-----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, TNn+YOgydtjiHu++OWjf7kA6OiWFcN5NBsaCkaTpO1C3xAQc2wUOFCD1CYw4WlrK pm4ZBfhic5nhUOKlYKjsWg== 0000014280-99-000004.txt : 19990407 0000014280-99-000004.hdr.sgml : 19990407 ACCESSION NUMBER: 0000014280-99-000004 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990405 ITEM INFORMATION: FILED AS OF DATE: 19990406 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: 8-K/A SEC ACT: SEC FILE NUMBER: 001-01768 FILM NUMBER: 99587732 BUSINESS ADDRESS: STREET 1: 333 SEVENTH AVENUE STREET 2: 20TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 2125947688 MAIL ADDRESS: STREET 1: 333 SEVENTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10001 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 8-K/A 1 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: April 5, 1999 ------------- 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) 212/594-7688 ------------ (Registrant's telephone number, including area code) Item 2. Acquisition or Disposition of Assets - --------------------------------------------- On January 15, 1999, Marketing Services Group, Inc. ("MSGI") entered into a stock purchase agreement effective January 1, 1999 to acquire all of the issued and outstanding capital stock (the "Shares") of Stevens-Knox and Associates, Inc., Stevens-Knox List Brokerage, Inc. and Stevens-Knox International, Inc. (collectively "SKA") from Ralph Stevens (the "Seller"). In consideration of the purchase of the Shares and other transactions contemplated in the agreement, the Seller received the aggregate sum of $3,000,000. The agreement includes an earnout payment of up to $1,000,000 a year for each year beginning July 1st and ending June 30th for the years of 2000, 2001 and 2002, adjustable forward to apply to the next fiscal year if no earn out payment is due for one such year. The earn out payments are contingent upon (a) SKA meeting targeted earnings before interest and taxes and (b) targeted billings of MSGI subsidiaries and affiliates for electronic data processing services for clients originally introduced by SKA. The earnout payments shall be paid in shares of MSGI Common Stock, provided, however, that Seller may elect to receive up to twenty-five (25) percent of each earnout payment in cash, or, with the written consent of the Chief Executive Officer of MSGI, Seller may elect to receive up to fifty (50) percent of earnout payment in cash. In addition, the Seller is entitled to receive $500,000 in stock as consideration for the Shares, in the event that actual billings of MSGI Subsidiaries and affiliates for electronic data processing services for clients originally introduced by SKA exceeds targeted billings for the period February 1, 1999 through January 31, 2000. SKA is a leading list management and brokerage firm based in New York and London. Its clientele are segregated into four main industries: catalog marketing (40%), publishing (30%), business-to-business (12%) and general consumer (8%). Item 7. Financial Statements, Pro Forma Financial Information and Exhibits - --------------------------------------------------------------------------- (a) Financial Statements of Businesses Acquired (included herein): (i) Independent Auditor's Report, dated March 12, 1999 (ii) Combined Balance Sheet as of December 31, 1997 (iii) Combined Statement of Operations for the Year Ended December 31, 1997 (iv) Combined Statement of Cash Flows for the Year Ended December 31, 1997 (v) Combined Statement of Stockholders' Deficit for the Year Ended December 31, 1997 (vi) Combined Balance Sheet as of September 30, 1998 (vii) Combined Statement of Operations for the Nine Months Ended September 30, 1998 (viii) Combined Statement of Cash Flows for the Nine Months Ended September 30, 1998 (ix) Statement of Stockholders' Deficit for the Nine Months Ended September 30, 1998 (b) Unaudited Pro Forma Condensed Combined Financial Information (included herein) (i) Pro Forma Condensed Combined Balance Sheet as of September 30, 1998 (ii) Pro Forma Condensed Combined Statement of Operations for the Three Months Ended September 30, 1998 (iii) Pro Forma Condensed Combined Statement of Operations for the Year Ended June 30, 1998 (iv) Notes to Pro Forma Condensed Combined Financial Statements (c) Exhibits previously filed February 1, 