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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 2005
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 No.)
75 Ninth Avenue, New York, New York 11021
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 622-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of September 30, 2004, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $10,372,270.
As of June 27, 2005, 6,261,690 shares of Common Stock, $.001 par value, were
outstanding.
Documents Incorporated by Reference
Document Part of 10-K into which incorporated
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Definitive Proxy Statement relating to Part III
Registrant's 2005 Annual Meeting of
Stockholders
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PART I
This report contains certain "forward-looking statements" concerning the
Company's operations, economic performance and financial condition, which are
subject to inherent uncertainties and risks. Actual results could differ
materially from those anticipated in this report. When used in this report, the
words "estimate," "project," "anticipate," "expect," "intend," "believe" and
similar expressions are intended to identify forward-looking statements.
Item 1. Business.
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Corporate Overview
CoActive Marketing Group, Inc., through its wholly-owned
subsidiaries Inmark Services LLC, Optimum Group LLC, U.S. Concepts LLC and
Digital Intelligence Group LLC, together with its affiliate Garcia Baldwin, Inc.
doing business as MarketVision, is a multicultural, integrated sales promotional
and marketing services agency. We enjoy a client base predominantly consisting
of Fortune 500 companies. We develop, manage and execute sales promotion
programs at both national and local levels. Our programs help our clients
effectively promote their goods and services directly to retailers and consumers
and are intended to assist them in achieving a maximum impact and return on
their marketing investment. Our activities reinforce brand awareness, provide
incentives to retailers to order and display our clients' products, and motivate
consumers to purchase those products.
Our services include experiential and event marketing,
interactive marketing, Hispanic marketing, and all elements of consumer and
trade promotion and are marketed directly to our clients by our sales force
operating out of offices located in Great Neck and New York, New York;
Cincinnati, Ohio; Atlanta, Georgia; Chicago, Illinois; Irvine and San Francisco,
California and San Antonio, Texas.
CoActive was formed under the laws of the State of Delaware in
March 1992 and is the successor to a sales promotion business originally founded
in 1972. CoActive began to engage in the promotion business following a merger
consummated on September 29, 1995 that resulted in Inmark becoming its
wholly-owned subsidiary.
Our corporate headquarters are located at 75 Ninth Avenue, New
York, New York 10011, and our telephone number is 516-622-2800. Our Web site is
www.coactivemarketing.com. Copies of all reports we file with the Securities and
Exchange Commission are available on our Web site.
Subsidiaries and Affiliate
The services offered by our subsidiaries and affiliate are
complementary with each other and have allowed us to broaden the scope of our
services and achieve positive results from our cross-selling efforts.
Inmark provides traditional promotional services, which
primarily consist of developing radio and television promotional programs for
manufacturers of packaged goods. The promotional programs often include
additional components, such as coupons and sweepstakes. In most instances, in
addition to developing the promotional program, Inmark will purchase the
broadcast media and administer the program on behalf of its client. The programs
frequently include the participation of retailers who are allocated a portion of
the purchased media, at no cost, for their support of the promotion and
prominent featuring of the manufacturer's products.
2
Optimum, acquired on March 31, 1998, provides strategic
planning (including marketing positioning, brand strategy and
marketing/promotion plan development), creative marketing, visual communications
and graphic design services.
U.S. Concepts, acquired on December 31, 1998, provides event
and experiential marketing programs, entertainment marketing and on-premise
promotion services. U.S. Concepts' programs include concerts, tours and
festivals, sales driven sampling activities, demonstration programs and other
events that introduce and promote its clients' brands, services and products.
U.S. Concepts provides complete "turnkey" execution of its events.
MarketVision is a minority owned, predominately Hispanic,
ethnically oriented promotion agency headquartered in San Antonio, Texas.
MarketVision provides marketing and promotional services comparable to those
provided by CoActive's subsidiaries with an emphasis on increasing sales of its
clients' products in the Hispanic community. CoActive acquired 49% of
MarketVision's shares of capital stock on February 27, 2001.
Digital Intelligence, formerly known as TrikMedia, Inc.,
acquired on October 29, 2003, provides digital marketing and advertising
services, interactive software development and content creation.
What We Do
We execute a wide range of precision strategies and tactics to
achieve specific and measurable objectives for our clients. In contrast with
general advertising agencies that promote brand awareness, as a promotions
agency, we provide specialized services with the goal of increasing sales of our
client's products and services as a direct and verifiable consequence of our
programs.
As domestic manufacturers and their channels of distribution
consolidate and re-align, and as a result of changes in lifestyles and
demographics, reaching marketing targets to achieve bottom line return on
investment of marketing funds has become more specialized and demanding than in
the past. We have an array of in-house core competencies which enable us to
integrate a wide range of tools and tactics on our clients' behalf. These
competencies, some of which are more fully described below, include interactive,
customized e-marketing, targeted broadcast, account specific co-marketing,
experiential marketing and "buzz" marketing, strategic planning, concept
development, and graphic design.
Experiential Marketing
U.S. Concepts is among the nation's most awarded event,
experiential, mobile and field marketing resource. U.S. Concepts designs and
executes brand experiences based on the philosophy that "continuous consumer
contact drives brand growth." Clients' expectations can be exceeded through the
effective and efficient connecting of brands and consumers.
Interactive Marketing
An increasing number of consumers are using the Internet as a
resource for purchasing decisions, and consumer packaged goods companies are
responding to this in their marketing outreach. According to PROMO Magazine's
Industry Trends Report, Interactive promotional spending grew approximately 24%
in 2004. Our Digital Intelligence Group delivers technological and creative
communications programs for a clientele that includes global and Fortune 500
companies.
Hispanic Marketing
As a multicultural agency, we help our clients address the
exploding double-digit growth in the Latino market. Our MarketVision affiliate
creates marketing programs to address this need. These programs reflect and
respect the Hispanic population's cultural values and lifestyles. MarketVision
designs and executes strategic integrated Hispanic marketing initiatives
grounded in brand position for its clients, retail customers and consumers.
3
Strategic Planning
Taking into account each client's need for brand positioning,
message creation and the selection of the appropriate communication channels to
be employed, we immerse ourselves in our client's business and collaborate with
their marketing team to develop a strategic plan. Once the plan is agreed upon,
we focus on creative development and implementation, recognizing that successful
execution is as important as the plan.
Trade Marketing
We have extensive experience in developing customized programs
for retailers in a variety of channels. We are active in all major channels
including mass, grocery, drug, do-it-yourself (or "DIY") and convenience. With
our clients, we present marketing and promotional programs to retailers,
capitalizing on established relationships we have cultivated with these
retailers over many years.
The Industry
The industry is composed of hundreds of large and small
companies, and is dominated by affiliates of advertising agencies.
Promotional Magazine's 2004 Annual Report of the U.S.
Promotion Industry reported promotional marketing spending of $313 billion in
2004, up 9% over 2003. The revenues in this segment came from event marketing,
premiums and incentives; direct mail; retail; sponsorship; coupons; specialty
printing; licensing; fulfillment; agency revenues; interactive/online; games,
contests and sweepstakes; and samplings. Historically, most of the industry's
revenues originate from specific assignments on a project-by-project basis from
continuing client relationships. As the credibility and recognized value of
integrated marketing and promotional services tend to increase, a number of
clients are designating more promotion and related specialty marketing firms as
their specific promotion agency of record, thereby establishing the designated
agency as an exclusive promotion service supplier.
Premier Client Roster
The Company's principal clients are manufacturers of packaged
goods and other consumer products, generally among the Fortune 500 companies.
Our client partners are actively engaged in promoting their products both to the
"Trade" (i.e., retailers, distributors, etc.) and to consumers, and include,
among others, The Procter & Gamble Company, Diageo North America, Inc., HBO,
Coca-Cola, AOL, Fisher-Price, The Scotts Company, T-Mobile, The Valvoline
Company, Pfizer Corp., Coty, Fresh Express, Inc., Nintendo, Kikkoman
International, Inc., Dell Inc., Best Buy, and ACH Food Cos. Our Trade partners
include Albertsons, Safeway, Pathmark, Kroger, H-E-B, Wal-Mart, Target,
Walgreens, Rite Aid, Eckerd, CVS, Lowe's, The Home Depot and Fasmart.
For our fiscal years ended March 31, 2005 and 2004, Diageo
North America, Inc. accounted for approximately 27% and 13%, respectively, of
our revenues, and for our fiscal years ended March 31, 2005, 2004 and 2003,
Schieffelin & Somerset Co. and its successor companies accounted for
approximately 13%, 30% and 35%, respectively, of our revenues. At March 31, 2005
and 2004, Diageo accounted for 9% and 12%, respectively, of our accounts
receivable, and at March 31, 2005 and 2004, Schieffelin accounted for 1% and
35%, respectively, of our accounts receivable.
4
To the extent that we continue to have a heavily weighted
sales concentration with one or more clients, the loss of any such client could
have a material adverse affect on our earnings. Unlike traditional general
advertising firms, which are engaged as agents of record on behalf of their
clients, promotional companies such as CoActive, typically are engaged on a
product-by-product, or project-by-project basis. However, our relationship with
certain of our clients has continued in excess of 20 years and we currently have
a few agency of record relationships.
Backlog
At March 31, 2005, our sales backlog, exclusive of
reimbursable costs and expenses, amounted to approximately $22,602,000 compared
to a sales backlog of approximately $15,809,000 at March 31, 2004. As described
further below our revenue patterns are unpredictable and may vary significantly
from period to period. Our backlog at any given point in time is similarly
subject to fluctuation.
Competition
The market for promotional services is highly competitive,
with hundreds of companies claiming to provide various services in the
promotions industry. In general, our competition is derived from two basic
groups: other full service promotion agencies, and companies which specialize in
providing one specific aspect of a general promotional program. Some of our
competitors are affiliated with larger general advertising agencies, and have
greater financial and marketing resources available than we do. These
competitors include Imperic (which is affiliated with Young & Rubicam), J.
Brown/LMC (which is affiliated with Grey Advertising), GMR Marketing and USM&P
(which are divisions of Omnicom Group, Inc.), CMI (which is a division of Clear
Channel Communications), Pierce Promotions, Inc., and Market Drive Worldwide
(which is a division of the FCB Group). Niche competitors include Don Jagoda,
Inc., which specializes in sweepstakes, and Catalina Marketing, Inc., which
specializes in cash register couponing programs.
Employees
The Company currently has 247 full-time and 3,091 part-time
employees, involved in sales, marketing support, program management, in-store
sampling and demonstration, interactive and information technology, finance and
administration. None of our employees are represented by a labor organization
and we consider our relationship with our employees to be good.
Risk Factors
Outstanding Indebtedness; Security Interest. At March 31,
2005, loans outstanding from our secured lender amounted to $4,584,500, and we
had $2,415,500 of borrowing availability under our revolving credit facility. As
security for our obligations under our Credit Agreement, we have granted the
lender a first priority security interest in all of our assets. In the event of
a 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, and the rights and remedies of a secured party under
applicable law. In the past we have been required to obtain waivers with respect
to our non-compliance with financial covenants provided for in the Credit
Agreement, and we may be required to do so in the future. However, there can be
no assurance that the lender would waive any future non-compliance with these
covenants.
5
Recent Loss. We sustained a net loss of approximately
$2,745,000 for our fiscal year ended March 31, 2004. This loss was due in part
to the unpredictable revenue patterns associated with our business, as described
below. Although we were profitable for fiscal 2005, there can be no assurance we
will be profitable in future periods.
Dependence on Key Personnel. Our business is managed by a
limited number of key management and operating personnel. The loss of any one of
those persons could have a material adverse impact on our business. We believe
that our future success will depend in large part on our continued ability to
attract and retain highly skilled and qualified personnel. Each of our key
executives is a party to an employment agreement that expires in 2006.
Customers. A substantial portion of our 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 if a particular client reduces its budget
allocated to the services we provide.
Unpredictable Revenue Patterns. A significant portion of our
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, our 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. Some of these companies have greater financial and
marketing resources than we do. We compete on the basis of the quality and the
degree of comprehensive services which we provide to our clients. There can be
no assurance that we will be able to continue to compete successfully with
existing or future industry competitors.
Risks Associated with Acquisitions. An integral part of our
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 future acquisitions, if any,
will be successful.
Expansion Risk. In the past, we have experienced periods of
rapid expansion. This growth has increased our operating complexity as well as
the level of responsibility for both existing and new management personnel. Our
ability to manage our expansion effectively will require us to continue to
implement and improve our operational and financial systems and to expand, train
and manage our employee base. Our inability to effectively manage expansion
could have a material adverse effect on our business.
Control by Executive Officers and Directors. Our executive
officers and directors collectively beneficially own a significant percentage of
the voting stock of CoActive and, in effect, have the power to influence
strongly the outcome of all matters requiring stockholder approval, including
the election or removal of directors and the approval of significant corporate
transactions. Such voting could also delay or prevent a change in the control of
CoActive in which the holders of CoActive Common Stock could receive a
substantial premium. In addition, our Credit Agreement requires our executive
officers to maintain, at a minimum, a 15% beneficial ownership of CoActive
Common Stock during the term of the Credit Agreement.
6
Item 2. Properties.
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The Company has the following leased facilities:
Square Fiscal
Facility Location Feet 2005 Rent (3)
- ----------------------------------------- -------------------------- -------- -------------
Principal office of CoActive and
principal and sales office of
U.S. Concepts New York, New York 33,200 $ 765,000
Principal and sales office of Inmark Great Neck, New York 16,700 $ 345,000
Principal and sales office of Optimum (1) Cincinnati, Ohio 17,000 $ 160,000
Principal and sales office of
MarketVision (2) San Antonio, Texas 9,900 $ 211,000
Other sales offices of
Inmark, Optimum, U. S. Concepts Chicago, Illinois 5,000
and MarketVision San Francisco, California 900
Irvine, California 1,400
Atlanta, Georgia 100
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Total 7,400 $ 138,000
Warehouses of Optimum New York, New York 1,000
and U.S. Concepts used Miami Beach, Florida 1,300
for storage of promotional items Houston, Texas 350
Southfield, Michigan 350
Cincinnati, Ohio 250
Fairfield, Ohio 400
Chicago, Illinois 5,500
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Total 9,150 $ 106,000
(1) The Company leases this facility from Thomas Lachenman, a director of
the Company and the former owner of Optimum Group, Inc. This lease
expires in December 2010.
(2) Represents a new lease with rent which commenced on May 20, 2005, in
replacement of a lease for 4,400 square feet with an annual base rent
of $57,000 which terminated on May 31, 2005. MarketVision leases this
facility from an entity owned and controlled by Yvonne Garcia,
MarketVision's President and 51% owner. The amount in the table above
represents the costs for this new office.
(3) Amounts listed are prior to any reimbursements from clients.
With the exception of the principal office leases for Great Neck, New York,
Cincinnati, Ohio, San Antonio, Texas and New York, New York, which at March 31,
2005 have remaining terms of approximately three years, five years, five years
and ten years, respectively, each of the Company's other facility leases are
short term and renew annually. For a summary of the Company's minimal rental
commitments under all non-cancelable operating leases as of March 31, 2005, see
note 5 to the Notes to Consolidated Financial Statements.
The Company considers its facilities sufficient to maintain its current
operations.
Item 3. Legal Proceedings.
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None.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
Not Applicable.
