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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-20394
COACTIVE MARKETING GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1340408
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
415 Northern Boulevard, Great Neck, New York 11021
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 622-2800
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. [ ]
As of June 29, 2001, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $7,532,456.
As of June 29, 2001, 5,022,231 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 Part III
to Registrant's 2001 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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General Introduction
CoActive Marketing Group, Inc. ("CoActive"), through its
wholly-owned subsidiaries, Inmark Services, Inc. ("Inmark"), Optimum Group, Inc.
("Optimum"), and U.S. Concepts, Inc. ("U.S. Concepts"), together the "Company",
is a full service marketing, sales promotion and interactive new media services
and e-commerce provider organization which designs, develops and implements
turnkey customized national, regional and local consumer and trade promotion
programs principally for Fortune 500 consumer product companies. The Company's
programs are designed to enhance the value of its clients' budgeted expenditures
and achieve, in an objectively measurable way, its clients' specific marketing
and promotional objectives. In the industry, the Company's programs are commonly
referred to as "account specific" and/or "co-marketing", as they may target the
participation and cooperation of a specific retail chain or groups of retailers
or other sources of distribution to attain results in the form of increased
in-store product displays, related consumer purchases and enhanced product brand
name recognition.
In addition to offering a full range of traditional marketing
and sales promotional services consisting of strategic marketing, creative
services, direct marketing, multi cultural marketing, event marketing,
entertainment marketing, and in-store sampling and merchandising; the Company is
also a provider of interactive new media services consisting of Internet web
site designing and hosting, e-commerce tools, electronic sales tools and
computer based training. By providing a wide range of programs and services, the
Company affords its clients a total solutions resource for strategic planning,
creative development, production, implementation and sales training aids,
including in-store and special event activities.
CoActive was initially formed under the laws of the State of
Delaware in March 1992 as Health Image Media, Inc. Its principal offices are
located at 415 Northern Boulevard, Great Neck, New York 11021, and its telephone
number is 516-622-2800.
The Company began to engage in its current operations on
September 29, 1995 upon consummation of a merger transaction (the "Merger") as a
result of which Inmark, a New York corporation, became a wholly-owned subsidiary
of CoActive and the management of Inmark became the executive management of the
Company. Previously, CoActive had been engaged in unrelated activities which
were discontinued in June 1993.
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On March 31, 1998, Optimum, an indirect wholly-owned
subsidiary of CoActive acquired all of the assets and assumed certain
liabilities of OG Holding Corporation, formerly known as Optimum Group, Inc.
(the "Optimum Acquisition"). The purchase price for the Optimum Acquisition
consisted of $9,298,000 in cash (including expenses), a subordinated note of
CoActive in the principal amount of $2,500,000, 565,385 shares of newly and
validly issued common stock of CoActive ("CoActive Common Stock") and the
payment or assumption of approximately $1,900,000 of existing debt of the
seller. Simultaneously with the closing of the Optimum Acquisition, the Company
entered into a loan agreement with a bank (the "Loan Agreement") pursuant to
which the Company obtained a $5,000,000 five-year term loan (the "Term Loan")
and a $5,000,000 revolving loan credit facility (the "Revolving Loan Facility",
and together with the Term Loan, the "Loan"). A portion of the proceeds of the
Loan was used to finance the Optimum Acquisition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations". The Optimum
business, founded in 1973, provides marketing, visual communications and graphic
design services which complement and add value to those services provided by
other subsidiaries of the Company. Optimum assists clients in varied industries
in identifying the best and most complete solution for their business
communication needs. Optimum offers clients leading edge visual communications
technology and Internet development, interface and access, interactive sales
training and support solutions. In addition to its role in providing the
Company's clients with an integrated total resource range of marketing
solutions, Optimum serves as an independent resource for strategic planning,
creative development, production and implementation.
