8-K/A 1 0001.txt FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------------------------------- FORM 8-K/A Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: March 23, 2000 -------------- MARKETING SERVICES GROUP, INC. ------------------------------ (Exact name of Registrant as specified in charter) Nevada 0-16730 88-0085608 ------ ------- ---------- (State or other (Commission (I.R.S. Employer jurisdiction of File No.) Identification No.) incorporation) 333 Seventh Avenue New York, New York 10001 ------------------------ (Address of Principal Executive Offices) 917/339-7100 ------------ (Registrant's telephone number, including area code) Item 2. Acquisition or Disposition of Assets -------------------------------------------- On March 22, 2000, Marketing Services Group, Inc (the "Company") closed on an agreement to acquire all of the outstanding capital stock of Grizzard Advertising, Inc. ("Grizzard"). Grizzard and its wholly owned subsidiary operate a vertically integrated network of marketing communications companies. Pursuant to an Agreement and Plan of Merger dated July 8, 1999, as amended, we acquired, by merger, all of the capital stock of Grizzard from its current stockholders (the "Sellers"). In consideration of the purchase, the Sellers received an aggregate sum of $100,000,000 including $50,000,000 cash (subject to certian adjustments and holdback provisions) and an aggregate of 2,545,799 shares of Common Stock of MSGI, par value $.01, valued at $19.64 per share. A portion of the purchase price was financed by Paribas, part of the BNP Paribas Group, through a $58 million senior secured credit facility. The facility is comprised of a $13 million revolving line of credit, $40 million term loan and $5 million LC commitment. The credit facility expires March 31, 2005, and bears interest at prime rate or LIBOR plus an applicable margin raging from 1.5% to 2.5% for prime and 2.5% to 3.5% for LIBOR based on certain leverage ratios. The loans are guaranteed by the Company's non Internet subsidiaries. The revolving line of credit is limited to the lesser of the maximum availability of $13 million or a percentage of eligible receivables. The facility is subject to certain financial and other covenants. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits --------------------------------------------------------------------------- (a) Financial statements of business acquired * (b) Pro forma financial information * (c) The following documents are filed herewith as exhibits to this Form 8-K: 2.1 Agreement and Plan of Merger dated as of July 8, 1999, by and among the Registrant, a wholly-owned subsidiary of the Registrant and Grizzard Advertising, Inc. ** 20.1 Press release of the Registrant dated July 14, 1999 ** 20.2 Press release of the Registrant dated March 23, 2000 * Filed herewith ** Incorporated by reference from the Registrant's Current Report on Form 8-K dated July 8, 1999. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. MARKETING SERVICES GROUP, INC. Date: June 5, 2000 By: /s/ Cindy H. Hill ------------ -------------------------- Title: Chief Accounting Officer Grizzard Advertising Incorporated Financial Statements as of and for the Years Ended December 31, 1999 and 1998 and Independent Auditors' Reports Grizzard Advertising Incorporated INDEX TO FINANCIAL STATEMENTS ________________________________________________________________________________ Page INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS: Balance Sheets 2 Statements of Income 3 Statements of Stockholders' Equity 4 Statements of Cash Flows 5-6 Notes to Financial Statements 7 INDEPENDENT AUDITORS' REPORT Board of Directors Grizzard Advertising Incorporated We have audited the accompanying balance sheets of Grizzard Advertising Incorporated ("Grizzard") as of December 31, 1999 and 1998 and the related statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of Grizzard'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 statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Grizzard at December 31, 1999 and 1998 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. March 27, 2000 GRIZZARD ADVERTISING INCORPORATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (In thousands, except share amounts) ________________________________________________________________________________ 1999 1998 ASSETS ---- ---- CURRENT ASSETS: Cash $ - $ - Accounts receivable, less allowance for doubtful accounts of $459 in 1999 and $717 in 1998 30,875 23,293 Inventory 5,816 4,423 Prepaid postage 1,796 2,502 Deferred income taxes 770 834 Other 1,757 532 ----- ----- Total current assets 41,014 31,584 ------ ------ OTHER ASSETS: Cash value of life insurance, net of loans of $53 in 1999 and $189 in 1998 108 226 Notes receivable - affiliate 50 50 Other 107 8 --- --- Total other assets 265 284 --- --- PROPERTY AND EQUIPMENT: Land 842 842 Buildings and leasehold improvements 10,474 9,787 Furniture and equipment 23,855 20,980 ------ ------ 35,171 31,609 Less accumulated depreciation 19,496 18,509 ------ ------ 15,675 13,100 INTANGIBLE ASSETS, net of accumulated amortization of $561 in 1999 and $137 in 1998 7,080 860 ----- ----- TOTAL ASSETS $64,034 $45,828 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable, includes cash overdraft of $1,213 in 1999 and $2,726 in 1998 $8,198 $7,185 Advances from affiliate - 1,754 Advances on line of credit 14,940 5,826 Customer deposits 1,643 1,949 Accrued expenses 2,268 2,141 Current maturities of long-term debt 2,932 1,264 Current maturities of long-term debt - employee 278 278 Income taxes payable 1,438 2,042 Dividends payable - 342 ------ ------ Total current liabilities 31,697 22,781 ------ ------ LONG-TERM LIABILITIES: Long-term debt, less current maturities 7,932 3,368 Long-term debt - employee, less current maturities - 277 Deferred income taxes 2,358 569 ----- ----- Total long-term liabilities 10,290 4,214 ------ ----- COMMITMENTS AND CONTINGENCIES (Note 12) STOCKHOLDERS' EQUITY: Common stock, par value $1 per share; authorized 1,000,000 shares; issued 192,701 and 189,416 shares for 1999 and 1998 193 189 Additional paid-in capital 6,139 4,580 Retained earnings 20,632 18,351 ------ ------ 26,964 23,120 Less: Treasury stock at cost, 57,345 and 51,248 shares for 1999 and 1998 4,736 4,056 Notes receivable - stockholders 181 231 ----- ----- Stockholders' equity - net 22,047 18,833 ------ ------ $ 64,034 $ 45,828 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ======== ======== See notes to financial statements. GRIZZARD ADVERTISING INCORPORATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1999 AND 1998 (In thousands) ________________________________________________________________________________ 1999 1998 ---- ---- NET SALES $ 80,095 $ 65,198 COST OF SALES 45,056 36,171 ------- ------ Gross profit 35,039 29,027 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 29,031 21,564 ------ ------ Operating income 6,008 7,463 OTHER INCOME (EXPENSE): Interest expense (1,315) (709) Interest income 111 97 Other - net (12) 172 ----- ----- Other expense - net (1,216) (440) ------- ------ INCOME BEFORE INCOME TAXES 4,792 7,023 INCOME TAXES 2,511 2,628 ----- ----- NET INCOME $ 2,281 $ 4,395 ======= ======= See notes to financial statements.
