================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended MARCH 31, 2004
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.
(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 No.)
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of September 30, 2003, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $19,298,935.
As of July 12, 2004, 5,941,856 shares of Common Stock, $.001 par value, were
outstanding.
Documents Incorporated by Reference
Document Part of 10-K into which incorporated
-------- ------------------------------------
Definitive Proxy Statement relating to
Registrant's 2004 Annual Meeting of Stockholders Part III
================================================================================
PART I
This report contains certain "forward-looking statements" concerning the
Company's operations, economic performance and financial condition, which are
subject to inherent uncertainties and risks. Actual results could differ
materially from those anticipated in this report. When used in this report, the
words "estimate," "project," "anticipate," "expect," "intend," "believe" and
similar expressions are intended to identify forward-looking statements.
Item 1. Business.
- ------ --------
General Introduction
CoActive Marketing Group, Inc. ("CoActive"), through its
wholly-owned subsidiaries, Inmark Services LLC ("Inmark"), Optimum Group LLC
("Optimum"), U.S. Concepts LLC ("U.S. Concepts"), and TrikMedia LLC
("TrikMedia"), together the "Company", with its affiliate Garcia Baldwin, Inc.
doing business as MarketVision ("MarketVision"), is a full service multicultural
marketing, sales promotion and interactive media services and e-commerce
provider organization which designs, develops and implements turnkey customized
national, regional and local consumer and trade promotion programs principally
for Fortune 500 consumer product companies. The Company's programs are designed
to enhance the value of its clients' budgeted expenditures and achieve, in an
objectively measurable way, its clients' specific marketing and promotional
objectives which include reinforcement of product brand recognition and
providing incentives which generate near term sales. Having developed a wide
variety of specialties, the Company is a multi-disciplined agency.
The full range of marketing and sales promotional services
offered by the Company consists of strategic marketing, creative services,
broadcast and print media, direct marketing, multicultural marketing, event
marketing, entertainment marketing, in-store sampling and merchandising,
Internet web site designing and hosting, e-commerce tools, electronic sales
tools and computer based training. By providing a wide range of programs and
services, the Company affords its clients a total solutions resource for
strategic planning, creative development, production, implementation and sales
training aids, including in-store and special event activities, and enhanced
product brand name recognition on a multicultural basis.
CoActive was initially formed under the laws of the State of
Delaware in March 1992. Its principal offices are located at 415 Northern
Boulevard, Great Neck, New York 11021, and its telephone number is 516-622-2800.
The Company began to engage in its current operations on
September 29, 1995 upon consummation of a merger transaction as a result of
which Inmark, then a New York corporation, became a wholly-owned subsidiary of
CoActive and the management of Inmark became the executive management of the
Company. Previously, CoActive had been engaged in unrelated activities which
were discontinued in June 1993. CoActive provides its consumer products clients
with a full range of promotional programs that are designed to target both a
client's sources of distribution and the retail consumer with the intent of
increasing in-store displays and purchases of the client's product as well as
enhanced product and brand recognition.
Acquisitions
On March 31, 1998, Optimum acquired all of the assets and
assumed certain liabilities of OG Holding Corporation, formerly known as Optimum
Group, Inc. The Optimum business, founded in 1973, provides marketing, visual
communications and graphic design services which complement and add value to
those services provided by other subsidiaries of the Company. Optimum assists
2
clients in varied industries in identifying the best and most complete solution
for their business communication needs. Optimum offers clients leading edge
visual communications technology and Internet development, interface and access,
interactive sales training and support solutions. In addition to its role in
providing the Company's clients with an integrated total resource range of
marketing solutions, Optimum serves as an independent resource for strategic
planning, creative development, production and implementation.
On December 29, 1998, U.S. Concepts, a Delaware corporation
and wholly-owned subsidiary of the Company acquired the business of U.S.
Concepts, Inc., a New York corporation. The U.S. Concepts business, founded in
1983, provides event marketing, entertainment marketing and in-store promotion
services which include brand creating and execution of special fully turnkey
production of concerts, tours and festivals, sales driven sampling,
demonstration programs and events. These services complement and integrate with
the other services provided by the Company. U.S. Concepts assists clients with
the expertise and manpower to reach target customers where they live, shop, play
and study in a manner that integrates client brands directly with customer
lifestyles.
On February 27, 2001, the Company acquired 49% of the shares
of capital stock of MarketVision which is a minority owned, predominately
Hispanic, ethnically oriented promotion agency headquartered in San Antonio,
Texas. The MarketVision acquisition had been accounted for as an equity
investment on the Company's consolidated balance sheet through the Company's
fiscal year ended March 31, 2003. Pursuant to the equity method of accounting,
the Company's balance sheet carrying value of the investment was periodically
adjusted to reflect the Company's 49% interest in the operations of
MarketVision. Effective in the fourth quarter of fiscal year ended March 31,
2004, pursuant to the adoption of Financial Accounting Standards Board's
("FASB") Interpretation ("FIN") No. 46 (revised 2003), "Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51," the operations
and financial statements of MarketVision for the year ended March 31, 2004 are
included in the consolidated financial statements of the Company. The
MarketVision business, founded in 1998, provides marketing and promotional
services comparable to those provided by the Company with an emphasis on
increasing sales of its clients' products in the Hispanic community.
On October 29, 2003, TrikMedia LLC, a newly formed
wholly-owned subsidiary of the Company acquired certain of the assets and
assumed certain of the liabilities of TrikMedia, Inc. for a purchase price in
the amount of $885,000, in a transaction accounted for as a purchase by the
Company. The TrikMedia business, founded in 2000, is a full service media agency
engaged in providing digital marketing and advertising services, interactive
software development and content creation. These services complement and add
value to the Company's interactive offerings.
Description of Business
General. The Company is a full service multicultural
marketing, sales promotion and interactive media services and e-commerce
provider organization which designs, develops and implements turnkey customized
national, regional and local consumer and trade promotion programs principally
for Fortune 500 consumer product companies. The Company's programs are designed
to enhance the value of its clients' budgeted expenditures and to achieve, in an
objectively and measurable way, its clients' specific marketing and promotional
objectives which include reinforcement of product brand recognition and
providing incentives which generate near term sales. The Company's services
include:
o strategic planning, market research and analysis, product
positioning, and direct marketing services which assist clients in identifying,
defining and achieving specific objectives;
o advising clients on the deployment of budgeted amounts to
maximize value and meet objectives;
3
o specifically created "account specific" and/or "co-marketing
programs" which target the participation and cooperation of a specific retail
chain, group or groups of retailers or other sources of distribution (the
"Trade") to attain results in the form of increased in-store product displays,
related consumer purchases and product brand recognition;
o providing on-site and in-store personnel to conduct and
coordinate specifically created special events, promotional entertainment
activities and sampling and demonstration activities;
o Internet Web site designing, hosting and e-commerce software
for business to consumer and business to business activities, multimedia
electronic sales tools and presentations, and interactive computer based sales
training;
o concept development, graphic design, conventional and computer
illustration, copy writing, 3-D graphics and animation, layout and production,
photography and video services which develop the concept and subsequently create
the consumer and trade promotional program;
o implementing turnkey training and incentive programs, which
provide detailed documentation, program manuals, artwork, the training of a
client's marketing and sales staffs;
o buying of broadcast and print media and merchandise, the
designing of in-store displays, commercial editing, and the coordination and
trafficking of media and total program administration; and
o providing the above services to clients targeting Hispanic and
other ethnic consumers.
A typical program may integrate numerous promotional services
and techniques which take into consideration various factors, including: (a) the
channel of Trade on which the client is focused and a determination of the most
effective manner to obtain distribution support for the client's product; (b)
the means by which to best educate the client's sales force in soliciting Trade
support for the client's products without creating excessive or burdensome
administrative details; and (c) the profile of consumers and the most effective
way of communicating with consumers of the client's products. Distinct from many
promotion and marketing companies which may adopt specific promotional programs
or techniques regardless of the product, the Company's programs are tailored to
the client's particular goals and may include various components, including
promotional broadcast media, premium incentives to Trade employees and
representatives, special events, in-store merchandising and sampling, commercial
tagging, specialty printing, licensing, point-of-purchase displays, couponing,
and interactive Internet and other electronic services, including e-commerce
tools, and video and computer based sales and training aids.
Industry Background. The industry is comprised of hundreds of
large and small companies, including affiliates of advertising agencies, many of
which tend to specialize in providing clients with one or more of a wide array
of retailers or other channels of distribution and/or consumer oriented
promotional services and products. Although promotional services may in certain
circumstances duplicate, overlap or relate to traditional advertising services,
advertising agencies over the years have considered these services as distinct
auxiliary marketing services. Consumer product manufacturers and service
provider companies typically employ two separate but related marketing programs
to sell their products. Initially, a general advertising campaign would be
launched by an advertising agency engaged to create an image for the product and
to communicate the image to the consumer. The campaign typically employs
television, radio, print media, the Internet and other forms of communication
designed to generate brand recognition and product awareness among consumers.
4
Subsequently, a promotional advertising program would be launched by a marketing
services promotion agency, on either a local, regional or national level, aiming
to induce the Trade to order and display the client's product while also
inducing and targeting the consumer to purchase the product and further brand
name recognition. While promotional programs also typically include the same
communication media as an advertising campaign and may employ or integrate
portions of the image created through a general advertising campaign,
promotional programs are typically more focused and directed to a point of
purchase utilizing techniques such as couponing, sampling, incentives for both
retailers and consumers, events, entertainment, merchandising and licensing
among others. The basic distinction between the services of promotion companies
and those of advertising agencies is that advertising agency services are used
to create a positive image for a client's product and communicate that image to
consumers for continued product recognition and awareness, while promotion
company services, such as those provided by the Company, are used to motivate
consumers to take immediate positive action while further increasing product
recognition.
Promo Magazine's Annual Report of the U.S. Promotion Industry
reported estimated promotional marketing spending of $288.3 billion in 2003 (an
increase of 9.7% compared with 2002) consisting of industry revenues segmented
as follows: Event Marketing, Premiums/Incentives, Retail (Point of Purchase)
In-Store Services, Sponsorship, Coupons, Licensing, Specialty Printing,
Fulfillment, Agency Net Revenues, Interactive, Games/Contests/Sweepstakes,
Sampling, Direct Mail to Consumer, and Loyalty Marketing. Historically, most of
the industry's annual revenues originate from specific assignments on a project
by project basis from continuing client relationships. As the credibility and
recognized value of integrated marketing and promotional services tend to
increase, a number of clients are designating more promotion and related
specialty marketing firms as their specific promotion agency of record thereby
establishing the designated agency as an exclusive promotion service supplier.
The Company's Programs. The Company believes that it is well
positioned to meet the increasing demands of consumer product manufacturers by
offering a wide range of customized, rather than "off the shelf", promotional
programs. These programs provide turnkey implementation and utilize creative
development tools, sales support, relationships with media outlets, event and
entertainment genres and sponsorship, the Internet and other forms of visual
communications, promotional products and activities, and administrative
services. The Company's services are supported with an innovative management
information system to gather, monitor, track and report the implementation
status of each program. The Company's ability to capture data regarding sales
activity and Trade acceptance of a particular program on a real time basis
enables the Company and its clients to continually monitor and adjust the
program to maximize its effectiveness. The Company's promotional program may
promote a client's products on a uniform basis nationwide or may be tailored for
a particular regional or local market for a specific product. A program,
localized for specific markets or products, can be coordinated with respect to
both timing and expenditure, to run simultaneously with individual and
customized programs nationwide.
The Company's promotional campaign strategies are typically
implemented with the use or integration of one or more of the following
promotional products:
o Promotional Radio - Broadcast time purchased for the
Company's clients for their own use for traditional concept, image and brand
recognition advertising and provided on behalf of such clients to the Trade as
an incentive for "Trade participation". Trade participation for a client often
takes the form of tangible merchandising performance such as additional display
of a client's products within the Trade's stores, an increase in the product
inventory throughout the Trade's chain, a Trade's coupon circular or
solo-mailers referencing and promoting the client's product. The Trade may also
permit product sampling within one or more stores in the chain. The value of
broadcast time made available to the Trade for its own discretionary use is a
5
significant inducement for Trade participation and support of a promotional
program because it provides to the Trade media which the Trade would otherwise
have to purchase.
o Promotional Television - Broadcast time purchased for the
Company's clients for their own use to achieve objectives similar to those of
promotional radio, and to create an incentive for Trade participation. The
Company also adds advertising value by editing clients' television commercials
to include a specific Trade customer's name, logo and other Trade specific
information, providing an incentive similar to promotional radio for Trade
participation in the promotional program.
o Dealer Loaders - Awards, of various types and value,
consisting of merchandise, travel, entertainment and or other services, offered
to the Trade in return for providing specific in-store merchandising on behalf
of a client's product.
o Special Events/Entertainment - Event and entertainment
marketing programs specifically designed and produced to support clients' brand
needs. These programs consist of creating, organizing, implementing and/or
participating in tours, concerts, comedy and music events, competitions, fairs,
festivals and college marketing events and, as required, include talent
negotiations/sponsorships, TV production and public relations.
o In-Store Sampling and Demonstrations - Trained personnel
providing sampling or demonstration of a client's product at various retail
outlets including grocery, mass merchandise, beverage and drug stores.
o Trade/Account Specific Consumer Promotions - A full range
of consumer in-store promotional programs, integrated with Trade-directed
promotion programs, which are designed to increase consumer interest in a
client's products and increase brand name recognition. These promotions include
(a) merchandise giveaways in conjunction with product purchases; (b) vacation
and product sweepstakes (for which the Company designs display materials, writes
the rules, qualifies the winners and arranges travel plans or product ordering);
(c) product sampling in one or more stores; and (d) traditional couponing.
o Interactive Media - Use of the Internet and other forms of
interactive visual communication designed to augment traditional media and reach
audiences that prefer a more active media. The Company's interactive new media
services include Internet Web site design, development, hosting, support,
e-commerce software for business to consumer and business to business
activities, providing reliable, high-speed access and maintenance through the
Company's own dedicated communication lines, computer based training and
electronic sales tools.
o Creative Services - A full range of services which include
concept development, graphic layout/design and production, copywriting, digital
imaging/retouching/film separation, illustration, animation, photography and
video.
Marketing Strategy. The Company's marketing strategy is to
offer its clients creative promotional programs intended to produce objectively
measurable results while removing from clients the significant burden of
administrative and logistical details associated with such programs. While
continuing to focus on ample opportunities which exist with clients in the
packaged goods industry, the Company has broadened its strategy by offering its
promotion products to clients in other industries, such as electronics,
entertainment, lawn and gardening and other sellers of do-it-yourself products,
which the Company believes can benefit from a comprehensive customized program
on a turnkey implementation basis.
The Company believes that its strategy of attempting to
provide comprehensive solutions to its clients' promotional advertising programs
distinguishes it from certain of its competitors, which provide only specific
promotional programs without field and office support provided by the Company as
an integral part of its programs. The Company also believes that its strategy is
6
more attuned to clients' needs, particularly as clients seek to contract out all
promotional advertising for a specific product as a result of downsizing their
in-house capabilities.
The Company's services are marketed directly by the Company's
sales force consisting of twenty-nine salespersons operating out of fully
staffed and/or sales offices located in Great Neck and New York, New York;
Cincinnati, Ohio; Birmingham, Alabama; Los Angeles, Irvine and San Francisco,
California and San Antonio, Texas.
Customers. The Company's principal clients are packaged goods
and other consumer products manufacturers, generally among the Fortune 500,
which are actively engaged in promoting their products both to the Trade and to
consumers. The Company's clients include, among others, The Procter & Gamble
Company, General Motors, Diageo North America, Inc., Starkist Seafood Company,
Schieffelin & Somerset Co., Kelly Moore Paints, Ethicon Endo-Surgery, Inc., The
Scotts Company, The Valvoline Company, Heinz North America, Old Navy, Inc.,
Pfizer Corp., Coty Rimmel, College Television Network, Fresh Express, Inc.,
Nintendo, Kikkoman International, Inc., Schick Manufacturing Inc. and Lowes
Companies, Inc. For the fiscal years ended March 31, 2004, 2003 and 2002, the
Company had one client, Schieffelin & Somerset Co., which accounted for
approximately 29.9%, 34.8% and 29.6%, respectively, of its revenues, inclusive
of 21.0%, 19.2% and 13.6%, respectively, of revenues attributable to
reimbursable costs and expenses for such client pursuant to the adoption of
accounting standard EITF 01-14, Income Statement Characterization of
Reimbursements Received for "Out-of-Pocket" Expenses Incurred, in the fourth
quarter of fiscal 2002 (see "Management Discussion and Analysis of Financial
Condition and Results of Operations-Adoption of Recent Accounting Standards").
At March 31, 2004, 2003 and 2002, this client accounted for 35%, 38% and 13%,
respectively, of accounts receivable. In addition, for the fiscal year ended
March 31, 2004, the Company had another client, Diageo North America, Inc.,
which accounted for approximately 13% of revenues, inclusive of 4.6% of revenues
attributable to reimbursable costs and expenses. At March 31, 2004, this client
accounted for 12% of accounts receivable.
To the extent that the Company continues to have a heavily
weighted sales concentration with one or more clients, the loss of any such
client could have a material adverse affect on the earnings of the Company.
Unlike traditional general advertising firms, which are engaged as agents of
record on behalf of their clients, promotional companies, including the Company,
typically are engaged on a product-by-product, or project-by-project basis.
However, the relationship of the Company and its predecessors with certain of
its clients has continued for in excess of 20 years and the Company currently
has a few agency of record relationships.
Competition. The market for promotional services is highly
competitive, with hundreds of companies claiming to provide various services in
the promotion industry. In general, the Company's competition is derived from
two basic groups: (a) other full service promotion agencies and (b) companies
which specialize in one specific aspect or niche of a general promotional
program. Other full service promotion agencies may be a part of or affiliated
with larger general advertising agencies which have greater financial and
marketing resources available than the Company. These competitors include
Imperic (which is affiliated with Young & Rubicam), J. Brown/LMC (which is
affiliated with Grey Advertising), GMR Marketing and USM&P (which are divisions
of Omnicom Group, Inc.), CMI (which is a division of Clear Channel
Communications), Pierce Promotions, Inc., and Market Drive Worldwide (which is a
division of the FCB Group). Niche competitors include Don Jagoda, Inc., which
specializes in sweepstakes, and Catalina Marketing, Inc., which specializes in
cash register couponing programs. See "Risk Factors - Competition".