On December 29, 1998, U.S. Concepts, a Delaware corporation
and wholly-owned subsidiary of the Company acquired the business conducted by
U.S. Concepts, Inc., a New York corporation now known as Murphy Liquidating
Corporation (the "U.S. Concepts Acquisition"). The purchase price for the U.S.
Concepts Acquisition was $1,660,000, consisting of $1,410,000 in cash (including
expenses) and 30,000 newly issued shares of CoActive Common Stock valued at
$250,000. In the event that U.S. Concepts achieves specified pre-tax earnings
during the two year period ending December 31, 2000 and cumulatively during the
four-year period ending December 31, 2002, additional installments of purchase
price totaling up to $2,500,000 may be payable and will be reflected as a
purchase price adjustment as an addition to goodwill. At the option of the
recipient, 50% of such installments may be paid in shares of CoActive Common
Stock. During the year ended March 31, 2001, the Company paid an additional
purchase price installment totaling $500,000 based upon pre-tax earnings during
the two year period ending December 31, 2000. The payment has been reflected as
additional goodwill on the consolidated balance sheet.
In connection with the U.S. Concepts Acquisition, U.S.
Concepts assumed liabilities in the amount of $2,500,000. The cash portion of
the U.S. Concepts Acquisition was financed with proceeds from the Company's
remaining unused Revolving Loan Facility. The U.S. Concepts business founded in
1983, provides event marketing and in-store promotion services, including brand
creating and execution of special event campaigns, tours and festivals, sales
driven sampling, demonstration programs and events. These services complement
and add value to the services provided by the other subsidiaries of the Company.
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U.S. Concepts assists clients with the expertise and manpower to reach target
customers where they live, shop, play and study in a manner that integrates
client brands directly with customer lifestyles.
Effective March 1, 2000, the Company entered into a
twelve-month Retainer and Option Agreement, with Garcia Baldwin, Inc., a Texas
corporation which is a minority owned, predominantly Hispanic, ethnically
oriented promotion agency headquartered in San Antonio, Texas, doing business as
MarketVision ("MarketVision"). The Retainer and Option Agreement (i) established
a strategic alliance with respect to the cooperative marketing and support of
services; (ii) provided for a monthly retainer payment by the Company to
MarketVision and (iii) granted the Company an option, during the term of the
agreement, to acquire a 49% ownership interest in MarketVision for a fixed
amount reduced by one-half of the retainer payments. On February 27, 2001, the
Company exercised its option and acquired 49% of the shares of capital stock of
MarketVision for a purchase price of $300,000 and issued 35,000 stock options
with a fair value of $25,630 to purchase shares of CoActive common stock using
the Black-Scholes option pricing model. In connection with the transaction, the
Company extended a credit line in the amount of $200,000 to MarketVision. There
were no borrowings on the credit line at March 31, 2001. The MarketVision
acquisition has been accounted for as an equity investment whereby (i) the
excess of the purchase price of $129,658 over the Company's percentage ownership
of the stockholders' equity of MarketVision has been included in investment in
MarketVision on the accompanying consolidated balance sheets and will be
amortized on a straight-line basis over a twenty-five year period and (ii) the
Company's investment is accounted for on the equity method of accounting to
reflect the Company's 49% interest in and effect in the operations of
MarketVision.
On January 31, 2000, the Company sold 500,000 newly issued
unregistered shares of the Company's common stock together with five year
warrants to purchase an additional 250,000 shares of the Company's common stock
at an exercise price of $2.50 for an aggregate purchase price of $1,000,000. The
purchasers of such securities included Special Situations Private Equity Fund,
L.P., which purchased approximately 85% of the securities sold in such offering,
and certain affiliates of a director of the Company.
