This MSGI information is a little dated, but interesting.
From Zacks:
Business Description for MARKETING SVCS (MSGI) 06/1998
General
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Marketing Services Group, Inc. (the "Company" or "MSGI") through its subsidiaries provides direct marketing and database marketing, custom telemarketing/telefundraising, media planning and buying, online consulting and commerce, Web design, interactive fulfillment, and other direct marketing services to a diverse group of nearly 1,000 clients located throughout the
United States and Canada. These services include customer and market data analysis, database creation and analysis, data warehousing, merge/purge, predictive behavioral modeling, list processing, brokerage and management, data enhancement, other direct marketing information services, Web site design and hosting, on-line ticketing, product warehousing and fulfillment, and custom
outbound telemarketing/telefundraising services. The Company believes its expertise in applying these marketing tools increases the productivity of its clients' marketing expenditures.
The Company's services have enabled it to become a leading provider of direct marketing services to nonprofit and commercial businesses throughout the United States and Canada. The Company's nonprofit clients include: Art Institute of Chicago, Chicago Symphony Orchestra, Kennedy Center, Lincoln Center, Nature Conservancy, New York Philharmonic, Paralyzed Veterans of America, Planned Parenthood Affiliates, Shubert Organization, Sierra Club and numerous public broadcasting stations. The Company's commercial clients include: Avery Dennison, Cisco Systems, Citicorp, General Electric Capital, Gymboree, LIVENT, Madison Square Garden, MBNA America, TOSCO/Unocal, Walt Disney Company and numerous
business publishing clients including Crains Communications. The Company seeks to become an integral part of its clients' marketing programs and to foster long-term client relationships thereby providing recurring revenue opportunities.
The Company's Strategy
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MSGI's strategy to enhance its position as a value-added premium provider of marketing services is to:
Increase revenues by expanding the range of marketing services offered and by selling additional services to existing clients;
Deepen market penetration in new industries and market segments as
well as those currently served by the Company;
Develop existing and creating new proprietary database software and
database management applications; and
Pursue strategic acquisitions, joint ventures and marketing alliances to expand marketing services offered and industries served.
Other than as described in this Annual Report on Form 10-KSB (this "Form 10-KSB") the Company has no agreements to acquire any companies and there can be no assurance that the Company will be able to acquire such companies.
Background
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The Company was originally incorporated in Nevada in 1919. The current business of MSGI, previously known as All-Comm Media Corporation and prior to that as Sports-Tech, Inc., arose out of a 1995 merger and concurrent acquisition of Stephen Dunn & Associates, Inc. ("SD&A"), a leading telemarketing and
telefundraising company specializing in direct marketing services for the arts, educational and other institutional tax-exempt organizations.
SD&A was formed in 1983. Clients of SD&A include many of the larger performing arts and cultural institutions, such as major symphonies, theatres and musical arts companies, along with public broadcasting stations, advocacy groups and educational institutions. SD&A's clients include over 150 of the nation's leading institutions and universities. SD&A has its headquarters in Los Angeles, California, where it manages telemarketing/telefundraising services which are
conducted both on-site at client-provided facilities and also at its calling center in Berkeley, California.
Effective October 1, 1996, the Company acquired Metro Direct, Inc. ("Metro"). Metro was formed in 1987. Clients include many of the same performing arts and cultural institutions, public broadcasting, advocacy groups and educational institutions as SD&A, as well as a variety of commercial organizations. Metro is headquartered in New York City, with satellite offices in Michigan, Illinois, California, Georgia and Texas.
Metro develops and markets a variety of database and direct marketing products and services to a wide range of commercial clients and nonprofit organizations. Metro vertically integrates the three elements needed for most direct marketing campaigns; strategy, information and technology. Most of their account managers came from the client side and that experience has resulted in very high client
retention rates. Services include: Consulting and campaign strategy, market penetration mapping, database marketing, demographic/psychographic data overlay, Carrier Route coding, CASS/PAVE certification, list brokerage, sub-minimum list rentals, response analysis, merge/purge, predictive modeling, response
enhancement modeling, telemarketing lead generation, telephone appendage, list maintenance, data entry, label generation and laser letters.