7
Employees
The Company currently has 246 full-time and 2,447 utilized as
needed part-time employees, including 26 full-time employees involved in sales,
164 full-time and 2,445 part-time employees in marketing support, program
management and in-store sampling and demonstration, 31 full-time employees in
interactive and information technology and 25 full-time employees in finance and
administration. None of the Company's employees is represented by a labor
organization and the Company considers the relationships with its employees to
be good.
Risk Factors
Outstanding Indebtedness; Security Interest. At March 31,
2004, loans outstanding under the Company's credit agreement with its lender
(the "Credit Agreement") amounted to $4,984,500 and the Company had no borrowing
availability under the Credit Agreement revolving credit facility. As security
for all its obligations under the Credit Agreement, the Company granted the
lender a first priority security interest in all of its assets. In the event of
default under the Credit Agreement, at the lender's option, (i) the principal
and interest of the loans and all other obligations under the Credit Agreement
will immediately become due and payable, and (ii) the lender may exercise its
rights and remedies provided for in the Credit Agreement and the related
Security Agreements, the rights and remedies of a secured party under the
Uniform Commercial Code, and all other rights and remedies that may otherwise be
available to it under applicable law. At December 31, 2003, the Company was not
in compliance with three of the financial covenants of the Credit Agreement, and
on February 10, 2004, the bank granted a waiver of the Company's non-compliance
with respect to such financial covenants as at December 31, 2003. At March 31,
2004, the Company was again not in compliance with the financial covenants in
the Credit Agreement; namely, the maximum permitted ratio of consolidated senior
funded debt to earnings before interest, taxes, depreciation and amortization,
the minimum permitted debt service coverage ratio and the requirement of no net
loss for a fiscal quarter. On July 22, 2004 the bank waived the Company's
defaults arising as a result of such noncompliance and entered into an Amended
and Restated Credit Agreement with the Company, pursuant to which, among other
things, the financial covenants were amended with respect to future periods.
Although the Company expects that it will comply with such amended financial
covenants, there can be no assurance in such regard.
Need for Additional Funding. At March 31, 2004, the Company
had no borrowing availability under its revolving line of credit. To satisfy
cash requirements during Fiscal 2004, the Company issued 652,000 shares of its
common stock to certain directors and officers to raise $1,630,000, and
temporarily increased its revolving loan facility by $500,000. The Company may
have to seek additional outside funding sources in the future to satisfy working
capital requirements if operations do not produce the level of revenue required
to operate the Company's business. There can be no assurance that outside
funding will be available to the Company at the time it is needed or in the
amount necessary to satisfy the Company's needs, or, that if such funds are
available, they will be available on terms that are favorable to the Company. If
the Company is unable to secure financing when needed, its businesses may be
adversely affected. If the Company issues additional shares of common stock or
securities convertible into common stock in order to secure additional funding,
current stockholders may experience dilution of their ownership. In the event
the Company issues securities or instruments other than common stock, the
Company may be required to issue such instruments with greater rights than those
currently possessed by holders of common stock.
Recent Loss. The Company sustained a net loss of approximately
$2,745,000 for Fiscal 2004. This loss was due in part to the unpredictable
revenue patterns associated with the Company's business, as described below.
Although the Company expects to be profitable for Fiscal 2005, there can be no
assurance in such regard or with respect to future periods.
8
Dependence on Key Personnel. The Company's business is managed
by a limited number of key management and operating personnel, the loss of
certain of whom could have a material adverse impact on the Company's business.
The Company believes that its future success will depend in large part on its
continued ability to attract and retain highly skilled and qualified personnel.
Each of the Company's key executives is either a party to an employment
agreement that expires in 2006 or is expected to enter into an amendment to an
employment agreement that would extend the term thereof to expire in 2006.
Customers. A substantial portion of the Company's sales has
been dependent on one client or a limited concentration of clients. To the
extent such dependency continues, significant fluctuations in revenues, results
of operations and liquidity could arise should such client or clients reduce
their budgets allocated to the Company's activities.
Unpredictable Revenue Patterns. A significant portion of the
Company's revenues is derived from large promotional programs which originate on
a project by project basis. Since these projects are susceptible to change,
delay or cancellation as a result of specific client financial or other
marketing and manufacturing related circumstantial issues as well as changes in
the overall economy, the Company's revenue is unpredictable and may vary
significantly from period to period.
Competition. The market for promotional services is highly
competitive, with hundreds of companies claiming to provide various services in
the promotion industry. Certain of these companies may have greater financial
and marketing resources than those available to the Company. The Company
competes on the basis of the quality and the degree of comprehensive service
which it provides to its clients. There can be no assurance that the Company
will be able to continue to compete successfully with existing or future
industry competitors.
Risks Associated with Acquisitions. An integral part of the
Company's growth strategy is evaluating and, from time to time, engaging in
discussions regarding acquisitions and strategic relationships. No assurance can
be given that suitable acquisitions or strategic relationships can be
identified, financed and completed on acceptable terms, or that the Company's
future acquisitions, if any, will be successful.
Expansion Risk. The Company has in the past experienced
periods of rapid expansion. This growth has increased the operating complexity
of the Company as well as the level of responsibility for both existing and new
management personnel. The Company's ability to manage its expansion effectively
will require it to continue to implement and improve its operational and
financial systems and to expand, train and manage its employee base. The
Company's inability to effectively manage its expansion could have a material
adverse effect on its business.
Control by Executive Officers and Directors. The executive
officers of the Company collectively beneficially own a significant percentage
of the voting stock of CoActive and, in effect, have the power to influence
strongly the outcome of all matters requiring stockholder approval, including
the election or removal of directors and the approval of significant corporate
transactions. Such voting could also delay or prevent a change in the control of
CoActive in which the holders of the CoActive Common Stock could receive a
substantial premium. In addition, the Credit Agreement requires the executive
officers of CoActive maintain, at a minimum, a 15% beneficial ownership of
CoActive Common Stock during the term of the Credit Agreement.
9
Item 2. Properties.
- ------ ----------
The Company has the following leased facilities:
Square Annual
Facility Location Feet Base Rent
- ----------------------------------------- -------------------------- -------- ---------
Principal office of CoActive and
principal and sales office of Inmark Great Neck, New York 16,700 $338,000
Principal and sales office of Optimum (1) Cincinnati, Ohio 17,000 $160,000
Principal and sales office of
U.S. Concepts (2) New York, New York 33,200 $752,000
Principal office of MarketVision San Antonio, Texas 4,400 $ 57,000
Other sales offices of
Inmark, Optimum Chicago, Illinois 5,000
and U.S. Concepts Los Angeles, California 1,000
San Francisco, California 900
Irvine, California 1,400
Birmingham, Alabama 100
-------
Total 8,400 $123,000
Warehouses of Optimum San Francisco, California 800
and U.S. Concepts used Los Angeles, California 1,000
for storage of promotional items New York, New York 1,000
Miami Beach, Florida 1,300
Houston, Texas 350
Southfield, Michigan 350
Chicago, Illinois 5,500
-------
Total 10,300 $128,000
(1) The Company leases this facility at an annual rental of $160,000 from
Thomas Lachenman, a director of the Company and the former owner of
Optimum Group, Inc. This lease expires in December 2010.
(2) Represents a new lease with rent which commenced on July 1, 2003, in
replacement of a lease for 11,500 square feet with an annual base rent of
$368,000 which terminated on August 31, 2003.
With the exception of the principal office leases for Great Neck, New York,
Cincinnati, Ohio, San Antonio, Texas and New York, New York, which at March 31,
2004 have remaining terms of five years, six years, four years and eleven years,
respectively, each of the Company's other facility leases are short term and
renew annually. For a summary of the Company's minimal rental commitments under
all non-cancelable operating leases as of March 31, 2004, see note 6 to the
Notes to Consolidated Financial Statements.
The Company considers its facilities sufficient to maintain its current
operations.
Item 3. Legal Proceedings.
- ------ -----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
Not Applicable.
10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ---------------------------------------------------------------------
Market Information
The Company's Common Stock is traded on the Nasdaq SmallCap
Market under the symbol CMKG. The following table sets forth for the periods
indicated the high and low trade prices for CoActive Common Stock as reported by
Nasdaq. The quotations listed below reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
Common Stock
---------------------
High Low
---- ---
Fiscal Year 2003
- ----------------
First Quarter 2.690 1.600
Second Quarter 2.150 0.950
Third Quarter 2.990 1.450
Fourth Quarter 3.040 1.960
Fiscal Year 2004
- ----------------
First Quarter 3.700 1.900
Second Quarter 4.950 2.750
Third Quarter 4.900 2.640
Fourth Quarter 3.490 2.230
On June 10, 2004, there were 5,941,856 shares of CoActive
Common Stock outstanding, approximately 63 shareholders of record and
approximately 700 beneficial owners of shares held by a number of financial
institutions.
No cash dividends have ever been declared or paid on CoActive
Common Stock. The Company intends to retain earnings, if any, to finance future
operations and expansion and does not expect to pay any cash dividends in the
foreseeable future. In addition, the Company is prohibited from paying any cash
dividends during the term of the Credit Agreement. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
Equity Compensation Plan Information
The following table sets forth information with respect to
equity compensation plans (including individual compensation arrangements) of
the Company as of March 31, 2004.
Number of securities
Number of securities remaining available for
to be issued upon Weighted average future issuance under
exercise of outstanding exercise price of equity compensation plans
options, warrants outstanding options, (excluding securities
Plan category and rights warrants and rights reflected in column (a))
- ------------- ----------------------- -------------------- -------------------------
Equity compensation
plans approved by
security holders 2,130,229 $2.46 40,000
Equity compensation
plans not approved
by security holders 75,000 $4.00 --
------------- ----------- -------------
Total 2,205,229 $2.51 40,000
============= =========== =============
11
Item 6. Selected Financial Data.
- ------ -----------------------
The selected financial data reported below has been derived
from the Company's audited financial statements for each fiscal year ended March
31 within the five year period ended March 31, 2004. The selected financial data
reported below should be read in conjunction with the consolidated financial
statements and related notes thereto and other financial information appearing
elsewhere herein.
Year Ended
Year Ended Year Ended Year Ended Year Ended March 31,
March 31, 2000 March 31, 2001 March 31, 2002 March 31, 2003 2004(1)
-------------- -------------- -------------- -------------- --------------
Statement of Operations Data:
Sales (2) $ 46,379,282 $ 58,609,347 $ 59,264,617 $ 59,956,204 $ 69,715,457
Gross Profit 11,408,595 15,043,084 15,053,122 13,699,763 13,585,766
Income (Loss) before Cumulative Effect
of Change in Accounting Principle,
Provision (Benefit) for Income Taxes,
Equity in Loss of Affiliate and
Minority Interest in the Net Income of
Consolidated Subsidiary (1,382,476) 1,465,412 1,637,082 2,974,258 (490,120)
(Benefit) Provision for Income Taxes (508,774) 583,382 708,818 1,189,676 (33,008)
Equity in Loss of Affiliate -- -- (18,000) (11,500) --
Net Income (Loss) before Cumulative
Effect of Change in Accounting
Principle for Revenue Recognition and
Minority Interest in the Net Income of
Consolidated Subsidiary (873,702) 882,030 910,264 1,773,082 (457,112)
Cumulative Effect of Change in
Accounting Principle for Revenue
Recognition, Net of Income Taxes (3)(4) -- (502,800) -- -- (2,182,814)
Minority Interest in the Net Income
of Consolidated Subsidiary -- -- -- -- (105,359)
Net (Loss) Income (873,702) 379,230 910,264 1,773,082 (2,745,285)
Net (Loss) Income per Common and Common
Equivalent Share before Cumulative Effect
of Change in Accounting Principle for
Revenue Recognition:
Basic $ (.19) $ .18 $ .18 $ .35 $ (.11)
Diluted $ (.19) $ .16 $ .17 $ .32 $ (.11)
Cumulative Effect of Change in
Accounting Principle for Revenue
Recognition:
Basic -- $ (.10) -- -- $ (.41)
Diluted -- $ (.09) -- -- $ (.41)
Net Income (Loss):
Basic $ (.19) $ .08 $ .18 $ .35 $ (.52)
Diluted $ (.19) $ .07 $ .17 $ .32 $ (.52)
Pro Forma Amounts Assuming the Change
in Accounting Principle for Revenue
Recognition is Applied Retroactively:
Net Income (Loss) 727,828 796,496 1,128,478 224,679 (562,471)
Net Income (Loss) per Common Share:
Basic $ .16 $ .16 $ .22 $ .04 $ (.11)
Diluted $ .13 $ .15 $ .21 $ .04 $ (.11)
March 31, March 31, March 31, March 31, March 31,
2000 2001 2002 2003 2004(5)
--------- --------- --------- --------- ---------
Balance Sheet Data:
Working Capital (Deficiency) (1,671,668) (3,877,534) (2,749,170) (718,147) (4,683,066)
Total Assets 36,196,610 35,004,400 36,872,138 39,098,698 40,696,697
Current Debt 3,325,000 2,983,333 2,358,333 1,375,000 1,875,000
Long-Term Debt 6,160,000 3,801,667 3,333,333 4,500,000 3,534,500
Total Liabilities 23,490,282 21,886,012 22,831,586 23,277,864 25,518,867
Stockholders' Equity 12,706,328 13,118,388 14,040,552 15,820,834 15,177,830
(1) Includes the operations of the Company and the operations of TrikMedia,
which was acquired on October 29, 2003, for the five months ended March 31,
2004, and the operations of MarketVision, which is accounted for as a
variable interest entity, for the year ended March 31, 2004, pursuant to
Company's adoption of Financial Accounting Standards Board's ("FASB")
Interpretation ("FIN") No. 46 (revised 2003), "Consolidation of Variable
Interest Entities-an Interpretation of ARB No. 51," as the Company has
determined that it is the primary beneficiary of MarketVision.
(2) Restated for the years ended March 31, 2000, 2001 and 2002 to reflect the
adoption of EITF 01-14, Income Statement Characterization of Reimbursements
Received for "Out-of-Pocket" Expenses Incurred ("EITF 01-14"). EITF 01-14
requires reimbursements received for "out-of-pocket" expenses to be
characterized as revenues. The resulting costs are now recorded as direct
expenses resulting in no change in gross profit but a decrease in gross
profit margins. The impact of the Company's adoption of EITF 01-14 was to
increase revenues and direct expenses by $5,794,323, $9,841,290,
$8,208,694, $11,669,664 and $18,088,851 for the years ended March 31, 2000,
2001, 2002, 2003 and 2004, respectively.
12
(3) For the year ended March 31, 2001, the cumulative effect of change in
accounting principle for revenue recognition is a one-time non-cash charge
relating to the Company's adoption of Staff Accounting Bulletin No. 101
("SAB 101"). SAB 101 was issued by the Securities and Exchange Commission
("SEC") in December 1999. SAB 101 provides guidance related to revenue
recognition policies based on interpretations and practices followed by the
SEC. The impact of the Company's adoption of SAB 101 was to defer revenue
recognition and the related expense for certain portions of revenue and
expense previously recognized by the Company under its project arrangements
with its clients into future accounting periods.
(4) For the year ended March 31, 2004, the cumulative effect of change in
accounting principle for revenue recognition is a one-time non-cash charge
relating to the Company's adoption of EITF 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables ("EITF 00-21") issued in May 2003.
The Company adopted the provisions of EITF 00-21 effective April 1, 2003,
the beginning of the Company's fiscal year ended March 31, 2004. EITF 00-21
provides guidance related to revenue recognition with respect to contracts
with multiple revenue generating activities. The impact of the Company's
adoption of EITF 00-21 was to defer revenue recognition and the related
expense for certain portions of revenue and expense previously recognized
by the Company under its project arrangements with its clients into future
accounting periods.
(5) Includes the accounts of MarketVision, pursuant to the Company's adoption
of FIN 46.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------ of Operations.
-----------------------------------------------------------------------
Forward Looking Statements.
This report contains forward-looking statements which the
Company believes to be 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 include but are not limited to those
described above in "Risk Factors". 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.
Overview
Fiscal 2004 was a difficult year during which the Company's
expectations were not met. Independent of the effect of a non-cash charge taken
as a result of a change in accounting principle, the Company had a net loss of
$562,000 culminating primarily from the combined impact of (i) lower than
expected sales volume, due in part to a delay in the implementation of marketing
programs as a result of a grocers' strike in southern California which was
recently settled, and (ii) increased operating expenditures related to added
personnel, and increased spending for advertising and marketing in anticipation
of increased sales volume. Following the settlement of the strike, a number of
contracts that had been delayed have been entered into, and related revenues are
expected to be recognized in Fiscal 2005. In addition, to better align and
maintain the cost of the Company's operations with sales levels, management
initiated cost saving measures during Fiscal 2004 by cutting back on personnel
and reducing other operating costs. Sales are expected to improve in Fiscal
2005, and, coupled with the full impact of the reduction in costs initiated
during Fiscal 2004, the Company expects to realize a profit for Fiscal 2005.
13
In Fiscal 2004, to further enhance the performance of its
interactive activities, the Company acquired TrikMedia, a full service
multimedia agency engaged in providing complementary digital marketing and
advertising services, interactive software development and content creation.
During Fiscal 2004, the Company's working capital was
constrained due to the funding of the TrikMedia acquisition, together with
expenditures for fixed assets, incurred in connection with the relocation of the
Company's New York City office, and increased operating expenses. Between
January and February 2004, to provide added working capital, the Company raised
$1,630,000 through sales of its capital stock to a group of its directors and an
officer of one of its subsidiaries.
At March 31, 2004, the Company was not in compliance with
three of the financial covenants of its Credit Agreement. On July 22, 2004, the
bank waived the Company's noncompliance with such financial covenants and, as
described further under "Liquidity and Capital Resources" below, entered into an
Amended and Restated Credit Agreement with the Company, pursuant to which, among
other things, such financial covenants were amended for future periods.
The following information should be read together with the
consolidated financial statements and notes thereto included elsewhere herein.
