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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 December 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
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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 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 January 31, 2005, 6,211,690 shares of the Registrant's Common Stock, par
value $.001 per share, were outstanding.
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INDEX
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 - December 31, 2004 and
March 31, 2004 3
Consolidated Statements of Operations - Three and nine
months ended December 31, 2004 and 2003 4
Consolidated Statement of Stockholders' Equity - Nine
months ended December 31, 2004 5
Consolidated Statements of Cash Flows - Nine months
ended December 31, 2004 and 2003 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
- ---------------------------
Items 1-5. 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
December 31, 2004 and March 31, 2004
December 31, 2004 March 31, 2004*
----------------- ---------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 5,185,399 $ 3,164,158
Accounts receivable, net of allowance for doubtful accounts of
$90,031 at December 31, 2004 and $295,981 at March 31, 2004 7,031,120 10,504,973
Unbilled contracts in progress 3,058,120 2,083,507
Deferred contract costs 426,914 339,100
Prepaid taxes 357,139 449,582
Prepaid expenses and other current assets 524,798 608,175
------------- -------------
Total current assets 16,583,490 17,149,495
Property and equipment, net 2,344,208 2,598,929
Note and interest receivable from officer 782,928 762,276
Goodwill, net 19,895,694 19,895,694
Intangible asset 200,000 200,000
Deferred financing costs, net 83,027 72,905
Other assets 15,752 17,398
------------- -------------
Total assets $ 39,905,099 $ 40,696,697
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 6,462,647 $ 7,525,683
Deferred revenue 6,643,277 7,932,115
Accrued job costs 2,308,881 2,860,550
Accrued compensation - 96,127
Other accrued liabilities 1,700,938 1,480,070
Accrued taxes payable 928,768 -
Deferred taxes payable 170,169 63,016
Notes payable bank - current 4,022,000 1,450,000
Subordinated notes payable - current 425,000 425,000
------------- -------------
Total current liabilities 22,661,680 21,832,561
Notes payable bank - long term - 3,534,500
Minority interest of consolidated subsidiary 531,063 151,806
------------- -------------
Total liabilities 23,192,743 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 5,953,106 shares at December 31, 2004
and 5,941,856 shares at March 31, 2004 5,952 5,941
Additional paid-in capital 8,871,930 8,853,166
Retained earnings 7,834,474 6,318,723
------------- -------------
Total stockholders' equity 16,712,356 15,177,830
------------- -------------
Total liabilities and stockholders' equity $ 39,905,099 $ 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 Nine Months Ended December 31, 2004 and 2003
(Unaudited)
Three Months Ended December 31, Nine Months Ended December 31,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Sales $ 21,553,640 $ 19,076,940 $ 64,179,921 $ 55,458,455
Operating expenses:
Reimbursable costs and expenses 7,551,412 4,849,999 19,117,679 13,478,095
Outside production costs and expenses 5,315,723 6,302,216 20,290,060 18,512,288
Salaries, payroll taxes and benefits 5,048,108 5,260,631 15,190,113 14,566,372
General and administrative expense 2,150,498 2,769,905 6,455,831 7,391,150
------------- ------------- ------------- -------------
Total operating expenses 20,065,741 19,182,751 61,053,683 53,947,905
------------- ------------- ------------- -------------
Operating income (loss) 1,487,899 (105,811) 3,126,238 1,510,550
Interest expense, net 56,241 59,468 177,193 178,169
------------- ------------- ------------- -------------
Income (loss) before provision (benefit) for income
taxes, minority interest in net income of
consolidated subsidiary and cumulative effect
of change in accounting principle for revenue
recognition 1,431,658 (165,279) 2,949,045 1,332,381
Provision (benefit) for income taxes 504,292 (100,216) 1,054,037 516,666
------------- ------------- ------------- -------------
Net income (loss) before minority interest in net
income of consolidated subsidiary and cumulative
effect of change in accounting principle for
revenue recognition 927,366 (65,063) 1,895,008 815,715
Minority interest in net income of consolidated