Pursuant to certain agreements (the "ComedyLab Agreements")
dated as of January 24, 2001, U.S. Concepts became entitled to receive
approximately 33% of the shares of common stock of ComedyLab Productions, Inc.,
a New York corporation ("ComedyLab"). ComedyLab was organized by certain former
employees of iCast Corporation and iCast Comedy Corporation (collectively
"iCast"), including a director of the Company who is also the chief executive
officer of both ComedyLab and U.S. Concepts (the "ComedyLab CEO"), to continue
business previously conducted by iCast. The ComedyLab business consists of
owning and operating a Web site which provides comedy related programming and
content from which advertising and other revenue may be realized. Pursuant to
the ComedyLab Agreements, among other things, (i) ComedyLab acquired certain
assets and assumed limited obligations of iCast in exchange for 5% of the issued
and outstanding shares of capital stock of ComedyLab, (ii) U.S. Concepts agreed
to provide certain services and support to ComedyLab for which it is entitled to
be compensated, and (iii) U.S. Concepts became entitled to receive all equity in
ComedyLab that would have otherwise been issued to the ComedyLab CEO. The assets
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acquired by ComedyLab from iCast included event sponsorship agreements, related
receivables and assets (including intellectual properties of iCast), which
relate to certain events which U.S. Concepts had been retained to manage and
execute. The obligations assumed by ComedyLab were limited to the performance
obligations under the acquired sponsorship agreements.
During fiscal 2001, the Company advanced ComedyLab
approximately $267,000. The Company also recorded its share of losses from
equity investment totaling $88,966 which has been recorded as a reduction of
amounts advanced. The net receivable totaling $178,034 has been recorded as due
from affiliate on the accompanying consolidated balance sheet. Subsequent to
March 31, 2001, the ComedyLab CEO executed a secured promissory note in favor of
U.S. Concepts pursuant to which he is obligated to reimburse U.S. Concepts for
amounts advanced by U.S. Concepts to ComedyLab to fund its operating expenses
and the further development of its business.
On May 17, 2001, the Company entered into a credit agreement
with a bank (the "Credit Agreement") pursuant to which the Company obtained a
$4,000,000 three-year term loan ("the "New Term Loan") and a $2,000,000
revolving loan credit facility (the "New Revolving Loan ", and together with the
New Term Loan, the "New Loans"). Contemporaneously with the closing of the
Credit Agreement, the Company borrowed $4,000,000 under the New Term Loan and
$1,000,000 under the New Revolving Loan. $4,510,000 of the proceeds of the New
Loans was used to repay in full the Company's indebtedness under the Term Loan
and Revolving Loan Facility, and the remaining proceeds were used to increase
the Company's working capital. See "Risk Factors-Outstanding Indebtedness;
Security Interest" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Description of Business
General. The Company is a full service marketing, sales
promotion and interactive new media services and e-commerce provider
organization which designs, develops and implements turnkey customized national,
regional and local consumer and trade promotion programs principally for Fortune
500 consumer product companies. The Company's programs are designed to enhance
the value of its clients' budgeted expenditures and to achieve, in an
objectively and measurable way, its clients' specific marketing and promotional
objectives. In the industry, the Company's programs are commonly referred to as
"account specific" and/or "co-marketing", as they may target the participation
and cooperation of a specific retail chain, group or groups of retailers or
other sources of distribution (the "Trade") to attain results in the form of
increased in-store product displays, related consumer purchases and enhanced
product brand name recognition.
The Company's customized and creative marketing, sales
promotion, interactive new media and e-commerce services generally include:
o strategic planning, market research and analysis, product
positioning, selling strategy and process, and direct marketing services which
assist clients in identifying, defining and achieving specific objectives;
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o advising clients on the deployment of budgeted amounts to
maximize value and meet objectives;
o concept development, graphic design, conventional and computer
illustration, copy writing, 3-D graphics and animation, layout and production,
photography and video services which develop the concept and subsequently create
the consumer and trade promotional program;
o implementing turnkey training and incentive programs,
including providing documentation, program manuals and artwork, training a
client's marketing and sales staffs, buying media and merchandise, designing
in-store displays, commercial editing, coordination and trafficking of media and
total program administration;
o multimedia electronic sales tools and presentations,
interactive computer based sales training, Internet Web site designing, hosting
and e-commerce software for business to consumer and business to business
activities;
o providing on-site and in-store personnel to conduct and
coordinate sampling and demonstration activities, specifically created
promotional entertainment and other special events and activities; and
o promotional and marketing campaigns geared specifically to
ethnic groups targeted by the Company's clients.
