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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-20394
COACTIVE MARKETING GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1340408
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
415 Northern Boulevard
Great Neck, New York 11021
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 622-2800
--------------
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.
[X] Yes [ ] No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
As of November 3, 2004, 5,941,856 shares of the Registrant's Common Stock, par
value $.001 per share, were outstanding.
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INDEX
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COACTIVE MARKETING GROUP, INC. AND SUBSIDIARIES
Page
----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements of CoActive Marketing
Group, Inc. and Subsidiaries (Unaudited)
Consolidated Balance Sheets - September 30, 2004
and March 31, 2004 3
Consolidated Statements of Operations - Three and six
months ended September 30, 2004 and September
30, 2003 4
Consolidated Statement of Stockholders' Equity - Six
months ended September 30, 2004 5
Consolidated Statements of Cash Flows - Six months
ended September 30, 2004 and September 30, 2003 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II - OTHER INFORMATION
- ---------------------------
Items 1-3. Not Applicable 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Not Applicable 18
Item 6. Exhibits and Reports on Form 8-K. 18
SIGNATURES 19
- ----------
2
PART I - FINANCIAL INFORMATION
COACTIVE MARKETING GROUP, INC.
Consolidated Balance Sheets
September 30, 2004 and March 31, 2004
September 30, 2004 March 31, 2004*
----------------- -----------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 4,083,900 $ 3,164,158
Accounts receivable, net of allowance for doubtful accounts of
$184,557 at September 30, 2004 and $295,981 at March 31, 2004 15,662,674 10,504,973
Unbilled contracts in progress 2,578,921 2,083,507
Deferred contract costs 1,038,116 339,100
Prepaid taxes 357,139 449,582
Prepaid expenses and other current assets 425,959 608,175
----------------- -----------------
Total current assets 24,146,709 17,149,495
Property and equipment, net 2,416,597 2,598,929
Note and interest receivable from officer 776,253 762,276
Goodwill, net 19,895,694 19,895,694
Intangible asset 200,000 200,000
Deferred financing costs, net 92,175 72,905
Other assets 17,398 17,398
----------------- -----------------
Total assets $ 47,544,826 $ 40,696,697
================= =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 10,045,332 $ 7,525,683
Deferred revenue 8,409,755 7,932,115
Accrued job costs 5,255,345 2,860,550
Accrued compensation 61,344 96,127
Other accrued liabilities 1,954,013 1,480,070
Deferred taxes payable 595,659 63,016
Notes payable bank - current 1,950,000 1,450,000
Subordinated notes payable - current 425,000 425,000
----------------- -----------------
Total current liabilities 28,696,448 21,832,561
Notes payable bank - long term 2,559,500 3,534,500
Minority interest of consolidated subsidiary 262,085 151,806
----------------- -----------------
Total liabilities 31,518,033 25,518,867
----------------- -----------------
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 September 30, 2004
and March 31, 2004 5,941 5,941
Additional paid-in capital 8,844,766 8,853,166
Retained earnings 7,176,086 6,318,723
----------------- -----------------
Total stockholders' equity 16,026,793 15,177,830
----------------- -----------------
Total liabilities and stockholders' equity $ 47,544,826 $ 40,696,697
================= =================
* The consolidated balance sheet as of March 31, 2004 has been summarized from
the Company's audited balance sheet as of that date.
See accompanying notes to unaudited consolidated financial statements.
3
COACTIVE MARKETING GROUP, INC.