7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------- ---------------------------------------------------------------------
Market Information
The Company's Common Stock is traded on the Nasdaq SmallCap
Market under the symbol CMKG. The following table sets forth for the periods
indicated the high and low trade prices for CoActive Common Stock as reported by
Nasdaq. The quotations listed below reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
Common Stock
------------
High Low
---- ---
Fiscal Year 2004
- ----------------
First Quarter 3.700 1.900
Second Quarter 4.950 2.750
Third Quarter 4.900 2.640
Fourth Quarter 3.490 2.230
Fiscal Year 2005
- ----------------
First Quarter 3.020 1.380
Second Quarter 2.650 1.360
Third Quarter 4.240 2.200
Fourth Quarter 4.640 3.060
On June 15, 2005, there were 6,261,690 shares of CoActive
Common Stock outstanding, approximately 57 shareholders of record and
approximately 800 beneficial owners of shares held by a number of financial
institutions.
No cash dividends have ever been declared or paid on CoActive
Common Stock. The Company intends to retain earnings, if any, to finance future
operations and expansion and does not expect to pay any cash dividends in the
foreseeable future. In addition, the Company is prohibited from paying any cash
dividends during the term of the Credit Agreement. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Equity Compensation Plan Information
The following table sets forth information with respect to
equity compensation plans (including individual compensation arrangements) of
the Company as of March 31, 2005.
(a) (b) (c)
Number of securities
Number of securities remaining available for
to be issued upon Weighted average future issuance under
exercise of outstanding exercise price of equity compensation plans
options, warrants outstanding options, (excluding securities
Plan category and rights warrants and rights reflected in column (a))
- ------------- ----------------------- -------------------- -------------------------
Equity compensation
plans approved by
security holders 1,992,238 $2.42 12,500
Equity compensation
plans not approved
by security holders 81,532 $3.68 --
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Total 2,073,770 $2.47 12,500
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8
Item 6. Selected Financial Data.
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The selected financial data reported below has been derived
from the Company's audited financial statements for each fiscal year ended March
31 within the five year period ended March 31, 2005. The selected financial data
reported below should be read in conjunction with the consolidated financial
statements and related notes thereto and other financial information appearing
elsewhere herein.
Year Ended Year Ended Year Ended Year Ended Year Ended
March 31, March 31, March 31, March 31, March 31,
2001 2002 2003 2004(1) 2005(1)
------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
Sales (2) $ 58,609,347 $ 59,264,617 $ 59,956,204 $ 69,280,484 $ 84,300,217
Operating Expenses 56,268,799 57,249,529 56,943,825 69,530,316 80,977,737
Operating Income (Loss) 2,340,548 2,015,088 3,012,379 (249,832) 3,322,480
Income (Loss) before Provision
(Benefit) for Income Taxes, Equity
in Loss of Affiliate, Minority
Interest in Net Income of
Consolidated Subsidiary and 1,465,412 1,637,082 2,974,258 (490,120) 3,095,997
Cumulative Effect of Change in
Accounting Principle
Provision (Benefit) for Income Taxes 583,382 708,818 1,189,676 (33,008) 1,240,417
Equity in Loss of Affiliate -- (18,000) (11,500) -- --
Minority Interest in Net Income of
Consolidated Subsidiary -- -- -- (105,359) (494,165)
Net Income (Loss) before Cumulative
Effect of Change in Accounting
Principle for Revenue Recognition 882,030 910,264 1,773,082 (562,471) 1,361,415
Cumulative Effect of Change in
Accounting Principle for Revenue
Recognition, Net of Income Taxes(3)(4) (502,800) -- -- (2,182,814) --
Net Income (Loss) 379,230 910,264 1,773,082 (2,745,285) 1,361,415
Net Income (Loss) per Common Share
before Cumulative Effect of Change
in Accounting Principle for
Revenue Recognition:
Basic $ .18 $ .18 $ .35 $ (.11) $ .23
Diluted $ .16 $ .17 $ .32 $ (.11) $ .21
Cumulative Effect of Change in Accounting
Principle for Revenue Recognition, Net
of Income Taxes:
Basic $ (.10) $ -- $ -- $ (.41) $ --
Diluted $ (.09) $ -- $ -- $ (.41) $ --
Net Income (Loss):
Basic $ .08 $ .18 $ .35 $ (.52) $ .23
Diluted $ .07 $ .17 $ .32 $ (.52) $ .21
Pro Forma Amounts Assuming the
Change in Accounting Principle for
Revenue Recognition is Applied
Retroactively:
Net Income (Loss) 796,496 1,128,478 224,679 -- --
Net Income (Loss) per Common Share:
Basic $ .16 $ .22 $ .04 -- --
Diluted $ .15 $ .21 $ .04 -- --
March 31, March 31, March 31, March 31, March 31,
2001 2002 2003 2004(1) 2005(1)
------------ ------------ ------------ ------------ ------------
Balance Sheet Data:
Working Capital (Deficiency) (3,877,534) (2,749,170) (718,147) (4,767,993) (926,248)
Total Assets 35,004,400 36,872,138 39,098,698 40,781,624 42,337,757
Current Debt 2,983,333 2,358,333 1,375,000 1,875,000 1,000,000
Long-Term Debt 3,801,667 3,333,333 4,500,000 3,534,500 3,584,500
Total Liabilities 21,886,012 22,831,586 23,277,864 25,603,794 25,002,335
Stockholders' Equity 13,118,388 14,040,552 15,820,834 15,177,830 17,335,422
(1) Includes the operations and accounts of the Company and the operations and
accounts of Digital Intelligence, which was acquired on October 29, 2003,
for the twelve months and five months ended March 31, 2005 and 2004,
respectively, and the operations and accounts of MarketVision, which is a
variable interest entity, for the years ended March 31, 2005 and 2004,
pursuant to Company's adoption of Financial Accounting Standards Board's
("FASB") Interpretation ("FIN") No. 46 (revised 2003), Consolidation of
Variable Interest Entities-an Interpretation of ARB No. 51, as the Company
has determined that it is the primary beneficiary of MarketVision.
9
(2) Restated for the years ended March 31, 2001 and 2002 to reflect the
adoption of EITF 01-14, Income Statement Characterization of Reimbursements
Received for "Out-of-Pocket" Expenses Incurred ("EITF 01-14"). EITF 01-14
requires reimbursements received for "out-of-pocket" expenses to be
characterized as revenues. The resulting costs are now recorded as
reimbursable expenses resulting in no change in operating income. The
impact of the Company's adoption of EITF 01-14 was to increase revenues and
operating expenses by $9,841,290, $8,208,694, $11,669,664, $20,002,471 and
$29,999,150 for the years ended March 31, 2001, 2002, 2003, 2004 and 2005,
respectively.
(3) For the year ended March 31, 2001, the cumulative effect of change in
accounting principle for revenue recognition is a one-time non-cash charge
relating to the Company's adoption of Staff Accounting Bulletin No. 101
("SAB 101"). SAB 101 was issued by the Securities and Exchange Commission
("SEC") in December 1999. SAB 101 provides guidance related to revenue
recognition policies based on interpretations and practices followed by the
SEC. The impact of the Company's adoption of SAB 101 was to defer revenue
recognition and the related expense for certain portions of revenue and
expense previously recognized by the Company under its project arrangements
with its clients into future accounting periods.
(4) For the year ended March 31, 2004, the cumulative effect of change in
accounting principle for revenue recognition is a one-time non-cash charge
relating to the Company's adoption of EITF 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables ("EITF 00-21") issued in May 2003.
The Company adopted the provisions of EITF 00-21 effective April 1, 2003,
the beginning of the Company's fiscal year ended March 31, 2004. EITF 00-21
provides guidance related to revenue recognition with respect to contracts
with multiple revenue generating activities. The impact of the Company's
adoption of EITF 00-21 was to defer revenue recognition and the related
expense for certain portions of revenue and expense previously recognized
by the Company under its project arrangements with its clients into future
accounting periods.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations.
-------------
Forward Looking Statements.
This report contains forward-looking statements which the
Company believes to be within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, that are based on beliefs of the Company's management as well as
assumptions made by and information currently available to the Company's
management. When used in this report, the words "estimate," "project,"
"believe," "anticipate," "intend," "expect," "plan," "predict," "may," "should,"
"will," the negative thereof or other variations thereon or comparable
terminology are intended to identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events based on
currently available information and are subject to risks and uncertainties that
could cause actual results to differ materially from those contemplated in those
forward-looking statements. Factors that could cause actual results to differ
materially from the Company's expectations include but are not limited to those
described above in "Risk Factors." Other factors may be described from time to
time in the Company's public filings with the Securities and Exchange
Commission, news releases and other communications. The forward-looking
statements contained in this report speak only as of the date hereof. The
Company does not undertake any obligation to release publicly any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
Overview
Fiscal 2005 marked a return to profitability for CoActive,
primarily as a result of increased demand for our Hispanic, event and
interactive marketing services. Fiscal 2005 net income amounted to $1,361,000.
On March 24, 2005, we entered into an Amended and Restated
Credit Agreement with Signature Bank ("Signature"), under which amounts
available for borrowing under our revolving credit line were increased by
$2,415,500 to $3 million, and the term loan portion of the credit facility was
increased by $1,050,000 to $4 million. On March 25, 2005, Signature advanced us
the increased portion of the term loan, a portion of which was used to repay the
remaining $425,000 in principal outstanding under our 9% subordinated note we
issued in connection with our acquisition of Optimum. At March 31, 2005, our
bank borrowings were $4,584,500, a decrease of $400,000 compared to bank
borrowings of $4,984,500 at March 31, 2004.
10
During Fiscal 2005, we moved our corporate offices into the
New York City offices of our U.S. Concepts subsidiary and in conjunction with
the move, to effect efficiencies and potential savings; we centralized the
Company's finance, accounting and human resource departments in the New York
City offices.
The following information should be read together with the
consolidated financial statements and notes thereto included elsewhere herein.
Adoption of Accounting Standards
The Company adopted EITF 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21"), in the fourth quarter
of Fiscal 2004. EITF 00-21, which became effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003, provides guidance
on how to determine when an arrangement that involves multiple
revenue-generating activities or deliverables should be divided into separate
units of accounting for revenue recognition purposes, and if this division is
required, how the arrangement consideration should be allocated among the
separate units of accounting. Prior to the adoption of EITF 00-21, the Company
recognized revenue on its broadcast media and special event contracts on the
percentage-of-completion method over the life of the contract as identifiable
phases of services, such as concept creation and development, media purchase,
production, media airing and event execution occurred. Under that method, the
Company generally recognized a portion of revenues attributable to those
contracts upon signing by the Company's clients. Pursuant to EITF 00-21, with
regard to contracts with multiple deliverables, the Company now recognizes
income for each unit of accounting, as defined, identified within a contract. In
contracts with multiple deliverables where separate units of accounting can not
be defined, all of the contract's revenue is recognized 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 in Fiscal 2004
reported as a cumulative effect of a change in accounting principle of
$2,183,000. The pro forma amounts presented in the consolidated statements of
operations were calculated assuming the change in accounting principal was made
retroactively to all years presented. For Fiscal 2004, the adoption of EITF
00-21 resulted in an increase in sales of $2,479,000 and an increase in outside
production costs and expenses of $1,639,000. After giving effect to the
implementation of EITF 00-21 and before the cumulative effect of the change in
method of accounting for revenue recognition, the Company had a net loss of
$(562,000) or $(.11) per common share for Fiscal 2004.
In January 2003, the FASB issued Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities - 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 fiscal years ended
March 31, 2005 and 2004 are included in the consolidated financial statements of
the Company, whereas for prior fiscal years, under the equity method of
11
accounting, the Company reported its investment in MarketVision as adjusted for
its share of net income or loss in the Company's financial statements. The
Fiscal 2003 financial statements were not restated as the effects were
immaterial. The effect of the Company's adoption of FIN 46R did not impact the
Company's Fiscal 2004 net loss.
Lease Accounting Correction
- ---------------------------
Until the fourth quarter of Fiscal 2005, the Company
recognized certain lease obligations as they became due and payable. In light of
recent announcements made by a number of public companies regarding lease
accounting and SEC clarification on the subject, the Company corrected its lease
accounting. As a result with regard to one of its office leases, the Company
corrected its computation of rent expense, depreciation of leasehold
improvements and the classification of landlord allowances related to leasehold
improvements. The correction does not affect the Company's historical or future
cash flows or the timing of payments under the related lease. The effect on the
Company's prior years' earnings (loss) per share, cash flow from operations and
stockholders' equity were deemed to be immaterial requiring no restatement.
The Company has historically received reimbursements from
certain clients for expenses, including, but not limited to, rent. Such
reimbursements are made based on current rental payments payable independent of
any straight-lining accounting methodology. Accordingly, in order to match the
effect of the straight line rent adjustment to projected future reimbursements
from clients, the Company has recorded a deferred asset for the estimated
portion allocable to these clients as of March 31, 2005. At March 31, 2005, the
projected reimbursements from these clients for the effect of the straight line
adjustment amounted to approximately $371,000 and are included in other assets.
This asset will be amortized over the period of the clients' expected
reimbursement. Should any of these clients elect not to renew their contracts
with the Company prior to the payment of such amounts, the remaining asset or
portion thereof, may result in a charge to earnings.
The correction was recorded by the Company in the fourth
quarter of Fiscal 2005 and resulted in a non-cash pre-tax reduction in earnings
of approximately $299,000. In addition, in connection with the correction, the
Company recorded an increase in property and equipment - leasehold improvements,
of $1,979,000, an increase in other assets of $371,000, an increase in deferred
rent of $2,649,000 and a decrease in deferred taxes payable of $119,000.
Significant Customers
For the fiscal years ended March 31, 2005 and 2004, Diageo
North America, Inc. accounted for approximately 27% and 13%, respectively, of
the Company's revenues. For the fiscal years ended March 31, 2005, 2004 and
2003, Schieffelin & Somerset Co. and its successor entities ("S&S") accounted
for approximately 13%, 30% and 35%, respectively, of its revenues. These
revenues included revenues attributable to reimbursable costs and expenses for
Diageo of 17% and 5%, respectively, for the years ended March 31, 2005 and 2004,
and 9%, 21% and 19% for S&S, respectively, for the years ended March 31, 2005,
2004, and 2003. At March 31, 2005 and 2004, Diageo accounted for 9% and 12%,
respectively, of the Company's accounts receivable. At March 31, 2005 and 2004,
S&S accounted for 1% and 35%, respectively, of accounts receivable.
To the extent the Company's sales are dependent on one client
or a limited concentration of clients, and such dependency continues,
significant fluctuations in revenues, results of operations and liquidity could
arise should such client or clients reduce their budgets allocated to the
Company's activities.
12
Critical Accounting Policies
The Company's significant accounting policies are described in
Note 1 to the consolidated financial statements included in Item 8 of this Form
10-K. The Company believes the following represent its critical accounting
policies:
Estimates and Assumptions
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires the
Company to make estimates and assumptions that affect the reported amounts of
assets and liabilities and of revenues and expenses during the reporting period.
Estimates are made when accounting for revenue (as discussed below under
"Revenue Recognition"), depreciation, amortization, bad debt reserves, income
taxes and certain other contingencies. The Company is subject to risks and
uncertainties that may cause actual results to vary from estimates. The Company
reviews all significant estimates affecting the financial statements on a
recurring basis and records the effect of any adjustments when necessary.
