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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 December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
415 Northern Boulevard
Great Neck, New York 11021
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(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 February 3, 2003, 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
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PART I - FINANCIAL INFORMATION
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Item 1. Consolidated Financial Statements of CoActive Marketing
Group, Inc. and Subsidiaries (Unaudited)
Consolidated Balance Sheets - December 31, 2002 and
March 31, 2002 3
Consolidated Statements of Operations - Three month and
nine month periods ended December 31, 2002 and
December 31, 2001 4
Consolidated Statement of Stockholders' Equity - Nine
month period ended December 31, 2002 5
Consolidated Statements of Cash Flows - Nine month
periods ended December 31, 2002 and December 31, 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 12
Item 4. Controls and Procedures 12
PART II - OTHER INFORMATION 13
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Item 1, 2, 3, 4 and 5. Not Applicable 13
Item 6. Exhibits and Reports on Form 8-K. 13
SIGNATURES 14
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CERTIFICATIONS 15
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2
PART I - FINANCIAL INFORMATION
------------------------------
COACTIVE MARKETING GROUP, INC.
Consolidated Balance Sheets
December 31, 2002 and March 31, 2002
December 31, 2002 March 31, 2002*
----------------- ----------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 389,107 $ 1,959,617
Accounts receivable, net of allowance for doubtful accounts of
$99,000 at December 31, 2002 and $75,000 at March 31, 2002 8,375,387 10,077,770
Unbilled contracts in progress 5,820,092 3,160,372
Due from affiliate 317,310 -
Prepaid taxes 141,831 141,831
Prepaid expenses and other current assets 675,049 878,603
---------------- ----------------
Total current assets 15,718,776 16,218,193
Property and equipment, net 1,705,288 1,721,176
Investment in MarketVision 320,130 307,630
Note receivable from officer 550,000 613,000
Goodwill, net 18,991,196 17,491,196
Intangible asset 200,000 200,000
Deferred financing costs, net 211,091 189,029
Other assets 170,747 131,914
---------------- ----------------
Total assets $ 37,867,228 $ 36,872,138
================ ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 6,106,212 $ 6,934,320
Deferred revenue 1,866,718 3,807,017
Accrued job costs 5,528,930 4,876,089
Accrued compensation 2,266 54,923
Other accrued liabilities 2,169,095 725,086
Accrued taxes payable 760,351 211,595
Notes payable bank - current 750,000 1,333,333
Subordinated notes payable - current 625,000 1,025,000
---------------- ----------------
Total current liabilities 17,808,572 18,967,363
Notes payable bank - long term 3,787,500 3,333,333
Deferred taxes payable 742,485 530,890
---------------- ----------------
Total liabilities 22,338,557 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 shares;
issued and outstanding 5,028,481 shares 5,028 5,028
Additional paid-in capital 6,744,598 6,744,598
Retained earnings 8,779,045 7,290,926
---------------- ----------------
Total stockholders' equity 15,528,671 14,040,552
---------------- ----------------
Total liabilities and stockholders' equity $ 37,867,228 $ 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 Month and Nine Month Periods Ended December 31, 2002 and December 31, 2001
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
2002 2001* 2002 2001*
---------------- ---------------- ---------------- ----------------
Sales $ 17,311,177 14,659,214 44,787,806 45,660,407
Direct expenses 13,304,561 11,005,389 34,502,714 34,404,438
---------------- ---------------- ---------------- ----------------
Gross Profit 4,006,616 3,653,825 10,285,092 11,255,969
---------------- ---------------- ---------------- ----------------
Salaries and payroll taxes 1,442,547 1,517,084 4,039,921 4,797,489
Selling, general and administrative expenses 1,370,144 1,565,812 3,820,150 5,047,544
---------------- ---------------- ---------------- ----------------
Total operating expenses 2,812,691 3,082,896 7,860,071 9,845,033
---------------- ---------------- ---------------- ----------------
Operating income 1,193,925 570,929 2,425,021 1,410,936
Interest expense, net 65,760 100,006 224,135 375,467
Other income 256,877 - 258,496 88,966
---------------- ---------------- ---------------- ----------------
Income before provision for income taxes 1,385,042 470,923 2,459,382 1,124,435
Provision for income taxes 554,006 188,611 983,763 451,023
Equity in (income) loss of affiliate (43,000) 18,000 (12,500) 18,000
---------------- ---------------- ---------------- ----------------