subsidiary (268,978) (58,282) (379,257) (49,009)
------------- ------------- ------------- -------------
Net income (loss) before cumulative effect of
change in accounting principle for revenue
recognition 658,388 (123,345) 1,515,751 766,706
Cumulative effect of change in accounting
principle for revenue recognition, net of
income taxes - - - (2,182,814)
------------- ------------- ------------- -------------
Net income (loss) $ 658,388 $ (123,345) $ 1,515,751 $ (1,416,108)
============= ============= ============= =============
Net income (loss) per common share before cumulative
effect of change in accounting principle for
revenue recognition:
Basic $ .11 $ (.02) $ .26 $ .15
============= ============= ============= =============
Diluted $ .10 $ (.02) $ .24 $ .12
============= ============= ============= =============
Cumulative effect of change in accounting principle
for revenue recognition, net of income taxes $ - $ - $ - $ (.43)
------------- ------------- ------------- -------------
Net income (loss) per common share after cumulative
effect of change in accounting principle for
revenue recognition:
Basic $ .11 $ (.02) $ .26 $ (.28)
============= ============= ============= =============
Diluted $ .10 $ (.02) $ .24 $ (.28)
============= ============= ============= =============
Weighted average number of common shares outstanding
before cumulative effect of change in accounting
principle for revenue recognition:
Basic 5,943,255 5,137,179 5,942,324 5,130,925
Dilutive effect of options and warrants 665,859 - 469,279 1,078,539
------------- ------------- ------------- -------------
Diluted 6,609,114 5,137,179 6,411,603 6,209,464
============= ============= ============= =============
Weighted average number of shares outstanding after
cumulative effect of change in accounting
principle for revenue recognition:
Basic 5,943,255 5,137,179 5,942,324 5,130,925
============= ============= ============= =============
Diluted 6,609,114 5,137,179 6,411,603 6,209,464
============= ============= ============= =============
See accompanying notes to unaudited consolidated financial statements.
4
COACTIVE MARKETING GROUP, INC.
Consolidated Statement of Stockholders' Equity
Nine Months Ended December 31, 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)
Exercise of options 11,250 11 27,164 - 27,175
Net income - - - 1,515,751 1,515,751
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2004 5,953,106 $ 5,952 $ 8,871,930 $ 7,834,474 $ 16,712,356
============= ============= ============= ============= =============
See accompanying notes to unaudited consolidated financial statements.
5
COACTIVE MARKETING GROUP, INC.
Consolidated Statements of Cash Flows
Nine Months Ended December 31, 2004 and 2003
(Unaudited)
2004 2003
------------- -------------
Cash flows from operating activities:
Net income (loss) $ 1,515,751 $ (1,416,108)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
(Credit) provision for bad debt expense (72,544) 141,992
Depreciation and amortization 471,289 606,752
Deferred income taxes 107,153 206,782
Minority interest of consolidated subsidiary 379,257 49,373
Cumulative effect of change in accounting principle for revenue recognition - 2,182,814
Other - (363)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 3,546,397 (308,619)
(Increase) in unbilled contracts in progress (974,613) (103,468)
(Increase) in deferred contract costs (87,814) -
Decrease in prepaid taxes 92,443 -
Decrease (increase) in prepaid expenses and other assets 85,023 (95,162)
(Decrease) increase in accounts payable (1,063,036) 194,256
(Decrease) in deferred revenue (1,288,838) (2,379,676)
(Decrease) increase in accrued job costs (551,669) 2,048,787
Increase (decrease) in accrued taxes payable 928,768 (15,789)
Increase in other accrued liabilities 220,868 179,282
(Decrease) increase in accrued compensation (96,127) 3,943
------------- -------------
Net cash provided by operating activities 3,212,308 1,294,796
------------- -------------
Cash flows from investing activities:
Purchases of fixed assets (187,746) (1,332,878)
Acquisitions, net of cash acquired - (700,000)
Increase in note receivable from officer (20,652) (22,059)
Increase in cash for consolidation of variable interest entity - 35,691
------------- -------------
Net cash used in investing activities (208,398) (2,019,246)
------------- -------------
Cash flows from financing activities:
Borrowings - 500,000
Repayments of debt (962,500) (278,000)
Costs incurred in connection with sale of stock (8,400) -