Consolidated Statements of Operations
Three and Six Months Ended September 30, 2004 and September 30, 2003
(Unaudited)
Three Months Ended September 30, Six Months Ended September 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Sales $ 23,223,187 $ 16,557,568 $ 42,626,281 $ 36,761,491
Operating expenses:
Reimbursable costs and expenses 4,973,908 4,264,837 11,566,267 8,628,096
Outside production costs and expenses 9,892,344 5,036,636 14,974,337 12,590,048
Salaries, payroll taxes and benefits 4,898,849 4,789,336 10,142,005 9,305,741
General and administrative expense 2,228,742 2,384,840 4,305,333 4,621,245
-------------- -------------- -------------- --------------
Total operating expenses 21,993,843 16,475,649 40,987,942 35,145,130
-------------- -------------- -------------- --------------
Operating income 1,229,344 81,919 1,638,339 1,616,361
Interest expense, net 63,830 55,400 120,952 118,701
-------------- -------------- -------------- --------------
Income before provision for income taxes, minority
interest in net (income) loss of consolidated
subsidiary and cumulative effect of change in
accounting principle for revenue recognition 1,165,514 26,519 1,517,387 1,497,660
Provision for income taxes 434,402 5,872 549,745 616,882
-------------- -------------- -------------- --------------
Net income before minority interest in net (income)
loss of consolidated subsidiary and cumulative
effect of change in accounting principle for
revenue recognition 731,112 20,647 967,642 880,778
Minority interest in net (income) loss of
consolidated subsidiary (71,286) (8,801) (110,279) 9,273
-------------- -------------- -------------- --------------
Net income before cumulative effect of change in
accounting principle for revenue recognition 659,826 11,846 857,363 890,051
Cumulative effect of change in accounting principle
for revenue recognition, net of income taxes -- -- -- (2,182,814)
-------------- -------------- -------------- --------------
Net income (loss) $ 659,826 $ 11,846 $ 857,363 $ (1,292,763)
============== ============== ============== ==============
Net income per common share before cumulative
effect of change in accounting principle for
revenue recognition:
Basic $ .11 $ -- $ .14 $ .17
============== ============== ============== ==============
Diluted $ .10 $ -- $ .13 $ .15
============== ============== ============== ==============
Cumulative effect of change in accounting principle
for revenue recognition, net of income taxes $ -- $ -- $ -- $ (.42)
-------------- -------------- -------------- --------------
Net income (loss) per common share after cumulative
effect of change in accounting principle for
revenue recognition:
Basic $ .11 $ -- $ .14 $ (.25)
============== ============== ============== ==============
Diluted $ .10 $ -- $ .13 $ (.25)
============== ============== ============== ==============
Weighted average number of common shares
outstanding before cumulative effect of change
in accounting principle for revenue recognition:
Basic 5,941,856 5,135,035 5,941,856 5,127,780
Dilutive effect of options and warrants 413,439 1,088,784 430,207 995,079
-------------- -------------- -------------- --------------
Diluted 6,355,295 6,223,819 6,372,063 6,122,859
============== ============== ============== ==============
Weighted average number of shares outstanding after
cumulative effect of change in accounting
principle for revenue recognition:
Basic 5,941,856 5,135,035 5,941,856 5,127,780
============== ============== ============== ==============
Diluted 6,355,295 6,223,819 6,372,063 6,122,859
============== ============== ============== ==============
See accompanying notes to unaudited consolidated financial statements.
4
COACTIVE MARKETING GROUP, INC.
Consolidated Statement of Stockholders' Equity
Six Months Ended September 30, 2004
(Unaudited)
Common Stock
par value $.001 Total
--------------------------------- Additional Retained Stockholders'
Shares Amount Paid-in Capital Earnings Equity
--------------- --------------- --------------- --------------- ---------------
Balance, March 31, 2004 5,941,856 $ 5,941 $ 8,853,166 $ 6,318,723 $ 15,177,830
Costs incurred in connection with
sale of stock -- -- (8,400) -- (8,400)
Net income -- -- -- 857,363 857,363
--------------- --------------- --------------- --------------- ---------------
Balance, September 30, 2004 5,941,856 $ 5,941 $ 8,844,766 $ 7,176,086 $ 16,026,793
=============== =============== =============== =============== ===============
See accompanying notes to unaudited consolidated financial statements.
5
COACTIVE MARKETING GROUP, INC.
Consolidated Statements of Cash Flows
Six Months Ended September 30, 2004 and 2003
(Unaudited)
2004 2003
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 857,363 $ (1,292,763)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
(Credit) provision for bad debt expense (101,544) 18,000
Depreciation and amortization 326,170 360,104
Deferred income taxes 532,643 206,973
Minority interest of consolidated subsidiary 110,279 (4,832)
Cumulative effect of change in accounting principle for revenue recognition -- 2,182,814
Other -- (4,441)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (5,056,157) (839,027)
(Increase) decrease in unbilled contracts in progress (495,414) 640,163
(Increase) in deferred contract costs (699,016) --
Decrease in prepaid taxes 92,443 --
Decrease (increase) in prepaid expenses and other assets 182,216 (591,565)
Increase (decrease) in accounts payable 2,519,649 (950,586)
Increase (decrease) in deferred revenue 477,640 (646,998)
Increase in accrued job costs 2,394,795 1,013,662
Increase in accrued taxes payable -- 139,727
Increase (decrease) in other accrued liabilities 473,943 (266,899)
(Decrease) increase in accrued compensation (34,783) 101,197
------------ ------------
Net cash provided by operating activities 1,580,227 65,529
------------ ------------
Cash flows from investing activities:
Purchases of fixed assets (126,164) (955,287)
Increase in note receivable from officer (13,977) (14,679)
Increase in cash for consolidation of variable interest entity -- 35,691
------------ ------------
Net cash used in investing activities (140,141) (934,275)
------------ ------------
Cash flows from financing activities:
Repayments of debt (475,000) (90,500)
Costs incurred in connection with sale of stock (8,400) --
Financing costs (36,944) (5,000)
Proceeds from exercise of stock options -- 5,000
------------ ------------
Net cash used in financing activities (520,344) (90,500)
------------ ------------
Net increase (decrease) in cash and cash equivalents 919,742 (959,246)
Cash and cash equivalents at beginning of period 3,164,158 1,336,886
------------ ------------
Cash and cash equivalents at end of period $ 4,083,900 $ 377,640
============ ============
Supplemental disclosures of cash flow information:
Interest paid during the period $ 133,067 $ 136,694
============ ============
Income tax paid during the period $ 10,577 $ 192,152
============ ============
Noncash activities relating to investing and financing activities:
Stock issued in payment of earnout $ -- $ 218,000
============ ============
See accompanying notes to unaudited consolidated financial statements.