GRIZZARD ADVERTISING INCORPORATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999 AND 1998 (In thousands, except share and per share amounts) ________________________________________________________________________________ Additional Notes Common Paid-In Retained Treasury Receivable - Stock Capital Earnings Stock Stockholders Total ----- ------- -------- ----- ------------ ----- BALANCE - January 1, 1998 $ 175 $ 3,267 $ 14,298 $ (2,713) $(375) $14,652 Net income 4,395 4,395 Issuance of 12,330 shares of common stock 12 1,315 (19) 1,308 Purchase of 12,297 shares of treasury stock (1,343) (1,343) Dividends declared ($2.50 per share) (342) (342) Notes repayments - stockholders 163 163 Other 2 (2) ----- ----- ----- ----- ----- ----- BALANCE - December 31, 1998 189 4,580 18,351 (4,056) (231) 18,833 Net income 2,281 2,281 Issuance of 3,285 shares of common stock 3 1,560 (19) 1,544 Purchase of 57,345 shares of treasury stock (680) (680) Notes repayments - stockholders 69 69 Other 1 (1) ----- ----- ----- ----- ----- ----- BALANCE - December 31, 1999 $ 193 $6,139 $20,632 $(4,736) $(181) $22,047 ===== ====== ======= ====== ===== ======= See notes to financial statements.
GRIZZARD ADVERTISING INCORPORATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999 AND 1998 (In thousands) _______________________________________________________________________________ 1999 1998 ---- ---- OPERATING ACTIVITIES: Net income $ 2,281 $ 4,395 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,865 2,298 Amortization 724 137 Provision for doubtful accounts receivable 81 190 Deferred income taxes 1,853 (148) Noncash compensation expense 1,598 - Gain on sale of equipment (32) (62) Changes in assets and liabilities, net of business acquired: Accounts receivable (7,324) (334) Inventory (1,393) (2,012) Prepaid postage 706 (1,219) Other assets (783) 346 Accounts payable 2,526 (1,851) Customer deposits (306) (720) Accrued expenses 127 33 Income taxes payable (604) 23 ----- ----- Net cash provided by operating activities 2,319 1,076 ----- ----- INVESTING ACTIVITIES: Purchase of property and equipment (6,258) (2,942) Capitalized expenditures for software development (4,975) (339) Payment for Colecorp, Inc. acquisition, net of cash received (2,192) - Proceeds from sale of property and equipment 205 63 Collections on notes receivable - stockholders - net 50 163 ----- ----- Net cash used in investing activities (13,170) (3,055) ------- ------ FINANCING ACTIVITIES: Repayments to affiliate (1,754) (2,500) Cash overdraft (1,513) 2,726 Net borrowings on line of credit 9,114 2,495 Net borrowings (repayments) on long-term debt and capital lease obligations 5,955 (1,835) Proceeds from sale of common stock 71 1,308 Purchases of treasury stock (680) (1,343) Dividends paid (342) (136) ----- ----- Net cash provided by financing activities 10,851 715 ------ ------ NET DECREASE IN CASH - (1,264) CASH: Beginning of year - 1,264 ---- ----- End of year $ 0 $ 0 ==== ==== See notes to financial statements. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: 1999 1998 ---- ---- Cash paid during the year for: Interest $ 1,334 $ 808 ======= ===== Income taxes $ 988 $ 2,746 ====== ======= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: A mortgage note of $1,975,000 was incurred when the Company constructed a building addition, in 1998. Dividends of $342,000 were declared in 1998 and paid in 1999. Notes received during the year ended December 31, 1999 and 1998 from officers and employees for stock purchases was $19,000 in both years. See notes to financial statements. GRIZZARD ADVERTISING INCORPORATED NOTES TO FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 _______________________________________________________________________________ 1. MERGER On March 22, 2000, Grizzard Advertising Incorporated ("Grizzard") completed the sale of all of its outstanding capital stock for $119.7 million to Marketing Services Group, Inc. ("MSGI") pursuant to an Agreement and Plan of Merger dated as of July 8, 1999. The purchase price was paid $69.7 million in cash and the remainder in shares of MSGI common stock. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization - Grizzard Advertising Incorporated ("Grizzard") is primarily engaged in direct mail advertising and related support operations using the trade names Grizzard; TABS Direct; and Grizzard List Services. For the years ended December 31, 1999 and 1998, approximately 61% and 55% of the revenues, respectively, were from nonprofit organizations. Inventory - Inventory is stated at the lower of cost (first-in, first-out method) or market. Property and Equipment - Property and equipment are stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets ranging from three to twenty years. Intangible Assets - The development costs of new software applications, which will be utilized in customer service, are capitalized, and once completed are amortized over three years. Revenues - Revenue recognition occurs at the point at which a complete job is delivered for mailing on behalf of the customer. Impairment of Long-Lived Assets - Grizzard evaluates its long-lived assets and certain identifiable intangible assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and any impairment losses are reported in the period in which the recognition criteria are first applied based on the fair value of the assets. No impairment losses were reported for the years ended December 31, 1999 and 1998. Income Taxes - Income taxes are provided for the tax effects of transactions reported in the financial statements. Deferred taxes are recognized for differences between the bases of assets and liabilities for financial statement and income tax purposes, based on enacted tax rates expected to be effective for the periods in which the differences will reverse. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principals requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of Credit Risk - A significant portion of Grizzard's revenues is derived from nonprofit organizations located throughout the country. Although the individual offices are affiliated with the national offices of these organizations, the individual offices separately authorize their direct mail advertising. Generally, no collateral or other security is required to support customer receivables. To reduce credit risk, a customer's credit history is reviewed before extending credit. In addition, an allowance for doubtful accounts is established based upon factors surrounding the credit risk of specific customers, historical trends, and other information. Management does not believe significant credit risk exists at December 31, 1999. Recent Accounting Pronouncements - In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires Grizzard to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS No. 133 is effective in 2001 for Grizzard. Grizzard has not finished evaluating the impact of adoption of SFAS No. 133 and is therefore unable to disclose the effect, if any, that adoption of SFAS No. 133 will have on its financial statements. 3. ACQUISITION AND INTANGIBLE ASSETS On February 10, 1999, Grizzard acquired 100% of the issued and outstanding capital stock of Colecorp, Inc. pursuant to a Stock Purchase Agreement. The purchase price was $2,275,000 plus an amount equal to a multiple of the earnings before income taxes, depreciation, and amortization of Colecorp, Inc., as defined, to be paid annually 60 days after the end of each of the four years beginning January 1, 1999 and ending December 31, 2002. In the event of a change of control of Grizzard prior to December 31, 1999, the Additional Payment may be elected to be received in a lump sum payment. The purchase price has been allocated to the identifiable assets and liabilities based on fair values at the acquisition date. The excess of the purchase price over the value of identifiable net assets in the amount of $1.6 million has been classified as goodwill. Goodwill is amortized on a straight-line basis over 15 years. Grizzard evaluates the amortization period and the carrying value of intangibles, including goodwill, on a periodic basis, including evaluating the performance of the underlying business which gave rise to such amount to determine whether impairment exists. In performing the review of recoverability, Grizzard estimates future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount, impairment is recognized based on the difference between the estimated fair value and the carrying value. Management believes that no impairment existed at December 31, 1999. Intangible assets also include costs related to the development and implementation of software obtained for internal use. 4. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of the net deferred income tax asset at December 31, 1999 and 1998 are as follows (in thousands): 1999 1998 ---- ---- Deferred Income Tax Assets: Allowance for bad debts $176 $265 Uniform capitalization 405 296 Commission accrual - 191 Accrued vacation 49 37 Other 140 68 --- --- 770 857 --- --- Deferred Income Tax Liabilities: Capitalized software 2,046 255 Property, plant and equipment 284 305 Prepaid expenses 28 24 Other - 8 --- --- 2,358 592 ------- ----- Net deferred tax asset (liability) $(1,588) $ 265 ======= ===== No valuation reserve has been recorded for deferred tax assets. The provision for income taxes for the years ended December 31, 1999 and 1998 consists of the following (in thousands): 1999 1998 ---- ---- Current provision: Federal $590 $2,446 State 68 330 ---- ------ 658 2,776 ---- ------ Deferred provision: Federal $1,633 $(135) State 220 (13) ---- ------ 1,853 (148) ----- ----- Total $2,511 $2,628 ====== ====== The provision for income taxes for the years ended December 31, 1999 and 1998 is reconciled with the Federal statutory rate as follows (in thousands): 1999 1998 ---- ---- Income tax at Federal statutory rate $1,629 $2,388 State income taxes, net of Federal income tax benefit 190 209 Nondeductible compensation expense 543 - Nondeductible meals and entertainment 47 37 Other 102 (6) ------ ------ Total provision $2,511 $2,628 5. INVENTORY Inventory consists of the following at December 31, 1999 and 1998 (in thousands): 1999 1998 ---- ---- Raw materials and supplies $401 $774 Work in-process 5,415 3,649 ----- ----- Total $5,816 $4,423 ====== ====== Work in-process includes job related costs which have not yet been billed to the customer. 