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
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MARKETING SERVICES GROUP, INC.
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(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
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(Address of Principal Executive Offices)
917/339-7100
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(Registrant's telephone number, including area code)
<PAGE>
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
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(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.
<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: June 5, 2000 By: /s/ Cindy H. Hill
------------ --------------------------
Title: Chief Accounting Officer
<PAGE>
Grizzard Advertising Incorporated
Financial Statements as of and for the Years Ended
December 31, 1999 and 1998
and Independent Auditors' Reports
<PAGE>
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
<PAGE>
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
<PAGE>
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
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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.
<PAGE>
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
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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)
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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.
<PAGE>
<TABLE>
<CAPTION>
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
----- ------- -------- ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
<TABLE>
<CAPTION>
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
----------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
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
======== ======== =========
</TABLE>
See Notes to Pro Forma Combined Balance Sheet.
<PAGE>
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
======
<PAGE>
<TABLE>
<CAPTION>
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
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
====== ====== ======
</TABLE>
See Notes to Pro Forma Combined Statement of Operations.
<PAGE>
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.
<PAGE>
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
=====
<PAGE>
<TABLE>
<CAPTION>
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
-------------------------------------------------------------
<S> <C> <C> <C> <C>
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
====== ======
</TABLE>
See Notes to Pro Forma Combined Statements of Operations
<PAGE>
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
=====
<PAGE>
<TABLE>
<CAPTION>
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
-------------------------------------------------------------
<S> <C> <C> <C> <C>
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
====== ======
</TABLE>
See Notes to Pro Forma Combined Statements of Operations
<PAGE>
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
=====