6
CoActive Marketing Group, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
September 30, 2004 and 2003
(1) Basis of Presentation
---------------------
The interim financial statements of CoActive Marketing Group, Inc. (the
"Company") for the three and six months ended September 30, 2004 and
2003 have been prepared without audit. The consolidated statements of
operations have been modified to break out and reclassify as an
operating expense those costs and expenses which were previously
reported as direct expenses, namely, reimbursable costs and expenses,
outside production costs and expenses, and the salaries, payroll taxes
and benefit costs directly related to servicing client projects. In the
opinion of management, such consolidated financial statements reflect
all adjustments, consisting of normal recurring accruals, necessary to
present fairly the Company's results for the interim periods presented.
The results of operations for the three and six months ended September
30, 2004 are not necessarily indicative of the results for a full year.
The consolidated financial statements of the Company include the
financial statements of the Company and its wholly-owned subsidiaries.
In addition, the consolidated financial statements include the accounts
of a variable interest entity, Garcia Baldwin, Inc. d/b/a MarketVision
("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 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 Company owns 49% of the common
stock of MarketVision. A third party owns the remaining 51%. The third
party owned portion of MarketVision is accounted for as minority
interest in the Company's consolidated financial statements.
On October 29, 2003, a newly formed wholly-owned subsidiary of the
Company, TrikMedia LLC ("TrikMedia"), acquired certain assets and
assumed certain liabilities of TrikMedia, Inc. for a purchase price of
$885,000, consisting of a cash payment in the amount 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. On September 23, 2004, TrikMedia changed its name to
Digital Intelligence Group LLC ("Digital Intelligence"). The results of
operations of Digital Intelligence are not material and have been
integrated into and included with the pre-existing operations of the
Company. Pro forma information regarding the acquisition has not been
provided, as the results of operations of Digital Intelligence are not
material.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended March 31, 2004.
(2) 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 revenue 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
7
reported as a cumulative effect of a change in accounting principle of
$2,183,000. For the three months ended September 30, 2003, the adoption
of EITF 00-21 resulted in a decrease in sales of $743,000 and a
decrease in direct expenses of $335,000. For the six months ended
September 30, 2003, the adoption of EITF 00-21 resulted in an increase
in sales of $1,526,000 and an increase in direct expenses of
$1,019,000. 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 net income of $12,000 or $.00 per
basic common share and $890,000 or $.17 per basic common share for the
three and six months ended September 30, 2003, respectively.
(3) Adoption of FIN 46R
-------------------
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities - an Interpretation of ARB
No. 51," 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
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 three
and six months ended September 30, 2004 are included in the
consolidated financial statements of the Company, whereas for prior
fiscal periods, under the equity method of accounting, the Company
reported its investment in MarketVision as adjusted for its share of
net income or loss in each fiscal period in the Company's financial
statements. The consolidated financial statements of the Company for
the three and six months ended September 30, 2003 have been restated to
reflect the Company's adoption of FIN 46R effective April 1, 2003. The
effect of the Company's adoption of FIN 46R did not impact the
Company's net income (loss). For the three and six months ended
September 30, 2004, MarketVision had net income of $140,000 and
$216,000, respectively. For the three and six months ended September
30, 2003, MarketVision had net income of $16,000 and a net loss of
$10,000, respectively.
(4) 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; (iv)
on certain other fixed price contracts, revenue is recognized on a
percentage of completion basis, whereby the percentage of completion is
determined by relating the actual cost of labor performed to date to
the estimated total cost of labor for each contract. 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.