6. DEBT Long-term debt at December 31, 1999 and 1998 consists of the following (in thousands): 1999 1998 ---- ---- Notes payable, bank, due in monthly installments totaling $27,778 plus interest at prime (8.50% at December 31, 1999) through Januar $1,000 - Notes payable, bank, due in monthly installments totaling $36,250 plus interest at prime (8.50% at December 31, 1999) through January 1,776 - Notes payable, IBM, due in monthly installments totaling $127,946, including interest at rates ranging from 6.5% to 8.5% through January 2003 3,864 - Notes payable, bank, due in monthly installments totaling $40,000 plus interest at rates ranging from 7.3% to 8.5% through December 1999 - $ 510 Mortgage notes payable, bank, due in monthly installments totaling $25,000 plus interest through March 2003, interest at 8.65% 1,375 1,675 Mortgage note payable, bank, due in annual installments of $19,000 plus interest through October 2003, interest at 8% 1,894 1,964 Note payable, former shareholder, due in annual installments of $20,000 plus interest at prime (8.50% and 7.75% at December 31, 1999 and 1998, respectively) through April 1999 - 20 Notes payable, employee, due in annual installments of $278,000 plus interest at prime (8.50% and 7.75% at December 31, 1999 and 1998, respectively) through January 2000 278 555 Note payable, former shareholder, due in quarterly installments of $33,000, including interest through April 2000 69 194 Capitalized leases 849 239 Other 37 30 --- --- 11,142 5,187 Less current maturities 3,210 1,542 ------ ----- Long-term portion $7,932 $3,645 ====== ====== Additionally, Grizzard had advances on a bank line of credit of $14,940,000 and $5,826,000 at December 31, 1999 and 1998, respectively. Additional borrowing capacity under this $15,500,000 line was $560,000 at December 31, 1999, as determined by a formula based on the level of inventory and receivables. The line of credit bears interest at rates approximating prime (8.5% and 7.75% at December 31, 1999 and 1998, respectively) and expires in 2000. Future debt maturities are as follows (in thousands): Year Ending December 31, 2000 $ 3,210 2001 2,859 2002 2,197 2003 2,360 2004 276 2005 and Thereafter 240 ----- $ 11,142 ======== All bank debt is collateralized by accounts receivable, inventories, equipment, real estate, and the personal guarantees of certain shareholders. In addition, it is subject to a loan agreement which requires a financial statement audit within a specified time after year-end, maintenance of a specified minimum amount of net worth, compliance with certain financial ratios, and imposes restrictions on additional debt, investments, disposal of assets, and guarantees of debt of others. Grizzard has issued a guarantee in the amount of $100,000 for certain bank indebtedness of CZG. 7. OBLIGATIONS UNDER CAPITAL LEASES Grizzard is leasing certain computer and production equipment under capitalized leases. Amortization of the cost of this equipment is included with depreciation expense. The cost of this equipment and related accumulated depreciation, included in property and equipment, are as follows at December 31, 1999 and 1998 (in thousands): 1999 1998 ---- ---- Equipment at cost $940 $885 Less accumulated depreciation 71 681 -- --- $869 $204 ==== ==== Future minimum lease payments required by the capital leases and the net future minimum lease payments are as follows (in thousands): Year Ending December 31, 2000 $ 280 2001 273 2002 199 2003 90 2004 and thereafter 53 ----- 895 Less amount representing interest 40 ----- Net future minimun lease payments $ 855 ===== 8. RETIREMENT PLAN Grizzard has a 401(k) profit-sharing plan ("the Plan") which is qualified under the Internal Revenue Code. All employees are eligible to participate upon satisfaction of the age and service requirements defined in the Plan. Participants may defer up to 15% of their annual compensation as contributions to the Plan. Grizzard provides a matching contribution equal to 50% of each participant's contribution up to $1,500. In addition the Plan provides for a discretionary profit-sharing contribution which is determined annually by the Board of Directors. Matching contributions totaled $329,000 and $326,000 for the years ended December 31, 1999 and 1998, respectively. 9. STOCKHOLDERS' EQUITY Grizzard has a policy of allowing officers and employees of Grizzard to purchase shares of Grizzard stock, at book value. Prior to January 1, 1998, the purchases were financed by paying 20% of the total cost of the shares in cash and executing a note to Grizzard for the remainder. The remainder is then paid in four equal annual installments plus accrued interest. These notes receivable accrue interest at a floating prime interest rate. As of December 31, 1999 and 1998, the total amount of notes receivable was $181,000 and $231,000, respectively. These notes have been recorded as contra-equity on the balance sheets. Interest income received on the notes was $12,000 and $67,000 for the years ended December 31, 1999 and 1998, respectively. Effective January 1, 1998, officers and employees were allowed to obtain outside financing for their stock purchase amounts. In 1998, Grizzard signed a separation agreement with a former employee. In that agreement Grizzard agreed to repurchase 5,512 shares of Grizzard stock from the former employee at approximately book value. As of December 31, 1999, this repurchase of shares has been completed. 