Net income 874,036 264,312 1,488,119 655,412
---------------- ---------------- ---------------- ----------------
Net income per common and common
Equivalent share:
Basic $ .17 $ .05 $ .30 $ .13
================ ================ ================ ================
Diluted $ .16 $ .05 $ .27 $ .12
================ ================ ================ ================
Weighted average number of common and
common equivalent shares outstanding:
Basic 5,028,481 5,028,481 5,028,481 5,024,390
================ ================ ================ ================
Diluted 5,566,291 5,474,806 5,498,709 5,506,112
================ ================ ================ ================
Reconciliation of weighted average shares
used for basic and diluted computation
is as follows:
Weighted average shares - Basic 5,028,481 5,028,481 5,028,481 5,024,390
Dilutive effect of options and warrants 537,810 446,325 470,228 481,722
---------------- ---------------- ---------------- ----------------
Weighted average shares - Diluted 5,566,291 5,474,806 5,498,709 5,506,112
================ ================ ================ ================
* 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
Nine Months Ended December 31, 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 - - - 1,488,119 1,488,119
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2002 5,028,481 $ 5,028 $ 6,744,598 $ 8,779,045 $ 15,528,671
============= ============= ============= ============= =============
See accompanying notes to unaudited consolidated financial statements.
5
COACTIVE MARKETING GROUP, INC.
Consolidated Statements of Cash Flows
Nine Months Ended December 31, 2002 and 2001
(Unaudited)
2002 2001
--------------- ---------------
Cash flows from operating activities:
Net income $ 1,488,119 $ 655,412
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for bad debt expense 24,000 81,000
Equity in (income) loss of affiliate (12,500) 18,000
Other - (84,266)
Depreciation and amortization 464,974 1,326,087
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,678,383 3,779,009
Increase in unbilled contracts in progress (2,659,720) (4,358,244)
Decrease (increase) in notes receivable officers 63,000 (886,990)
Decrease in prepaid expenses and other assets 164,721 58,900
Increase (decrease) in accounts payable (828,108) 431,386
Decrease in deferred revenue (1,940,299) (860,522)
Increase in accrued job costs 652,841 2,005,948
Increase in accrued taxes payable 760,351 387,307
Decrease in other accrued liabilities (55,991) (372,832)
Decrease in accrued compensation (52,657) (41,328)
--------------- ---------------
Net cash (used in) provided by operating activities (252,886) 2,138,867
--------------- ---------------
Cash flows from investing activities:
Purchases of fixed assets (374,838) (258,171)
Purchase of intangible asset - (200,000)
--------------- ---------------
Net cash used in investing activities (374,838) (458,171)
--------------- ---------------
Cash flows from financing activities:
Borrowings 4,200,000 -
Repayments of borrowings (4,729,166) (985,001)
Financing costs (96,310) (226,381)
(Increase) decrease in advances to affiliates (317,310) 266,897
Proceeds from exercise of stock options - 7,200
--------------- ---------------
Net cash used in financing activities (942,786) (937,285)
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (1,570,510) 743,411
Cash and cash equivalents at beginning of period 1,959,617 855,219
--------------- ---------------
Cash and cash equivalents at end of period $ 389,107 $ 1,598,630
=============== ===============
Supplemental disclosure:
Interest paid during the period $ 211,204 $ 309,626
=============== ===============
Income tax paid during the period $ 199,745 $ 48,470
=============== ===============
Supplemental disclosure of noncash activities:
Contingent earnout accrued relating to a prior acquisition $ 1,500,000 $ -
=============== ===============
See accompanying notes to unaudited consolidated financial statements
6
CoActive Marketing Group, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
December 31, 2002 and 2001
(1) Basis of Presentation
---------------------
The interim financial statements of CoActive Marketing Group, Inc. (the
"Company") for the three and nine month periods ended December 31, 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 and nine month periods ended
December 31, 2002 are 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, an Internet
domain name (together with all related intellectual property rights)
which was acquired in fiscal 2002, 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
intangible assets will be tested annually to identify if an impairment
has occurred. Upon completion of such annual review, if an impairment
is found to have occurred, a corresponding charge will be recorded.