(5) Goodwill and 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 September 30,
2004, the Company had approximately $19,896,000 of goodwill and
$200,000 as an intangible asset. During Fiscal 2004, the Company
increased goodwill in the amount of $866,000 and $244,000 to reflect
the goodwill relating to its acquisition of Digital Intelligence and
its consolidation of MarketVision, respectively.
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
8
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
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. During the six months ended September
30, 2004, the Company has not identified any indication of goodwill
impairment. Goodwill and the intangible asset will be tested annually
at the end of each fiscal year to determine whether they have been
impaired. Upon completion of each annual review, there can be no
assurance that a material charge will not be recorded.
(6) Earnings Per Share
------------------
Options and warrants, which expire through April 30, 2014, to purchase
1,706,232 shares of common stock at prices ranging from $2.31 to $10.00
for the three and six months ended September 30, 2004 and 478,000
shares of common stock at prices ranging from $4.00 to $10.00 per share
for the three and six months ended September 30, 2003, respectively,
were excluded from the computation of diluted earnings per share for
each period because the exercise prices exceeded the then fair market
value of the Company's common stock.
(7) Unbilled Contracts in Progress
------------------------------
Unbilled contracts in progress represent revenue recognized in advance
of billings rendered based on work performed to date on certain
contracts. Accrued job costs are also recorded for such contracts to
properly match costs and revenue.
(8) Deferred Contract Costs
-----------------------
Deferred contract costs represent direct contract costs and expenses
incurred prior to the Company's related revenue recognition on such
contracts.
(9) Deferred Revenue
----------------
Deferred revenue represents contract amounts billed and client advances
in excess of costs incurred and estimated profit earned.
(10) Notes Payable Bank
------------------
At March 31, 2004, the Company was not in compliance with certain
financial covenants of its credit agreement. 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 that 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) effective July 22, 2004, 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
Company's consolidated balance sheet at March 31, 2004 retroactively
reflects the new repayment terms of the loans. At September 30, 2004,
the Company was in compliance with the covenants of its Amended and
Restated Credit Agreement.
(11) Income Taxes
------------
The provision for income taxes for the three and six months ended
September 30, 2004 and 2003 is based upon the Company's estimated
effective tax rate for the respective fiscal years.
(12) 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 the issuance of 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"
9
("SFAS No. 123"), but has elected to disclose the pro forma net income
(loss) 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 No. 148, "Accounting for Stock
Based Compensation - Transition and Disclosure an amendment of SFAS No.
123."
The following table illustrates the effects on net income (loss) and
earnings (loss) per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to its stock based incentive
plans:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003
-------------- -------------- -------------- --------------
Net income (loss) as reported $ 659,826 $ 11,846 $ 857,363 $ (1,292,763)
Less compensation expense determined
under the fair value method 91,156 60,976 182,312 121,952
-------------- -------------- -------------- --------------
Pro forma net income (loss) $ 568,670 $ (49,130) $ 675,051 $ (1,414,715)
============== ============== ============== ==============
Net income (loss) per share - Basic:
As reported $ .11 $ -- $ .14 $ (.25)
Pro forma $ .10 $ (.01) $ .11 $ (.28)
Net income (loss) per share - Diluted:
As reported $ .10 $ -- $ .13 $ (.25)
Pro forma $ .09 $ (.01) $ .11 $ (.28)
(13) New 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 No. 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 Other,"
and amends other existing pronouncements. The effect of this
pronouncement did not have an impact on the financial statements of the
Company.
(14) Reclassifications
-----------------
Certain amounts as previously reported have been reclassified to
conform to current year classifications.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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This report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that are based on
beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words "estimate," "project," "believe," "anticipate," "intend,"
"expect," "plan," "predict," "may," "should," "will," the negative thereof or
other variations thereon or comparable terminology are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events based on currently available information
and are subject to risks and uncertainties that could cause actual results to
differ materially from those contemplated in those forward-looking statements.
10
Factors that could cause actual results to differ materially from the Company's
expectations are set forth under the caption "Risk Factors," in addition to
other information set forth herein and elsewhere in our other public filings
with the Securities and Exchange Commission. 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
The Company is a full service multi-cultural marketing, sales
promotion and interactive media services and e-commerce provider, and 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, multi cultural 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.
On October 29, 2003, TrikMedia LLC ("TrikMedia"), a newly
formed wholly-owned subsidiary of the Company, acquired certain of the assets
and assumed certain of the liabilities of TrikMedia, Inc. in a transaction
accounted for as a purchase by the Company. Accordingly, the following
discussion compares the Company's consolidated results of operations for the
three and six months ended September 30, 2004, including the operations of
TrikMedia for the three and six months ended September 30, 2004, to the
Company's consolidated results of operations for the three and six months ended
September 30, 2003, excluding the operations of TrikMedia. On September 23,
2004, TrikMedia changed its name to Digital Intelligence Group LLC ("Digital
Intelligence"). The results of operations of Digital Intelligence are not
material and have been integrated into and included with the pre-existing
operations of the Company.
