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)
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
STEVENS-KNOX & ASSOCIATES, INC. AND AFFILIATES
COMBINED FINANCIAL STATEMENTS
As of and for the year ended December 31, 1997
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
STEVENS-KNOX & ASSOCIATES, INC. AND AFFILIATES
COMBINED STATEMENT OF STOCKHOLDERS' DEFECIT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Stock Additional
----- Paid-in Treasury Accumulated
Common Preferred Capital Stock Deficit
------ --------- ------- ----- ---------
<S> <C> <C> <C> <C> <C>
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)
======== ======== ======== ========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
=========
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
STEVENS-KNOX & ASSOCIATES, INC. AND AFFILIATES
COMBINED STATEMENT OF STOCKHOLDERS' DEFECIT
(unaudited)
For the nine months ended September 30, 1998
<TABLE>
<CAPTION>
Stock Additional
----- Paid-in Treasury Accumulated
Common Preferred Capital Stock Deficit
------ --------- ------- ----- ---------
<S> <C> <C> <C> <C> <C>
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)
======== ======== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE>
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.
<PAGE>
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.
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Historical
---------------------------------------
Stevens-Knox and
Associates, Stevens-
Marketing Knox List Brokerage, Pro forma
Services and Stevens-Knox ---------------------------
Group, Inc. International Adjustments Combined
----------- ------------- ----------- --------
<S> <C> <C> <C> <C>
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
============ ============ ============
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Historical
---------------------------------------
Stevens-Knox and
Associates, Stevens-
Marketing Knox List Brokerage, Pro forma
Services and Stevens-Knox ---------------------------
Group, Inc. International Adjustments Combined
----------- ------------- ----------- --------
<S> <C> <C> <C> <C>
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
========== ==========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
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
----------- ------------- ------------- ---------------------------
<S> <C> <C> <C> <C> <C>
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
========== ==========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
<PAGE>
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.
