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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-20394
COACTIVE MARKETING GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1340408
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
415 Northern Boulevard
Great Neck, New York 11021
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 622-2800
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 9, 2002, 5,028,481 shares of the Registrant's Common Stock, par
value $.001 a share, were outstanding.
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INDEX
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COACTIVE MARKETING GROUP, INC. AND SUBSIDIARIES
Page
----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements of CoActive Marketing
Group, Inc. (Unaudited)
Consolidated Balance Sheets - June 30, 2002 and
March 31, 2002 .......................................... 3
Consolidated Statements of Operations - Three month
periods ended June 30, 2002 and June 30, 2001 ........... 4
Consolidated Statement of Stockholders' Equity -
Three month period ended June 30, 2002 .................. 5
Consolidated Statements of Cash Flows - Three month
periods ended June 30, 2002 and June 30, 2001 ........... 6
Notes to Unaudited Consolidated Financial Statements .... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk ... 11
PART II - OTHER INFORMATION
- ---------------------------
Items 1-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K. ............................ 11
SIGNATURES ................................................................ 12
- ----------
2
PART I - FINANCIAL INFORMATION
------------------------------
COACTIVE MARKETING GROUP, INC.
Consolidated Balance Sheets
June 30, 2002 and March 31, 2002
June 30, 2002 March 31, 2002*
------------- -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 778,275 $ 1,959,617
Accounts receivable, net of allowance for doubtful accounts of
$81,000 at June 30, 2002 and $75,000 at March 31, 2002 8,088,118 10,077,770
Unbilled contracts in progress 2,938,156 3,160,372
Prepaid taxes 141,831 141,831
Prepaid expenses and other current assets 810,811 878,603
------------- -------------
Total current assets 12,757,191 16,218,193
------------- -------------
Property and equipment, net 1,636,611 1,721,176
Investment in MarketVision 286,630 307,630
Notes receivable from officers 613,000 613,000
Goodwill, net 17,491,196 17,491,196
Intangible asset 200,000 200,000
Deferred financing costs, net 163,134 189,029
Other assets 169,289 131,914
------------- -------------
Total assets $ 33,317,051 $ 36,872,138
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,783,796 $ 6,934,320
Deferred revenue 4,205,072 3,807,017
Accrued job costs 4,459,794 4,876,089
Accrued compensation 78,995 54,923
Other accrued liabilities 883,769 725,086
Deferred taxes payable 211,595 211,595
Notes payable bank - current 1,653,333 1,333,333
Subordinated notes payable - current 625,000 1,025,000
------------- -------------
Total current liabilities 15,901,354 18,967,363
Notes payable bank - long term 2,680,000 3,333,333
Deferred taxes payable 530,890 530,890
------------- -------------
Total liabilities 19,112,244 22,831,586
------------- -------------
Stockholders' equity:
Class A convertible preferred stock, par value $.001;
Authorized 650,000 shares; none issued and outstanding -- --
Class B convertible preferred stock, par value $.001;
Authorized 700,000 shares; none issued and outstanding -- --
Preferred stock, undesignated; authorized 3,650,000
Shares; none issued and outstanding -- --
Common stock, par value $.001; authorized 25,000,000 5,028 5,028
Shares; issued and outstanding 5,028,481 shares
Additional paid-in capital 6,744,598 6,744,598
Retained earnings 7,455,181 7,290,926
------------- -------------
Total stockholders' equity 14,204,807 14,040,552
------------- -------------
Total liabilities and stockholders' equity $ 33,317,051 $ 36,872,138
============= =============
* The consolidated balance sheet as of March 31, 2002 has been summarized from
the Company's audited balance sheet as of that date.
See accompanying notes to unaudited consolidated financial statements.
3
COACTIVE MARKETING GROUP, INC.