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 contract's 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. For the three months
ended September 30, 2003, the adoption of EITF 00-21 resulted in a decrease in
sales of $743,000 and a decrease in direct expenses of $335,000. For the six
months ended September 30, 2003, the adoption of EITF 00-21 resulted in an
increase in sales of $1,526,000 and an increase in direct expenses of
$1,019,000. 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 net income of $12,000 or $.00 per basic common
share and $890,000 or $.17 per basic common share for the three and six months
ended September 30, 2003, respectively.
In January 2003, the FASB issued Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities - an Interpretation of ARB
No. 51," 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
11
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 it the activities of its MarketVision affiliate. Accordingly, the
operations and financial statements of MarketVision for the three and six months
ended September 30, 2004 are included in the consolidated financial statements
of the Company, whereas for prior fiscal periods, under the equity method of
accounting, the Company reported its investment in MarketVision as adjusted for
its share of net income or loss in each fiscal period in the Company's financial
statements. The consolidated financial statements of the Company for the three
and six months ended September 30, 2003 have been restated to reflect the
Company's adoption of FIN 46R effective April 1, 2003. The effect of the
Company's adoption of FIN 46R did not impact the Company's net income (loss) for
these periods. For the three and six months ended September 30, 2004,
MarketVision had net income of $140,000 and $216,000, respectively. For the
three and six months ended September 30, 2003, MarketVision had net income of
$16,000 and a net loss of $10,000, respectively.
The information herein should be read together with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended March 31, 2004.
Results of Operations
The following table presents operating data of the Company
expressed as a percentage of sales for each of the three and six months ended
September 30, 2004 and 2003, respectively, retroactively adjusted for the (i)
the operating results of MarketVision effective April 1, 2003 and (ii) EITF
00-21 accounting change effective April 1, 2003, exclusive of the associated
cumulative effect of the change in accounting principle:
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Statement of Operations Data:
Sales 100.0% 100.0% 100.0% 100.0%
Reimbursable costs and expenses 21.4% 25.8% 27.1% 23.5%
Outside production costs and expenses 42.6% 30.4% 35.1% 34.2%
Salaries, payroll taxes and benefits 21.1% 28.9% 23.8% 25.3%
General and administrative expense 9.6% 14.4% 10.1% 12.6%
Total operating expenses 94.7% 99.5% 96.2% 95.6%
Operating income 5.3% 0.5% 3.8% 4.4%
Interest expense, net 0.3% 0.3% 0.3% 0.3%
Income before provision for income taxes and minority
interest in net (income) loss of consolidated subsidiary 5.0% 0.2% 3.6% 4.1%
Provision for income taxes 1.9% -- 1.3% 1.7%
Minority interest in net (income) loss of consolidated
subsidiary (0.3)% (0.1)% (0.3)% --
Net income 2.8% 0.1% 2.0% 2.4%
Sales. Sales for the quarter ended September 30, 2004 were
$23,223,000, compared to sales of $16,557,000 for the quarter ended September
30, 2003, an increase of $6,666,000. Sales for the six months ended September
30, 2004 were $42,626,000, compared to sales of $36,761,000 for the six months
ended September 30, 2003, an increase of $5,865,000. The following table
presents a comparative summary of the components of sales for the quarter and
six month periods ended September 30, 2004 and 2003:
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------------------------------- -----------------------------------------------------
Sales 2004 % 2003 % 2004 % 2003 %
----- ------------ ---------- ------------ ---------- ------------ ---------- ------------ ----------
Core business $ 14,302,581 61.6 $ 11,872,949 71.7 $ 25,597,597 60.1 $ 25,851,701 70.3
Reimbursable costs
and expenses 4,973,908 21.4 4,264,837 25.8 11,566,267 27.1 8,628,096 23.5
MarketVision 3,946,698 17.0 419,782 2.5 5,462,417 12.8 2,281,694 6.2
------------ ---------- ------------ ---------- ------------ ---------- ------------ ----------
Total sales $ 23,223,187 100.0 $ 16,557,568 100.0 $ 42,626,281 100.0 $ 36,761,491 100.0
============ ========== ============ ========== ============ ========== ============ ==========
In the delivery of certain services to our clients, the
Company purchases a variety of items and services on their behalf for which it
is reimbursed. The amount of reimbursable costs and expenses, which are included
in revenues, will vary from period to period, based on the service provided.