Adoption of Accounting Standards
The Company adopted EITF 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21") in the fourth quarter of
Fiscal 2004. EITF 00-21, which became effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003, provides guidance on how
to determine when an arrangement that involves multiple revenue-generating
activities or deliverables should be divided into separate units of accounting
for revenue recognition purposes, and if this division is required, how the
arrangement consideration should be allocated among the separate units of
accounting. Prior to the adoption of EITF 00-21, the Company recognized revenue
on its broadcast media and special event contracts on the
percentage-of-completion method over the life of the contract as identifiable
phases of services, such as concept creation and development, media purchase,
production, media airing and event execution occurred. Under that method, the
Company generally recognized a portion of revenues attributable to those
contracts upon signing by the Company's clients. Pursuant to EITF 00-21, the
Company now recognizes all of the contract's revenue as the media is aired and
the events take place, without regard to the timing of the contracts' signing or
when cash is received under these contracts. The adoption of EITF 00-21
(effective April 1, 2003) resulted in a non-cash charge reported as a cumulative
effect of a change in accounting principle of $2,183,000. The pro forma amounts
presented in the consolidated statements of operations were calculated assuming
the change in accounting principal was made retroactively to all years
presented. For Fiscal 2004, the adoption of EITF 00-21 resulted in an increase
in sales of $2,479,000 and an increase in direct expenses of $1,639,000. After
giving effect to the implementation of EITF 00-21 and before the cumulative
effect of the change in method of accounting for revenue recognition, the
Company had a net loss of $(562,000) or $(.11) per common share for Fiscal 2004.
In January 2003, the FASB issued Interpretation No. 46 ("FIN
46"),"Consolidation of Variable Interest Entities" with the objective of
improving financial reporting by companies involved with variable interest
entities. A variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights, or (b) has equity investors that do
not provide sufficient financial resources for the entity to support its
activities. Historically, entities generally were not consolidated unless the
entity was controlled through voting interests. FIN 46 changes that by requiring
a variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. A company that consolidates a variable interest entity is called the
"primary beneficiary" of that entity. The provisions regarding implementation
dates were revised by FIN 46 (revised) ("FIN 46R"). The consolidation
14
requirements of FIN 46R apply to variable interest entities in the first year or
interim period ending after March 15, 2004. Effective in the fourth quarter of
Fiscal 2004, the Company adopted FIN 46R as it relates to the activities of its
MarketVision affiliate. Accordingly, the operations and financial statements of
MarketVision for the year ended March 31, 2004 are included in the consolidated
financial statements of the Company, whereas for prior fiscal years, under the
equity method of accounting, the Company reported its investment in MarketVision
as adjusted for its share of net income or loss in the Company's financial
statements. The effect of the Company's adoption of FIN 46 did not impact the
Company's net loss.
Effective in the fourth quarter of Fiscal 2002, the Company
adopted EITF 01-14, "Income Statement Characterization of Reimbursements
Received for "Out-of-Pocket" Expenses Incurred" ("EITF 01-14"). EITF 01-14,
which became effective in the fourth quarter of Fiscal 2002 (and requires
retroactive application), requires reimbursements received for "out-of-pocket"
expenses to be characterized as revenues. The resulting costs are now recorded
as direct expenses resulting in no change in gross profit but a reduction in
gross profit margins. The impact of the Company's adoption of EITF 01-14 was to
increase revenues and direct expenses by $5,794,323, $9,841,290, $8,208,694,
$11,669,664 and $18,088,851 for the years ended March 31, 2000, 2001, 2002, 2003
and 2004, respectively.
Effective in the fourth quarter of its fiscal year ended March
31, 2001 ("Fiscal 2001"), the Company changed its method of accounting for
revenue recognition in accordance with the Securities and Exchange Commission's
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). Previously, the Company had recognized revenue relating to certain
promotional projects in accordance with a client's written letter of
authorization instructing the Company to proceed with a project's required
services. In most instances, the letters of authorization contained language
which provided that the letter would be followed by a definitive contract
incorporating the terms of the letter of authorization. Under the then new
accounting method adopted retroactively to April 1, 2000, as modified by the
Company's adoption of EITF 00-21, absent payment for services actually rendered,
the Company will not recognize revenue without receipt of a definitive contract
executed by its clients. The cumulative effect of the change in accounting
principle on prior years resulted in an after tax charge to income of $502,800,
which is included in the net income for the fiscal year ended March 31, 2001.
Significant Customers
For the fiscal year ended March 31, 2004 ("Fiscal 2004"), the
Company had one client, Schieffelin & Somerset Co., which accounted for
approximately 29.9% of its revenues, inclusive of, pursuant to the adoption of
accounting standard EITF 01-14, approximately 21.0% of revenues attributable to
reimbursable costs and expenses for such client. In comparison, for the fiscal
year ended March 31, 2003 ("Fiscal 2003"), the same client accounted for 34.8%
of the Company's revenues, inclusive of, pursuant to the adoption of accounting
standard EITF 01-14, approximately 19.2% of revenues attributable to
reimbursable costs and expenses for such client. At both March 31, 2004 and
2003, the same client accounted for 35% and 38%, respectively, of accounts
receivable. In addition, at March 31, 2004, the Company had another client which
accounted for approximately 13% of its revenues, inclusive of 4.6% of revenues
attributable to reimbursable costs and expenses, and 12% of its accounts
receivable. To the extent the Company's sales are dependent on one client or a
limited concentration of clients, and such dependency continues, significant
fluctuations in revenues, results of operations and liquidity could arise should
such client or clients reduce their budgets allocated to the Company's
activities.
15
Critical Accounting Policies
The Company's significant accounting policies are described in
Note 1 to the consolidated financial statements included in Item 8 of this Form
10-K. The Company believes the following represent its critical accounting
policies:
Estimates and Assumptions
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires the
Company to make estimates and assumptions that affect the reported amounts of
assets and liabilities and of revenues and expenses during the reporting period.
Estimates are made when accounting for revenue (as discussed below under
"Revenue Recognition"), depreciation, amortization, bad debt reserves, income
taxes and certain other contingencies. The Company is subject to risks and
uncertainties that may cause actual results to vary from estimates. The Company
reviews all significant estimates affecting the financial statements on a
recurring basis and records the effect of any adjustments when necessary.
Revenue Recognition
The Company's revenues are generated from projects subject to
contracts requiring the Company to provide its services within specified time
periods generally ranging up to twelve months. As a result, on any given date,
the Company has projects in process at various stages of completion. Depending
on the nature of the contract, revenue is recognized as follows: (i) on time and
material service contracts, revenue is recognized as services are rendered and
the costs are incurred; (ii) on fixed price retainer contracts, revenue is
recognized on a straight-line basis over the term of the contract; (iii) on
fixed price multiple services contracts, revenue is recognized over the term of
the contract for the fair value of segments of the services rendered which
qualify as separate activities or delivered units of service, to the extent
multi-service arrangements are deemed inseparable, revenue on these contracts is
recognized as the contracts are completed. The Company's business is such that
progress towards completing projects may vary considerably from quarter to
quarter.
If the Company does not accurately estimate the resources
required or the scope of work to be performed, or does not manage its projects
properly within the planned periods of time to satisfy its obligations under the
contracts, then future profit margins may be significantly and negatively
affected or losses on existing contracts may need to be recognized. The
Company's direct expenses consist primarily of direct labor costs; costs to
purchase media and program merchandise; cost of production, merchandise
warehousing and distribution, and third party contract fulfillment; and other
directly related program expenses. Any such resulting reductions in margins or
contract losses could be material to the Company's results of operations.
In many instances, revenue recognition will not result in
related billings throughout the duration of a contract due to timing differences
between the contracted billing schedule and the time such revenue is recognized.
In such instances, when revenue is recognized in an amount in excess of the
contracted billing amount, the Company records such excess on its balance sheet
as unbilled contracts in progress. Alternatively, on a scheduled billing date,
should the billing amount exceed the amount of revenue recognized, the Company
records such excess on its balance sheet as deferred revenue. In addition, on
contracts where costs are incurred prior to such contracts revenue recognition,
the Company records such costs on its balance sheet as deferred contract costs.
16
Goodwill and Other Intangible Asset
On April 1, 2002, the Company adopted Statements of Financial
Accounting Standards No. 141 ("SFAS 141"), "Business Combinations," and No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 141 requires the use
of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that the Company recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria. It also requires, upon adoption of SFAS 142, that the Company
reclassify, if necessary, the carrying amounts of intangible assets and goodwill
based on the criteria in SFAS 141. The Company has determined that the
classification and useful lives utilized for its intangible assets are
appropriate. SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life.
The Company's goodwill consists of the cost in excess of the
fair market value of the acquired net assets of its subsidiary companies,
Inmark, Optimum, U.S. Concepts, MarketVision and TrikMedia, which have been
identified as the Company's reporting units. The Company also has an intangible
asset consisting of an Internet domain name and related intellectual property.
At March 31, 2004, the Company's balance sheet reflected goodwill in the amount
of approximately $19,896,000 and an intangible asset (the domain name) in the
amount of $200,000. In accordance with SFAS 142, the Company did not amortize
goodwill or intangible assets in Fiscal 2004 and 2003 and will not do so in
future periods. Prior to Fiscal 2003, the Company amortized goodwill on a
straight-line basis over a period of twenty five years, recording goodwill
amortization expense of approximately $1,042,000 for the year ended March 31,
2002.
The Company has completed its annual impairment review for
each reporting unit as of March 31, 2004 and no impairment in the recorded
goodwill was identified. Goodwill 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.
Results of Operations
The following tables reflect selected pro forma financial data
for the fiscal years ended March 31, 2003 and 2002 retroactively adjusted for
the EITF 00-21 accounting change effective April 1, 2003, exclusive (i) of the
associated cumulative effect of the change in accounting principle compared to
fiscal year ended March 31, 2004 operating results as reported and (ii) the pro
forma operating results of MarketVision for the fiscal years ended March 31,
2003 and 2002:
17
Year Ended March 31,
--------------------------------------------
As Reported Pro Forma
------------- ----------------------------
2004 2003 2002
------------ ------------ ------------
Operations Data:
Sales $ 69,715,457 $ 53,500,998 $ 59,887,678
Direct expenses 56,129,691 42,381,906 44,470,866
Gross profit 13,585,766 11,119,092 15,416,812
Salaries, payroll taxes and benefits 6,134,248 5,454,695 6,646,730
Selling, general and administrative expenses 7,701,350 5,232,689 6,391,304
Total operating expenses 13,835,598 10,687,384 13,038,034
Operating (loss) income (249,832) 431,708 2,378,778
Interest expense, net (240,288) (293,471) (466,972)
Other income -- 255,350 88,966
(Loss) income before cumulative effect of change in
accounting principle, (benefit) provision for
income taxes, equity in loss of affiliate and
minority interest in net income of consolidated
subsidiary (490,120) 393,587 2,000,772
(Benefit) provision for income taxes (33,008) 157,408 854,294
Equity in loss of affiliate -- (11,500) (18,000)
Minority interest in net income of consolidated
subsidiary (105,359) -- --
Net (loss) income (562,471) 224,679 1,128,478
Per Share Data
Basic (loss) income per share applicable to
common shareholders $ (.11) $ .04 $ .22
Diluted (loss) income per share applicable to
common shareholders $ (.11) $ .04 $ .21
Weighted Average Shares Outstanding
Basic 5,257,241 5,029,303 5,024,390
Diluted 5,257,241 5,522,784 5,502,448
As Reported Pro Forma As Reported
-------------- -------------- --------------
March 31, 2004 April 1, 2003 March 31, 2003
-------------- -------------- --------------
Financial Position
Unbilled contracts in progress $ 2,083,507 $ 956,435 $ 5,127,526
Deferred contract costs 339,100 2,089,043 --
Total assets 40,696,697 37,016,650 39,098,698
Deferred revenue 7,932,115 8,818,710 2,941,547
Accrued job costs 2,860,550 750,000 5,071,187
Deferred taxes payable 63,016 172,933 1,628,143
Retained earnings 6,318,723 6,881,194 9,064,008
Stockholders' equity 15,177,830 13,638,020 15,820,834
Total liabilities and stockholders' equity 40,696,697 37,016,650 39,098,698
The following table presents as reported and pro forma
operating data expressed as a percentage of sales for each of the fiscal years
ended March 31, 2004, 2003 and 2002, respectively, retroactively adjusted for
the EITF 00-21 accounting change effective April 1, 2003, exclusive (i) of the
associated cumulative effect of the change in accounting principle and (ii) the
pro forma operating results of MarketVision for the fiscal years ended March 31,
2003 and 2002:
18
Year Ended March 31,
---------------------------------------
As Reported Pro Forma
---------- ------------------------
2004 2003 2002
---------- ---------- ----------
Statement of Operations Data:
Sales 100.0% 100.0% 100.0%
Direct expenses 80.5% 79.2% 74.3%
Gross profit 19.5% 20.8% 25.7%
Salaries, payroll taxes and benefits 8.8% 10.2% 11.1%
Selling, general and administrative expenses 11.0% 9.8% 10.7%
Total operating expenses 19.8% 20.0% 21.8%
Operating (loss) income (0.4)% 0.8% 4.0%
Interest expense, net 0.3% 0.5% 0.8%
Other income -- 0.5% 0.1%
(Loss) income before (benefit) provision for income
taxes, equity in loss of affiliate and minority
interest in net income of consolidated subsidiary (0.7)% 0.7% 3.3%
(Benefit) provision for income taxes -- 0.3% 1.4%
Minority interest in net income of consolidated
subsidiary (0.2)% -- --
Net (loss) income (0.8)% 0.4% 1.9%
The following table presents as reported and pro forma
operating data expressed as a comparative percentage of change from the
immediately preceding fiscal year for each of the fiscal years ended March 31,
2004, 2003 and 2002, respectively, retroactively adjusted for the EITF 00-21
accounting change effective April 1, 2003, exclusive of (i) the associated
cumulative effect of the change in accounting principle and (ii) the pro forma
operating results of MarketVision for the fiscal years ended March 31, 2003 and
2002:
Year Ended March 31,
--------------------------------------------------
As Reported Pro Forma
------------ -------------------------------
2004 2003 2002
------------ ------------ ------------
Statement of Operations Data:
Sales 30.3% (10.7)% (1.8)%
Direct expenses 32.4% (4.7)% (3.5)%
Gross profit 22.2% (27.9)% 3.5%
Salaries, payroll taxes and benefits 12.5% (17.9)% (1.8)%
Selling, general and administrative expenses 47.2% (18.1)% 7.7%
Total operating expenses 29.5% (18.0)% 2.6%
Operating (loss) income (157.9)% (81.9)% 8.2%
Interest expense, net (18.1)% (37.2)% (40.6)%
Other income (100.0)% 187.0% (200.0)%
(Loss) income before (benefit) provision for income
taxes, equity in loss of affiliate and minority
interest in net income of consolidated subsidiary (224.5)% (80.3)% 51.2%
(Benefit) provision for income taxes (121.0)% (81.6)% 62.3%
Minority interest in net income of consolidated
subsidiary 100.0% -- --
Equity in (loss) of affiliate (100.0)% (36.1)% 100.0%
Net (loss) income (350.3)% (80.1)% 41.7%
19
Fiscal Year 2004 Compared to Fiscal Year 2003
Sales. Sales for Fiscal 2004 were $69,715,000, compared to
sales of $59,956,000 for Fiscal 2003, an increase of $9,759,000. Included in
Fiscal 2004 sales were (i) $18,089,000 of reimbursable costs and expenses in
accordance with EITF 01-14, (ii) $2,479,000 of sales applicable to the net
effect of sales included in Fiscal 2004 and sales deferred to Fiscal 2005 of
$10,048,000 and $7,569,000, respectively, resulting from the adoption of EITF
00-21, (iii) $4,743,000 of sales of MarketVision resulting from the adoption of
FIN 46R and (iv) $1,059,000 of sales of TrikMedia acquired on October 29, 2003.
In comparison, sales for Fiscal 2003 included $11,670,000 of sales solely
applicable to the adoption of EITF 01-14. Without the adoption of EITF 01-14,
EITF 00-21, FIN 46R and the acquisition of TrikMedia, the recorded sales for
Fiscal 2004 would have been approximately $4,941,000 less than in Fiscal 2003.
This net decrease in sales for Fiscal 2004 was primarily attributable to a
shortfall in the contracting of new sales, a part of which was due to a delay
caused by the extended period of a grocer's strike in southern California.
Direct Expenses. Direct expenses for Fiscal 2004 were
$56,130,000 compared to direct expenses of $46,256,000 for Fiscal 2003, an
increase of $9,874,000. Included in Fiscal 2004 direct expenses were (i)
$18,089,000 of reimbursable costs and expenses in accordance with EITF 01-14,
(ii) $1,639,000 of direct expenses applicable to the net effect of direct
expenses included in Fiscal 2004 and direct expenses deferred to Fiscal 2005 of
$6,410,000 and $4,771,000, respectively, resulting from the adoption of EITF
00-21, (iii) $3,393,000 of direct expenses of MarketVision resulting from the
adoption of FIN 46R and (iv) $835,000 of direct expenses of TrikMedia. In
comparison, direct expenses for Fiscal 2003 included $11,670,000 of direct
expenses solely applicable to the adoption of EITF 01-14. Without the adoption
of EITF 01-14, EITF 00-21, FIN 46R and the acquisition of TrikMedia, the
recorded direct expenses for Fiscal 2004 would have been approximately
$2,412,000 less than in Fiscal 2003. This net decrease in direct expenses for
Fiscal 2004 was primarily due to the net decrease in sales for the year.
As a result of the changes in sales and direct expenses,
inclusive of $840,000 and $1,350,000, respectively, of gross profit applicable
to the adoption of EITF 00-21 and FIN 46R, the Company's gross profit for Fiscal
2004 decreased to $13,586,000 from $13,700,000 for Fiscal 2003 and gross profit
as a percentage of sales decreased to 19.5% for Fiscal 2004, compared with 22.8%
for Fiscal 2003. Without the impact of the adoption of EITF 01-14, EITF 00-21,
FIN 46R and the acquisition of TrikMedia, gross profit as a percentage of sales
for Fiscal 2004 was 25.8% compared to 28.4% for Fiscal 2003 as a result of the
aggregate mix of Fiscal 2004 client projects having a lower margin of gross
profit.