The Company's shares are traded on the NASDAQ Small Cap MarketSM under the symbol "MSGI". The Company's principal executive offices are located at 333 Seventh Avenue, 20th Floor, New York, NY 10001. Its telephone number is (212)594-7688.
Developments During Fiscal 1998
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Pegasus Internet, Inc. ("Pegasus"):
Pegasus was formed in 1994 and was acquired by the Company effective July 1, 1997. Pegasus provides a full suite of Internet services, including content development and planning, marketing strategy, on-line ticketing system development, technical site hosting, graphic design, multimedia production and electronic commerce.
The acquisition was accounted for using the purchase method of accounting. Accordingly, the operating results of Pegasus are included in the consolidated results of operations of the Company starting July 1, 1997.
Media Marketplace, Inc. ("MMI"):
Effective December 1, 1997, MSGI acquired Media Marketplace, Inc. and Media Marketplace Media Division, Inc. (collectively "MMI"). MMI was founded in 1973 and specializes in providing list management, list brokerage and media planning services to national publishing and fundraising clients in the direct marketing industry, including magazines, continuity clubs, membership groups and catalog
buyers.
As the MMI acquisition was accounted for as a purchase, its operating results are included in the Company's consolidated results of operations starting December 1, 1997.
Formation of Metro Fulfillment, Inc. ("MFI"):
In May 1998, the Company formed Metro Fulfillment, Inc. ("MFI"), a new operating subsidiary. MFI provides clients with services such as online commerce, real-time database management, inbound/ outbound customer service, custom packaging, assembling, product warehousing, shipping, payment processing and retail distribution.
Capital Stock and Financing Transactions
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Issuance of Redeemable Convertible Preferred Stock:
On December 24, 1997, the Company and General Electric Capital Corporation ("GE Capital") entered into a purchase agreement (the "Purchase Agreement") providing for the purchase by GE Capital of (i) 50,000 shares of Series D redeemable convertible preferred stock, par value $0.01 per share, (the "Convertible Preferred Stock"), and (ii) warrants to purchase up to 10,670,000 shares of
Common Stock (the "Warrants"), all for an aggregate purchase price of $15,000,000. The Convertible Preferred Stock is convertible into shares of Common Stock at a conversion rate, subject to antidilution adjustments. As of June 30, 1998, the conversion rate was approximately 89.02, resulting in the
beneficial ownership by GE Capital of 4,451,117 shares of Common Stock. On an as-converted basis, the Convertible Preferred Stock represents approximately 24% of the issued and outstanding shares of Common Stock. The Warrants are exercisable in November 2001 and are subject to reduction or cancellation based on the Company's meeting certain financial goals set forth in the Warrants or
upon occurrence of a qualified secondary offering, as defined.
The Company recorded the Convertible Preferred Stock at a discount of approximately $1,362,000, to reflect an allocation of the proceeds to the estimated value of the warrants and is being amortized into dividends using the "interest method" over the redemption period. In addition, the Company recorded a non-cash, non-recurring dividend of approximately $3,200,000 representing the difference between the conversion price of the Convertible Preferred Stock and the fair market value of the common stock as of the date of the agreement.
The Convertible Preferred Stock is convertible at the option of the holder at any time and at the option of the Company (a) at any time the current market price, as defined, equals or exceeds $8.75 per share, subject to adjustments, for at least 20 days during a period of 30 consecutive business days or (b) upon the occurrence of a qualified secondary offering, as defined.
Dividends are cumulative and accrue at the rate of 6% per annum, adjusted upon event of default. The Convertible Preferred Stock is mandatorily redeemable for $300 per share, if not previously converted, on the sixth anniversary of the original issue date and is redeemable at the option of the holder upon the occurrence of an organic change in the Company, as defined in the Purchase
Agreement.
The Purchase Agreement contains, among other provisions, requirements for maintaining certain minimum tangible net worth, as defined, and other financial ratios and restrictions on payment of dividends.
Change in Authorized Shares:
On April 3, 1998, the stockholders voted to increase the number of authorized common shares from 36,250,000 to 75,000,000, and the number of authorized preferred shares from 50,000 to 150,000, to facilitate the Company's corporate
strategy and growth plans.