12
The increase in sales attributable to MarketVision for both
the quarter and six months ended September 30, 2004 was due to an increase in
client demand for the Company's Hispanic marketing services.
In addition to increased sales attributable to increased
reimbursable costs and expenses and increased sales by Market Vision, the
Company experienced increased sales in the quarter ended September 30, 2004
attributable to increased business from both new and existing clients.
Operating Expenses. Operating expenses for the three and six
months ended September 30, 2004 increased by $5,518,000 and $5,843,000,
respectively, and amounted to $21,994,000 and $40,988,000, respectively,
compared to $16,476,000 and $35,145,000, respectively, for the three and six
months ended September 30, 2003. The increase in operating expenses for the
three and six month periods resulted from the aggregate of the following:
Reimbursable Costs and Expenses. In the delivery of certain
services to our clients, the Company purchases a variety of items and services
on their behalf for which it is reimbursed. The amount of reimbursable costs and
expenses will vary from period to period, based on the service provided.
Outside Production Costs and Expenses. Outside production
costs consist of the cost of purchased materials, media, services and other
expenditures incurred in connection with and directly related to sales. Outside
production costs for the three and six months ended September 30, 2004 were
$9,892,000 and $14,974,000, respectively, compared to $5,037,000 and
$12,590,000, respectively, for the comparable prior year three and six month
periods, an increase of $4,855,000 and $2,384,000, respectively. The increase in
these costs for the three and six months were primarily attributable to the
increased costs of $3,210,000 and $2,570,000, respectively, related to the
increase in MarketVision's sales for the three and six months ended September
30, 2004. The weighted mix of outside production costs and in-house labor and
the mark-up related to these components may vary significantly from project to
project. Accordingly, for the three and six months ended September 30, 2004,
outside production costs as a percentage of sales are reflective of the
aggregate mix of client projects during such periods.
Salaries, Payroll Taxes and Benefits. Salaries, payroll taxes
and benefits consist of the salaries, payroll taxes and benefit costs related to
all direct labor, indirect labor and overhead personnel. For the three and six
months ended September 30, 2004, salaries, payroll taxes and benefits were
$4,899,000 and $10,142,000, respectively, compared to $4,789,000 and $9,306,000,
respectively, for the comparative prior year three and six month periods, an
increase of $110,000 and $836,000, respectively. The increase in these costs for
the three and six months ended September 30, 2004 was primarily attributable to
the net effect of the increased costs of $141,000 and $241,000, respectively,
related to added personnel of MarketVision to support MarketVision's increased
level of operations, offset by a decrease in costs associated a reduction of
personnel at other subsidiaries of the Company.
General and Administrative Expense. General and administrative
expenses consist of office and equipment rent, depreciation and amortization,
professional fees and other overhead expenses which for the three and six months
ended September 30, 2004 were $2,229,000 and $4,305,000, respectively, compared
to $2,385,000 and $4,621,000, respectively, for the comparative prior year three
and six month periods, a decrease of $156,000 and $316,000, respectively. The
decrease in these expenses for the three and six month periods was primarily the
result of an overall reduction in overhead expenses offset by the inclusion of
increased expenses attributable to MarketVision of $293,000 and $585,000,
respectively, for the three and six months ended September 30, 2004.
Operating Income. As a result of the changes in sales and
operating expenses, the Company's operating income for the three and six months
ended September 30, 2004 increased to $1,229,000 and $1,638,000, respectively,
from $82,000 and $1,616,000 for the three and six months ended September 30,
2003. The operating income for the three and six months ended September 30, 2004
included $164,000 and $254,000, respectively, of operating income attributable
to MarketVision.
Interest Expense, Net. Net interest expense, consisting of
interest expense of $71,000 offset by interest income of $7,000, for the quarter
ended September 30, 2004, amounted to $64,000, an increase of $9,000, compared
to net interest expense of $55,000, consisting of interest expense of $64,000
offset by interest income of $9,000, for the quarter ended September 30, 2003.
Net interest expense, consisting of interest expense of $135,000 offset by
interest income of $14,000, for the six months ended September 30, 2004 amounted
to $121,000, an increase of $2,000, compared to net interest expense of
$119,000, consisting of interest expense of $135,000 offset by interest income
of $16,000, for the six months ended September 30, 2003. The increase in
interest expense for the quarter and six month period ended September 30, 2004
was primarily related to the increase in interest rates on the Company's
outstanding bank and subordinated debt borrowings during such periods.