Operating Expenses. Operating expenses for Fiscal 2004
increased by $3,148,000, inclusive of $1,076,000 applicable to MarketVision, and
amounted to $13,835,000, compared to $10,687,000 for Fiscal 2003. The increase
in operating expenses for Fiscal 2004 was primarily the result of increases in
(i) salaries, related payroll taxes and benefits in the amount of $679,000,
inclusive of $136,000 applicable to MarketVision and (ii) selling, general and
administrative expenses in the amount of $2,469,000 inclusive of $940,000
applicable to MarketVision, to support an anticipated increase in the level of
operations that did not materialize. Excluding MarketVision, the increase in
salaries and related payroll expenses was primarily attributable to the cost of
added personnel. The increase in selling, general and administrative expenses
was primarily the result of the increases in expenses incurred for (i)
marketing, advertising and related travel and entertainment expenses in the
amount of $538,000, (ii) professional fees, inclusive of personnel recruitment
fees, in the amount of $197,000, (iii) other selling, general and administration
expenses in the amount of $579,000 and (iv) the provision for bad debts, for
potentially non-collectible accounts receivable, in the amount of $215,000.
20
Interest Expense. Interest expense for Fiscal 2004, inclusive
of $40,000 of interest expense applicable to MarketVision, decreased by $53,000
to $240,000, compared with interest expense in the amount of $293,000 for Fiscal
2003. The decrease in interest expense was primarily related to the $466,000
reduction in the Company's overall debt together with lower interest rates on
the Company's bank borrowings.
Other Income. Other income in Fiscal 2003 primarily resulted
from the Company's sale of certain of its Internet domain names, of limited
value to the Company, for $250,000.
(Benefit) Provision for Income Taxes. The (benefit) for
federal, state and local income taxes for Fiscal 2004 in the amount of $(33,000)
was net of a provision for income taxes for MarketVision in the amount of
$35,000 compared with a provision for federal, state and local income taxes in
the amount of $1,190,000 for Fiscal 2003. Both the (benefit) and provision for
income taxes for Fiscal 2004 and 2003 were based upon the Company's estimated
effective tax rate for each respective fiscal year.
Equity in Loss of Affiliate. For Fiscal 2004, the Company
includes the operations of its affiliate in its consolidated financial
statements, whereas for Fiscal 2003 the Company recorded a loss of $12,000 as
its share of losses from its 49% equity investment in MarketVision.
Net (Loss) Income Before Cumulative Effect of Change in
Accounting Principle for Revenue Recognition and Minority Interest in the Net
Income of Consolidated Subsidiary. The Company's net loss before the effect of
the change in accounting principle for revenue recognition and minority interest
in the net income of consolidated subsidiary for Fiscal 2004 was $(562,000)
compared with net income of $1,773,000 for Fiscal 2003.
Cumulative Effect of Change in Accounting Principle for
Revenue Recognition. For Fiscal 2004, the Company incurred a non-cash charge
of $2,183,000 representing the cumulative effect of a change in accounting
principle related to its adoption of EITF 00-21 on a cumulative basis as of
April 1, 2003.
Minority Interest in the Net Income of Consolidated
Subsidiary. For Fiscal 2004, the Company reflected a non-cash charge of
$105,000 representing a third party's owned interest in the net income of
MarketVision related to the Company's adoption of FIN 46R.
Net (Loss) Income. As a result of the items discussed above,
net loss for Fiscal 2004 was $(2,745,000), compared with net income of
$1,773,000 for Fiscal 2003.
Fiscal Year 2003 Compared to Fiscal Year 2002
Sales. Sales for Fiscal 2003 were $59,956,000, compared to
sales of $59,265,000 for Fiscal 2002, an increase of $691,000. Included in sales
for Fiscal 2003 and Fiscal 2002 were $11,670,000 and $8,209,000, respectively,
of reimbursable costs and expenses in accordance with EITF 01-14. Although sales
increased slightly for Fiscal 2003, without the adoption of EITF 01-14, recorded
sales for Fiscal 2003 would have been approximately $2,770,000 less than in
Fiscal 2002. The Company believes that the lack of growth in the Company's sales
in Fiscal 2003 was due primarily to the general weakness in the economy.
Direct Expenses. Direct expenses for Fiscal 2003 were
$46,256,000 compared to direct expenses of $44,211,000 for Fiscal 2002, an
increase of $2,045,000. Included in direct expenses for Fiscal 2003 and Fiscal
2002 were $11,670,000 and $8,209,000, respectively, of reimbursable costs and
expenses in accordance with EITF 01-14. The increase in direct expenses in
Fiscal 2003 was primarily due to an increase in the amount of reimbursable costs
and expenses incurred by the Company on behalf of its clients.
21
As a result of these changes in sales and direct expenses, the
Company's gross profit for Fiscal 2003 decreased to $13,700,000 from $15,053,000
for Fiscal 2002 and gross profit as a percentage of sales decreased to 22.8% for
Fiscal 2003, compared with 25.4% for Fiscal 2002.
Operating Expenses. Operating expenses for Fiscal 2003
decreased by $2,351,000 and amounted to $10,687,000, compared to $13,038,000 for
Fiscal 2002. The decrease in operating expenses for Fiscal 2003 was primarily
the result of respective decreases in (i) salaries, related payroll taxes and
benefits in the amount of $1,192,000 and (ii) selling, general and
administrative expenses in the amount of $1,159,000. The decrease in salaries
and related payroll expenses was primarily attributable to a reduction in
personnel and, to a lesser extent, the reimbursement by MarketVision of the cost
of personnel deployed by the Company in support of MarketVision's operations.
The decrease in selling, general and administrative expenses was primarily the
result of the elimination of approximately $1,033,000 of goodwill amortization
expense in accordance with SFAS 142, which was adopted on April 1, 2002.
Interest Expense. Interest expense for Fiscal 2003 decreased
by $174,000 to $293,000, compared with interest expense in the amount of
$467,000 for Fiscal 2002. The decrease in interest expense was primarily related
to a reduction in interest rates applicable to the Company's borrowings under
its bank loans.
Other Income. Other income for Fiscal 2003 increased by
$166,000 to $255,000, compared with other income in the amount of $89,000 for
Fiscal 2002. Other income in Fiscal 2003 primarily resulted from the Company's
sale of certain of its Internet domain names (which had limited value to the
Company) for $250,000.
Provision for Income Taxes. The provision for federal, state
and local income taxes in the amount of $1,190,000 and $709,000, respectively,
for Fiscal 2003 and 2002 were based upon the Company's estimated effective tax
rate for the respective fiscal year.
Equity in Loss of Affiliate. For Fiscal 2003 and 2002, the
Company recorded a loss of $12,000 and $18,000, respectively, as its share of
losses from its 49% equity investment in MarketVision.
Net Income. As a result of the items discussed above, net
income for Fiscal 2003 was $1,773,000, compared with net income of $910,000 for
Fiscal 2002.
Liquidity and Capital Resources
On October 31, 2002, the Company entered into a Credit
Agreement (the "Credit Agreement") with Signature Bank (the "Lender") pursuant
to which the Company obtained a $3,000,000 term loan (the "Term Loan") and a
$3,000,000 three year revolving loan credit facility (the "Revolving Loan" and
together with the Term Loan, the "Loans"). The principal amount of the Term Loan
is repayable in equal installments over 48 months, with the final payment due
October 30, 2006. 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 Loans to
repay in full the Company's indebtedness under its prior credit agreement. 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 Lender plus its legal costs and expenses and will pay the Lender a
quarterly fee equal to .25% per annum on the unused portion of the credit
facility. Interest on the Loans is due on a monthly basis at an annual rate
equal to the Lender's prime rate plus .25% with respect to Revolving Loans and
..50% with respect to the Term Loan. 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)
22
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. On July 18, 2003, the Credit Agreement was amended
pursuant to which the revolving loan credit facility was increased by $500,000
to $3,500,000. To provide for anticipated near term additional working capital
needs, on November 24, 2003, the Credit Agreement was further amended pursuant
to which the revolving loan credit facility was temporarily increased by
$500,000 to $4,000,000 until January 31, 2004. Such additional $500,000 was
borrowed on November 24, 2003 and pursuant to the amendment, the Company repaid
such amount on January 29, 2004.
At December 31, 2003, the Company was not in compliance with
three of the financial covenants of the Credit Agreement, namely: (i) the
maximum permitted ratio of consolidated senior funded debt to earnings before
interest, taxes, depreciation and amortization, (ii) the minimum permitted debt
service coverage ratio and (iii) the requirement of no net loss for a fiscal
quarter. On February 10, 2004, the Lender granted a waiver of the Company's
non-compliance with respect to such financial covenants as at December 31, 2003.
At March 31, 2004, the Company was again not in compliance
with the same three financial covenants of the Credit Agreement, and in
addition, the Lender determined that the Company's Revolving Loan borrowings
exceeded the amount of such borrowings permitted under the Credit Agreement. On
July 22, 2004 the Lender waived the Company's defaults arising as a result of
such noncompliance and entered into an Amended and Restated Credit Agreement
with the Company. The Amended and Restated Credit Agreement subjects the Company
to the following financial covenants:
o beginning June 30, 2005 and on the last day of each succeeding
fiscal quarter, the Company's ratio of consolidated senior
funded debt to earnings before interest, taxes, depreciation
and amortization (calculated in accordance with the Amended
and Restated Credit Agreement), cannot exceed 1.50:1.00;
o beginning June 30, 2005 and on the last day of each succeeding
fiscal quarter, the Company's debt service coverage ratio
(calculated in accordance with the Amended and Restated Credit
Agreement), cannot be less than 2.00:1.00;
o the Company is required to have a minimum net worth
(calculated in accordance with the Amended and Restated Credit
Agreement), of at least $15,500,000 on March 31, 2005 and
March 31, 2006; and
o the Company is required to generate net income before taxes
(calculated in accordance with the Amended and Restated Credit
Agreement) of at least $250,000 for the fiscal quarter ended
June 30, 2004 and at least $1,000,000 for each succeeding
fiscal quarter.
In addition, pursuant to the Amended and Restated Credit
Agreement (i) the revolving loan facility was reduced from $3,500,000 to
$1,100,000, and $2,400,000 of outstanding Revolving Loans were converted to a
term loan, requiring principal monthly repayments in the amount of $100,000 each
commencing September 1, 2004, (ii) interest on term loans (including the
$2,400,000 of Revolving Loans converted to a term loan) was increased to the
Lender's prime rate plus 1.0%, and interest on Revolving Loans was increased to
the Lender's prime rate plus .50%, (iii) the Company's cash deposits maintained
with the Lender cannot be less than $3,000,000 at any time, and (iv) the Company
paid the Lender a $25,000 amendment fee.
23
The following analysis of the Company's statements of cash
flows compares (i) the Company's March 31, 2004 balance sheet with its pro forma
balance sheet at April 1, 2003, after recording the cumulative effect of the
change in accounting principle for revenue recognition and (ii) the Company's
statement of operations as of March 31, 2004 with its pro forma statement of
operations as of March 31, 2003, after recording the cumulative effect of the
change in accounting principle for revenue recognition. The aforementioned
financial statements as of March 31, 2004 include the balance sheet accounts and
operations of MarketVision whereas the pro forma financial statements exclude
such balance sheet accounts and operations of MarketVision. Summarized financial
information of MarketVision for the year ended March 31, 2004 is as follows:
Balance sheet information:
Cash $ 107,000
Accounts receivable 845,000
Unbilled contracts in progress 287,000
Prepaid expenses and other current assets 86,000
Deferred taxes 22,000
Property and equipment, net 110,000
Accounts payable 64,000
Deferred revenue 141,000
Accrued job costs 938,000
Accrued compensation 15,000
Statement of operations information:
Sales $ 4,743,000
Direct expenses 3,393,000
Gross profit 1,350,000
Operating expenses 1,076,000
Interest expense 40,000
Provision for income taxes 35,000
Net income 199,000
At March 31, 2004, the Company had cash and cash equivalents
of $3,164,000, a working capital deficit of $(4,683,000), which includes
approximately $7,900,000 of deferred revenue, outstanding bank loans of
$4,985,000 and an outstanding bank letter of credit of $500,000 under the
Revolving Loan, with no additional availability under the Revolving Loan,
indebtedness of $425,000 under a subordinated note (the "Subordinated Note") and
stockholders' equity of $15,178,000. In comparison, at April 1, 2003, after
recording the cumulative effect of change in accounting principle for revenue
recognition, the Company had cash and cash equivalents of $1,337,000, a working
capital deficit of $(3,981,000), outstanding bank loans of $5,250,000 and an
outstanding bank letter of credit of $500,000 under the Revolving Loan, with no
additional availability under the Revolving Loan, indebtedness of $625,000 under
a Subordinated Note and stockholders' equity of $13,638,000. The comparative
increase in the working capital deficit at March 31, 2004 was primarily
attributable to the Company's net loss for the year before the cumulative effect
of change in accounting principle for revenue recognition and the increase in
the current maturity of the Company's note payable to the bank.
For Fiscal 2004, the Company funded its activities from cash
provided by operating activities, Revolving Loan borrowings under the Credit
Agreement and cash provided from the sale of shares of the Company's capital
stock, as described further below. With no borrowing ability currently available
under the Revolving Loan, management believes cash generated from operations
will be sufficient to meet the Company's cash requirements for Fiscal 2005,
although there can be no assurance in this regard. To the extent that 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 2005 or as subsequently required to
repay Loans under the Credit Agreement.
24
The $1,827,000 increase in the Company's cash and cash
equivalents at March 31, 2004 resulted primarily from the aggregate of the
Company's net cash from operating activities and net financing activities
exceeding the net cash used in investing activities.
Net cash provided by operating activities during Fiscal 2004
was $2,646,000, which was attributable to the net loss of $(2,745,000),
inclusive of $199,000 of net income of MarketVision, offset by the net of (i)
non-cash charges for depreciation and amortization of $798,000, inclusive of
$25,000 applicable to MarketVision, the provision for bad debt expense of
$215,000, the provision for deferred income taxes of $46,000, other of $4,000
and the cumulative effect for the change in accounting principle of $2,183,000;
(ii) the minority interest in the net income of consolidated subsidiary of
$102,000; and (iii) cash provided by the change in operating assets and
liabilities of $2,043,000. The change in operating assets and liabilities was
due to the net effect of the aggregate of the following:
(i) an increase in accounts payable of $1,075,000, net of
$283,000 attributable to MarketVision,
(ii) an increase in accrued job costs of $1,286,000 (as a
result of a balance of $750,000 at April 1, 2003,
after recording the amount of change in accounting
principle for revenue recognition of $4,321,000)
increasing to $2,861,000 at March 31, 2004, inclusive
of $114,000 attributable to MarketVision,
(iii) a decrease in deferred contract costs of $1,750,000
(as a result of a $2,089,000 balance at April 1,
2003, the effect of recording $2,089,000 for the
amount of change in accounting principle for revenue
recognition) decreasing to $339,000 at March 31,
2004,
(iv) a decrease in prepaid expenses and other assets of
$302,000 and increases in other accrued liabilities,
accrued compensation and accrued taxes payable
totaling $192,000, net of $22,000 of prepaid expenses
and inclusive of $50,000 of accrued liabilities
attributable to MarketVision, offset by
(i) an increase in accounts receivable of $765,000, net
of $49,000 attributable to MarketVision,
(ii) an increase in unbilled contracts in progress of
$290,000 (as a result of a $956,000 balance at April
1, 2003, after recording the amount of change in
accounting principle for revenue recognition of
$4,171,000) increasing to $2,083,000 at March 31,
2004, net of $550,000 attributable to MarketVision,
(iii) a decrease in deferred revenue of $1,057,000 (as a
result of a $8,819,000 balance at April 1, 2003,
after recording the amount of change in accounting
principle for revenue recognition of $5,877,000)
decreasing to $7,932,000 at March 31, 2004, net of
$137,000 attributable to MarketVision,
(iv) an increase in prepaid taxes of $450,000.
For Fiscal 2004, net cash used in investing activities
amounted to $2,057,000 as a result of $1,364,000 used for the purchase of fixed
assets, inclusive of $25,000 applicable to MarketVision, $700,000 used for the
TrikMedia acquisition, and $29,000 accrued as interest on a note from an officer
offset by $36,000 of cash in consolidation of MarketVision. In comparison for
Fiscal 2003, net cash used in investing activities amounted to $2,150,000 as a
result of $607,000 used for the purchase of fixed assets, $700,000 used to pay
an earnout in connection with the U.S. Concepts Acquisition, the net increase of
$120,000 in notes receivable from officers resulting from $183,000 of accrued
interest on a note from an officer offset by a $63,000 repayment of another
officer's loan, and $723,000 used as a working capital advance to the Company's
MarketVision affiliate. The Company does not expect to make material investments
in fixed assets in Fiscal 2005.
25
For Fiscal 2004, financing activities provided net cash of
$1,238,000 resulting from proceeds of $1,630,000 from the sale of shares of the
Company's common stock, proceeds of $98,000 from the exercise of stock options
and warrants and the issuance of stock in payment of an earnout pertaining to
the Company's acquisition of U.S. Concepts, offset by payment of $466,000 to
reduce the Company's overall debt and payment of financing costs of $24,000 in
connection with the Company's bank borrowings. In comparison, for Fiscal 2003,
financing activities provided net cash of $94,000 resulting from increased
borrowings of $183,000 and the proceeds from the exercise of stock options in
the amount of $7,000, offset by an increase in financing costs of $96,000
incurred in connection with the Company's refinancing of its bank debt.
Off-Balance Sheet Transactions
The Company is not a party to any "off-balance sheet
transactions" as defined in Item 301 of Regulation S-K.
Contractual Obligations
The table below sets forth as of March 31, 2004, future
minimum payments required to be made by the Company in respect of its debt
obligations, operating leases, and employment agreements.
