selling and providing other direct marketing services. No agreement, definitive or otherwise, has been reached with respect to any acquisition currently being considered and no assurance can be given that the Company will complete either the acquisitions under consideration or any other acquisition, or that any acquisition, if completed, will be successful. The Company also intends to continue to grow internally by investing in systems, technology and personnel development to enable clients to utilize, within a single environment, various services such as database creation, data warehousing, database management and decision support capabilities, list processing, modeling, and response measurement and analysis. Because these services provide the fundamental support systems for direct marketing and media selection processes, the Company seeks to expand its base of technology. Services - -------- The Company's operating businesses provide comprehensive database management, custom telemarketing/telefundraising and other direct marketing services. The principal advantages of customized services include: (i) the ability to expand and adapt a database to the client's changing business needs; (ii) the ability to have services operate on a flexible basis consistent with the client's goals; and (iii) the integration with other direct marketing, database management and list processing functions, which are necessary to keep a given database current. Some services offered by the Company are described below. Database Management Services: The Company's database management services begin with database creation and development, which include the planning stages and analytical processes to review all of the client's customer and operational files. Utilizing both proprietary and commercial software, the Company consolidates all of the separate information and relationships across multiple files and converts the client's raw information into a consolidated format. Once the client's customer data is consolidated and the database created, the data is enhanced using a wide selection of demographic, geographic, census and lifestyle information for over 95 million households and 153 million individuals to identify patterns and probabilities of behavior. The Company licenses this information from a variety of leading data compilers. The combination of each client's proprietary customer information with external data files provides a customized profile of a client's customer base, enabling the client, through the use of the Company's behavior modeling and analysis services, to design a direct marketing program for its customers. Through the development of a scoring model, the client can segment its database and determine its best customers and prospects in each marketplace. The entire process results in a customized direct marketing program that can be targeted to distinct audiences with a high propensity to buy the client's products or services. Because of the dynamic nature and complexity of these databases, clients frequently request that the Company update such databases with the results of recent marketing programs and periodically perform list processing services as part of the client's ongoing direct marketing efforts. Data Processing: The Company's primary data processing service is to manage from the Company's data center, all or a portion of a client's marketing information processing needs. After migrating a client's raw data to the Company's data center, the Company's technology allows the client to continue to request and access all available information from remote sites. The database can also be verified for accuracy and overlaid with external data elements to further identify specific consumer behavior. Other data processing services provided include migration (takeover and turnover) support for database maintenance or creation, merge/purge, data overlay and postal qualification. The Company also offers on-line and batch processing capacity, technical support, and data back-up and recovery. List Services: List processing includes the preparation and generation of comprehensive name and address lists which are used in direct marketing promotions. The Company's state-of-the-art data center in New York City and large volume processing capabilities allow the Company to meet the list processing needs of its clients through its advanced list processing software applications, list brokerage and list management operations. The Company customizes list processing solutions by utilizing a variety of licensed software products and services, such as Address Conversion and Reformat, Address Standardization and Enhanced Merge/Purge, as well as 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, most of whom are hired 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 over 75 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. Custom Telemarketing/Telefundraising Services: Custom telemarketing/ telefundraising services are designed according to the client's existing database and any other databases which may be purchased or rented on behalf of the client to create a direct marketing program or fundraising campaign to achieve specific objectives. After designing the program according to the marketing information derived from the database analysis, it is conceptualized in terms of the message content of the offer or solicitation, and an assessment is made of other supporting elements, such as the use of a direct mail letter campaign. Typically, a campaign is designed in collaboration with a client, tested for accuracy and responsiveness and adjusted accordingly, after which the full campaign is commenced. The full campaign runs for a mutually agreed period, which can be shortened or extended depending on the results achieved. An important feature of the custom telemarketing/telefundraising campaign is that it can be implemented either on-site at a client-provided facility or at the Company's calling center in Berkeley, California. On-site campaigns are generally based on what is called a "relationship" or "affinity" sale. Telemarketing campaigns often require multiple calls whereby a caller must be knowledgeable about the organization and the subject matter and will seek to engage a prospect selected from the client's database in an extended conversation which serves to: (i) gather information; (ii) convey the offer, describe its merits and cost, and solicit gifts or donations; and (iii) conclude with a purchase, donation or pledge. Telefundraising from the Company's calling center usually involves campaigns that do not use the multiple call format, but instead use computer driven predictive dialing systems which are designed to maximize the usage rate for all telephones as the system works through the calling database. 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. Marketing and Sales - ------------------- The Company's marketing strategy is to offer customized solutions to clients' database management, telemarketing/telefundraising 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 services and customized telemarketing/telefundraising services. The Company markets its database management services, custom telemarketing/telefundraising services and other direct 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, custom telemarketing/telefundraising 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 database management services, custom telemarketing/ telefundraising services and other 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 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. Personnel and Training - ---------------------- The Company believes that the quality and training of its employees is a key element of client satisfaction. The Company further believes that its strategy of recruiting personnel with industry specific experience, technical knowledge or affinities related to the client's purpose, particularly with respect to its custom telemarketing/telefundraising on-site calling services, attracts a more effective work force. The Company offers in-house and on-the-job training programs for personnel, including instruction on the nature and purpose of the specific projects, as well as regular briefings concerning regulatory matters and proper telemarketing and data capture techniques. Calls are typically made from a lead provided by the client or other third party sources. Callers are always required to identify themselves and the institution they represent, in advance of any dialogue. Since calls are meant to be non-intrusive and friendly, it often takes two or more calls to a customer to confirm a transaction. Approximately 80% of the Company's service representatives are part-time employees who are compensated on an hourly basis with a commission and/or performance bonus, which is typical for the telemarketing industry. The Company's use of calling facilities provided by a client relates in part to a high level of dedication to customer service and to the localized talent pool found by the Company to be most effective for employee retention. None of the Company's employees is represented by a labor union and the Company believes it has satisfactory relations with its employees. Client Base - ----------- The Company believes that its large and diversified client base is a primary asset which contributes to stability and the opportunity for growth in revenues. The Company has approximately 600 clients who utilize various database management services, custom telemarketing/telefundraising services and other direct marketing services. These clients are comprised of leading arts and cultural institutions, advocacy groups, and commercial companies in the publishing, live entertainment and events marketing, public broadcasting, financial services (including credit card, home mortgage and home equity services), education, travel and leisure and healthcare industries. No single client accounted for more than 5% of such total revenue in fiscal 1997. Quality Assurance - ----------------- Each of the Company's operating businesses has consistently emphasized service and employee training. In particular, the Company's quality assurance program with respect to its telemarketing/ telefundraising services includes the selection and training of qualified calling representatives, the training and professional development of call center management personnel, monitoring of calls and sales verification and editing. Both the Company and its clients are able to perform real time on-site and remote call monitoring to maintain quality and efficiency. Sales confirmations may be recorded (with customer consent), and calls may also be monitored by management personnel to verify the accuracy and authenticity of transactions. The Company diligently pursues its policies of good practice and has had satisfactory experience with regulators concerning its activities. Although the telemarketing industry has had, in certain instances, a history of abusive practices, many of which have been targeted at the elderly or uneducated segments of the population, the individuals targeted by the Company generally consist of affinity group members who are receptive to the calls, often volunteering valuable marketing information to the institution for which the representative is calling. 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 Abacus Direct, Acxiom Corporation, Dimac Corporation, Direct Marketing Technology, Fair-Isaac, Inc., Harte-Hanks Communications, Inc. and May & Speh, Inc. The Company's principal competitors in the custom telemarketing/telefundraising field are Arts Marketing, Inc. and Ruffalo, Cody & Associates, and, with respect to the operation of calling centers, The Share Group and Great Lakes Communications. Competitive Strengths - --------------------- Customized Premium Services: The Company believes that a competitive advantage of its services is the custom nature and value-added component it provides within a client's overall marketing process. This customization arises from enhancing and integrating data provided by clients to achieve the most productive and cost-effective marketing program. The Company not only collaborates on message content but also assists its client in identifying which medium or mix of mediums is best suited to implement the client's marketing program. Long-Term Client Relationships and Recurring Revenue Streams: The Company believes that the reason the majority of its client-base stays with the Company for many years is because of the Company's ability to provide customized, quality services. The Company is able to gain knowledge of and experience with a client's customer base and market dynamics. The Company seeks recurring revenues by becoming an integral part of clients' marketing programs along with offering a wide breadth of ongoing interrelated services. Although many of the Company's arrangements with clients are entered into on a project by project basis, it has been the Company's experience that its database management clients cannot easily change service providers due to the breadth and nature of the ongoing services provided. These services often become a key element of the clients' marketing operations and there are significant costs associated with making such a change. Continuity of Management, Industry Specific Expertise and Investment in Technical Personnel: The Company believes that its industry focused approach creates a competitive advantage over other providers of database management, custom telemarketing/telefundraising services and other direct marketing services who have a more generalized approach. The Company has hired and seeks to hire many individuals with industry specific experience who understand the nature of the clients' customers and the dynamics of the marketplace. The Company considers such personnel better able to apply the Company's proprietary software programs to meet the client's direct marketing and data processing needs. State-of-the-Art Technology: The Company's investment in state-of-the-art technology has enabled it to provide quality service to clients for whom the use of timely, accurate data is critical for the success of their direct marketing programs. This is particularly true with respect to the Company's database management services designed to drive higher response rates within a specific time period allotted for a marketing program. In addition, much outsourced data processing requires prompt turnaround time for marketing decisions. Technological Resources and Facilities - -------------------------------------- The Company maintains a state-of-the-art outbound telemarketing/ telefundraising calling center in Berkeley, California. The Berkeley calling center increases the efficiency of its outbound calling by using a computerized predictive dialing system supported by a UNIX-based call processing server system and networked computers. The predictive dialing system, using relational database software, supports 72 outbound telemarketers and maximizes calling efficiency by reducing the time between calls for each calling station and reducing the number of calls connected to wrong numbers, answering machines and electronic devices. The system provides on-line real time reporting of caller efficiency and client program efficiency as well as flexible and sophisticated reports analyzing caller sales results and client program results against Company and client selected parameters. The Berkeley calling center has the capacity to serve up to 15 separate clients or projects simultaneously and can produce 27,000 valid contacts per week (1,400,000 per year) or 3,400 calling hours per week (176,800 per year) on a single shift basis. A valid contact occurs when the caller speaks with the intended person and receives a "yes," "no" or "will consider" response. The existing platform can be expanded to accommodate 100 predictive dialing stations with a single shift capacity of approximately 1,900,000 valid contacts per year. The Company leases all of its real property. The Company leases facilities for its headquarters and its sales and service offices in New York City and Los Angeles, California, its data center in New York City and its telemarketing calling center in Berkeley, California. To accommodate its rapid growth, the Company plans to expand its data center and administrative offices in New York during fiscal 1998. 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 1998, except for its planned expansion in New York. The Company has begun negotiations for additional space in the building it currently occupies and believes such space is readily available at commercially reasonable rates and terms. The Company also believes that its technological resources, including the mainframe computer and other data processing and data storage computers and electronic machinery at its data center in New York City, as well as its related operating, processing and database software, are all adequate for its needs through fiscal 1998. Nevertheless, the Company intends to expand its technological resources, including computer systems, software, telemarketing equipment and technical support. Any such expansion may require the leasing of additional operating office space. Intellectual Property Rights - ---------------------------- The Company relies upon its trade secret protection program and non-disclosure safeguards to protect its proprietary computer technologies, software applications and systems know-how. In the ordinary course of business, the Company enters into license agreements and contracts which specify terms and conditions prohibiting unauthorized reproduction or usage of the Company's proprietary technologies and software applications. In addition, the Company generally enters into confidentiality agreements with its employees, clients, potential clients and suppliers with access to sensitive information and limits the access to and distribution of its software documentation and other proprietary information. No assurance can be given that steps taken by the Company will be adequate to deter misuse or misappropriation of its proprietary rights or trade secret know-how. The Company believes that there is rapid technological change in its business and, as a result, legal protections generally afforded through patent protection for its products are less significant than the knowledge, experience and know-how of its employees, the frequency of product enhancements and the timeliness and quality of customer support in the usage of such products. Government Regulation and Privacy Issues - ---------------------------------------- The telemarketing industry has become subject to an increasing amount of federal and state regulation during the past five years. The federal Telephone Consumer Protection Act of 1991 (the "TCPA") limits the hours during which telemarketers may call consumers and prohibits the use of automated telephone dialing equipment to call certain telephone numbers. The federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 (the "TCFAPA") broadly authorizes the Federal Trade Commission (the "FTC") to issue regulations prohibiting misrepresentations in telemarketing sales. The FTC's new telemarketing sales rules prohibit misrepresentations of the cost, terms, restrictions, performance or duration of products or services offered by telephone solicitation, prohibit a telemarketer from calling a consumer when that consumer has instructed the telemarketer not to contact him or her, prohibit a telemarketer from calling prior to 8:00 a.m. or after 9:00 p.m. and specifically address other perceived telemarketing abuses in the offering of prizes and the sale of business opportunities or investments. Violation of these rules may result in injunctive relief, monetary penalties or disgorgement of profits and can give rise to private actions for damages. While the FTC's new rules have not caused the Company to alter its operating procedures, additional federal or state consumer-oriented legislation could limit the telemarketing activities of the Company or its clients or significantly increase the Company's costs of regulatory compliance. Several of the industries which the Company intends to serve, including the financial services, and healthcare industries, are subject to varying degrees of government regulation. Although compliance with these regulations is generally the responsibility of the Company's clients, the Company could be subject to a variety of enforcement or private actions for its failure or the failure of its clients to comply with such regulations. In addition, the growth of information and communications technology has produced a proliferation of information of various types and has raised many new issues concerning the privacy of such information. Congress and various state legislatures have considered legislation which would restrict access to, and the use of, credit and other personal information for direct marketing purposes. The direct marketing services industry, including the Company, could be negatively impacted in the event any of these or similar types of legislation are enacted. Currently the Company trains its service representatives and other personnel to comply with the regulations of the TCPA, the TCFAPA and the FTC and the Company believes that it is in substantial compliance with all such regulations. All-Comm Holdings, Inc. - ----------------------- In 1979, under prior management, the Company, through its wholly-owned subsidiary, acquired 6.72 acres of undeveloped land on the Colorado River in Laughlin, Nevada, for approximately $560,000. On August 16, 1996 the land was sold to an independent third party, via a public auction, for $952,000 in cash, resulting in a net gain of approximately $90,000 over book value, as adjusted for capitalized costs and assessments during the holding period. In June, 1997, All-Comm Holdings, Inc. was dissolved. Employees - --------- At September 24, 1997, the Company, SD&A, Metro and Pegasus collectively have approximately 1,150 employees, of whom approximately 1,000 are part-time. None of the Company's employees are covered by collective bargaining agreements and the Company believes that its relations with its employees are good. Executive Officers and Directors of the Registrant and Significant Employees - ---------------------------------------------------------------------------- The Company's executive officers, directors and significant employees and their positions with MSGI are as follows: Name Age Position - ---- --- ------------------------------------------- J. Jeremy Barbera 41 Chairman of the Board of Directors, Chief Executive Officer, President and Chief Operating Officer Scott Anderson 40 Chief Financial Officer and Treasurer Alan I. Annex 35 Director and Secretary S. James Coppersmith 64 Director Seymour Jones 66 Director C. Anthony Wainwright 64 Director Robert M. Budlow 36 Vice President of MSGI and President of Metro Direct Janet Sautkulis 41 Chief Operating Officer, Metro Direct Michael T. Reynolds 47 Executive Vice President and General Manager of Metro Direct Stephen Dunn 47 Vice President of MSGI and President and Chief Executive Officer of Stephen Dunn & Associates, Inc. Thomas Scheir 44 Chief Operating Officer, Stephen Dunn & Associates, Inc. Mr. Barbera has been Chairman, Chief Executive and Operating Officer and President of the Company since April 1997 and was a Director and Vice President of the Company from October 1996 to April 1997. He has been Chief Executive Officer of Metro since its formation in 1987. Mr. Barbera has sixteen years of experience in data management services, and over twenty years of experience in the entertainment marketing area. Mr. Anderson has been Chief Financial Officer of the Company since May 1996, Treasurer since May, 1997, and was Controller from May 1995 to May 1996 and a Director of the Company from May 1996 to August 1996. Prior thereto, from December 1994 to April 1995, he was associated with the accounting firm of Coopers & Lybrand L.L.P., and, from 1988 to 1994, he was a manager in the assurance department of an affiliate of the accounting firm of Deloitte & Touche, LLP. Mr. Anderson is a Certified Public Accountant. Mr. Annex has been a Director and Secretary of the Company since May 1997. He has been a partner in the law firm of Camhy Karlinsky & Stein LLP since July 1995, where he practices corporate and securities law. Camhy Karlinsky & Stein LLP is the Company's legal counsel. From July 1994 to June 1995, Mr. Annex was Of Counsel to said firm. Prior thereto he was associated with Proskauer Rose, LLP. Mr. Annex is also a director of Pacific Coast Apparel, Inc. Mr. Coppersmith has been a Director of the Company since June 1996. Since 1994, Mr. Coppersmith has been Chairman of the Board of Trustees of Boston's Emerson College. Until his retirement in 1994, he held various senior executive positions with Metromedia Broadcasting where he managed its television operations in Los Angeles, New York, and Boston and served as President and General Manager of Boston's WCVB-TV, an ABC affiliate owned by The Hearst Corporation. Mr. Coppersmith also serves as a director for WABAN, Inc., Sun America Asset Management Corporation, Chyron Corporation, Uno Restaurant Corp., Kushner-Locke, Inc., and The Boston Stock Exchange. Mr. Jones has been a Director of the Company since June 1996. Since September 1995, Mr. Jones has been a professor of accounting at New York University. Prior thereto, from April 1974 to September 1995, Mr. Jones was a senior partner of the accounting firm of Coopers & Lybrand, L.L.P. Mr. Jones has over 35 years of accounting experience and over ten years of experience as an arbitrator and as an expert witness, particularly in the area of mergers and acquisitions. Mr. Wainwright has been a Director of the Company since August 1996 and was also a Director of the Company from the acquisition of Alliance until May 1996. Prior thereto, he was a director of Alliance. Mr. Wainwright is currently Vice Chairman of the advertising agency McKinney & Silver and was Chairman and Chief Executive Officer of the advertising firm Harris Drury Cohen, Inc., from 1995 to 1996. From 1994 to 1995, he served as a senior executive with Cordient PLC's Compton Partners, a unit of the advertising firm Saatchi & Saatchi World Advertising, and, from 1989 to 1994, as Chairman and Chief Executive Officer of Campbell Mithun Esty, a unit of Saatchi & Saatchi in New York. Mr. Wainwright also serves as a director of Caribiner International, Gibson Greetings, Inc., Del Webb Corporation and American Woodmark Corporation. Mr. Budlow has been Vice President of the Company since October 1996 and President of Metro since April 1997. Prior thereto, he was Executive Vice President and Chief Operating Officer of Metro since 1990. He has eleven years of experience in database management services and subscription, membership and donor renewal programs. Ms. Sautkulis serves as Chief Operating Officer of Metro Direct, having previously served as Executive Vice President. Prior to joining Metro Direct, she held various positions at Jetson Direct Mail and Belth Associates. Ms. Sautkulis has more than twenty years experience in database management, list brokerage and lettershop services specializing in the business-to-business sector. Mr. Reynolds joined Metro in June 1997, as Executive Vice President and General Manager. He served the Metromail Corporation from 1990 to 1997, most recently as Senior Vice President and General Manager, List Enhancement Services. From 1986 to 1990, he was Director of Sales and Marketing at Acxiom Corporation. Prior to his eleven years in the Direct Marketing industry, he spent eight years at IBM in various sales and marketing management positions. Mr. Dunn has been Vice President of the Company since September 1996 and has also been President and Chief Executive Officer of SD&A, which he co-founded, since its formation in 1983. Previously, Mr. Dunn served as a consultant for the Los Angeles Olympic Organizing Committee for the Olympic Arts Festival, as Director of Marketing for the New World Festival of the Arts, and as Director of Marketing for the Berkeley Repertory Theater. Mr. Scheir has been Vice President and Chief Operating Officer of SD&A since September 1996. Prior thereto, from 1990 to September 1996, he was Chief Financial Officer of SD&A, and from 1983 to 1990, he served as Business Manager of SD&A. Prior to joining SD&A, Mr. Scheir was List Manager with the San Francisco Symphony's marketing department. Item 2 - Properties - ------------------- The Company, through All-Comm Holdings, Inc., owned the property identified in Item 1. The Company leases approximately 2,000 square feet of office space in Los Angeles, California. The lease runs through May 31, 1998. SD&A leases approximately 5,500 square feet of office space in Venice, California from its founder and president, 6,600 square feet in Berkeley, California, and 250 square feet in Patterson, New York. These leases range from month-to-month, to August 2001, and include options to renew. Metro currently leases approximately 14,000 square feet of office and data processing space in New York, New York, which it plans to expand in fiscal 1998, to accommodate its rapid growth. The Company believes its facilities are suitable and adequate for the purposes for which they are used and are adequately maintained. Item 3 - Legal Proceedings - -------------------------- The Company has been party to minor legal proceedings. The outcome of these legal proceedings are not expected to have a material adverse effect on the consolidated financial condition, liquidity or expectations of the Company, based on the Company's current understanding of the relevant facts and law. Item 4 - Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ On June 30, 1997, the Company held a Special Meeting of Shareholders to vote on management's proposal to amend the Company's Amended and Restated Articles of Incorporation to change the name of the Company from All-Comm Media Corporation to Marketing Services Group, Inc. The shares voted were as follows: For 8,484,960 Against 11,805 Abstentions 1,302 Broker non-votes None PART II Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters - ------------------------------------------------------------------------------ The common stock of the Company previously traded on the NASDAQ Small-Cap MarketSM under the symbol SPTK. As approved by the shareholders on August 22, 1995, the Company changed its name to All-Comm Media Corporation and the symbol was changed to ALCM. As approved by the stockholders on June 30, 1997, the Company changed its name to Marketing Services Group, Inc. and the symbol was changed to MSGI. The following table reflects the high and low sales prices for the Company's common stock for the fiscal quarters indicated, as furnished by the NASD, adjusted to reflect a one-for-four reverse stock split, effected August 22, 1995: Common Stock Low Sales Price High Sales Price Fiscal 1997 Fourth Quarter $1.69 $3.56 Third Quarter 2.00 5.25 Second Quarter 3.19 5.63 First Quarter 4.63 6.13 Fiscal 1996 Fourth Quarter $2.13 $6.38 Third Quarter 3.00 4.44 Second Quarter 1.88 5.00 First Quarter 3.63 8.25 As of June 30, 1997, there were approximately 900 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 six 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 - Management's Discussion and Analysis or Plan of Operation - ------------------------------------------------------------------ Introduction This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flow of the Company for the three year period ended June 30, 1997. This should be read in conjunction with the financial statements, and notes thereto, included in this Annual Report. As more fully described in Footnote 4 to the consolidated financial statements, on April 25, 1995, the Company purchased 100% of the stock of Alliance which had simultaneously acquired SD&A. These acquisitions have been reflected in the consolidated financial statements using the purchase method of accounting. Accordingly, the Consolidated Statement of Operations and Consolidated Statement of Cash Flows include the operations of Alliance and SD&A starting on April 25, 1995. From April 25, 1995 through September 30, 1996, the Company operated as a direct marketing services provider with its initial concentration as a telemarketing and telefundraising company that specialized in direct marketing services for the arts, educational and other cultural organizations. As more fully described in Note 3 to the consolidated financial statements included herein, effective October 1, 1996 the Company purchased 100% of the stock of Metro Services Group, Inc., to be renamed Metro Direct, Inc. ("Metro"). This acquisition is reflected in the consolidated financial statements using the purchase method of accounting starting October 1, 1996. Metro develops and markets information-based services used primarily in direct marketing by a variety of commercial and tax-exempt organizations. In the year ended June 30, 1995, ("Fiscal 1995"), the Company discontinued the operations of Sports-Tech International, Inc. and High School Gridiron Report. In Fiscal 1995, the Company sold Sports-Tech International and closed the HSGR operation. The ultimate sale of STI resulted in a gain of $322,000. The Consolidated Financial Statements have been reclassified to report the net assets, operating results, gain on disposition and cash flows of these operations as discontinued operations. With the disposition of the STI operations, closure of the HSGR operations and the acquisition of Alliance and Metro, the Company is now operating in the direct marketing industry. Results of Operations 1997 compared to 1996 Revenues of $24.1 million for the year ended June 30, 1997 ("Fiscal 1997") increased by $8.2 million over revenues of $15.9 million during the year ended June 30, 1996 ("Fiscal 1996"), principally due to the inclusion of the operations of Metro effective October 1, 1996. Fiscal 1997 revenues from SD&A's off-site campaigns totaled $3.1 million (19.4% of SD&A revenues), an increase of $0.4 million over Fiscal 1996. Fiscal 1997 revenues from on-site telemarketing and telefundraising campaigns totaled $12.9 million (80.6% of SD&A revenues), a decrease of $0.4 million over Fiscal 1996. On average, SD&A's margins relating to off-site campaigns are generally higher than margins relating to on-site campaigns. Salaries and benefits of $15.0 million in Fiscal 1997 increased by $2.3 million over salaries and benefits of $12.7 million in fiscal 1996, principally due to the inclusion of $1.8 million from Metro. SD&A increased by $0.6 million principally due to the minimum wage increase and changes in campaign efficiencies. Corporate administrative salaries decreased by $0.1 million due to corporate restructuring and resulting administrative headcount reductions. In addition, in Fiscal 1997 the Company incurred a non-recurring, non-cash charge of $1,650,000 to compensation expense relating to options granted to two former principal executive officers. Such charge was incurred because the exercise price of each 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 date 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. Direct costs of $5.6 million in Fiscal 1997 increased by $4.8 million over direct costs of $0.8 million in Fiscal 1996, principally due to the inclusion of Metro. Selling, general and administrative expenses of $2.7 million in Fiscal 1997 increased by $1.0 million or 59.5% over $1.7 million of such expenses in Fiscal 1996, principally due to the inclusion of $0.8 million from Metro. The remaining increase of $0.2 million which came from SD&A resulted from increased travel and training principally as a result of bringing campaign managers to Los Angeles for training on SD&A's new on-site software, combined with increased rent, business taxes and insurance associated with moving and expanding the Berkeley Calling Center in August 1996. Restructuring costs of $1.0 million were incurred in the current year 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. Professional fees of $0.9 million in Fiscal 1997 increased by $0.3 million, or 39%, over $0.6 million in Fiscal 1996, principally to the inclusion of $0.2 million from Metro, as well as a non-recurring charge of $0.1 million in consulting fees attributable to the value of warrants acquired by former consultants during the period. Depreciation expense of $250,000 in Fiscal 1997 increased by $110,000 over $140,000 in Fiscal 1996 including $86,000 from Metro. The remaining increase resulted principally from leasehold improvements made in the move and expansion of SD&A's Berkeley Calling Center. Amortization of intangible assets of $719,000 in Fiscal 1997 increased by $357,000 over $362,000 in Fiscal 1996. Of the increase, $338,000 is attributable to the amortization of costs in excess of net tangible assets acquired in the Metro acquisition starting on October 1, 1997, including the amortization of $250,000 in proprietary software over its expected period of benefit of five years. A value of $650,000 was assigned to the covenants-not-to-compete with the former principals of Metro and is being amortized over their three year lives. The unassigned excess costs are being amortized over their expected period of benefit of forty years. Amortization of the goodwill and a covenant-not-to-compete associated with the Alliance and SD&A acquisition on April 25, 1995 increased by $22,000 in Fiscal 1997 due to an increase in goodwill of $850,000 as of June 30, 1996 for payments made to the former owner of SD&A resulting from achievement of defined results of operations of SD&A for the year then ended. Amortization expense is expected to increase during the year ended June 30, 1998 due to the inclusion of a full year of Metro, plus amortization of amounts payable to the former owner of SD&A for achieving defined results of operations for the two years ended June 30, 1997. 