1999: 2.1 Stock Purchase Agreement among Marketing Services Group, Inc., and Ralph Stevens 10.1 Form of Employment Agreement by and among Marketing Services Group, Inc. and Ralph Stevens 20.1 Press Release dated January 22, 1999 20.2 Press Release dated January 26, 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: April 5, 1999 By: /s/ Cindy H. Hill ------------- -------------------------- Title: Chief Financial Officer STEVENS-KNOX & ASSOCIATES, INC. AND AFFILIATES COMBINED FINANCIAL STATEMENTS As of and for the year ended December 31, 1997 Report of Independent Accountants To the Boards of Directors of Stevens-Knox & Associates, Inc., Stevens-Knox List Brokerage Inc., and Stevens-Knox International, Inc.: In our opinion, the accompanying combined balance sheet and the related combined statement of operations, stockholders' deficit and cash flows present fairly, in all material respects, the financial position of Stevens-Knox & Associates, Inc., and affiliates at December 31, 1997 and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for the opinion expressed above. /s/PricewaterhouseCoopers LLP New York, New York March 12, 1999 STEVENS-KNOX & ASSOCIATES, INC. AND AFFILIATES COMBINED BALANCE SHEET At December 31, ASSETS 1997 ---- Current assets: Cash and cash equivalents $ 309 Accounts receivable, net of allowance for doubtful accounts of $309,582 11,249,258 Marketable securities 341,140 Prepaid expenses and other current assets 21,704 ---------- Total current assets 11,612,411 Fixed assets, net 83,397 Related party loans and advances 47,820 Security deposits 64,376 ---------- Total assets $11,808,004 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $11,872,517 Accrued expenses and other 627,016 Current portion of long-term debt 324,245 Corporate income taxes payable 380,068 ----------- Total current liabilities 13,203,846 Long-term debt 176,519 ----------- Total liabilities 13,380,365 Commitments and contingencies (Note 3) Stockholders' deficiency: Common stock 2,332 Additional paid-in-capital 575,477 Treasury stock - 1,499 shares at cost (619,564) Accumulated deficit (1,530,606) ---------- Total liabilities and stockholders' deficiency $11,808,004 =========== The accompanying notes are an integral part of these combined financial statements. STEVENS-KNOX & ASSOCIATES, INC. AND AFFILIATES COMBINED STATEMENT OF OPERATIONS As of December 31, 1997 ---- Revenues $33,016,047 Cost of sales 27,407,403 ---------- Gross profit 5,608,644 ---------- Operating Expenses: Compensation and related costs 3,565,081 Advertising and promotion 855,757 Occupancy costs 284,969 Computer costs and expenses 117,838 General and administrative 667,399 Depreciation and amortization 58,924 ---------- Total operating expenses 5,549,968 ---------- Income before other income (expense), net 58,676 Other income (expense), net 6,903 ---------- Income before income taxes 65,579 Corporate income taxes 20,224 ---------- Net income $ 45,355 ========== The accompanying notes are an integral part of these combined financial statements. STEVENS-KNOX & ASSOCIATES, INC. AND AFFILIATES COMBINED STATEMENT OF CASH FLOWS For the year ended December 31, 1997 1997 ---- Cash Flows from Operating Activities: Net loss $ 45,355 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful accounts 106,726 Depreciation and amortization 58,924 Changes in operating assets and liabilities: Decrease (increase) in assets: Accounts receivable (689,369) Prepaid expenses and advances 20,599 Security deposits (250) Increase (decrease) in liabilities: Accounts payable 599,498 Accrued expenses 71,851 Corporate income taxes payable (3,663) ------ Net cash provided by operating activities 209,671 ------- Cash Flows from Investing Activities: Increase in marketable securities (181,487) Purchase of fixed assets (133,445) --------- Net cash used in investing activities (314,932) -------- Cash Flows from Financing Activities: Related party loans and advances 68,099 Reduction of long-term debt (10,556) Dividends paid to preferred stockholders (35,815) Preferred stock redemption premiums (24,700) ------- Net cash used by financing activities (2,972) -------- Net decrease in cash (108,233) Cash - beginning of year 108,542 ------- Cash - end of year $ 309 ========== Supplementary disclosures of cash flow information: Cash paid during the year for interest $ 68,775 Cash paid during the year for income taxes $ 19,015 The accompanying notes are an integral part of these combined financial statements. STEVENS-KNOX & ASSOCIATES, INC. AND AFFILIATES COMBINED STATEMENT OF STOCKHOLDERS' DEFECIT For the year ended December 31, 1997