Revenue Recognition
The Company's revenues are generated from projects subject to
contracts requiring the Company to provide its services within specified time
periods generally ranging up to twelve months. As a result, on any given date,
the Company has projects in process at various stages of completion. Depending
on the nature of the contract, revenue is recognized as follows: (i) on time and
material service contracts, revenue is recognized as services are rendered and
the costs are incurred; (ii) on fixed price retainer contracts, revenue is
recognized on a straight-line basis over the term of the contract; (iii) on
fixed price multiple services contracts, revenue is recognized over the term of
the contract for the fair value of segments of the services rendered which
qualify as separate activities or delivered units of service, to the extent
multi-service arrangements are deemed inseparable, revenue on these contracts is
recognized as the contracts are completed; (iv) on certain fixed price
contracts, revenue is recognized on a percentage of completion basis, whereby
the percentage of completion is determined by relating the actual costs incurred
to date to the estimated total costs for each contract; (v) on certain fixed
price contracts, revenue is recognized on the basis of proportional performance
as certain key milestones are delivered. 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. The
Company's business is such that progress towards completing projects may vary
considerably from quarter to quarter.
If the Company does not accurately estimate the resources
required or the scope of work to be performed, or does not manage its projects
properly within the planned periods of time to satisfy its obligations under the
contracts, then future profit margins may be significantly and negatively
affected or losses on existing contracts may need to be recognized. The
Company's outside production costs consist primarily of costs to purchase media
and program merchandise; costs of production, merchandise warehousing and
distribution, third party contract fulfillment costs; and other costs directly
related to marketing programs. Any such resulting reductions in margins or
contract losses could be material to the Company's results of operations.
In many instances, revenue recognition will not result in
related billings throughout the duration of a contract due to timing differences
between the contracted billing schedule and the time such revenue is recognized.
In such instances, when revenue is recognized in an amount in excess of the
contracted billing amount, the Company records such excess on its balance sheet
as unbilled contracts in progress. Alternatively, on a scheduled billing date,
should the billing amount exceed the amount of revenue recognized, the Company
records such excess on its balance sheet as deferred revenue. In addition, on
13
contracts where costs are incurred prior to the time revenue is recognized on
such contracts, the Company records such costs as deferred contract costs on its
consolidated balance sheet.
Goodwill and Other Intangible Asset
The Company's goodwill consists of the cost in excess of the
fair market value of the acquired net assets of its subsidiary companies,
Inmark, Optimum, U.S. Concepts, MarketVision and Digital Intelligence, which
have been identified as the Company's reporting units. The Company also has an
intangible asset consisting of an Internet domain name and related intellectual
property rights. At March 31, 2005 and 2004, the Company's balance sheet
reflected goodwill in the amount of approximately $19,896,000 and an intangible
asset in the amount of $200,000.
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 and
intangible assets 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 review, if impairment is found to have occurred, a
corresponding charge will be recorded.
The Company has completed its annual impairment review for
each reporting unit as of March 31, 2005 and no impairment in the recorded
goodwill and intangible asset was identified. The Company has noted no
subsequent indicators that would require testing of goodwill or the intangible
asset for impairment. Goodwill and the intangible asset will be tested annually
at the end of each fiscal year to determine whether they have been impaired.
However, in the future, upon completion of each annual review, there can be no
assurance that a material charge will not be recorded.
Results of Operations
The following table presents the reported operating results
for the fiscal years ended March 31, 2005 and 2004, and pro forma financial data
for the fiscal year ended March 31, 2003. The financial data for Fiscal 2003 has
been retroactively adjusted for the EITF 00-21 accounting change effective April
1, 2003, and is exclusive of (i) the associated cumulative effect of the change
in accounting principle and (ii) the operating results of MarketVision:
14
Year Ended March 31,
-----------------------------------------------
As Reported As Reported Pro Forma
------------- ------------- -------------
2005 2004 2003
------------- ------------- -------------
Operations Data:
Sales $ 84,300,217 $ 69,280,484 $ 53,500,997
Reimbursable costs and expenses 29,999,150 20,002,471 11,669,664
Outside production costs and expenses 21,218,373 19,366,050 18,178,556
Salaries, payroll taxes and benefits 20,593,053 19,989,835 15,500,981
General and administrative expenses 9,167,161 10,171,960 7,720,088
Total operating expenses 80,977,737 69,530,316 53,069,289
Operating income (loss) 3,322,480 (249,832) 431,708
Interest expense, net (226,483) (240,288) (293,471)
Other income -- -- 255,350
Income (loss) before provision (benefit) for
income taxes, equity in loss of affiliate,
minority interest in net income of consolidated
subsidiary and cumulative effect of change in
accounting principle 3,095,997 (490,120) 393,587
Provision (benefit) for income taxes 1,240,417 (33,008) 157,408
Equity in loss of affiliate -- -- (11,500)
Minority interest in net income of consolidated
subsidiary (494,165) (105,359) --
Net income (loss) 1,361,415 (562,471) 224,679
Per Share Data
Basic income (loss) per share applicable to
common shareholders $ .23 $ (.11) $ .04
Diluted income (loss) per share applicable to
common shareholders $ .21 $ (.11) $ .04
Weighted Average Shares Outstanding
Basic 6,004,948 5,257,241 5,029,303
Diluted 6,391,435 5,257,241 5,522,784
The following table presents as reported and pro forma
operating data expressed as a percentage of sales for each of the fiscal years
ended March 31, 2005, 2004 and 2003, respectively. The financial data for Fiscal
2003 has been retroactively adjusted for the EITF 00-21 accounting change
effective April 1, 2003, and is exclusive (i) of the associated cumulative
effect of the change in accounting principle and (ii) the operating results of
MarketVision for the fiscal year ended March 31, 2003:
Year Ended March 31,
-------------------------------------------------------
As Reported As Reported Pro Forma
----------- ----------- -----------
2005 2004 2003
----------- ----------- -----------
Statement of Operations Data:
Sales 100.0% 100.0% 100.0%
Reimbursable costs and expenses 35.6% 28.9% 21.8%
Outside production costs and expenses 25.2% 28.0% 34.0%
Salaries, payroll taxes and benefits 24.4% 28.9% 29.0%
General and administrative expenses 10.9% 14.7% 14.4%
Total operating expenses 96.1% 100.4% 99.2%
Operating income (loss) 3.9% (0.4)% 0.8%
Interest expense, net (0.3)% (0.3)% (0.5)%
Other income -- -- 0.5%
Income (loss) before provision (benefit) for
income taxes, equity in loss of affiliate and
minority interest in net income of consolidated
subsidiary 3.7% (0.7)% 0.7%
Provision (benefit) for income taxes 1.5% -- 0.3%
Minority interest in net income of consolidated
subsidiary (0.6)% (0.2)% --
Net income (loss) 1.6% (0.8)% 0.4%
15
The following table presents as reported and pro forma
operating data expressed as a comparative percentage of change from the
immediately preceding fiscal year for each of the fiscal years ended March 31,
2005, 2004 and 2003, respectively. The financial data for Fiscal 2003 has been
retroactively adjusted for the EITF 00-21 accounting change effective April 1,
2003, exclusive of (i) the associated cumulative effect of the change in
accounting principle and (ii) the operating results of MarketVision for the
fiscal year ended March 31, 2003:
Year Ended March 31,
-------------------------------------------------------
As Reported As Reported Pro Forma
----------- ----------- -----------
2005 2004 2003
----------- ----------- -----------
Statement of Operations Data:
Sales 21.7% 29.5% (10.7)%
Reimbursable costs and expenses 50.0% 71.4% 42.2%
Outside production costs and expenses 9.6% 6.5% (24.4)%
Salaries, payroll taxes and benefits 3.0% 29.0% (5.3)%
General and administrative expenses (9.9)% 31.8% (13.0)%
Total operating expenses 16.5% 31.0% (7.7)%
Operating income (loss) n/a (157.9)% (81.9)%
Interest expense, net (5.7)% (18.1)% (37.2)%
Other income -- (100.0)% 187.0%
Income (loss) before provision (benefit) for
income taxes, equity in loss of affiliate and
minority interest in net income of consolidated
subsidiary n/a (224.5)% (80.3)%
Provision (benefit) for income taxes n/a (121.0)% (81.6)%
Minority interest in net income of consolidated
subsidiary 369.0% 100.0% --
Equity in (loss) of affiliate -- (100.0)% (36.1)%
Net income (loss) n/a (350.3)% (80.1)%
Fiscal Year 2005 Compared to Fiscal Year 2004
Sales. Sales for Fiscal 2005 were $84,300,000, compared to
sales of $69,280,000 for Fiscal 2004, an increase of $15,020,000. The following
table presents a comparative summary of the components of sales for Fiscal 2005
and 2004:
Year Ended March 31,
-------------------------------------------------
Sales 2005 % 2004 %
----- ------------ -------- ------------ --------
Core business $ 49,449,644 58.7 $ 46,883,538 67.7
MarketVision 4,851,423 5.7 2,394,475 3.4
Reimbursable costs and
expenses 29,999,150 35.6 20,002,471 28.9
------------ -------- ------------ --------
Total sales $ 84,300,217 100.0 $ 69,280,484 100.0
============ ======== ============ ========
The Company's net increase in its core business sales for
Fiscal 2005 reflects (i) an increase in cross-sold services provided on behalf
of MarketVision, and (ii) increased event and interactive marketing services
revenues.
The increase in sales attributable to MarketVision was due to
an increase in client demand for the Company's Hispanic marketing services.
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.
16
Operating Expenses. Operating expenses for Fiscal 2005
increased by $11,448,000 and amounted to $80,978,000, compared to $69,530,000
for Fiscal 2004. The increase in operating expenses 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. Reimbursable costs and expenses for Fiscal
2005 and Fiscal 2004 were $29,999,000 and $20,002,000, respectively. The
increase in reimbursable costs and expenses of approximately $9,998,000 in
Fiscal 2005 was primarily due to increases from MarketVision customers as well
as one U. S. Concepts customer. This was partially offset by lower reimbursable
costs and expenses from S&S in Fiscal 2005.
Outside Production Costs and Expenses. Outside production
costs and expenses 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 Fiscal 2005 were $21,218,000 compared to
$19,366,000 for Fiscal 2004, an increase of $1,852,000. The weighted mix of
outside production costs 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 fiscal years ended March 31, 2005 and 2004,
outside production costs as a percentage of sales are reflective of the
aggregate mix of client projects during such periods. Outside production costs
as a percentage of sales (exclusive of reimbursements of costs and expenses)
amounted to 39.1% and 39.3%, respectively.
Salaries, Payroll Taxes and Benefits. Salaries, payroll taxes
and benefits, exclusive of program reimbursable costs, consist of the salaries,
payroll taxes and benefit costs related to all direct labor, indirect labor and
overhead personnel. For Fiscal 2005, salaries, payroll taxes and benefits were
$20,593,000, compared to $19,990,000 for Fiscal 2004. The increase in these
costs of $603,000 was primarily attributable to added personnel in support of
MarketVision's increased level of operations.
General and Administrative Expenses. General and
administrative expenses consist of office and equipment rent, depreciation and
amortization, professional fees and other overhead expenses which for Fiscal
2005 were $9,167,000, compared to $10,172,000 for Fiscal 2004, a decrease of
$1,005,000. The decrease in these expenses 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 $255,000 at MarketVision. The
increased costs at MarketVision were primarily related to travel and
entertainment, rent and other general and administrative expenses incurred in
connection with MarketVision's growth in Fiscal 2005. General and administrative
expense for Fiscal 2005 includes a net credit of $66,000 for bad debt expense.
This was primarily the result of reversals of bad debt allowances that were
previously established for certain doubtful accounts which were collected during
the first quarter.
In the fourth quarter of Fiscal 2005, the Company corrected
its lease accounting practices to account for rent expense on a straight line
basis, the depreciation of leasehold improvements and the classification of
landlord allowances related to leasehold improvements. As a result of the
correction of this error and included in general and administrative expenses,
the Company recorded a non-cash charge of $299,000 in the fourth quarter
representing the cumulative rent adjustment applicable to a correction of its
accounting for the rent expense of its New York City offices in prior periods.
Previously, the Company recognized lease payment obligations as rent expense in
amounts to be paid as such obligations became due and payable, in lieu of
amortizing such obligations on a straight-line basis over the term of the lease.
17
Operating Income (Loss). As a result of the changes in sales
and operating expenses, the Company's operating income for Fiscal 2005 increased
to $3,322,000, from an operating loss of $250,000 for the year ended March 31,
2004. The operating income for the year ended March 31, 2005 included $1,385,000
of operating income attributable to MarketVision.
Interest Expense, Net. Net interest expense, consisting of
interest expense of $276,000 offset by interest income of $50,000, for Fiscal
2005, amounted to $226,000, a decrease of $14,000, compared to net interest
expense of $240,000, consisting of interest expense of $314,000 offset by
interest income of $74,000, for Fiscal 2004. The decrease in interest expense
for Fiscal 2005 was primarily related to the decrease in the Company's
outstanding bank borrowings, offset by an increase in interest rates.
Income (Loss) Before Provision (Benefit) for Income Taxes,
Equity in Loss of Affiliate, 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, equity in loss of affiliate, minority interest in net income of
consolidated subsidiary and cumulative effect of change in accounting principle
for revenue recognition for Fiscal 2005 was $3,096,000, compared to a loss of
$490,000 for Fiscal 2004.
Provision (Benefit) For Income Taxes. The provision (benefit)
for federal, state and local income taxes for Fiscal 2005 and Fiscal 2004 were
based upon the Company's estimated effective tax rate for the respective fiscal
years.
Minority Interest in Net Income of Consolidated Subsidiary.
For Fiscal 2005, the Company reflected a non-cash charge of $494,000,
representing a third party's 51% ownership interest in the net income of
MarketVision, compared to a non-cash charge of $105,000 for such third party's
interest in the net income of MarketVision for Fiscal 2004.
Cumulative Effect of Change in Accounting Principle for
Revenue Recognition. For Fiscal 2004, the Company incurred a non-cash charge of
$2,183,000 representing the cumulative effect of a change in accounting
principle related to its adoption of EITF 00-21 on a cumulative basis as of
April 1, 2003.
Net Income (Loss). As a result of the items discussed above,
net income (loss) for Fiscal 2005 and Fiscal 2004 was $1,361,000 and
$(2,745,000), respectively.
Fiscal Year 2004 Compared to Fiscal Year 2003
Sales. Sales for Fiscal 2004 were $69,280,000, compared to
sales of $59,956,000 for Fiscal 2003, an increase of $9,324,000. The following
table presents a comparative summary of the components of sales for Fiscal 2004
and 2003:
Year Ended March 31,
-------------------------------------------------
Sales 2004 % 2003 %
----- ------------ -------- ------------ --------
Core business $ 46,883,538 67.7 $ 48,286,540 80.5
MarketVision 2,394,475 3.4 -- --
Reimbursable costs and
expenses 20,002,471 28.9 11,669,664 19.5
------------ -------- ------------ --------
Total sales $ 69,280,484 100.0 $ 59,956,204 100.0
============ ======== ============ ========
18
The Company experienced a net decrease of $1,403,000 in core
business sales during the year ended March 31, 2004, primarily attributable to a
short fall in the contracting of new sales, a part of which was due to a delay
caused by the extended period of a grocer's strike in Southern California. The
decrease was partially offset by (i) $2,479,000 of net sales included in Fiscal
2004 as a result of the adoption of EITF 00-21 and (ii) $1,059,000 of sales of
Digital Intelligence acquired on October 29, 2003.
The Company included sales of MarketVision for Fiscal 2004 as
a result of the consolidation of the operations of MarketVision pursuant to the
Company's adoption of FIN 46R.
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.