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 of $530,000 in Fiscal 1997 increased by $25,000 over $505,000 in Fiscal 1996. The current year included $128,000 on the Company's redeemable convertible preferred stock, prior to its conversion and repurchase in the December 1996 recapitalization, $78,000 payable on notes to the former owners of Metro, $55,000 on the Company's $2.2 million in convertible notes (including amortization of issuance costs) and $42,000 from the inclusion of Metro. These amounts were offset by reductions of $226,000 due to principal repayments on the SD&A seller debt and reductions in the interest rate combined with $46,000 incurred in Fiscal 1996 for expenses incurred from warrants issued in financing transactions and $6,000 of other minor net reductions. Interest expense is expected to increase slightly at the operating subsidiary level due to new financing arrangements, offset by significant reductions at the corporate level upon further pay down and conversions of existing corporate debt. The Company recorded a net gain of $90,000 from the sale of its undeveloped parcel of land in Laughlin, Nevada in August 1996, which gain was recorded net of commissions and related selling expenses. The provision for income taxes in Fiscal 1997 of $109,000 decreased by $32,000 over the provision of $141,000 in Fiscal 1996. The provision results from state and local taxes incurred on taxable income at the operating subsidiary level which can not be offset by losses incurred at the corporate level. Taxes of $64,000 resulted from inclusion of Metro and were offset by reductions of $96,000 due primarily to lower taxable income and changes in filing status at SD&A. Results of Operations 1996 compared to 1995 Revenues of $15.9 million in Fiscal 1996 increased by $12.3 million over Fiscal 1995 revenues, principally due to the inclusion of a full year of operations of SD&A in Fiscal 1996 as compared with the period from the date of acquisition (April 25, 1995) to June 30, 1995 in Fiscal 1995. Fiscal 1996 revenues from off-site campaigns totaled $2.7 million (16.7% of revenues) and revenues from on-site telemarketing and telefundraising campaigns totaled $13.2 million (83.3% of revenues). During Fiscal 1995 and 1996, the Company's margins relating to off-site campaigns were generally higher than margins relating to on-site campaigns. Salaries and benefits of $12.7 million in Fiscal 1996 increased by $9.6 million over salaries and benefits of $3.1 million in Fiscal 1995, principally due to the inclusion of a full year of operations of SD&A in Fiscal 1996. As a percentage of revenues, however, salaries and benefits declined from 86.5% to 80.0% because, in Fiscal 1995 and Fiscal 1996, the Company had a full year of administrative salaries and benefits at the corporate level (including administrative salaries and benefits associated with the Company's former management prior to the acquisition of Alliance) but only approximately two months of revenues from the operations of SD&A in Fiscal 1995. Direct costs of $0.8 million in Fiscal 1996 increased by $0.7 million over direct costs of $0.1 million in Fiscal 1995, principally due to the inclusion of costs associated with the Berkeley calling center operations for all of Fiscal 1996 as well as $0.2 million in costs associated with advertising for staff for on-site campaigns in Fiscal 1996. Selling, general and administrative expenses of $1.7 million in Fiscal 1996 increased by $0.6 million, or 59%, over $1.1 million of such expenses in Fiscal 1995, principally due to the inclusion of a full year of operations of SD&A in Fiscal 1996. Professional fees of $0.6 million in 1996 increased by $166,323, or 36.2%, over professional fees of $0.5 million in Fiscal 1995, principally due to legal and accounting fees incurred in connection with the evaluation of potential acquisitions and financing sources. Depreciation expense of $140,000 in fiscal 1996 increased by $88,000 over $52,000 in 1995 due to a full year of depreciation at SD&A. Amortization of intangible assets of $0.4 million in Fiscal 1996 increased by $0.3 million over amortization of approximately $65,000 in Fiscal 1995, due to the amortization of the goodwill and a covenant-not-to-compete associated with the Alliance and SD&A acquisitions on April 25, 1995. The Company had other expense of $0.5 million in Fiscal 1996 compared to other income of $1.2 million in Fiscal 1995, a decrease of $1.7 million, principally due to increases in Fiscal 1996 interest expense related to the SD&A Seller Debt. In Fiscal 1995, the Company had nonrecurring net gains from sales of securities of $1.6 million, which were partially offset by a loan commitment fee of $0.3 million in connection with the original purchase of such securities. The provision for income taxes in Fiscal 1996 of $141,000 increased by approximately $66,000, or 88.1%, over the provision for income taxes of $75,000 in 1995. The provision for income taxes increased, despite losses from continuing operations, as a result of state and local taxes incurred on taxable income at the operating subsidiary level. Under applicable tax law, such taxes at the operating subsidiary level could not be offset by losses incurred at the corporate level. The gain on sale of, and loss from, discontinued operations in Fiscal 1995 relates to the STI and HSGR operations which were either sold or closed in Fiscal 1995 as a condition precedent to the acquisition of Alliance. No amounts related to discontinued operations were incurred in Fiscal 1996. As a result of the foregoing factors, the Company had a net loss of $1.1 million in Fiscal 1996 as compared to net income of $0.1 million in 1995. Capital Resources and Liquidity Historically, the Company has funded its operations, capital expenditures and acquisitions primarily through cash flow from operations, private placements of common and preferred stock, and its SD&A credit facility. Cash used for operating activities totaled $2,664,000 for fiscal 1997. Fiscal 1997 operating activities included cash for non-recurring charges incurred on the Company's withdrawn public offering, as well as the corporate restructuring and related prior management settlement agreements. Cash provided by investing activities totaled $578,000 for fiscal 1997. These activities included $860,000 provided from the August 1996 sale of the Company's land in Laughlin, Nevada, and $207,000 net cash received from the inclusion of Metro. These were offset by $490,000 in purchases of property and equipment, principally computer hardware and software at Metro, and for expansion of capacity at SD&A's Berkeley Calling Center. The Company anticipates continued capital expenditures in fiscal 1998 for computer hardware and software at Metro and Pegasus. Net cash provided by financing activities during fiscal 1997 totaled $3,622,000. The Company had intended to raise funds for capital expenditures and debt repayment in fiscal 1997 via an underwritten public offering. Upon its withdrawal in February 1997, the Company pursued private financing including obtaining $2,065,000 through induced warrant exercises and $2,200,000 from the sale of convertible notes. $1,675,000 of the notes were converted to common stock subsequent to year end, through September 23, 1997. During fiscal 1997, Metro obtained a credit facility with a lender for up to $1.5 million, of which $812,000 was used as of June 30, 1997. Also during fiscal 1997, SD&A increased its $500,000 credit facility to $875,000, consisting of a $125,000 term loan and $750,000 line of credit, of which $104,000 and $746,000, respectively, were outstanding as of June 30, 1997. In August, 1997, SD&A replaced its credit facility with a line of credit for up to $2.0 million. Effective October 1, 1996, the Company purchased all of the outstanding stock of Metro for 1,814,000 shares of its common stock, valued at $7,256,000 and $1,000,000 in convertible notes. In April, 1997, the Company paid $100,000 of the Metro seller debt. An additional $400,000 of Metro seller debt, originally due in June 1998, was paid in July, 1997. As part if its December 23, 1996 recapitalization, the Company repurchased its Series C redeemable convertible preferred stock for a $1,000,000 note, which was paid in April, 1997. Also during fiscal 1997, the Company paid $467,000 of its SD&A seller debt. The Company believes that funds available from operations and its unused credit facilities will be adequate to finance its current operations and anticipated growth and meet planned capital expenditures and interest and debt obligations in its fiscal year ending June 30, 1998. In conjunction with the Company's acquisition strategy, additional financing may be required to meet potential acquisition payment requirements. The Company believes that it has the ability to raise funds through private placements or public offerings of debt and/or equity securities to meet these requirements. There can be no assurance, however, that such capital will be required or available at terms acceptable to the Company, or at all. The Company is engaged in ongoing evaluation of, and discussions with, third parties regarding possible acquisitions; however, the Company currently has no definitive agreements with respect to any significant acquisitions. Seasonality and Cyclicality: The businesses of SD&A and Metro tend to be seasonal. SD&A has higher revenues and profits occurring in the fourth fiscal quarter, followed by the first fiscal quarter. This is due to subscription renewal campaigns for SD&A's tax exempt clients, which generally begin in the spring time and continue during the summer months. Metro tends to have higher revenues and profits occurring in the second fiscal quarter, based on the seasonality of its clients' mail dates. New Accounting Pronouncements In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("SFAS 128") which is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted; however, restatement of all prior-period earnings per share data presented is required. The Company has not yet determined the effect SFAS 128 will have on its financial statements; however, the adoption is not expected to have a material impact on the financial position or results of operations of the Company. In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129"), which is required to be adopted by the Company in fiscal 1998. This Statement specifies certain disclosures about capital structure. Management does not expect that implementation of this Statement will have a significant impact on the financial statements of the Company. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. An enterprise that has no items of other comprehensive income in any period presented is not required to report comprehensive income. SFAS 130 is effective for fiscal years beginning after Decemebr 15, 1997. Management does not believe that the adoption of SFAS 130 will have a material impact on the Company's financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 is effective for fiscal years beginning after December 15, 1997. Management has not yet assessed the impact that the adoption of SFAS 131 will have on the Company's financial statements. Item 7 - Financial Statements - ----------------------------- The Consolidated Financial Statements required by this Item 7 are set forth as indicated in the index following Item 13(a)(1). Item 8 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - ----------------------------------------------------------------------------- None PART III The information required by this Part III (items 9, 10, 11 and 12) is hereby incorporated by reference from the Company's definitive proxy statement which is expected to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 not later than 120 days after the end of the fiscal year covered by this report. Certain information, with respect to the Company's executive officers, is set forth in Part I, under the caption "Executive Officers and Directors of the Registrant and Significant Employees." PART IV Item 13 - Exhibits and Reports on Form 8-K - ------------------------------------------ (A)(1) Financial statements - see "Index to Financial Statements" on page 30. (2) Exhibits: 3 (i) Amended and Restated Articles of Incorporation (b) 3 (ii) Certificate of Amendment to the Amended and Restated Articles of Incorporation of the Company (b) 3 (iii)Certificate of Amendment to the Articles of Incorporation for change of name to All-Comm Media Corporation (e) 3 (iv) By-Laws (b) 3 (v) Certificate of Amendment of Articles of Incorporation for increase in number of authorized shares to 36,300,000 total (h) 3 (vi) Certificate of Amendment of Articles of Incorporation for change of name to Marketing Services Group, Inc. (a) 10.1 1991 Stock Option Plan (c) 10.2 Operating Covenants Agreement, dated April 25, 1995, between Alliance Media Corporation and Mr. Stephen Dunn (d) 10.3 Pledge Agreement, dated as of April 25, 1995, between Alliance Media Corporation and Mr. Stephen Dunn (d) 10.4 Option Agreement (e) 10.5 Amendment to Option Agreement (f) 10.6 Memorandums of Understanding (f) 10.7 Sample Series B Convertible Preferred Stock Subscription Agreement (g) 10.8 Sample Private Placement Purchase Agreement for Convertible Notes (g) 10.9 Letter from Seller of SD&A agreeing to long-term obligation payment and restructuring (g) 10.10 Sample Convertible Notes Rescission Letter (h) 10.11 Sample Series C Convertible Preferred Stock Subscription Agreement (h) 10.12 Agreement and Plan of Merger between All-Comm Media Corporation and Metro Services Group, Inc. (i) 10.13 Security Agreement between Milberg Factors, Inc. and Metro Services Group, Inc. (j) 10.14 Security Agreement between Milberg Factors, Inc. and Stephen Dunn & Associates, Inc. (a) 10.15 Agreement and Plan of Merger between Marketing Services Group, Inc. and Pegasus Internet, Inc. (a) 10.16 J. Jeremy Barbera Employment Agreement (c) 10.17 Robert M. Budlow Employment Agreement (i) 10.18 Janet Sautkulis Employment Agreement (i) 10.19 Scott Anderson Employment Agreement (a) 10.20 Robert Bourne Employment Agreement (a) 10.21 Thomas Scheir Employment Agreement (a) 10.22 Krista Mooradian Employment Agreement (a) 10.23 Stephen Dunn Employment Agreement (d) 10.24 Severance Agreement with Barry Peters (j) 10.25 Severance Agreement with E. William Savage (j) 10.26 Form of Private Placement Agreement (j) 10.27 Form of Series B Conversion Agreement (k) 10.28 Form of Warrant Cancellation Agreement (k) 10.29 Form of Series C Repurchase and Exchange Agreement (k) 10.30 Form of Option Cancellation Agreement (k) 10.31 Form of Amended and Restated Series B Conversion Agreement (k) 10.32 Form of Amended and Restated Series C Repurchase and Exchange Agreement (k) 10.33 Form of Amended and Restated Option Cancellation Agreement (k) 11 Statement re: computation of per share earnings (a) 21 List of Company's subsidiaries (a) 23 Consent of Coopers and Lybrand 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 Registration Statement on Form SB-2, as amended, originally filed on October 17, 1996 (B) Reports on Form 8-K. The Company filed a Report on Form 8-K reporting the change of the name of the Company from All-Comm Media Corporation to Marketing Services Group, Inc., pursuant to approval by the shareholders at a special meeting on June 30, 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MARKETING SERVICES GROUP, INC. (Registrant) By: /s/ J. Jeremy Barbera J. Jeremy Barbera Chairman of the Board and Chief Executive Officer Date: September 26, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ------- /s/ J. Jeremy Barbera Chairman of the Board and September 26, 1997 J. Jeremy Barbera Chief Executive Officer (Principal Executive Officer) /s/ Scott Anderson Chief Financial Officer(Principal September 26, 1997 Scott Anderson Financial and Accounting Officer) /s/ Alan I. Annex Director and Secretary September 26, 1997 Alan I. Annex /s/ S. James Coppersmith Director September 26, 1997 S. James Coppersmith /s/ Seymour Jones Director September 26, 1997 Seymour Jones /s/ C. Anthony Wainwright Director September 26, 1997 C. Anthony Wainwright The foregoing constitute all of the Board of Directors. MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS [Items 7 and 13(a)] (1) FINANCIAL STATEMENTS: Page Report of Independent Public Accountants 30 Consolidated Balance Sheets June 30, 1997 and 1996 31 Consolidated Statements of Operations Years Ended June 30, 1997, 1996 and 1995 32 Consolidated Statements of Stockholders' Equity Years Ended June 30, 1997, 1996 and 1995 33 Consolidated Statements of Cash Flows Years Ended June 30, 1997, 1996 and 1995 34-36 Notes to Consolidated Financial Statements 37-55 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Stockholders of Marketing Services Group, Inc. We have audited the accompanying consolidated financial statements of Marketing Services Group, Inc. and Subsidiaries, listed in Items 7 and 13(a) of this Form 10-KSB. These financial statements are the responsibility of Marketing Services Group, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Marketing Services Group, Inc. and Subsidiaries as of June 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. Los Angeles, CA September 25, 1997 MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - JUNE 30, 1997 AND 1996 1997 1996 ---- ---- ASSETS (as restated) Current assets: Cash and cash equivalents $ 2,929,012 $ 1,393,044 Accounts receivable billed, net of allowance for doubtful accounts of $32,329 and $34,906 in 1997 and 1996, respectively 4,178,634 2,681,748 Accounts receivable unbilled 826,204 Land held for sale at cost 921,465 Other current assets 281,458 107,658 ----------- ----------- Total current assets 8,215,308 5,103,915 Property and equipment at cost, net 745,783 299,045 Intangible assets at cost, net 16,126,598 7,851,060 Other assets 303,583 47,046 ----------- ----------- Total assets $25,391,272 $13,301,066 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 1,661,708 $ 500,000 Trade accounts payable 2,317,482 470,706 Accrued salaries and wages 807,017 706,039 Other accrued expenses 734,958 758,112 Income taxes payable 41,757 10,000 Current portion of long term obligations 2,083,772 583,333 Related party payable 379,444 ----------- ----------- Total current liabilities 8,026,138 3,028,190 Long-term obligations 3,205,238 1,516,667 Related party payable 379,444 425,000 Other liabilities 94,638 80,315 ----------- ----------- Total liabilities 11,705,458 5,050,172 ----------- ----------- Commitments and contingencies: Redeemable convertible preferred stock - $.01 par value; consisting of 6,200 shares of Series B convertible preferred stock issued and outstanding at June 30, 1996, none at June 30,1997, 2,000 shares of Series C convertible preferred stock issued and outstanding at June 30, 1996, none at June 30, 1997 1,306,358 ----------- Stockholders' equity: Convertible preferred stock - $.01 par value; 50,000 shares authorized, none outstanding Common stock - authorized 36,250,000 and 6,250,000 shares of $.01 par value at June 30, 1997 and 1996, respectively; 11,438,564 and 3,198,534 shares issued, respectively 114,386 31,985 Additional paid-in capital 25,209,493 13,173,520 Accumulated deficit (11,502,596) (6,125,500) Less 11,800 shares of common stock in treasury, at cost (135,469) (135,469) ----------- ----------- Total stockholders' equity 13,685,814 6,944,536 ----------- ----------- Total liabilities and stockholders' equity $25,391,272 $13,301,066 =========== =========== See Notes to Consolidated Financial Statements. MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1997, 1996, AND 1995 1997 1996 1995 (as restated) Revenues $ 24,144,874 $15,889,210 $3,630,828 ----------- ----------- ---------- Operating costs and expenses: Salaries and benefits 14,967,420 12,712,150 3,139,232 Direct costs 5,587,343 807,057 102,052 Selling, general and administrative 2,717,583 1,703,355 1,068,675 Non-recurring compensation expense on option grants 1,650,000 Non-recurring restructuring costs 958,376 Professional fees 868,389 625,667 459,344 Depreciation 250,194 139,881 52,348 Amortization of intangible assets 719,400 361,537 65,101 ----------- ----------- ----------- Total operating costs and expenses 27,718,705 16,349,647 4,886,752 ----------- ----------- ----------- Loss from operations (3,573,831) (460,437) (1,255,924) ----------- ----------- ----------- Other income (expense): Non-recurring discounts on warrant exercises (113,137) Non-recurring withdrawn public offering costs (1,179,571) Gain from sales of securities 1,579,539 Loan commitment fee (300,000) Interest and other income 38,316 12,276 14,726 Interest expense (529,521) (505,128) (94,200) Gain from sale of land 90,021 ----------- ----------- ----------- Total (1,693,892) (492,852) 1,200,065 ----------- ----------- ----------- Loss from continuing operations before income taxes (5,267,723) (953,289) (55,859) Provision for income taxes (109,373) (141,084) (75,000) ----------- ----------- ----------- Loss from continuing operations before discontinued operations (5,377,096) (1,094,373) (130,859) Gain on sale of discontinued operations 322,387 Loss from discontinued operations (81,131) ----------- ----------- ----------- Net income (loss) $ (5,377,096) $(1,094,373) $ 110,397 =========== =========== =========== Net income (loss) attributable to common stockholders* $(20,199,038) $(1,189,341) $ 110,397 =========== =========== =========== Income (loss) per common share: From continuing operations $(2.85) $ (.39) $(.07) From discontinued operations .13 ------ ------ ----- Income (loss) per common share $(2.85) $ (.39) $ .06 ====== ====== ===== Weighted average common and common equivalent shares outstanding 7,089,321 3,068,278 1,807,540 ========= ========= ========= Primary and fully diluted income (loss) per common share are the same in each year. * The twelve months ended June 30, 1997 include the impact of non-recurring dividends on preferred stock for (a) $8.5 million non-cash dividend on conversion of Series B Preferred Stock; (b) $573,000 on repurchase of Series C Preferred Stock; (c) periodic non-cash accretions on preferred stock; and (d) $5.0 million in discounts on warrant exercises (see Notes 14 and 22). See Notes to Consolidated Financial Statements. MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (as restated)
Convertible Additional Accu- Preferred Stock Common Stock Paid-in mulated Treasury Stock Shares Amount Shares Amount Capital Deficit Shares Amount Totals ------ ------ --------- ------- ---------- ----------- ------ --------- --------- Balance June 30, 1994 1,436,833 $14,368 $5,928,542 $(5,141,524) (11,800) $(135,469) $ 665,917 Issuance of restricted shares for litigation settlement 37,500 375 149,625 150,000 Issuance of restricted shares for merger with Alliance Media Corp. 1,025,000 10,250 2,734,750 2,745,000 Issuance of restricted shares as finders fees 42,500 425 138,325 138,750 Private placement of shares-cash 413,759 4,138 1,014,537 1,018,675 Shares issued upon exercise of stock options and warrants 72,500 725 207,193 207,918 Discounts granted on exercise of options 127,875 127,875 Net income 110,397 110,397 ------ ------ --------- ------- ---------- ----------- ------ --------- ---------- Balance June 30, 1995 3,028,092 30,281 10,300,847 (5,031,127) (11,800) (135,469) 5,164,532 Issuance of common shares as compensation to employees, directors and consultants 95,442 954 218,974 219,928 Sale of shares (including 12,500 to related parties) 75,000 750 119,250 120,000 Sale of Series A Preferred Stock 10,000 $100 686,669 686,769 Repurchase of Series A Preferred Stock (10,000) (100) (812,400) (812,500) Warrants issued with Preferred Stock 2,672,522 2,672,522 Warrants issued to consultants and creditors 82,626 82,626 Accretion of redeemable convertible preferred stock (94,968) (94,968) Net loss (1,094,373) (1,094,373) ------ ------ --------- ------- ---------- ----------- ------ --------- ---------- Balance June 30, 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 earnout 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 acqui- sition of Metro Services Group 1,814,000 18,140 7,237,860 7,256,000 Recapitalization: Conversion of 6,200 shares of Series B redeemable convertible preferred stock into common 2,480,000 24,800 1,661,288 1,686,088 Accretion on repurchase of 2,000 shares of Series C redeemable preferred stock (573,305) (573,305) Issuances of restricted stock in exchange for warrants 600,000 6,000 (6,000) Issuances of restricted stock for accrued interest on Series B&C redeemable convertible preferred stock 88,857 889 144,864 145,753 Issuances of restricted shares upon exercise of discounted warrants 3,152,500 31,526 2,033,600 2,065,126 Discounts granted on exercise of warrants 113,137 113,137 Issuances of warrants to consultants 76,000 76,000 Net loss (5,377,096) (5,377,096) ------ ------ ---------- -------- ----------- ------------ ------ --------- ----------- Balance June 30, 1997 11,438,564 $114,386 $25,209,493 $(11,502,596) (11,800) $(135,469) $13,685,814 ====== ====== ========== ======== =========== ============ ====== ========= ===========