Stock Additional ----- Paid-in Treasury Accumulated Common Preferred Capital Stock Deficit ------ --------- ------- ----- --------- Balance - January 1, 1997 $ 2,332 $ 2 $ 822,475 $ (619,564) $(1,515,446) Net income for the year ended December 31, 1997 45,355 Cash dividends paid to preferred stockholders during 1997 (29,640) Dividends accrued to preferred stockholders prior to redemption (6,175) Redemption of preferred stock (2) (246,998) (24,700) -------- -------- -------- -------- --------- Balance - December 31, 1997 $ 2,332 $ 0 $575,477 $ (619,564) $(1,530,606) ======== ======== ======== ========== ===========
The accompanying notes are an integral part of these combined financial statements. STEVENS-KNOX & ASSOCIATES, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS 1. Description of Business - ----------------------------- Description of Business Stevens-Knox & Associates, Inc. (SKA), a Subchapter S corporation, is primarily engaged in the administration and marketing of list rental profit centers. Stevens-Knox List Brokerage, Inc. (SKLB) and Stevens-Knox International, Inc. (SKI), Subchapter C corporations, provide advice to direct marketers on which lists to utilize in their mailing programs, and are responsible for procuring and processing lists for use by direct marketers. SKA was previously known as Computer Directions Group, Inc. ("CDG"). In 1992, certain entities of CDG were spun off and the remaining entities were renamed Stevens-Knox & Associates, Inc. In order to accomplish the spin off as a tax-free transaction the accumulated deficit of the spun off entities was retained by SKA. 2. Summary of Significant Accounting Policies - ------------------------------------------------ Combined Presentation SKA and its affiliates, SKLB and SKI, are commonly owned and managed. The accompanying combined financial statements include the accounts of all three companies. All significant intercompany accounts and transactions have been eliminated in combination. Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Although cash balances are maintained in high quality financial institutions, the balances at times exceed insurable amounts. Concentration of Credit Risk The Company performs ongoing evaluations of its customers' financial condition and generally does not require collateral on accounts receivable. The Company maintains allowances for credit losses and such losses have been within management's expectations. Revenue Recognition Revenues are recognized as earned as list orders are fulfilled. Fixed Assets Fixed assets, comprised of computer equipment, furniture, fixtures, office equipment, and leasehold improvements, are recorded at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the respective assets ranging from three to seven years. Leasehold improvements are amortized over the shorter of their estimated lives or the term of the lease. The cost of betterments is capitalized, and repairs and maintenance are charged to operations in the periods incurred. Long-lived Assets The carrying value of assets is reviewed on a regular basis for the existence of facts or circumstances, both internally and externally, that suggest impairment. To date no such impairment has been indicated. Should there be an impairment in the future, the Company will determine the impairment based on a comparison of the recorded amounts to the expected future cash flows from the impaired assets. The cash flow estimates will contain management's best estimates, using appropriate and customary assumptions and projections at the time. Income Taxes Effective January 1, 1997, Stevens-Knox & Associates, Inc. (SKA) elected Subchapter S corporation status under the applicable provisions of the Internal Revenue code and New York State income tax law. The net income of SKA flows through to the stockholders' personal income tax returns. Accordingly, no provision for Federal and New York State income taxes has been made. SKA remains liable for New York City General Corporation tax. The income tax liability as of December 31, 1997 relates, primarily, to certain transactions that occurred prior to the Subchapter S corporation election. SKA's affiliates file separate tax returns which provide for federal, state and city corporate income taxes at the rates in existence at the time in which incurred. No significant timing differences exist between taxable and reportable income. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. In June 1997, 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. In June 1997, 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 the financial statements. SFAS 130 is effective for years beginning after December 15, 1997. In March 1998, the American Institute of Certified Public Accountants, (the "AICPA") issued SOP 98-1 which provides guidance on accounting for the costs of computer software developed or obtained for internal use. The pronouncement identifies the characteristics of internal use software and provides guidance on new cost recognition principles. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. The adoption of the above pronouncements is not expected to have a significant impact on the Company's consolidated results of operations, financial position or cash flow. 3. Fixed Assets - ------------------ The major classifications of fixed assets are summarized below: 1997 ---- Computer hardware and software $113,196 Office furniture and fixtures 113,920 Office machinery and equipment 30,081 Leasehold improvements 42,100 ------ 299,297 Less, accumulated depreciation and amortization (215,900) -------- $ 83,397 ======== Depreciation and amortization expense for the year ended December 31, 1997 totaled approximately $58,900. 4. Commitments and Contingencies - ----------------------------------- Stevens-Knox & Associates, Inc. (SKA) leases its Manhattan office facilities under a five-year lease which commenced in May 1993. An option that provides for an additional five years was exercised in April 1998. SKA's affiliates, Stevens-Knox List Brokerage, Inc. (SKLB) and Stevens-Knox International, Inc. (SKI) have also entered into lease agreements. SKLB leases office facilities in Pennsylvania under a three-year lease that commenced in July 1996, with an option for an additional three-years. SKI leases office facilities in London under a nine-year lease that commenced in September 1996. Rent expense for 1997 was $222,946. The remaining combined minimum rent obligations are: 1998 $ 228,000 1999 237,000 2000 246,000 2001 255,000 2002 249,000 Thereafter 122,000 ------- 1,337,000 ========= 5. Related Party Transactions - -------------------------------- Long-Term Debt: December 31, 1997 -------------- Loan payable to stockholder, which $ 181,903 bears interest at 11.75% and is payable in monthly installments of principle and interest over 30 years through 2022. Loan payable to stockholders, which 20,000 bears interest at 10% and is due on demand. Loans payable to stockholders, which 20,986 bears interest at 10% and is payable over 5 years through 1998. Notes payable to stockholders 401(k) plan accounts, which bear interest at 12% and is payable in twelve quarterly 277,875 payments through 1998. -------------- 500,764 Less: Current portion (324,245) -------------- Long-term portion $ 176,519 ============== Loans and Advances Receivable: Loans receivable represent $25,000 to be received under a loan agreement with a stockholder. Advances of approximately $23,000 were also made to this stockholder during 1996. These amounts bear interest at 8.25% and are payable upon demand. All of the outstanding loans and advances were repaid during 1998. 6. 401(k) Plan - ----------------- Stevens-Knox & Associates, Inc. sponsors a contributory Profit Sharing Plan for eligible employees of SKA and SKLB. The Company makes a matching contribution in the amount of 5% of each employees' contribution. During 1997, the Company contributed approximately $4,000 to the Plan. 7. Common Stock - ------------------ The common stock reported on the balance sheet represents the combined totals of SKA, SKLB and SKI. SKA has 20,000 shares authorized, $1 par value, 2,331 shares issued. SKLB has 200 shares authorized, no par value, 100 shares issued. SKI has 1,000 shares authorized, $0.01 par value, 100 shares issued. The 1,499 shares of