The Direct Marketing Industry
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Overview - Direct marketing is used for a variety of purposes including lead-generation and prospecting for new customers, enhancing existing customer relationships, exploring the potential for new products and services and establishing new products. Unlike traditional mass marketing, aimed at a broad audience and focused on creating image and general brand or product awareness,
successful direct marketing requires the identification and analysis of customers and purchasing patterns. Such patterns enable businesses to more easily identify and create a customized message aimed at a highly defined audience. Previous direct marketing activity consisted principally of direct mail, but now has expanded into the use of multiple mediums including
telemarketing, print, television, radio, video, CD-ROM, on-line services, the Internet and a variety of other interactive marketing formats.
The success of a direct marketing program is the result of the analysis of customer information and related marketing data. Database management capabilities allow for the creation of customer lists with specific, identifiable attributes. Direct marketers use these lists to customize messages and marketing programs to generate new customers whose purchasing patterns can
be statistically analyzed to isolate key determinants. In turn, this enables direct marketers to continually evaluate and adjust their marketing programs, to measure customer response rates in order to assess returns on marketing expenditures, and to increase the effectiveness of such marketing programs.
Database management covers a range of services, including general marketing consultation, execution of marketing programs and the creation and development of customer databases and sales tracking and data analysis software. Data analysis software consolidates and analyzes customer profile information to find common characteristics among buyers of certain products. The results of such tracking and analysis are used to define and match customer and product
attributes from millions of available database files for future direct marketing applications. The process is one of continual refinement, as the number of points of contact with customers increases, together with the proliferation of mediums available to reach customers.
Telemarketing/telefundraising projects generally require significant amounts of customer information supplied by the client or third party sources. Custom telemarketing/telefundraising programs seek to maximize a client's direct marketing results by utilizing appropriate databases to communicate with a specific audience. This customization is often achieved through sophisticated and comprehensive data analysis which identifies psychographic, cultural and behavioral patterns in specific geographic markets.
Industry Growth - The use of direct marketing has increased over the last few years due in part to the relative cost efficiency of direct marketing compared to mass marketing, as well as the rapid development of more powerful and more cost-effective information technology and data capture capabilities. According to industry sources, over the next decade, demographic shifts and changes in
lifestyle, combined with new marketing mediums, are expected to create higher demand by businesses for marketing information and services to provide businesses with direct access to their customers and a more efficient means of targeting specific audiences and developing long-term customer relationships. According to a study commissioned by the Direct Marketing Association ("DMA"),
expenditures for direct marketing services in 1997 reached $153 billion. The study estimated that annual direct marketing advertising expenditures may grow to $205 billion by the year 2001, including $84.4 billion on telemarketing.
Corporate marketing departments often lack the technical expertise to create, manage and control highly technical aspects of the direct marketing process. As a result, the Company believes that there is a growing trend among direct marketers to outsource direct marketing programs.
Industry Consolidation - The direct marketing industry is extremely fragmented. According to industry sources, there are almost 11,000 direct marketing service and database service businesses in the United States. The Company believes that most of such businesses are small, specialized companies which offer limited services. However, industry consolidation has increased in the last few years
resulting in a greater number of large companies providing services similar to those provided by the Company. See "Competition." The Company believes that much of this consolidation is due to: (i) economies of scale in hardware, software and other marketing resources; (ii) cross-selling of services; and (iii)
coordinating various components of direct marketing and media programs within a single, reliable environment. The Company believes these trends are likely to continue due in part to client demand for more cost-effective service to perform increasingly complex functions.
Services
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The Company's operating businesses provide comprehensive database management, Internet marketing, custom telemarketing/telefundraising, fulfillment and other direct marketing services. The principal advantages of customized services include: (i) the ability to expand and adapt a database to the client's changing business needs; (ii) the ability to have services operate on a flexible basis consistent with the client's goals; and (iii) the integration with other direct
marketing, Internet, database management and list processing functions, which are necessary to keep a given database current. Some services offered by the Company are described below.