See Notes to Consolidated Financial Statements. MARKETING SERVICES GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1997, 1996 AND 1995 1997 1996 1995 ----------- ----------- ----------- Operating activities: (as restated) Net income (loss) $(5,377,096) $(1,094,373) $ 110,397 Adjustments to reconcile loss to net cash used in operating activities: Gains from sales of securities (1,579,539) Gain on sale of STI (322,387) Gain on sale of land (90,021) Depreciation 250,194 139,881 52,348 Amortization 719,400 361,537 65,101 Loss on disposal of assets 35,640 30,319 Discount on exercise of warrants and options 127,875 Discounts on exercise of warrants 113,137 Compensation expense on option grants 1,650,000 Stock issuances to employees, directors and consultants 193,677 Accretion on note payable and redeemable stock 161,597 Warrant issuances to consultants and creditors 152,000 82,626 Promissory notes issued for settlement agreements 499,524 Accrued interest on redeemable convertible preferred stock 17,490 Changes in assets and liabilities net of effects from acquisition: Accounts receivable (483,959) (613,771) (377,631) Other current assets (119,263) 38,710 (16,844) Other assets (144,237) (8,346) 20,519 Trade accounts payable (312,493) 105,068 (147,360) Accrued expenses and other liabilities 259,314 (21,674) 6,757 Income taxes payable 22,225 (84,565) 55,000 Discontinued operations, net (152,662) ---------- ---------- ----------- Net cash used in operating activities (2,664,038) (883,740) (2,128,107) ---------- ---------- ----------- Investing activities: Proceeds from sales of investments in securities 2,682,811 Purchase of investment in securities (1,063,272) Proceeds from sale of STI 800,000 Proceeds from sales of fixed assets 11,000 Proceeds from sale of land 860,443 Acquisition of Alliance Media Corporation, net of cash acquired of $567,269 259,088 Acquisition of Metro Services Group, Inc., net of cash acquired of $349,446 207,327 Payments relating to acquisition of Alliance & SD&A (477,704) Purchase of property and equipment (489,846) (94,772) (43,905) Land development costs (10,526) ---------- ---------- ---------- Net cash provided by (used in) investing activities 577,924 (572,476) 2,635,196 ---------- ---------- ---------- Financing activities: Proceeds from exercise of warrants 2,065,125 Repurchase of preferred stock (812,500) Proceeds from convertible notes payable 2,200,000 Proceeds from issuances of common stock 120,000 1,226,593 Proceeds from issuances of preferred stock and warrants 5,000 4,570,682 Proceeds from (repayment of) land option (150,000) 150,000 Proceeds from bank loans and credit facilities 1,686,546 500,000 Repayments of bank loans and credit facilities (524,838) (49,694) (513,059) Payments on promissory notes (51,889) Proceeds from note payable other 1,000,000 Repayments of note payable other (1,000,000) (72,000) (1,072,000) Principal payments under capital lease obligation (41,195) Related party repayments (566,667) (2,775,000) (350,000) ---------- ---------- ---------- Net cash provided by financing activities 3,622,082 1,631,488 291,534 ---------- ---------- ---------- Net increase in cash and cash equivalents 1,535,968 175,272 798,623 Cash and cash equivalents at beginning of year 1,393,044 1,217,772 419,149 ---------- ---------- ---------- Cash and cash equivalents at end of year $2,929,012 $1,393,044 $1,217,772 ========== ========== ========== Supplemental disclosures of cash flow data: Cash paid during the year for: Interest $ 243,482 $ 455,276 $ 60,422 Financing charge $ 154,000 $300,000 Income tax paid $ 45,154 $ 155,025 $ 15,000 Supplemental scheduleof non cash investing and financing activities - ------------------------------------------------------------------- For the year ended June 30, 1997: In August, 1996, 7,925 net additional shares of common stock were issued upon exercise of stock options for 15,000 shares, using 7,075 outstanding shares as payment of the exercise price. In September, 1996, the Company issued 96,748 shares of common stock, valued at $425,000, as an earn out payment to the former owner of SD&A for achieving certain targeted earnings for the fiscal year ended June 30, 1996. During September, 1996, two former members of executive management were granted stock options for 600,000 shares of common stock as part of their employment agreements. Compensation expense of $1,650,000 was recognized for the difference between the exercise price and the fair market value at date of grant. On October 1, 1996, the Company issued 1,814,000 shares of its common stock and $1,000,000 face value in 6% convertible notes to acquire 100% of the outstanding stock of Metro Services Group, Inc. The debt was originally discounted to $920,000 to reflect an effective interest rate of 10%, increased to $943,806 in April, 1997, as a result of a $100,000 prepayment. At acquisition, assets acquired and liabilities assumed, less payments made for acquisition, were: Working capital, other than cash $ 389,310 Property and equipment (242,726) Other assets (50,000) Costs in excess of net assets of acquired company (8,236,046) Long-term debt, discounted 943,806 Other liabilities 146,983 Common stock issued 7,256,000 --------- $ 207,327 ========= On December 23, 1996, the Company issued 3,168,857 shares of its common stock and $1,000,000 face value in debt as part of a recapitalization. 6,200 shares of Redeemable Series B Preferred Stock were converted into 2,480,000 common shares; 2,000 shares of Redeemable Series C Preferred Stock were repurchased for $1,000,000 in notes; warrants for 3,000,000 shares were exchanged for 600,000 common shares and $145,753 in accrued interest was converted into 88,857 common shares. Interest expense for fiscal 1997 was $128,264 (see Note 15). In March, 1997, the Company entered into promissory notes payable for executive management settlement agreements at a discounted value of $499,524, of which $447,635 was unpaid at June 30, 1997. During March 1997, to raise $2.1 million in cash, the Company accepted offers from warrant holders to discount their exercise prices as an inducement to exercise. The non-cash value of the discounts totaled $5,088,637, of which $113,137 was expensed in fiscal 1997 and $4,975,500 was charged directly to paid in capital. In April, 1997, the Company made prepayments on a portion of discounted long-term debt to a former owner of Metro Services Group, Inc., resulting in non-cash accretion of $23,810 on the discounted debt and goodwill. Accretion of the discount on the unpaid notes was $33,333. On June 30, 1997, intangible assets were increased by $758,888, payable half in common stock and half in cash to the former owner of SD&A as additional consideration resulting from SD&A's achievement of defined results of operations, during fiscal 1997 (see Note 4). During fiscal 1997, the Company issued warrants to acquire common stock for consulting services valued at $152,000. On July 1, 1997, the Company consummated an agreement to purchase Pegasus Internet, Inc. At June 30, 1997, the Company has accrued $80,000 in unpaid acquisition costs. For the year ended June 30, 1996: In October, 1995, in accordance with the acquisition agreement between Alliance Media Corporation and the former owner of SD&A, the purchase price was increased by $85,699. In October, 1995, the Company issued 6,250 shares of common stock in settlement of a liability of $26,250. In November, 1995, a special county bond measure, with principal totaling $154,814, was assessed on the Company's land and was recorded as a land improvement, offset by a liability in accrued other expenses. In April, 1996, the Company issued 89,192 shares of common stock in settlement of liabilities to employees, directors and consultants of $193,678. During the year ended June 30, 1996, the Company issued warrants to consultants and creditors valued at $82,626. Accrued and unpaid interest on shares of redeemable convertible preferred stock during fiscal 1996 totaled $17,490. On June 30, 1996, intangible assets were increased by $425,000 for accrued restricted common stock payable to the former owner of SD&A as an additional payment resulting from SD&A achievement of defined results of operations. See Note 4. For the year ended June 30, 1995: In Fiscal 1995, the Company purchased all of the capital stock of Alliance Media Corporation for 1,025,000 shares of common stock valued at $2,745,000. Additionally, 37,500 shares of common stock valued at $100,000 were issued as finders fee. Other direct costs of the acquisition totaled approximately $500,000. In conjunction with the acquisition, net assets acquired and liabilities assumed, less payments prior to year end, were: Working capital, other than cash $ 601,729 Property and equipment (326,320) Costs in excess of net assets of companies acquired (7,337,870) Other assets (23,451) Long term debt 4,500,000 Common stock issued 2,845,000 --------- $ 259,088 ========= Five thousand shares of common stock valued at $38,750 were issued as a commission on the sale of STI during 1995. The Company issued 37,500 shares of common stock valued at $150,000 in Fiscal 1995 in settlement of a 1994 liability for early termination of a consulting agreement. See Notes to Consolidated Financial Statements. MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL: Marketing Services Group, Inc. ("MSGI" or the "Company") was formerly known as All-Comm Media Corporation and, prior to that, as Sports-Tech, Inc. On April 25, 1995, the Company, through a wholly-owned subsidiary, was merged with Alliance Media Corporation ("Alliance") and its wholly-owned subsidiary, Stephen Dunn & Associates, Inc. ("SD&A"). Upon consummation of the merger, the members of the board of directors of the Company resigned and a new board was appointed. SD&A provides telemarketing and telefundraising services to not-for-profit arts and other organizations principally in the United States. Effective October 1, 1996, the Company purchased 100% of the outstanding stock of Metro Services Group, Inc. (to be renamed Metro Direct, Inc.) ("Metro"). Metro develops and markets information-based services used primarily in direct marketing by a variety of commercial and tax-exempt organizations. The Company's mission is to create a growth-oriented direct marketing company through acquisitions and internal growth. Prior to the merger with Alliance, the Company's owned two operating subsidiaries, Sports-Tech International ("STI") and High School Gridiron Report ("HSGR"). STI was engaged in the sale of computer software, computer equipment and computer aided video systems used by sports programs at the professional, collegiate and high school levels. HSGR provided academic and video data to aid in pre-qualifying high school athletes to colleges and universities. In fiscal 1995, the Company discontinued the operations of STI and HSGR. With the disposition of the STI operations, closure of the HSGR operations and the acquisitions of Alliance and Metro, the Company is now operating in the direct marketing industry segment. The Company believes that funds available from operations and its unused credit facilities will be adequate to finance its current operations and anticipated growth and meet planned capital expenditures, interest and debt obligations in its fiscal year ending June 30, 1998. Thereafter, and in conjunction with the Company's acquisition and growth strategy, additional financing may be required to meet potential acquisition payment requirements. The Company believes that it has the ability to raise funds through private placements or public offerings of debt and/or equity securities to meet these requirements. There can be no assurance, however, that such capital will be required or available at terms acceptable to the Company, or at all. The Company is engaged in ongoing evaluation of, and discussions with, third parties regarding possible acquisitions; however, the Company currently has no definitive agreements with respect to any significant acquisitions. 2. SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation: The consolidated financial statements include the accounts of Marketing Services Group, Inc. and its wholly-owned subsidiaries: Alliance; SD&A; Metro; All-Comm Holdings, Inc. (formerly, Bullhead Casino Corporation), dissolved during fiscal 1997; All-Comm Acquisition Corporation (formerly, BH Acquisitions, Inc.), dissolved during fiscal 1997; Sports-Tech International, Inc., sold during fiscal year 1995; High School Gridiron Report, Inc., dissolved during fiscal year 1996; and BRST Mining Company, dissolved during fiscal year 1996. STI and HSGR are presented as discontinued operations in the consolidated financial statements. All material intercompany accounts and transactions are eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates and assumptions made in the preparation of the consolidated financial statements relate to the carrying value of intangible assets, deferred tax valuation allowance and the allowance for doubtful accounts. Actual results could differ from those estimates. Cash and Cash Equivalents/Statement of Cash Flows: Highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. Land held for Sale: The cost of acquiring, improving and planning the development of land was capitalized. Costs related to development were written off when such plans are abandoned. Interest cost was capitalized in periods in which activities specifically related to the development of the land took place. The land was valued at lower of cost or market. The land was sold on August 16, 1996. See Note 7. Property and Equipment: Property and equipment is recorded at cost less accumulated depreciation. Maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation and amortization of property and equipment sold or retired are removed from the accounts and resulting gains or losses are included in current operations. Depreciation and amortization are provided on a straight line basis over the useful lives of the assets involved, limited as to leasehold improvements by the term of the lease, as follows: Equipment...........................5 years Furniture and fixtures..............2 to 7 years Computer equipment and software.....3 to 5 years Leasehold improvements..............over the useful life of the assets or term of the lease, whichever is shorter Intangible Assets: Excess of cost over net assets acquired in connection with the Alliance and SD&A acquisitions are being amortized over the period of expected benefit of 40 years. Covenants not to compete are stated at cost and are amortized over the period of expected benefit. Proprietary software is amortized over its period of expected benefit of five years. For each of its investments, the Company assesses the recoverability of its goodwill, by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future cash flows over the remaining amortization period. If projected future cash flows indicate that unamortized goodwill will not be recovered, an adjustment will be made to reduce the net goodwill to an amount consistent with projected future cash flows discounted at the Company's incremental borrowing rate. Cash flow projections are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. No impairment has been recognized in the accompanying financial statements. Revenue recognition: Revenues represent fees earned by SD&A which are recorded when pledged cash is received for on-site campaigns and when services are provided for off-site campaigns. Metro recognizes revenue when its services have been fully performed and completed (the "Service Date") but does not bill for such services, in accordance with industry practices, until all services relating to a client's campaign, including services to be performed by unrelated third parties, have been completed. The client's obligation to pay Metro for its completed services is not contingent upon completion of the services to be performed by these unrelated third parties. In any event, clients are billed no later than a predetermined mailing date for their respective campaigns, which date is generally not more than thirty days after the Service Date. Unbilled receivables represent the portion of revenues recognized in excess of revenues billed in accordance with this practice. Income taxes: Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates and laws applicable to the years in which the differences are expected to reverse. Valuation allowances, if any, are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. Concentration of Credit Risk: Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of temporary cash investments and trade receivables. The Company restricts investment of temporary cash investments to financial institutions with high credit standing. Credit risk on trade receivables is minimized as a result of the large and diverse nature of the Company's customer base. Stock Option Plan: Prior to fiscal 1997, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. In 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation", which requires entities to either recognize as expense the fair value of all stock-based awards or to provide pro forma net earnings and pro forma earnings per share disclosures for employee stock option grants made in 1996 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the pro forma disclosure provisions of SFAS No. 123. Earnings (loss) per share: Primary earnings (loss) per common and common equivalent share and earnings per common and common equivalent share assuming full dilution are computed based on the weighted average number of common shares outstanding and common share equivalents attributable to the effects, if dilutive, of the assumed exercise of outstanding stock options and warrants, and the conversion of convertible notes and preferred shares. Reclassifications: Certain prior year items have been reclassified to conform with current year presentation. 3. ACQUISITION OF METRO SERVICES GROUP, INC. Effective as of October 1, 1996, the Company acquired Metro Services Group, Inc. pursuant to a merger agreement. In exchange for all of the then outstanding shares of Metro, the Company issued 1,814,000 shares of its common stock valued at $7,256,000 and promissory notes (the "Notes") totaling $1,000,000. The Notes, which have a stated interest rate of 6%, were discounted to $920,000, (adjusted to $944,000 as of June 30, 1997, subsequent to an April payment) to reflect an estimated effective interest rate of 10%. The Notes are due and payable, together with interest thereon, on June 30, 1998, and are convertible on or before maturity, at the option of the holder, into shares of common stock at a conversion rate of $5.38 per share. In April 1997, $100,000 of the Notes were repaid and, in July 1997, $400,000 were repaid. The acquisition was accounted for using the purchase method of accounting. The purchase price was allocated to assets acquired based on their estimated fair value. This treatment resulted in approximately $7.3 million of costs in excess of net assets acquired, after recording covenants not to compete of $650,000 and proprietary software of $250,000. Such excess is being amortized over the expected period of benefit of forty years, except for the covenants and software which are amortized over their expected benefit periods of three and five years respectively. The operating results of this acquisition are included in the consolidated results of operations from the date of acquisition. The following summary, prepared on a pro forma basis, combines the consolidated results of operations as if Metro had been acquired as of the beginning of the periods presented, after including the impact of certain adjustments, such as amortization of intangibles and increased interest on acquisition debt. The net loss for the year ended June 30, 1997 includes the non-cash compensation expense of $1.7 million recorded on the grant of options in September, 1996, as well as the $5.1 million in warrant discounts, $1.2 million in withdrawn offering costs and $1.0 million in restructuring costs, as discussed in notes 16, 20 and 21. Net loss to common stockholders includes $9.8 million of non-cash dividends and accretion on preferred stock. Unaudited 1997 1996 ---- ---- Revenues $26,360,830 $23,983,070 Net loss (5,400,262) (1,255,713) Net loss to common (20,222,204) (1,350,681) Loss per common share $(2.68) $(0.28) The unaudited pro forma information is provided for informational purposes only. It is based on historical information and is not necessarily indicative of future results of operation of the combined entities. 4. ACQUISITION OF ALLIANCE MEDIA CORPORATION AND STEPHEN DUNN & ASSOCIATES, INC: On April 25, 1995, the Company, through a statutory merger, acquired all of the outstanding common shares of Alliance. The purchase price was approximately $2,745,000, consisting of issuance of 1,025,000 restricted common shares of the Company to former shareholders of Alliance valued at $2.68 per common share. Direct costs of the acquisition approximated $500,000. Pursuant to the terms of the merger agreement, upon consummation of the merger the then current members of the Company's board of directors resigned, and a new board consisting of six persons designated by Alliance was appointed. The assets of Alliance acquired by the Company consisted primarily of (i) all the issued and outstanding stock of SD&A, which Alliance had acquired simultaneously with the merger, (ii) a five year covenant not to compete with the former owner of SD&A, and (iii) the cash proceeds of $1,509,750 (net of certain payments, including the payment of $1.5 million made pursuant to the acquisition of SD&A) of a private placement of equity securities of Alliance, which securities, upon consummation of the merger, were converted into the Company's common stock. The purchase price of SD&A paid by Alliance was $1.5 million in cash, plus $4.5 million in long-term obligations yielding prime rate, payable over four years. Additional contingent payments of up to $850,000 per year over the period ending June 30, 1998 may be required based on the achievement of defined results of operations of SD&A after its acquisition. At the Company's option, up to one half of the additional contingent payments may be made with restricted common shares of the Company. Alliance and SD&A had entered into an operating covenant agreement relating to the operations of SD&A and Alliance had pledged all of the common shares of SD&A acquired to collateralize its obligations under that agreement. These acquisition terms were revised pursuant to the Company private placement financing which occurred on June 7, 1996 (see Note 14) whereby the long term obligations were revised and approximately $2.0 million was paid in June, 1996. The balance of $2.1 million was revised to be payable in 36 monthly principal payments of $58,333, plus interest at 8%, starting September 19, 1996. As of June 30, 1997, due to a pending change in financing relationship, the May and June, 1997 payments had not been made. These payments were paid in full in August, 1997. The assets of SD&A acquired by Alliance (and therefore by the Company upon consummation of the merger) consisted primarily of cash and cash equivalents, accounts receivable and furniture, fixtures and equipment. These acquisitions were accounted for using the purchase method. The purchase price was allocated to assets acquired based on their estimated fair value. This treatment initially resulted in approximately $6.3 million of costs in excess of net assets required, after recording a covenant not to compete of approximately $1.0 million. The excess was increased by $759,000 and $850,000 on June 30, 1997 and 1996, respectively, due to achievement of defined results of operations of SD&A for the years then ended. Such excess, which may increase for one further contingent payment, is being amortized over the remainder of the expected period of benefit of 40 years. The operating results of these acquisitions are included in the consolidated results of operations from the date of acquisition. The following summary, prepared on a pro forma basis, combines the consolidated results of operations as if Alliance and SD&A had been acquired as of the beginning of the period presented, after including the impact of certain adjustments, such as: amortization of intangibles, increased interest on the acquisition debt, and adjustment of officer salary for new contract. 1995 (unaudited) ---------------- Net sales $15,013,000 Loss from continuing operations (113,911) Loss from continuing operations per common share $(.04) The unaudited pro forma information is provided for informational purposes only. It is based on historical information and is not necessarily indicative of the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined entities. 5. DISCONTINUED OPERATIONS: During the year ended June 30, 1995, the Company sold its STI subsidiary for $800,000, out of which $80,000 was paid as a commission to STI's former president. The former president of STI also received 5,000 shares of common stock, valued at $38,750, and warrants to purchase 2,500 shares of the Company's common stock at $8.00 per share in connection with this transaction. The Company realized a gain on the sale of $322,387. No tax was allocable to this gain due to net operating loss carryforwards. Concurrent with the closing of sale of STI, all operations of HSGR ceased and all unrecoverable assets were written off, which amounted to approximately $22,000. Accordingly, STI and HSGR are reported as discontinued operations for the year ending June 30, 1995, and the consolidated financial statements were reclassified to report separately the operating results, gain on disposition and cash flows of these operations. Revenues of these discontinued operations for fiscal 1995 were $1,147,829. 6. PROPERTY AND EQUIPMENT: Property and equipment of continuing operations at June 30, 1997 and 1996 consisted of the following: 1997 1996 ---- ---- Office furnishings and equipmen $ 934,148 $ 302,607 Leasehold improvements 201,212 169,771 --------- --------- 1,135,360 472,378 Less accumulated depreciation and amortization (389,577) (173,333) --------- --------- $ 745,783 $ 299,045 ========= ========= 7. LAND HELD FOR SALE: The Company, through its wholly owned subsidiary, All-Comm Holdings, Inc., owned approximately seven acres of undeveloped land in Laughlin, Nevada, which had a carrying value of $921,465 as of June 30, 1996. During fiscal 1996, a bond measure was passed by Clark County, Nevada authorities, resulting in a special assessment to fund improvements which would benefit the land. The principal balance assessed to the Company totaled $154,814 plus interest at 6.4% and was payable in semi-annual installments over twenty years. The principal was capitalized by the Company in fiscal 1996. On August 16, 1996, the land was sold to, and liability assumed by, an independent third party, via auction, for $952,000 in cash, resulting in a net gain of approximately $90,000. 8. INTANGIBLE ASSETS: Intangible assets at June 30, 1997 and 1996, consist of the following: 1997 1996 ---- ---- Covenants not to compete $ 1,650,000 $1,000,000 Proprietary software 250,000 Goodwill 15,372,636 7,277,698 ----------- ----------- 17,272,636 8,277,698 Less accumulated amortization (1,146,038) (426,638) ----------- ----------- $16,126,598 $7,851,060 =========== ========== The increase in intangible assets during 1997 was due to the costs in excess of net assets acquired in the Metro acquisition, as well as recording of an estimated contingent payment of $759,000 due to the former owner of SD&A subsequent to the achievement of defined results of operations of SD&A during the year ended June 30, 1997. 9. SHORT-TERM BORROWINGS: At June 30, 1996, SD&A had a $500,000 line of credit from a bank which was fully used. The line bore interest at prime plus 1/2% (8.75% at June 30, 1996), was collateralized by substantially all of SD&A's assets and was personally guaranteed by SD&A's President. The line of credit also contained certain financial covenants, including current ratio, working capital, debt and net worth, capital expenditure, and cash flow requirements. During fiscal 1997, the personal guarantee of SD&A's President was removed, the line was increased to $750,000 and SD&A obtained a note payable of $125,000 to finance expansion of the Berkeley Calling Center. The note payable required monthly principal repayments of $3,473, plus interest. At June 30, 1997, the outstanding balances on the note and line of credit were $104,162 and $746,000, respectively, which bore interest at the bank's prime rate plus 3/4% and 1/2%, respectively. In August, 1997, SD&A entered into a two-year renewable credit facility with a lender for a line of credit commitment of up to a maximum of $2,000,000, collateralized by its accounts receivable. Interest is payable monthly at the Chase Manhattan reference rate (8 1/2% at June 30, 1997) plus 1 1/2% with a minimum annual interest requirement of $80,000. The facility has an annual fee of 1% of the available line. The facility has tangible net worth and working capital covenants. In August, the outstandings on the bank line and note payable were fully paid from borrowings on the new facility. In April, 1997, Metro entered into a two-year renewable revolving credit facility with a lender for a line of credit commitment of up to a maximum of $1,500,000, collateralized by its accounts receivable. Interest is payable monthly at the Chase Manhattan reference rate (8 1/2% at June 30, 1997) plus 1 1/2%, with a minimum annual interest requirement of $60,000. The facility has an annual fee of 1 1/2% of the available line. At June 30, 1997, Metro had drawn $811,546 on the line. The facility has tangible net worth and working capital covenants. 10. OTHER ACCRUED EXPENSES: Accrued expenses at June 30, 1997 and 1996 consisted of the following: 1997 1996 ---- ---- Accrued professional fees $362,500 $290,897 Other 372,458 467,215 -------- -------- Total $734,958 $758,112 ======== ======== 11. LONG TERM OBLIGATIONS: Long term obligations at June 30, 1997 and 1996 consist of the following: 1997 1996 ---- ---- 6% Convertible notes (a) $2,200,000 Promissory notes to seller of SD&A (b) 1,633,333 $2,100,000 Promissory notes to sellers of Metro (c) 877,142 Promissory notes to former executives (d) 447,635 Capital lease obligation (e) 130,900 ---------- ---------- Total 5,289,010 2,100,000 Less: Current portion (2,083,772) (583,333) ---------- ---------- Total long term obligations $3,205,238 $1,516,667 ========== ========== (a) In April, 1997, the Company obtained $2,046,000, net of fees from the private placement of 6% convertible notes, with a face value of $2,200,000. The notes are payable with interest on April 15, 1999, if not previously converted. The notes are convertible into shares of the Company's Common Stock at the lesser of $2.50 per share or 83% of the average closing bid price of the Common Stock during the last five trading days prior to conversion. Subsequent to fiscal 1997 through September 23, 1997, $1,675,000 face value of the notes, plus interest, was converted into 684,122 shares. (b) In connection with the acquisition of SD&A on April 25, 1995, Alliance issued promissory notes totaling $4,500,000 to SD&A's current President and former sole shareholder. The notes bore interest at prime rate, not to exceed 10% or drop below 8%, and were payable monthly. Principal payments were due quarterly, and originally $1,500,000 was due in quarterly installments during fiscal 1996. During 1996 the July 1, 1996 principal payment of $375,000 was made and the long term obligations were restructured to defer principal payments due October 1, 1995, January 1, 1996 and April 1, 1996, until June 1996. In June, 1996, principal payments of $2,025,000 were made and the remaining obligations of $2,100,000 are now payable at $58,333 per month, plus interest at 8%, starting September 19, 1996. As of June 30, 1997, due to a pending change in financing relationship, the May and June payments had not been made. These payments were made in full in August, 1997. (c) As discussed in Note 3, in connection with the acquisition of Metro, 6% convertible promissory notes with a face value of $1,000,000 were issued to the sellers, who remain related parties. The notes, which were discounted to $920,000 to reflect an effective interest rate of 10%, are due and payable, if not previously converted, on June 30, 1998. In April, 1997, the Company repaid $100,000 face value of the notes, payable to its Chief Executive Officer, and in July, 1997, an additional $400,000 was repaid. (d) As discussed in Note 12, effective March 31, 1997, the Company entered into settlement agreements with former senior executives, which included promissory notes payable with face amounts totaling $540,000 at 0% interest. The notes are payable in equal monthly installments, starting May 14, 1997. The notes were discounted to $499,000, to reflect an effective interest rate of 10%. Amounts payable on these notes at June 30, 1997 totaled $448,000. (e) Metro leases certain computer hardware and software under a three year capital lease obligation. Future minimum lease payments at June 30, 1997 are: 1998 $ 68,965 1999 68,965 2000 5,746 -------- Total minimum lease payments 143,676 Less interest 12,776 -------- Present value of minimum payments 130,900 Current portion 59,869 -------- Non-current portion $ 71,031 ======== 12. EMPLOYMENT CONTRACTS: Subject to execution of definitive agreements, the Company has entered into three-year employment arrangements with current officers of the Company. The arrangements provide for annual base salaries, base increases, cash and option bonuses which are payable if specified management goals are achieved, and certain termination benefits. In the event of termination without cause, the aggregate liability for these employees is approximately $1,425,000. The Company also had employment contracts with certain members of the prior management of the Company. Effective March 31, 1997, the Company entered into settlement agreements with two former members of executive management which included cash payments totaling $200,000, promissory notes payable with a face value of $540,000 and other expenses. Amounts paid to these executives under these agreements in fiscal 1997 totaled $266,000. In fiscal 1995, severance payments to prior management of Sports-Tech totaling approximately $60,000 were made. 13. COMMITMENTS AND CONTINGENCIES: Leases: SD&A leases its corporate business premises from its former owner. The lease requires monthly rental payments of $11,805 through January 1, 1999, with an option to renew. SD&A incurs all costs of insurance, maintenance and utilities. Metro leases its office and data processing space under long term leases. The Company also leases its corporate office space, copier, phones and automobiles. Future minimum rental commitments under all non-cancelable leases, as of fiscal years ending June 30, are as follows: 1998 $ 474,968 1999 363,609 2000 294,858 2001 301,358 2002 186,560 ---------- $1,621,353 ========== Rent expense for continuing operations was approximately $445,000, $297,000, and $89,000, for fiscal years ended 1997, 1996 and 1995, respectively. Total rent paid by SD&A to its former owner during 1997, 1996 and from the date of acquisition to June 30, 1995 was approximately $142,000, $138,000 and $26,000, respectively. The Company is party to various minor legal proceedings. The outcome of these legal proceedings are not expected to have a material adverse effect on the financial condition or operation of the Company based on the Company's current understanding of the relevant facts and law. 14. REDEEMABLE CONVERTIBLE PREFERRED STOCK: On June 7, 1996, the Company completed the private placements with accredited investors of 6,200 shares of Series B redeemable convertible preferred stock for $3,100,000. The preferred stock was preferred as to the Company's assets over the common stock in the event of liquidation, dissolution or winding-up of the Company, prior to distribution of assets to common stockholders. The preferred stockholders were entitled to their original investment, plus accrued, unpaid dividends or, if unavailable, a ratable distribution of existing assets. The holders of the stock were entitled to receive a dividend payable only on redemption or credited against conversion, which accrued at the rate of 6% per annum. The convertible preferred stock was convertible, in whole or in part, at any time and from time to time until the second anniversary of the date of issuance, into common shares of the company at the lesser of the price paid divided by $1.25, or 80% of the average closing sales price of the Company's common stock for the last five days prior to conversion, and is subject to certain restrictions, including automatic conversion on the second anniversary of issuance. Under certain unlikely conditions prior to conversion, the preferred stock may be redeemed. In addition, the Company issued warrants to preferred shareholders for 3,100,000 shares of common stock exercisable at $2.50 for three years. The preferred stock and accrued interest was converted in the recapitalization discussed in Note 15. On June 7, 1996, the Company completed the private placements with accredited investors of $1,000,000 of convertible notes and warrants for 3,000,000 shares of common stock. In September, 1996, the notes and warrants were rescinded retroactive to June 7, 1996 and replaced with 2,000 shares of Series C redeemable convertible preferred stock for $1,000,000. The Series C redeemable convertible preferred stock was preferred as to the Company's assets over the common stock in the event of liquidation, dissolution or winding-up of the Company, prior to distribution of assets to common stockholders. The preferred shareholders were entitled to their original investment, plus accrued unpaid dividends or, if available, a ratable distribution of existing assets. The holders of the stock were entitled to receive a dividend payable only on redemption or credited against conversion, which accrued at the same rate of 8% per annum. The Series C redeemable convertible preferred stock was convertible, in whole or in part, at any time and from time to time until the second anniversary of the date of issuance, into common shares of the Company at the price paid divided by $6.00, and was subject to certain restrictions, including automatic conversion on the second anniversary of issuance. Under certain unlikely conditions prior to conversion, the preferred stock may be redeemed. In addition, the Company issued warrants to preferred shareholders for 3,000,000 shares of common stock exercisable at $3.00 for three years. The preferred stock was repurchased and the related accrued interest and the warrants were converted to common stock as discussed in Note 15. The Company allocated the net proceeds received on the sales of each series of preferred shares and warrants based on the relative fair values of the securities at the time of issuance. 