Operating Expenses. Operating expenses for Fiscal 2004
increased by $12,586,000 and amounted to $69,530,000, compared to $56,944,000
for Fiscal 2003. The increase in operating expenses 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. Reimbursable costs and expenses for the
Fiscal 2004 and Fiscal 2003 were $20,002,000 and $11,670,000, respectively.
Outside Production Costs and Expenses. Outside production
costs and expenses 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 Fiscal 2004 were $19,366,000 compared to
$22,053,000 for Fiscal 2003, a decrease of $2,687,000. The weighted mix of
outside production costs 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 Fiscal 2004 and Fiscal 2003, 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 Fiscal 2004,
salaries, payroll taxes and benefits were $19,990,000, compared to $15,501,000
for Fiscal 2003. The increase in these costs of $4,489,000 was primarily the
result of the inclusion of $1,130,000 attributable to the personnel of
MarketVision and added personnel at other subsidiaries of the Company.
General and Administrative Expenses. General and
administrative expenses consist of office and equipment rent, depreciation and
amortization, professional fees and other overhead expenses which for Fiscal
2004 were $10,172,000, compared to $7,720,000 for Fiscal 2003, an increase of
$2,452,000. The increase in these expenses was primarily the result of the
inclusion of $940,000 of such expenses applicable to MarketVision and increases
of expenses incurred for (i) marketing, advertising and related travel and
entertainment expenses in the amount of $538,000, (ii) professional fees,
inclusive of personnel recruitment fees in the amount of $197,000, (iii) other
general and administrative expenses in the amount of $562,000 and (iv) the
provision for bad debts for potentially non-collectible accounts receivable in
the amount of $215,000.
19
Operating Income (Loss). As a result of the changes in sales
and operating expenses, the Company's operating loss for Fiscal 2004 was
$250,000, compared to operating income of $3,012,000 for the year ended March
31, 2003. The operating income for the year ended March 31, 2004 included
$275,000 of operating income attributable to MarketVision.
Interest Expense. Interest expense for Fiscal 2004, inclusive
of $40,000 of interest expense applicable to MarketVision, decreased by $53,000
to $240,000, compared with interest expense in the amount of $293,000 for Fiscal
2003. The decrease in interest expense was primarily related to a reduction in
the Company's overall debt together with lower interest rates on the Company's
bank borrowings.
Other Income. Other income in Fiscal 2003 primarily resulted
from the Company's sale of certain of its Internet domain names, of limited
value to the Company, for $250,000.
Income (Loss) Before Provision (Benefit) for Income Taxes,
Equity in Loss of Affiliate, 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, equity in loss of affiliate, minority interest in net income of
consolidated subsidiary and cumulative effect of change in accounting principle
for revenue recognition for Fiscal 2004 was $(490,000), compared to income of
$2,974,000 for Fiscal 2003.
Provision (Benefit) for Income Taxes. The (benefit) for
federal, state and local income taxes for Fiscal 2004 in the amount of $(33,000)
was net of a provision for income taxes for MarketVision in the amount of
$35,000 compared with a provision for federal, state and local income taxes in
the amount of $1,190,000 for Fiscal 2003. Both the (benefit) and provision for
income taxes for Fiscal 2004 and 2003 were based upon the Company's estimated
effective tax rate for each respective fiscal year.
Equity in Loss of Affiliate. For Fiscal 2004, the Company
includes the operations of its affiliate in its consolidated financial
statements, whereas for Fiscal 2003 the Company recorded a loss of $12,000 as
its share of losses from its 49% equity investment in MarketVision.
Minority Interest in the Net Income of Consolidated
Subsidiary. For Fiscal 2004, the Company reflected a non-cash charge of $105,000
representing a third party's 51% ownership interest in the net income of
MarketVision.
Cumulative Effect of Change in Accounting Principle for
Revenue Recognition. For Fiscal 2004, the Company incurred a non-cash charge of
$2,183,000 representing the cumulative effect of a change in accounting
principle related to its adoption of EITF 00-21 on a cumulative basis as of
April 1, 2003.
Net (Loss) Income. As a result of the items discussed above,
net loss for Fiscal 2004 was $(2,745,000), compared with net income of
$1,773,000 for Fiscal 2003.
Liquidity and Capital Resources
On March 24, 2005, the Company entered into an Amended and Restated
Credit Agreement with Signature Bank, under which amounts available for
borrowing under its revolving credit line were increased by $2,415,500 to $3
million, and the term loan portion of the credit facility was increased by
$1,050,000 to $4 million. On March 25, 2005, Signature advanced the Company the
increased portion of the term loan, a portion of which was used to repay the
remaining $425,000 in principal outstanding under its 9% subordinated note
issued in connection with its acquisition of Optimum. Borrowings under the
Credit Agreement are evidenced by promissory notes and are secured by all of the
20
Company's assets. The Company pays Signature a quarterly fee equal to .25% per
annum on the unused portion of the revolving credit line. Pursuant to the
Amended and Restated Credit Agreement:
o Principal payments on the term loan are to be made in 48 equal monthly
installments of $83,333 commencing April 1, 2005. Prior to the
amendment, principal payments to Signature on the term loan portion of
the facility were $162,500 per month.
o The maturity date of loans made under the revolving credit line has
been extended from July 22, 2006 to March 24, 2008.
o Interest on the revolving loans has been reduced to Signature's prime
rate from its prime rate plus .50%, and interest on the term loan has
been reduced to Signature's prime rate plus .50% from its prime rate
plus 1.0%.
o Amounts that may be borrowed under the revolving line of credit are
not subject to a borrowing base. Prior to the amendment, borrowings
under the revolving line of credit were limited to a borrowing base
consisting of 80% of "eligible" accounts receivables.
o The Company paid a $10,000 fee to Signature plus its legal costs and
expenses.
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)
restriction on the use of proceeds, (iii) prohibition on incurring a
consolidated net loss, as defined in the Credit Agreement, in two consecutive
fiscal quarters or any fiscal year, (iv) compliance with a defined senior debt
leverage ratio and debt service ratio covenants, (v) maximum annual capital
expenditures, (vi) limitation on annual capital expenditures, and (vii)
maintenance of 15% of beneficially owned shares of the Company held by the
Company's management. At March 31, 2005, the Company was in compliance with its
covenants in the Credit Agreement.
The following analysis of the Company's statements of cash
flows is inclusive of the cash flows of MarketVision. Summarized financial
information of MarketVision for Fiscal 2005 and Fiscal 2004 is as follows:
March 31, March 31,
2005 2004
------------ ------------
Cash $ 223,000 $ 107,000
Current assets 5,698,000 1,325,000
Current liabilities 4,563,000 1,137,000
Working capital 1,135,000 188,000
Net cash provided by operating
activities 176,000 105,000
Net income 969,000 199,000
At March 31, 2005, the Company had cash and cash equivalents
of $2,394,000, a working capital deficit of $926,000, which includes
approximately $7,483,000 of deferred revenue, outstanding bank loans of
$4,584,500 and an outstanding bank letter of credit of $500,000, $2,415,500
available for borrowing under the revolving credit line, no subordinated debt
outstanding, and stockholders' equity of $17,335,000. In comparison, at March
31, 2004, the Company had cash and cash equivalents of $3,164,000, a working
capital deficit of $4,768,000, which includes approximately $13,097,000 of
deferred revenue, outstanding bank loans of $4,985,000, an outstanding bank
letter of credit of $500,000, no additional availability under the Company's
revolving credit line, indebtedness of $425,000 under a subordinated note and
stockholders' equity of $15,178,000.
21
Operating Activities. Net cash used in operating activities
was $401,000 for Fiscal 2005. The net cash used in operating activities was
primarily attributable to the Company's net income of $1,361,000 for Fiscal 2005
(i) increased by $1,961,000, primarily for the aggregate of non-cash charges for
depreciation and amortization, deferred income taxes, minority interest of
consolidated subsidiary, and a non-cash reduction of the provision for bad debt
expense and (ii) reduced by the net effect of changes in accounts receivable,
accounts payable, deferred revenue, unbilled contracts in progress, and other
operating assets and liabilities.
Investing Activities. For Fiscal 2005, net cash used in
investing activities amounted to $269,000 as a result the purchase of fixed
assets. The Company does not expect to make material investments in fixed assets
in Fiscal 2006.
Financing Activities. For Fiscal 2005, net cash used in
financing activities amounted to $99,000 resulting from a net use of $825,000 to
reduce bank borrowings and payoff the remaining balance of subordinated debt,
$50,000 to pay costs associated with the amendments to the restated credit
agreement, $8,000 to pay costs incurred in connection with the Company's sale of
stock in Fiscal 2004, offset by proceeds of $784,000 from the exercise of stock
options and warrants.
For Fiscal 2005, the Company funded its activities from cash
provided by operating activities, loan borrowings under the Credit Agreement and
cash provided from the exercise of stock options and warrants. Management
believes that cash generated from operations together with the amount currently
available for borrowing under the revolving credit line will be sufficient to
meet the Company's cash requirements for Fiscal 2006, although there can be no
assurance in this regard. To the extent that the Company is required to seek
additional external financing, there can be no assurance that the Company will
be able to obtain such additional funding to satisfy its cash requirements for
Fiscal 2006 or as subsequently required to repay loans under the Credit
Agreement.
Off-Balance Sheet Transactions
The Company is not a party to any "off-balance sheet
transactions" as defined in Item 301 of Regulation S-K.
Contractual Obligations
The table below sets forth as of March 31, 2005, future
minimum payments required to be made by the Company in respect of its debt
obligations, operating leases, and employment agreements.
Payments Due Fiscal Year Ending March 31,
------------------------------------------------------------------------------------------------------
Total 2006 2007 2008 2009 2010 Thereafter
------------ ------------ ------------ ------------ ------------ ------------ ------------
Contractual
Obligations
- -----------
Bank Term Loan $ 4,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ -- $ --
Bank Revolving
Credit Loan 585,000 -- -- 585,000 -- -- --
Operating Leases 14,443,000 1,888,000 1,784,000 1,808,000 1,525,000 1,330,000 6,108,000
Employment
Agreements 2,630,000 2,518,000 112,000 -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total $ 21,658,000 $ 5,406,000 $ 2,896,000 $ 3,393,000 $ 2,525,000 $ 1,330,000 $ 6,108,000
============ ============ ============ ============ ============ ============ ============
22
Note: In connection with U.S. Concepts' lease of New York office facilities, the
Company has provided the landlord of such facilities with a security deposit in
the form of a letter of credit in the amount of $500,000. The letter of credit,
which was issued by Signature under the Credit Agreement, expires October 30,
2006, at which time the Company will be required to provide a replacement letter
of credit or provide the landlord with a $500,000 cash deposit.
Impact of Recently Issued Accounting Standards
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes
and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement
No. 3" ("SFAS No. 154"). This statement replaces APB Opinion No. 20 and FASB No.
3 and changes the requirements for the accounting for and reporting of a change
in accounting principle. SFAS No. 154 applies to all voluntary changes in
accounting principle and to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. This statement requires retrospective application to prior periods'
financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. When it is impracticable to determine the period-specific
effects of an accounting change on one or more individual prior periods
presented, the statement requires that the new accounting principle be applied
to the balances of assets and liabilities as of the beginning of the earliest
period for which retrospective application is practicable and that a
corresponding adjustment be made to the opening balance of retained earnings (or
other appropriate components of equity or net assets in the statement of
financial position) for that period rather than being reported in an income
statement. When it is impracticable to determine the cumulative effect of
applying a change in accounting principle to all prior periods, the statement
requires that the new accounting principle be applied as if it were adopted
prospectively from the earliest date practicable. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Earlier adoption is permitted for accounting changes
and corrections of errors made in fiscal years beginning after the date the
statement is issued. The adoption of this statement is not expected to have a
material effect on the Company's consolidated financial statements.
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 fiscal years beginning after June 15, 2005. The Company
anticipates that the adoption of SFAS No. 123R will impact the reported
financial results of the Company in a manner similar to the effects shown in the
pro forma disclosure included in Note 1 of the accompanying audited financial
statements under the caption "Accounting for Stock Based Compensation."
23
Certain Transactions
MarketVision
On February 27, 2001, the Company acquired 49% of the shares
of capital stock of MarketVision which is a minority owned, predominately
Hispanic, ethnically oriented promotion agency headquartered in San Antonio,
Texas. The MarketVision acquisition had been accounted for as an equity
investment on the Company's consolidated balance sheet through the Company's
fiscal year ended March 31, 2003. Pursuant to the equity method of accounting,
the Company's balance sheet carrying value of the investment was periodically
adjusted to reflect the Company's 49% interest in the operations of
MarketVision. Effective in the fourth quarter of fiscal year ended March 31,
2004, the Company included in its consolidated financial statements the
operations of MarketVision pursuant to the adoption of FIN 46R.
In connection with the acquisition, the Company extended a
working capital credit line to MarketVision in the amount of $200,000. At March
31, 2005 and 2004, there were no borrowings by MarketVision outstanding under
this line of credit. In addition, from time to time the Company provides
promotional and related services for customers of MarketVision on MarketVision's
behalf. In these situations, the customers' contract is with MarketVision, and
the Company records amounts owed to it for these services and related expenses
on its balance sheet as due from affiliate. All intercompany transactions with
MarketVision are eliminated upon consolidation. Furthermore, pursuant to an
Administration and Marketing Services Agreement (the "Services Agreement")
between the Company and MarketVision, the Company provides MarketVision with
specific administrative, accounting, collection, financial, marketing and
project support services for a monthly fee currently in the amount of $55,000.
In accordance with the Services Agreement, the Company dedicates and allocates
certain of its resources and the specific time of certain of its personnel to
MarketVision.
MarketVision Lease
On May 20, 2005, MarketVision entered into a five year lease
agreement with Yvonne Garcia, the President and 51% owner of MarketVision. The
lease provides for an annual base rental of $166,000 and additional rent of
$45,000 for maintenance fees, taxes and insurance. The additional rent is
adjusted annually for increases in the landlord's cost of maintenance fees,
taxes and insurance. The lease expires in May 2010.
Officer Loan
The Company has made loans to Paul A. Amershadian, a director
of the Company and its Executive Vice President-Marketing and Sales, aggregating
$550,000, which are evidenced by an Amended and Restated Promissory Note dated
May 24, 2001. The Amended and Restated Promissory Note is secured by (i) a first
lien and security interest in 282,127 shares of the Company's common stock owned
by Mr. Amershadian, (ii) a second mortgage on Mr. Amershadian's home and (iii)
collateral assignments of $550,000 of life insurance policies. The Amended and
Restated Promissory Note provides for payment of interest at a floating rate
equal to the highest rate at which the Company pays interest on its bank
borrowings, monthly payment of one-half of the interest that accrued over the
preceding month, payment of accrued interest and principal from one-half of the
after-tax amount, if any, of bonuses paid to Mr. Amershadian by the Company, and
payment of the remaining balance of principal and accrued interest on May 24,
2006. To date, Mr. Amershadian has not made any of the required monthly interest
payments under the Amended and Restated Promissory Note. At March 31, 2005, the
Amended and Restated Promissory Note is recorded in the Company's accounts as a
note receivable from officer in the amount of $789,000, which includes accrued
interest at March 31, 2005 in the amount of $239,000, of which $60,000 was past
due and owing at such date.