Financing costs (38,944) (24,007)
Proceeds from exercise of stock options 27,175 6,563
------------- -------------
Net cash (used in) provided by financing activities (982,669) 204,556
------------- -------------
Net increase (decrease) in cash and cash equivalents 2,021,241 (519,894)
Cash and cash equivalents at beginning of period 3,164,158 1,336,886
------------- -------------
Cash and cash equivalents at end of period $ 5,185,399 $ 816,992
============= =============
Supplemental disclosures of cash flow information:
Interest paid during the period $ 204,997 $ 204,919
============= =============
Income tax paid during the period $ 13,552 $ 244,265
============= =============
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
December 31, 2004 and 2003
(1) Basis of Presentation
---------------------
The interim financial statements of CoActive Marketing Group, Inc. (the
"Company") for the three and nine months ended December 31, 2004 and 2003
have been prepared without audit. The consolidated statements of operations
have been modified to break out and reclassify as operating expenses 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 nine months ended December 31, 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. 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 reported as a cumulative effect of a change
7
in accounting principle of $2,183,000. For the three months ended December
31, 2003, the adoption of EITF 00-21 resulted in an increase in sales of
$1,647,000 and an increase in outside production costs of $1,058,000. For
the nine months ended December 31, 2003, the adoption of EITF 00-21
resulted in an increase in sales of $3,173,000 and an increase in outside
production costs of $2,077,000. 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
$(123,000) or $(.02) per basic common share and net income of $767,000 or
$.15 per basic common share for the three and nine months ended December
31, 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 nine
months ended December 31, 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 nine months ended December 31,
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 nine
months ended December 31, 2004, MarketVision had net income of $527,000 and
$744,000, respectively. For the three and nine months ended December 31,
2003, MarketVision had net income of $106,000 and $96,000, 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 December 31, 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.
8
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 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 nine
months ended December 31, 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
740,160 shares of common stock at prices ranging from $2.94 to $10.00 for
the three months ended December 31, 2004, 1,618,732 shares of common stock
at prices ranging from $2.49 to $10.00 for the nine months ended December
31, 2004 and 477,500 shares of common stock at prices ranging from $4.00 to
$10.00 per share for the three and nine months ended December 31, 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 the 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 the revolving loans was
increased to the bank's prime rate plus .50%, (iii) effective July 22,
2004, the Company was required to maintain minimum cash deposits with the
bank of not 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.
On December 27, 2004, the Amended and Restated Credit Agreement with the
bank was further amended such that the minimum cash deposits required to be
maintained with the bank was reduced to $2,000,000 at any time.
9
At December 31, 2004, the Company was in compliance with the covenants of
its Amended and Restated Credit Agreement. However, management expects that
net income before taxes (calculated in accordance with the Amended and
Restated Credit Agreement) for the fourth quarter ending March 31, 2005
will be less than the $1,000,000 required under the Amended and Restated
Credit Agreement. As such, the Company may be required to obtain an
amendment to the Amended and Restated Credit Agreement or a waiver from the
bank to avoid the occurrence of an event of default under the Amended and
Restated Credit Agreement following the conclusion of the fourth quarter
ending March 31, 2005. Accordingly, notes payable bank - current includes
$1,487,500 that would have otherwise been classified as notes payable bank
- long term in the Company's consolidated balance sheet at December 31,
2004.