15. RECAPITALIZATION: On December 23, 1996, the Company and certain of its security holders effected a recapitalization of the Company's capital stock, whereby: (i) the Company's Series B Convertible Preferred Stock, par value $.01 per share (the "Series B Preferred Stock"), was converted, in accordance with its terms without the payment of additional consideration, into 2,480,000 shares of Common Stock; (ii) the Company's Series C Convertible Preferred Stock, par value $.01 per share (the "Series C Preferred Stock"), was repurchased for promissory notes in an aggregate principal amount of $1.0 million, which promissory notes bore interest at a rate of 8% per annum and were repayable on demand at any time from and after the date of the consummation of an underwritten public offering by the Company of Common Stock, but in any event such notes originally matured June 7, 1998 but were paid in full in April, 1997; (iii) all accrued interest on the Series B Preferred Stock and the Series C Preferred Stock was converted into 88,857 shares of Common Stock; (iv) warrants related to the Series C Preferred Stock, currently exercisable for 3,000,000 shares of Common Stock, were exchanged for 600,000 shares of Common Stock; and (v) options held by two of the Company's principal executive officers to purchase 300,000 shares of common stock were to be canceled at no cost to the Company, subject to successful completion of an underwritten offering. The Offering was not consummated and, accordingly, the options were not canceled. Upon conversion of the Series B Preferred Stock and accumulated interest thereon into Common Stock on December 23, 1996, the Company incurred a non-cash, non-recurring dividend for the difference between the conversion price and the market price of the Common Stock, totaling $8.5 million. Upon repurchase of the Series C Preferred Stock, the Company incurred a non-recurring dividend of $573,000 for the difference between the repurchase price and the accreted book value of the stock at December 23, 1996. These dividends do not impact net income (loss), but do impact net income (loss) attributable to common stockholders in the calculation of earnings per share. 16. STOCKHOLDERS' EQUITY: Preferred Stock: On May 9, 1996, the Company completed the private placement with an institutional investor of 10,000 shares of Series A convertible preferred stock for $750,000, $687,000 net after offering costs. The convertible preferred stock was convertible into common shares of the Company at the lesser of the price paid divided by $2.50, or 80% of the closing bid price of the Company's common stock for the five trading days immediately prior to the conversion date, and was subject to certain restrictions. In connection with the June 7, 1996 transactions, as described above, the Company reacquired the 10,000 shares of Series A convertible preferred stock for $800,000 plus fees of $12,500. Common Stock: The Board of Directors approved a one-for-four reverse stock split of the Company's authorized and issued common stock, effective August 22, 1995. The Board also approved reducing the number of authorized shares of common stock to 6,250,000 with a par value of $.01 per share, from the 25,000,000 common shares previously authorized. Accordingly, all share and per share data, as appropriate, reflect the effect of the reverse split. Effective August 14, 1996, the shareholders and Board of Directors approved an increase in the number of authorized shares of common stock, from 6,250,000 to 36,250,000. In August 1997, consultants paid $5,000 for warrants valued at $81,000, as per consulting agreements. In September 1997, the Company issued 96,748 shares of common stock in settlement of a $425,000 liability to the former owner of SD&A, as an additional payment resulting from SD&A achievement of defined results of operations for fiscal 1996. Prior to the December 23, 1996, recapitalization discussed in Note 15, the Company recorded dividends in fiscal 1997 of $806,425 to its preferred stockholders to accrete the value assigned to the stock at June 6, 1996 (date of sale) up to its convertible value at June 6, 1998 (date of automatic conversion prior to the recapitalization). In March 1997, to obtain $2.1 million in working capital and reduce the overhang associated with the existence of such warrants, the Company accepted offers from certain warrant-holders to exercise their warrants for 3,152,500 shares of common stock at discounted exercise prices. The Company recognized the dates of acceptance as new measurement dates and, accordingly, recorded non-cash charges totaling $5.1 million in March 1997, to reflect the market value of the discounts. Of the total, $113,000 was charged directly to expense as the underlying source transaction was debt related, and $4,976,000 was charged directly to stockholders equity as the underlying source transaction was equity related. In May and June 1997, the Company issued warrants for 240,000 shares of common stock valued at $76,000 to three consultants for financial advisory services. During 1996, the Company issued 95,442 shares of restricted common stock as compensation to various employees, directors and consultants. In March 1996, the Company sold 75,000 restricted shares of its common stock for $120,000 to four individuals, including 12,500 shares to related parties. In May 1995, the Company completed a private placement of 413,759 shares of restricted common stock, at $2.68 per share. These shares have registration rights as of December 1, 1995. Net proceeds from this offering totaled $1,018,675. As discussed in Note 4, in connection with the acquisition of Alliance and SD&A, the Company issued 1,025,000 restricted common shares to the former shareholders of Alliance. Also in connection with the acquisition, the Company issued 37,500 common shares valued at $100,000 and warrants to purchase 43,077 common shares at $6.00-to-$8.00 per share to investment banking firms, a shareholder, a director and a law firm which represented the Company. These warrants expire between April 25, 1998 and April 25, 2000. In connection with the sale of Sports-Tech International, Inc., the Company approved issuance of 5,000 common shares valued at $38,750 and warrants to purchase 2,500 shares at $8.00 through April 25, 1995 to its former president. In May, 1995, the Board of Directors approved the temporary reduction of the exercise price of certain warrants from $6.00 to $2.68 and, on May 31, 1995, these 37,500 warrants were exercised for $100,500 in cash payments. As of June 30, 1997, the Company has the following outstanding warrants to purchase 570,577 shares of common stock: Date Issued Shares of Common Exercise Price Per and Exercisable Stock upon Exercise Share of Common Stock --------------- ------------------- --------------------- April 1995 33,750 $6.00 -$8.00 May 1995 11,827 $ 6.00 January 1996 32,500 $3.375-$8.00 February 1996 15,000 $3.00 -$4.00 May 1996 100,000 $4.50 July 1996 37,500 $3.50 August 1996 50,000 $2.50 -$3.50 September 1996 50,000 $2.50 -$3.50 May 1997 140,000 $ 3.00 June 1997 100,000 $3.375 ------- Total as of June 30, 1997 570,577 ======= Stock Options: In 1991, the Company adopted a non-qualified stock option plan (the "1991 Plan") for key employees, officers, directors and consultants to purchase up to 250,000 shares of common stock. In November, 1995, the Board of Directors increased the number of available shares by 600,000. An additional 600,000 shares were approved by the Board of Directors on September 26, 1996 and 1,700,000 shares on May 27, 1997, increasing the number of shares available under the 1991 Plan to 3,150,000. The 1991 Plan is administered by the Board of Directors which has the authority to determine which officers and key employees of the Company will be granted options, the option price and exercisability of the options. In no event shall an option expire more than ten years after the grant. The following summarizes the stock option transactions under the 1991 Plan for the three fiscal years ended June 30, 1997: Number Option Price of Shares Per Share --------- ------------ Outstanding at June 30, 1994 107,892 $6.00 to $22.00 Granted 8,750 $5.24 to $ 7.00 Exercised (22,500) $2.68 to $ 5.24 Canceled (3,334) $6.00 --------- Outstanding at June 30, 1995 90,808 Granted 525,003 $2.00 to $ 3.00 Canceled (91,004) $6.00 to $22.00 --------- Outstanding at June 30, 1996 524,807 Granted 1,117,000 $2.50 to $3.00 Exercised (15,000) $2.625 Canceled (40,060) $2.00 to $2.50 --------- Outstanding at June 30, 1997 1,586,747 ========= All the outstanding options under the 1991 Plan are currently exercisable, except for 200,000 options which are exercisable 100,000 in May 1998 and 100,000 in May 1999. They expire as follows: fiscal 1998 - 2,084, fiscal 2000 - 5,000, fiscal 2003 - 462,663 and fiscal 2004 - 1,117,000. The weighted average exercise price of all outstanding options under the Plan is $2.55 and the weighted average remaining contractual life is 6.2 years. Except as noted below, all options granted in fiscal years 1997, 1996 and 1995 were issued at fair market value. At June 30, 1997, 1,402,564 options were available for grant. In May, 1995, a $128,000 discount was given to a former director of the Company to exercise 18,750 options and was recognized as compensation expense. On September 26, 1996, the Board of Directors granted options exercisable for 300,000 shares of common stock, par value $.01 per share (the "Common Stock") to each of the Company's then Chief Executive Officer and Chief Operating Officer. Options exercisable for the first 150,000 shares were granted to each such officer at an exercise price of $2.50 per share and the remaining 150,000 each were granted at an exercise price of $3.00 per share. On December 23, 1996, the $3.00 options were to be canceled subject to successful completion of an underwritten public offering, as part of the recapitalization described in Note 15. As described in Note 20, the Offering was not consummated and, accordingly, the options were not canceled. The options vest and are exercisable immediately and expire on July 1, 2001. Although the Company intended to grant the options in May, 1996, when the market price of the stock was $2.50, at September 26, 1996, the date of Board ratification, the market price was $5.50. Accordingly, the Company recorded a non-recurring, non-cash charge of $1,650,000 to compensation expense for the difference between market price and exercise price of the options for 600,000 shares. In addition to the 1991 Plan, the Company has other option agreements with current and former officers, directors, employees and owners of an acquired Company. The following summarizes transactions outside the 1991 Plan for the three fiscal years ended June 30, 1997: Number Option Price of Shares Per Share --------- ------------ Outstanding at June 30, 1994 73,791 $3.00 to $16.00 Exercised (12,500) $3.00 Canceled (28,875) $6.00 to $16.00 --------- Outstanding at June 30, 1995 32,416 Canceled (30,166) $4.50 to $6.00 --------- Outstanding at June 30, 1996 2,250 Granted 1,000,000 $2.625 to $3.50 --------- Outstanding at June 30, 1997 1,002,250 ========= During May, 1997, 1,000,000 options were issued pursuant to an employment agreement with the Company's current Chief Executive Officer. These options are exercisable 1/3 currently, 1/3 in May 1998 and 1/3 in May 1999, have a weighted average exercise price of $3.04 per share and expire in 2004. The remaining 2,250 options are currently exercisable, expire in fiscal 1999, and have a weighted average price of $16.00 per share. Under SFAS No. 123, had the Company determined compensation cost based on the fair value at the grant date for its stock options, the Company's net loss and earnings per share would have been adjusted to the pro forma amounts indicated below: Years ended June 30, 1997 1996 ------------- ------------ Net loss as reported $ (5,377,096) $(1,094,373) pro forma $ (7,822,901) $(1,847,535) Net loss attributable to common stockholders as reported $(20,199,038) $(1,189,341) pro forma $(22,644,843) $(1,942,503) Earnings per share as reported $(2.85) $(0.39) pro forma (3.19) (0.63) Pro forma net loss reflects only options granted in fiscal 1997 and 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' maximum vesting period of seven years and compensation cost for options granted prior to July 1, 1995, is not considered. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: an expected life of four years, expected volatility of 50%, no dividend yield and a risk-free interest rate ranging from 5.23% to 6.61%. Common Stock in Treasury: The Company has purchased 26,800 shares of its common stock for a total cost of $214,579 (or an average of $8.00 per share). In connection with the acquisition of the High School Gridiron Report assets, 15,000 shares were issued from the treasury stock. The remaining treasury shares have a total cost of $135,469 (or an average of $11.48 per share). 17. INCOME TAXES: Income tax expense from continuing operations is as follows: Years Ended June 30, 1997 1996 1995 ---- ---- ---- Current state and local $109,373 $141,084 $75,000 ======== ======== ======= A reconciliation of the Federal statutory income tax rate to the effective income tax rate based on pre-tax loss from continuing operations follows: 1997 1996 1995 ---- ---- ---- Statutory rate (34)% (34)% (34)% Increase in tax rate resulting from: Loss limitations and valuation allowance 34 34 34 State income taxes 2 15 134 --- --- --- Effective rate 2% 15% 134% === === === 1997 1996 ---- ---- Deferred tax assets: Net operating loss carryforwards $1,687,100 $691,100 Compensation on option grants 561,000 Amortization of intangibles 149,500 142,300 Other 245,750 95,900 ----------- -------- Total deferred tax assets 2,643,350 929,300 Valuation allowance (2,573,600) (789,800) ----------- -------- Net deferred tax assets 69,750 139,500 ----------- -------- Deferred tax liabilities: Cash to accrual adjustment (69,750) (139,500) ----------- --------- Total deferred tax liabilities (69,750) (139,500) ----------- --------- Total deferred taxes, net $ - $ - =========== ========= The Company has a net operating loss of approximately $4,949,000 available which expires from 2008 through 2012. These losses can only be offset with future income and are subject to annual limitations. No income taxes are allocable to the gain on sale of discontinued operations during 1995 due to utilization of net operating loss carryforwards. 18. GAINS FROM SALES OF SECURITIES: In July, 1994, the Company borrowed $1,000,000 to fund the exercise by the Company of a common stock purchase warrant. The loan was collateralized by a pledge of such common stock pursuant to the terms of a pledge agreement. The parties to the $1,000,000 loan included, among others, the Company's former chairman, former president, a former director and a stockholder, who each provided $200,000. The other lenders were non-affiliates. The lenders received the repayment of the $1,000,000 loan, interest at 7.75% totaling $9,493 and a $300,000 commitment fee from the proceeds of the subsequent sales of such common stock. Effective July 1, 1994, the Company adopted SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." In accordance with SFAS No. 115, the Company's marketable equity securities were considered "available-for-sale" investments and were carried at market value with the difference between cost and market value recorded as a component of stockholders' equity. The Company subsequently sold all these securities and recognized a gain of $1,580,000 in fiscal 1995. 19. RELATED PARTY TRANSACTIONS: In May, 1997, the Company's outside directors each received options for 100,000 common shares (400,000 in the aggregate), exercisable at $2.625, of which one half vested immediately and one fourth vest in each of May 1998 and May 1999. A director and the secretary of the Company, appointed during fiscal 1997, is a partner in a law firm which provides legal services for which the Company recognized expenses aggregating approximately $110,000 during fiscal 1997. During fiscal 1997, two directors purchased warrants for 50,000 common shares each, for $2,500 each pursuant to consulting agreements entered into prior to their appointments. A former director of the Company is the senior managing director of a private merchant banking firm which was paid approximately $5,700 for investment advisory services in 1995. In connection with the acquisition of Alliance, a finders fee totaling $100,000 was paid to the merchant banking firm in fiscal 1995, along with the former director and the other principal owner of the merchant banking firm each receiving 9,375 restricted common shares of the Company valued at $2.67 per share and warrants to purchase 6,250 common shares at $8.00 per share. On June 9, 1994, the Company borrowed $350,000 from the Company's former chief executive officer and its former president and pledged its equity interest in the Laughlin land as security for repayment of the loan. The note was due July 31, 1995 with interest at the rate of 7.25% (the Bank of America Nevada prime rate at the time of execution). The promissory note and interest of $8,695 were repaid in advance on October 4, 1994. A former director of the Company, and another person serving as secretary in 1993, were each partners in different law firms that provided legal services for which the Company recognized expenses aggregating approximately $31,000 in 1995. In April 1995, the former chairman of the Company purchased property and equipment owned by the Company with a cost of $160,109 and net book value of $5,870 for a discounted appraised value of $11,000 in cash. 20. WITHDRAWAL OF REGISTRATION STATEMENT: On October 17, 1996, the Company filed a Form SB-2 registration statement (the "Registration Statement") with the Securities and Exchange Commission. The Registration Statement related to a proposed underwritten public offering of 2,100,000 shares of Common Stock, of which 1,750,000 shares were being offered by the Company and 350,000 were being offered by certain stockholders of the Company. It also related to the sale of 1,381,056 shares of Common Stock by certain selling stockholders on a delayed basis. Due to market conditions, on February 11, 1997, the Company withdrew the Registration Statement and expensed $1.2 million in proposed offering costs in fiscal 1997. 21. RESTRUCTURING COSTS: During the quarter ended March 31, 1997, the Company effected certain corporate restructuring steps, including the decision to reduce corporate staffing and related administrative costs, as well as making two executive management changes. In this connection, restructuring expenses of $986,000 were recorded, including $44,000 in estimated office restructuring costs and $942,000 in executive management and other settlement costs. The executive management settlement agreements include two non-interest bearing promissory notes with face values of $290,000 and $250,000, respectively, payable in equal installments over eighteen months starting in May, 1997. These notes have been discounted to $268,000 and $231,000, respectively, to reflect effective interest rates of 10%. 22. RESTATEMENTS FOR CORRECTIONS OF ERRORS: The financial statements for the three and nine months ended March 31, 1997, the three months ended September 30, 1996 and year ended June 30, 1996 were restated for corrections of errors. As originally filed, the financial statements for the three and nine months ended March 31, 1997 recognized an expense charge of $5.1 million for non-recurring discounts on warrant exercises. To reduce the overhang associated with such warrants, and to obtain working capital subsequent to the withdrawal of the Company's proposed underwritten public offering, the Company accepted offers from certain warrant-holders to exercise their warrants to obtain 3,152,500 shares of Common Stock at discounted exercise prices. Of the total, warrants for 52,500 shares arose from a previous financing transaction. Warrants for 3,100,000 shares arose from a June 6, 1996 sale of redeemable convertible preferred stock with attached warrants. The discount of $4,975,500 on these warrants was originally classified as a charge to expense as the Company considered the underlying redeemable convertible preferred stock (classified as mezzanine financing for financial reporting) to be debt financing. Upon subsequent analysis, the mezzanine financing was determined to more closely approximate equity financing and this charge was reclassified from an expense transaction to an equity transaction. There is no change to the net worth of the Company or to its earnings per share as the charge affects net loss attributable to common stockholders in the earnings per share calculation in the same manner as an expense transaction. As originally filed, the financial statements for the three months ended September 30, 1996 did not include compensation expense for the stock options granted to officers (as discussed in Note 16), as the Company intended the options to be granted in May 1996 when the market price of the stock was $2.50. The net loss attributable to common stockholders for the three months ended September 30, 1996 was originally reported at $344,481 and related net loss per share was $(0.11). Subsequently, in accordance with Securities and Exchange Commission requirements it was determined that the grant of these options was not effective until ratification by the Board on September 26, 1996, when the market price was $5.50. Accordingly, the Company amended the financial statements for the three months ended September 30, 1996 to record a non-recurring, non-cash charge of $1,650,000 for compensation expense in connection with the grant of these options, which increased the net loss for the quarter to $1,994,481 and net loss per share to $(0.62). Additionally, as originally filed, the Company reported its Convertible Preferred Stock as equity. The Preferred Stock contained two provisions for mandatory redemption, which the Company had considered remote and not within the control of the holders. Subsequently, in accordance with the Securities and Exchange Commission requirements, these securities were reclassified as mezzanine financing and the September 30, 1996 and June 30, 1996 financial statements were restated accordingly. In conjunction with this, previously recorded dividends of $66,500 for the three months ended September 30, 1996 were reclassified as interest and the net loss of $277,981 increased to $344,481. Previously recorded dividends of $17,490 for the year ended June 30, 1996 were reclassified as interest and the net loss of $1,076,833 increased to $1,094,373. There was no impact on earnings per share from this adjustment, as the dividends had previously increased the net loss attributable to common stockholders. Also, as originally filed, accretion of the discount on the redeemable convertible preferred stock was not included as a preferred dividend in the earnings per share calculation for the year ended June 30, 1996. As such, the calculation has been restated to consider the fiscal 1996 accretion of the preferred dividend which has resulted in an increase in the net loss attributable to common stockholders by $94,968 and increased net loss per common share from $(0.36) to $(0.39). 23. NEW ACCOUNTING PRONOUNCEMENTS: In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("SFAS 128") which is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted; however, restatement of all prior-period earnings per share data presented is required. The Company has not yet determined the effect SFAS 128 will have on its financial statements; however, the adoption is not expected to have a material impact on the financial position or results of operations of the Company. In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129"), which is required to be adopted by the Company in fiscal 1998. This Statement specifies certain disclosures about capital structure. Management does not expect that implementation of this Statement will have a significant impact on the financial statements of the Company. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. An enterprise that has no items of other comprehensive income in any period presented is not required to report comprehensive income. SFAS 130 is effective for fiscal years beginning after Decemebr 15, 1997. Management does not believe that the adoption of SFAS 130 will have a material impact on the Company's financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 is effective for fiscal years beginning after December 15, 1997. Management has not yet assessed the impact that the adoption of SFAS 131 will have on the Company's financial statements. 24. SUBSEQUENT EVENTS: Effective July 1, 1997, the Company acquired 100% of the stock of Pegasus Internet, Inc. ("Pegasus"). Terms of the agreement called for issuance of 600,000 shares of common stock of the Company valued at $1.8 million plus $200,000 in cash. The Company's Chief Executive Officer owned 25% of Pegasus. Pegasus provides Internet services including web site planning and development, site hosting, on-line ticketing system development, graphic design and electronic commerce. The acquisition will be accounted for using the purchase method of accounting. Accordingly, the operating results of Pegasus will be included in the consolidated results of operations of the Company starting on July 1, 1997. EX-11 2 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Exhibit 11 STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE Fiscal Year 1997 1996 1995 ------ ------ ------ (as restated) Net income (loss) per share was calculated as follows: Loss from continuing operations before discontinued operations ($5,377,096) ($1,094,373) ($130,859) Income from discontinued operations $241,256 Net income (loss) ($5,377,096) ($1,094,373) $110,397 Periodic non-cash accretions on redeemable convertible preferred stock (806,425) (94,968) Non-cash, non-recurring dividends on conversions of redeemable preferred B stock (8,466,712) Non-recurring dividends on repurchase of redeemable preferred C stock (573,305) Non-recurring discounts on warrant exercises (4,975,500) Net income (loss) attributable to common stockholders ($20,199,038) ($1,189,341) $110,397 Primary: Weighted average common shares outstanding 7,089,321 3,068,278 1,804,827 Incremental shares under stock options and warrantscomputed under the treasury stock method usingthe average market price of the issuer's common stock during the periods 546,974 280,758 2,713 Incremental shares under convertible preferred stock 220,556 Incremental shares under convertible notes 196,167 Weighted average common and common equivalent shares outstanding 7,089,321 3,068,278 1,807,540 Loss per common share from continuing operations ($2.85) ($.39) ($.07) Income per common share from discontinued operations $.13 Net income (loss) per common share ($2.85) ($.39) $.06 Fully diluted: Weighted average common shares outstanding 7,089,321 3,068,278 1,804,827 Incremental shares under stock options and warrants computed under the treasury stock method using the market price of the issuer's common stock at the end of the periods if higher than the averagemarket price 546,974 420,652 13,565 Incremental shares under convertible preferred stock 220,556 Incremental shares under convertible notes 196,167 Weighted average common and common equivalent shares outstanding 7,089,321 3,068,278 1,818,392 Loss per common share from continuing operations ($2.85) ($.39) ($.07) Income per common share from discontinued operations $.13 Net income (loss) per common share ($2.85) ($.39) $.06 EX-21 3 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 SUBSIDIARIES OF MARKETING SERVICES GROUP, INC. All-Comm Acquisition Corporation* (100%) All-Comm Holdings, Inc.* (100%) Alliance Media Corporation (100%) Metro Services Group, Inc. (100%) Stephen Dunn & Associates, Inc. (100%) * Dissolved in June, 1997 EX-23 4 CONSENT OF COOPERS & LYBRAND Exhibit 23 The Board of Directors Marketing Services Group, Inc.: We consent to the incorporation by reference in the registration statements (No. 333-30969 on Form S-3 and No. 333-30839 on Form S-8) of Marketing Services Group, Inc. and Subsidiaries, of our report dated September 25, 1997, relating to the consolidated balance sheets of Marketing Services Group, Inc. as of June 30, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three year period ended June 30, 1997. /s/ Coopers & Lybrand L.L.P. Los Angeles, CA September 25, 1997 EX-27 5 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF MARKETING SERVICES GROUP, INC. AS OF AND FOR THE YEAR ENDED JUNE 30, 1997 INCLUDED IN THIS REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 U.S. Dollars 12-MOS Jun-30-1997 Jul-01-1996 Jun-30-1997 1.000 2,929,012 0 5,037,167 (32,329) 0 8,215,308 1,135,360 (389,577) 25,391,272 8,026,138 3,679,320 0 0 114,386 13,571,428 25,391,272 24,144,874 24,144,874 5,587,343 5,587,343 22,131,362 0 529,521 (5,267,723) (109,373) (5,377,096) 0 0 0 (5,377,096) (2.85) (2.85)