Payments Due Fiscal Year Ending March 31,
------------------------------------------------------------------------------------------------------
TOTAL 2005 2006 2007 2008 2009 Thereafter
------------ ------------ ------------ ------------ ------------ ------------ ------------
Contractual
Obligations
- -----------
Bank Term Loan $ 4,400,000 $ 1,450,000 $ 1,950,000 $ 1,000,000 -- -- --
Bank Revolving
Credit Loan 584,500 -- 584,500 -- -- -- --
Subordinated Note 425,000 425,000 -- -- -- -- --
Capital Lease
Obligations -- -- -- -- -- -- --
Operating Leases 15,592,000 1,526,000 1,605,000 1,580,000 1,632,000 1,309,000 7,940,000
Employment
Agreements 4,240,000 2,120,000 2,120,000 -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total $ 25,241,500 $ 5,521,000 $ 6,259,500 $ 2,580,000 $ 1,632,000 $ 1,309,000 $ 7,940,000
============ ============ ============ ============ ============ ============ ============
Note: In connection with U.S. Concepts' lease of New York office facilities, the
Company has provided the landlord of such facilities with a security deposit in
the form of a letter of credit in the amount of $500,000. The letter of credit,
which was issued by the Lender under the Credit Agreement, expires October 30,
2006, at which time the Company will be required to provide a replacement letter
of credit or provide the landlord with a $500,000 cash deposit.
Impact of Recently Issued Accounting Standards
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity". This statement establishes standards for how a company classifies and
26
measures certain financial instruments with characteristics of both liabilities
and equity. This statement is effective for financial instruments entered into
or modified after May 31, 2003 and otherwise is effective at the beginning of
the first interim period beginning after December 15, 2004. The statement is to
be implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the period of adoption. The
effect of this pronouncement did not have an impact on the Company's financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149")
which amends and clarifies financial accounting and reporting derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. In particular, SFAS
No. 149 clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative discussed in SFAS No.133,
clarifies when a derivative contains a financing component, amends the
definition of an underlying (as initially defined in SFAS No 133) to conform it
to language used in FIN No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others", and amends other existing pronouncements. The effect of this
pronouncement did not have an impact on the financial statements of the Company.
Certain Transactions
Sales of Capital Stock
On January 26, 2004, Brian Murphy, a director of the Company,
and the chief executive officer of the Company's U.S. Concepts subsidiary,
purchased from the Company 150,000 shares of a newly designated class of the
Company's preferred stock for an aggregate purchase price of $600,000.
Thereafter, on February 9, 2004, the Company sold an aggregate of 412,000 shares
of the Company's common stock, at a price of $2.50 per share, to five
individuals, consisting of the Company's President and Chief Executive Officer,
three of the Company's other directors and an officer of one of the Company's
subsidiaries, resulting in an additional $1,030,000 of cash proceeds to the
Company. In connection with such sale of common stock, and pursuant to the terms
upon which Mr. Murphy purchased the shares of preferred stock described above,
Mr. Murphy was issued an additional 240,000 shares of common stock in exchange
for the cancellation of such shares of preferred stock.
Earnout Payment
On April 14, 2003, the Company issued 100,000 shares of its
common stock, with an aggregate contract value, based on the U.S. Concepts
acquisition agreement, of $218,000 at such date, in partial satisfaction of the
Company's earnout obligations in connection with its acquisition of its U.S.
Concepts subsidiary. The amount of such obligation was previously reflected on
the Company's financial statements for the periods ended March 31, 2003 as
additional purchase price payable pursuant to the terms of the U.S. Concepts
acquisition agreement.
MarketVision
On February 27, 2001, the Company acquired 49% of the shares
of capital stock of MarketVision which is a minority owned, predominately
Hispanic, ethnically oriented promotion agency headquartered in San Antonio,
Texas. The MarketVision acquisition had been accounted for as an equity
investment on the Company's consolidated balance sheet through the Company's
fiscal year ended March 31, 2003. Pursuant to the equity method of accounting,
27
the Company's balance sheet carrying value of the investment was periodically
adjusted to reflect the Company's 49% interest in the operations of
MarketVision. Effective in the fourth quarter of fiscal year ended March 31,
2004, the Company included in its consolidated financial statements the
operations of MarketVision pursuant to the adoption of FIN 46R.
In connection with the acquisition, the Company extended a
working capital credit line to MarketVision in the amount of $200,000. In
addition, from time to time the Company provides promotional and related
services for customers of MarketVision on MarketVision's behalf. In these
situations, the customers' contract is with MarketVision, and the Company
records amounts owed to it for these services and related expenses on its
balance sheet as due from affiliate. Furthermore, pursuant to an Administration
and Marketing Services Agreement (the "Services Agreement") between the Company
and MarketVision, the Company provides MarketVision with specific
administrative, accounting, collection, financial, marketing and project support
services for a monthly fee currently in the amount of $50,000. In accordance
with the Services Agreement, the Company dedicates and allocates certain of its
resources and the specific time of certain of its personnel to MarketVision. At
March 31, 2004, there were no borrowings under credit line available to
MarketVision.
Officer Loan
The Company has made loans to Paul A. Amershadian, a director
of the Company and its Executive Vice President-Marketing and Sales, aggregating
$550,000, which are evidenced by an Amended and Restated Promissory Note dated
May 24, 2001. The Amended and Restated Promissory Note provides for payment of
interest at a floating rate equal to the highest rate at which the Company pays
interest on its bank borrowings, monthly payment of one-half of the interest
that accrued over the preceding month, payment of accrued interest and principal
from one-half of the after-tax amount, if any, of bonuses paid to Mr.
Amershadian by the Company, and payment of the remaining balance of principal
and accrued interest on May 24, 2006. To date, Mr. Amershadian has not made any
of the required monthly interest payments under the Amended and Restated
Promissory Note. At March 31, 2004, the Amended and Restated Promissory Note is
recorded in the Company's accounts as a note receivable from officer in the
amount of $762,000, which includes accrued interest at March 31, 2004 in the
amount of $212,000, of which $46,500 was past due and owing at such date.
Optimum Lease
In connection with the Company's acquisition of Optimum, the
Company entered into a lease agreement with Thomas Lachenman, a director of the
Company and former owner of Optimum, for the lease of the Cincinnati principal
office of Optimum. The lease provides for an annual rental, currently at
$160,000, adjusted annually based upon changes in the local consumer price
index. The lease expires in December 2010.
Item 7A. 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. See note 7 to "Notes to Consolidated Financial Statements-Debt."
28
Item 8. Consolidated Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of CoActive Marketing Group, Inc.
Report of Independent Registered Public Accounting Firm.......................30
Consolidated Balance Sheets as of March 31, 2004 and 2003.....................31
Consolidated Statements of Operations for the years ended
March 31, 2004, 2003 and 2002.............................................32
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 2004, 2003 and 2002.............................................33
Consolidated Statements of Cash Flows for the years ended
March 31, 2004, 2003 and 2002 ............................................34
Notes to Consolidated Financial Statements....................................35
29
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
CoActive Marketing Group, Inc.
We have audited the accompanying consolidated balance sheets of CoActive
Marketing Group, Inc. and subsidiaries as of March 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Accounting Oversight Board (United States). 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CoActive Marketing
Group, Inc. and subsidiaries as of March 31, 2004 and 2003, and the results of
their operations and their cash flows each of the three years in the period
ended March 31, 2004, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1, the Company changed its policy of accounting for
goodwill in fiscal 2003 as required by Financial Accounting Standards Board
Statement ("FASB") No. 142, "Goodwill and Other Intangible Assets". In fiscal
2004, the Company changed its revenue recognition policy as required by Emerging
Issues Task Force Statement 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables". In fiscal 2004, the Company changed the manner in which
it reports an investment in an affiliate as required by FASB Interpretation No.
46 (Revised).
BDO SEIDMAN, LLP
Melville, New York
July 13, 2004, except for Note 7,
which is as of July 22, 2004
30
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2003
2004 2003
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 3,164,158 $ 1,336,886
Accounts receivable, net of allowance for doubtful accounts
of $295,981 in 2004 and $80,412 in 2003 10,504,973 9,061,305
Unbilled contracts in progress 2,083,507 5,127,526
Deferred contract costs 339,100 --
Due from affiliate -- 722,989
Prepaid taxes 449,582 --
Prepaid expenses and other current assets 608,175 730,965
------------ ------------
Total current assets 17,149,495 16,979,671
Property and equipment, net 2,598,929 1,781,226
Investment in MarketVision -- 296,130
Notes and interest receivable from officer 762,276 733,000
Goodwill 19,895,694 18,784,946
Intangible asset 200,000 200,000
Deferred financing costs, net of amortization of $478,098 in 2004 and
$336,643 in 2003 72,905 190,353
Other assets 17,398 133,372
------------ ------------
Total assets $ 40,696,697 $ 39,098,698
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 7,525,683 $ 6,103,068
Deferred revenue 7,932,115 2,941,547
Accrued job costs 2,860,550 5,071,187
Accrued compensation 96,127 65,467
Other accrued liabilities 1,480,070 1,560,579
Accrued taxes payable -- 32,873
Deferred taxes payable 63,016 548,097
Notes payable bank - current 1,450,000 750,000
Subordinated notes payable - current 425,000 625,000
------------ ------------
Total current liabilities 21,832,561 17,697,818
Notes payable bank - long term 3,534,500 4,500,000
Deferred taxes payable -- 1,080,046
Minority interest of consolidated subsidiary 151,806 --
------------ ------------
Total liabilities 25,518,867 23,277,864
------------ ------------
Commitments and contingencies
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 5,941,856 shares at March 31, 2004
and 5,034,731 shares at March 31, 2003 5,941 5,034
Additional paid-in capital 8,853,166 6,751,792
Retained earnings 6,318,723 9,064,008
------------ ------------
Total stockholders' equity 15,177,830 15,820,834
------------ ------------
Total liabilities and stockholders' equity $ 40,696,697 $ 39,098,698
============ ============
See accompanying notes to consolidated financial statements.
31
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002
2004 2003 2002
------------ ------------ ------------
Sales $ 69,715,457 $ 59,956,204 $ 59,264,617
Direct expenses 56,129,691 46,256,441 44,211,495
------------ ------------ ------------
Gross profit 13,585,766 13,699,763 15,053,122
------------ ------------ ------------
Operating expenses:
Salaries, payroll taxes and benefits 6,134,248 5,454,695 6,646,730
Selling, general and administrative expenses 7,701,350 5,232,689 6,391,304
------------ ------------ ------------
Total operating expenses 13,835,598 10,687,384 13,038,034
------------ ------------ ------------
Operating (loss) income (249,832) 3,012,379 2,015,088
Interest expense, net (240,288) (293,471) (466,972)
Other income -- 255,350 88,966
------------ ------------ ------------
(Loss) income before (benefit) provision for income taxes,
equity in loss of affiliate, cumulative effect of change in
accounting principle for revenue recognition and minority
interest in net income of consolidated subsidiary (490,120) 2,974,258 1,637,082
(Benefit) provision for income taxes (33,008) 1,189,676 708,818
Equity in loss of affiliate -- (11,500) (18,000)
------------ ------------ ------------
Net (loss) income before cumulative effect of change in
accounting principle for revenue recognition and minority
interest in net income of consolidated subsidiary (457,112) 1,773,082 910,264
Cumulative effect of change in accounting principle for
revenue recognition, net of income taxes (2,182,814) -- --
Minority interest in net income of consolidated subsidiary (105,359) -- --
------------ ------------ ------------
Net (loss) income $ (2,745,285) $ 1,773,082 $ 910,264
============ ============ ============
Net (loss) income per common share before cumulative
effect of change in accounting principle for revenue
recognition and after effect of minority interest in net
income of consolidated subsidiary:
Basic $ (.11) $ .35 $ .18
============ ============ ============
Diluted $ (.11) $ .32 $ .17
============ ============ ============
Cumulative effect of change in accounting principle
for revenue recognition, net of income taxes $ (.41) $ -- $ --
------------ ------------ ------------
Net (loss) income per common share after cumulative effect
of change in accounting principle for revenue recognition:
Basic $ (.52) $ .35 $ .18
============ ============ ============
Diluted $ (.52) $ .32 $ .17
============ ============ ============
Weighted average number of shares outstanding before
cumulative effect of change in accounting principle for
revenue recognition
Basic 5,257,241 5,029,303 5,024,390
Dilutive effect of options and warrants -- 493,481 478,058
------------ ------------ ------------
Diluted 5,257,241 5,522,784 5,502,448
============ ============ ============
Weighted average number of shares outstanding after
cumulative effect of change in accounting principle for
revenue recognition
Basic 5,257,241 5,029,303 5,024,390
============ ============ ============
Diluted 5,257,241 5,522,784 5,502,448
============ ============ ============
Pro forma amounts assuming the change in accounting
principle for revenue recognition is applied retroactively:
Net (loss) income $ (562,471) $ 224,679 $ 1,128,478
Net (loss) income per share:
Basic $ (.11) $ .04 $ .22
Diluted $ (.11) $ .04 $ .21
See accompanying notes to consolidated financial statements.
32
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002
Common Stock
par value $.001 Additional Total
--------------------------- Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2001 5,022,231 $ 5,022 $ 6,732,704 $ 6,380,662 $ 13,118,388
Exercise of options 6,250 6 7,194 -- 7,200
Stock compensation for services -- -- 4,700 -- 4,700
Net income -- -- -- 910,264 910,264
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2002 5,028,481 5,028 6,744,598 7,290,926 14,040,552
Exercise of options 6,250 6 7,194 -- 7,200
Net income -- -- -- 1,773,082 1,773,082
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2003 5,034,731 5,034 6,751,792 9,064,008 15,820,834
Stock issued in payment of earnout 100,000 100 217,900 -- 218,000
Exercise of options 2,625 2 6,560 -- 6,562
Exercise of warrants and related
tax benefit 152,500 153 247,566 -- 247,719
Sale of stock 652,000 652 1,629,348 -- 1,630,000
Net loss -- -- -- (2,745,285) (2,745,285)
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2004 5,941,856 $ 5,941 $ 8,853,166 $ 6,318,723 $ 15,177,830
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
33
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
2004 2003 2002
------------ ------------ ------------
Cash flows from operating activities:
Net (loss) income $ (2,745,285) $ 1,773,082 $ 910,264
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 797,725 642,195 1,747,682
Provision for bad debt expense (credit) 215,569 5,412 (25,000)
Equity in loss of affiliate -- 11,500 18,000
Minority interest of consolidated subsidiary 101,724 -- --
Other 3,635 -- (84,266)
Cumulative effect of change in accounting principle for revenue recognition 2,182,814 -- --
Deferred income taxes 46,302 788,232 579,473
Changes in operating assets and liabilities, net of effects of acquisitions:
(Increase) decrease in accounts receivable (764,925) 1,011,053 1,284,754
Increase in unbilled contracts in progress (290,425) (1,967,154) (2,340,159)
Decrease in deferred contract costs 1,749,943 -- --
Decrease in prepaid expenses and other assets 302,265 146,180 17,724
(Increase) decrease in prepaid taxes (449,582) 141,831 17,039
Increase (decrease) in accounts payable 1,075,046 (831,252) 2,906,957
Increase (decrease) in accrued job costs 1,286,287 195,098 (1,397,285)
Increase (decrease) in other accrued liabilities 137,491 241,743 (184,150)
Increase in accrued taxes payable 23,596 130,299 --
(Decrease) increase in deferred revenue (1,056,713) (865,470) 207,114
Increase (decrease) in accrued compensation 30,660 10,544 (73,201)
------------ ------------ ------------
Net cash provided by operating activities 2,646,127 1,433,293 3,584,946
------------ ------------ ------------
Cash flows from investing activities:
Purchases of fixed assets (1,363,825) (607,260) (346,930)
Purchase of intangible asset -- -- (200,000)
Acquisitions, net of cash acquired (700,000) (700,000) --
Increase in notes receivable from officers (29,276) (120,000) (888,000)
Increase in cash for consolidation of variable interest entity 35,691 -- --
Advances (to) from affiliate -- (722,989) 266,897
------------ ------------ ------------
Net cash used in investing activities (2,057,410) (2,150,249) (1,168,033)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from sale of stock 1,630,000 -- --
Proceeds from exercise of stock options and warrants 98,062 7,200 7,200
Financing costs (24,007) (96,309) (226,381)
Borrowings (payments) of debt, net (465,500) 183,334 (1,093,334)
------------ ------------ ------------
Net cash provided by (used in) financing activities 1,238,555 94,225 (1,312,515)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,827,272 (622,731) 1,104,398
Cash and cash equivalents at beginning of year 1,336,886 1,959,617 855,219
------------ ------------ ------------
Cash and cash equivalents at end of year $ 3,164,158 $ 1,336,886 $ 1,959,617
============ ============ ============
Supplemental disclosures of cash flow information:
Interest paid during the period $ 274,273 $ 278,664 $ 485,735
============ ============ ============
Income taxes paid during the period $ 340,865 $ 303,695 $ 82,793
============ ============ ============
Noncash transactions relating to investing and financing activities consist of:
Accrued balance of earnout $ -- $ 593,750 $ --
============ ============ ============
Earnout applied to notes receivable from officer $ -- $ -- $ 500,000
============ ============ ============
Stock issued in payment of earnout $ 218,000 $ -- $ --
============ ============ ============
See accompanying notes to consolidated financial statements.
34
COACTIVE MARKETING GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003, 2002
(1) Organization and Nature of Business
-----------------------------------
CoActive Marketing Group, Inc. ("the Company") is a full service
marketing, sales promotion and interactive media services and e-commerce
provider organization which designs, develops and implements turnkey
customized national, regional and local consumer and trade promotion
programs primarily for consumer product client companies. The Company's
operations consist solely of this single segment. The Company's programs
are designed to enhance the value of its clients' budgeted expenditures
and achieve, in an objectively measurable way, its client's specific
marketing and promotional objectives.
Acquisition of TrikMedia LLC
On October 29, 2003, a newly formed wholly-owned subsidiary of the
Company, TrikMedia LLC, a Delaware limited liability company,
("TrikMedia") acquired certain assets and assumed certain liabilities of
TrikMedia, Inc., a full service media agency engaged in providing
digital marketing and advertising services, interactive software
development and content creation. The purchase price of $885,000
consists of a cash payment of $700,000 and the assumption of $185,000 of
deferred revenue. In addition, the Company acquired fixed assets with a
fair value of $36,000 and assumed additional liabilities in the amount
of $17,000. The Company has accounted for the acquisition as a purchase
whereby the excess of the purchase price over the fair value of net
assets acquired, including costs of the acquisition, of approximately
$866,000 has been classified as goodwill. Pro forma information
regarding the acquisition has not been provided as the results of
operations of TrikMedia are not material.