(11) Income Taxes
------------
The provision (benefit) for income taxes for the three and nine months
ended December 31, 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" ("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 Nine Months Nine Months
Ended Ended Ended Ended
Dec. 31, 2004 Dec. 31, 2003 Dec. 31, 2004 Dec. 31, 2003
------------- ------------- ------------- -------------
Net income (loss) as reported $ 658,388 $ (123,345) $ 1,515,751 $ (1,416,108)
Less compensation expense determined
under the fair value method 91,167 60,976 273,479 182,928
------------ ------------ ------------ -------------
Pro forma net income (loss) $ 567,221 $ (184,321) $ 1,242,272 $ (1,599,036)
============ ============ ============ =============
Net income (loss) per share - Basic:
As reported $ .11 $ (.02) $ .26 $ (.28)
Pro forma $ .10 $ (.04) $ .21 $ (.31)
Net income (loss) per share - Diluted:
As reported $ .10 $ (.02) $ .24 $ (.28)
Pro forma $ .09 $ (.04) $ .19 $ (.31)
(13) New Accounting Standards
------------------------
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS No. 123R"), that addresses the accounting for share-based
payment transactions in which a company receives employee services in
exchange for (a) equity instruments of the company or (b) liabilities that
are based on the fair value of the company's equity instruments or that may
be settled by the issuance of such equity instruments. SFAS No. 123R
addresses all forms of share-based payment awards, including shares issued
under employee stock purchase plans, stock options, restricted stock and
stock appreciation rights. SFAS No. 123R eliminates the ability to account
for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees," that was provided in Statement
123 as originally issued. Under SFAS No. 123R companies are required to
record compensation expense for all share-based payment award transactions
measured at fair value. This statement is effective for quarters ending
after June 15, 2005. The Company has not yet determined the impact of
applying the various provisions of SFAS No. 123R.
10
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets." This statement amends Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as
a result of the exchange. The provisions of this statement are effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. Earlier application is permitted for nonmonetary asset
exchanges occurring in fiscal periods beginning after December 16, 2004.
The provisions of this statement should be applied prospectively. The
adoption of this statement is not expected to have a material effect on the
Company's consolidated financial statements.
EITF Issue 04-8, "The Effect of Contingently Convertible Instruments on
Diluted Earnings per Share." The EITF reached a consensus in September 2004
that contingently convertible instruments, such as contingently convertible
debt, contingently convertible preferred stock, and other such securities
should be included in diluted earnings per share (if dilutive) regardless
of whether the market price trigger has been met. The consensus is
effective for reporting periods ending after December 15, 2004. The
adoption of this pronouncement did not have an effect on the Company's
consolidated financial statements.
(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.
- --------------
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that are based on beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. When used in this report, the words
"estimate," "project," "believe," "anticipate," "intend," "expect," "plan,"
"predict," "may," "should," "will," the negative thereof or other variations
thereon or comparable terminology are intended to identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to future events based on currently available information and are
subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated in those forward-looking statements. Factors
that could cause actual results to differ materially from the Company's
expectations are set forth 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 multi-cultural 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 nine months
ended December 31, 2004, including the operations of TrikMedia for the three and
nine months ended December 31, 2004, to the Company's consolidated results of
operations for the three and nine months ended December 31, 2003, including the
operations of TrikMedia for the three months ended December 31, 2003. 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.
11
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 December 31, 2003, the adoption of EITF 00-21 resulted in an increase in
sales of $1,647,000 and an increase in outside production costs of $1,058,000.
For the nine months ended December 31, 2003, the adoption of EITF 00-21 resulted
in an increase in sales of $3,173,000 and an increase in outside production
costs of $2,077,000. 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 $(123,000) or $(.02) per basic common
share and net income of $767,000 or $.15 per basic common share for the three
and nine months ended December 31, 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 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 nine months ended
December 31, 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 nine months ended December 31, 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 nine months ended December 31, 2004,
MarketVision had net income of $527,000 and $744,000, respectively. For the