Contribution to total revenue for the two most recent fiscal years by type of
service is as follows:
Fiscal Year Ended June 30,
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1998 1997
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Marketing and Internet services 67% 34%
Telemarketing and telefundraising 32% 66%
Fulfillment 1% -
Marketing Services
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Database Management Services - The Company's database management services begin with database creation and development, which include the planning stages and analytical processes to review all of the client's customer and operational files. Utilizing both proprietary and commercial software, the Company consolidates all of the separate information and relationships across multiple
files and converts the client's raw information into a consolidated format. Once the client's customer data is consolidated and the database created, the data is enhanced using a wide
selection of demographic, geographic, census and lifestyle information for over 95 million households and 153 million individuals to identify patterns and probabilities of behavior. The Company licenses this information from a variety of leading data compilers.
The combination of each client's proprietary customer information with external data files provides a customized profile of a client's customer base, enabling the client, through the use of the Company's behavior modeling and analysis services, to design a direct marketing program for its customers. Through the development of a scoring model, the client can segment its database and
determine its best customers and prospects in each marketplace. The entire process results in a customized direct marketing program that can be targeted to distinct audiences with a high propensity to buy the client's products or services. Because of the dynamic nature and complexity of these databases, clients frequently request that the Company update such databases with the
results of recent marketing programs and periodically perform list processing services as part of the client's ongoing direct marketing efforts.
Data Processing - The Company's primary data processing service is to manage from the Company's data center, all or a portion of a client's marketing information processing needs. After migrating a client's raw data to the Company's data center, the Company's technology allows the client to continue to request and access all available information from remote sites. The database can also be verified for accuracy and overlaid with external data elements to further identify specific consumer behavior.
Other data processing services provided include migration (takeover and turnover) support for database maintenance or creation, merge/purge, data overlay and postal qualification. The Company also offers on-line and batch processing capacity, technical support, and data back-up and recovery.
List Services - List processing includes the preparation and generation of comprehensive name and address lists which are used in direct marketing promotions. The Company's state-of-the-art data center in New York City and large volume processing capabilities allow the Company to meet the list
processing needs of its clients through its advanced list processing software applications, list brokerage and list management operations. The Company customizes list processing solutions by utilizing a variety of licensed software products and services, such as Address Conversion and Reformat, Address Standardization and Enhanced Merge/Purge, in addition to services provided by
third parties, including; National Change of Address (NCOA), Delivery Sequence File and Locatable Address Conversion System. Other licensed products include databases used for suppressions such as the DMA Mail Preference File and the American Correctional Association Prison Suppress File.
The Company also offers an array of list acquisition techniques. Approximately 12,000 lists are available for rental in the list industry. The Company's account managers, many of whom are recruited from existing Company accounts, use their industry experience as well as sophisticated computer profiles to recommend particular lists for customer acquisition campaigns. The Company acquires hundreds of millions of records annually for customer acquisition
campaigns. The Company also manages several hundred lists for rental purposes on behalf of list owners.
Database Product Development - To further leverage its database management and list processing services, the Company has participated in the development of a new product using client/server technology. The product is a scaleable,
three-tiered client/server data warehouse system that provides desktop, real-time decision support and marketing analysis to a non-technical user. This application is an intuitive, graphical user interface tool that offers both flexibility and the ability to access and analyze large customer files exceeding 100 million records. The incorporation of third-party software, relational and multidimensional database technology in an open system environment is intended to allow the Company's clients to take advantage of the latest developments in high-speed computing, utilizing both single and multi-processor hardware.
Market Analysis - The Company's market research services include problem conceptualization, program design, data gathering and results analysis. These services are conducted through telephone, mail and focus groups. Through the use of data capture technology, the Company is also able to obtain data from a statistically predictable sample of market survey contacts. The Company then
tabulates and analyzes fielded data using multi-variate statistical techniques, and produces detailed reports to answer clients' marketing questions and suggest further marketing opportunities.
Direct Mail Support Services - The Company's direct mail support services include preparing and coordinating database services and custom telemarketing/telefundraising services for use in addressing and mailing materials to current and potential customers. The Company obtains name and address data from clients and other external sources, processes the data to
eliminate duplicates, corrects errors, sorts for postal discounts and electronically prepares the data for other vendors who will address pre-printed materials.