During the quarter and nine month period ended December 31, 2002, the
Company accrued $500,000 and $1,500,000, respectively, of a contingent
earnout relating to a prior acquisition.
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:
7
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------- -------------------------------
2002 2001 2002 2001
----------- ----------- ------------- -------------
Net income $ 874,036 $ 264,312 $ 1,488,119 655,412
Add back goodwill amortization,
net of tax provision - 156,310 - 468,929
----------- ----------- ------------- -------------
Adjusted net income $ 874,036 $ 420,622 $ 1,488,119 $ 1,124,341
=========== =========== ============= =============
Diluted net income per share:
Net income $ .16 $ .05 $ .27 $ .12
Goodwill amortization, net of
tax provision . - .03 . - .08
----------- ----------- ------------- -------------
Adjusted diluted net income
per share $ .16 $ .08 $ .27 $ .20
=========== =========== ============= =============
(3) Earnings Per Share
------------------
Options and warrants to purchase 1,732,251 and 1,372,101 shares of
common stock at prices ranging from $2.31 to $10.00 and $2.00 to $10.00
per share were excluded from the computation of diluted earnings per
share during the three months ended December 31, 2002 and 2001,
respectively, and options and warrants to purchase 1,782,876 and
1,342,165 shares of common stock at prices ranging from $2.00 to $10.00
and $2.31 to $10.00 per share were excluded from the computation of
diluted earnings per share during the nine months ended December 31,
2002 and 2001, respectively. These options and warrants expire through
April 30, 2011 and were excluded from the computation of diluted
earnings per share for each period because the exercise prices exceed
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 and nine month periods
ended December 31, 2002 and 2001 is based upon the Company's estimated
effective tax rate for the respective years.
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 and nine month periods ended December 31,
2002 to the Company's consolidated results of operations for the three and nine
month periods ended December 31, 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.
8
Results of Operations
The following table presents operating data of the Company, expressed
as a percentage of sales for each of the three and nine month periods ended
December 31, 2002 and 2001:
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------------- ----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Statement of Operations Data:
Sales 100.0% 100.0% 100.0% 100.0%
Direct expenses 76.9% 75.1% 77.0% 75.3%
Gross profit 23.1% 24.9% 22.9% 24.7%
Salaries 8.3% 10.3% 9.0% 10.5%
Selling, general and administrative expenses 7.9% 10.7% 8.5% 11.1%
Total operating expenses 16.2% 21.0% 17.5% 21.6%
Operating income 6.9% 3.9% 5.4% 3.1%
Interest expense, net 0.4% 0.7% 0.5% 0.8%
Income before provision for income taxes 8.0% 3.2% 5.4% 2.5%
Provision for income taxes 3.2% 1.3% 2.2% 1.0%
Net income 5.0% 1.8% 3.3% 1.4%
The following table presents operating data of the Company, expressed
as a comparative percentage of change for the three and nine month periods ended
December 31, 2002 compared to the three and nine month periods ended December
31, 2001 and the three and nine month periods ended December 31, 2001 compared
to the three and nine month periods ended December 31, 2000:
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------------- ----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Statement of Operations Data:
Sales 18.1% 5.4% (1.9%) 6.8%
Direct expenses 20.9% 4.8% 0.3% 7.9%
Gross profit 9.7% 7.2% (8.6%) 3.8%
Salaries (4.9%) 3.9% (15.8%) 0.8%
Selling, general and administrative expenses (12.5%) (2.7%) (24.3%) 12.4%
Total operating expenses (8.8%) 0.5% (20.2%) 6.4%
Operating income 109.1% 68.1% 71.9% (11.7%)
Interest expense, net (34.2%) (48.1%) (40.3%) (37.6%)