24
Optimum Lease
In connection with the Company's acquisition of Optimum, the
Company entered into a lease agreement with Thomas Lachenman, a director of the
Company and former owner of Optimum, for the lease of the Cincinnati principal
office of Optimum. The lease provides for an annual rental, which approximated
$160,000 in Fiscal Year 2005, to be adjusted annually based upon changes in the
local consumer price index. The lease expires in December 2010.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's earnings and cash flows are subject to
fluctuations due to changes in interest rates primarily from its investment of
available cash balances in money market funds with portfolios of investment
grade corporate and U.S. government securities and, secondarily, from its
long-term debt arrangements. Under its current policies, the Company does not
use interest rate derivative instruments to manage exposure to interest rate
changes. See note 6 to "Notes to Consolidated Financial Statements-Debt."
Item 8. Consolidated Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of CoActive Marketing Group, Inc.
Report of Independent Registered Public Accounting Firm.................26
Consolidated Balance Sheets as of March 31, 2005 and 2004...............27
Consolidated Statements of Operations for the years ended
March 31, 2005, 2004 and 2003.......................................28
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 2005, 2004 and 2003.......................................29
Consolidated Statements of Cash Flows for the years ended
March 31, 2005, 2004 and 2003 ......................................30
Notes to Consolidated Financial Statements..............................31
25
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
CoActive Marketing Group, Inc.
We have audited the accompanying consolidated balance sheets of CoActive
Marketing Group, Inc. and subsidiaries as of March 31, 2005 and 2004, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CoActive Marketing
Group, Inc. and subsidiaries as of March 31, 2005 and 2004, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 2005, in conformity with accounting principles generally
accepted in the United States.
In fiscal 2004, the Company changed its revenue recognition policy as required
by Emerging Issues Task Force Statement 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables." In fiscal 2004, the Company changed
the manner in which it reports an investment in an affiliate as required by FASB
Interpretation No. 46 (Revised).
BDO SEIDMAN, LLP
Melville, New York
June 27, 2005
26
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND 2004
2005 2004
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 2,394,248 $ 3,164,158
Accounts receivable, net of allowance for doubtful accounts of
$68,944 in 2005 and $295,981 in 2004 9,321,653 10,504,973
Unbilled contracts in progress 3,739,233 2,083,507
Deferred contract costs 656,577 339,100
Prepaid expenses and other current assets 533,421 608,175
Other receivables 60,625 --
Prepaid taxes 25,777 449,582
------------ ------------
Total current assets 16,731,534 17,149,495
Property and equipment, net 4,252,327 2,598,929
Note and interest receivable from officer 789,459 762,276
Goodwill 19,895,694 19,895,694
Intangible asset 200,000 200,000
Deferred financing costs, net of amortization of $518,890 in 2005 and
$478,098 in 2004 82,142 72,905
Other assets 386,601 17,398
Deferred tax asset -- 84,927
------------ ------------
Total assets $ 42,337,757 $ 40,781,624
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 5,013,409 $ 2,360,921
Deferred revenue 7,482,926 13,096,877
Accrued job costs 2,174,885 2,860,550
Accrued compensation 425,855 451,274
Other accrued liabilities 1,192,141 1,124,923
Accrued taxes payable 144,396 --
Deferred taxes payable 224,170 147,943
Notes payable bank - current 1,000,000 1,450,000
Subordinated notes payable - current -- 425,000
------------ ------------
Total current liabilities 17,657,782 21,917,488
Notes payable bank - long term 3,584,500 3,534,500
Deferred rent 2,649,091 --
Minority interest of consolidated subsidiary 645,971 151,806
Deferred taxes payable 464,991 --
------------ ------------
Total liabilities 25,002,335 25,603,794
------------ ------------
Commitments and contingencies
Stockholders' equity:
Class A convertible preferred stock, par value $.001; authorized
650,000 shares; none issued and outstanding -- --
Class B convertible preferred stock, par value $.001; authorized
700,000 shares; none issued and outstanding -- --
Preferred stock, undesignated; authorized 3,650,000 shares; none
issued and outstanding -- --
Common stock, par value $.001; authorized 25,000,000 shares;
issued and outstanding 6,261,690 shares at March 31, 2005 and
5,941,856 shares at March 31, 2004 6,261 5,941
Additional paid-in capital 9,649,023 8,853,166
Retained earnings 7,680,138 6,318,723
------------ ------------
Total stockholders' equity 17,335,422 15,177,830
------------ ------------
Total liabilities and stockholders' equity $ 42,337,757 $ 40,781,624
============ ============
See accompanying notes to consolidated financial statements
27
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2005, 2004 AND 2003
2005 2004 2003
------------ ------------ ------------
Sales $ 84,300,217 $ 69,280,484 $ 59,956,204
Operating expenses:
Reimbursable costs and expenses 29,999,150 20,002,471 11,669,664
Outside production costs and expenses 21,218,373 19,366,050 22,053,092
Salaries, payroll taxes and benefits 20,593,053 19,989,835 15,500,981
General and administrative expenses 9,167,161 10,171,960 7,720,088
------------ ------------ ------------
Total operating expenses 80,977,737 69,530,316 56,943,825
------------ ------------ ------------
Operating income (loss) 3,322,480 (249,832) 3,012,379
Interest expense, net (226,483) (240,288) (293,471)
Other income -- -- 255,350
------------ ------------ ------------
Income (loss) before provision (benefit) for income taxes,
equity in loss of affiliate, minority interest in net
income of consolidated subsidiary and cumulative effect
of change in accounting principle for revenue recognition 3,095,997 (490,120) 2,974,258
Provision (benefit) for income taxes 1,240,417 (33,008) 1,189,676
Equity in loss of affiliate -- -- (11,500)
------------ ------------ ------------
Net income (loss) before minority interest in net
income of consolidated subsidiary and cumulative
effect of change in accounting principle for
revenue recognition 1,855,580 (457,112) 1,773,082
Minority interest in net income of consolidated
subsidiary (494,165) (105,359) --
------------ ------------ ------------
Net income (loss) before cumulative effect of change in
accounting principle for revenue recognition 1,361,415 (562,471) 1,773,082
Cumulative effect of change in accounting principle for
revenue recognition, net of income taxes -- (2,182,814) --
------------ ------------ ------------
Net income (loss) $ 1,361,415 $ (2,745,285) $ 1,773,082
============ ============ ============
Net income (loss) per common share before cumulative effect
of change in accounting principle for revenue recognition:
Basic $ .23 $ (.11) $ .35
============ ============ ============
Diluted $ .21 $ (.11) $ .32
============ ============ ============
Cumulative effect of change in accounting principle for
revenue recognition, net of income taxes $ -- $ (.41) $ --
------------ ------------ ------------
Net income (loss) per common share after cumulative effect of
change in accounting principle for revenue recognition:
Basic $ .23 $ (.52) $ .35
============ ============ ============
Diluted $ .21 $ (.52) $ .32
============ ============ ============
Weighted average number of shares outstanding:
Basic 6,004,948 5,257,241 5,029,303
Dilutive effect of options and warrants 386,487 -- 493,481
------------ ------------ ------------
Diluted 6,391,435 5,257,241 5,522,784
============ ============ ============
Pro forma amounts assuming the change in accounting
principle for revenue recognition is applied retroactively:
Net income (loss) $ 224,679
Net income (loss) per share:
Basic $ .04
Diluted $ .04
See accompanying notes to consolidated financial statements.
28
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2005, 2004 AND 2003
Common Stock
par value $.001 Additional Total
--------------------------- Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2002 5,028,481 $ 5,028 $ 6,744,598 $ 7,290,926 $ 14,040,552
Exercise of options 6,250 6 7,194 -- 7,200
Net income -- -- -- 1,773,082 1,773,082
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2003 5,034,731 5,034 6,751,792 9,064,008 15,820,834
Stock issued in payment of earnout 100,000 100 217,900 -- 218,000
Exercise of options 2,625 2 6,560 -- 6,562
Exercise of warrants and related tax
benefit 152,500 153 247,566 -- 247,719
Sale of stock 652,000 652 1,629,348 -- 1,630,000
Net loss -- -- -- (2,745,285) (2,745,285)
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2004 5,941,856 5,941 8,853,166 6,318,723 15,177,830
Costs incurred in connection with sale
of stock -- -- (8,400) -- (8,400)
Exercise of options and warrants 319,834 320 783,806 -- 784,126
Tax benefit of exercised options -- -- 20,451 -- 20,451
Net income -- -- -- 1,361,415 1,361,415
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2005 6,261,690 $ 6,261 $ 9,649,023 $ 7,680,138 $ 17,335,422
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
29
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2005, 2004 AND 2003
2005 2004 2003
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 1,361,415 $ (2,745,285) $ 1,773,082
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 975,795 806,251 642,195
Deferred rent amortization (41,645) -- --
(Credit) provision for bad debt expense (66,044) 215,569 5,412
Interest income on note receivable from officer (27,183) (29,276) (120,000)
Deferred income taxes 626,145 46,302 788,232
Equity in loss of affiliate -- -- 11,500
Minority interest of consolidated subsidiary 494,165 101,724 --
Cumulative effect of change in accounting principle for
revenue recognition -- 2,182,814 --
Other -- 3,635 --
Changes in operating assets and liabilities, net of effects
of acquisitions:
Decrease (increase) in accounts receivable 1,249,364 (764,925) 1,011,053
(Increase) in unbilled contracts in progress (1,655,726) (290,425) (1,967,154)
(Increase) decrease in deferred contract costs (317,477) 1,749,943 --
Decrease in prepaid expenses and other assets 77,002 302,265 146,180
(Increase) in other receivables (60,625) -- --
Decrease (increase) in prepaid taxes 423,805 (449,582) 141,831
Increase (decrease) in accounts payable 2,652,488 (4,089,716) (831,252)
(Decrease) increase in deferred revenue (5,613,951) 4,108,049 (865,470)
(Decrease) increase in accrued job costs (685,665) 1,286,287 195,098
(Decrease) increase in accrued compensation (25,419) 385,807 10,544
Increase (decrease) in other accrued liabilities 67,218 (217,656) 241,743
Increase in accrued taxes payable 164,847 23,596 130,299
------------ ------------ ------------
Net cash (used in) provided by operating activities (401,491) 2,625,377 1,313,293
------------ ------------ ------------
Cash flows from investing activities:
Purchases of fixed assets (269,116) (1,372,351) (607,260)
Acquisitions, net of cash acquired -- (700,000) (700,000)
Increase in cash for consolidation of variable interest entity -- 35,691 --
Advances to affiliate -- -- (722,989)
------------ ------------ ------------
Net cash used in investing activities (269,116) (2,036,660) (2,030,249)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 784,126 98,062 7,200
Borrowings of debt 1,050,000 1,200,000 5,600,000
Payments of debt (1,875,000) (1,665,500) (5,416,666)
Financing costs (50,029) (24,007) (96,309)
Costs incurred in connection with sale of stock (8,400) -- --
Proceeds from sale of stock -- 1,630,000 --
------------ ------------ ------------
Net cash (used in) provided by financing activities (99,303) 1,238,555 94,225
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (769,910) 1,827,272 (622,731)
Cash and cash equivalents at beginning of year 3,164,158 1,336,886 1,959,617
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,394,248 $ 3,164,158 $ 1,336,886
============ ============ ============
Supplemental disclosures of cash flow information:
Interest paid during the period $ 289,010 $ 274,273 $ 278,664
============ ============ ============
Income taxes paid during the period $ 323,208 $ 340,865 $ 303,695
============ ============ ============
Noncash transactions relating to investing and financing
activities consist of:
Lease accounting correction $ 2,690,736 $ -- $ --
============ ============ ============
Stock issued in payment of earnout $ -- $ 218,000 $ --
============ ============ ============
Accrued balance of earnout $ -- $ -- $ 593,750
============ ============ ============
See accompanying notes to consolidated financial statements.
30
COACTIVE MARKETING GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004, 2003
(1) Organization and Nature of Business
-----------------------------------
CoActive Marketing Group, Inc. (the "Company") is a full service
marketing, sales promotion and interactive media services and
e-commerce provider organization which designs, develops and implements
turnkey customized national, regional and local consumer and trade
promotion programs primarily for consumer product client companies. The
Company's operations consist solely of this single segment. The
Company's programs are designed to enhance the value of its clients'
budgeted expenditures and achieve, in an objectively measurable way,
its client's specific marketing and promotional objectives.
Acquisition of TrikMedia LLC
On October 29, 2003, a newly formed wholly-owned subsidiary of the
Company, TrikMedia LLC, a Delaware limited liability company,
("TrikMedia") acquired certain assets and assumed certain liabilities
of TrikMedia, Inc., a full service media agency engaged in providing
digital marketing and advertising services, interactive software
development and content creation. The purchase price of $885,000
consisted of a cash payment of $700,000 and the assumption of $185,000
of deferred revenue. In addition, the Company acquired fixed assets
with a fair value of $36,000 and assumed additional liabilities in the
amount of $17,000. The Company has accounted for the acquisition as a
purchase whereby the excess of the purchase price over the fair value
of net assets acquired; including costs of the acquisition, of
approximately $866,000 has been classified as goodwill. On September
23, 2004, TrikMedia changed its name to Digital Intelligence Group LLC
("Digital Intelligence"). Pro forma information regarding the
acquisition has not been provided as the results of operations of
Digital Intelligence are not material.
Acquisition of U.S. Concepts, Inc.
On December 29, 1998, a wholly-owned subsidiary of the Company, U.S.
Concepts, Inc., a Delaware corporation, ("U.S. Concepts") purchased
substantially all of the assets and business from and assumed certain
of the liabilities of Murphy Liquidating Corporation formerly known as
U.S. Concepts, Inc., a New York corporation in a transaction accounted
for as a purchase for $1,660,000. The purchase price was increased by
an additional $2,293,750 (which included 100,000 shares of the
Company's common stock with an aggregate value of $218,000 at the time
of issuance) as a result of U.S. Concepts achieving specified pre-tax
earnings targets during the four year period ended December 31, 2002.
The acquisition of U.S. Concepts has been accounted for as a purchase
whereby the excess of the purchase price, including costs of the
acquisition, over the fair value of assets acquired less liabilities
assumed of $3,881,000 has been classified as goodwill and through March
31, 2002 was being amortized on a straight-line basis over a
twenty-five year period. At March 31, 2003, as specified pre-tax
earnings for the respective periods through December 31, 2002 were
achieved, the Company paid additional installments of purchase price
totaling $1,700,000. During Fiscal 2004, the Company issued 100,000
shares of common stock at a fair value of $218,000 to satisfy a portion
of the earnout accrued in prior years. For Fiscal 2003 an additional
purchase price of $1,293,750 was reflected as additional goodwill.
31
Summary of Significant Accounting Policies
(a) Principles of Consolidation
---------------------------
The consolidated financial statements include the financial
statements of the Company and its wholly-owned subsidiaries.
In addition, the consolidated financial statements, for Fiscal
2005 and 2004, 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 ("FIN") No. 46 (Revised) ("FIN46R"),
"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.