EX-3 6 AMENDMENT TO ARTICLES OF INCORPORATION Exhibit 3(vi) CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION (After Issuance of Stock) ----------------------------------------------------- ALL-COMM MEDIA CORPORATION We the undersigned, J. Jeremy Barbera, Chairman and President, and Alan I. Annex, Secretary of ALL-COMM MEDIA CORPORATION, a Nevada corporation (the "Company"), do hereby certify: That the Board of Directors of said corporation, by Unanimous Written Consent on the 27th day of May, 1997, adopted a resolution to amend the amended and restated articles as follows: Article I is hereby amended to read as follows: "The name of the Corporation is Marketing Services Group, Inc." The number of shares of the Corporation outstanding and entitled to vote on an amendment the Articles of Incorporation is 11,426,764; that the said change and amendment has been consented to and approved by a majority of the stockholders holding at least a majority of each class of stock outstanding and entitled to vote thereon IN WITNESS WHEREOF, the undersigned have executed this Certificate of Amendment as of June 30, 1997. By: /s/ J. Jeremy Barbera J. Jeremy Barbera Chairman and President By: /s/ Alan I. Annex Alan I. Annex Secretary State of New York } ss. County of NY } On June 30, 1997 personally appeared before me, a Notary Public, J. Jeremy Barbera, Chairman and President and Alan I. Annex, Secretary of All-Comm Media Corporation, who acknowledged that they executed the above instrument. /s/ Eric M. Roth Signature of Notary EX-10 7 SECURITY AGREEMENT Exhibit 10.14 Milberg Factors, Inc. 99 Park Avenue New York, New York 10016 SECURITY AGREEMENT (Accounts Receivable - Financing) Gentlemen: We propose the following arrangements with you, effective as of the date of your acceptance, wherein you may make loans and advances to us in accordance with the terms, provisions and conditions hereinafter stated: 1. As security for all such loans and advances (both referred to as "Advances"), and for all other debts, liabilities and obligations of every nature whatsoever now or hereafter owing from the undersigned to you, the undersigned hereby sells, assigns, transfers, sets over, hypothecates and pledges to you at your office in the City of New York, with absolute recourse to us, and grants you a security interest in all Receivables (as hereinafter defined) and all general intangibles (as such term is defined in the Uniform Commercial Code) and all intellectual property including but not limited to lists, data, computer memory and software, now or hereafter owned by us. For the purposes of this agreement the term "Receivables" means and includes all accounts, accounts receivable, contract rights, instruments, documents, chattel paper and leases, and any and all other forms of claims or obligations owing to us, whether secured or unsecured, all proceeds thereof including insurance thereon and all our rights as to any merchandise which is represented thereby (delivered or undelivered) including all of our rights of stoppage in transit, replevin and reclamation and as an unpaid vendor or lienor. You shall be privileged to enjoy all the rights and remedies of the seller of such goods and shall be and become subrogated to all guaranties and securities possessed by us or due to come into our hands, but you shall not be liable in any manner for exercising or refusing to exercise any rights thereby bestowed. From time to time at you request, but not less than weekly, we shall provide you with schedules describing all Receivables created or acquired by us, in form satisfactory to you, and shall execute and deliver to you at your office in the City of New York, written assignments of such Receivables to you and shall furnish at the same time copies of customers' invoices or the equivalent, together with original shipping or delivery receipts for all merchandise sold and/or the original of all contracts, mortgages and other documents executed by the customers and/or all notes, bills, acceptances or other evidences of their indebtedness, duly endorsed in blank by us, and at the end of every month a detailed open item Accounts Receivable Trial Balance indicating each customer's name, address and owing by individual invoice and/or any other information or documents you may call upon us from time to time to submit, but your failure to request any or all of the foregoing or our failure to deliver same shall not affect your security interest in or rights to Receivables. 2. At the time of assignment of Receivables and periodically thereafter, you may in your sole and absolute discretion make Advances to us which, in the aggregate at any time outstanding, will not exceed the lesser of (i) $2,000,000.00 (the "Maximum Revolving Amount"), or (ii) eighty percent (80%) (the "Advance Percentage") of the net face amount of all Eligible Receivables (as hereinafter defined), less such reserves as you may deem reasonably proper and necessary from time to time, and you will charge the amount of each such advance to our account. Notwithstanding the above, it is understood that you may, at our request, from time to time advance a sum that is more or less than the sum determined by application of the above percentage of Eligible Receivables and may, in fact, make Advances at a time when there are no Eligible Receivables. You may, or we shall upon request from you, at any time notify customers that Receivables have been assigned to you. You may collect Receivables directly in your own name or our name and charge the collection costs and expenses to our account. But, until you give us other instructions, we shall continue to make collection of all Receivables for you. All payments on account of Receivables shall be your specific property; we shall receive them as your trustee and we shall immediately deliver them to you in their original form. After allowing four (4) banking days for collection time, you will credit all such payments to our account and, subject to the provisions of this Agreement, you will at our request remit to us any net balance standing to our credit on your books, or any part thereof. In consideration for your agreement to make the loans referenced above, upon the execution of this Agreement and upon each anniversary of its effective date, we shall, in addition to the payment of the other fees stated herein, pay you a yearly facility fee equal to one percent (1%) of the Maximum Revolving Amount in effect on such date; it being understood that we may, upon written notice to you, elect to reduce the Maximum Revolving Amount at any time, any such reduction being irrevocable. 3. Interest hereunder upon the net balance of our account due at the close of each day, which will be due and payable at the close of each month, shall be based upon the highest publicly announced "reference", "prime", or "base" interest rate of Chase Manhattan Bank (the "Prime Rate") (which is now 8 1/2% per annum) plus one and one-half percent (1 1/2%) (the "Effective Rate"). The effective rate shall be increased or decreased as the case may be for each increase or decrease in the Prime Rate in an amount equal to such increase or decrease in the Prime Rate; each change to be effective as at the first day of the month after the related change in such Prime Rate; but in no event shall the Effective Rate of interest hereunder be less than 8% per annum, nor shall interest charged hereunder be less than $80,000.00 in any contract year, nor in excess of the maximum rate you are permitted to charge by law. However, upon the occurrence of an Event of Default by the undersigned under this Agreement, any supplement hereto or any related agreement and subsequent to any termination of this Agreement pursuant to paragraph 11 hereof, interest upon the net balance of our account due at the close of each day shall be payable at a fluctuating interest rate per annum equal to the Effective Rate plus four percent (4%), but not in excess of the maximum rate permitted by law. Interest shall be calculated on the basis of actual days elapsed and on a 360 day year. Nothing herein shall limit or restrict your right to adjust advance formulas upward or downward and eligibility requirements based upon your lending criteria which is established in your sole discretion and on your own collateral evaluations. You will account monthly to us and each monthly accounting will be final, binding and conclusive upon us unless we give you written notice by registered mail of specified exceptions thereto within 30 days of its date. Such notice shall only be deemed an objection to those items specifically objected to therein. All interest is payable to you daily but shall be charged to our account monthly as a cash advance made by you to us for our account. 4. "Eligible Receivables" shall mean and include each Receivable which conforms to the following criteria: (a) shipment of the merchandise or the rendition of services has been completed; (b) no return, rejection or repossession of the merchandise has occurred; (c) merchandise or services shall not have been rejected or disputed by the customer and there shall not have been asserted any offset, defense or counterclaim; (d) it continues to be in full conformity with the representations and warranties made by the undersigned to you with respect thereto; (e) you are, and continue to be, satisfied with the credit standing of the customer in relation to the amount of credit extended; (f) it is documented by an invoice in a form approved by you and shall not be unpaid more than 90 days from the date of invoice, except in the case of Receivables owed by Optima Direct where they shall not be unpaid more than 120 days from the date of invoices; (g) less than 30% of the unpaid amount of invoices due from such customer and its affiliates remain unpaid more than 90 days from the date of invoice; (h) it is not evidenced by chattel paper or an instrument any kind with respect to or in payment of the Receivable unless such instrument is duly endorsed to and in your possession or represents a check in payment of a Receivable; (i) if the customer is located outside of the United States, the goods which gave rise to such Receivable were shipped after receipt by us from or on behalf of the customer of an irrevocable letter of credit, assigned and delivered to you and confirmed by a financial institution acceptable to you and is in form and substance acceptable to you payable in the full amount of the Receivable in United States dollars at a place of payment located within the United States; (j) such Receivable is not subject to any lien other than in your favor; (k) it does not arise out of transactions with any employee, officer, agent, director, stockholder or affiliate of the undersigned; (l) it is payable to the undersigned; (m) it does not arise out of a bill and hold sale prior to shipment or a sale to any customer to whom we are indebted; (n) it is net of any returns, discounts, claims, credits and allowances; (o) if the Receivable arises out of contracts between the undersigned and the United States, any state, or any department, agency or instrumentality of any of them, we have so notified you, in writing, prior to the creation of such Receivable, and, if you so request, there has been compliance with any governmental notice or approval requirements, including without limitation, compliance with the Federal Assignment of Claims Act; (p) it is a good and valid account representing an undisputed bona fide indebtedness incurred by the customer therein named, for a fixed sum as set forth in the invoice relating thereto with respect to an unconditional sale and delivery upon the stated terms of goods sold by the undersigned, or work, labor and/or services rendered by the undersigned; and (q) it is otherwise satisfactory to you as determined in good faith by you in the reasonable exercise of your discretion. We warrant and agree as to each such Receivable that: (i) we have good title thereto and good right to sell, negotiate, pledge and assign the same to you: and (ii) all documents delivered to you in connection therewith will be genuine. If any Eligible Receivable is later deemed ineligible, you shall have the right to demand payment therefor, but such demand or payment therefor shall not be deemed a reassignment and title to all Receivables, Eligible and ineligible, will remain in you until all of our obligations to you have been fully satisfied. Any merchandise which is returned by customers or otherwise recovered, or held subject to bill and hold invoices, shall be set aside, marked in your name, held by us as your trustee and insured by us for your benefit, and shall remain a part of your security until the amount of Receivables represented thereby has been paid to you. We shall notify you promptly of all returns and recoveries of merchandise and of all disputes and claims, and we shall settle or adjust all disputes and claims at no expense to you, but no discount, credit or allowance shall be granted to any customer and no returns of merchandise shall be accepted by us without your prior consent, except in the ordinary course of business and involving less than $35,000.00 in any separate instance. You will always retain the right to settle or adjust disputes and claims directly with customers for amounts and upon terms which you consider advisable and the right to dispose of merchandise returns as you see fit, all without liability to us. In all cases you will credit our account with only the net amounts received by you in payment of Receivables. We exonerate you from any liability for any loss, depreciation or other damage to Receivables unless caused by your willful and malicious act. We agree to execute and authorize you to execute in our name, such further instruments (including financing and continuation statements) as may be required or permitted by any law relating to notices of or affidavits in connection with assignments of accounts receivable or other security granted to you by us and to cooperate with you in the filing or recording and renewal thereof. 5. During the term of this Agreement, we shall not sell, negotiate, pledge, assign or grant or permit to exist any security interest, lien or encumbrance in, any Receivables, general intangibles, goods or inventory (other than sales of inventory in the ordinary course of business) to anyone other than you without your prior consent, nor shall we grant or permit to exist without your prior consent any mortgage, pledge, security interest, encumbrance or lien or any kind upon any of our property, except liens for taxes not yet due, liens incidental to our business which were not incurred in connection with the borrowing of money or obtaining of advances or credit and which do not detract from the value of our assets or impair the use thereof in the operation of our business. We shall immediately place notations upon our books of account to disclose the assignment of all Receivables to you. You will be entitled to hold all sums at any time standing to our credit on your books and all of our property at any time in your possession, or upon or in which you have a lien or security interest, as security for all of our obligations (direct or indirect, absolute or contingent, under this Agreement or otherwise) at any time owing to you and to each corporation which is at any time your parent, subsidiary or affiliate. Such obligations shall include, without limitation, all loans, advances, debts, liabilities, obligations covenants and duties owing by us to, all obligations (direct or indirect, absolute or contingent under this Agreement or otherwise) for purchases made us from other clients factored or financed by you or any such parent, subsidiary or affiliate, no matter how or when arising and whether due or to become due, and further including all interest, fees, charges, expenses and attorney's fees chargeable to our account or incurred in connection with our account whether provided for herein or in any other agreement between us, and you shall have the right to charge to our account the amounts of all such obligations and pay over such amounts to such parent, subsidiary or affiliate. 6. All advances and all other amounts chargeable to our account under this Agreement shall be payable by us on the termination of this Agreement; recourse to security will not be required at any time. We hereby waive presentment and protest of any instrument and notice thereof, notice of default and all other notices to which we might otherwise be entitled. We shall perform all steps requested by you to create and maintain in your favor valid first security interests in and valid first assignments of and/or liens on all Receivables and all other security held by or for you and shall upon your request and at reasonable intervals also furnish you with statements showing our financial condition and the results of our operations and annually, at our expense, we shall furnish you with audited operating statements and balance sheets prepared by independent certified public accountants acceptable to you and accompanied by the unqualified report of such accountants and on each anniversary hereof, a list of our shareholders, officers and directors. We warrant that we and any guarantors of our obligations hereunder are solvent and will so remain during the term of this Agreement. You will have the right at all times to have access to inspect, audit and make extracts from all of our records, files and books of account. We appoint your officers or any other person whom you may designate as our attorney with power to endorse our name on any checks, notes, acceptances, money orders, drafts or other forms of payment or security that may come in your possession; to sign our name on any invoice or bill of lading relating to any Receivable, on drafts against customers, on schedules of assignments of Receivables, on notices of assignment, on financing statements under the Uniform Commercial Code and other public records, on verification of accounts and on notices to customers; to notify the post office authorities to change the address for delivery of our mail to an address designated by you; to receive, open and dispose of all mail addressed to us; to send requests for verifications of accounts to customers; and to do all other things you deem necessary to carry out this Agreement. We hereby ratify and approve all acts of the attorney and neither you nor the attorney will be liable for any acts of commission or omission, nor for any error of judgment or mistake of fact or law. This power, being coupled with an interest, is irrevocable so long as any money remains due to you from us. 7. We agree to keep our books, records and accounts on a current basis in accordance with generally accepted accounting principles, practices and procedures in the United States of America in effect from time to time ("GAAP") and in a manner satisfactory to you at our own cost and expense. All assignments of Receivables to you by is shall be deemed to include all of our right, title and interest to all of our books, records, files and all other data and documents relating to each Receivable. If any tax by any governmental authority is or may be imposed on or as a result of any transaction between us, or in respect to sales or the merchandise affected by such sales, which you are or may be required to withhold or pay, we agree to indemnify and hold you harmless in respect of such taxes, and we will repay you the amount of any such taxes which shall be charged to our account; and until we shall furnish you with an indemnity therefor satisfactory to you (or supply you with evidence satisfactory to you that due provision for the payment thereof has been made), you may hold without interest any balance standing to our credit and you shall retain your security interest in any and all collateral held by you. We hereby represent and warrant during the term of this Agreement that (a) we have submitted to you the address of our chief executive office (set fort below) and the addresses of our other places of business and will promptly notify you in writing of any closing of existing or opening of new places of business; (b) no significant change in management or ownership will be made; (c) we will not guarantee or endorse the obligations of any person1 firm or corporation, except in the ordinary course of business, enter into any merger or consolidation, or purchase or otherwise acquire the obligations, assets or stock of any person, firm, corporation or other enterprise; (d) we will not incur indebtedness for borrowed money, except to you; (e) we shall not at any time permit our Tangible Net Worth (as customarily defined under GAAP) to be less than $1,000,000.00 and (f) we shall not at any time permit our Working Capital (as customarily defined under GAAP) to be less than $750,000.00. 8. We hereby further represent, warrant and covenant to you that: (a) the execution, delivery and performance of this Agreement any supplements hereto and all related documents, if any, the borrowing of the loans and advances hereunder and thereunder, if any, and the grants of security interests hereunder and thereunder if any, do not and will not (i) violate the provisions of any applicable law. statute, rule, regulation, order or decree to which we are subject, (ii) conflict with, result in a breach of, or constitute a default under, our certificate of incorporation or by-laws, or any indenture, agreement or other instrument to which we are a party, or by which we or any of our property may be bound, or (iii) result in or require the creation or imposition of any security interest, mortgage, pledge or other lien upon any property now owned or hereafter acquired by us other than the security interests granted to you hereunder; (b) the operation of our business is and will remain in compliance in all material respects with all applicable laws including all applicable environmental laws and regulations and all applicable state and federal laws and regulations: (c) based upon the Employee Retirement Income Security Act of 1974 ("ERISA") and the regulations and published interpretations thereunder: (i) we have not engaged in any Prohibited Transactions as defined in Section 406 of ERISA and Section 4975 of the Internal Revenue Code, as amended, (ii) we have met all applicable minimum funding requirements under Section 302 of ERISA in respect of our plans, (iii) we have no knowledge of any event or occurrence which would cause the Pension Benefit Guaranty Corporation to institute proceedings under Title IV of ERISA to terminate any employee benefit plan(s), (iv) we have no fiduciary responsibility for investments with respect to any plan existing for the benefit of persons other than our employees and (v) we have not withdrawn, completely or partially, from any multiemployer pension plan so as to incur liability under the Multiemployer Pension Plan Amendments Act of 1980; (d) we are a corporation duly incorporated, validly existing and in good standing under the laws of the state of our incorporation and are and will remain duly licensed and qualified to do business and are in good standing in all other states where the nature of our business makes licensing or qualification as a foreign corporation necessary; (e) there are no pending or threatened investigations, actions or proceedings before or by any court, govemmental department, commission, board, bureau or administrative agency which if adversely determined would materially affect our condition, business or operation; (f) we own and have good and marketable title to all of the goods and chattels and other assets real and personal in which a lien or security interest is given to you under your security agreements free and clear of all liens, charges and encumbrances other than liens set forth on any schedule annexed to said agreements; (g) we have filed all required tax returns and paid applicable United States federal, state and local taxes, if any, other than taxes not yet due or which may hereafter be paid without penalty, and have no knowledge of any deficiency or additional assessment in connection therewith not provided for on our books and will continue to do so during the term hereof; (h) we are (i) in compliance with, and (ii) have procured and are now in possession of, all licenses or permits required by any applicable federal, state or local law or regulation for the operation of our business in each jurisdiction wherein we are now conducting or propose to conduct business; (i) we are not in default in the payment of the principal of or interest on any indebtedness for borrowed money or under any instrument or agreement under and subject to which any indebtedness for borrowed money has been issued and no event has occurred under the provisions of any such instrument or agreement which with or without the lapse of time or the giving of notice, or both, constitutes or would constitute, an event of default thereunder; (j) we will promptly inform you of: (i) the commencement of all proceedings and investigations by or before any governmental or nongovernmental body and all actions and proceedings in any court or before any arbitrator against or in any way concerning any of our properties, assets or business, which might singly or in the aggregate, have a materially adverse effect on us, (ii) any amendment of our certificate of incorporation or by-laws, (iii) any change in our business, assets, liabilities, financial condition, results of operations or business prospects which has had or might have any materially adverse effect on us, (iv) any default or Event of Default hereunder or any event which with the passage of time or giving of notice or both would constitute a default or Event of Default, (v) any default or any event which with the passage of time or giving of notice or both would constitute a default under any agreement for the payment of money to which we are a party or by which we or any of our properties may be bound or which would have a material adverse effect on our business, operations, property or financial condition, (vi) any change in the location of our places of business, and (vii) any change in our corporate name; (k) all financial, projections prepared by us or at our direction and delivered to you will represent, at the time of delivery to you, our best estimate of our future financial performance and will be based upon assumptions which are valid in light of the then current business conditions; and (l) all balance sheet and income statements which have been delivered to you fairly, accurately and properly state our financial condition and there has been no material adverse change in our financial condition as reflected in such statements since the date of the latest thereof and such statements do not fail to disclose any fact or facts which might materially and adversely affect our financial condition. 9. We irrevocably waive the right to: (i) direct the application of any and all payments at any time or times hereafter received by you from or on our behalf and we do hereby irrevocably agree that you shall have the continuing exclusive right to apply and reapply any and all payments received at any time or times hereafter against our debts and obligations hereunder in such manner as you may deem advisable notwithstanding any entry by you upon any of your books and records: (ii) pay any management fees or make any similar payments or declare any dividends, except dividends payable exclusively in our stock or redeem any of our stock or make any other payments in respect of our stock that are the equivalent to dividends or stock redemption payments, to any shareholder or affiliate as long as any debts and obligations hereunder remain outstanding without your express prior written consent; and (iii) issue any guarantees of the obligations of any third person or entity as long as any debts and obligations hereunder remain outstanding, without your express prior written consent. 10. Since the transactions hereunder will take place at your office in the City of New York, this Agreement and all transactions, assignments and transfers hereunder, and all rights of the parties, shall be governed as to validity, construction, enforcement and in all other respects by the laws of the State of New York. Each of the parties to this Agreement expressly submits and consents to the jurisdiction of the courts of the State of New York, in the County of New York, with respect to any controversy arising out of or relating to this Agreement or any amendment or supplement hereto or to any transactions in connection herewith and each of the parties to this Agreement hereby waives personal service of any summons or complaint or other process or papers to be issued in any action or proceeding involving any such controversy and hereby agrees that service of such summons or complaint or process may be made by registered or certified mail to the other party at the address appearing herein; failure on the part of either party to appear or answer within thirty (30) days of such mailings of such summons, complaint or process shall constitute a default entitling the other party to enter a judgment or order as demanded or prayed for therein to the extent that said Court or duly authorized officer thereof may authorize or permit. 11. This Agreement shall have an initial term of two years from its effective date and shall thereafter be automatically renewed for successive periods of two years unless terminated by us at the conclusion of its initial term or any renewal term by giving you at least sixty (60) days prior written notice; provided, however, that you may terminate it at any tune during the initial term or any. renewal term by giving us at least sixty (60) days prior written notice. The mailing of a registered or certified letter of notice addressed by one party to the other at its usual address shall constitute sufficient notice, and the termination shall be effective on the appropriate date specified in such letter. Upon the effective date of termination all outstanding Advances and all other moneys chargeable to our account under this Agreement, supplements hereto, or otherwise, shall become immediately due and payable without further notice or demand. Your rights with respect to obligations owing to you prior to the effective date of termination will not be affected by termination, and all of the provisions of this Agreement, including without limitation, all of our representations, warranties, covenants and agreements and all other provisions binding upon us contained herein, shall continue operative until all such obligations have been fully satisfied or indemnified in a manner satisfactory to you. 12. To the extent you receive any payment or payments by or on our behalf which payment or payments, or any part thereof, are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be'repaid to us, our estate, trustee, receiver, custodian or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such payment or repayment, the obligation or part thereof which has been paid, reduced or satisfied by the amount so repaid shall be reinstated and included within the liabilities as of the date such initial payment, reduction or satisfaction occurred and same shall be secured by our assets in which you have been granted a lien or security interest. 13. The occurrence of any one or more of the following events shall constitute an "Event of Default": (a) default in the payment or performance, when due or payable, of any payment required under this Agreement or under any future agreement or supplement with you or under any agreement to which we are a party with third parties; (b)any warranty, representation, or other statement made or furnished to you by us or on our behalf or by any guarantor of our obligations hereunder or in connection herewith or in any instrument furnished in compliance with or in reference to this Agreement proves to have been false or misleading in any material respect when made or furnished or becomes false in any material respect; (c) we fail or neglect to perform, keep or observe any term, provision, condition. covenant, warranty or representation contained in this Agreement or in any other agreement between us or any rider or supplement which is required to be performed, kept or observed by us; (d) any statement, report, financial statement, or certificate made or delivered by us, or by any of our officers, employees or agents, to you is not true and correct in any material respect; (e) the imposition of a lien or encumbrance on any of our assets, including the Receivables, or the making of any levy, seizure or attachment on all or any of our assets, including the Receivables; (f) any material adverse change in our financial condition or the financial condition of any guarantor of our obligations hereunder; (g) we or any guarantor of our obligations hereunder become insolvent, or unable to meet our debts, as they mature, or fail, suspend or go out of business or a case is commenced under the Bankruptcy Code or an order for relief in a case under the Bankruptcy Code is entered with respect to us or any such guarantor, or a custodian or receiver (or other court designee performing the functions of a receiver) is appointed for or takes possession of either our or any such guarantor's assets or affairs; (h) we or any guarantor of our obligations hereunder cease to conduct our business as now conducted or are enjoined, restrained or in any way prevented by court, governmental or administrative order from conducting all or any material part of our business affairs; (i) a notice of any lien. levy or assessment is filed of record with respect to all or any of our assets by the United States, or any department, agency or instrumentality thereof, or by any state, county, municipal or other governmental agency, including, without limitation, the Pension Benefit Guaranty Corporation, if any taxes or debts owing at any time or times hereafter to any one of them becomes a lien or encumbrance upon any of the Receivables or any of our other assets and the same is not released within thirty (30) days after the same becomes a lien or encumbrance; (j) you shall in good faith deem yourself insecure or unsafe; (k) any guaranty given you with respect to our obligations, is limited or terminated or otherwise deemed unenforceable or invalid; (1) death of a guarantor of our obligations hereunder or in connection herewith, which guaranty is not replaced by a guarantor, acceptable to you in your sole discretion; or (m) we shall fail to pay our taxes when due unless such taxes are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been provided on our books. Upon the occurrence of an Event of Default you may, at your option, terminate this Agreement, any supplement or rider hereto and any agreement related hereto, and all Advances and other debts and obligations to you shall be immediately due and payable. Without further demand and upon five (5) days notice (which we agree constitutes reasonable notice) you may, at your option, sell and deliver any or all Receivables and any or all other Security held by or for you, at public or private sale, for cash, upon credit or otherwise, at such prices and upon such terms as you may deem advisable, in New York or at such other place or places as you may designate, at your sole discretion, and you may be the purchaser at any such sale, if it is public, free from any right of redemption which is also waived by us, or you may otherwise recover upon the Receivables in any commercially reasonable manner as you, in your sole discretion deem advisable. The proceeds of any sale shall be applied first to all costs and expenses of sale, including attorneys' fees, and second to the payment (in whatever order you elect) of all of our obligations to you, whether absolute or contingent, or whether due or to become due, and whether under this Agreement or otherwise. Such obligations shall include damages sustained by reason of any default by us. You will return any surplus to us and we shall remain liable to you for any deficiency. Failure by you to exercise any right, remedy or option under this Agreement or any related agreement or delay by you in exercising the same will not operate as a waiver; no waiver by you will be effective unless it is confirmed in writing and then only to the extent specifically stated. In addition to all other sums due you, we will pay you all costs and expenses incurred by you, including a reasonable allowance for attorneys' fees and internal collection efforts, to obtain or enforce payment of Receivables, Advances, interest, or other charges due you hereunder or under any related agreement. Both you and we waive all right to a trial by jury in any litigation relating to transactions under this Agreement, supplements hereto and any related agreements and we agree not to assert any counterclaim of any nature in any such litigation. Your rights and remedies under this Agreement will be cumulative and not exclusive of any other right or remedy which you may have under the Uniform Commercial Code or other provisions of law; nothing herein contained shall limit or otherwise affect any other existing or future lien, security interest, or right to which you may be entitled. This Agreement cannot be changed or terminated orally, is our entire contract, and is for the benefit of and binding upon the parties hereto and their respective successors and assigns. 