three and nine months ended December 31, 2003, MarketVision had net income of
$106,000 and $96,000, 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 nine months ended December 31,
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:
12
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Statement of Operations Data:
Sales 100.0% 100.0% 100.0% 100.0%
Reimbursable costs and expenses 35.0% 25.4% 29.8% 24.3%
Outside production costs and expenses 24.7% 33.0% 31.6% 33.4%
Salaries, payroll taxes and benefits 23.4% 27.6% 23.7% 26.3%
General and administrative expense 10.0% 14.5% 10.1% 13.3%
Total operating expenses 93.1% 100.6% 95.1% 97.3%
Operating income (loss) 6.9% (0.6)% 4.9% 2.7%
Interest expense, net 0.3% 0.3% 0.3% 0.3%
Income (loss) before provision (benefit) for
income taxes and minority interest in net
income of consolidated subsidiary 6.6% (0.9)% 4.6% 2.4%
Provision (benefit) for income taxes 2.3% (0.5)% 1.6% 0.9%
Minority interest in net income of consolidated subsidiary (1.2)% (0.3)% (0.6)% (0.1)%
Net income (loss) 3.1% (0.6)% 2.4% 1.4%
Sales. Sales for the quarter ended December 31, 2004 were $21,554,000,
compared to sales of $19,077,000 for the quarter ended December 31, 2003, an
increase of $2,477,000. Sales for the nine months ended December 31, 2004 were
$64,180,000, compared to sales of $55,458,000 for the nine months ended December
31, 2003, an increase of $8,722,000. The following table presents a comparative
summary of the components of sales for the three and nine month periods ended
December 31, 2004 and 2003:
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------------------------------- -----------------------------------------------
Sales 2004 % 2003 % 2004 % 2003 %
----- ------------ ------- ------------ ------- ------------ ------- ------------ -------
Core business $11,136,952 51.7 $13,394,427 70.2 $36,734,549 57.2 $38,866,152 70.1
Reimbursable costs and
expenses 7,551,412 35.0 4,849,999 25.4 19,117,679 29.8 13,478,095 24.3
MarketVision 2,865,276 13.3 832,514 4.4 8,327,693 13.0 3,114,208 5.6
------------ ------- ------------ ------- ------------ ------- ------------ -------
Total sales $21,553,640 100.0 $19,076,940 100.0 $64,179,921 100.0 $55,458,455 100.0
============ ======= ============ ======= ============ ======= ============ =======
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 type and scope of the promotional
service being provided.
The increase in sales attributable to MarketVision for both the quarter and
nine months ended December 31, 2004 was due to an increase in client demand for
the Company's Hispanic marketing services.
The Company experienced a decrease in core business sales in the quarter
ended December 31, 2004 primarily as a result of a delay in effecting the sales
of certain otherwise anticipated client contracts.
Operating Expenses. Operating expenses for the three and nine months ended
December 31, 2004 increased by $883,000 and $7,106,000, respectively, and
amounted to $20,066,000 and $61,054,000, respectively, compared to $19,183,000
and $53,948,000, respectively, for the three and nine months ended December 31,
2003. The increase in operating expenses for the three and nine 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 type and scope of the promotional
service being 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 months ended December 31, 2004 were $5,316,000 compared to $6,302,000
for the comparable prior year three month period, a decrease of $986,000.
Outside production costs for the nine months ended December 31, 2004 were
$20,290,000 compared to $18,512,000 for the comparable prior year nine month
period, an increase of $1,778,000. 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 based on the type and scope of the service
being provided. Accordingly, for the three and nine months ended December 31,
2004, outside production costs as a percentage of sales are reflective of the
aggregate mix of client projects during such periods.
13
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 nine months
ended December 31, 2004, salaries, payroll taxes and benefits were $5,048,000
and $15,190,000, respectively, compared to $5,261,000 and $14,566,000,
respectively, for the comparable prior year three and nine month periods. The
decrease in these costs of $213,000 for the three months ended December 31, 2004
was primarily attributable to a reduction of personnel at subsidiaries of the
Company other than MarketVision, offset by increased costs of $270,000 related
to added personnel of MarketVision to support MarketVision's increased level of
operations. The increase in these costs of $624,000 for the nine months ended
December 31, 2004 was primarily attributable to the net effect of the increased
costs of $511,000 related to added personnel of MarketVision to support
MarketVision's increased level of operations, offset by a decrease in costs
associated with 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 nine
months ended December 31, 2004 were $2,150,000 and $6,456,000, respectively,
compared to $2,770,000 and $7,391,000, respectively, for the comparable prior
year three and nine month periods, a decrease of $620,000 and $935,000,
respectively. The decrease in these expenses for the three and nine month
periods was primarily the result of the Company's continuing effort to more
effectively manage and control costs, offset by the inclusion of increased
expenses of $48,000 and $152,000, respectively, incurred in line with
MarketVision's growth for the three and nine months ended December 31, 2004.