(b) Adoption of EITF 00-21
----------------------
The Company adopted EITF 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21") in the
fourth quarter of Fiscal 2004. EITF 00-21, which became
effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003, provides guidance on
how to determine when an arrangement that involves multiple
revenue-generating activities or deliverables should be
divided into separate units of accounting for revenue
recognition purposes, and if this division is required, how
the arrangement consideration should be allocated among the
separate units of accounting. Prior to the adoption of EITF
00-21, the Company recognized revenue on its broadcast media
and special event contracts on the percentage-of-completion
method over the life of the contract as identifiable phases of
services, such as concept creation and development, media
purchase, production, media airing and event execution
occurred. Under that method, the Company generally recognized
a portion of the revenues attributable to those contracts upon
signing by the Company's clients. Pursuant to EITF 00-21, with
regard to contracts with multiple deliverables, the Company
now recognizes income for each unit of accounting,as defined,
identified within a contract. In contracts with multiple
deliverables where separate units of accounting can not be
defined, all of the contract's revenue is recognized as the
media is aired and the events take place, without regard to
the timing of the contracts' signing or when cash is received
under these contracts. The adoption of EITF 00-21 (effective
April 1, 2003) resulted in a non-cash charge reported as a
cumulative effect of a change in accounting principle of
$2,183,000 in Fiscal 2004. The pro forma amounts presented in
the consolidated statements of operations were calculated
assuming the change in accounting principal was made
retroactively to all years presented. For Fiscal 2004, the
adoption of EITF 00-21 resulted in an increase in sales of
$2,479,000 and an increase in outside production and expenses
of $1,639,000. After giving effect to the implementation of
EITF 00-21 and before the cumulative effect of the change in
method of accounting for revenue recognition, the Company had
a net loss of $(562,471) or $(.11) per common share for Fiscal
2004.
32
(c) 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 fiscal years
ended March 31, 2005 and 2004 are included in the consolidated
financial statements of the Company, whereas for prior fiscal
years, under the equity method of accounting, the Company
reported its investment in MarketVision as adjusted for its
share of net income or loss each fiscal year in the Company's
financial statements. The Fiscal 2003 financial statements
were not restated as the effects were immaterial. The effect
of the Company's adoption of FIN 46R did not impact the
Company's net loss in Fiscal 2004.
(d) Reimbursable Costs and Expenses
-------------------------------
The Company records reimbursements received for reimbursable
program costs and expenses as revenues, with the corresponding
costs included in operating expenses as reimbursable costs and
expenses. Such costs may include variable employee
compensation costs.
(e) Revenue Recognition
-------------------
The Company's revenues are generated from projects subject to
contracts requiring the Company to provide its services within
specified time periods generally ranging up to twelve months.
As a result, on any given date, the Company has projects in
process at various stages of completion. Depending on the
nature of the contract, revenue is recognized as follows: (i)
on time and material service contracts, revenue is recognized
as services are rendered and the costs are incurred; (ii) on
fixed price retainer contracts, revenue is recognized on a
straight-line basis over the term of the contract; (iii) on
fixed price multiple services contracts, revenue is recognized
over the term of the contract for the fair value of segments
of the services rendered which qualify as separate activities
or delivered units of service, to the extent multi-service
arrangements are deemed inseparable, revenue on these
contracts is recognized as the contracts are completed; (iv)
on certain fixed price contracts, revenue is recognized on a
percentage of completion basis, whereby the percentage of
completion is determined by relating the actual costs incurred
to date to the estimated total costs for each contract; (v) on
certain fixed price contracts, revenue is recognized on the
basis of proportional performance as certain key milestones
are delivered. Costs associated with
33
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.
(f) Cash Equivalents
----------------
Investments with original maturities of three months or less
at the time of purchase are considered cash equivalents. Due
to the short-term nature of the cash equivalents, the carrying
value approximates fair value.
(g) Accounts Receivable and Credit Policies
---------------------------------------
The carrying amount of accounts receivable is reduced by a
valuation allowance that reflects management's best estimate
of the amounts that will not be collected. In addition to
reviewing delinquent accounts receivable, management considers
many factors in estimating its general allowance, including
historical data, experience, customer types, credit
worthiness, and economic trends. From time to time, management
may adjust its assumptions for anticipated changes in any of
those or other factors expected to affect collectability.
(h) Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is
computed on the straight-line method over the estimated useful
lives of the assets, which are three to ten years. Leasehold
improvements are amortized over the shorter of the lease term
or the estimated useful life of the asset. Funds received from
a landlord to reimburse the Company for the cost, or a portion
of the cost, of leasehold improvements are recorded as
deferred rent and amortized as reductions to rent expense over
the lease term. In addition, to the extent that the Company
leases a property, but does not move in until construction is
complete it is the Company's policy to capitalize the lease's
straight line rent expense allocable to the construction
period as part of leasehold improvements and amortize such
rent expense over the term of the lease.
(i) Deferred Contract Costs
-----------------------
Deferred contract costs represent direct contract costs and
expenses incurred prior to the Company's related revenue
recognition on such contracts.
(j) Long-Lived Assets
-----------------
The Company's long-lived assets include goodwill, intangible
assets and property and equipment. The Company periodically
reviews its property and equipment whenever events or changes
in circumstances indicate that the carrying amount of the
assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets,
or if their depreciation periods should be accelerated. When
any such impairment exists, the related assets will be written
down to fair value. No impairments were identified as of March
31, 2005.
34
(k) Goodwill and Other Intangible Asset
-----------------------------------
Goodwill consists of the cost in excess of the fair value of
the acquired net assets of the Company's subsidiary companies.
The Company's other intangible asset consists of an Internet
domain name and related intellectual property rights. At March
31, 2005 and 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 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 five reporting units representing each of its
subsidiaries. The Company has completed its impairment review
for each reporting unit as of March 31, 2005 and no impairment
in the recorded goodwill and intangible asset was identified.
The Company has noted no subsequent indicators that would
require testing of goodwill for impairment. However, in the
future, upon completion of the annual review, there can be no
assurance that a material charge will not be recorded.
(l) Deferred Financing Costs
------------------------
Deferred financing costs consist of bank fees and legal costs
incurred with respect to the Company's bank credit agreement,
the amounts of which are being amortized over the remaining
term of the credit agreement which expires in March 2009.
(m) Deferred Rent
-------------
Deferred rent consists of (i) the excess of the allocable
straight line rent expense to date as compared to the total
amount of rent due and payable through such period (ii) the
capitalization of rent during any build out period during
which the Company has the right to occupy the space but pays
no rent or a reduced rate of rent, and (iii) funds received
from landlords to reimburse the Company for the cost, or a
portion of the cost, of leasehold improvements. Deferred rent
is amortized as a reduction to rent expense over the term of
the lease.
(n) Net Income (Loss) Per Common Share
----------------------------------
The computation of basic earnings per common share is based
upon the weighted average number of common shares outstanding
during the year. The computation of diluted earnings per
common and common equivalent share is based upon the weighted
average number of common shares outstanding during the year,
plus the assumed exercise of stock options and warrants, less
the number of treasury shares assumed to be purchased from the
proceeds of such exercises using the average market price of
the Company's common stock. For the fiscal years ended March
31, 2005, 2004 and 2003 1,127,221, 2,620,093 and 1,529,211
35
stock options and warrants, at exercise prices ranging from
$2.31 to $10.00 for Fiscal 2005, $1.12 to $10.00 for Fiscal
2004 and $2.31 to $10.00 for Fiscal 2003, respectively, have
been excluded from the calculation of diluted earnings per
share as their inclusion would be antidilutive. These options
and warrants expire through 2014.
(o) Income Taxes
------------
The provision for income taxes includes federal, state and
local income taxes that are currently payable. Deferred income
taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period
that includes the enactment date.
(p) Accounting for Stock-Based Compensation
---------------------------------------
The Company applies the intrinsic-value based method of
accounting prescribed by Accounting Principles Board (APB) No.
25, "Accounting for Stock Issued to Employees," and related
interpretations, in accounting for its stock-based
compensation plans and accordingly, no compensation cost has
been recognized for its stock options in the consolidated
financial statements. The Company has elected not to implement
the fair value based accounting method for employee stock
options under SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), but has elected to disclose the
pro forma net income (loss) per share for employee stock
option grants as if such method had been used to account for
stock-based compensation costs described in SFAS 148
"Accounting for Stock Based Compensation-Transition and
Disclosure an amendment of SFAS Statement No. 123."
The following table illustrates the effects on net 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:
Fiscal 2005 Fiscal 2004 Fiscal 2003
------------- ------------- -------------
Net income (loss) as reported $ 1,361,415 $ (2,745,285) $ 1,773,082
Less compensation expense
determined under the fair
value method, net of tax (1) 215,476 260,235 105,003
------------- ------------- -------------
Pro forma net income (loss) $ 1,145,939 $ (3,005,520) $ 1,668,079
============= ============= =============
Net income (loss) per share - Basic:
As reported $ .23 $ (.52) $ .35
Pro forma $ .19 $ (.57) $ .33
Net income (loss) per share - Diluted:
As reported $ .21 $ (.52) $ .32
Pro forma $ .18 $ (.57) $ .30
(1) Compensation expense for Fiscal 2004 and Fiscal 2003 has been restated to
reflect net of tax amounts. The effects of these restatements were not
material.
36
The per share weighted-average fair value of stock options and
warrants granted on their respective date of grant using the
modified Black-Scholes option-pricing model and their related
weighted-average assumptions are as follows:
Fiscal 2005 Fiscal 2004 Fiscal 2003
------------ ------------ ------------
Risk-free interest rate 4.90% 1.67% 2.25%
Expected life - years 10.00 5.54 5.00
Expected volatility 67.3% 50.0% 50.0%
Expected dividend yield 0% 0% 0%
Fair value of option grants $ 1.93 $ 1.34 $ 1.14
(q) Fair Value of Financial Instruments
-----------------------------------
The carrying value of all financial instruments classified as
a current asset or liability, and long term debt, is deemed to
approximate fair value due to the short maturity of these
instruments and interest rates that approximate current market
rates.
(r) Use of Estimates
----------------
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of the contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Management bases its estimates on certain assumptions,
which they believe are reasonable in the circumstances, and
does not believe that any change in those assumptions would
have a significant effect on the financial position or results
of operations of the Company. Actual results could differ from
those estimates.
(s) Recent Accounting Standards
---------------------------
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes
and Error Corrections - A Replacement of APB Opinion No. 20
and FASB Statement No. 3." This statement replaces APB Opinion
No. 20 and FASB No. 3 and changes the requirements for the
accounting for and reporting of a change in accounting
principle. This statement applies to all voluntary changes in
accounting principle. It also applies to changes required by
an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions.
This statement requires retrospective application to prior
periods' financial statements of changes in accounting
principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the
change. When it is impracticable to determine the
period-specific effects of an accounting change on one or more
individual prior periods presented, the statement requires
that the new accounting principle be applied to the balances
of assets and liabilities as of the beginning of the earliest
37
period for which retrospective application is practicable and
that a corresponding adjustment be made to the opening balance
of retained earnings (or other appropriate components of
equity or net assets in the statement of financial position)
for that period rather than being reported in an income
statement. When it is impracticable to determine the
cumulative effect of applying a change in accounting principle
to all prior periods, the statement requires that the new
accounting principle be applied as if it were adopted
prospectively from the earliest date practicable. This
statement is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15,
2005. Earlier adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the
date the statement is issued. The adoption of this statement
is not expected to have a material effect on the Company's
consolidated financial statements.
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 fiscal years beginning
after June 15, 2005. The Company anticipates that the adoption
of SFAS No. 123R will impact the reported financial results of
the Company in a manner similar to the effects shown in the
pro forma disclosure included in Note 1 above under the
caption `Accounting for Stock Based Compensation."
(t) Lease Accounting Correction
---------------------------
Until the fourth quarter of Fiscal 2005, the Company
recognized certain lease obligations as they became due and
payable. In light of recent announcements made by a number of
public companies regarding lease accounting and a SEC
clarification on the subject, the Company corrected its lease
accounting. As a result, with regard to one of its office
leases, the Company corrected its computation of rent expense,
depreciation of leasehold improvements and the classification
of landlord allowances related to leasehold improvements. The
correction does not affect the Company's historical or future
cash flows or the timing of payments under the related lease.
The effect on the Company's prior years' earnings (loss) per
share, cash flow from operations and stockholders' equity were
deemed to be immaterial requiring no restatement.
The Company has historically received reimbursements from
certain clients for expenses, including, but not limited to,
rent. Such reimbursements are made based on current rental
payments payable independent of any straight-lining accounting
methodology. Accordingly, in order to match the effect of the
straight line rent adjustment to projected future
reimbursements from clients, the Company has recorded a
deferred asset for the estimated portion allocable to these
clients as of March 31, 2005 as a result of the correction of
this error. At March 31, 2005, the projected reimbursements
38
from these clients for the effect of the straight line
adjustment amounted to approximately $371,000 and are included
in other assets. This asset will be amortized over the period
of the clients' expected reimbursement. Should any of these
clients elect not to renew their contracts with the Company
prior to the payment of such amounts; the remaining asset or
portion thereof may result in a charge to earnings.
The Company recorded the correction as an operating expense in
the fourth quarter of Fiscal 2005 resulting in a non-cash
pre-tax charge to earnings of approximately $299,000. In
addition, in connection with the correction, the Company
recorded an increase in property and equipment - leasehold
improvements, of $1,979,000, an increase in other assets of
$371,000, an increase in deferred rent of $2,649,000 and a
decrease in deferred taxes payable of $119,000.
(u) Reclassifications
-----------------
Certain amounts as previously reported have been reclassified
to conform to current year classifications.
(2) Investment in MarketVision
--------------------------
Acquisition of 49% of MarketVision
On February 27, 2001, the Company acquired 49% of the shares of capital
stock of MarketVision which is a minority owned, predominately
Hispanic, ethnically oriented promotion agency headquartered in San
Antonio, Texas. The MarketVision acquisition had been accounted for as
an equity investment on the Company's consolidated balance sheet
through the Company's fiscal year ended March 31, 2003. Pursuant to the
equity method of accounting, the Company's balance sheet carrying value
of the investment was periodically adjusted to reflect the Company's
49% interest in the operations of MarketVision. Following its
acquisition, the Company extended a line of credit to MarketVision in
the amount of $200,000. At March 31, 2005 and 2004, there were no
advances outstanding under this line of credit. Effective in the fourth
quarter of fiscal year ended March 31, 2004, the Company included in
its consolidated financial statements the financial statements of
MarketVision, pursuant to the adoption of FIN 46R.
On March 22, 2002, MarketVision entered into an Administration and
Marketing Services Agreement with the Company pursuant to which the
Company provides MarketVision with specific administrative, accounting,
financial, marketing and project support services for a monthly fee of
$35,000. This fee is adjusted periodically by the Company and
MarketVision and as of May 1, 2005 the monthly fee was $55,000. In
accordance with the agreement, the Company dedicates and allocates
certain of its resources and the specific time of certain of its
personnel to MarketVision. For Fiscal 2005 and 2004, the Company
recorded fees in the amount of $655,000 and $570,000, respectively,
which were eliminated in the consolidation of MarketVision, whereas in
Fiscal 2003 fees of $450,000 were recorded as a reduction of operating
expenses.
(3) Notes Receivable From Officer
-----------------------------
Notes receivable from officer at March 31, 2005 and 2004 consist of an
Amended and Restated Promissory Note (the "Amended Note") from an
officer of the Company dated May 24, 2001 in the principal amount of
39
$550,000 which (i) amended and restated two notes evidencing prior
loans to such officer in the aggregate amount of $225,000 (which at
March 31, 2001 had unrecorded accrued interest of $119,299) and (ii)
reflected an additional loan in the amount of $325,000. The Amended
Note provides for (i) monthly interest payments at a floating rate
equal to the highest rate at which the Company pays interest on its
bank borrowings, (ii) monthly payment of one-half of the interest that
accrue over the preceding month, (iii) payment of accrued interest and
principal from one-half of the after-tax amount, if any, of bonuses
paid to the officer by the Company, and (iii) payment of the remaining
balance of principal and accrued interest on May 24, 2006. To date, the
officer has not made any of the required monthly interest payments
under the Amended Note. The Amended Note is secured by (i) a first lien
and security interest in 282,127 shares of the Company's common stock
owned by the officer, (ii) a second mortgage on the officer's home and
(iii) collateral assignments of $550,000 of life insurance policies. At
March 31, 2005 and 2004, the note due from officer with respect to the
Amended Note of $789,459 and $726,276, respectively, included accrued
interest in the amount of $239,000 and $212,000, respectively, of which
$60,000 and $46,500 were past due and owing on such dates.