treasury stock are all shares of SKA. 8. Subsequent Events - ----------------------- Effective January 1, 1999, pursuant to a stock purchase agreement all of the issued and outstanding capital stock (the "Shares") of Stevens-Knox and Associates, Inc., Stevens-Knox List Brokerage, Inc. and Stevens-Knox International, Inc. (collectively "SKA") were acquired by Marketing Services Group, Inc. ("MSGI"). In consideration of the purchase of the Shares and other transactions contemplated in the agreement, MSGI paid the aggregate sum of $3,000,000. The agreement includes payments of additional consideration of up to $1,000,000 a year for each year beginning July 1st and ending June 30th for the years of 2000, 2001 and 2002. STEVENS-KNOX & ASSOCIATES, INC. AND AFFILIATES COMBINED BALANCE SHEET (unaudited) As of September 30, ASSETS 1998 ---- Current assets: Cash and cash equivalents $ 241,750 Accounts receivable, net of allowance for doubtful accounts of $309,582 11,098,933 Marketable securities 195,505 Prepaid expenses and other current assets 62,689 ------ Total current assets 11,598,877 Fixed assets, net 106,325 Security deposits 58,725 ------ Total assets $11,763,927 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $11,976,672 Accrued expenses and other 576,228 Current portion of long-term debt 458,226 Corporate income taxes payable 360,634 ------- Total current liabilities 13,371,760 Long-term debt 1,451,864 --------- Total liabilities 14,823,624 Commitments and contingencies (Note 3) Stockholders' deficiency: Common stock 2,332 Additional paid-in-capital 575,477 Treasury stock - 1,912 shares at cost (2,054,193) Accumulated deficit (1,583,313) ---------- Total liabilities and stockholders' deficiency $11,763,927 =========== The accompanying notes are an integral part of these combined financial statements STEVENS-KNOX & ASSOCIATES, INC. AND AFFILIATES COMBINED STATEMENT OF OPERATIONS For the nine months ended September 30, 1998 ---- Revenues $25,562,508 Cost of sales 21,315,770 ---------- Gross profit 4,246,738 --------- Operating Expenses Compensation and related costs 2,791,234 Advertising and promotion 592,983 Occupancy costs 215,389 Computer costs and expenses 78,036 General and administrative 468,130 Depreciation and amortization 41,419 ------ Total operating expenses 4,187,191 --------- Income before other income (expense) 59,547 Other income (expense), net (86,947) ------- Income before income taxes (27,400) Corporate income taxes 25,307 ------ Net loss $ (52,707) ======== The accompanying notes are and integral part of these combined financial statements. STEVENS-KNOX & ASSOCIATES, INC. AND AFFILIATES COMBINED STATEMENT OF CASH FLOWS (unaudited) For the nine months ended September 30, 1998 1998 ---- Cash Flows from Operating Activities: Net loss $ (52,707) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 41,419 Changes in operating assets and liabilities: Decrease (increase) in assets: Accounts receivable 150,325 Prepaid expenses and advances (40,985) Security deposits 5,651 Increase (decrease) in liabilities: Accounts payable 104,155 Accrued expenses (50,788) Corporate income taxes payable (19,434) ------- Net cash provided by operating activities 137,636 ------- Cash Flows from Investing Activities: Decrease in marketable securities 145,635 Purchase of fixed assets (64,347) -------- Net cash provided by investing activities 81,288 ------ Cash Flows from Financing Activities: Related party loans and advances 47,820 Reduction of long-term debt (127,483) Bank loan received 150,000 Note payable on common stock redemption 1,386,809 Common stock redemption (1,434,629) ---------- Net cash provided by financing activities 22,517 ------ Net increase in cash 241,441 Cash - beginning of period 309 --- Cash - end of period $ 241,750 =========== Supplementary disclosures of cash flow information: Cash paid during the period for interest $ 68,775 Cash paid during the period for income taxes $ 19,015 The accompanying notes are an integral part of these combined financial statements. STEVENS-KNOX & ASSOCIATES, INC. AND AFFILIATES COMBINED STATEMENT OF STOCKHOLDERS' DEFECIT (unaudited) For the nine months ended September 30, 1998