14. We will pay all of your out-of-pocket costs and expenses, including without limitation reasonable attorneys' fees and disbursements and appraisers, in connection with the preparation, execution and delivery of this Agreement, supplements hereto and related agreements, if any, and as they may be amended from time to time hereafter, and in connection with the prosecution or defense of any action, contest, dispute, suit or proceeding concerning any matter in any way arising out of, related to, or connected with this Agreement, supplements hereto and related agreements. We will also pay all of your out-of-pocket costs and expenses, including without limitation reasonable attorneys' fees and disbursements, in connection with (a) the preparation, execution and delivery of any waiver, amendment or consent proposed or executed in connection with the transactions contemplated by this Agreement and any supplements hereto and related agreements, (b) your obtaining performance of our obligations under this Agreement and any supplements hereto and related agreements, including, but not limited to, the enforcement or defense of your security interests, assignments of rights and liens hereunder and under any supplements hereto and related agreements as valid first security interests, (c) any attempt to inspect, verify, protect collect, sell, liquidate or otherwise dispose of any security held by you, and (d) any consultations in connection with any of the foregoing. We shall also pay your customary charges for all services performed by you for us at our request and all banking facility charges incurred in connection with the opening and operation of our account with you. In addition, and not as a limitation of the above, we shall pay you $500 per month to perform any collateral monitoring namely any field examination, collateral analysis or other business analysis, the need for which is determined by you and for which monitoring is undertaken by you or for your benefit, plus all costs and disbursements incurred by you in the performance of such examinations or analysis. All charges, costs and expenses reflected therein, together with all filing, recording and search fees, taxes and interest payable by us to you shall be payable on demand and may be charged by you to our account. Very truly yours, STEPHEN DUNN & ASSOCIATES, INC. Attest: By: /s/ Krista Mooradian /s/ Thomas Scheir Krista Mooradian, Vice President Thomas Scheir, CFO & Secretary Date: August 4, 1997 Accepted at New York, New York Address: 1728 Abbot Kinney Blvd. MILBERG FACTORS, INC. Venice, CA 90292 By: /s/ David J. Milberg David J. Milberg, Vice President Date: August 4, 1997 EX-10 8 AGREEMENT AND PLAN OF MERGER Exhibit 10.15 AGREEMENT AND PLAN OF MERGER (this "Merger Agreement") effective as of the 1st day of July 1997, by and among MARKETING SERVICES GROUP, INC., a Nevada corporation ("MSGI" or the "Purchaser"); PII MERGER CORP., a New York corporation and a wholly-owned subsidiary of MSGI ("Merging Subsidiary"); PEGASUS INTERNET, INC., a New York corporation ("Pegasus" or "the Company"); ROBERT BOURNE, an individual ("RB"); J. JEREMY BARBERA, an individual ("JJB"); ROBERT K. BOURNE, an individual; ("RKB"); and KATHLEEN R. BOURNE, an individual ("KRB"; together with RB, JJB, and RKB, the "Shareholders"). W I T N E S S E T H: WHEREAS, MSGI, Merging Subsidiary, PII and the Shareholders deem it to be desirable and in the best interests of each corporation that MSGI acquire Pegasus such that all of the issued and outstanding shares of capital stock of Pegasus be acquired by MSGI pursuant to a merger (the "Merger") as described herein; WHEREAS, MSGI has formed PII Corp. as a wholly-owned subsidiary ("Merging Subsidiary") under the Business Corporation Law of the State of New York (the "BCL") for the purpose of merging it with Pegasus pursuant to the applicable provisions of the BCL and the terms of this Merger Agreement; WHEREAS, subject to the terms and conditions of this Merger Agreement, MSGI and Pegasus desire to cause Merging Subsidiary to be merged with and into Pegasus, Pegasus and Merging Subsidiary shall be referred to herein as the "Constituent Corporations"; and WHEREAS, it is the express intention of MSGI, Merging Subsidiary and Pegasus that the Merger constitute a plan of reorganization intended to qualify for federal income tax purposes as a "reorganization" within the meaning of IRC Sections 368(a)(1)(A) and 368(a)(2)(E): NOW, THEREFORE, in consideration of the premises, representations, warranties and covenants contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. THE MERGER. 1.1 The Merger. At the Effective Time (as defined in Section 1.2), upon the terms and subject to the conditions of this Agreement, Merging Subsidiary shall be merged with and into Pegasus (the "Merger") in accordance with the BCL. Pegasus shall be the surviving corporation (the "Surviving Corporation") in the Merger. As a result of the Merger, the outstanding shares of capital stock of the Constituent Corporations shall be converted or canceled in the manner provided in Article 2. 1.2 Effective Time. At the Closing (as defined in Section 1.3), a certificate of merger (the "Certificate of Merger") shall be duly prepared and executed by Pegasus and Merging Subsidiary and thereafter delivered to the Secretary of State of the State of New York (the "Secretary") on, or as soon as practicable after, the Closing Date (as defined in Section 1.3). The Merger shall become effective at the time of the filing of the Certificate of Merger with the Secretary (the date and time of such filing being referred to herein as the "Effective Time"). 1.3 Closing. The closing of the Merger (the "Closing") will take place at the offices of Camhy Karlinsky & Stein LLP, 1740 Broadway, New York, New York 10019-4315, on July 11, 1997 or at such other place as the parties hereto mutually agree, on a date and at a time to be specified by the parties, which shall in no event be later than 10:00 a.m., local time, provided that the closing conditions set forth in Article 5 have been satisfied or, if permissible, waived in accordance with this Merger Agreement, or on such other date as the parties hereto mutually agree (the "Closing Date"). 1.4 Certificate of Incorporation and Bylaws of the Surviving Corporation. At the Effective Time, (i) the Certificate of Incorporation of Pegasus as in effect immediately prior to the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended as provided by law and such Certificate of Incorporation, and (ii) the Bylaws of Pegasus as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation until thereafter amended as provided by law, the Certificate of Incorporation of the Surviving Corporation, and such Bylaws. 1.5 Directors of the Surviving Corporation. From and after the Effective Time, the directors of the Surviving Corporation shall be JJB and RB. The directors of the Surviving Corporation shall serve until their successors shall have been duly elected or appointed and qualified or until their earlier death, resignation, or removal in accordance with the Surviving Corporation's Certificate of Incorporation and Bylaws. 1.6 Effects of the Merger. Subject to the foregoing, the effects of the Merger shall be as provided in the applicable provisions of the BCL. 2. STATUS AND CONVERSION OF SECURITIES. 2.1 Stock of Pegasus. (a) Pegasus. Each share of common stock, without par value, of Pegasus ("Pegasus Common Stock") issued and outstanding at the Effective Time shall, by virtue of the Merger and without any action on the part of the holders thereof, be converted into the right to receive (i) 3,000 shares of common stock, par value $0.01 per share, of MSGI ("MSGI Common Stock") for a total of 600,000 shares of MSGI Common Stock (the "Stock Consideration"), except that any shares of Pegasus Common Stock held in Pegasus' treasury or owned by Pegasus or Merging Subsidiary at the Effective Time shall be canceled without payment of any consideration thereof and (ii) $1,000 in cash for a total of $200,000 in cash (the "Cash Consideration"). Each Shareholder shall receive a portion of the Cash Consideration equal to the product (x multiplied by y) of (x) $200,000 divided by the total number of shares of Pegasus Common Stock outstanding, and (y) the number of shares of Pegasus Common Stock held by such Shareholder. (b) Exchange of Pegasus Common Stock. At the Effective Time, MSGI shall deliver to its transfer agent instructions to forthwith issue from its authorized but unissued shares and distribute to holders of certificates representing shares of Pegasus Common Stock, upon surrender to MSGI of such certificates for cancellation, together with a duly-executed stock power, if applicable, one or more certificates representing the number of whole shares of MSGI Common Stock into which the shares represented by the certificate(s) shall have been converted pursuant to Sections 2.1(a) and the certificate(s) so surrendered shall be canceled. Such instructions shall be accompanied by an opinion of MSGI's counsel, sufficient in form and scope to cause the transfer agent to comply with MSGI's instructions. Upon surrender of his or her Pegasus shares, each shareholder of Pegasus prior to the Effective Time shall be deemed the owner of the number of MSGI shares into which such Pegasus shares are to be converted pursuant hereto. (c) After the Effective Time, there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Pegasus Common Stock that were outstanding immediately prior to the Effective Time. As of the Effective Time, the holders of certificates representing shares of Pegasus Common Stock shall cease to have any rights as shareholders of Pegasus, except such rights, if any, as they may have pursuant to New York law. Except as provided above, until such certificates are surrendered for exchange, each such certificate shall, after the Effective Time, represent for all purposes only the right to receive the number of whole shares of MSGI Common Stock into which the shares of Pegasus Common Stock have been converted by the Merger as provided in Sections 2.1(a) hereof. (d) Dissenters' Rights. All of the Shareholders hereby waive any dissenters' rights under New York Law. 2.2 Stock of Merging Subsidiary. Each share of common stock, par value $.01, of Merging Subsidiary shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into one share of Pegasus Common Stock, which will be registered in the name of MSGI. 2.3 Other Transactions at Closing. In addition to the transactions referred to in this Article 1 above, at the Closing, Pegasus shall deliver to the Purchaser the following: (a) The minute books, stock certificate books, stock transfer ledgers, and corporate seals of the Company; (b) Certificates of Good Standing, with "bring down" telegrams or similar documentation, as to the Company issued by the appropriate governmental authorities of the State of New York and each state in which the Company is qualified to do business; (c) Certified copy of the Certificate of Incorporation of the Company, and all amendments thereto, certified by the Secretary of State of the State of New York; and (d) A copy of the Bylaws of the Company, certified by the secretary or assistant secretary thereof as being true, complete, and correct. 3. REPRESENTATIONS AND WARRANTIES OF PEGASUS AND THE SHAREHOLDERS. Pegasus and each of the Shareholders, jointly and severally, represent and warrant to the Purchaser as follows: 3.1 Organization and Qualification. The Company does not own any capital stock of any corporation or any interest in any joint venture, partnership, association, trust, or other entity. The business and operations of the Company are conducted solely by and through the Company. Schedule 3.1 correctly sets forth the Company's place of incorporation, principal place of business, and jurisdictions in which it is qualified to do business. The Company is a corporation duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation, with all requisite power and authority, and all necessary consents, authorizations, approvals, orders, licenses, certificates, and permits of and from, and declarations and filings with, all federal, state, local, and other governmental authorities, and all courts and other tribunals, to own, lease, license, and use its properties and assets and to carry on the business in which it is now engaged and the business in which it contemplates engaging. To the best of the Shareholders' and the Company's knowledge, the Company is duly qualified to transact the business in which it is now engaged and is in good standing as a foreign corporation in every jurisdiction in which its ownership, leasing, licensing, or use of property or assets or the conduct of its business makes such qualification necessary. 3.2 Capitalization. The authorized capital stock of the Company consists of 200 shares of Pegasus Common Stock, all of which shares are outstanding. Each of such outstanding shares of Pegasus Common Stock is validly authorized, validly issued, fully paid, and nonassessable, has not been issued and is not owned or held in violation of any preemptive right of stockholders, and is owned of record and beneficially by the Shareholders as set forth on Schedule 3.2 attached hereto. The Pegasus Common Stock is owned by the Shareholders free and clear of all liens, security interests, pledges, charges, encumbrances, stockholders' agreements, and voting trusts. There is no commitment, plan, or arrangement to issue, and no outstanding option, warrant, or other right calling for the issuance of, any share of capital stock of the Company or any security or other instrument convertible into, exercisable for, or exchangeable for capital stock of the Company. There is no outstanding security or other instrument convertible into or exchangeable for capital stock of the Company. 3.3 Financial Condition. Pegasus has delivered to the Purchaser true and correct copies of the following: the balance sheets of the Company as of December 31, 1995 and 1996 and March 31, 1997, the statements of income, statements of retained earnings, and statements of cash flows of the Company for the years ended December 31, 1995 and 1996, and for the six months ended March 31, 1997. Each such balance sheet presents fairly the financial condition, assets, liabilities, and stockholders' equity of the Company as of its date; each such statement of income and statement of retained earnings presents fairly the results of operations of the Company for the period indicated and their retained earnings as of the date indicated; and each such statement of cash flows presents fairly the information purported to be shown therein. To the best of the Shareholders' and the Company's knowledge, the Company understands that the financial statements referred to in this Section 3.3 have been prepared by management of the Company and are in accordance with generally accepted accounting principles consistently applied throughout the periods involved, are in accordance with the books and records of the Company and are capable of being audited by independent certified public accountants in accordance with generally accepted accounting standards. Since March 31, 1997: (a) There has at no time been a material adverse change in the financial condition, results of operations, business, properties, assets, liabilities, or, to the Shareholder's knowledge, the future prospects of the Company. (b) The Company has not authorized, declared, paid, or effected any dividend or liquidating or other distribution in respect of its capital stock or any direct or indirect redemption, purchase, or other acquisition of any stock of the Company. (c) The operations and business of the Company have been conducted in all material respects only in the ordinary course. (d) The Company has not suffered an extraordinary loss (whether or not covered by insurance) or waived any right of substantial value. There is no fact known to the Shareholders, which materially and adversely affects or in the future (as far as the Shareholders can reasonably foresee) may materially and adversely affect the financial condition, results of operations, business, properties, assets, liabilities, or future prospects of the Company; provided, however, that the Shareholders express no opinion as to political or economic matters of general applicability. 3.4 Tax and Other Liabilities. (a) The Company has no known liability of any nature, accrued or contingent, including without limitation liabilities for Taxes (as defined in Section 3.4(f) and liabilities to customers or suppliers, other than the following: (i) Liabilities for which full provision has been made, except Taxes, on the balance sheet (the "Last Balance Sheet") as of March 31, 1997 (the "Last Balance Sheet Date"); and (ii)Other liabilities arising since the Last Balance Sheet Date and prior to the Closing, including Taxes, in the ordinary course of business which are not materially inconsistent with the representations and warranties of any Shareholder or any other provision of this Merger Agreement. (b) Without limiting the generality of Section 3.4(a): (i) The Company and any combined, consolidated, unitary or affiliated group of which the Company is or has been a member prior to the Closing Date: (i) has paid all Taxes required to be paid on or prior to the Closing Date (including, without limitation, payments of estimated Taxes) for which the Company could be held liable, except for Taxes which are being contested in good faith and by appropriate proceedings; and (ii) has accurately and timely filed (or filed an extension for), all federal, state, local, and foreign tax returns, reports, and forms with respect to such taxes required to be filed by them on or before the Closing Date. (ii)The amount set up as provisions for Taxes on the Last Balance Sheet are sufficient for all accrued and unpaid Taxes of the Company, whether or not due and payable and whether or not in dispute, under tax laws as in effect on the Last Balance Sheet Date or now in effect, for the period ended on such date and for all periods prior thereto. (c) There is no material dispute or claim concerning any liability for Taxes of the Company either (i) claimed or raised by any authority in writing, or (ii) as to which the Company has knowledge based upon personal contact with any agent of such authority. (d) Schedule 3.4 sets forth all federal, state, local and foreign income tax returns filed with respect to the Company for taxable periods on or after January 1, 1994 ("Tax Returns"), indicates those Tax Returns that currently are subject to audit. The Company has delivered or made available to Purchaser complete and correct copies of all Tax Returns, examination reports, and statements of deficiencies assessed against, or agreed to by the Company since January 1, 1994. The Company has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to any Tax assessment or deficiency. (e) The Company has not filed a consent under Section 341(f) of the Internal Revenue Code of 1986, as amended (the "Code"). The Company has not made any payments, nor is it obligated to make any payments, nor is a party to any agreement that under certain circumstances could obligate it to make any payment that will not be deductible under Section 280G of the Code. The Company will not have any liability on or after the Closing Date pursuant to any tax sharing or tax allocation agreement. The Company has no liability for the Taxes of any other person under Treasury Regulation 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor, by contract, or otherwise. (f) For purposes of this Merger Agreement, "Taxes" shall mean all federal, state, local or foreign taxes, assessments, duties which are payable or remittable by the Company or levied upon the Company or any property of the Company, or levied with respect to its assets, franchises, income, receipts, including, without limitation, import duties, excise, franchise, gross receipts, utility, real property, capital, personal property, withholding, FICA, unemployment compensation, sales or use, withholding, governmental charges (whether or not requiring the filing of a return), and all additions to tax, penalties and interest relating thereto. 3.5 Litigation and Claims. There is no litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation pending, threatened, or in prospect (or any basis therefor known to the Shareholders) with respect to the Company, or any of its respective businesses, properties, or assets. The Company is not affected by any present or threatened strike or other labor disturbance nor to the knowledge of the Shareholders is any union attempting to represent any employee of the Company as collective bargaining agent. To the best of the Shareholders' and the Company's knowledge, the Company is not in violation of, or in default with respect to, any law, rule, regulation, order, judgment, or decree; nor is the Company required to take any action in order to avoid such violation or default. 3.6 Properties. (a) The Company owns no real property. Set forth on Schedule 3.6(a) is a list of all real property leased by the Company. (b) Set forth in Schedule 3.6(b) is a true and complete list of all personal properties and assets (other than real property) owned by the Company or leased or licensed by the Company from or to a third party. All such properties and assets owned by the Company are reflected on the Last Balance Sheet (except for acquisitions subsequent to the Last Balance Sheet Date which are noted on Schedule 3.6(b)). All such properties and assets owned, leased, or licensed by the Company are in good and usable condition (reasonable wear and tear which is not such as to affect adversely the operation of the business of the Company excepted). (c) All accounts and notes receivable reflected on the Last Balance Sheet, or arising since the Last Balance Sheet Date, have been collected, or are believed to be collectible in the ordinary course subject to adjustment consistent with industry standards. (d) No real property owned, leased, or licensed by the Company lies in an area which is, or to the knowledge of Sellers will be, subject to zoning, use, or building code restrictions that would prohibit the continued effective ownership, leasing, licensing, or use of such real property in the business which the Company is now engaged. (e) The Company has not caused or permitted its respective businesses, properties, or assets to be used to generate, manufacture, refine, transport, treat, store, handle, dispose of, transfer, produce, or process any Hazardous Substance (as such term is defined in this Section 3.6(e)) except in compliance with all applicable laws, rules, regulations, orders, judgments, and decrees, and has not caused or permitted the Release (as such term is defined in this Section 3.6(e)) of any Hazardous Substance on or off the site of any property of the Company. The term "Hazardous Substance" shall mean any hazardous waste, as defined by 42 U.S.C. ss.6903(5), any hazardous substance, as defined by 42 U.S.C. ss.9601(14), any pollutant or contaminant, as defined by 42 U.S.C. ss.9601(33), and all toxic substances, hazardous materials, or other chemical substances regulated by any other law, rule, or regulation. The term "Release" shall have the meaning set forth in 42 U.S.C. ss.9601(22). 3.7 Contracts and Other Instruments. Schedule 3.7 accurately and completely sets forth a list of all material contracts, agreements, loan agreements, instruments, leases, licenses, arrangements, or understandings with respect to the Company not otherwise identified in this Agreement or on any other Schedule hereto. To the best of the Shareholders' and the Company's knowledge, each such contract, agreement, loan agreement, instrument, lease, or license is in full force and is the legal, valid, and binding obligation of the Company and (subject to applicable bankruptcy, insolvency, and other laws affecting the enforceability of creditors' rights generally) is enforceable as to it in accordance with its terms. To the best of the Shareholders' and the Company's knowledge, the Company is not in violation, in breach of, or in default with respect to any material terms of any such contract, agreement, loan agreement, instrument, lease, or license. Except for employment agreements and as disclosed in Schedule 3.7, the Company is not a party to any contract, agreement, loan agreement, instrument, lease, license, arrangement, or understanding with, any Shareholder or any director, officer, or employee of the Company, or any relative or affiliate of any Shareholder or of any such director, officer, or employee. The stock ledgers and stock transfer books and the minute book records of the Company relating to all issuances and transfers of the shareholders of the Board of Directors and committees thereof of the Company since its incorporation made available to the Purchaser are the original stock ledgers and stock transfer books and minute book records of the Company or exact copies thereof. 3.8 Employees. (a) The Company does not have and it does not contribute to, any pension, profit sharing, option, other incentive plan, or any other type of Employee Benefit Plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and does not have any obligation to or non-customary arrangement with employees for bonuses, incentive compensation, vacations, severance pay, insurance, or other benefits, other than a 401(k) plan as described on Schedule 3.8(a) hereof. (b) Schedule 3.8(b) contains a true and correct statement of the names, relationship with the Company, present rates of compensation (whether in the form of salary, bonuses, commissions, or other supplemental compensation now or hereafter payable), and aggregate compensation for the twelve month period ending June 30, 1997 of each employee of the Company. Since June 30, 1997, the Company has not changed the rate of compensation of any of its directors, officers, employees, agents, dealers, or distributors, nor has any Employee Benefit Plan or program been instituted or amended to increase benefits thereunder. 3.9 Patents, Trademarks, Et Cetera. Except as disclosed on Schedule 3.9, the Company does not own or have pending, or is licensed under, any patent, patent application, trademark, trademark application, trade name, service mark, copyright, franchise, or other intangible property or asset (all of the foregoing being herein called "Intangibles"). Those Intangibles listed on Schedule 3.9 are in good standing and uncontested. Neither any Shareholder, any director, officer, or employee of the Company, nor any relative or affiliate of any Shareholder or of any such director, officer, or employee, possesses any Intangible which relates to the business of the Company. There is no right under any Intangible necessary to the business of the Company as presently conducted, except such as are so designated in Schedule 3.9. To the best of the Shareholders' and the Company's knowledge, the Company has not infringed, is not infringing, and has not received notice of infringement with regard to asserted Intangibles of others. To the knowledge of the Shareholders, there is no infringement by others of Intangibles of the Company. 3.10 Questionable Payments. To the best of the Shareholders' and the Company's knowledge, none of the Company, any director, officer, agent, employee, or other person associated with or acting on behalf of the Company has, directly, or indirectly: used any corporate funds for unlawful contributions, gifts, entertainment, or other unlawful expenses relating to political activity; made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; established or maintained any unlawful or unrecorded fund of corporate monies or other assets; made any false or fictitious entry on the books or records of the Company; or made any bribe, kickback, or other payment of a similar or comparable nature, whether lawful or not, to any person or entity, private or public, regardless of form, whether in money, property, or services, to obtain favorable treatment in securing business or to obtain special concessions, or to pay for favorable treatment for business secured or for special concessions already obtained. 3.11 Authority to Merge. (a) The Company and each of the Shareholders has the capacity to execute, deliver, and perform this Merger Agreement. This Merger Agreement has been duly executed and delivered by the Company and each of the Shareholders, is the legal, valid, and binding obligation of each of the Shareholders, and is enforceable as to each of them in accordance with its terms. None of the Company nor any of the Shareholders is under any contractual restriction or obligation which is inconsistent with the execution and performance of this Merger Agreement. Neither the Company nor any of the Shareholders has any knowledge of any consent, authorization, approval, order, license, certificate, or permit of or from, or declaration or filing with, any federal, state, local, or other governmental authority or any court or other tribunal that is required by the Company, or any Shareholder for the execution, delivery, or performance of this Merger Agreement by the Company and the Shareholders. (b) No consent of any party to any material lease, license, distribution, agency, consulting, employment, financing, lending, installment sale or conditional sale, security, pledge, guarantee, or other agreement, arrangement, or understanding to which the Company or any Shareholder is a party, or to which any of its or his properties or assets are subject, is required for the execution, delivery, or performance of this Merger Agreement, except as disclosed in Schedule 3.11. Neither the Company nor any Shareholder has made any agreement or understanding not approved in writing by the Purchaser as a condition for obtaining any consent, authorization, approval, order, license, certificate, or permit required for the consummation of the transactions contemplated by this Merger Agreement. The execution, delivery, and performance of this Merger Agreement by the Company and the Shareholders will not violate, result in a breach of, conflict with, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under such lease, license, distribution, agency, consulting, employment, financing, lending, installment sale or conditional sale, security, pledge, guarantee, or other agreement, or understanding, or violate or result in a breach of any term of the certificate of incorporation (or other charter document) or bylaws of the Company or, to the Shareholders knowledge, violate, result in a breach of, or conflict with any law, rule, regulation, order, judgment, or decree binding on the Company, or to which any of its operations, business, properties, or assets are subject. 3.12 Nondistributive Intent. Each Shareholder is acquiring the shares of MSGI Stock to be issued hereunder to him for his own account (and not for the account of others) for investment and not with a view to the distribution thereof. No Shareholder will sell or otherwise dispose of such shares without registration under the Securities Act of 1933, as amended (the "Securities Act"), or an exemption therefrom, and the certificate or certificates representing such shares may contain a legend to the foregoing effect. Each Shareholder understands that he may not sell or otherwise dispose of such shares in the absence of either a registration statement under the Securities Act or an exemption from the registration provisions of the Securities Act. 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser represents and warrants to Pegasus and the Shareholders as follows: 4.1 Organization. MSGI is a corporation duly organized, validly existing and in good standing under the laws of Nevada. Merging Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of New York. MSGI and Merging Subsidiary have all requisite power and authority, corporate or otherwise, to carry on and conduct its business as it is now being conducted and to own or lease its properties and assets, and is duly qualified and in good standing in every state of the United States in which the conduct of the business of MSGI or Merging Subsidiary, as the case may be, or the ownership of such properties and assets requires it to be so qualified, except where the failure to be so qualified would not have a material adverse effect on the business, assets or financial condition of MSGI and its subsidiaries taken as a whole. 4.2 Validity of Shares. The Shares of MSGI Stock to be delivered to the Shareholders pursuant to this Merger Agreement, when issued in accordance with the terms and provisions of this Merger Agreement, will be validly authorized, validly issued, fully paid, and nonassessable. 4.3 Authority to Merge. The Purchaser and Merging Subsidiary have all requisite power and authority to execute, deliver, and perform this Merger Agreement. All necessary corporate proceedings of the Purchaser and Merging Subsidiary have been duly taken to authorize the execution, delivery, and performance of this Merger Agreement by the Purchaser. This Merger Agreement has been duly authorized, executed and delivered by the Purchaser and Merging Subsidiary, is the legal, valid, and binding obligation of the Purchaser and Merging Subsidiary, and is enforceable as to them in accordance with its terms. 4.4 SEC Reports. Since April 25, 1995, MSGI has filed all reports, registrations, proxy or information statements and all other material documents, together with any amendments or supplements required to be made thereto ("SEC Reports"), required to be filed with the Securities and Exchange Commission (the "SEC") under the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and MSGI has heretofore made available to the Shareholders true copies of all such reports. As of their respective dates, such reports referred to herein complied, as of their respective dates, in all material respects with all rules and regulations promulgated by the SEC and did not, or will not, as the case may be, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or omit to state any fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not materially misleading. With respect to the SEC Reports filed by MSGI with the SEC prior to April 25, 1995, MSGI has no knowledge that such reports contained any material misstatements or omissions. 5. CONDITIONS TO OBLIGATIONS OF THE PURCHASER. The obligations of the Purchaser under this Merger Agreement are subject, at the option of the Purchaser, to the following conditions: 5.1 Accuracy of Representations and Compliance With Conditions. All representations and warranties of the Company and the Shareholders contained in this Merger Agreement shall be accurate as of the Closing as though such representations and warranties were then made in exactly the same language by the Company and the Shareholders and regardless of knowledge or lack thereof on the part of the Company and the Shareholders or changes beyond its or their control; as of the Closing, the Company and the Shareholders shall have performed and complied with all covenants and agreements and satisfied all conditions required to be performed and complied with by any of them at or before such time by this Merger Agreement; and the Purchaser shall have received a certificate executed by the Company and each of the Shareholders, dated the date of the Closing, to that effect. 