10. OPERATING LEASES Grizzard leases office space and equipment under operating leases with varying maturity dates. Aggregate rental expense under these and other month-to-month leases for the years ended December 31, 1999 and 1998 was $1,884,000 and $914,000, respectively. The minimum commitments under the above described leases are as follows (in thousands): Year Ending December 31, 2000 $ 2,456 2001 2,236 2002 1,771 2003 1,097 2004 1,092 Thereafter 1,361 ----- $ 10,013 ======== 11. RELATED PARTIES Grizzard is affiliated with the following entities through common ownership. Those entities and their related transactions are as follows: 1480 Colorado Boulevard - Grizzard rented its office space in Los Angeles from this entity, and paid $124,000 in rent expense in 1998. In 1998, this property was sold to a nonrelated entity. CZG - Grizzard purchased various marketing services from this entity, which specializes in systems to encourage donors to commit larger gifts of cash, other assets, and estate bequests to charity. These purchases amounted to $94,000 and $211,000 during 1999 and 1998, respectively. Grizzard also recorded sales of $160,000 and $167,000 of printing and lettershop services to this entity in 1999 and 1998, respectively. CFM Direct - Grizzard paid $162,000 and $123,000 in 1999 and 1998, respectively, in interest to this entity on monies advanced to it by CFM Direct, a direct marketing agency which specializes in the financial services industry. At December 31, 1999 and 1998 Grizzard owed $0 and $1,754,000, respectively, to CFM Direct, which is classified as advances from affiliate in the accompanying balance sheets. These amounts were due on demand and earned interest at a rate between the prime rate and the overnight funds rate. The rate on these advances during 1999 was 6.0%. CFR, Inc. - Grizzard paid commissions and consulting service fees in 1999 and 1998 amounting to $128,000 and $362,000, respectively, to CFR, Inc., a sales and marketing agency. Dynamic Marketing Services, Inc. - Grizzard paid $272,000 and $1,357,000 in 1999 and 1998, respectively, to this entity for software services rendered. In 1999, this entity was sold to nonrelated parties. Grizzard Benefit Trust - Grizzard made employer contributions related to health insurance benefits of $1,179,000 and $1,049,000 to this entity in 1999 and 1998, respectively. 12. COMMITMENTS AND CONTINGENCIES Grizzard has guaranteed employee and officer notes receivable with a bank related to Grizzard stock purchases. Notes receivable outstanding with the bank at December 31, 1999 total $968,000. In 1997, Grizzard was notified by the California State Board of Equalization that it planned to perform a sales tax audit for the years 1994 through 1996. This audit has not yet been performed, and management cannot currently predict the outcome. In 1998, the State of Georgia performed a sales tax audit for the years 1995 through 1998. The audit resulted in an additional tax assessment of $199,000, penalties of $53,000, and interest of $46,000. These amounts have not been paid, as Grizzard is appealing the audit findings with the Georgia Sales and Use Tax Division. Management cannot currently predict the outcome of this appeal. UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (In thousands) The accompanying unaudited combined pro forma statements of operations give effect to the consummation of the merger with Grizzard (the "Merger"), the completed acquisitions of CMG Direct Corporation ("CMG Direct") and Stevens-Knox & Associates and Affiliates ("SKA"), (collectively the "Acquisitions") and the conversion of redeemable convertible preferred stock as if the transactions occurred as of July 1, 1998. The accompanying unaudited pro forma combined balance sheet gives effect to the consummation of the Merger and the sale of convertible preferred stock as if the transactions occurred on December 31, 1999. The Merger will be accounted for using the purchase method of accounting. The fair values of the assets and liabilities of Grizzard to be acquired are assumed to be their historical amounts. Accordingly, the purchase price and estimated acquisition costs in excess of the net assets acquired have preliminarily been allocated to goodwill. Goodwill is being amortized in the pro forma financial statements on a straight-line basis over periods deemed appropriate by MSGI's management based on its judgment of the current facts and circumstances of the business acquired. The purchase price allocation and the amortization period for goodwill may be adjusted upon calculation of the valuation of assets acquired and liabilities assumed. The effect of any such adjustments could be significant. The unaudited pro forma combined financial statements should be read in conjunction with the accompanying notes and the historical financial statements of MSGI, Grizzard, CMG Direct, and SKA and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" which have been previously filed. The unaudited pro forma combined financial statements do not purport to present the results of operations of MSGI had the transactions assumed herein occurred as of July 1, 1998, nor are they necessarily indicative of the results of operations which may be achieved in the future.