The Company combines the needs of its clients, its clients'
sales forces and Trade outlets with the Company's experience, in-house
resources, techniques and proprietary systems to develop and provide solutions,
incremental value and measurable results. A typical program may integrate
numerous promotional techniques which take into consideration various factors,
including: (a) the channel of Trade on which the client is focused and a
determination of the most effective manner to obtain distribution support for
the client's product; (b) the means by which to best educate the client's sales
force in soliciting Trade support for the client's products without creating
excessive or burdensome administrative details; and (c) the profile of the
retail consumer of the client's products. Distinct from many promotion and
marketing companies which may adopt specific promotional programs or techniques
regardless of the product, the Company's programs are tailored to the client's
particular goals and may include various components, including promotional
broadcast media, premium incentives to Trade employees and representatives,
in-store merchandising and sampling, commercial tagging, special events,
specialty printing, licensing, point-of-purchase displays, couponing, and
interactive Internet and other electronic services, including e-commerce tools,
and video and computer based sales and training aids.
Industry Background. The industry is comprised of hundreds of
large and small companies, including affiliates of advertising agencies, many of
which tend to specialize in providing clients with one or more of a wide array
of Trade (a specific retail chain, group or groups of retailers or other
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channels of distribution) and or consumer oriented promotional services and
products. Although promotional services may in certain circumstances duplicate,
overlap or relate to traditional advertising services, advertising agencies over
the years have considered these services as distinct auxiliary marketing
services. Consumer product manufacturers and service provider companies
typically employ two separate but related marketing programs to sell their
products. Initially, a general advertising campaign would be launched by an
advertising agency engaged to create an image for the product and to communicate
the image to the consumer. The campaign typically employs television, radio,
print media, the Internet and other forms of communication designed to generate
brand recognition and product awareness among consumers. Subsequently, a
promotional advertising program would be launched by a marketing services
promotion agency, on either a local, regional or national level, which aims to
induce the Trade to order and display the client's product while also inducing
and targeting the consumer to purchase the product and further brand name
recognition. While promotional programs also typically include the same
communication media as an advertising campaign and may employ or integrate
portions of the image created through a general advertising campaign,
promotional programs are typically more focused and directed to a point of
purchase utilizing techniques such as couponing, sampling, incentives for both
retailers and consumers, events, entertainment, merchandising and licensing
among others. The basic distinction between the services of promotion companies
and those of advertising agencies is that advertising agency services are used
to create a positive image for a client's product and communicate that image to
consumers for continued product recognition and awareness, while promotion
company services, such as those provided by the Company, are used to motivate
consumers to take immediate positive action while further increasing product
recognition.
Promo Magazine's 2001 Annual Report on the Promotion Industry
reported that "the industry posted another solid year of growth in 2000, as
spending on promotion marketing rose 8.1% to break the $100 billion plateau for
the first time at $100.98 billion". Although the promotion industry's
recession-proof nature may be tested in 2001, continued growth is anticipated as
marketers are trending to employ more sophisticated, efficient and cost
effective consumer motivational marketing strategies provided by promotional
activities. Such strategies which include, among others, entertainment
sponsorships and event marketing have moved the industry away from the price
reducing tactics that in the past has kept it flourishing during times of
economic uncertainty.