Income before provision for income taxes 194.1% 220.2% 118.7% 12.7%
Provision for income taxes 193.7% 220.6% 118.1% 13.1%
Net income 230.7% 199.6% 127.1% 585.8%
Sales. Sales for the quarter ended December 31, 2002 were
$17,311,000, compared to sales of $14,659,000 for the quarter ended December 31,
2001, an increase of $2,652,000, after including $3,410,000 and $2,043,000,
respectively, of reimbursable costs and expenses. Sales for the nine months
ended December 31, 2002 were $44,788,000, compared to sales of $45,660,000 for
the nine months ended December 31, 2001, a decrease of $872,000, after including
$8,174,000 and $6,645,000, respectively, of reimbursable costs and expenses. The
increase in sales for the quarter was primarily the result of a greater amount
of contracted sales materializing in the quarter, whereas, the decrease in sales
for the nine month period was primarily attributable to a lesser amount of
contracted sales materializing during the period. 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.
9
Direct Expenses. Direct expenses for the quarter ended
December 31, 2002 were $13,305,000, compared to $11,005,000 for the comparable
prior year quarter, an increase of $2,300,000, after including $3,410,000 and
$2,043,000, respectively, of reimbursable cost and expenses. Direct expenses for
the nine months ended December 31, 2002 were $34,503,000, compared to
$34,404,000 for the comparable prior year nine month period, an increase of
$99,000, after including $8,174,000 and $6,645,000, respectively, of
reimbursable costs and expenses. The increase in direct expenses for the quarter
was primarily attributable to an increase in variable direct expenses applicable
to the increase in sales for the quarter, whereas the increase in direct
expenses for the nine month period was primarily attributable to the increase in
variable direct expenses applicable to the sales in such period. The respective
increase in direct expenses as a percentage of sales for both the quarter and
for the nine month period ended December 31, 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 in the respective comparable prior year quarter
and nine month periods.
As a result of these changes in sales and direct expenses, the
Company's gross profit for the quarter and nine month periods ended December 31,
2002 increased to $4,007,000 and decreased to $10,285,000, respectively, from
$3,654,000 and $11,256,000 for the prior year respective periods.
Operating Expenses. Operating expenses for the quarter and
nine month period ended December 31, 2002 decreased respectively by $270,000 and
$1,985,000, to $2,813,000 and $7,860,000, respectively, compared to $3,083,000
and $9,845,000, respectively, for the quarter and nine month periods ended
December 31, 2001. The decrease in operating expenses for both the quarter and
nine month period was primarily the result of (i) the respective decrease in
salaries and related payroll expenses of $75,000 and $758,000, and (ii) the
respective decrease in selling, general and administrative expenses of $196,000
and $1,227,000. The respective decreases in salaries and related payroll
expenses for the quarter and nine month periods ended December 31, 2002 were
primarily attributable to a reduction in personnel and to a lesser extent the
reimbursement, by our affiliate, Garcia Baldwin, Inc. doing business as Market
Vision ("Market Vision"), of the cost of personnel deployed in support of Market
Vision's operations. The respective decreases in selling, general and
administrative expenses for the quarter and nine month periods ended December
31, 2002 were primarily related to (i) the elimination of approximately $258,000
and $775,000, respectively, 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) for the quarter,
an offsetting increase in, and for the nine month period a reduction in, overall
variable expenses related to supporting and maintaining the Company's level of
operations.