Marketing Services Group, Inc. Pro Forma Combined Balance Sheet As of December 31, 1999 (Unaudited) (In thousands) Grizzard MSGI Advertising Inc. Pro Forma (A) (Historical) (B) Adjustments Combined ----------- ----------------- ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 5,861 $ - $ 1,160 (C) $ 7,021 Accounts receivable, net 30,240 30,875 61,115 Inventory - 5,816 5,816 Note receivable 174 - 174 Other current assets 890 4,323 5,213 ------- ------- ------- Total current assets 37,165 41,014 79,339 Investment, at cost, net 34,355 - 34,355 Property and equipment at cost, net 2,568 15,675 18,243 Intangible assets at cost, net 62,328 7,080 81,793 (D) 151,201 Note receivable 652 - 652 Other assets 1,048 265 (500)(E) 813 ------ ----- ------ Total assets $ 138,116 $64,034 $ 285,603 ========= ======= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 1,067 $14,940 $(7,940)(F) $ 8,067 Trade accounts payable 24,057 8,198 32,255 Accrued expenses and other current liabilities 4,561 3,911 2,040 (G) 10,512 Current portion of long-term debt 5,310 4,648 (648)(H) 9,310 ----- ----- ----- Total current liabilities 34,995 31,697 60,144 Long-term obligations 951 7,932 28,045 (I) 36,928 Other liabilities 25 2,358 2,383 ----- ----- ----- Total liabilities 35,971 41,987 99,455 ------ ------ ------ Stockholders' Equity: Preferred stock - - 29,500 (J) 29,500 Common stock 274 193 (168)(K) 299 Additional paid-in capital 131,251 6,139 47,339 (L) 184,729 (Accumulated deficit) retained earnings (27,213) 20,632 (20,632)(M) (27,213) Deferred compensation (773) - (773) Less: treasury stock at cost (1,394) (4,736) 4,736 (N) (1,394) Notes receivable- stockholders - (181) 181 (O) - ----- ----- ----- Total stockholders' equity 102,145 22,047 185,148 ------- ------ ------- Total liabilities and stockholder's equity $138,116 $ 64,034 $ 284,603 ======== ======== =========
See Notes to Pro Forma Combined Balance Sheet. Marketing Services Group, Inc. Notes to Pro Forma Combined Balance Sheet As of December 31, 1999 (Unaudited) (In thousands) (A) The MSGI pro forma balance sheet represents MSGI's historical balance sheet as of December 31, 1999. (B) Grizzard's balance sheet as of December 31, 1999 has been derived from the audited statements included in this Form 8-K/A. (C) Cash: Additional debt incurred in connection with new financing 47,000 Proceeds from sale of Convertible Preferred Stock 29,500 Refinancing of Grizzard debt (30,520) Cash paid to Grizzard shareholders (44,820) ------- $ 1,160 ======= (D) Intangible assets: To record intangible assets associated with the Grizzard transaction as follows: Purchase price in cash $ 44,880 Valuation of stock purchase price 48,472 Liabilities assumed 49,987 Transaction costs 2,541 --------- Total cost of acquisition 145,827 Less: Current assets 41,014 Property, plant and equipment 15,675 Other assets 265 Intangible assets 7,080 ----- Excess of cost over net assets $ 81,793 ======== MSGI is in the process of determining the fair value of the assets and liabilities acquired. (E) Other assets: Amounts previously paid associated with the merger (legal, accounting, investment banking and registration fees) $ (500) ====== (F) Short term borrowings: Elimination of Grizzard line of credit $ (14,940) Proceeds received on line of credit in connection with new financing 7,000 -------- $ (7,940) ======== (G) Accrued expenses: Accrual of MSGI related costs associated with the merger (legal, accounting, investment banking and registration fees). $ 2,040 ======= (H) Current portion of long-term debt: Grizzard debt refinanced $(4,648) Current portion of new financing 3,000 Current portion of contingent purchase price 1,000 ------- $ (648) ======= (I) Long-term debt: Grizzard debt refinanced $(7,932) New financing 37,000 Contingent purchase price 4,000 Discount on new financing (5,023) ------- $28,045 ======= (J) Preferred stock: Convertible preferred stock issued, net of acquisition costs $ 29,500 ======== (K) Common stock: MSGI shares issued in connection with the acquisition $ 25 Less: elimination of Grizzard historical common stock (193) ---- Total common stock $ (168) ====== (L) Additional paid-in capital: MSGI shares issued in connection with the acquisition $ 48,455 Warrants issued in connection with financing 5,023 Less: elimination of Grizzard historical common stock (6,139) ------- Total additional paid-in capital $ 47,339 ======== (M) (Accumulated deficit) retained earnings: Elimination of Grizzard retained earnings $(20,632) ======== (N) Treasury stock: Elimination of Grizzard treasury stock $ 4,736 ======= (O) Notes Receivable-stockholders Receipt of payment from stockholders $ 181 ======
Marketing Services Group, Inc. Pro Forma Combined Statement of Operations For the Year Ended June 30, 1999 (Unaudited) (In thousands, except per share data) Grizzard Advertising CMG Inc. Pro Direct MSGI (Historical) forma MSGI (A) SKA (B) (C) Adj. (Pro forma) (D) Adj. Combined ----------------------------------------------------------------------------------------------------- Revenues $82,242 $18,412 $ 9,561 $110,215 $ 73,036 $183,251 ------- ------- ------- -------- -------- -------- Operating Expenses: Salaries and benefits 26,188 1,959 4,463 142 (E) 32,752 30,994 (4,329)(M) 59,417 Compensation expense on option and stock grants 444 (28)(F) 416 1,598 (1,598)(N) 416 Direct costs 52,510 15,403 3,893 (202)(G) 71,604 25,447 97,051 Selling, general and administrative 6,765 812 2,313 (482)(H) 9,408 6,906 16,314 Severance cost 1,125 - - 1,125 - 1,125 Depreciation and amortization 2,282 35 381 1,902 (I) 4,600 3,040 4,615 (O) 12,255 ------ ----- ----- ----- ------ ------ Total operating costs and expenses 89,314 18,209 11,050 119,905 67,985 186,578 ------ ------ ------ ------- ------ ------- Income (loss) from operations (7,072) 203 (1,489) (9,690) 5,051 (3,327) Other income (expense) (516) (66) - (1,050)(J) (1,632) (796) (5,712)(P) (8,140) ------ ----- ------ ------- ----- ------ Income (loss) before income taxes (7,588) 137 (1,489) (11,322) 4,255 (11,467) Income tax (provision) benefit (57) (14) 14 (57) (1,592) (1,348)(Q) (301) ------ ----- ----- ------ ------ ----- Net income (loss) $ (7,645) $ 123 $(1,475) $(11,379) $2,663 $(11,768) ======== ===== ======= ======== ====== ======== Net income (loss) attributable to common stockholders $(20,181) $(11,379)(K) $(11,768) ======== ======== ======== Net loss per common share-basic and fully diluted $(1.39) $(0.56) $(0.57) ====== ====== ====== Weighted average common shares outstanding 14,552 5,942 (L) 20,494 2,546 (R) 20,496 ====== ====== ======
See Notes to Pro Forma Combined Statement of Operations. Marketing Services Group, Inc. Notes to Pro Forma Combined Statement of Operations For the Year Ended June 30, 1999 (Unaudited) (In thousands) (A) MSGI's historical statement of operations for the year ended June 30, 1999, derived from a previously filed Form 10K. (B) SKA's historical statement of operations for the period July 1, 1998 through December 1998, derived from SKA's books and records. (C) CMG Direct's historical statement of operations for the period July 1, 1998 through May 13, 1999, derived from the books and records of CMG Direct. (D) Grizzard's statement of operations for the twelve months ended June 30, 1999, derived from unaudited quarterly financial information. (E) Salaries and benefits: Increase in salary expense pursuant to agreements entered into in connection with the CMG Direct acquisition agreement. $ 142 ===== (F) Compensation expense on option and stock grants: Reduction in compensation expense for stock option grants to reflect expense for options which would have vested during the year. $(28) ===== (G) Direct costs: Intercompany allocations which would have not been incurred by CMG Direct on a stand alone basis . $(202) ==== (H) Selling, general and administrative: Intercompany allocations which would have not been incurred by CMG Direct on a stand alone basis $(392) Reduction of legal expense incurred in connection with the buy back of common stock from a former shareholder of SKA. (90) ----- $(482) ===== (I) Depreciation and amortization: Increase amortization of intangibles associated with the acquisition of CMG Direct over a blended rate of 12 years on a straight line basis. $1,750 Increased amortization of intangibles associated with the acquisition of SKA over a blended rate of 22 years on a straight line basis. 152 ---- $1,902 ====== (J) Other income (expense): Increase in interest expense to reflect a full year of interest expense on $10,000 of debt incurred for the acquisition of CMG Direct pursuant to a promissory note at a fixed interest rate of 12%. $(1,050) ======= (K) Excludes $12,536 of preferred dividends associated with the pro forma conversion of redeemable convertible preferred stock. Marketing Services Group, Inc. Notes to Pro Forma Combined Statement of Operations For the Year Ended June 30, 1999 Continued (Unaudited) (In thousands) (L) Weighted average shares outstanding: Adjustment to number of shares outstanding to reflect shares issued in connection with the CMG Direct acquisition 2,016 Adjustment to number of shares outstanding to reflect pro forma conversion of redeemable convertible preferred stock 3,926 ----- 5,942 ===== (M) Reduction in salary expense pursuant to agreements entered into in connection with the signing of the Merger agreement $(4,329) ======= (N) Reduction in compensation expense on option and stock grants pursuant to agreements entered into in connection with the signing of the merger agreement $(1,598) ======= (O) Depreciation and amortization: Intangibles associated with the acquisition to be amortized over twenty years on a straight line basis $ 4,090 Amortization of deferred financing costs 525 ------ $ 4,615 (P) Other income (expense): Adjustment to interest expense to reflect total variable pro forma interest charged on new debt assuming $47,000 in financing at the interest rate of LIBOR plus 3.5% (10.375%). The effect on pre-tax earnings of 1/8 percent favorable/(unfavorable) change in the assumed interest rate would be $59 $ (4,876) Amortization of discount on debt incurred in connection with Merger. (1,632) Less: Grizzard interest expense on historical debt. 796 ------ $(5,712) ====== (Q) Income Tax: Adjustment to tax expense on net taxable income attributable to pro forma adjustments and to reflect a consolidated effective tax rate indicative of the combined company and assuming the utilization of MSGI's net losses to offset Grizzard's net income at at an assumed statutory rate of 35%. Significant permanent differences arise due to non-deductible goodwill $ (1,348) ====== (R) Weighted average shares outstanding: Shares issued in connection with Merger 2,546 =====