Acquisition of U.S. Concepts, Inc.
On December 29, 1998, a wholly-owned subsidiary of the Company, U.S.
Concepts, Inc., a Delaware corporation, ("U.S. Concepts") purchased
substantially all of the assets and business from and assumed certain of
the liabilities of Murphy Liquidating Corporation formerly known as U.S.
Concepts, Inc., a New York corporation in a transaction accounted for as
a purchase for $1,660,000. The purchase price was increased by an
additional $2,293,750 (which included 100,000 shares of the Company's
common stock with an aggregate value of $218,000 at the time of
issuance), as a result of U.S. Concepts achieving specified pre-tax
earnings targets during the four year period ended December 31, 2002.
The acquisition of U.S. Concepts has been accounted for as a purchase
whereby the excess of the purchase price, including costs of the
acquisition, over the fair value of assets acquired less liabilities
assumed of $3,881,000 has been classified as goodwill and through March
31, 2002 was being amortized on a straight-line basis over a twenty-five
year period. At March 31, 2003, as specified pre-tax earnings for the
respective periods through December 31, 2002 were achieved, the Company
paid additional installments of purchase price totaling $1,700,000.
During Fiscal 2004, the Company issued 100,000 shares of common stock at
a fair value of $218,000 to satisfy a portion of the earnout accrued in
prior years. For Fiscal 2003 and Fiscal 2002, an additional purchase
price of $1,293,750 and $500,000, respectively, was reflected as
additional goodwill.
35
Summary of Significant Accounting Policies
(a) Principles of Consolidation
---------------------------
The consolidated financial statements include the financial
statements of the Company and its wholly-owned subsidiaries. In
addition, the consolidated financial statements, for Fiscal 2004,
include the accounts of a variable interest entity, MarketVision,
an affiliate that provides ethnically oriented marketing and
promotional services. The Company has determined that it is the
primary beneficiary of this entity and has included the accounts
of this entity, pursuant to the requirements of Financial
Accounting Standards Board's ("FASB") Interpretation ("FIN") No.
46 (revised 2003), "Consolidation of Variable Interest Entities -
an Interpretation of ARB No. 51". All significant intercompany
balances and transactions have been eliminated in consolidation.
The third party owned portion of MarketVision is accounted for as
minority interest in the Company's consolidated financial
statements.
(b) Adoption of EITF 00-21
----------------------
The Company adopted EITF 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21") in the
fourth quarter of Fiscal 2004. EITF 00-21, which became effective
for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003, provides guidance on how to determine when
an arrangement that involves multiple revenue-generating
activities or deliverables should be divided into separate units
of accounting for revenue recognition purposes, and if this
division is required, how the arrangement consideration should be
allocated among the separate units of accounting. Prior to the
adoption of EITF 00-21, the Company recognized revenue on its
broadcast media and special event contracts on the
percentage-of-completion method over the life of the contract as
identifiable phases of services, such as concept creation and
development, media purchase, production, media airing and event
execution occurred. Under that method, the Company generally
recognized a portion of the revenues attributable to those
contracts upon signing by the Company's clients. Pursuant to EITF
00-21, the Company now recognizes all of the contract's revenue
as the media is aired and the events take place, without regard
to the timing of the contracts' signing or when cash is received
under these contracts. The adoption of EITF 00-21 (effective
April 1, 2003) resulted in a non-cash charge reported as a
cumulative effect of a change in accounting principle of
$2,183,000. The pro forma amounts presented in the consolidated
statements of operations were calculated assuming the change in
accounting principal was made retroactively to all years
presented. For Fiscal 2004, the adoption of EITF 00-21 resulted
in an increase in sales of $2,479,000 and an increase in direct
expenses of $1,639,000. After giving effect to the implementation
of EITF 00-21 and before the cumulative effect of the change in
method of accounting for revenue recognition, the Company had a
net loss of $(562,471) or $(.11) per common share for Fiscal
2004.
(c) Adoption of FIN 46R
-------------------
In January 2003, the FASB issued Interpretation No. 46 ("FIN
46"),"Consolidation of Variable Interest Entities" with the
objective of improving financial reporting by companies involved
with variable interest entities. A variable interest entity is a
corporation, partnership, trust, or any other legal structure
used for business purposes that either (a) does not have equity
36
investors with voting rights, or (b) has equity investors that do
not provide sufficient financial resources for the entity to
support its activities. Historically, entities generally were not
consolidated unless the entity was controlled through voting
interests. FIN 46 changes that by requiring a variable interest
entity to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the
entity's residual returns or both. A company that consolidates a
variable interest entity is called the "primary beneficiary" of
that entity. The provisions regarding implementation dates were
revised by FIN 46 (Revised) ("FIN 46R"). The consolidation
requirements of FIN 46R apply to variable interest entities in
the first year or interim period ending after March 15, 2004.
Effective in the fourth quarter of Fiscal 2004, the Company
adopted FIN 46R as it relates to the activities of its
MarketVision affiliate. Accordingly, the operations and financial
statements of MarketVision for the year ended March 31, 2004 are
included in the consolidated financial statements of the Company,
whereas for prior fiscal years, under the equity method of
accounting, the Company reported its investment in MarketVision
as adjusted for its share of net income or loss each fiscal year
in the Company's financial statements. The fiscal 2003 and 2002
financial statements were not restated as the effects were
immaterial. The effect of the Company's adoption of FIN 46R did
not impact the Company's net loss.
(d) Adoption of EITF 01-14
----------------------
Effective in the fourth quarter of Fiscal 2002, the Company
adopted EITF 01-14, "Income Statement Characterization of
Reimbursements Received for "Out-of-Pocket" Expenses Incurred"
("EITF 01-14"). EITF 01-14, which became effective in the fourth
quarter of Fiscal 2002 (and requires retroactive application),
requires reimbursements received for "out-of-pocket" expenses to
be characterized as revenues. The resulting costs are now
recorded as direct expenses resulting in no change in gross
profit but a reduction in gross profit margins. The impact of the
Company's adoption of EITF 01-14 was to increase revenues and
direct expenses by approximately $18,089,000, $11,670,000 and
$8,209,000 for the years ended March 31, 2004, 2003 and 2002,
respectively.
(e) Revenue Recognition
-------------------
The Company's revenues are generated from projects subject to
contracts requiring the Company to provide its services within
specified time periods generally ranging up to twelve months. As
a result, on any given date, the Company has projects in process
at various stages of completion. Depending on the nature of the
contract, revenue is recognized as follows: (i) on time and
material service contracts, revenue is recognized as services are
rendered and the costs are incurred; (ii) on fixed price retainer
contracts, revenue is recognized on a straight-line basis over
the term of the contract; (iii) on fixed price multiple services
contracts, revenue is recognized over the term of the contract
for the fair value of segments of the services rendered which
qualify as separate activities or delivered units of service, to
the extent multi-service arrangements are deemed inseparable,
revenue on these contracts is recognized as the contracts are
completed. Costs associated with the fulfillment of projects are
accrued and recognized proportionately to the related revenue in
order to ensure a matching of revenue and expenses in the proper
period. Provisions for anticipated losses on uncompleted projects
are made in the period in which such losses are determined. The
Company's revenue recognition policy reflects the adoption of
EITF 00-21 effective April 1, 2003.
37
(f) Cash Equivalents
----------------
Investments with original maturities of three months or less at
the time of purchase are considered cash equivalents. Due to the
short-term nature of the cash equivalents, the carrying value
approximates fair value.
(g) Accounts Receivable and Credit Policies
---------------------------------------
The carrying amount of accounts receivable is reduced by a
valuation allowance that reflects management's best estimate of
the amounts that will not be collected. In addition to reviewing
delinquent accounts receivable, management considers many factors
in estimating its general allowance, including historical data,
experience, customer types, credit worthiness, and economic
trends. From time to time, management may adjust its assumptions
for anticipated changes in any of those or other factors expected
to affect collectability.
(h) Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is
computed on the straight-line method over the estimated useful
lives of the assets, which are three to ten years. Leasehold
improvements are amortized over the shorter of the lease term or
the estimated useful life of the asset.
(i) Deferred Contract Costs
-----------------------
Deferred contract costs represent contract costs and expenses
incurred prior to the Company's related revenue recognition on
such contracts.
(j) Long-Lived Assets
-----------------
The Company's long-lived assets include goodwill, intangible
assets and property and equipment. The Company periodically
reviews its property and equipment whenever events or changes in
circumstances indicate that the carrying amount of the assets may
not be recoverable through the estimated undiscounted future cash
flows from the use of these assets, or if their depreciation
periods should be accelerated. When any such impairment exists,
the related assets will be written down to fair value. No
impairments were identified as of March 31, 2004.
(k) Goodwill and Other Intangible Asset
-----------------------------------
Goodwill consists of the cost in excess of the fair value of the
acquired net assets of the Company's subsidiary companies. The
Company's other intangible asset consists of an Internet domain
name and any and all related intellectual property rights
associated therewith which are used in the Company's operations.
At March 31, 2004, the Company had approximately $19,896,000 of
goodwill and $200,000 as an intangible asset. Through March 31,
2002, goodwill had been amortized, on a straight-line basis, over
a period of twenty five years. Accumulated amortization at March
31, 2002 approximated $4,380,000 and amortization expense for the
year ended March 31, 2002 approximated $1,042,000. During Fiscal
2004, the Company increased goodwill in the amount of $866,000
38
and $244,000 to reflect the goodwill relating to its acquisition
of TrikMedia and its consolidation of MarketVision, respectively.
During Fiscal 2003, the Company increased goodwill in the amount
of $1,294,000 to reflect an earnout provision relating to its
prior acquisition of U.S. Concepts.
In accordance with Statements of Financial Accounting Standards
No. 141 ("SFAS 141"), "Business Combinations," and No 142 ("SFAS
142"), "Goodwill and Other Intangible Assets", goodwill and
intangible assets deemed to have indefinite lives are no longer
amortized but are subject to annual impairment tests. Goodwill
impairment tests require the comparison of the fair value and
carrying value of reporting units. Measuring fair value of a
reporting unit is generally based on valuation techniques using
multiples of earnings. The Company assesses the potential
impairment of goodwill annually and on an interim basis whenever
events or changes in circumstances indicate that the carrying
value may not be recoverable. Upon completion of such annual
review, if an impairment is found to have occurred, a
corresponding charge will be recorded. Based on the guidance of
SFAS 142, the Company has determined that it has four operating
units representing each of its subsidiaries. The Company has
completed its impairment review for each reporting unit as of
March 31, 2004 and no impairment in the recorded goodwill and
intangible asset was identified. The Company has noted no
subsequent indicators that would require testing of goodwill for
impairment. 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 SFAS 142 in the first quarter of Fiscal
2003, the Company ceased amortization of goodwill as of March 31,
2002. The following table presents the effect of adoption of SFAS
142 on the reported net (loss) income of the Company as follows:
Years Ended March 31,
----------------------------------------------
2004 2003 2002
------------- ------------- -------------
Net (loss) income $ (2,745,285) $ 1,773,082 $ 910,264
Add back of goodwill amortization,
net of tax provision -- -- 619,799
------------- ------------- -------------
Adjusted net (loss) income $ (2,745,285) $ 1,773,082 $ 1,530,063
============= ============= =============
Diluted net (loss) income per share:
Net (loss) income $ (.52) $ .32 $ .17
Goodwill amortization, net of
tax provision -- -- .11
------------- ------------- -------------
Adjusted diluted net (loss) income
per share $ (.52) $ .32 $ .28
============= ============= =============
(l) Deferred Financing Costs
------------------------
Deferred financing costs consist of bank fees and legal costs
incurred with respect to the Company's bank credit agreement, the
amounts of which are being amortized over the remaining term of
the credit agreement which expires in October 2006.
39
(m) Net (Loss) Income Per Common Share
----------------------------------
The computation of basic earnings per common share is based upon
the weighted average number of common shares outstanding during
the year. The computation of diluted earnings per common and
common equivalent share is based upon the weighted average number
of common shares outstanding during the year, plus the assumed
exercise of stock options and warrants, less the number of
treasury shares assumed to be purchased from the proceeds of such
exercises using the average market price of the Company's common
stock. For the fiscal years ended March 31, 2004, 2003 and 2002,
2,620,093, 1,529,211 and 1,728,705, stock options and warrants,
at exercise prices ranging from $1.12 to $10.00 for Fiscal 2004
and $2.31 to $10.00 for Fiscal 2003 and 2002, have been excluded
from the calculation of diluted earnings as their inclusion would
be antidilutive. These options and warrants expire through 2007.
(n) Income Taxes
------------
The provision for income taxes includes federal, state, and local
income taxes that are currently payable. Deferred income taxes
are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(o) Accounting for Stock-Based Compensation
---------------------------------------
The Company applies the intrinsic-value based method of
accounting prescribed by Accounting Principles Board (APB) No.
25, "Accounting for Stock Issued to Employees", and related
interpretations, in accounting for its stock-based compensation
plans and accordingly, no compensation cost has been recognized
for its stock options in the consolidated financial statements.
The Company has elected not to implement the fair value based
accounting method for employee stock options under SFAS No. 123,
"Accounting for Stock-Based Compensation", ("SFAS 123") but has
elected to disclose the pro forma net income per share for
employee stock option grants made beginning in fiscal 1997 as if
such method had been used to account for stock-based compensation
costs described in SFAS 148 "Accounting for Stock Based
Compensation-Transition and Disclosure an amendment of SFAS
Statement No. 123".
The following table illustrates the effects on net (loss) income
and (loss) earnings per share as if the Company had applied the
fair value recognition provisions of SFAS No. 123 to its stock
based incentive plans:
40
Fiscal 2004 Fiscal 2003 Fiscal 2002
-------------- -------------- --------------
Net (loss) income as reported $ (2,745,285) $ 1,773,082 $ 910,264
Less compensation expense
determined under the fair value
method 433,725 175,005 130,959
-------------- -------------- --------------
Pro forma net (loss) income $ (3,179,010) $ 1,598,077 $ 779,305
============== ============== ==============
Net (loss) income per share -Basic:
As reported $ (.52) $ .35 $ .18
Pro forma $ (.60) $ .32 $ .16
Net (loss) income per share -Diluted:
As reported $ (.52) $ .32 $ .17
Pro forma $ (.60) $ .29 $ .14
The per share weighted-average fair value of stock options and
warrants granted on their respective date of grant using the
modified Black-Scholes option-pricing model and their related
weighted-average assumptions are as follows:
Fiscal 2004 Fiscal 2003 Fiscal 2002
----------- ----------- -----------
Risk-free interest rate 1.67% 2.25% 3.00%
Expected life - years 5.54 5.00 5.17
Expected volatility 50.0% 50.0% 25.0%
Expected dividend yield 0% 0% 0%
Fair value $1.34 $1.14 $ .67
(p) Fair Value of Financial Instruments
-----------------------------------
The carrying value of all financial instruments classified as a
current asset or liability, and long term debt, is deemed to
approximate fair value due to the short maturity of these
instruments and interest rates that approximate current market
rates.
(q) Use of Estimates
----------------
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of the contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Management bases its
estimates on certain assumptions, which they believe are
reasonable in the circumstances, and does not believe that any
change in those assumptions would have a significant effect on
the financial position or results of operations of the Company.
Actual results could differ from those estimates.
41
(r) Recent Accounting Standards
---------------------------
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both
Liabilities and Equity". This statement establishes standards for
how a company classifies and measures certain financial
instruments with characteristics of both liabilities and equity.
This statement is effective for financial instruments entered
into or modified after May 31, 2003 and otherwise is effective at
the beginning of the first interim period beginning after
December 15, 2004. The statement is to be implemented by
reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance
date of the statement and still existing at the beginning of the
period of adoption. The effect of this pronouncement did not have
an impact on the Company's financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities"
("SFAS 149") which amends and clarifies financial accounting and
reporting derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. In particular, SFAS No. 149
clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative discussed in
SFAS No.133, clarifies when a derivative contains a financing
component, amends the definition of an underlying (as initially
defined in SFAS No 133) to conform it to language used in FIN No.
45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others", and amends other existing pronouncements. The effect of
this pronouncement did not have an impact on the financial
statements of the Company.
(2) Investment in MarketVision
--------------------------
Acquisition of 49% of MarketVision
On February 27, 2001, the Company acquired 49% of the shares of capital
stock of MarketVision which is a minority owned, predominately
Hispanic, ethnically oriented promotion agency headquartered in San
Antonio, Texas. The MarketVision acquisition had been accounted for as
an equity investment on the Company's consolidated balance sheet
through the Company's fiscal year ended March 31, 2003. Pursuant to the
equity method of accounting, the Company's balance sheet carrying value
of the investment was periodically adjusted to reflect the Company's
49% interest in the operations of MarketVision. Effective in the fourth
quarter of fiscal year ended March 31, 2004, the Company included in
its consolidated financial statements the financial statements of
MarketVision, pursuant to the adoption of FIN 46R.
The Company has extended a line of credit to MarketVision in the amount
of $200,000. At March 31, 2004, there were no advances made to
MarketVision under this line of credit.
On March 22, 2002, MarketVision entered into an Administration and
Marketing Services Agreement with the Company pursuant to which the
Company provides MarketVision with specific administrative, accounting,
financial, marketing and project support services for a monthly fee of
$35,000. Subsequently, from January 1 through September 30, 2003, the
monthly fee was increased to $45,000 and as of October 1, 2003, the
42
monthly fee was increased to $50,000. In accordance with the agreement,
the Company dedicates and allocates certain of its resources and the
specific time of certain of its personnel to MarketVision. During
Fiscal 2002, the Company absorbed the cost of providing marketing
support services to MarketVision to further integrate the extended
service offerings of both the Company and MarketVision and enhance
cross-selling opportunities. For Fiscal 2004, the Company recorded fees
in the amount of $570,000 which were eliminated in the consolidation of
MarketVision, whereas in Fiscal 2003 fees of $450,000 were recorded as
a reduction of operating expenses.