Stock Additional ----- Paid-in Treasury Accumulated Common Preferred Capital Stock Deficit ------ --------- ------- ----- --------- Balance - January 1, 1998 $ 2,332 $ 0 $ 575,477 $ (619,564) $(1,530,606) Net loss for the nine months ended September 30, 1998 (52,707) Redemption of common stock (1,434,629) -------- -------- -------- ---------- ---------- Balance - September 30, 1998 $ 2,332 $ 0 $ 575,477 $(2,054,193) $(1,583,313) ======== ======== ========= =========== ===========
The accompanying notes are an integral part of these combined financial statements. STEVENS-KNOX & ASSOCIATES, INC. AND AFFILIATES NOTES TO COMBINES FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation - --------------------------- The accompanying unaudited Interim Condensed Combined Financial Statements include the accounts of Stevens-Knox & Associates, Inc. (SKA), a Subchapter S corporation, Stevens-Knox List Brokerage, Inc. (SKLB) and Stevens-Knox International, Inc. (SKI), Subchapter C corporations. SKA and its affiliates, SKLB and SKI, are commonly owned and managed. The accompanying combined financial statements include the accounts of all three companies. All significant intercompany accounts and transactions have been eliminated in combination. These condensed combined financial statements should be read in conjunction with the Company's annual combined financial statements for the fiscal year ended December 31, 1997 and the related notes included therein. In the opinion of management, the accompanying unaudited condensed combined financial statements include all adjustments, consisting of only normal recurring accruals, necessary to present fairly the condensed combined financial position, results of operations and cash flows of the Company. Certain information and footnote disclosure normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. Operating results for the nine month period ended September 30, 1998 is not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1998. 2. Common Stock Buyback - -------------------------- In September 1998, pursuant to the Amended and Restated Shareholders' Agreement dated May 7, 1996, 333, 40 and 40 shares of common stock were repurchased by SKA, SKLB and SKI, respectively. The shares were repurchased for a total of $1,434,629. Promissory notes in the amount of 1,386,809 were issued which are payable monthly over ten years and bear interest at 5.59% per annum. Total monthly payments under the promissory notes are $11,557 plus interest. 3. Subsequent Events - ----------------------- Effective January 1, 1999, pursuant to a stock purchase agreement all of the issued and outstanding capital stock (the "Shares") of Stevens-Knox and Associates, Inc., Stevens-Knox List Brokerage, Inc. and Stevens-Knox International, Inc. (collectively "SKA") were acquired by Marketing Services Group, Inc. ("MSGI"). In consideration of the purchase of the Shares and other transactions contemplated in the agreement, MSGI paid the aggregate sum of $3,000,000. The agreement includes payments of additional consideration of up to $1,000,000 a year for each year beginning July 1st and ending June 30th for the years of 2000, 2001 and 2002. MARKETING SERVICES GROUP, INC., STEVENS-KNOX AND ASSOCIATES, INC., STEVENS-KNOX LSIT BROKERAGE, INC., AND STEVENS-KNOX INTERNATIONAL, INC. UNAUDITED PRO FORMA FINANCIAL INFORMATION The unaudited pro forma combined condensed balance sheet as of September 30, 1998 is presented as if the acquisition of Stevens-Knox and Associates, Inc., Stevens-Knox List Brokerage, Inc., and Stevens-Knox International, Inc., (collectively "SK&A") had occurred on September 30, 1998. The unaudited pro forma combined condensed statement of operations are presented as if the SK&A acquisition occurred on July 1 of each period presented. They also include the unaudited historical statement of operations of Media Marketplace, Inc. and Media Marketplace Media Division, Inc. (collectively "MMI") for the five months ended November 30, 1997. MMI was acquired by the Company effective December 1, 1997. The acquisition of MMI was accounted for using the purchase method of accounting and, accordingly, the operating results of MMI were included in the consolidated results of operations of MSGI from the date of acquisition. Pro forma adjustments for each such pro forma financial statements are described in the accompanying notes. The unaudited pro forma combined financial statements