Consolidated Statements of Operations
Three Months Ended June 30, 2002 and 2001
(Unaudited)
2002 2001*
----------- -----------
Sales $14,143,991 $15,760,038
Direct expenses 11,228,670 12,127,129
----------- -----------
Gross profit 2,915,321 3,632,909
----------- -----------
Salaries 1,175,675 1,586,970
Selling, general and administrative expense 1,363,942 1,739,216
----------- -----------
Total operating expenses 2,539,617 3,326,186
----------- -----------
Operating income 375,704 306,723
Interest expense, net 66,892 155,051
Other -- 88,966
----------- -----------
Income before provision for income taxes 308,812 240,638
Provision for income taxes 123,557 97,256
Equity in loss of affiliate 21,000 --
----------- -----------
Net income $ 164,255 $ 143,382
=========== ===========
Net income per common and common
equivalent share:
Basic $ .03 $ .03
=========== ===========
Diluted $ .03 $ .03
=========== ===========
Weighted average number of common and
common equivalent shares outstanding:
Basic 5,028,481 5,022,231
=========== ===========
Diluted 5,531,533 5,478,608
=========== ===========
Reconciliation of weighted average shares used for basic and diluted computation
is as follows:
Weighted average shares - Basic 5,028,481 5,022,231
Dilutive effect of options and warrants 503,052 456,377
----------- -----------
Weighted average shares - Diluted 5,531,533 5,478,608
=========== ===========
* Restated to reflect the adoption of EITF 01-14, Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses.
See accompanying notes to unaudited consolidated financial statements.
4
COACTIVE MARKETING GROUP, INC.
Consolidated Statement of Stockholders' Equity
Three Months Ended June 30, 2002
(Unaudited)
Common Stock
Par value $.001 Additional Total
------------------------- Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
----------- ----------- ----------- ----------- -----------
Balance, March 31, 2002 5,028,481 $ 5,028 $ 6,744,598 $ 7,290,926 $14,040,552
Net income -- -- -- 164,255 164,255
----------- ----------- ----------- ----------- -----------
Balance, June 30, 2002 5,028,481 $ 5,028 $ 6,744,598 $ 7,455,181 $14,204,807
=========== =========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
5
COACTIVE MARKETING GROUP, INC.
Consolidated Statements of Cash Flows
Three Months Ended June 30, 2002 and 2001
(Unaudited)
2002 2001
----------- -----------
Cash flows from operating activities:
Net income $ 164,255 $ 143,382
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for bad debt expense 6,000 27,000
Equity in loss of affiliate 21,000 --
Other -- (88,966)
Depreciation and amortization 175,282 439,656
Deferred tax benefit -- 35,586
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,983,652 2,978,428
Decrease (increase) in unbilled contracts in progress 222,216 (1,942,481)
Increase in notes receivable - officers -- (839,619)
Decrease (increase) in prepaid expenses and other assets 30,417 (312,301)
(Decrease) increase in accounts payable (3,150,524) 1,203,174
Increase in deferred revenue 398,055 233,253
Decrease in accrued job costs (416,295) (17,386)
Increase (decrease) in other accrued liabilities 158,683 (201,228)
Increase (decrease) in accrued compensation 24,072 (49,570)
----------- -----------
Net cash (used in) provided by operating activities (383,187) 1,608,928
----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (64,822) (146,343)
----------- -----------
Net cash used in investing activities (64,822) (146,343)
----------- -----------
Cash flows from financing activities:
Repayments of borrowings (733,333) (1,285,000)
Financing costs -- (158,399)
Decrease in advances to affiliates -- 266,897
----------- -----------
Net cash used in financing activities (733,333) (1,176,502)
----------- -----------
Net (decease) increase in cash and cash equivalents (1,181,342) 286,083
Cash and cash equivalents at beginning of period 1,959,617 855,219
----------- -----------
Cash and cash equivalents at end of period $ 778,275 $ 1,141,302
=========== ===========
Supplemental disclosure:
Interest paid during the period $ 33,555 $ 168,842
=========== ===========
Income tax paid during the period $ 86,075 $ 47,000
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
6
CoActive Marketing Group, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
June 30, 2002 and 2001
(1) Basis of Presentation
---------------------
The interim consolidated financial statements of CoActive Marketing
Group, Inc. (the "Company") for the three month periods ended June 30,
2002 and 2001 have been prepared without audit. In the opinion of
management, such consolidated financial statements reflect all
adjustments, consisting of normal recurring accruals, necessary to
present fairly the Company's results for the interim periods presented.
The results of operations for the three month period ended June 30,
2002 is not necessarily indicative of the results for a full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended March 31, 2002.