Income Before Provision for Income Taxes, Minority Interest in
Net (Income) Loss of Consolidated Subsidiary and Cumulative Effect of Change in
Accounting Principle for Revenue Recognition. The Company's income before
provision for income taxes, minority interest in net (income) loss of
consolidated subsidiary and cumulative effect of change in accounting principle
13
for revenue recognition for the three and six months ended September 30, 2004
was $1,165,000 and $1,517,000, respectively, compare to income of $27,000 and
$1,498,000 for the three and six months ended September 30, 2003, respectively.
Income for the six months ended September 30, 2004 includes $84,000 of income
resulting from the reversal of an allowance previously established for a
particular doubtful account that was collected during the first quarter.
Provision For Income Taxes. The provision for federal, state
and local income taxes for the quarters and six month periods ended September
30, 2004 and 2003, were based upon the Company's estimated effective tax rate
for the respective fiscal years.
Minority Interest in Net (Income) Loss of Consolidated
Subsidiary. For the three and six months ended September 30, 2004, the Company
reflected a non-cash charge of $(71,000) and $(110,000), respectively,
representing a third party's 51% ownership interest in the net income of
MarketVision, compared to a non-cash charge of $(9,000) and $9,000 for such
third party's interest in the net (income) loss of Market Vision for the three
and six months ended September 30, 2003, respectively.
Cumulative Effect of Change in Accounting Principle for
Revenue Recognition. For the six months ended September 30, 2003, 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.
Net Income. As a result of the items discussed above, net
income for the three and six months ended September 30, 2004 was $660,000 and
$857,000, respectively, compared to net income of $12,000 and net loss of
$(1,293,000), respectively, for the prior year quarter and six month period
ended September 30, 2003.
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 pays 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, and prior to the post-quarter
amendments described below, accrued at an annual rate equal to the Lender's
prime rate plus .25% with respect to the 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) 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.
At March 31, 2004, the Company was not in compliance with
certain financial covenants of the Credit Agreement, and in addition, the Lender
determined that the Company's Revolving Loan borrowings exceeded the amount of
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.
14
In addition, pursuant to the Amended and Restated Credit
Agreement (i) the revolving loan facility was reduced from $3,500,00 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 the 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 the Revolving Loans was increased
to the Lender's prime rate plus .50% (5.75% and 5.25%, respectively, at
September 30, 2004), (iii) effective July 22, 2004, 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.
The following analysis of the Company's statements of cash
flows is inclusive of the cash flows of MarketVision. Summarized financial
information of MarketVision at September 30, 2004 is as follows:
Cash $ 71,000
Current assets 3,147,000
Current liabilities 2,748,000
Working capital 399,000
Net cash used in operating activities 13,000
At September 30, 2004, the Company had cash and cash
equivalents totaling $4,084,000, working capital deficit of $4,550,000,
inclusive of $8,410,000 of deferred revenue; bank debt in the amount of
$4,510,000 exclusive of an outstanding bank letter of credit of $500,000 under
the Company's Revolving Loan with no additional availability under the Revolving
Loan, outstanding subordinated debt of $425,000 and stockholders' equity of
$16,027,000. In comparison, at March 31, 2004, the Company had cash and cash
equivalents of $3,164,000, a working capital deficit of $4,683,000, which
included $7,932,000 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, outstanding
subordinated debt of $425,000 and stockholders' equity of $15,178,000.
Operating Activities. Net cash provided by operating
activities was $1,580,000 for the six months ended September 30, 2004. The net
cash provided by operating activities was primarily attributable to the
Company's net income for the six months ended September 30, 2004 and the net
effect of increases from March 31, 2004 in components of working capital,
specifically, accounts receivable, unbilled contracts in progress, deferred
contract costs, accounts payable and accrued job costs resulting from increased
client business.
Investing Activities. Cash used in investing activities
amounted to $140,000, as a result of $126,000 used to purchase fixed assets and
an increase in notes receivable from an officer of $14,000 attributable to
accrued interest.
Financing Activities. Cash used in financing activities was
$520,000, of which $475,000 was used to repay bank borrowings, $37,000 used to
pay costs associated with the Company's amended credit agreement and $8,000 used
to pay costs incurred in connection with the sale of the Company's stock.
As a result of the net effect of the foregoing, the Company's
cash and cash equivalents at September 30, 2004 increased by $920,000. For the
six months ended September 30, 2004, the Company's activities were funded from
working capital with no additional borrowings available under the Revolving
Loan. Management believes that cash generated from operations will be sufficient
to meet the Company's cash requirements for the remainder of the fiscal year,
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 cash requirements for the current fiscal year or as subsequently
required to repay Loans under the Credit Agreement.
Outlook
Trends are positively impacting the Company's business. As
clients seek to derive greater efficiency and effectiveness from their marketing
dollars, the call for the services the Company provides, which are oriented to
deliver measurable results, are increasing in demand. As such, the Company
anticipates that sales and net income for the third quarter ending December 31,
2004 will exceed sales and net income reported in the prior year's third quarter
ended December 31, 2003.