Marketing Services Group, Inc. Pro Forma Combined Statement of Operations For the Six Months Ended December 31, 1999 (Unaudited) (In thousands except per share data) Grizzard Advertising, Inc. Pro (historical) Forma MSGI (A) (B) Adjustments Combined ------------------------------------------------------------- Revenues $ 55,049 $ 46,743 $101,792 -------- -------- -------- Operating expenses: Salaries and benefits 16,862 19,843 (2,440) (C) 34,265 Non-cash compensation 292 - 292 Direct costs 36,356 17,480 53,836 Selling, general and administrative 5,973 1,450 7,423 Depreciation and amortization 2,245 1,920 2,307 (D) 6,472 ------ ------ ------- Total operating costs & expenses 61,728 40,693 102,288 ------ ------ ------- Income (loss) from operations (6,679) 6,050 (496) Other income (expense) (544) (665) (2,588) (E) (3,797) ------ ----- ------ Income (loss) before income taxes (7,223) 5,385 (4,293) Income tax (provision) benefit (62) (2,154) 1,912 (F) (304) ------ ------ ----- Net income (loss) $(7,285) $ 3,231 $4,597 ======= ======= ====== Net loss per common share-basic and $ (0.30) $ (0.17) fully diluted ======== ======== Weighted average common shares outstanding 24,291 2,546 (G) 26,837 ====== ======
See Notes to Pro Forma Combined Statements of Operations Marketing Services Group, Inc. Pro Forma Combined Statement of Operations For the Six Months Ended December 31, 1999 (Unaudited) (In thousands) (A) The MSGI statement of operations represents MSGI's historical statement of operations for the six months ended December 31, 1999 and has been derived from a previously filed Form 10Q. (B) Grizzard's statement of operations for the six months ended December 31, 1999 has been derived from unaudited interim financial information. (C) Reduction in salary expense pursuant to agreements entered into in connection with the signing of the merger agreement $ (2,440) ======== (D) Depreciation and amortization: Increase in amortization of goodwill associated with the acquisition over twenty years on a straight line basis $ 2,045 Amortization of deferred financing costs 262 ------ $ 2,307 ====== (E) Other income (expense): Increase in interest expense to reflect interest charged on new debt assuming $47,000 in financing at the interest rate of LIBOR plus 3.5% (10.375%). The effect on pre-tax earnings of 1/8 percent favorable/(unfavorable) change in the assumed interest rate would be $29 $(2,438) Amortization of discount on debt incurred in connection with Merger. (815) Less: Grizzard interest expense on historical debt. 665 ----- $(2,588) ===== (F) Income Tax: Adjustment to tax expense on net taxable income attributable to pro forma adjustments and to reflect a consolidated effective tax rate indicative of the combined company and assuming the utilization of MSGI's NetLosses to offset Grizzard's Net Income at at an assumed statutory rate of 35%. Significant permanent differences arise due to non-deductible goodwill $ 1,912 ======= (G) Weighted average shares outstanding Shares issued in connection with Merger 2,546 =====
Marketing Services Group, Inc. Pro Forma Combined Statement of Operations For the Nine Months Ended March 31, 2000 (Unaudited) (In thousands except per share data) Grizzard Advertising, Inc. Pro (historical) Forma MSGI (A) (B) Adjustments Combined ------------------------------------------------------------- Revenues $ 84,037 $ 64,106 $148,143 -------- -------- -------- Operating expenses: Salaries and benefits 28,323 29,132 (3,089) (C) 54,366 Non-cash compensation 2,998 - 2,998 Direct costs 53,562 23,220 76,782 Selling, general and administrative 11,278 2,921 14,199 Depreciation and amortization 3,776 2,957 3,273 (D) 10,006 ------ ------ ------- Total operating costs and expenses 99,937 58,230 158,351 ------ ------ ------- Income (loss) from operations (15,900) 5,876 (10,208) Other income (expense) 98 (1,330) (3,503) (E) (4,735) ------ ------- ------- Income (loss) before income taxes (15,802) 4,546 (14,943) Income tax (provision) benefit (155) (1,818) 1,606 (F) (367) ------ ------ ------ Net income (loss) $(15,957) $ 2,728 $(15,311) ========= ======= ======== Net loss per common share-basic and $ (0.63) $ (0.55) fully diluted ======= ======= Weighted average common shares outstanding 25,452 2,490 (G) 27,942 ====== ======
See Notes to Pro Forma Combined Statements of Operations Marketing Services Group, Inc. Pro Forma Combined Statement of Operations For the Nine Months Ended March 31, 2000 (Unaudited) (In thousands) (A) The MSGI statement of operations represents MSGI's historical statement of operations for the nine months ended March 31, 2000 and has been derived from a previously filed Form 10Q. (B) Grizzard's statement of operations for the nine months ended March 31, 2000 has been derived from unaudited quarterly financial information. (C) Reduction in salary expense pursuant to agreements entered into in connection with the signing of the merger agreement. $ (3,089) ======== (D) Depreciation & amortization: Adjustment to goodwill associated with the acquisition over twenty years on a straight line basis $ 2,895 Amortization of deferred financing costs 378 --------- $ 3,273 ========= (E) Other income (expense): Adjustment to interest expense to reflect total variable pro forma interest charged on new debt assuming $47,000 in financing at the interest rate of LIBOR plus 3.5% (10.375%). The effect on pre-tax earnings of 1/8 percent favorable/(unfavorable) change in the assumed interest rate would be $44 $ (3,657) Amortization of discount on debt incurred in connection with the Merger. (1,176) Less: Grizzard interest expense on historical debt. 1,330 -------- $ (3,503) ======== (F) Income Tax: Adjustment to tax expense on net taxable income attributable to pro forma adjustments and to reflect a consolidated effective tax rate indicative of the combined company and assuming the utilization of MSGI's net losses to offset Grizzard's net income at at an assumed statutory rate of 35%. Significant permanent differences arise due to non-deductible goodwill $ 1,606 ======= (G) Weighted average shares outstanding Shares issued in connection with the Merger 2,490 =====