should be read in conjunction with the respective historical consolidated financial statements and related notes of MSGI which have been previously filed with the Commission and the historical financial statements and related notes of SK&A included elsewhere in this Current Report on Form 8-K/A. The following unaudited pro forma condensed combined financial information is not necessarily indicative of the actual results of operations that would have been reported if the events described above had occurred as of the beginning of the periods described above, nor does such information purport to indicate the results of the Company's future operations. In the opinion of management, all adjustments necessary to present fairly such pro forma financial information have been made. PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1998 (Unaudited)
Historical --------------------------------------- Stevens-Knox and Associates, Stevens- Marketing Knox List Brokerage, Pro forma Services and Stevens-Knox --------------------------- Group, Inc. International Adjustments Combined ----------- ------------- ----------- -------- Assets Current assets: Cash and cash equivalents $ 5,422,809 $ 437,255 $ 5,860,064 Accounts receivable, net 15,711,730 11,098,933 26,810,663 Other current assets 824,720 62,689 887,409 ------- ------ ------- Total current assets 21,959,259 11,598,877 33,558,136 Property and equipment at cost, net 1,660,233 106,325 1,766,558 Intangible assets at cost, net 24,479,739 - 6,307,599 (A) 30,787,338 Other assets 842,111 58,725 900,836 ------- ------ ------- Total assets $48,941,342 $ 11,763,927 $67,012,868 ========== ========== =========== Liabilities and Stockholders' Equity Current liabilities: Short-term borrowings $ 1,660,867 $ - 3,633,205 (B) 5,294,072 Trade accounts payable 12,576,591 11,976,672 24,553,263 Accrued expenses and other current liabilities 1,367,338 936,862 2,304,200 Current portion of long-term obligations 2,069,116 458,226 (385,303)(C) 2,142,039 --------- ------- --------- Total current liabilities 17,673,912 13,371,760 34,293,574 Long-term obligations 79,008 1,451,864 1,530,872 Other liabilities 28,334 - 28,334 ------ ------ ------ Total liabilities 17,781,254 14,823,624 35,852,780 ---------- ---------- ---------- Redeemable convertible preferred stock, $.01 par value; 150,000 shares authorized; 50,000 shares of Series D convertible preferred stock issued and outstanding 14,654,027 - 14,654,027 ---------- ------- ---------- Stockholders' equity: Common Stock 131,033 2,332 (2,332)(A) 131,033 Additional paid-in capital 29,338,732 575,477 (575,477)(A) 29,338,732 Accumulated deficit (12,780,085) (1,583,331) 1,583,331 (A) (12,780,085) Less: common stock in treasury, at cost (183,619) (2,054,193) 2,054,193 (A) (183,619) -------- ---------- -------- Total stockholders' equity 16,506,061 (3,059,715) 16,506,061 ---------- ---------- ---------- Total liabilities and stockholders' equity $ 48,941,342 $ 11,763,909 $ 67,012,868 ============ ============ ============
See accompanying notes to unaudited pro forma combined condensed financial statements. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (Unaudited)
Historical --------------------------------------- Stevens-Knox and Associates, Stevens- Marketing Knox List Brokerage, Pro forma Services and Stevens-Knox --------------------------- Group, Inc. International Adjustments Combined ----------- ------------- ----------- -------- Revenues $17,152,928 $9,083,709 26,236,637 ----------- ---------- ---------- Salaries and benefits 6,286,822 1,036,167 $ (36,465)(D) 7,286,524 Direct costs 9,514,162 7,549,673 17,063,835 Selling, general and administrative 1,335,625 408,893 (90,000)(I) 1,654,518 Depreciation and amortization 455,298 16,177 52,563 (E) 524,038 ------- ------ ------- Total operating costs and expenses 17,591,907 9,010,910 26,528,915 ---------- --------- ---------- Income (loss) from operations (438,979) 72,799 (292,278) Other income (expense) (30,727) (19,235) (56,381)(F) (106,343) ------- ------- -------- Income (loss) before income taxes (469,706) 53,564 (398,621) Income tax (provision) benefit (27,305) (8,436) (35,741) ------- ------ ------- Net income (loss) $ (497,011) $ 45,128 $ (434,362) ============ ========== ============ Net income (loss) attributable to common stockholders $ (783,737) $ (721,088) =========== =========== Net loss per common share - basic and diluted $ (0.06) $ (0.06) ========= ========= Weighted average common shares outstanding 13,090,141 13,090,141 ========== ==========