5.2 Opinion of Counsel. The Company and the Shareholders shall have delivered to the Purchaser on the date of the Closing the opinion of counsel to the Company and the Shareholders, dated as of the Closing Date, in form and substance satisfactory to counsel for the Purchaser, substantially to the effect that: (a) The Company is a corporation validly existing and in good standing under the laws of the State of New York, with all requisite corporate power and authority to own, lease, license, and use its properties and assets and to carry on the business in which it is now engaged. (b) The Company is duly qualified to transact the business in which it is now engaged. (c) The authorized and outstanding capital stock of the Company is as set forth in Section 3.2 of this Merger Agreement, and all the outstanding shares of capital stock of the Company are validly authorized, validly issued, fully paid, and nonassessable. (d) This Merger Agreement has been duly authorized, executed, and delivered by the Company and the Shareholders, constitutes the legal, valid, and binding obligation of the Shareholders, and (subject to applicable bankruptcy, insolvency, and other laws affecting the enforceability of creditors' rights generally) is enforceable as to the Company and the Shareholders in accordance with its terms. 5.3 Other Closing Documents. The Company and the Shareholders shall have delivered to the Purchaser at or prior to the Closing such other documents as the Purchaser may reasonably request in order to enable the Purchaser to determine whether the conditions to its obligations under this Merger Agreement have been met and otherwise to carry out the provisions of this Merger Agreement. 5.4 Legal Action. There shall not have been instituted or threatened any legal proceeding relating to, or seeking to prohibit or otherwise challenge the consummation of, the transactions contemplated by this Merger Agreement, or to obtain substantial damages with respect thereto. 5.5 No Governmental Action. There shall not have been any action taken, or any law, rule, regulation, order, judgment, or decree proposed, promulgated, enacted, entered, enforced, or deemed applicable to the transactions contemplated by this Merger Agreement by any federal, state, local, or other governmental authority or by any court or other tribunal, including the entry of a preliminary or permanent injunction, which, in the sole judgment of the Purchaser, (a) makes any of the transactions contemplated by this Merger Agreement illegal, (b) results in a delay in the ability of the Purchaser to consummate any of the transactions contemplated by this Merger Agreement, (c) requires the divestiture by the Purchaser of any of the shares of the Company to be acquired pursuant to this Merger Agreement or of a material portion of the business of either the Purchaser and its subsidiaries taken as a whole, or of the Company, (d) imposes material limitations on the ability of the Purchaser effectively to exercise full rights of ownership of such shares including the right to vote such shares on all matters properly presented to the stockholders of the Company, or (e) otherwise prohibits, restricts, or delays consummation of any of the transactions contemplated by this Merger Agreement or impairs the contemplated benefits to the Purchaser of any of the transactions contemplated by this Merger Agreement. 5.6 Contractual Consents Needed. The parties to this Merger Agreement shall have obtained at or prior to the Closing all consents required for the consummation of the transactions contemplated by this Merger Agreement from any party to any contract, agreement, instrument, lease, license, arrangement, or understanding to which any of them is a party, or to which any of them or any of their respective businesses, properties, or assets are subject. 5.7 Material Adverse Change. Since March 31, 1997, there has been no event or development or combinations of changes or developments, individually or in the aggregate, that could be reasonably expected to have a material adverse effect on the business, operations, or future prospects of the Company. 6. CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE SHAREHOLDERS. The obligations of the Company and the Shareholders under the Merger Agreement are subject, at the option of the Company and the Shareholders, to the following conditions. 6.1 Accuracy of Representations and Compliance With Conditions. All representations and warranties of the Purchaser contained in this Merger Agreement shall be accurate when made and, in addition, shall be accurate as of the Closing as though such representations and warranties were then made in exactly the same language by the Purchaser and regardless of the knowledge or lack thereof on the part of the Purchaser or changes beyond its control; as of the Closing, the Purchaser shall have performed and complied with all conditions required to be performed and complied with by it at or before such time by this Merger Agreement, and the Company and the Shareholders shall have received a certificate executed by an executive officer of the Purchaser, dated the date of the Closing, to that effect. 6.2 Legal Action. There shall not have been instituted or threatened any legal proceeding relating to, or seeking to prohibit or otherwise challenge the consummation of, the transactions contemplated by this Merger Agreement, or to obtain substantial damages with respect thereto. 6.3 Other Closing Documents. The Purchaser and Merging Subsidiary shall have delivered to the Company and the Shareholders at or prior to the Closing such other documents as the Shareholders may reasonably request in order to enable the Shareholders to determine whether the conditions to their obligations under this Merger Agreement have been met and otherwise to carry out the provisions of this Merger Agreement. 6.4 No Governmental Action. There shall not have been any action taken, or any law, rule, regulation, order, judgment, or decree proposed, promulgated, enacted, entered, enforced, or deemed applicable to the transactions contemplated by this Merger Agreement by any federal, state, local or other governmental authority or by any court or other tribunal, including the entry of a preliminary or permanent injunction, which, in the sole judgment of the Shareholders, (a) makes any of the transactions contemplated by this Merger Agreement illegal, (b) results in a delay in the ability of the Shareholders to consummate any of the transactions contemplated by this Merger Agreement, or (c) otherwise prohibits, restricts, or delays consummation of any of the transactions contemplated by this Merger Agreement or impairs the contemplated benefits to the Shareholders of any of the transactions contemplated by this Merger Agreement. 6.5 Contractual Consents. The parties to this Merger Agreement shall have obtained at or prior to the Closing all consents required for the consummation of the transactions contemplated by this Merger Agreement from any party to any contract, agreement, instrument, lease, license, arrangement, or understanding to which any of them is a party, or to which any of them or any of their respective businesses, properties, or assets are subject. 6.6 Opinion of Counsel. The Purchaser shall have delivered to Pegasus and the Shareholders on the date of the Closing the opinion of counsel to the Purchaser and Merging Subsidiary, dated as of the Closing Date, in form and substance satisfactory to counsel for Pegasus and the Shareholders, substantially to the effect that: (a) MSGI and Merging Subsidiary are corporations validly existing and in good standing under the laws of their states of incorporation, with all requisite corporate power and authority to own, lease, license, and use their properties and assets and to carry on the businesses in which they are now engaged. (b) This Merger Agreement has been duly authorized, executed, and delivered by the Purchaser and Merging Subsidiary, constitutes the legal, valid, and binding obligation of the Purchaser and Merging Subsidiary, and (subject to applicable bankruptcy, insolvency, and other laws affecting the enforceability of creditors' rights generally) is enforceable as to Purchaser and Merging Subsidiary in accordance with its terms. (c) The shares of MSGI Common Stock to be delivered to the Shareholders pursuant to this Merger Agreement when issued in accordance with the terms and provisions of this Merger Agreement, will be validly authorized, validly issued, fully paid and nonassessable. 6.7 Registration Rights. On the date of the Closing, MSGI shall grant the Shareholders certain registration rights with respect to the MSGI Common Stock received by them pursuant to the terms of an agreement in the form attached hereto as Exhibit C. 6.8 Employment Agreement. On the date of the Closing, the Company shall have entered into an employment agreement with RB (the "Employment Agreement"), in the form of Exhibit B hereto. 6.9 Tax Opinion. On the date of the Closing, Pegasus and the Shareholders shall have received an opinion from Hutton Ingram Yuzek Gainen Carroll & Bertolotti to the effect that the Merger constitutes a reorganization within the meaning of IRC Section 368 and will result in the tax-free acquisition of shares of MSGI by the Shareholders. 7. COVENANTS OF THE PURCHASER. The Purchaser covenants and agrees as follows: 7.1 Confidentiality. The Purchaser shall insure that all confidential information which the Purchaser, any of its respective officers, directors, employees, counsel, agents, investment bankers, or accountants, may now possess or may hereafter create or obtain relating to the financial condition, results of operations, business, properties, assets, liabilities, or future prospects of the Company shall not be published, disclosed, or made accessible by any of them to any other person or entity at any time or used by any of them without the prior written consent of the Company; provided, however, that the restrictions of this sentence shall not apply (a) to the extent required to enforce this Merger Agreement or (b) to the extent the information shall have otherwise become publicly available. 7.2 SEC Filings. For a period of five years from the Effective Time the Purchaser shall use its best efforts to timely file all reports required to be filed by it under the Exchange Act. 7.3 NASDAQ Listing. For a period of five years from the Effective Time the Purchaser shall use its best efforts to maintain the listing of the MSGI Stock on the NASDAQ SmallCap Market or on another inter-dealer quotation system or stock exchange. 7.4 Voting of Securities. MSGI covenants and agrees to vote its securities of the Company which they are entitled to vote so as to effectuate the provisions and intent of this Merger Agreement. 7.5 Lock-Up Agreements. The Shareholders agree to execute and deliver to MSGI agreements with respect to limiting their ability to sell their shares of MSGI Stock upon the same terms and conditions as agreements being executed by other executive officers and directors of MSGI in connection with a potential public offering of securities of MSGI. 8. INDEMNIFICATION; SURVIVAL; LIMITATIONS ON LIABILITY. 8.1 Indemnification. (a) Subject to the terms and conditions set forth in Section 8.2, the Shareholders jointly and severally agree to indemnify and hold harmless the Purchaser, its officers, directors, employees, counsel, and agents, (collectively, the "Indemnitees"), against and in respect of any and all claims, suits, actions, proceedings (formal or informal), investigations, judgments, deficiencies, damages, settlements, liabilities, and reasonable legal and other expenses related thereto (collectively, "Claims"), as and when incurred, arising out of or based upon any breach of any representation, warranty, covenant, or agreement of any Shareholder contained in this Merger Agreement or any document or instrument delivered in connection with this Merger Agreement. (b) Each Indemnitee shall give the Shareholders prompt notice of any claim asserted or threatened against such Indemnitee on the basis of which such Indemnitee intends to seek indemnification (but the obligations of the Shareholders shall not be conditioned upon receipt of such notice, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice). The Shareholders shall promptly assume the defense of any Indemnitee, with counsel reasonably satisfactory to such Indemnitee, and the fees and expenses of such counsel shall be at the sole cost and expense of the Shareholders. Notwithstanding the foregoing, any Indemnitee shall be entitled, at his or its expense, to employ counsel separate from counsel for the Shareholders and from any other party in such action, proceeding, or investigation. No Indemnitee may agree to a settlement of a claim without the prior written approval of the Shareholders, which approval shall not be unreasonably withheld. Notwithstanding the above, if the claim for indemnification arises out of a breach of the representations set forth in Section 3.4, the Purchaser, at its option, shall have the sole right to represent the Company in any federal, state, local or foreign tax matter, including any audit or administrative or judicial proceeding or the filing of an amended return. The Shareholders agree that they will cooperate fully with Purchaser and its counsel in the defense or compromise of any such tax matter. 8.2 Survival. (a) Subject to the provisions of Section 8.2(b), the covenants, agreements, representations, and warranties contained in or made pursuant to this Merger Agreement shall survive the Closing and the delivery of the purchase price by the Purchaser, irrespective of any investigation made by or on behalf of any party. (b) The liabilities and obligations of the Shareholders under this Merger Agreement shall be subject to the following limitations: (i) The Shareholders shall have no liability or obligation with respect to any claim for a breach of a representation or warranty under this Merger Agreement made after one (1) year from the Closing Date except for claims arising out of a breach of the representations as to tax liabilities under Section 2.4, with respect to which the Shareholders shall remain liable until ninety (90) days after the expiration of the applicable statute of limitations relating to such tax liabilities; and (ii) The Shareholders shall not be responsible for any claims until the cumulative aggregate amount thereof shall exceed Fifty Thousand ($50,000.00) Dollars (the "Minimum Amount") in which case the Shareholders shall then be jointly and severally liable for all amounts in excess of the Minimum Amount. 9. MISCELLANEOUS. 9.1 Brokerage Fees. Each of the parties hereto represent and warrant to each other that no person has been engaged as a broker or finder in connection with this Merger Agreement. If any person shall assert a claim to a fee, commission, or other compensation on account of alleged employment as a broker or finder, in connection with or as a result of any of the transactions contemplated by this Merger Agreement, the person who is purported to have engaged such broker or finder shall indemnify and hold harmless the other party against any and all Claims as and when incurred, arising out of, based upon, or in connection with such Claim by such person, except to the extent that it is determined in any suit, action, or proceeding that the other party had engaged such broker or finder. Notwithstanding anything in the preceding sentence to the contrary, MSGI acknowledges that Heinemann & Co., Inc., Moskowitz Altman & Hughes LLP and Nancy Cooper, MBA have provided professional advisory and consulting services to Pegasus in connection with the transactions contemplated by this Agreement, and that the fees due to such entities and individual are the responsibility of Pegasus, and that such fees will be paid by Pegasus in the ordinary course of business. 9.2 Further Actions. At any time and from time to time, each party agrees, as its or his expense, to take such actions and to execute and deliver such documents as may be reasonably necessary to effectuate the purposes of this Merger Agreement. 9.3 Submission to Jurisdiction. Each of the parties hereto irrevocably submits to the exclusive jurisdiction of the courts of the County and State of New York, and of any federal court located in the County and State of New York, in connection with any action or proceeding arising out of or relating to, or a breach of, this Merger Agreement, or of any document or instrument delivered pursuant to, in connection with, or simultaneously with this Merger Agreement. Each of the parties hereto agrees that such court may award reasonable legal fees and expenses to the prevailing party. 9.4 Merger; Modification. This Merger Agreement and the Schedules and Exhibits attached hereto set forth the entire understanding of the parties with respect to the subject matter hereof, supersede all existing agreements among them concerning such subject matter, and may be modified only by a written instrument duly executed by each party to be charged. 9.5 Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested by Federal Express, or Express Mail or delivered (in person or by telecopy, or similar telecommunications equipment) against receipt to the party to whom it is to be given at the address set forth in this Section 9.5 (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 9.5). Any notice given to the Purchaser or Merging Subsidiary shall be addressed to Marketing Services Group, Inc., 333 Seventh Avenue, 20th Floor, New York, New York 10001 attention of the President and a copy of such notice (which copy shall not constitute notice) shall also be sent to Camhy Karlinsky & Stein LLP, 1740 Broadway, 16th Floor, New York, New York 10019-4315, Attention: Alan I. Annex, Esq. Any notice given to the Company shall be addressed to Pegasus Internet, Inc., 112 East 11th Street, Suite 4C, New York, New York 10003, Attn: Mr. Robert Bourne. Any notice given to RB shall be addressed to him at 11 Waverly Place, Apt. 5C, New York, New York 10003. Any notice given to JJB shall be addressed to him at 24 West 70th Street, New York, New York 10023. Any notice given to RKB shall be addressed to him at 227 Campbell Court, Geneva, Illinois 60134. Any notification to KRB shall be addressed to her at 227 Campbell Court, Geneva, Illinois 60134. A copy of any notice given to the Company or the Shareholders (which copy shall not constitute notice) shall also be sent to Moskowitz, Altman & Hughes LLP, 11 East 44th Street, Suite 504, New York, NY 10017, Attention: John J. Hughes, Jr. Notice to the estate of any party shall be sufficient if addressed to the party as provided in this Section 9.5. 9.6 Waiver. Any waiver by any party of a breach of any terms of this Merger Agreement shall not operate as or be construed to be a waiver of any other breach of that term or of any breach of any other term of this Merger Agreement. The failure of a party to insist upon strict adherence to any term of this Merger Agreement on one or more occasions will not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Merger Agreement. Any waiver must be in writing. 9.7 Guaranty. MSGI hereby unconditionally and irrevocably guarantees the obligations of Merging Subsidiary under this Agreement. 9.8 Binding Effect. The provisions of this Merger Agreement shall be binding upon and inure to the benefit of the Purchaser, and its successors and assigns Pegasus, and its successors and assigns, and each Shareholder and his respective assigns, heirs, and personal representatives, and shall inure to the benefit of each Indemnitee and its successors and assigns (if not a natural person) and his assigns, heirs, and personal representatives (if a natural person). 9.9 No Third-Party Beneficiaries. This Merger Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Merger Agreement (except as provided in 10.8). 9.10 Separability. If any provision of this Merger Agreement is invalid, illegal, or unenforceable, the balance of this Merger Agreement shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. 9.11 Headings. The headings in this Merger Agreement are solely for convenience of reference and shall be given no effect in the construction or interpretation of this Merger Agreement. 9.12 Counterparts; Governing Law. This Merger Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by, and construed in accordance with, the laws of the State of New York, without giving effect to the rules governing the conflict of laws. IN WITNESS WHEREOF, the parties have duly executed this Merger Agreement on July 11, 1997. MARKETING SERVICES GROUP, INC. By: /s/ J. Jeremy Barbera Name: J. Jeremy Barbera Title: Chairman PII MERGER CORP. By: /s/ J. Jeremy Barbera Name: J. Jeremy Barbera Title: President PEGASUS INTERNET, INC. By: /s/ Robert Bourne Name: Robert Bourne Title: President /s/ Robert Bourne ROBERT BOURNE /s/ J. Jeremy Barbera J. JEREMY BARBERA /s/ Robert K. Bourne ROBERT K. BOURNE /s/ Kathleen R. Bourne KATHLEEN R. BOURNE EX-10 9 EMPLOYMENT AGREEMENT - SCOTT ANDERSON Exhibit 10.19 EMPLOYMENT AGREEMENT THIS AGREEMENT (this "Agreement") is being made as of the 1st day of July, 1997 between MARKETING SERVICES GROUP, INC., a Nevada corporation (the "Company"), having its principal offices at 333 Seventh Avenue, New York, New York 10001, and Scott Anderson ("Employee"), an individual residing at 396 Winslow Avenue, California 90814. W I T N E S S E T H: WHEREAS, the Company desires to continue to employ Employee and Employee desires to be employed by the Company as its Chief Financial Officer, upon the terms and conditions contained herein. NOW, THEREFORE, in consideration of the mutual premises and agreements contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Nature of Employment; Term of Employment. The Company hereby employs Employee and Employee agrees to serve the Company as its Chief Financial Officer, upon the terms and conditions contained herein, for a term commencing as of the date hereof and continuing until June 30, 1998 or as renewed by the parties according to the terms of this Agreement (the "Employment Term"); provided, that this Agreement (including this Section 1) shall, upon mutual written consent of the parties hereto, be renewed for one (1) additional one (1) year period upon terms no less favorable than the terms existing in the first year of the Employment Term. 2. Duties and Powers as Employee. During the Employment Term, Employee agrees to devote all of his full working time, energy, and efforts to the business of the Company. In performance of his duties, Employee shall be subject to the reasonable direction of the Board of Directors of the Company. Employee shall be available to travel as the needs of the business require. Employee agrees that the Company may obtain a life insurance policy on the life of Employee naming the Company as the beneficiary thereof. 3. Compensation. (a) As compensation for his services hereunder, the Company shall pay Employee, a salary (a "Base Salary"), payable in equal bi-weekly installments, at the annual rate of $100,000.00 for the first year of the Employment Term. Additionally, Employee shall participate in all present or future employee benefit and plans of the Company, provided that he meets the eligibility requirements therefor. (b) Employee shall be eligible to receive raises and bonuses each year of the Employment Term if and as determined by the Compensation Committee of the Board of Directors of the Company. Such bonuses, if any, shall be based upon the achievement of earnings and other targeted criteria. It is also contemplated that Employee will receive incentive stock options to acquire common stock of the Company to be determined by the Stock Option Committee of the Board of Directors of the Company. 4. Expenses; Vacations. Employee shall be entitled to reimbursement for reasonable travel and other out-of-pocket expenses reasonably incurred in the performance of his duties hereunder, upon submission and approval of written statements and bills in accordance with the then regular procedures of the Company. Employee shall be entitled to thirty (30) days paid vacation time in accordance with then regular procedures of the Company governing executives as determined from time to time by the Company's Board of Directors and communicated, in writing to Employee. 5. Representations and Warranties of Employee. Employee represents and warrants to the Company that (a) Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder; and (b) Employee knows of no physical or mental disability that would hinder his performance of duties under this Agreement. 6. Non-Competition. (a) Employee agrees that during the Employment Term he will not engage in, or otherwise directly or indirectly be employed by, or act as a consultant, or be a director, officer, employee, owner, agent, member or partner of, any other business or organization that is or shall then be competing with the Company, except that in each case the provisions of this Section 6 will not be deemed breached merely because Employee owns not more than five percent (5.0%) of the outstanding common stock of a corporation, if, at the time of its acquisition by Employee, such stock is listed on a national securities exchange, is reported on NASDAQ, or is regularly traded in the over-the-counter market by a member of a national securities exchange. (b) If this Agreement is terminated, Employee, for a period of three (3) years from the date of termination, shall not, directly or indirectly, solicit or encourage any person who was a customer of the Company during the three years prior to the date of such termination to cease doing business with the Company or to do business with any other enterprise that is engaged in the same or similar business to that of the Company. 7. Inventions; Patents; Copyrights. Any interest in patents, patent applications, inventions, copyrights, developments, and processes ("Such Inventions") which Employee now or hereafter during the period she is employed by the Company under this Agreement may, directly or indirectly, own or develop relating to the fields in which the Company may then be engaged shall belong to the Company; and forthwith upon request of the Company, Employee shall execute all such assignments and other documents and take all such other action as the Company may reasonably request in order to vest in the Company all of her right, title, and interest in and to Such Inventions, free and clear of all liens, charges, and encumbrances. 8. Confidential Information. All confidential information which Employee may now possess, may obtain during the Employment Term, or may create prior to the end of the period he is employed by the Company under this Agreement, relating to the business of the Company or of any customer or supplier of the Company shall not be published, disclosed, or made accessible by him to any other person, firm, or corporation during the Employment Term or any time thereafter without the prior written consent of the Company. Employee shall return all tangible evidence of such confidential information to the Company prior to or at the termination of his employment. 9. Termination. (a) Notwithstanding anything herein contained, if on or after the date hereof and prior to the end of the Employment Term, Employee is terminated "For Cause" (as defined below) then the Company shall have the right to give notice of termination of Employee's services hereunder as of a date to be specified in such notice, and this Agreement shall terminate on the date so specified. Termination "For Cause" shall mean Employee shall (i) be convicted of a felony crime, (ii) commit any act or omit to take any action in bad faith and to the material detriment of the Company, (iii) commit an act of moral turpitude to the material detriment of the Company, (iv) commit an act of fraud against the Company, or (v) materially breach any term of this Agreement and fail to correct such breach within ten (10) days after written notice thereof; provided that in the case of a termination pursuant to (ii), (iii) or (iv) such determination must be made by the Board of Directors of the Company after a meeting at which Employee was given an opportunity to explain such actions. In the event this Agreement is terminated "For Cause" pursuant to Section 9(a), then Employee shall be entitled to receive only his salary at the rate provided in Section 3 to the date on which termination shall take effect plus any compensation which is accrued but unpaid on the date of termination. (b) In the event that Employee shall be physically or mentally incapacitated or disabled or otherwise unable fully to discharge his duties hereunder for a period of six (6) months, then this Agreement shall terminate upon ninety (90) days' written notice to Employee, and no further compensation (other than accrued but unpaid salary or bonus through the date of termination) shall be payable to Employee, except as may otherwise be provided under any disability insurance policy. (c) In the event that Employee shall die, then this Agreement shall terminate on the date of Employee's death, and no further compensation (other than accrued but unpaid salary or bonus through the date of death) shall be payable to Employee, except as may otherwise be provided under any insurance policy or similar instrument. (d) In the event this Agreement is terminated without Cause, Employee shall receive severance pay consisting of a single lump sum distribution (with no present value adjustment) equal to the balance of his Base Salary as provided in Section 3 for the then existing Employment Term. 10. Merger, Etc. In the event of a future disposition of the properties and business of the Company, substantially as an entirety, by merger, consolidation, sale of assets, sale of stock, or otherwise, then the Company may elect to assign this Agreement and all of its rights and obligations hereunder to the acquiring or surviving corporation. In the event the Company does not assign this Agreement or that this Agreement is not so assumed then Employee shall have the right to terminate this Agreement by written notice given within six (6) months of the date of such acquisition. Upon such termination, Employee shall receive severance pay consisting of a single lump sum distribution (with no present value adjustment) equal to the balance of his Base Salary as provided in Section 3 for the then existing Employment Term. 11. Survival. The covenants, agreements, representations, and warranties contained in or made pursuant to this Agreement shall survive Employee's termination of employment, irrespective of any investigation made by or on behalf of any party. 12. Modification. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 13. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 13). In the case of a notice to the Company, a copy of such notice (which copy shall not constitute notice) shall be delivered to Camhy Karlinsky & Stein LLP, 1740 Broadway, 16th Floor, New York, New York 10019, Attn. Alan I. Annex, Esq. In the case of a notice to Employee, a copy of such notice (which copy shall not consitute notice) shall be delivered to 396 Winslow Avenue, Long Beach, California 90814. Notice to the estate of Employee shall be sufficient if addressed to Employee as provided in this Section 13. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. 14. Waiver. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing and signed by the party against whose waiver is asserted. 15. Binding Effect. Employee's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives, and shall be binding upon and inure to the benefit of the Company and its successors and those who are its assigns under Section 10. 16. Headings. The headings in this Agreement are solely for the convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 17.Counterparts; Governing Law. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by, and construed in accordance with, the laws of the State of New York, without given effect to the rules governing the conflicts of laws. Each of the parties hereto irrevocably submits to the exclusive jurisdiction of the courts of the County and State of New York, and of any federal court located in the County and State of New York, in connection with any action or proceeding arising out of or relating to, or a breach of, this Agreement. Each of the parties hereto agrees that such court may award reasonable legal fees and expenses to the prevailing party. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first written above. MARKETING SERVICES GROUP, INC. /s/ Jeremy Barbera Jeremy Barbera, Chairman /s/ Scott Anderson Scott Anderson EX-10 10 EMPLOYMENT AGREEMENT - ROBERT BOURNE Exhibit 10.20 EMPLOYMENT AGREEMENT THIS AGREEMENT (this "Agreement") is being made as of the 1st day of July, 1997 between PEGASUS INTERNET, INC., a New York corporation (the "Company"), having its principal offices at 122 East 11th Street, Suite 4C, New York, New York 10003, and ROBERT BOURNE ("Employee"), an individual residing at 11 Waverly Place, Apartment 5C, New York, New York 10003. W I T N E S S E T H: WHEREAS, the Company has, or contemporaneously herewith will become, a wholly-owned subsidiary of Marketing Services Group, Inc., a Nevada corporation ("MSGI") and the Company desires to continue to employ Employee and Employee desires to be employed by the Company as its President and Chief Executive Officer, upon the terms and conditions contained herein. NOW, THEREFORE, in consideration of the mutual premises and agreements contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Nature of Employment; Term of Employment. The Company hereby employs Employee and Employee agrees to serve the Company as its President and Chief Executive Officer, upon the terms and conditions contained herein, for a term commencing as of the date hereof and continuing until June 30, 2000 (the "Employment Term"); provided, that this Agreement (including this Section 1) shall automatically be renewed for one (1) additional three (3) year period upon terms no less favorable than the terms existing in the third year of the Employment Term, unless the Company or Employee gives written notice to the other party of its intention not to renew this Agreement with sixty (60) days prior to the expiration of the Employment Term. 2. Duties and Powers as Employee. During the Employment Term, Employee agrees to devote all of his full working time, energy, and efforts to the business of the Company. In performance of his duties, Employee shall be subject to the reasonable direction of the Board of Directors of the Company. Employee shall be available to travel as the needs of the business require. Employee agrees that the Company or MSGI may obtain a life insurance policy on the life of Employee naming the Company or MSGI as the beneficiary thereof. 