(3) Notes Receivable From Officer
-----------------------------
Notes receivable from officer at March 31, 2004 and 2003 consist of an
Amended and Restated Promissory Note (the "Amended Note") from an
officer of the Company dated May 24, 2001 in the principal amount of
$550,000 which (i) amended and restated two notes evidencing prior
loans to such officer in the aggregate amount of $225,000 (which at
March 31, 2001 had unrecorded accrued interest of $119,299) and (ii)
reflected an additional loan in the amount of $325,000. The Amended
Note provides for (i) monthly interest payments at a floating rate
equal to the highest rate at which the Company pays interest on its
bank borrowings, (ii) monthly payment of one-half of the interest that
accrued over the preceding month, (iii) payment of accrued interest and
principal from one-half of the after-tax amount, if any, of bonuses
paid to the officer by the Company, and (iii) payment of the remaining
balance of principal and accrued interest on May 24, 2006. To date, the
officer has not made any of the required monthly interest payments
under the Amended Note. The Amended Note is secured by (i) a first lien
and security interest in 282,127 shares of the Company's common stock
owned by the officer, (ii) a second mortgage on the officer's home and
(iii) collateral assignments of $550,000 of life insurance policies. At
March 31, 2004 and 2003, the note due from officer with respect to the
Amended Note included accrued interest in the amount of $212,000 and
$183,000, respectively, of which $46,500 and $32,000 were past due and
owing on such dates.
(4) Due From Affiliate
------------------
At March 31, 2004, the Company did not have any amounts due from
affiliate, whereas at March 31, 2003, the due from affiliate of
approximately $723,000 consisted of obligations of MarketVision to the
Company in respect to (i) borrowings on the credit line provided by the
Company, (ii) services performed and expenses incurred by the Company
on behalf of MarketVision, and (iii) amounts due under the Company's
Service Agreement with MarketVision.
(5) Property and Equipment
----------------------
Property and equipment consist of the following:
March 31, 2004 March 31, 2003
-------------- --------------
Furniture, fixtures and computer equipment $ 3,996,984 $ 3,306,552
Leasehold improvements 1,519,699 864,931
Capitalized leases 21,748 21,748
-------------- --------------
5,538,431 4,193,231
Less: accumulated depreciation and amortization 2,939,502 2,412,005
-------------- --------------
$ 2,598,929 $ 1,781,226
============== ==============
Depreciation and amortization expense on property and equipment for the
years ended March 31, 2004, 2003 and 2002 amounted to $656,270,
$547,210 and $569,795, respectively.
43
(6) Leases
------
The Company has several non-cancelable operating leases, primarily for
property, that expire through 2015. Rent expense for the years ended
March 31, 2004, 2003 and 2002 amounted to $965,310, $838,162 and
$806,347, respectively. One of the Company's facilities is leased from
the former owner of Optimum, who is also a director of the Company,
with an annual rent of approximately $160,000 which expires in December
2010. Future non-cancelable minimum lease payments under all of the
leases as of March 31, 2004 are as follows:
Year ending March 31,
2005 $ 1,526,000
2006 1,605,000
2007 1,580,000
2008 1,632,000
2009 1,309,000
Thereafter 7,940,000
---------------
$ 15,592,000
===============
(7) Debt
----
Notes Payable, Bank
-------------------
At March 31, 2004, the Company's bank borrowings of $4,984,500
(exclusive of a letter of credit outstanding in the amount of $500,000)
reflect the terms and conditions of a credit agreement entered into
with a bank on October 31, 2002 in replacement of the Company's prior
bank loan agreement. Pursuant to the credit agreement, the Company
obtained a $3,000,000 four year amortizing term loan expiring on
October 30, 2006 and a three year $3,000,000 revolving loan credit
facility expiring October 30, 2005. On October 31, 2002, the Company
borrowed $3,000,000 under the term loan and $1,200,000 under the
revolving loan credit facility and used approximately $3,700,000 of the
proceeds 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 term loan and revolving credit
facility are evidenced by promissory notes and are secured by all the
Company's assets. Principal payments on the term loan, to be made in
monthly installments of $62,500, commenced on December 1, 2002. 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. In addition, the Company, on a
monthly basis, pays interest, 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 interest rate pursuant to the Company's credit
agreement at March 31, 2004 and 2003 was 4.25% and 4.5% on the
revolving loan, respectively, and 4.5% and 4.75% on the term loan,
respectively. On July 18, 2003, the credit agreement was amended
pursuant to which the revolving loan credit facility was increased by
$500,000 to $3,500,000. Further, 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
44
minimum quarterly earnings, (v) compliance with a defined senior debt
leverage ratio and debt service ratio, and (vi) maintenance of 15% of
beneficially owned shares of the Company held by the Company's
management. At March 31, 2004, the Company was not in compliance with
the financial covenants in the credit agreement; namely, (i) the
maximum permitted ratio of consolidated senior funded debt to earnings
before interest, taxes, depreciation and amortization, (ii) the minimum
permitted debt service coverage ratio and (iii) the requirement of no
net loss for a fiscal quarter. On July 22, 2004 the bank waived the
Company's defaults arising as a result of such noncompliance and
entered into an Amended and Restated Credit Agreement with the Company
which modified the financial covenants applicable to the Company. In
addition, pursuant to the Amended and Restated Credit Agreement (i) the
revolving loan facility was reduced from $3,500,000 to $1,100,000, and
$2,400,000 of outstanding revolving loans were converted to a term
loan, requiring principal monthly repayments in the amount of $100,000
each commencing September 1, 2004, (ii) interest on term loans
(including the $2,400,000 of revolving loans converted to a term loan)
was increased to the bank's prime rate plus 1.0%, and interest on
revolving loans was increased to the bank's prime rate plus .50%, (iii)
the Company's cash deposits maintained with the bank cannot be less
than $3,000,000 at any time, and (iv) the Company paid the bank a
$25,000 amendment fee. The aforementioned amended loans are
retroactively reflected in the Company's balance sheet at March 31
2004.
Total debt as of March 31, 2004 and 2003 is summarized as follows:
2004 2003
---------- ----------
Term loan note payable in monthly installments
of principal and interest commencing December 1,
2002 through October 30, 2006 $4,400,000 $2,750,000
Revolving loan note payable in monthly
installments of interest only with a final payment
of principal and interest due October 30, 2005 584,500 2,500,000
9% subordinated note payable to OG Holding
Corporation with interest payable in quarterly
installments and principal payments in annual
installments of $625,000 commencing March 31,
2000 with the final payment extended to July 31, 2004 425,000 625,000
---------- ----------
Total debt 5,409,500 5,875,000
Less current portion 1,875,000 1,375,000
---------- ----------
Total long-term debt $3,534,500 $4,500,000
========== ==========
Maturities of notes payable are as follows:
Notes Payable Subordinated
Bank Note
------------- -------------
2005 $ 1,450,000 $ 425,000
2006 2,534,500 --
2007 1,000,000 --
------------- -------------
$ 4,984,500 $ 425,000
============= =============
On April 13, 2004, the due date of the Company's subordinated
indebtedness was extended to July 31, 2004.
45
(8) Stockholders' Equity
--------------------
Common Stock Reserved for Issuance
----------------------------------
(i) Stock Options
-------------
Under the Company's 1992 Stock Option Plan (the "1992 Plan"),
employees of the Company and its affiliates and members of the
Board of Directors were granted options to purchase shares of
common stock of the Company. Options granted under the 1992 Plan
were either intended to qualify as incentive stock options under
the Internal Revenue Code of 1986, or non-qualified options.
Grants under the 1992 Plan were awarded by a committee of the
Board of Directors, and are exercisable over periods not exceeding
ten years from date of grant. The option price for incentive stock
options granted under the 1992 Plan must be at least 100% of the
fair market value of the shares on the date of grant, while the
price for non-qualified options granted to employees and employee
directors is determined by the committee of the Board of
Directors. The 1992 Plan was amended on May 11, 1999 to increase
the maximum number of shares of common stock for which options may
be granted to 1,500,000 shares.
On May 11, 1999, the Company established the 1997 Executive
Officer Stock Option Plan (the "1997 Plan"), pursuant to which (i)
a maximum of 375,000 non-qualified stock options may be granted to
purchase shares of common stock, (ii) three officers of the
Company were each granted 125,000 non-qualified stock options to
purchase shares of common stock in exchange for the surrender by
each of their incentive stock options to purchase 125,000 shares
of common stock issued on May 2, 1997 pursuant to the Company's
1992 Stock Option Plan and (iii) the exercise price and other
terms and conditions of the options granted are identical to those
of the options surrendered.
On July 1, 2002, the Company established the 2002 Long-Term
Incentive Plan (the "2002 Plan") providing for the grant of
options or other awards to employees, officers or directors of,
consultants to, the Company or its subsidiaries to acquire up to
an aggregate of 750,000 shares of Common Stock. Options granted
under the 2002 Plan may either be intended to qualify as incentive
stock options under the Internal Revenue Code of 1986, or may be
non-qualified options. Grants under the 2002 Plan are awarded by a
committee of the Board of Directors, and are exercisable over
periods not exceeding ten years from date of grant. The option
price for incentive stock options granted under the 2002 Plan must
be at least 100% of the fair market value of the shares on the
date of grant, while the price for non-qualified options granted
is determined by the Committee of the Board of Directors.
Changes in options outstanding and options exercisable and shares
reserved for issuance at March 31, 2004 under all plans are as
follows:
46
Weighted
average price
per share Outstanding Exercisable (D)
--------------- --------------- ---------------
Balance at March 31, 2001 $ 2.26 1,532,998 1,465,857
Became exercisable $ 2.72 -- 30,688
Granted (A) $ 2.36 244,113 103,488
Exercised $ 1.15 (6,250) (6,250)
Canceled $ 4.22 (31,360) (29,004)
--------------- --------------- ---------------
Balance at March 31, 2002 $ 2.84 1,739,501 1,564,779
Became exercisable $ 2.32 -- 74,083
Granted (B) $ 2.50 495,000 94,333
Exercised $ 1.15 (6,250) (6,250)
Canceled $ 5.29 (280,916) (281,296)
--------------- --------------- ---------------
Balance at March 31, 2003 $ 2.40 1,947,335 1,445,649
Became exercisable $ 2.44 -- 193,146
Granted (C) $ 2.93 255,000 171,252
Exercised $ 2.50 (2,625) (2,625)
Canceled $ 2.72 (69,481) (35,775)
--------------- --------------- ---------------
Balance at March 31, 2004 $ 2.46 2,130,229 1,771,647
=============== =============== ===============
(A) Represents options granted to purchase 187,238 shares
at an exercise price of $2.50, 30,000 shares at an
exercise price of $2.00, 20,625 shares at an exercise
price of $1.55 and 6,250 shares at an exercise price of
$2.50, respectively. Of the options granted, 103,488
were immediately exercisable and the balance in three
annual installments.
(B) Represents options granted to management of the
Company's subsidiaries to purchase 495,000 shares at an
exercise price of $2.50. Of the options granted, 94,333
became exercisable prior to March 31, 2003 and the
balance are exercisable as follows:
43,333 on January 1, 2004
43,334 on January 1, 2005
42,500 on September 1, 2003, 2004, 2005 and 2006
51,000 on December 31, 2003 and 2004
42,000 on January 1, 2005
(C) Represents options granted to purchase 227,500 shares
at an exercise price of $3.00 and 27,500 shares at an
exercise price of $2.33. Of the options granted,
171,252 became exercisable prior to March 31, 2004 and
of the balances, 13,748 are exercisable on April 30,
2004 and 70,000 are exercisable on March 31, 2005.
(D) Options exercisable at March 31, 2004, 2003 and 2002
had a weighted average exercise price of $2.43, $2.38
and $2.89, respectively.
The options outstanding and exercisable as of March 31, 2004
are summarized in ranges as follows:
47
Weighted
Number of average Weighted Weighted
options exercise average Exercisable average exercise
Range of exercise price outstanding price remaining life shares price of shares
----------------------- ----------- ----- -------------- ------ ---------------
$1.12-2.50 1,394,988 $ 1.82 2.60 1,121,153 $ 1.66
$2.80-4.00 721,491 $ 3.54 3.42 636,744 $ 3.62
more than $4.00 13,750 $10.00 4.08 13,750 $10.00
--------- ------ ---- --------- ------
2,130,229 $ 2.46 2.89 1,771,647 $ 2.43
========= ====== ==== ========= ======
(ii) Warrants
--------
At March 31, 2004, outstanding warrants to purchase shares of the
Company's common stock in the amount of 489,864 were exercisable
at a weighted average price per share of $2.23. At March 31, 2003
and 2002, respectively, outstanding warrants to purchase shares of
the Company's common stock in the amount of 642,364 were all
exercisable at a weighted average price per share of $1.85. At
March 31, 2004, these warrants are exercisable over the next three
years.
(9) Other Income
------------
Other income at March 31, 2003 was primarily the result of the
Company's sale of certain of its Internet domain names for $250,000.
(10) Income Taxes
------------
The Company and its wholly-owned subsidiaries file consolidated Federal
income tax returns.
The components of income tax provision for the years ended March 31,
2004, 2003, and 2002 are as follows:
March 31, 2004* March 31, 2003 March 31, 2002
---------------------------- --------------------------- ---------------------------
Current:
State and local $ 25,440 $ 232,338 $ 129,345
Federal (126,516) (101,076) 169,106 401,444 -- 129,345
------------ ------------ ------------
Deferred:
Federal and State (1,387,142) 788,232 579,473
------------ ------------ ------------
$ (1,488,218) $ 1,189,676 $ 708,818
============ ============ ============
*Income tax before cumulative
effect of the change in accounting
principle for revenue recognition $ (33,008)
Cumulative effect of change in
accounting principle for
revenue recognition (1,455,210)
------------
$ (1,488,218)
============
The differences between the provision for income taxes computed at the
federal statutory rate and the reported amount of tax expense
attributable to income before cumulative effect of a change in
accounting principle, (benefit) provision for income tax, equity in
loss of affiliate and minority interest in net income of consolidated
subsidiary for the year ended March 31, 2004, 2003 and 2002 are as
follows:
48
Rate
--------------
2004 2003 2002
-------------- -------------- --------------
Statutory Federal income tax (34.0)% 34.0% 34.0%
State and local taxes, net of Federal benefit 2.3 5.2 5.5
Under accrual from prior year 15.9 -- --
Permanent differences 4.3 -- --
Other 4.8 .8 3.8
-------------- -------------- --------------
Effective tax rate (6.7)% 40.0% 43.3%
============== ============== ==============
The tax effects of temporary differences between the financial
reporting and tax bases of assets and liabilities that are included in
net deferred tax liability are as follows:
March 31, March 31, March 31,
2004 2003 2002
------------ ------------ ------------
Deferred tax assets (liabilities):
Goodwill, principally due to differences in amortization $ (1,849,236) $ (1,070,085) $ (474,075)
Net operating loss carryforwards 2,046,163 55,740 183,735
Unbilled revenue (147,943) (548,097) (395,330)
Other (112,000) (65,701) (56,815)
------------ ------------ ------------
Net deferred tax liability $ (63,016) $ (1,628,143) $ (742,485)
============ ============ ============
At March 31, 2004, the Company has net operating loss carry-forwards of
approximately $4,884,000 that expire through 2024. For March 31, 2003
and 2002, the Company and its wholly-owned subsidiaries filed a
consolidated federal income tax return. For March 31, 2004, the
Company's wholly-owned subsidiaries are single-member limited liability
companies that are disregarded for federal income tax return purposes.
As such, the Company is no longer required to file a federal
consolidated income tax return.
(11) Significant Customers
---------------------
During the years ended March 31, 2004, 2003 and 2002, the Company had
one client which accounted for approximately 29.9%, 34.8%, and 29.6%,
respectively, of its revenues, inclusive of 21.0%, 19.2% and 13.6%,
respectively, of revenues attributable to reimbursable costs and
expenses for such client, pursuant to the adoption of accounting
standard EITF 01-14 (See Note 1). At March 31, 2004 and 2003, the same
client accounted for 35% and 38%, respectively, of the Company's
accounts receivable. In addition, at March 31, 2004, the Company had
another client that accounted for approximately 13% of its revenues,
inclusive of 4.6% of revenues attributable to reimbursable costs and
expenses, and 12% of its accounts receivable.
(12) Employee Benefit Plan
---------------------
The Company has a savings plan available to substantially all salaried
employees which is intended to qualify as a deferred compensation plan
under Section 401(k) of the Internal Revenue Code (the "401(k) Plan").
Pursuant to the 401(k) Plan, employees may contribute up to 15% of
their eligible compensation not in excess of $11,000 and the Company at
its sole discretion may from time to time make a discretionary matching
contribution as it deems advisable. For the years ended March 31, 2004,
2003 and 2002, the Company made a discretionary contribution of
approximately $313,000, $331,000 and $232,000, respectively.
49
(13) Commitments
-----------
Employment Agreements
---------------------
The Company has employment contracts which contain non-compete
agreements and have a remaining term of twenty-four months with three
of its officers and six officers of its subsidiaries. At March 31,
2004, the Company's remaining aggregate commitment under the employment
agreements is approximately $4,240,000 and such commitments for each of
the fiscal years 2005 and 2006 amount to $2,120,000. The aggregate
commitment does not include amounts that may be earned as a bonus.
(14) Related Party Transactions
--------------------------
(a) On January 26, 2004, Brian Murphy, a director of the Company and
the chief executive officer of the Company's U.S. Concepts
subsidiary, purchased from the Company 150,000 shares of a newly
designated class of the Company's preferred stock for an
aggregate purchase price of $600,000. Thereafter, on February 9,
2004, the Company sold an aggregate of 412,000 shares of the
Company's common stock, at a price of $2.50, to five
individuals, consisting of the Company's president and chief
executive officer, three of the Company's other directors and an
officer of one of the Company's subsidiaries, resulting in an
additional $1,030,000 of cash proceeds to the Company. In
connection with such sale of common stock, and pursuant to the
terms upon which Mr. Murphy purchased the shares of preferred
stock described above, Mr. Murphy was issued an additional
240,000 shares of common stock in exchange for the cancellation
of such preferred stock.
(b) On November 14, 2001, the Company's Board of Directors extended
the lives of two immediately exercisable warrants to purchase
the Company's common stock previously issued to a current
outside director and a consultant to the Company in 1997. The
warrants (37,500 each) which maintain the exercise price of
$4.00 per share, were due to expire on April 30, 2002 and will
now expire on April 30, 2007. The fair value ascribed to the
modification of the terms of the warrants was not material.