The Company recently received a letter from the Securities and
Exchange Commission stating that it appears that some portion of the Company's
goodwill balance associated with the acquisition of U.S. Concepts in 1998 should
have been classified as an intangible asset separate from goodwill, subject to
amortization. The Company is discussing this matter with the SEC and subject to
its resolution the Company may, or may not, be required to restate prior and
current financial statements to give effect to non-cash amortization charges.
However, management cannot currently determine the amount of any potential
adjustment or what the effect would be on the Company's financial statements.
15
Critical Accounting Policies
The preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America requires management to use judgment in making estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. Certain of the
estimates and assumptions required to be made relate to matters that are
inherently uncertain as they pertain to future events. While management believes
that the estimates and assumptions used were the most appropriate, actual
results could differ significantly from those estimates under different
assumptions and conditions.
Please refer to the Company's 2004 Annual Report on Form 10-K
for a discussion of the Company's critical accounting policies relating to
revenue recognition and goodwill and other intangible asset. During the six
months ended September 30, 2004, there were no material changes to these
policies.
Risk Factors
Any investment in the Company's common stock involves a high degree of risk.
Investors should consider carefully the risks described below, together with the
other information contained in this report. Due to the following risks, our
business, financial condition and results of operations may suffer materially.
As a result, the market price of our common stock could decline, and you could
lose all or part of your investment in our common stock.
Outstanding Indebtedness; Security Interest. At September 30,
2004, loans outstanding under the Company's Credit Agreement amounted to
$4,510,000 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 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 September 30, 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.
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.
16
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 its voting
stock, 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 the Company in which the
holders of the Company's common stock could receive a substantial premium. In
addition, the Credit Agreement requires the executive officers of the Company
maintain, at a minimum, a 15% beneficial ownership of common stock during the
term of the Credit Agreement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company's earnings and cash flows are subject to
fluctuations due to changes in interest rates primarily from its investment of
available cash balances in money market funds with portfolios of investment
grade corporate and U.S. government securities and, secondarily, from its
long-term debt arrangements. Under its current policies, the Company does not
use interest rate derivative instruments to manage exposure to interest rate
changes.
Item 4. Controls and Procedures
-----------------------
Evaluation of Disclosure Controls and Procedures
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 Rules 13a-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 Quarterly Report on Form 10-Q for the quarter ended
September 30, 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.
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.
17
PART II - OTHER INFORMATION
---------------------------
Items 1-3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Stockholders of the Company was held on
September 28, 2004 at 10:00 a.m. at the Company's offices at 415 Northern
Boulevard, Great Neck, New York 11021. A majority of the Company's voting shares
were present at the meeting, either in person or by proxy.
At such meeting, as set forth in the table below, the
stockholders elected Paul A. Amershadian, John P. Benfield, Donald A. Bernard,
James H. Feeney, Herbert M. Gardner, Thomas E. Lachenman, Brian Murphy and John
A. Ward, III to the Board of Directors. All of these individuals will serve on
the Board of Directors until the next annual meeting of stockholders and until
their successors are duly elected and qualified, except for Paul A. Amershadian,
who resigned following the annual meeting so that the Company would be in
compliance with the Nasdaq listing rule requiring that a majority of the
Company's Board of Directors be "independent" as defined by Nasdaq. The Nasdaq
requirement became applicable to the Company on the date of the Annual Meeting.
Directors Votes For Votes Withheld
--------- --------- --------------
Paul A. Amershadian 4,430,185 75,187
John P. Benfield 4,430,385 74,987
Donald A. Bernard 4,430,385 74,987
James H. Feeney 4,441,164 64,208
Herbert M. Gardner 4,441,164 64,208
Thomas E. Lachenman 4,430,385 74,987
Brian Murphy 4,430,385 74,987
John A. Ward III 4,441,164 64,208
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits. See Exhibit Index
(b) Reports on Form 8-K.
On September 28, 2004, the Company filed a Current Report on Form 8-K
with respect to the resignation of Paul A. Amershadian as a director
of the Company.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
COACTIVE MARKETING GROUP, INC.
Dated: November 3, 2004 By: /s/ JOHN P. BENFIELD
-------------------------------------
John P. Benfield, President
(Principal Executive Officer)
and Director
Dated: November 3, 2004 By: /s/ DONALD A. BERNARD
-------------------------------------
Donald A. Bernard, Executive Vice
President and Chief Financial Officer
(Principal Accounting and Financial
Officer) and Director
19
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
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.
20