3. Compensation. (a) As compensation for his services hereunder, the Company shall pay Employee, a salary (a "Base Salary"), payable in equal semi-monthly installments, at the annual rate of $90,000.00 for the first year of the Employment Term; $110,000.00 for the second year of the Employment Term and $130,000.00 for the third year of the Employment Term. Additionally, Employee shall participate in all present or future employee benefit and plans of the Company and MSGI, provided that he meets the eligibility requirements therefor. (b) Employee shall be eligible to receive bonuses each year of the Employment Term if and as determined by the Board of Directors of the Company; subject to the approval of the Compensation Committee of MSGI. Such bonuses, if any, shall be based upon the achievement of earnings and other targeted criteria. In addition, Employee will receive 25,000 incentive stock options to acquire common stock of MSGI for on each of June 30, 1998 (at an exercise price of $4.00 per share or fair market value on the date of grant, whichever is lower), June 30, 1999 (at an exercise price of $5.00 per share or fair market value on the date of grant, whichever is lower), and June 30, 2000 (at an exercise price of $6.00 per share or fair market value on the date of grant, whichever is lower), provided that the Company meets the following goals: Fiscal year ending June 30, 1998 1999 2000 ---- ---- ---- (000's) Income $945.00 $1,730.00 $2,650.00 Earnings Before Interest and Depreciation $163.70 $ 307.00 $ 473.30 4. Expenses; Vacations. Employee shall be entitled to reimbursement for reasonable travel and other out-of-pocket expenses reasonably incurred in the performance of her duties hereunder, upon submission and approval of written statements and bills in accordance with the then regular procedures of the Company. Employee shall be entitled to thirty (30) days paid vacation time in accordance with then regular procedures of the Company governing executives as determined from time to time by the Company's Board of Directors and communicated, in writing to Employee. 5. Representations and Warranties of Employee. Employee represents and warrants to the Company that (a) Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder; and (b) Employee is under no physical or mental disability that would hinder his performance of duties under this Agreement. 6. Non-Competition. (a) Employee agrees that during the Employment Term he will not engage in, or otherwise directly or indirectly be employed by, or act as a consultant, or be a director, officer, employee, owner, agent, member or partner of, any other business or organization that is or shall then be competing with the Company, except that in each case the provisions of this Section 6 will not be deemed breached merely because Employee owns not more than five percent (5.0%) of the outstanding common stock of a corporation, if, at the time of its acquisition by Employee, such stock is listed on a national securities exchange, is reported on NASDAQ, or is regularly traded in the over-the-counter market by a member of a national securities exchange. (b) If this Agreement is terminated, Employee, for a period of three (3) years from the date of termination, shall not, directly or indirectly, solicit or encourage any person who was a customer of the Company during the three years prior to the date of such termination to cease doing business with the Company or to do business with any other enterprise that is engaged in the same or similar business to that of the Company. 7. Inventions; Patents; Copyrights. Any interest in patents, patent applications, inventions, copyrights, developments, and processes ("Such Inventions") which Employee now or hereafter during the period she is employed by the Company under this Agreement may, directly or indirectly, own or develop relating to the fields in which the Company may then be engaged shall belong to the Company; and forthwith upon request of the Company, Employee shall execute all such assignments and other documents and take all such other action as the Company may reasonably request in order to vest in the Company all of her right, title, and interest in and to Such Inventions, free and clear of all liens, charges, and encumbrances. 8. Confidential Information. All confidential information which Employee may now possess, may obtain during the Employment Term, or may create prior to the end of the period she is employed by the Company under this Agreement, relating to the business of the Company or of any customer or supplier of the Company shall not be published, disclosed, or made accessible by her to any other person, firm, or corporation during the Employment Term or any time thereafter without the prior written consent of the Company. Employee shall return all tangible evidence of such confidential information to the Company prior to or at the termination of her employment. 9. Termination. (a) Notwithstanding anything herein contained, if on or after the date hereof and prior to the end of the Employment Term, Employee is terminated "For Cause" (as defined below) then the Company shall have the right to give notice of termination of Employee's services hereunder as of a date to be specified in such notice, and this Agreement shall terminate on the date so specified. Termination "For Cause" shall mean Employee shall (i) be convicted of a felony crime, (ii) commit any act or omit to take any action in bad faith and to the material detriment of the Company, (iii) commit an act of moral turpitude to the material detriment of the Company, (iv) commit an act of fraud against the Company, or (v) materially breach any term of this Agreement and fail to correct such breach within ten (10) days after written notice thereof; provided that in the case of a termination pursuant to (ii), (iii) or (iv) such determination must be made by the Board of Directors of MSGI after a meeting at which Employee was given an opportunity to explain such actions. In the event this Agreement is terminated "For Cause" pursuant to Section 9(a), then Employee shall be entitled to receive only his salary at the rate provided in Section 3 to the date on which termination shall take effect plus any compensation which is accrued but unpaid on the date of termination. (b) In the event that Employee shall be physically or mentally incapacitated or disabled or otherwise unable fully to discharge his/her duties hereunder for a period of six (6) months, then this Agreement shall terminate upon ninety (90) days' written notice to Employee, and no further compensation (other than accrued but unpaid salary or bonus through the date of termination) shall be payable to Employee, except as may otherwise be provided under any disability insurance policy. (c) In the event that Employee shall die, then this Agreement shall terminate on the date of Employee's death, and no further compensation (other than accrued but unpaid salary or bonus through the date of death) shall be payable to Employee, except as may otherwise be provided under any insurance policy or similar instrument. (d) In the event this Agreement is terminated without Cause, Employee shall receive severance pay consisting of a single lump sum distribution (with no present value adjustment) equal to the Base Salary as provided in Section 3 for a period of one (1) year, notwithstanding that such one-year period might extend beyond the Employment Term. 10. Merger, Etc. In the event of a future disposition of the properties and business of the Company, substantially as an entirety, by merger, consolidation, sale of assets, sale of stock, or otherwise, then the Company may elect to assign this Agreement and all of its rights and obligations hereunder to the acquiring or surviving corporation. In the event the Company does not assign this Agreement or that this Agreement is not so assumed then Employee shall have the right to terminate this Agreement by written notice given within six (6) months of the date of such acquisition. Upon such termination, Employee shall receive severance pay consisting of a single lump sum distribution (with no present value adjustment) equal to the Base Salary as provided in Section 3 for a period of (i) one (1) year, notwithstanding that such one-year period might extend beyond the Employment Term. 11. Survival. The covenants, agreements, representations, and warranties contained in or made pursuant to this Agreement shall survive Employee's termination of employment, irrespective of any investigation made by or on behalf of any party. 12. Modification. This Agreement sets forth the entire understanding of the parties with respect to she subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 13. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 13). In the case of a notice to the Company, a copy of such notice (which copy shall not constitute notice) shall be delivered to Camhy Karlinsky & Stein LLP, 1740 Broadway, 16th Floor, New York, New York 10019, Attn. Alan I. Annex, Esq. In the case of a notice to Employee, a copy of such notice (which copy shall not constitute notice) shall be delivered to Moskowitz Altman & Hughes LLP, 11 East 44th Street, New York, New York 10017, Attention: John T. Hughes, Jr. Notice to the estate of Employee shall be sufficient if addressed to Employee as provided in this Section 13. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. 14. Waiver. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing and signed by the party against whose waiver is asserted. 15. Binding Effect. Employee's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives, and shall be binding upon and inure to the benefit of the Company and its successors and those who are its assigns under Section 10. 16. Headings. The headings in this Agreement are solely for the convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 17. Counterparts; Governing Law. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by, and construed in accordance with, the laws of the State of New York, without given effect to the rules governing the conflicts of laws. Each of the parties hereto agrees that such court may award reasonable legal fees and expenses to the prevailing party. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first written above. PEGASUS INTERNET, INC. By: /s/ Jeremy Barbera Jeremy Barbera, Vice President /s/ Robert Bourne Robert Bourne EX-10 11 EMPLOYMENT AGREEMENT - TOM SCHEIR Exhibit 10.21 EMPLOYMENT AGREEMENT THIS AGREEMENT (this "Agreement") is being made as of the 1st day of July, 1997 between STEPHEN DUNN & ASSOCIATES, INC., a California corporation (the "Company"), having its principal offices at 1728 Abbot Kinney Boulevard, Venice, California 90291, and Tom Scheir ("Employee"), an individual residing at 915 Nowita Place, Venice, California 90291. W I T N E S S E T H: WHEREAS, the Company desires to continue to employ Employee and Employee desires to be employed by the Company as its Chief Operating Officer, upon the terms and conditions contained herein. NOW, THEREFORE, in consideration of the mutual premises and agreements contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Nature of Employment; Term of Employment. The Company hereby employs Employee and Employee agrees to serve the Company as its Chief Operating Officer, upon the terms and conditions contained herein, for a term commencing as of the date hereof and continuing until December 31, 1999 (the "Employment Term"); provided, that this Agreement (including this Section 1) shall automatically be renewed for one (1) additional three (3) year period upon terms no less favorable than the terms existing in the third year of the Employment Term, unless the Company or Employee gives written notice to the other party of its intention not to renew this Agreement with sixty (60) days prior to the expiration of the Employment Term. 2. Duties and Powers as Employee. During the Employment Term, Employee agrees to devote all of his full working time, energy, and efforts to the business of the Company. In performance of his duties, Employee shall be subject to the reasonable direction of the Board of Directors of the Company. Employee shall be available to travel as the needs of the business require. Employee agrees that the Company or MSGI may obtain a life insurance policy on the life of Employee naming the Company or MSGI as the beneficiary thereof. 3. Compensation. (a) As compensation for his services hereunder, the Company shall pay Employee, a salary (a "Base Salary"), payable in equal bi-weekly installments, at the annual rate of $175,000.00 for the first year of the Employment Term which ends December 31, 1997; $200,000.00 for the second year of the Employment Term and $250,000.00 for the third year of the Employment Term. Additionally, Employee shall participate in all present or future employee benefit and plans of the Company and MSGI, provided that he meets the eligibility requirements therefor. (b) Employee shall be eligible to receive bonuses each year of the Employment Term if and as determined by the Board of Directors of the Company; subject to the approval of the Compensation Committee of MSGI. Such bonuses, if any, shall be based upon the achievement of earnings and other targeted criteria. It is also contemplated that Employee will receive incentive stock options to acquire common stock of MSGI to be determined by the Stock Option Committee of the Board of Directors of the Company. 4. Expenses; Vacations. Employee shall be entitled to reimbursement for reasonable travel and other out-of-pocket expenses reasonably incurred in the performance of his duties hereunder, upon submission and approval of written statements and bills in accordance with the then regular procedures of the Company. Employee shall be entitled to thirty (30) days paid vacation time in accordance with then regular procedures of the Company governing executives as determined from time to time by the Company's Board of Directors and communicated, in writing to Employee. 5. Representations and Warranties of Employee. Employee represents and warrants to the Company that (a) Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder; and (b) Employee is under no physical or mental disability that would hinder his performance of duties under this Agreement. 6. Non-Competition. (a) Employee agrees that during the Employment Term he will not engage in, or otherwise directly or indirectly be employed by, or act as a consultant, or be a director, officer, employee, owner, agent, member or partner of, any other business or organization that is or shall then be competing with the Company, except that in each case the provisions of this Section 6 will not be deemed breached merely because Employee owns not more than five percent (5.0%) of the outstanding common stock of a corporation, if, at the time of its acquisition by Employee, such stock is listed on a national securities exchange, is reported on NASDAQ, or is regularly traded in the over-the-counter market by a member of a national securities exchange. (b) If this Agreement is terminated, Employee, for a period of three (3) years from the date of termination, shall not, directly or indirectly, solicit or encourage any person who was a customer of the Company during the three years prior to the date of such termination to cease doing business with the Company or to do business with any other enterprise that is engaged in the same or similar business to that of the Company. 7. Inventions; Patents; Copyrights. Any interest in patents, patent applications, inventions, copyrights, developments, and processes ("Such Inventions") which Employee now or hereafter during the period she is employed by the Company under this Agreement may, directly or indirectly, own or develop relating to the fields in which the Company may then be engaged shall belong to the Company; and forthwith upon request of the Company, Employee shall execute all such assignments and other documents and take all such other action as the Company may reasonably request in order to vest in the Company all of her right, title, and interest in and to Such Inventions, free and clear of all liens, charges, and encumbrances. 8. Confidential Information. All confidential information which Employee may now possess, may obtain during the Employment Term, or may create prior to the end of the period she is employed by the Company under this Agreement, relating to the business of the Company or of any customer or supplier of the Company shall not be published, disclosed, or made accessible by him to any other person, firm, or corporation during the Employment Term or any time thereafter without the prior written consent of the Company. Employee shall return all tangible evidence of such confidential information to the Company prior to or at the termination of his employment. 9. Termination. (a) Notwithstanding anything herein contained, if on or after the date hereof and prior to the end of the Employment Term, Employee is terminated "For Cause" (as defined below) then the Company shall have the right to give notice of termination of Employee's services hereunder as of a date to be specified in such notice, and this Agreement shall terminate on the date so specified. Termination "For Cause" shall mean Employee shall (i) be convicted of a felony crime, (ii) commit any act or omit to take any action in bad faith and to the material detriment of the Company, (iii) commit an act of moral turpitude to the material detriment of the Company, (iv) commit an act of fraud against the Company, or (v) materially breach any term of this Agreement and fail to correct such breach within ten (10) days after written notice thereof; provided that in the case of a termination pursuant to (ii), (iii) or (iv) such determination must be made by the Board of Directors of MSGI after a meeting at which Employee was given an opportunity to explain such actions. In the event this Agreement is terminated "For Cause" pursuant to Section 9(a), then Employee shall be entitled to receive only his salary at the rate provided in Section 3 to the date on which termination shall take effect plus any compensation which is accrued but unpaid on the date of termination. (b) In the event that Employee shall be physically or mentally incapacitated or disabled or otherwise unable fully to discharge his duties hereunder for a period of six (6) months, then this Agreement shall terminate upon ninety (90) days' written notice to Employee, and no further compensation (other than accrued but unpaid salary or bonus through the date of termination) shall be payable to Employee, except as may otherwise be provided under any disability insurance policy. (c) In the event that Employee shall die, then this Agreement shall terminate on the date of Employee's death, and no further compensation (other than accrued but unpaid salary or bonus through the date of death) shall be payable to Employee, except as may otherwise be provided under any insurance policy or similar instrument. (d) In the event this Agreement is terminated without Cause, Employee shall receive severance pay consisting of a single lump sum distribution (with no present value adjustment) equal to the Base Salary as provided in Section 3 for a period of one (1) year, notwithstanding that such one-year period might extend beyond the Employment Term. 10. Merger, Etc. In the event of a future disposition of the properties and business of the Company, substantially as an entirety, by merger, consolidation, sale of assets, sale of stock, or otherwise, then the Company may elect to assign this Agreement and all of its rights and obligations hereunder to the acquiring or surviving corporation. In the event the Company does not assign this Agreement or that this Agreement is not so assumed then Employee shall have the right to terminate this Agreement by written notice given within six (6) months of the date of such acquisition. Upon such termination, Employee shall receive severance pay consisting of a single lump sum distribution (with no present value adjustment) equal to the Base Salary as provided in Section 3 for a period of one (1) year, notwithstanding that such one-year period might extend beyond the Employment Term. 11. Survival. The covenants, agreements, representations, and warranties contained in or made pursuant to this Agreement shall survive Employee's termination of employment, irrespective of any investigation made by or on behalf of any party. 12. Modification. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 13. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 13). In the case of a notice to the Company, a copy of such notice (which copy shall not constitute notice) shall be delivered to Camhy Karlinsky & Stein LLP, 1740 Broadway, 16th Floor, New York, New York 10019, Attn. Alan I. Annex, Esq. Notice to the estate of Employee shall be sufficient if addressed to Employee as provided in this Section 13. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. 14. Waiver. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing and signed by the party against whose waiver is asserted. 15. Binding Effect. Employee's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives, and shall be binding upon and inure to the benefit of the Company and its successors and those who are its assigns under Section 10. 16. Headings. The headings in this Agreement are solely for the convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 17. Counterparts; Governing Law. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by, and construed in accordance with, the laws of the State of New York, without given effect to the rules governing the conflicts of laws. Each of the parties hereto agrees that such court may award reasonable legal fees and expenses to the prevailing party. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first written above. STEPHEN DUNN & ASSOCIATES, INC. /s/ Stephen Dunn Stephen Dunn Chairman /s/ Tom Scheir Tom Scheir EX-10 12 EMPLOYMENT AGREEMENT - KRISTA MOORADIAN Exhibit 10.22 EMPLOYMENT AGREEMENT THIS AGREEMENT (this "Agreement") is being made as of the 1st day of July, 1997 between STEPHEN DUNN & ASSOCIATES, INC., a California corporation (the "Company"), having its principal offices at 1728 Abbot Kinney Boulevard, Venice, California 90291, and Krista Mooradian ("Employee"), an individual residing at 638 Marine St., Santa Monica, California 90405. W I T N E S S E T H: WHEREAS, the Company desires to continue to employ Employee and Employee desires to be employed by the Company as its President, upon the terms and conditions contained herein. NOW, THEREFORE, in consideration of the mutual premises and agreements contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Nature of Employment; Term of Employment. The Company hereby employs Employee and Employee agrees to serve the Company as its President, upon the terms and conditions contained herein, for a term commencing as of the date hereof and continuing until December 31, 1999 (the "Employment Term"); provided, that this Agreement (including this Section 1) shall automatically be renewed for one (1) additional three (3) year period upon terms no less favorable than the terms existing in the third year of the Employment Term, unless the Company or Employee gives written notice to the other party of its intention not to renew this Agreement with sixty (60) days prior to the expiration of the Employment Term. 2. Duties and Powers as Employee. During the Employment Term, Employee agrees to devote all of his\her full working time, energy, and efforts to the business of the Company. In performance of his\her duties, Employee shall be subject to the reasonable direction of the Board of Directors of the Company. Employee shall be available to travel as the needs of the business require. Employee agrees that the Company or MSGI may obtain a life insurance policy on the life of Employee naming the Company or MSGI as the beneficiary thereof. 3. Compensation. (a) As compensation for his\her services hereunder, the Company shall pay Employee, a salary (a "Base Salary"), payable in equal bi-weekly installments, at the annual rate of $175,000.00 for the first year of the Employment Term which ends December 31, 1997; $200,000.00 for the second year of the Employment Term and $250,000.00 for the third year of the Employment Term. Additionally, Employee shall participate in all present or future employee benefit and plans of the Company and MSGI, provided that she meets the eligibility requirements therefor. (b) Employee shall be eligible to receive bonuses each year of the Employment Term if and as determined by the Board of Directors of the Company; subject to the approval of the Compensation Committee of MSGI. Such bonuses, if any, shall be based upon the achievement of earnings and other targeted criteria. It is also contemplated that Employee will receive incentive stock options to acquire common stock of MSGI to be determined by the Stock Option Committee of the Board of Directors of the Company. 4.Expenses; Vacations. Employee shall be entitled to reimbursement for reasonable travel and other out-of-pocket expenses reasonably incurred in the performance of her duties hereunder, upon submission and approval of written statements and bills in accordance with the then regular procedures of the Company. Employee shall be entitled to thirty (30) days paid vacation time in accordance with then regular procedures of the Company governing executives as determined from time to time by the Company's Board of Directors and communicated, in writing to Employee. 5. Representations and Warranties of Employee. Employee represents and warrants to the Company that (a) Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his\her duties hereunder, or the other rights of the Company hereunder; and (b) Employee is under no physical or mental disability that would hinder his\her performance of duties under this Agreement. 6. Non-Competition. (a) Employee agrees that during the Employment Term she will not engage in, or otherwise directly or indirectly be employed by, or act as a consultant, or be a director, officer, employee, owner, agent, member or partner of, any other business or organization that is or shall then be competing with the Company, except that in each case the provisions of this Section 6 will not be deemed breached merely because Employee owns not more than five percent (5.0%) of the outstanding common stock of a corporation, if, at the time of its acquisition by Employee, such stock is listed on a national securities exchange, is reported on NASDAQ, or is regularly traded in the over-the-counter market by a member of a national securities exchange. (b) If this Agreement is terminated, Employee, for a period of three (3) years from the date of termination, shall not, directly or indirectly, solicit or encourage any person who was a customer of the Company during the three years prior to the date of such termination to cease doing business with the Company or to do business with any other enterprise that is engaged in the same or similar business to that of the Company. 7. Inventions; Patents; Copyrights. Any interest in patents, patent applications, inventions, copyrights, developments, and processes ("Such Inventions") which Employee now or hereafter during the period she is employed by the Company under this Agreement may, directly or indirectly, own or develop relating to the fields in which the Company may then be engaged shall belong to the Company; and forthwith upon request of the Company, Employee shall execute all such assignments and other documents and take all such other action as the Company may reasonably request in order to vest in the Company all of her right, title, and interest in and to Such Inventions, free and clear of all liens, charges, and encumbrances. 8. Confidential Information. All confidential information which Employee may now possess, may obtain during the Employment Term, or may create prior to the end of the period she is employed by the Company under this Agreement, relating to the business of the Company or of any customer or supplier of the Company shall not be published, disclosed, or made accessible by her to any other person, firm, or corporation during the Employment Term or any time thereafter without the prior written consent of the Company. Employee shall return all tangible evidence of such confidential information to the Company prior to or at the termination of her employment. 9. Termination. (a) Notwithstanding anything herein contained, if on or after the date hereof and prior to the end of the Employment Term, Employee is terminated "For Cause" (as defined below) then the Company shall have the right to give notice of termination of Employee's services hereunder as of a date to be specified in such notice, and this Agreement shall terminate on the date so specified. Termination "For Cause" shall mean Employee shall (i) be convicted of a felony crime, (ii) commit any act or omit to take any action in bad faith and to the material detriment of the Company, (iii) commit an act of moral turpitude to the material detriment of the Company, (iv) commit an act of fraud against the Company, or (v) materially breach any term of this Agreement and fail to correct such breach within ten (10) days after written notice thereof; provided that in the case of a termination pursuant to (ii), (iii) or (iv) such determination must be made by the Board of Directors of MSGI after a meeting at which Employee was given an opportunity to explain such actions. In the event this Agreement is terminated "For Cause" pursuant to Section 9(a), then Employee shall be entitled to receive only his/her salary at the rate provided in Section 3 to the date on which termination shall take effect plus any compensation which is accrued but unpaid on the date of termination. (b) In the event that Employee shall be physically or mentally incapacitated or disabled or otherwise unable fully to discharge his/her duties hereunder for a period of six (6) months, then this Agreement shall terminate upon ninety (90) days' written notice to Employee, and no further compensation (other than accrued but unpaid salary or bonus through the date of termination) shall be payable to Employee, except as may otherwise be provided under any disability insurance policy. ( c) In the event that Employee shall die, then this Agreement shall terminate on the date of Employee's death, and no further compensation (other than accrued but unpaid salary or bonus through the date of death) shall be payable to Employee, except as may otherwise be provided under any insurance policy or similar instrument. (d) In the event this Agreement is terminated without Cause, Employee shall receive severance pay consisting of a single lump sum distribution (with no present value adjustment) equal to the Base Salary as provided in Section 3 for a period of (i) one (1) year, notwithstanding that such one-year period might extend beyond the Employment Term. 10. Merger, Etc. In the event of a future disposition of the properties and business of the Company, substantially as an entirety, by merger, consolidation, sale of assets, sale of stock, or otherwise, then the Company may elect to assign this Agreement and all of its rights and obligations hereunder to the acquiring or surviving corporation. In the event the Company does not assign this Agreement or that this Agreement is not so assumed then Employee shall have the right to terminate this Agreement by written notice given within six (6) months of the date of such acquisition. Upon such termination, Employee shall receive severance pay consisting of a single lump sum distribution (with no present value adjustment) equal to the Base Salary as provided in Section 3 for a period of (i) one (1) year, notwithstanding that such one-year period might extend beyond the Employment Term. 11. Survival. The covenants, agreements, representations, and warranties contained in or made pursuant to this Agreement shall survive Employee's termination of employment, irrespective of any investigation made by or on behalf of any party. 12. Modification. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 13. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 13). In the case of a notice to the Company, a copy of such notice (which copy shall not constitute notice) shall be delivered to Camhy Karlinsky & Stein LLP, 1740 Broadway, 16th Floor, New York, New York 10019, Attn. Alan I. Annex, Esq. Notice to the estate of Employee shall be sufficient if addressed to Employee as provided in this Section 13. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. 14. Waiver. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing and signed by the party against whose waiver is asserted. 15. Binding Effect. Employee's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his/her heirs and personal representatives, and shall be binding upon and inure to the benefit of the Company and its successors and those who are its assigns under Section 10. 16. Headings. The headings in this Agreement are solely for the convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 17. Counterparts; Governing Law. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by, and construed in accordance with, the laws of the State of New York, without given effect to the rules governing the conflicts of laws. Each of the parties hereto agrees that such court may award reasonable legal fees and expenses to the prevailing party. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first written above. STEPHEN DUNN & ASSOCIATES, INC. /s/ Stephen Dunn Stephen Dunn Chairman /s/ Krista Mooradian Krista Mooradian -----END PRIVACY-ENHANCED MESSAGE-----