(4) Property and Equipment
----------------------
Property and equipment consist of the following:
March 31, March 31,
2005 2004
------------ ------------
Furniture, fixtures and computer equipment $ 4,219,441 $ 3,996,984
Leasehold improvements 3,856,098 1,519,699
Capitalized leases 21,748 21,748
------------ ------------
8,097,287 5,538,431
Less: accumulated depreciation and amortization 3,844,960 2,939,502
------------ ------------
$ 4,252,327 $ 2,598,929
============ ============
Depreciation and amortization expense on property and equipment for the
years ended March 31, 2005, 2004 and 2003 amounted to $935,003,
$656,270 and $547,210, respectively.
During the fourth quarter of Fiscal 2005, the Company recorded
leasehold improvements, net of accumulated amortization, in the amount
of $1,979,000 pursuant to a correction of an error relating to its
lease accounting practices (note 1(t)). As a result of the correction,
the Company recorded leasehold amortization expense of $340,000 during
the fourth quarter of Fiscal 2005.
(5) Leases
------
The Company has several non-cancelable operating leases, primarily for
property, that expire through 2015. Rent expense for the years ended
March 31, 2005, 2004 and 2003, net of reimbursements from clients,
amounted to $1,071,178, $965,310 and $838,162, respectively. One of the
Company's facilities is leased from the former owner of Optimum, who is
also a director of the Company, This lease expires in December 2010.
The Company paid rent under this lease in each of Fiscal 2004 and 2005
in the amount of approximately $160,000. Another facility is leased by
MarketVision from an entity owned and controlled by MarketVision's
President and 51% owner, with a current annual base rent of $166,000
and additional rent of $45,000 for maintenance, taxes and insurance,
which expires in May 2010. Future non-cancelable minimum lease payments
under all of the leases as of March 31, 2005 are as follows:
40
Year ending March 31,
---------------------
2006 $ 1,888,000
2007 1,784,000
2008 1,808,000
2009 1,525,000
2010 1,330,000
Thereafter 6,108,000
------------
$ 14,443,000
============
(6) Debt
----
Notes Payable, Bank
-------------------
At March 31, 2005, the Company's bank borrowings of $4,584,500
(exclusive of a letter of credit outstanding in the amount of $500,000)
reflect the terms and conditions of an Amended and Restated Credit
Agreement ("Credit Agreement") entered into with a bank on March 24,
2005. Pursuant to the Credit Agreement, amounts available for borrowing
under its revolving credit line were increased by $2,415,500 to
$3,000,000, and the term loan portion of the credit facility was
increased by $1,050,000 to $4,000,000. On March 25, 2005, the bank
advanced the Company the increased portion of the term loan. The Credit
Agreement also provides a separate $500,000 letter of credit facility
to support the Company's lease obligations with respect to its New York
City offices. The Company utilized $425,000 of the proceeds of the
increased term loan to pay in full its remaining obligations on the 9%
subordinated note it issued in connection with its 1998 acquisition of
Optimum Group. Remaining loan proceeds will be used for working capital
purposes. Borrowings under the term loan and revolving credit facility
are evidenced by promissory notes and are secured by all the Company's
assets. Pursuant to the Credit Agreement:
o Principal payments on the term loan are to be made in 48 equal
monthly installments of $83,333 commencing April 1, 2005. Prior to
the amendment, principal payments on the term loan portion of the
facility were $162,500 per month.
o The maturity date of the loans made under the revolving credit line
was extended from July 22, 2006 to March 24, 2008.
o Interest on the revolving loans has been reduced to the bank's
prime rate (5.75% at March 31, 2005) from its prime rate plus .50%,
and interest on the term loan has been reduced to the bank's prime
rate plus .50% (6.25% at March 31, 2005) from its prime rate plus
1.0%.
o Amounts that may be borrowed under the revolving line of credit are
not subject to a borrowing base. Prior to the amendment, borrowings
under the revolving line of credit were limited to a borrowing base
consisting of 80% of "eligible" accounts receivable.
o The Company paid a $10,000 fee to the bank plus its legal costs and
expenses.
Further, the Credit Agreement provides for a number of affirmative and
negative covenants, restrictions, limitations and other conditions
including, among others, (i) limitations regarding the payment of cash
dividends, (ii) use of proceeds, (iii) prohibition on incurring a
consolidated net loss, as defined in the Credit Agreement in two
consecutive fiscal quarters or any fiscal year, (iv) compliance with a
defined senior debt leverage ratio and debt service ratio covenants,
(v) maximum annual capital expenditures and (vi) maintenance of 15% of
beneficially owned shares of the Company held by the Company's
management. At March 31, 2005, the Company was in compliance with its
covenants in the Credit Agreement.
41
Total debt as of March 31, 2005 and 2004 is summarized as follows:
2005 2004
------------ ------------
Term loan note payable $ 4,000,000 $ 4,400,000
Revolving loan note payable 584,500 584,500
9% subordinated note payable to OG Holding Corporation -- 425,000
------------ ------------
Total debt 4,584,500 5,409,500
Less current portion 1,000,000 1,875,000
------------ ------------
Total long-term debt $ 3,584,500 $ 3,534,500
============ ============
Maturities of notes payable are as follows:
Term Loan Revolving Total Notes
Note Loan Note Payable
Payable Payable Bank
------------ ------------ ------------
2006 $ 1,000,000 $ -- $ 1,000,000
2007 1,000,000 -- 1,000,000
2008 1,000,000 584,500 1,584,500
2009 1,000,000 -- 1,000,000
------------ ------------ ------------
$ 4,000,000 $ 584,500 $ 4,584,500
============ ============ ============
(7) Stockholders' Equity
--------------------
Common Stock Reserved for Issuance
----------------------------------
(i) Stock Options
-------------
Under the Company's 1992 Stock Option Plan (the "1992 Plan"),
employees of the Company and its affiliates and members of the
Board of Directors were granted options to purchase shares of
common stock of the Company. Options granted under the 1992
Plan were either intended to qualify as incentive stock
options under the Internal Revenue Code of 1986, or
non-qualified options. Grants under the 1992 Plan were awarded
by a committee of the Board of Directors, and are exercisable
over periods not exceeding ten years from date of grant. The
option price for incentive stock options granted under the
1992 Plan must be at least 100% of the fair market value of
the shares on the date of grant, while the price for
non-qualified options granted to employees and employee
directors is determined by the committee of the Board of
Directors. The 1992 Plan was amended on May 11, 1999 to
increase the maximum number of shares of common stock for
which options may be granted to 1,500,000 shares.
On May 11, 1999, the Company established the 1997 Executive
Officer Stock Option Plan (the "1997 Plan"), pursuant to which
(i) a maximum of 375,000 non-qualified stock options may be
granted to purchase shares of common stock, (ii) three
officers of the Company were each granted 125,000
non-qualified stock options to purchase shares of common stock
in exchange for the surrender by each of their incentive stock
options to purchase 125,000 shares of common stock issued on
May 2, 1997 pursuant to the Company's 1992 Stock Option Plan
and (iii) the exercise price and other terms and conditions of
the options granted are identical to those of the options
surrendered.
On July 1, 2002, the Company established the 2002 Long-Term
Incentive Plan (the "2002 Plan") providing for the grant of
options or other awards to employees, officers or directors
of, consultants to, the Company or its subsidiaries to acquire
up to an aggregate of 750,000 shares of Common Stock. Options
42
granted under the 2002 Plan may either be intended to qualify
as incentive stock options under the Internal Revenue Code of
1986, or may be non-qualified options. Grants under the 2002
Plan are awarded by a committee of the Board of Directors, and
are exercisable over periods not exceeding ten years from date
of grant. The option price for incentive stock options granted
under the 2002 Plan must be at least 100% of the fair market
value of the shares on the date of grant, while the price for
non-qualified options granted is determined by the Committee
of the Board of Directors.
Changes in options outstanding and options exercisable and
shares reserved for issuance at March 31, 2005 under all plans
are as follows:
Weighted
average price Exercisable
per share Outstanding (D)
------------ ------------ ------------
Balance at March 31, 2002 $ 2.84 1,739,501 1,564,779
Became exercisable $ 2.32 -- 74,083
Granted (A) $ 2.50 495,000 94,333
Exercised $ 1.15 (6,250) (6,250)
Canceled $ 5.29 (280,916) (281,296)
------------ ------------ ------------
Balance at March 31, 2003 $ 2.40 1,947,335 1,445,649
Became exercisable $ 2.44 -- 193,146
Granted (B) $ 2.93 255,000 171,252
Exercised $ 2.50 (2,625) (2,625)
Canceled $ 2.72 (69,481) (35,775)
------------ ------------ ------------
Balance at March 31, 2004 $ 2.46 2,130,229 1,771,647
Became exercisable $ 2.60 -- 293,585
Granted (C) $ 2.48 27,500 13,752
Exercised $ 2.31 (68,750) (68,750)
Canceled $ 3.38 (96,741) (96,741)
------------ ------------ ------------
Balance at March 31, 2005 $ 2.42 1,992,238 1,913,493
============ ============ ============
(A) Represents options granted to management of the Company's
subsidiaries to purchase 495,000 shares at an exercise price
of $2.50. Of the options granted, 94,333 became exercisable
prior to March 31, 2003 and the balance are exercisable as
follows:
43,333 on January 1, 2004
43,334 on January 1, 2005
42,500 on September 1, 2003, 2004, 2005 and 2006
51,000 on December 31, 2003 and 2004
42,000 on January 1, 2005
(B) Represents options granted to purchase 227,500 shares at an
exercise price of $3.00 and 27,500 shares at an exercise price
of $2.33. Of the options granted, 171,252 became exercisable
prior to March 31, 2004 and of the balances, 13,748 are
exercisable on April 30, 2004 and 70,000 are exercisable on
March 31, 2005.
43
(C) Represents options granted to purchase 27,500 shares at an
exercise price of $2.48. Of the options granted, 13,752 became
exercisable prior to March 31, 2005 and 13,748 are exercisable
on April 30, 2005.
(D) Options exercisable at March 31, 2005, 2004 and 2003 had a
weighted average exercise price of $2.41, $2.43 and $2.38,
respectively.
The options outstanding and exercisable as of March 31, 2005 are
summarized in ranges as follows:
Weighted Weighted Weighted
Number of average average average
Range of options exercise remaining Exercisable exercise price
exercise price outstanding price life shares of shares
---------------- ------------ ------------ ------------ ------------ ------------
$1.12 - 2.50 1,361,113 $ 1.83 1.72 1,282,368 $ 1.78
$2.80 - 4.00 624,250 $ 3.62 2.50 624,250 $ 3.62
more than $4.00 6,875 $ 10.00 3.08 6,875 $ 10.00
------------ ------------ ------------ ------------ ------------
1,992,238 $ 2.42 1.97 1,913,493 $ 2.41
============ ============ ============ ============ ============
(ii) Warrants
--------
At March 31, 2005, outstanding warrants to purchase shares of
the Company's common stock in the amount of 246,396 were
exercisable at a weighted average price per share of $1.90. In
January 2005, warrants to purchase 251,084 shares of the
Company's common stock were exercised at $2.49. During Fiscal
2005, pursuant to anti-dilution provisions contained in the
warrants, the warrants became exercisable for an additional
7,616 shares of the Company's common stock. The value of the
additional warrants granted were deemed to be immaterial. At
March 31, 2004, outstanding warrants to purchase shares of the
Company's common stock in the amount of 489,864 were
exercisable at a weighted average price per share of $2.23. At
March 31, 2003 outstanding warrants to purchase shares of the
Company's common stock in the amount of 642,364 were
exercisable at a weighted average price per share of $1.85. At
March 31, 2005, these warrants are exercisable over the next
two years.
(8) Other Income
------------
Other income at March 31, 2003 was primarily the result of the
Company's sale of certain of its Internet domain names for $250,000.
(9) Income Taxes
------------
The components of income tax provision (benefit) for the years ended
March 31, 2005, 2004, and 2003 are as follows:
March 31, 2005 March 31, 2004* March 31, 2003
--------------------------- --------------------------- ---------------------------
Current:
State and local $ 54,954 $ 25,440 $ 232,338
Federal 559,318 614,272 (126,516) (101,076) 169,106 401,444
------------ ------------ ------------
Deferred:
Federal and State 626,145 (1,387,142) 788,232
------------ ------------ ------------
$ 1,240,417 $ (1,488,218) $ 1,189,676
============ ============ ============
*Income tax benefit
before cumulative
effect of the change
in accounting principle
for revenue recognition $ (33,008)
Cumulative effect
of change in accounting
principle for revenue
recognition (1,455,210)
------------
$ (1,488,218)
============
44
The differences between the provision (benefit) for income taxes
computed at the federal statutory rate and the reported amount of tax
expense attributable to income (loss) before provision (benefit) for
income taxes, equity in loss of affiliate, minority interest in net
income of consolidated subsidiary and cumulative effect of a change in
accounting principle for the years ended March 31, 2005, 2004 and 2003
are as follows:
Rate
------------------------------------------
2005 2004 2003
------------ ------------ ------------
Statutory Federal income tax 34.0% (34.0)% 34.0%
State and local taxes, net of Federal benefit 3.0 2.3 5.2
Under accrual from prior year 1.6 15.9 --
Permanent differences .9 4.3 --
Depreciation and other .6 4.8 .8
------------ ------------ ------------
Effective tax rate 40.1% (6.7)% 40.0%
============ ============ ============
The tax effects of temporary differences between the financial
reporting and tax bases of assets and liabilities that are included in
net deferred tax liability are as follows:
March 31, March 31, March 31,
2005 2004 2003
------------ ------------ ------------
Deferred tax (liabilities) assets:
Current:
Unbilled revenue $ (224,170) $ (147,943) $ (548,097)
------------ ------------ ------------
Long-term:
Goodwill, principally due to
differences in amortization (2,497,275) (1,849,236) (1,070,085)
Net operating loss carryforwards 2,157,230 2,046,163 55,740
Other (124,946) (112,000) (65,701)
------------ ------------ ------------
(464,991) 84,927 (1,080,046)
------------ ------------ ------------
Net deferred tax liability $ (689,161) $ (63,016) $ (1,628,143)
============ ============ ============
At March 31, 2005, the Company has federal net operating loss
carry-forwards of approximately $5,003,000 that expire through 2024.
For March 31, 2003, the Company and its wholly-owned subsidiaries filed
a consolidated federal income tax return. For March 31, 2005 and 2004,
the Company's wholly-owned subsidiaries are single-member limited
liability companies that are disregarded for federal income tax return
purposes. As such, the Company is no longer required to file a federal
consolidated income tax return.