Interest Expense. Interest expense for the quarter and nine
month period ended December 31, 2002 decreased by $34,000 and $151,000 to
$66,000 and $224,000, respectively, compared to interest expense of $100,000 and
$375,000 respectively for the quarter and nine month period ended December 31,
2001. The decrease in interest expense for the quarter and nine month period
ended December 31, 2002 was primarily related to the decrease in the Company's
bank and subordinated debt borrowings, compared to such borrowings for the
comparable periods of the prior year, and to a lesser extent, to a reduction in
interest rates applicable to the Company's borrowings under its bank loans.
Other. Other income for the quarter and nine month period
ended December 31, 2002 increased by $257,000 and $170,000 to $257,000 and
$258,000 respectively, compared with no other income for the quarter ended
December 31, 2001 and other income in the amount of $89,000 for such prior
year's nine month period. The increase in other income for the quarter ended
December 31, 2002, was primarily the result of the Company's sale of Company
owned domain names for $250,000, whereas the increase for the nine month period
ended December 31, 2002, was primarily the result of the domain names sale
offset by income recognized in the amount of $89,000 resulting from a recovery
of a previously recorded share of losses of a then affiliate for the nine month
period ended December 31, 2001.
Provision For Income Taxes. The provision for federal, state
and local income taxes respectively reflected for the quarter and nine month
periods ended December 31, 2002 and 2001 were based upon the Company's estimated
effective tax rate for the respective fiscal years.
10
Equity in Income (Loss) of Affiliate. For the quarter and nine
month periods ended December 31 2002, the Company recorded $43,000 and $12,500,
respectively, as its share of income from its 49% equity investment in Market
Vision, compared with a share of loss of ($18,000) for both the quarter and nine
month periods ended December 31, 2001.
Net Income. As a result of the items discussed above, net
income for the quarter and nine month period ended December 31, 2002 was
$874,000 and $1,488,000 respectively, compared to net income $264,000 and
$655,000 respectively, for the prior year quarter and nine month period ended
December 31, 2001.
Liquidity and Capital Resources.
On October 31, 2002, 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 $3,000,000 term loan to be
amortized in equal monthly installments over 48 months commencing December 1,
2002 (the "Term Loan") and a $3,000,000 three year 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 $3,000,000 under the Term Loan and $1,200,000 under the Revolving Loan
and used approximately $3,700,000 of the proceeds of the New Loans to repay in
full the Company's indebtedness to its prior lender. The remaining loan proceeds
were used to increase the Company's working capital. Borrowings under the Credit
Agreement are evidenced by promissory notes and are secured by all of the
Company's assets. The Company paid a $60,000 closing fee to the bank plus its
legal costs and expenses and will pay a quarterly fee equal to .25% per annum on
the unused portion of the credit facility. Interest on the New Loans is due on a
monthly basis at an annual rate equal to the Bank's prime rate plus .25% on the
Revolving Loan and .50% on the Term Loan, respectively. The Credit Agreement
provides for a number of affirmative and negative covenants, restrictions,
limitations and other conditions including among others, (i) limitations
regarding the payment of cash dividends, (ii) use of proceeds, (iii) maintenance
of minimum net worth, (iv) maintenance of minimum quarterly earnings, (v)
compliance with senior debt leverage ratio and debt service ratio covenants, and
(vi) maintenance of 15% of beneficially owned shares of the Company held by
certain members of the Company's management.
For the nine months ended December 31, 2002, the Company's
activities and the repayment of bank and subordinated debt borrowings totaling
$529,000 were funded from working capital and borrowings under the Credit
Agreement. At December 31, 2002, the Company had cash and cash equivalents
totaling $389,000, a working capital deficit of $2,090,000, outstanding bank
loans of $4,537,500, borrowing capacity under the Credit Agreement of $900,000
(after giving effect to the letter of credit described below), outstanding
subordinated debt of $625,000 and stockholders' equity of $15,529,000. At
December 31, 2002, the Company also had outstanding a letter of credit issued
under the Credit Agreement in the amount of $500,000, payable in the event of a
default by U.S. Concepts, Inc., the Company's subsidiary, under a lease of
office space entered into by U.S. Concepts. 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
borrowing availability thereunder, outstanding subordinated debt of $1,025,000
and stockholders' equity of $14,041,000, and no outstanding letters of credit.