See accompanying notes to unaudited pro forma financial statements. PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE FISCAL YEAR ENDED JUNE 30, 1998 (Unaudited)
Historical -------------------------------------------------------- Stevens-Knox and Associates, Stevens- Marketing Media Market- Knox List Brokerage, Pro forma Services Place, Inc. and and Stevens-Knox --------------------------- Group, Inc. Media Divison International Adjustments Combined ----------- ------------- ------------- --------------------------- Revenues $51,174,063 $13,782,459 $33,585,281 $98,541,803 ----------- ----------- ----------- ----------- Salaries and benefits 19,255,348 818,063 3,537,607 (81,512)(D) 23,529,506 Direct costs 26,771,6111 2,148,472 27,968,561 66,888,644 Selling, general and administrative 4,240,805 735,620 1,866,629 6,843,054 Depreciation and amortization 1,486,106 42,664 54,704 283,171 (E) 1,866,645 --------- ------ ------ --------- Total operating costs and expenses 51,753,870 13,744,819 33,427,501 99,127,849 ---------- ---------- ---------- ---------- Income (loss) from operations (579,807) 37,640 157,780 (586,046) Other income (expense) (185,967) 43,382 (33,511) (235,250)(F) (411,346) -------- ------ ------- -------- Income (loss) before income taxes (765,774) 81,022 124,269 (997,392) Income tax provision (14,704) - (37,095) (51,799) ------- ------- ------- ------- Net income (loss) $ (780,478) $ 81,022 $ 87,174 $ (1,049,191) =========== ========== ========== ============ Net loss attributable to common stockholders $(4,724,480) (3,432,252)(G) $(1,560,941) ============ ============ Basic and diluted loss per share $ (0.37) $ (0.12) ======== ======== Weighted average common shares outstanding 12,892,323 111,111 (H) 13,003,434 ========== ==========
See accompanying notes to unaudited pro forma financial statements. NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (A) The cost of the acquisition was estimated to be allocated to the assets acquired and liabilities assumed, based on their estimated fair value, as follows: Working Deficit $(1,763,730) Property and equipment 106,325 Non-current liabilities (1,451,864) Intangible Assets 6,363,686 --------- $ 3,254,417 =========== The Company is in the process of further determining the allocation of the purchase price. (B) Represents amounts borrowed for acquisition payments. (C) Represents liabilities paid at the closing of the acquisition. (D) Reflects reductions in SK&A officers' salaries to consider post acquisition contractual amounts payable (E) Amortization of goodwill acquired in the SK&A acquisition of $6,363,686 amortized over thirty years. The year ended June 30, 1998 also includes $72,918 of amortization of intangibles acquired in the MMI transaction for the five months ended November 30, 1997. (F) Reflects interest expense on the amount borrowed for the SK&A acquisition. (G) Net loss attributable to common stockholders has been adjusted to reflect recurring preferred dividends which are being incurred on MSGI's $15,000,000 financing transaction with General Electric Capital Corporation as described more fully in the Company's Report on Form 10-KSB for the fiscal year ended June 30, 1998. The preferred dividends are cumulative and accrue at the rate of 6% per annum. Preferred dividends are also being recognized for periodic accretions of a discount to reflect an allocation of $1,362,000 of the proceeds to the estimated value of potentially issuable warrants. A preferred dividend of $3,214,400 to reflect a non-cash beneficial conversion feature in the financing transaction was included in the historical MSGI financial statements for the fiscal year ended June 30, 1997. It has been excluded in the accompanying pro forma condensed combined statements of operations as it is non-recurring. (H) Weighted average shares have been adjusted to reflect 222,222 shares of MSGI's common stock issued in conjunction with the acquisition of MMI. (I) Represents legal costs incurred in connection with the buy back of SKA, SKLB, and SKI shares of common stock. -----END PRIVACY-ENHANCED MESSAGE-----