45
(10) Significant Customers
---------------------
For the fiscal years ended March 31, 2005 and 2004, Diageo North
America, Inc. ("Diageo") accounted for approximately 27% and 13%,
respectively, of the Company's revenues. For the fiscal years ended
March 31, 2005, 2004 and 2003, Schieffelin & Somerset Co. and its
successor entities ("S&S"), accounted for approximately 13%, 30% and
35%, respectively, of its revenues. These revenues respectively
included revenues attributable to program reimbursable costs and
expenses for Diageo of 17% and 5% of revenues for the years ended March
31, 2005 and 2004, and 9%, 21% and 19% for S&S, respectively, for the
years ended March 31, 2005, 2004, and 2003. At March 31, 2005 and 2004,
Diageo accounted for 9% and 12%, respectively, of the Company's
accounts receivable. At March 31, 2005 and 2004, S&S accounted for 1%
and 35%, respectively, of accounts receivable.
(11) Employee Benefit Plan
---------------------
The Company has a savings plan available to substantially all salaried
employees which is intended to qualify as a deferred compensation plan
under Section 401(k) of the Internal Revenue Code (the "401(k) Plan").
Pursuant to the 401(k) Plan, employees may contribute up to 15% of
their eligible compensation, up to the maximum amount allowed by law.
The Company at its sole discretion may from time to time make a
discretionary matching contribution as it deems advisable. For the
years ended March 31, 2005, 2004 and 2003, the Company made
discretionary contributions of approximately $251,000, $313,000 and
$331,000, respectively.
(12) Commitments
------------
Employment Agreements
---------------------
The Company has employment contracts with various employees, including
four of its officers and directors as well as with nine other
employees. These agreements generally contain non-compete provisions
and have a remaining term of twelve to eighteen months. At March 31,
2005, the Company's remaining aggregate commitment under the employment
agreements is approximately $2,630,000 and such commitments amount to
$2,518,000 and $112,000 for Fiscal 2006 and 2007, respectively. The
aggregate commitment does not include amounts that may be earned as a
bonus.
(13) Related Party Transactions
--------------------------
(a) On January 26, 2004, Brian Murphy, a director of the Company
and the chief executive officer of the Company's U.S. Concepts
subsidiary, purchased from the Company 150,000 shares of a
newly designated class of the Company's preferred stock for an
aggregate purchase price of $600,000. Thereafter, on February
9, 2004, the Company sold an aggregate of 412,000 shares of
the Company's common stock, at a price of $2.50, to five
individuals, consisting of the Company's president and chief
executive officer, three of the Company's other directors and
an officer of one of the Company's subsidiaries, resulting in
an additional $1,030,000 of cash proceeds to the Company. In
connection with such sale of common stock, and pursuant to the
terms upon which Mr. Murphy purchased the shares of preferred
stock described above, Mr. Murphy was issued an additional
240,000 shares of common stock in exchange for the
cancellation of such preferred stock.
46
(b) In connection with the Company's acquisition of Optimum, the
Company entered into a lease agreement with Thomas Lachenman,
a director of the Company and former owner of Optimum, for the
lease of the Cincinnati principal office of Optimum. The lease
provides for an annual rental, adjusted annually based upon
changes in the local consumer price index. Rent expense under
this lease amounted to approximately $160,000 in each of
Fiscal 2004 and 2005. The lease expires in December 2010.
(c) On May 20, 2005, MarketVision entered into a five year lease
agreement with an entity owned and controlled by Yvonne
Garcia, MarketVision's President and 51% owner. The lease
provides for an annual base rental of $166,000 and additional
rent of $45,000 for maintenance fees, taxes and insurance. The
additional rent is adjusted annually for increases in the
landlord's cost of maintenance fees, taxes and insurance. The
lease expires in May 2010.
(14) Summarized Quarterly Consolidated Financial Data (Unaudited)
-----------------------------------------------------------
The quarterly information for the first three quarters of Fiscal 2004
reflects the quarters as restated reflecting the adoption of EITF 00-21
and FIN 46R as of April 1, 2003.
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Second Third Fourth
Quarter Quarter Quarter
First Quarter Ended Ended Ended
Ended June 30, September 30, December 31, March 31,
2004 2004 2004 2004
------------ ------------ ------------ ------------
Sales $ 19,403,094 $ 23,223,187 $ 21,553,640 $ 20,120,296
Operating expenses 18,994,099 21,993,843 20,065,741 19,924,054
------------ ------------ ------------ ------------
Operating income 408,995 1,229,344 1,487,899 196,242
------------ ------------ ------------ ------------
Net income (loss) $ 197,537 $ 659,826 $ 658,388 $ (154,336)
Net income (loss) per common share:
Basic $ .03 $ .11 $ .11 $ (.02)
Diluted $ .03 $ .10 $ .10 $ (.02)
Weighted average common shares:
Basic 5,941,856 5,941,856 5,943,255 6,192,823
Diluted 6,388,444 6,355,295 6,609,114 6,192,823
47
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Second Third Fourth
First Quarter Quarter Quarter
Quarter Ended Ended Ended
Ended June 30, September 30, December 31, March 31,
2003 2003 2003 2004
------------ ------------ ------------ ------------
As As As
Restated Restated Restated
------------ ------------ ------------ ------------
Sales $ 20,203,923 $ 16,557,568 $ 19,076,940 $ 13,442,053
Operating expenses 18,669,481 16,475,649 19,182,751 15,202,435
------------ ------------ ------------ ------------
Operating income (loss) 1,534,442 81,919 (105,811) (1,760,382)
------------ ------------ ------------ ------------
Net income (loss) $ 878,205 $ 11,846 $ (123,345) $ (1,329,177)
Net income (loss) per common share:
Basic $ .17 $ .00 $ (.02) $ (.23)
Diluted $ .15 $ .00 $ (.02) $ (.23)
Weighted average common shares:
Basic 5,119,347 5,135,035 5,137,179 5,673,630
Diluted 5,765,948 6,223,819 5,137,179 5,673,630
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
--------------------
None.
Item 9A. Controls and Procedures.
-----------------------
Evaluation of Disclosure Controls and Procedures
An evaluation was performed, under the supervision of, and with the
participation of, the Company's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rules13a-15(e) and 15d-(e) to the Securities and Exchange Act of 1934). Based on
that evaluation, the Company's management, including the Chief Executive Officer
and Chief Financial Officer, concluded that the Company's disclosure controls
and procedures were adequate and effective, as of the end of the period covered
by this Annual Report on Form 10-K for the year ended March 31, 2005 (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.
48
PART III
The information required to be disclosed in Part III (Items 10, 11, 12, 13 and
14, and fees and services) will be incorporated by reference from the Company's
definitive proxy statement if filed by July 29, 2005 or, if such proxy statement
is not filed by such date, such information will be disclosed by amendment to
this Form 10-K prior to July 30, 2005.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
------------------------------------------
(a) The following documents are filed as part of this Report.
Page
1. Financial Statements:
--------------------
Index to Financial Statements 25
Consolidated Financial Statements of CoActive Marketing
Group, Inc.
Report of Independent Registered Public Accounting Firm 26
Consolidated Balance Sheets as of March 31, 2005 and 2004 27
Consolidated Statements of Operations for the years ended
March 31, 2005, 2004 and 2003 28
Consolidated Statements of Stockholders' Equity
for the years ended March 31, 2005, 2004 and 2003 29
Consolidated Statements of Cash Flows for the years ended
March 31, 2005, 2004 and 2003 30
Notes to Consolidated Financial Statements 31
2. Financial Statement Schedules:
-----------------------------
S-1 Report of Independent Registered Public Accounting Firm 52
S-2 Allowance for Doubtful Accounts 53
3. Exhibits:
--------
49
Exhibit
Number Description of Exhibits.
- ------ -----------------------
2.1 Asset Purchase Agreement, dated as of December 8, 1997, by and among
OG Holding Corporation (formerly known as Optimum Group, Inc.), James
H. Ferguson, Michael J. Halloran, Christina M. Heile, David E.
Huddleston, Thomas E. Lachenman, Thomas L. Wessling, Optimum Group,
Inc. (formerly known as OG Acquisition Corp.) and Inmark Enterprises,
Inc. (incorporated by reference to Exhibit 2.1 to the Registrant's
Report on Form 8-K dated March 31, 1998, File No. 000-20394,
initially filed with the Securities and Exchange Commission on April
13, 1998).
2.2 Amendment No. 1 to the Asset Purchase Agreement, dated as of March
31, 1998 (incorporated by reference to Exhibit 2.2 to the
Registrant's Report on Form 8-K dated March 31, 1998, File No.
000-20394, initially filed with the Securities and Exchange
Commission on April 13, 1998).
2.3 Asset Purchase Agreement, dated as of December 29, 1998, by and among
U.S. Concepts, Inc., a New York corporation, Brian Murphy, U.S.
Concepts, Inc., a Delaware corporation, and Inmark Enterprises, Inc.
(incorporated by reference to Exhibit 2.3 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31, 1999,
initially filed with the Securities and Exchange Commission on July
6, 1999).
3.1 Certificate of Incorporation, as amended, of the Registrant
(incorporated by reference to Exhibit 3.1 to the Registrant's
Quarterly Report on Form 10-Q for the three month period ended
September 30, 1999, initially filed with the Securities and Exchange
Commission on November 22, 1999).
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to
the Registrant's Quarterly Report on Form 10-Q for the three month
period ended September 30, 1999, initially filed with the Securities
and Exchange Commission on November 22, 1999).
10.1 Employment Agreement dated September 29, 1995 between Registrant and
John P. Benfield (incorporated by reference to Exhibit 10.3 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996, initially filed with the Securities and Exchange
Commission on July 1, 1996).
10.2 Second Amendment to Employment Agreement dated November 14, 2001
between the Registrant and John P. Benfield (incorporated by
reference to Exhibit 10.3 to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 2002, initially filed with
the Securities and Exchange Commission on June 28, 2002).
10.3 Employment Agreement dated September 29, 1995 between the Registrant
and Donald A. Bernard (incorporated by reference to Exhibit 10.4 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996, initially filed with the Securities and Exchange
Commission on July 1, 1996).
10.4 Second Amendment to Employment Agreement dated November 14, 2001
between the Registrant and Donald A. Bernard (incorporated by
reference to Exhibit 10.5 to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 2002, initially filed with
the Securities and Exchange Commission on June 28, 2002).
10.5 Employment Agreement dated September 29, 1995 between Registrant and
Paul A. Amershadian (incorporated by reference to Exhibit 10.5 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996, initially filed with the Securities and Exchange
Commission on July 1, 1996).
10.6 Second Amendment to Employment Agreement dated November 14, 2001
between Registrant and Paul A. Amershadian (incorporated by reference
to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 2002, initially filed with the
Securities and Exchange Commission on June 28, 2002).
10.7 Amended and Restated Promissory Note, dated as of May 24, 2001, in
the principal amount of $550,000, by Paul A. Amershadian in favor of
the Company (incorporated by reference to Exhibit 10.5 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 2001, initially filed with the Securities and Exchange
Commission on July 13, 2001).
50
10.8 Amended and Restated Pledge Agreement, dated as of May 24, 2001,
between Paul A. Amershadian and the Company (incorporated by
reference to Exhibit 10.6 to Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 2001, initially filed with the
Securities and Exchange Commission on July 13, 2001).
10.9 Amended and Restated Credit Agreement dated as of March 24, 2005, by
and among CoActive Marketing Group, Inc., Inmark Services LLC,
Optimum Group LLC, U.S. Concepts LLC, Grupo Hacerlo LLC and Signature
Bank (incorporated by reference to Exhibit 10.1 to Registrant's
Current Report on Form 8-K dated March 24, 2005, filed with the
Securities and Exchange Commission on March 30, 2005).
10.10 Form of Security Agreement, dated as of October 31, 2002 between each
of CoActive Marketing Group, Inc., Inmark Services, Inc., Optimum
Group, Inc., U.S. Concepts, Inc. and Grupo Hacerlo LLC and Signature
Bank (incorporated by reference to Exhibit 10.1 to Registrant's
Current Report on Form 8-K dated October 31, 2002, initially filed
with the Securities and Exchange Commission on November 4, 2002).
10.11 Administration and Marketing Services Agreement, dated as of March
22, 2002, between the Registrant and MarketVision (incorporated by
reference to Exhibit 10.13 to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 2002, initially filed with
the Securities and Exchange Commission on June 28, 2002).
10.12 CoActive Marketing Group, Inc. 2002 Long-Term Incentive Plan
(incorporated by reference to Exhibit A to Registrant's Definitive
Proxy Statement initially filed with the Securities and Exchange
Commission on July 29, 2002).
10.13 Amended and Restated Credit Agreement dated as of July 22, 2004, by
and among CoActive Marketing Group, Inc., Inmark Services LLC,
Optimum Group LLC, U.S. Concepts LLC, Grupo Hacerlo LLC, TrikMedia
LLC and Signature Bank.
14 Registrant's Code of Ethics (incorporated by reference to Exhibit 14
to Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 2004, initially filed with the Securities and Exchange
Commission on July 24, 2004).
21 Subsidiaries of the Registrant
23 Consent of BDO Seidman, LLP
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
of the Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
of the Exchange Act.
32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b)
of the Exchange Act.
32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b)
of the Exchange Act.
51
S-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
CoActive Marketing Group, Inc.
The audits referred to in our report dated June 27, 2005 relating to the
consolidated financial statements of CoActive Marketing Group, Inc. and
Subsidiaries, which is contained in Item 8 of the Form 10-K, included the audits
of the financial statement schedule for the years ended March 31, 2005, 2004 and
2003. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
- --------------------------------
BDO Seidman, LLP
Melville, New York
June 27, 2005
52
S-2
Allowance for Doubtful Accounts
-------------------------------
Balance Balance
at beginning at end
of period Additions Deductions of period
------------ ------------ ------------ ------------
Year ended March 31, 2005 $ 295,981 $ 63,500 $ 290,537 $ 68,944
Year ended March 31, 2004 $ 80,412 $ 256,000 $ 40,431 $ 295,981
Year ended March 31, 2003 $ 75,000 $ 36,000 $ 30,588 $ 80,412
The amounts listed in the deductions column above, represent reductions to the
allowance for doubtful accounts resulting from either a) write offs of certain
identified uncollectible accounts receivables or b) a reduction of bad debt
expense previously provided for.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
COACTIVE MARKETING GROUP, INC.
By: /s/ DONALD A. BERNARD
-------------------------------------
Donald A. Bernard
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Dated: June 29, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
Signature and Title Signature and Title
By: /s/ JOHN P. BENFIELD By: /s/ DONALD A. BERNARD
----------------------------------- --------------------------------
John P. Benfield Donald A. Bernard
President and Executive Vice President and
Chief Executive Officer and Director Chief Financial Officer and
(Principal Executive Officer) Director (Principal Financial
and Accounting Officer)
Dated: June 29, 2005 Dated: June 29, 2005
By: /s/ PAUL A. AMERSHADIAN By: /s/ HERBERT M. GARDNER
----------------------------------- --------------------------------
Paul A. Amershadian Herbert M. Gardner
Executive Vice President - Marketing Director
and Sales and Director
Dated: June 29, 2005 Dated: June 29, 2005
By: /s/ MARC PARTICELLI By: /s/ BRIAN MURPHY
----------------------------------- --------------------------------
Marc Particelli Brian Murphy
Director Director
Dated: June 29, 2005 Dated: June 29, 2005
By: /s/ THOMAS E. LACHENMAN By: /s/ JOHN A. WARD, III
----------------------------------- --------------------------------
Thomas E. Lachenman John A. Ward, III
Director Director
Dated: June 29, 2005 Dated June 29, 2005
By: /s/ JAMES FEENEY
-----------------------------------
James Feeney
Director
Dated: June 29, 2005
54