(2) Goodwill and Intangible Asset
-----------------------------
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business
Combinations ("FAS 141"), and No. 142, Goodwill and Other Intangible
Assets ("FAS 142"), effective for fiscal years beginning after December
15, 2001. Under the new standards, goodwill and intangible assets
deemed to have indefinite lives are no longer amortized but are subject
to annual impairment tests in accordance with FAS 142. Other intangible
assets continue to be amortized over their estimated useful lives.
The Company adopted the new standards beginning in the first quarter of
fiscal 2003. Effective with the adoption of FAS 142, both goodwill,
which is primarily related to the Company's prior acquisitions of its
subsidiaries, and the Company's other intangible asset, which was
acquired in fiscal 2002 and consists of an Internet domain name and any
and all related intellectual property rights being used in the
Company's operations, are no longer amortized but are instead subject
to an annual impairment test. The Company has completed its initial
impairment review as of April 1, 2002 and no impairment in the recorded
goodwill and intangible asset was identified. Goodwill and the
intangible asset will be tested annually at the end of the fiscal year
to identify if an impairment has occurred. However, in the future,
upon completion of the annual review, there can be no assurance that a
material charge will not be recorded.
With the adoption of FAS 142, the Company ceased amortization of
goodwill as of March 31, 2002. The following table presents the results
of the Company for all periods presented on a comparable basis:
Three Months Ended
-------------------------
June 30, June 30,
2002 2001
----------- -----------
Net income $ 164,255 $ 143,382
Add back goodwill amortization, net of tax provision -- 156,309
----------- -----------
Adjusted net income $ 164,255 $ 299,691
=========== ===========
Diluted net income per share:
Net income $ .03 $ .03
Goodwill amortization, net of tax provision -- .03
----------- -----------
Adjusted diluted net income per share $ .03 $ .06
=========== ===========
7
(3) Earnings Per Share
------------------
Options and warrants to purchase 1,252,751 and 1,172,175 shares of
common stock at prices ranging from $2.31 to $10.00 and $2.00 to $10.00
per share were outstanding during the three months ended June 30, 2002
and 2001, respectively and expire through April 30, 2011. These options
and warrants were excluded from the computation of diluted earnings per
share for each period because the exercise prices exceeded the fair
market value of the Company's common stock.
(4) Unbilled Contracts in Progress
------------------------------
Unbilled contracts in progress represents revenue recognized in advance
of billings rendered based on work performed to date on certain
contracts. Accrued job costs are also recorded for such contracts to
properly match costs and revenue.
(5) Deferred Revenue
----------------
Deferred revenue represents contract amounts billed and client advances
in excess of costs incurred and estimated profit earned.
(6) Income Taxes
------------
The provision for income taxes for the three month period ended June
30, 2002 and 2001 is based upon the Company's estimated effective tax
rate for the respective fiscal year.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
-------------
The following discussion compares the Company's consolidated results of
operations for the three month period ended June 30, 2002 to the Company's
consolidated results of operations for the three month period ended June 30,
2001. The information herein should be read together with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended March 31, 2002.
Results of Operations
The following table presents operating data of the Company, expressed
as a percentage of sales for each of the three month periods ended June 30,
2002, and 2001:
Quarter Ended June 30,
----------------------
2002 2001
------ ------
Statement of Operations Data:
Sales 100.0% 100.0%
Direct expenses 79.4% 77.0%
Gross profit 20.6% 23.0%
Salaries 8.3% 10.1%
Selling, general and administrative expense 9.6% 11.0%
Total operating expense 17.9% 21.1%
Operating income 2.7% 1.9%
Interest expense, net 0.5% 1.0%
Other income n/a 0.6%
Income before provision for income taxes 2.2% 1.5%
Provision for income taxes 0.9% 0.6%
Equity in loss of affiliate 0.1% n/a
Net income 1.2% 0.9%
8
The following table presents operating data of the Company, expressed
as a comparative percentage of change for the three month period ended June 30,
2002 compared to the three month period ended June 30, 2001 and the three month
period ended June 30, 2001 compared to the three month period ended June 30,
2000:
Quarter Ended June 30,
----------------------
2002 2001
------ ------
Statement of Operations Data:
Sales (10.3%) 4.3%
Direct expenses (7.4%) 10.2%
Gross profit (19.8%) (11.4%)
Salaries (25.9%) 3.8%
Selling, general and administrative expense (21.6%) 12.6%
Total operating expense (23.7%) 8.3%
Operating income 22.5% (70.2%)
Interest expense, net (56.9%) (26.4%)
Income before provision for income taxes 28.3% (70.5%)
Provision for income taxes 27.0% (70.3%)
Net income 14.6% n/a
Sales. Sales for the quarter ended June 30, 2002 were
$14,144,000, compared to sales of $15,760,000 for the quarter ended June 30,
2001, a decrease of $1,616,000, after including $2,781,000 and $2,634,000,
respectively, of reimbursable costs and expenses. The decrease was primarily
attributable to a decrease in the amount of sales contracted during the quarter.