General and administrative expense for the nine months ended December 31, 2004
includes an $84,000 credit for bad debt expense resulting from the reversal of
an allowance previously established for a particular doubtful account that was
collected during the first quarter.
Operating Income (Loss). As a result of the changes in sales and operating
expenses, the Company's operating income for the three and nine months ended
December 31, 2004 increased to $1,488,000 and $3,126,000, respectively, from an
operating loss of $(106,000) and operating income of $1,510,000 for the three
and nine months ended December 31, 2003, respectively. The operating income for
the three and nine months ended December 31, 2004 included $789,000 and
$1,044,000, respectively, of operating income attributable to MarketVision.
Interest Expense, Net. Net interest expense, consisting of interest expense
of $72,000 offset by interest income of $16,000, for the quarter ended December
31, 2004, amounted to $56,000, a decrease of $3,000, compared to net interest
expense of $59,000, consisting of interest expense of $112,000 offset by
interest income of $53,000, for the quarter ended December 31, 2003. Net
interest expense, consisting of interest expense of $207,000 offset by interest
income of $30,000, for the nine months ended December 31, 2004 amounted to
$177,000, a decrease of $1,000, compared to net interest expense of $178,000,
consisting of interest expense of $247,000 offset by interest income of $69,000,
for the nine months ended December 31, 2003. The decrease in interest expense
for the quarter and nine month period ended December 31, 2004 was primarily
related to the decrease in the Company's outstanding bank borrowings during such
periods, offset by an increase in interest rates.
Income (Loss) Before Provision (Benefit) for Income Taxes, Minority
Interest in Net Income of Consolidated Subsidiary and Cumulative Effect of
Change in Accounting Principle for Revenue Recognition. The Company's income
(loss) before provision (benefit) for income taxes, minority interest in net
income of consolidated subsidiary and cumulative effect of change in accounting
principle for revenue recognition for the three and nine months ended December
31, 2004 was $1,432,000 and $2,949,000, respectively, compared to a loss of
$(165,000) and income of $1,332,000 for the three and nine months ended December
31, 2003, respectively.
Provision (Benefit) For Income Taxes. The provision (benefit) for federal,
state and local income taxes for the three and nine month periods ended December
31, 2004 and 2003, was based upon the Company's estimated effective tax rate for
the respective fiscal years.
Minority Interest in Net Income of Consolidated Subsidiary. For the three
and nine months ended December 31, 2004, the Company reflected a non-cash charge
of $(269,000) and $(379,000), respectively, representing a third party's 51%
ownership interest in the net income of MarketVision, compared to a non-cash
charge of $(58,000) and $(49,000) for such third party's interest in the net
income of MarketVision for the three and nine months ended December 31, 2003,
respectively.
Cumulative Effect of Change in Accounting Principle for Revenue
Recognition. For the nine months ended December 31, 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 (Loss). As a result of the items discussed above, net income for
the three and nine months ended December 31, 2004 was $658,000 and $1,516,000,
respectively, compared to a net loss of $(123,000) and $(1,416,000),
respectively, for the prior year quarter and nine month period ended December
31, 2003.
14
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 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.
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% (6.25% and 5.75%, respectively, at December 31, 2004), (iii)
effective July 22, 2004, the Company was required to maintain minimum cash
deposits with the Lender of not less than $3,000,000 at any time, and (iv) the
Company paid the Lender a $25,000 amendment fee.
On December 27, 2004, the Amended and Restated Credit Agreement with the
Lender was further amended such that the minimum cash deposits required to be
maintained with the Lender was reduced to $2,000,000 at any time.
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 December 31, 2004 is as follows:
Cash $ 1,155,000
Current assets 3,783,000
Current liabilities 2,849,000
Working capital 934,000
Net cash provided by operating activities 1,071,000
15
At December 31, 2004, the Company had cash and cash equivalents totaling
$5,185,000, working capital deficit of $6,078,000, inclusive of $6,643,000 of
deferred revenue; bank debt in the amount of $4,022,000, 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 $16,712,000. 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
$3,212,000 for the nine months ended December 31, 2004. The net cash provided by
operating activities was primarily attributable to the Company's net income for
the nine months ended December 31, 2004, deferred income taxes and minority
interest of consolidated subsidiary.