Media Planning and Buying - The Company's Media Division is a multifaceted direct response media broker specializing in direct advertising such as: Traditional print advertising; Cooperative direct mail programs; Sunday supplements; card decks and more.
Internet Services - The Company provides a full suite of Internet services such as content planning to market strategy, from technical site hosting to graphic design and multimedia production. The Company has developed Web sites from the perspective of both client and presence provider, resulting in an intimate knowledge of the issues encountered by both entities in a Web development
project. From the initial planning sessions and identification of an organization's promotional objectives to the live cutover of the finished site, the Company takes a proactive role in ensuring the most efficient development process for the client and the most rewarding experience for their online
clientele. Once the site is up and running, Company provides technical maintenance and ongoing consulting to keep Web resource current, technologically up-to-date and graphically ahead of the curve. The Company generates usage reports, complete with optional analysis and feedback features.
In addition, MSGI offers Internet fulfillment, which allows a customer to order products and services directly via the Internet. The Company's interactive customer service provides for on-line follow-up on the status of orders. Our on-line inventory management system provides the customer with real-time information from any location at any time.
Custom Telemarketing/Telefundraising Services
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Custom telemarketing/telefundraising services are designed according to the client's existing database and any other databases which may be purchased or rented on behalf of the client to create a direct marketing program or fundraising campaign to achieve specific objectives. After designing the program
according to the marketing information derived from the database analysis, it is conceptualized in terms of the message content of the offer or solicitation, and an assessment is made of other supporting elements, such as the use of a direct mail letter campaign.
Typically, a campaign is designed in collaboration with a client, tested for accuracy and responsiveness and adjusted accordingly, after which the full campaign is commenced. The full campaign runs for a mutually agreed period, which can be shortened or extended depending on the results achieved.
An important feature of the custom telemarketing/telefundraising campaign is that it can be implemented either on-site at a client-provided facility or at the Company's calling center in Berkeley, California. On-site campaigns are generally based on what is called a "relationship" or "affinity" sale.
Telemarketing campaigns often require multiple calls whereby a caller must be knowledgeable about the organization and the subject matter and will seek to engage a prospect selected from the client's database in an extended conversation which serves to: (i) gather information; (ii) convey the offer, describe its merits and cost, and solicit gifts or donations; and (iii) conclude
with a purchase, donation or pledge. Telefundraising from the Company's calling center usually involves campaigns that do not use the multiple call format, but instead use computer driven predictive dialing systems which are designed to maximize the usage rate for all telephones as the system works through the calling
database.
Fulfillment Services
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The Company offers its clients contract packaging and direct response fulfillment. These services include product warehousing and shipping, custom packaging, assembly and labeling, inbound/outbound customer service, payment processing, retail and end user distribution, package design and Internet based
fulfillment solutions. Customer services representatives are trained to provide customer support during regular working hours and the Company's automated call center application is accessible 24 hours a day, 365 days of the year.
Marketing and Sales
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The Company's marketing strategy is to offer customized solutions to clients'database management, Internet, telemarketing/telefundraising, fulfillment and
other direct marketing requirements. Historically, the Company's operating businesses have acquired new clients and marketed their services by attending trade shows, advertising in industry publications, responding to requests for proposals, pursuing client referrals and cross-selling to existing clients. The Company targets those companies that have a high probability of generating
recurring revenues because of their ongoing direct marketing needs, as well as companies which have large customer bases that can benefit from targeted direct marketing database and fulfillment services and customized telemarketing/telefundraising services.
The Company markets its marketing services through a sales force consisting of both salaried and commissioned sales persons. In some instances, account representatives, will coordinate a client's database management, Internet, custom telemarketing/telefundraising, fulfillment and/or other direct marketing needs to identify cross-selling opportunities.
Account representatives are responsible for keeping existing and potential clients informed of the results of recent marketing campaigns, industry trends and new developments in the Company's technical database resources. Often, the Company develops an initial pilot program for new or potential clients to
demonstrate the effectiveness of its services. Access to data captured during such pilot pr... |