At June 30, 2002, the Company's sales backlog amounted to approximately
$13,324,000 compared to a sales backlog of approximately $16,500,000 at June 30,
2001. At any given time, comparative differences in the Company's sales and
sales backlog may vary due to timing differences in the receipt of executed
contracts from clients with respect to project assignments being finalized.
Direct Expenses. Direct expenses for the quarter ended June
30, 2002 were $11,229,000, compared to $12,127,000 for the comparable prior year
quarter, a decrease of $898,000, after including $2,781,000 and $2,634,000,
respectively, of reimbursable costs and expenses. The decrease was primarily
attributable to a decrease in variable direct expenses which are applicable to
and relate to the decrease in sales. The increase in direct expenses as a
percentage of sales for the quarter ended June 30, 2002 was primarily the result
of the aggregate mix of client projects having a lower gross profit margin than
the mix of the Company's projects during the comparable prior year quarter.
Gross Profit. As a result of the changes in sales and direct
expenses, the Company's gross profit for the quarter ended June 30, 2002
decreased to $2,915,000 from $3,633,000 for the quarter ended June 30, 2001.
Operating Expenses. Operating expenses for the quarter ended
June 30, 2002 decreased by $787,000 and amounted to $2,540,000, compared to
operating expenses of $3,326,000 for the quarter ended June 30, 2001. The
decrease in operating expenses for the quarter ended June 30, 2002 was primarily
the result of a decrease of $411,000 in salaries and related payroll expenses
and a decrease of $375,000 in selling, general and administrative expenses. The
decrease in salaries and related payroll expenses was primarily attributable to
a reduction in personnel and to a lesser extent the cost of personnel deployed
in support of and charged to the Company's Market Vision affiliate. The decrease
in selling, general and administrative expenses was primarily related to (i) the
elimination of approximately $260,000 of goodwill amortization expense in
accordance with Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, which was adopted in the quarter ended June 30, 2002 and (ii)
an overall reduction in variable expenses related to supporting and maintaining
the Company's level of operations.
Interest Expense. Interest expense for the quarter ended June
30, 2002 decreased to $67,000, compared to interest expense of $155,000 for the
quarter ended June 30, 2001. The decrease in interest expense for the quarter
ended June 30, 2002 was primarily related to the decrease in the Company's bank
and subordinated debt borrowings, compared to such borrowings during the quarter
ended June 30, 2001.
9
Other. For the quarter ended June 30, 2001, the Company
recorded income resulting from a previously recorded share of losses of a then
affiliate in the amount of $89,000.
Provision For Income Taxes. The provision for federal, state
and local income taxes for the quarters ended June 30, 2002 and 2001 were based
upon the Company's estimated effective tax rate for the respective fiscal year.
Equity in Loss of Affiliate. For the quarter ended June 30,
2002, the Company recorded $21,000 as its share of losses from its 49% equity
investment in Market Vision.
Net Income. As a result of the items discussed above, net
income for the quarter ended June 30, 2002 was $164,000 compared with net income
of $143,000 for the comparable prior year quarter.
Liquidity and Capital Resources.
On May 17, 2001, the Company replaced its then existing bank loan
agreement with a new credit agreement with another bank (the "Credit Agreement")
pursuant to which the Company obtained a $4,000,000 three-year term loan (the
"Term Loan") and a $2,000,000 revolving loan credit facility (the "Revolving
Loan", and together with the Term Loan, the "New Loans"). Contemporaneously with
the closing of the Credit Agreement, the Company borrowed $4,000,000 under the
Term Loan and $1,000,000 under the Revolving Loan. $4,510,000 of the proceeds of
the New Loans was used to refinance the loan balance of its prior loan agreement
and the balance of the proceeds to increase its working capital. Borrowings
under the Credit Agreement are evidenced by promissory notes and are secured by
all of the Company's assets. Principal payments on the Term Loan to be made in
twelve equal quarterly installments of $333,333 commenced on June 30, 2001.