The decrease in working capital deficit at December 31, 2002 compared with March
31, 2002 was primarily the result of the net reduction of $1,159,000 in the
Company's current liabilities exceeding the net reduction of $499,000 in its
current assets. The net reduction in current liabilities resulted from decreases
in accounts payable and deferred revenue totaling $2,768,000 and subordinated
and bank notes payable totaling $983,000 offset by increases in accrued job
costs, other accrued liabilities (inclusive of $1,500,000 of an anticipated
earnout payment the Company is obligated to make in connection with its 1998
acquisition of U.S. Concepts, Inc.) and deferred taxes payable totaling
$2,593,000. The net reduction in current assets resulted from decreases in cash
of $1,571,000, accounts receivable, prepaid expenses and other current assets
totaling $1,589,000 offset by an increase in unbilled contracts in progress of
$2,660,000. Management believes that cash generated from operations together
with borrowings available under the Credit Agreement should be sufficient to
meet the Company's cash requirements for fiscal 2003, although there can be no
assurance in that regard. 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.
11
For the nine months ended December 31, 2002: (A) cash used in
operating activities amounted to $253,000, primarily as a result of the net
aggregate of (i) net income and non-cash charges for depreciation and
amortization, (ii) decreases in accounts receivable, notes receivable from
officers, prepaid expenses and other assets and (iii) increases in accrued job
costs and accrued taxes payable, offset by decreases in accounts payable,
deferred revenue and accrued compensation and other accrued liabilities and an
increase in unbilled contracts in progress. (B) cash used in investing
activities to purchase fixed assets amounted to $375,000; and (C) cash used in
financing activities to repay borrowings, related financing costs and increase
advances to affiliates amounted to $943,000. As a result of the net effect of
the aforementioned, the Company's cash and cash equivalents at December 31, 2002
decreased by $1,571,000.
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. 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 Directors," and "Outstanding Indebtedness; Security
Interest." Other factors may be described from time to time in the Company's
public filings with the Securities and Exchange 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.
Item 4. Controls and Procedures
-----------------------
Evaluation of Disclosure Controls and Procedures
The Company's chief executive officer and chief financial
officer, after evaluating the effectiveness of the Company's "disclosure
controls and procedures" (as defined in Rule 13a-14(c) under the Securities
Exchange Act of 1934, as amended) as of a date (the "Evaluation Date") within 90
days before the filing date of this quarterly report, have concluded that the
Company's disclosure controls and procedures are effective in ensuring that
material information required to be disclosed is included in the reports that it
files with the Securities and Exchange Commission.
12
Changes in Internal Controls
There were no significant changes in the Company's internal
controls or, to the knowledge of the management of the Company, in other factors
that could significantly affect these controls subsequent to the Evaluation
Date.
PART II - OTHER INFORMATION
---------------------------
Items 1, 2, 3, 4 and 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits. See Exhibit Index.
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K on November 4, 2002
relating to the Credit Agreement it entered into on October 31, 2002.
13
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: February 3, 2003 By: /s/ John P. Benfield
-------------------------------------------
John P. Benfield, President
(Principal Executive Officer)
and Director
Dated: February 3, 2003 By: /s/ Donald A. Bernard
-------------------------------------------
Donald A. Bernard, Executive Vice
President and Chief Financial Officer
(Principal Accounting and Financial
Officer) and Director
14
Certifications
--------------
I, John P. Benfield, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CoActive Marketing
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others with those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: February 3, 2003 /s/ John P. Benfield
-------------------------------------
John P. Benfield
President and Chief Executive Officer
15
I, Donald A. Bernard, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CoActive Marketing
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others with those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated :February 3, 2003 /s/ Donald A Bernard
-------------------------------------
Donald A. Bernard
Executive Vice President and Chief
Financial Officer
16
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.
17