Investing Activities. Cash used in investing activities amounted to
$208,000, as a result of $188,000 used to purchase fixed assets and an increase
in notes receivable from an officer of $20,000 attributable to accrued interest.
Financing Activities. Cash used in financing activities was $983,000, of
which $963,000 was used to repay bank borrowings, $39,000 was used to pay costs
associated with the Company's amended credit agreement, $8,000 was used to pay
costs incurred in connection with the sale of the Company's stock, and $27,000
was received from the exercise of stock options.
As a result of the net effect of the foregoing, the Company's cash and cash
equivalents at December 31, 2004 increased by $2,021,000. For the nine months
ended December 31, 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
Moving forward, business trends are positive. As clients seek to derive
greater efficiency and effectiveness from their marketing dollars, the demand
for the Company's services, which are oriented to deliver measurable results,
are expected to increase, particularly as it relates to the Hispanic market. As
such, the Company anticipates that sales and net income for the fourth quarter
and year ending March 31, 2005 will exceed sales and net income (loss) reported
in the prior year's fourth quarter and year ended March 31, 2004. However,
management expects that net income before taxes (calculated in accordance with
the Amended and Restated Credit Agreement) for the fourth quarter will be less
than the $1,000,000 required under the Amended and Restated Credit Agreement.
Accordingly, the Company may be required to obtain an amendment to the Amended
and Restated Credit Agreement or a waiver from the Lender to avoid the
occurrence of an event of default under the Amended and Restated Credit
Agreement following the conclusion of the fourth quarter ending March 31, 2005.
There can be no assurance that the Lender will agree to such a waiver or an
amendment, and in the event the Lender does not provide such waiver or
amendment, upon occurrence of an event of default the Lender would be entitled
to accelerate all amounts then due to it under the Amended and Restated Credit
Agreement.
The Company is in the process of consolidating its operations in
conjunction with the move of its headquarters into U.S. Concepts' offices in New
York City. This move and consolidation of certain of its operations are
anticipated to generate cost savings commencing in Fiscal 2006.
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 nine months
ended December 31, 2004, there were no material changes to these policies.
16
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 December 31, 2004, loans
outstanding under the Company's Credit Agreement amounted to $4,022,000 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 management expects to be profitable for the fourth quarter ending
March 31, 2005, management expects that net income before taxes (calculated in
accordance with the Amended and Restated Credit Agreement) for the fourth
quarter will be less than the $1,000,000 required under the Amended and Restated
Credit Agreement. Accordingly, the Company may be required to obtain a further
amendment to the Amended and Restated Credit Agreement or a waiver from the
Lender to avoid the occurrence of an event of default under the Amended and
Restated Credit Agreement following the conclusion of the fourth quarter. There
can be no assurance that the Lender will agree to such a waiver or an amendment,
and in the event the Lender does not provide such waiver or amendment, upon
occurrence of an event of default the Lender would be entitled to accelerate all
amounts then due to it under the Amended and Restated Credit Agreement which
could have a material adverse effect on the Company and its business.
Accordingly, notes payable bank - current includes $1,487,500 that would have
otherwise been classified as notes payable bank - long term in the Company's
consolidated balance sheet at December 31, 2004.
Need for Additional Funding. At December 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.
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 that 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.
17
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 that 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 December 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.
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 II - OTHER INFORMATION
---------------------------
Items 1-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits. See Exhibit Index
(b) Reports on Form 8-K.
On November 4, 2004, the Company filed a Current Report on Form 8-K
with respect to the press release it issued announcing its financial
results for its second fiscal quarter ended September 30, 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COACTIVE MARKETING GROUP, INC.
Dated: February 7, 2005 By: /s/ JOHN P. BENFIELD
------------------------------------
John P. Benfield, President
(Principal Executive Officer)
and Director
Dated: February 7, 2005 By: /s/ DONALD A. BERNARD
------------------------------------
Donald A. Bernard, Executive Vice
President and Chief Financial Officer
(Principal Accounting and Financial
Officer) and Director
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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