(c) Pursuant to certain agreements (the "ComedyLab Agreements")
dated as of January 24, 2001, U.S. Concepts, a wholly-owned
subsidiary of the Company, became entitled to receive
approximately 33% of the shares of common stock of ComedyLab,
which no longer has any assets or operations. ComedyLab was
organized by certain former employees of iCast Corporation and
iCast Comedy Corporation (collectively, "iCast"), including a
director of the Company who is also the chief executive officer
of both ComedyLab and U.S. Concepts (the "ComedyLab CEO"), to
continue business previously conducted by iCast. The ComedyLab
business consisted of owning and operating a Web site which
provided comedy related content. ComedyLab acquired certain
assets and assumed limited obligations of iCast in exchange for
5% of the issued and outstanding shares of capital stock of
ComedyLab, The assets acquired by ComedyLab from iCast included
event sponsorship agreements, related receivables and assets
(including intellectual properties of iCast), which related to
certain events which U.S. Concepts had been retained to manage
and execute. The obligations assumed by ComedyLab were limited
to the performance obligations under the acquired sponsorship
agreements.
Pursuant to the ComedyLab Agreements, U.S. Concepts agreed (i)
to allow ComedyLab to occupy a portion of its premises in
exchange for monthly rental and utility charges, (ii) to provide
ComedyLab, for a fee, with sales and consulting services and
(iii) to fund a limited amount of ComedyLab's expenses. By
separate agreement of the same date between the Company, U.S.
Concepts and the ComedyLab CEO, the parties agreed that all
equity in ComedyLab issued or issuable to the ComedyLab CEO
would be transferred and/or issued, as applicable, to U.S.
Concepts.
50
On June 19, 2001, the ComedyLab CEO executed a non-interest
bearing secured promissory note in favor of U.S. Concepts
pursuant to which he became obligated to reimburse U.S. Concepts
for amounts advanced by U.S. Concepts to ComedyLab ($563,000 at
March 31, 2002) to fund its operating expenses and the further
development of its business. The promissory note, which was
subsequently repaid in full, was secured by all amounts payable
to the director as additional installment of the purchase price
pursuant to the U.S. Concepts Acquisition agreement and the
bonus provision of the director's employment agreement with U.S.
Concepts. As the Company was no longer responsible for the
liabilities and or losses, if any, of ComedyLab, at March 31,
2002, a share of ComedyLab's losses in the amount of $89,000
previously recorded for the year ended March 31, 2001 had been
reversed and included in other income and the amount, together
with amounts related to advances to ComedyLab previously
recorded as due from affiliate, had been reclassified as a note
receivable from officer on the consolidated balance sheet at
March 31, 2002. The $89,000 was recorded for the year ended
March 31, 2001 because, as of such time, the Company did not yet
have the assurance of its ability to collect such amount. During
Fiscal 2002, the monies advanced to ComedyLab increased the
Company's note receivable from officer to the amount of $563,000
prior to such note's reduction to $63,000 at March 31, 2002 as a
result of the Company's offset of an additional U.S. Concept
Acquisition purchase price installment otherwise due the
director in the amount of $500,000. On July 12, 2002, the
Company received payment from Mr. Murphy of the $63,000 note
receivable balance outstanding at March 31, 2002.
(d) In connection with the Company's acquisition of Optimum, the
Company entered into a lease agreement with Thomas Lachenman, a
director of the Company and former owner of Optimum, for the
lease of the Cincinnati principal office of Optimum. The lease
provides for an annual rental, currently at $160,000, adjusted
annually based upon changes in the local consumer price index.
The lease expires in December 2010.
(15) Summarized Quarterly Consolidated Financial Data (Unaudited)
------------------------------------------------------------
The quarterly information for the first three quarters of Fiscal 2004
reflects the quarters as previously reported prior to the adoption of
EITF 00-21 and FIN 46R, together with the as restated quarters
reflecting the adoption of EITF 00-21 and FIN 46R as of April 1, 2003.
The Fiscal 2003 quarterly information reflects the quarters as
previously reported prior to the adoption of EITF 00-21 and FIN 46R,
together with the quarters on a pro forma basis to reflect the adoption
of EITF 00-21.
51
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
First Quarter Ended Second Quarter Ended
June 30, 2003 September 30, 2003
------------------------- -------------------------
As previously As As previously As
reported restated reported restated
----------- ----------- ----------- -----------
Sales $16,072,640 $20,203,923 $16,881,117 $16,557,568
Gross profit 3,591,430 4,735,782 3,415,876 3,315,377
----------- ----------- ----------- -----------
Operating income 649,159 1,534,442 472,848 81,919
----------- ----------- ----------- -----------
Net income (loss) $ 328,978 $ 878,205 $ 231,139 $ 11,846
Net income (loss) per common share:
Basic $ .06 $ .17 $ .05 $ .00
Diluted $ .06 $ .15 $ .04 $ .00
Weighted average common shares:
Basic 5,119,347 5,119,347 5,135,035 5,135,035
Diluted 5,765,948 5,765,948 6,223,819 6,223,819
Third Quarter Ended Fourth Quarter Ended
December 31, 2003 March 31, 2004
------------------------------ ------------
As previously As
reported restated
------------ ------------ ------------
Sales $ 16,631,648 $ 19,111,145 $ 13,842,821
Gross profit 2,588,870 3,565,375 1,969,232
------------ ------------ ------------
Operating (loss) income (861,292) (105,811) (1,760,382)
------------ ------------ ------------
Net (loss) income $ (490,156) $ (123,345) $ (1,329,177)
Net (loss) income per common share:
Basic $ (.10) $ (.02) $ (.23)
Diluted $ (.10) $ (.02) $ (.23)
Weighted average common shares:
Basic 5,137,179 5,137,179 5,673,630
Diluted 5,137,179 5,137,179 5,673,630
Sales, gross profit and net income (loss) for the quarters ended June 30, 2003,
September 30, 2003, and December 31, 2003 have been restated to reflect the
adoption of (i) EITF 00-21, which was reported as a cumulative effect of a
change in accounting principle for revenue recognition and (ii) FIN 46R,which
consolidates the operations of MarketVision, effective April 1, 2003. The
Company will file an amended Form 10-Q, with restated quarterly financial
statements reflecting this change for each of these quarterly periods. The
amended Forms 10-Q will be filed with the Securities and Exchange Commission as
soon as practicable.
52
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
First Quarter Ended Second Quarter Ended
June 30, 2002 September 30, 2002
----------------------------- -----------------------------
As previously As previously
reported Pro forma reported Pro forma
------------- ------------- ------------- -------------
Sales $ 14,143,991 $ 14,131,342 $ 13,332,639 $ 14,932,558
Gross profit 2,915,321 3,202,751 3,363,153 3,344,232
------------- ------------- ------------- -------------
Operating income 375,704 663,134 857,010 838,089
------------- ------------- ------------- -------------
Net income (loss) $ 164,255 $ 336,713 $ 449,825 $ 438,472
Net income (loss) per common share:
Basic $ .03 $ .07 $ .09 $ .09
Diluted $ .03 $ .06 $ .08 $ .08
Weighted average common shares:
Basic 5,028,481 5,028,481 5,028,481 5,028,481
Diluted 5,531,533 5,531,533 5,372,657 5,372,657
Third Quarter Ended Fourth Quarter Ended
December 31, 2002 March 31, 2003
----------------------------- -----------------------------
As previously As previously
reported Pro forma reported Pro forma
------------- ------------- ------------- -------------
Sales $ 17,311,177 $ 13,760,034 $ 15,168,397 $ 10,677,063
Gross profit 4,006,616 2,974,046 3,414,673 1,598,063
------------- ------------- ------------- -------------
Operating income (loss) 1,193,925 161,355 585,740 (1,230,870)
------------- ------------- ------------- -------------
Net income (loss) $ 874,036 $ 254,494 $ 284,966 $ (805,000)
Net income (loss) per common share:
Basic $ .17 $ .05 $ .06 $ (.16)
Diluted $ .16 $ .05 $ .05 $ (.16)
Weighted average common shares:
Basic 5,028,481 5,028,481 5,031,884 5,031,884
Diluted 5,566,291 5,566,291 5,579,495 5,031,884
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ Financial Disclosure.
---------------------------------------------------------------
None.
Item 9A. Controls and Procedures.
- ------- -----------------------
Evaluation of Disclosure Controls and Procedures
An evaluation was performed, under the supervision of, and
with the participation of, the Company's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures (as
defined in Rules13a-15(e) and 15d-(e) to the Securities and Exchange Act of
1934). Based on that evaluation, the Company's management, including the Chief
Executive Officer and Chief Financial Officer, concluded that the Company's
disclosure controls and procedures were adequate and effective, as of the end of
the period covered by this Annual Report on Form 10-K for the year ended March
31, 2004 (the "Report"), in timely alerting them to all material information
relating to the Company and its consolidated subsidiaries that is required to be
included in this Report.
53
Changes in Internal Controls
There have been no significant changes in the Company's
internal controls over financial reporting that occurred during the most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART III
The information required to be disclosed in Part III (Items 10, 11, 12, 13 and
14, and fees and services) will be incorporated by reference from the Company's
definitive proxy statement if filed by July 29, 2004 or, if such proxy statement
is not filed by such date, such information will be disclosed by amendment to
this Form 10-K prior to July 30, 2004.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
----------------------------------------------------------------
(a) The following documents are filed as part of this Report.
1. Financial Statements:
--------------------
Page
------------------------------------------------------------------------------------
Index to Financial Statements 29
Consolidated Financial Statements of CoActive Marketing Group, Inc.
Report of Independent Registered Public Accounting Firm 30
Consolidated Balance Sheets as of March 31, 2004 and 2003 31
Consolidated Statements of Operations for the years ended
March 31, 2004, 2003 and 2002 32
Consolidated Statements of Stockholders' Equity
for the years ended March 31, 2004, 2003 and 2002 33
Consolidated Statements of Cash Flows for the years ended
March 31, 2004, 2003 and 2002 34
Notes to Consolidated Financial Statements 35
2. Financial Statement Schedules:
-----------------------------
S-1 Report of Independent Registered Public Accounting Firm 57
S-2 Allowance for Doubtful Accounts 58
3. Exhibits:
--------
Exhibit
Number Description of Exhibits.
------ -----------------------
2.1 Asset Purchase Agreement, dated as of December 8, 1997,
by and among OG Holding Corporation (formerly known as
Optimum Group, Inc.), James H. Ferguson, Michael J.
Halloran, Christina M. Heile, David E. Huddleston,
Thomas E. Lachenman, Thomas L. Wessling, Optimum Group,
Inc. (formerly known as OG Acquisition Corp.) and Inmark
Enterprises, Inc. (incorporated by reference to Exhibit
2.1 to the Registrant's Report on Form 8-K dated March
31, 1998, File No. 000-20394, initially filed with the
Securities and Exchange Commission on April 13, 1998).
2.2 Amendment No. 1 to the Asset Purchase Agreement, dated
as of March 31, 1998 (incorporated by reference to
Exhibit 2.2 to the Registrant's Report on Form 8-K dated
March 31, 1998, File No. 000-20394, initially filed with
the Securities and Exchange Commission on April 13,
1998).
54
2.3 Asset Purchase Agreement, dated as of December 29, 1998,
by and among U.S. Concepts, Inc., a New York
corporation, Brian Murphy, U.S. Concepts, Inc., a
Delaware corporation, and Inmark Enterprises, Inc.
(incorporated by reference to Exhibit 2.3 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1999, initially filed with the
Securities and Exchange Commission on July 6, 1999).
3.1 Certificate of Incorporation, as amended, of the
Registrant (incorporated by reference to Exhibit 3.1 to
the Registrant's Quarterly Report on Form 10-Q for the
three month period ended September 30, 1999, initially
filed with the Securities and Exchange Commission on
November 22, 1999).
3.2 Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrant's Quarterly Report on Form
10-Q for the three month period ended September 30,
1999, initially filed with the Securities and Exchange
Commission on November 22, 1999).
10.1 Employment Agreement dated September 29, 1995 between
Registrant and John P. Benfield (incorporated by
reference to Exhibit 10.3 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31,
1996, initially filed with the Securities and Exchange
Commission on July 1, 1996).
10.2 Second Amendment to Employment Agreement dated November
14, 2001 between the Registrant and John P. Benfield
(incorporated by reference to Exhibit 10.3 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 2002, initially filed with the
Securities and Exchange Commission on June 28, 2002).
10.3 Employment Agreement dated September 29, 1995 between
the Registrant and Donald A. Bernard (incorporated by
reference to Exhibit 10.4 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31,
1996, initially filed with the Securities and Exchange
Commission on July 1, 1996).
10.4 Second Amendment to Employment Agreement dated November
14, 2001 between the Registrant and Donald A. Bernard
(incorporated by reference to Exhibit 10.5 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 2002, initially filed with the
Securities and Exchange Commission on June 28, 2002).
10.5 Employment Agreement dated September 29, 1995 between
Registrant and Paul A. Amershadian (incorporated by
reference to Exhibit 10.5 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31,
1996, initially filed with the Securities and Exchange
Commission on July 1, 1996).
10.6 Second Amendment to Employment Agreement dated November
14, 2001 between Registrant and Paul A. Amershadian
(incorporated by reference to Exhibit 10.7 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 2002, initially filed with the
Securities and Exchange Commission on June 28, 2002).
10.7 Amended and Restated Promissory Note, dated as of May
24, 2001, in the principal amount of $550,000, by Paul
A. Amershadian in favor of the Company (incorporated by
reference to Exhibit 10.5 to Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 2001,
initially filed with the Securities and Exchange
Commission on July 13, 2001).
55
10.8 Amended and Restated Pledge Agreement, dated as of May
24, 2001, between Paul A. Amershadian and the Company
(incorporated by reference to Exhibit 10.6 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 2001, initially filed with the
Securities and Exchange Commission on July 13, 2001).
10.9 Credit Agreement, dated as of October 31, 2002 by and
among CoActive Marketing Group, Inc., Inmark Services,
Inc., Optimum Group, Inc., U.S. Concepts, Inc., Grupo
Hacerlo LLC and Signature Bank (incorporated by
reference to Exhibit 10.1 to Registrant's Current Report
on Form 8-K dated October 31, 2002, initially filed with
the Securities and Exchange Commission on November 4,
2002).
10.10 Form of Security Agreement, dated as of October 31, 2002
between each of CoActive Marketing Group, Inc., Inmark
Services, Inc., Optimum Group, Inc., U.S. Concepts, Inc.
and Grupo Hacerlo LLC and Signature Bank (incorporated
by reference to Exhibit 10.1 to Registrant's Current
Report on Form 8-K dated October 31, 2002, initially
filed with the Securities and Exchange Commission on
November 4, 2002).
10.11 Administration and Marketing Services Agreement, dated
as of March 22, 2002, between the Registrant and
MarketVision (incorporated by reference to Exhibit 10.13
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 2002, initially filed with
the Securities and Exchange Commission on June 28,
2002).
10.12 CoActive Marketing Group, Inc. 2002 Long-Term Incentive
Plan (incorporated by reference to Exhibit A to
Registrant's Definitive Proxy Statement initially filed
with the Securities and Exchange Commission on July 29,
2002).
10.13 Amended and Restated Credit Agreement dated as of July
22, 2004, by and among CoActive Marketing Group, Inc.,
Inmark Services LLC, Optimum Group LLC, U.S. Concepts
LLC, Grupo Hacerlo LLC, TrikMedia LLC and Signature
Bank.
14 Registrant's Code of Ethics
21 Subsidiaries of the Registrant
23 Consent of BDO Seidman, LLP
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) of the Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) of the Exchange Act.
32.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(b) of the Exchange Act.
32.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(b) of the Exchange Act.
(b) Reports on Form 8-K.
On January 27, 2004, the Company furnished a report on Form
8-K relating to a press release it issued with respect to financial results for
its fiscal quarter ended December 31, 2003.
56
S-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
CoActive Marketing Group, Inc.
The audits referred to in our report dated July 13, 2004, except for Note 7,
which is as of July 22, 2004 relating to the consolidated financial statements
of CoActive Marketing Group Inc. and Subsidiaries, which is contained in Item 8
of the Form 10-K, included the audit of the financial statement schedule for the
years ended March 31, 2004, 2003 and 2002. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion of the financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO SEIDMAN, LLP
- --------------------------
BDO Seidman, LLP
Melville, New York
July 13, 2004, except for Note 7,
which is as of July 22, 2004.
57
S-2
Allowance for Doubtful Accounts
Balance Balance
at beginning at end
of Period Additions Deductions of Period
------------ ------------ ------------ ------------
Year ended March 31, 2004 $ 80,412 $ 256,000 $ 40,431 $ 295,981
Year ended March 31, 2003 $ 75,000 $ 36,000 $ 30,588 $ 80,412
Year ended March 31, 2002 $ 100,000 $ 111,000 $ 136,000 $ 75,000
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ DONALD A. BERNARD
--------------------------------------------
Donald A. Bernard
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: July 13, 2004
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated:
SIGNATURE AND TITLE SIGNATURE AND TITLE
By: /s/ JOHN P. BENFIELD By: /s/ DONALD A. BERNARD
------------------------------- -------------------------------
John P. Benfield Donald A. Bernard
President and Chief Executive Executive Vice President and
Officer and Director Chief Financial Officer and
(Principal Executive Officer) Director (Principal Financial
and Accounting Officer)
Dated: July 22, 2004 Dated: July 22, 2004
By: /s/ PAUL A. AMERSHADIAN By: /s/ HERBERT M. GARDNER
------------------------------- -------------------------------
Paul A. Amershadian Herbert M. Gardner
Executive Vice President - Marketing Director
and Sales and Director
Dated: July 22, 2004 Dated: July 22, 2004
By: /s/ By: /s/ BRIAN MURPHY
------------------------------- -------------------------------
Joseph S. Hellman Brian Murphy
Director Director
Dated: July 22, 2004 Dated: July 22, 2004
By: /s/ THOMAS E. LACHENMAN By /s/ JOHN A. WARD, III
------------------------------- --------------------------------
Thomas E. Lachenman John A. Ward, III
Director Director
Dated: July 22, 2004 Dated July 22, 2004
59