For the quarter ended June 30, 2002, the Company's activities and the
combined repayment of $733,000 of bank and subordinated debt borrowings were
funded from working capital. At June 30, 2002, the Company had cash and cash
equivalents totaling $778,000, a working capital deficit of $3,144,000,
outstanding bank loans of $4,333,000 with no additional availability under the
Revolving Loan, outstanding subordinated debt of $625,000 and stockholders'
equity of $14,205,000. In comparison, at March 31, 2002, the Company had cash
and cash equivalents of $1,960,000 and a working capital deficit of $2,749,000,
outstanding bank loans of $4,667,000 with no additional availability under the
Revolving Loan, outstanding subordinated debt of $1,025,000 and stockholders'
equity of $14,041,000. The increase in working capital deficit at June 30, 2002
compared with March 31, 2002 was primarily the result of the reclassification of
$320,000 from long term bank notes payable to current bank notes payable,
attributable to a payment requirement to reduce the Term Loan resulting from an
excess cash flow calculation pursuant to the Credit Agreement. Management
believes cash generated from operations together with borrowings under the
Credit Agreement should be sufficient to meet the Company's cash requirements
for fiscal 2003. To the extent the Company is required to seek additional
external financing, there can be no assurance that the Company will be able to
obtain such additional funding to satisfy its cash requirements for fiscal 2003
or as subsequently required under the Credit Agreement.
For the quarter ended June 30, 2002, (A) cash used in operating
activities amounted to $383,000, due principally to the aggregate net effect of
a decrease in accounts payable and accrued job costs offset by (i) net income
and non-cash charges for depreciation and amortization, (ii) decreases in
accounts receivable, unbilled contracts in progress and prepaid expenses and
other assets, and (iii) increases in deferred revenue and other accrued
liabilities; (B) cash used in investing activities to purchase fixed assets
amounted to $65,000; and (C) cash used in financing activities to repay
borrowings amounted to $733,000. As a result of the net effect of the
aforementioned, the Company's cash and cash equivalents at June 30, 2002
decreased by $1,181,000.
Forward Looking Statements.
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, that are based on beliefs of the Company's
management as well as assumptions made by and information currently available to
the Company's management. When used in this report, the words "estimate,"
"project," "believe," "anticipate," "intend," "expect," "plan," "predict,"
"may," "should," "will," the negative thereof or other variations thereon or
comparable terminology are intended to identify, forward-looking statements.
10
Such statements reflect the current views of the Company with respect to future
events based on currently available information and are subject to risks and
uncertainties that could cause actual results to differ materially from those
contemplated in those forward-looking statements. Factors that could cause
actual results to differ materially from the Company's expectations are set
forth in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 2002 under "Risk Factors", including but not limited to "Dependence on
Key Personnel," "Customers," "Unpredictable Revenue Patterns," "Competition,"
"Risk Associated with Acquisitions," "Expansion Risk," "Control by Executive
Officers," and "Outstanding Indebtedness; Security Interest." Other factors may
be described from time to time in the Company's public filings with the
Commission, news releases and other communications. The forward-looking
statements contained in this report speak only as of the date hereof. The
Company does not undertake any obligation to release publicly any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company's earnings and cash flows are subject to fluctuations due
to changes in interest rates primarily from its investment of available cash
balances in money market funds with portfolios of investment grade corporate and
U.S. government securities and, secondarily, from its long-term debt
arrangements. Under its current policies, the Company does not use interest rate
derivative instruments to manage exposure to interest rate changes.
PART II - OTHER INFORMATION
---------------------------
Items 1-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits. See Exhibit Index
(b) Reports on Form 8-K. None
11
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 thereunto duly authorized.
COACTIVE MARKETING GROUP, INC.
Dated: August 9, 2002 By: /s/ JOHN P. BENFIELD
-------------------------------------
John P. Benfield, President
(Principal Executive Officer)
and Director
Dated: August 9, 2002 By: /s/ DONALD A. BERNARD
-------------------------------------
Donald A. Bernard, Executive Vice
President and Chief Financial Officer
(Principal Accounting and Financial
Officer) and Director
12
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ---------- ----------------------
99.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
13