Promotion industry revenues are recognized under the following
classifications: Premium Incentives, Point of Purchase, Ad Specialties,
Couponing, Specialty Printing, Sponsorships, Broadcast Media, Promotion
Licensing, Promotion Fulfillment, Promotion Research, Interactive, Product
Sampling and In-Store Services. Historically, most of the industry's revenues
originate from continuing client relationships which give rise to specific
assignments on a project by project basis during the course of a year. With the
increasing credibility and recognized value of integrated marketing and
promotional services, a number of clients are designating various promotion and
related specialty marketing firms as their specific promotion agency of record
thereby establishing such designated agency as their exclusive promotion service
supplier.
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The Company's Programs. The Company, as a fully integrated
marketing, sales promotion, interactive new media and e-commerce service
provider, believes that it is well-positioned to meet the increasing demands of
consumer product manufacturers by offering a wide range of customized, rather
than "off the shelf", promotional programs. These programs provide turnkey
implementation and utilize creative development tools, sales support,
relationships with media outlets, the Internet and other forms of visual
communications, promotional products and activities, and administrative
services. The Company's services are supported with an innovative management
information system to gather, monitor, track and report the implementation
status of each program. The Company's ability to capture data regarding sales
activity and Trade acceptance of a particular program on a real time basis
enables the Company and its clients to continually monitor and adjust the
program to maximize its effectiveness. The Company's promotional program may
promote a client's products on a uniform basis nationwide or may be tailored for
a particular regional or local market for a specific product. A program,
localized for specific markets or products, can be coordinated with respect to
both timing and expenditure, to run simultaneously with individual and
customized programs nationwide.
The Company's promotional campaign strategies are typically
implemented with the use of one or more of the following promotional products:
o Promotional Radio - Broadcast time purchased for the
Company's clients for their own use for traditional concept, image and brand
recognition advertising and provided on behalf of such clients to the Trade as
an incentive for "Trade participation". Trade participation for a client often
takes the form of tangible merchandising performance such as additional display
of a client's products within the Trade's stores, an increase in the product
inventory throughout the Trade's chain, a Trade's coupon circular or
solo-mailers referencing and promoting the client's product. The Trade may also
permit product sampling within one or more stores in the chain. The value of
broadcast time made available to the Trade for its own discretionary use is a
significant inducement for Trade participation and support of a promotional
program because it provides to the Trade media which the Trade would otherwise
have to purchase.
o Promotional Television - Broadcast time purchased for the
Company's clients for their own use to achieve objectives similar to those of
promotional radio, and to create an incentive for Trade participation. The
Company also adds advertising value by editing clients' television commercials
to include a specific Trade customer's name, logo and other Trade specific
information, providing an incentive similar to promotional radio for Trade
participation in the promotional program.
o Dealer Loaders - Awards, of various types and value,
consisting of merchandise, travel, entertainment and or other services, offered
to the Trade in return for providing specific in-store merchandising on behalf
of a client's product.
o Special Events/Entertainment - Fully turnkey custom
designed and produced event and entertainment marketing programs in support of
client brand needs. These programs consist of creating, organizing, implementing
and/or participating in tours, concerts, comedy and music events, competitions,
fairs, festivals and college marketing events and, as required, include talent
negotiations/sponsorships, TV production and public relations.
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o In-Store Sampling and Demonstrations - Trained personnel
providing sampling or demonstration of a client's product at various retail
outlets including grocery, mass merchandise, beverage and drug stores.
o Trade/Account Specific Consumer Promotions - A full range
of consumer in-store promotional programs, integrated with Trade-directed
promotion programs, which are designed to increase consumer interest in a
client's products and increase brand name recognition. These promotions include
(a) merchandise giveaways in conjunction with product purchases; (b) vacation
and product sweepstakes (for which the Company designs display materials, writes
the rules, qualifies the winners and arranges travel plans or product ordering);
(c) product sampling in one or more stores; and (d) traditional couponing.
o Interactive New Media - Use of the Internet and other
forms of interactive visual communication designed to augment traditional media
and reach audiences that prefer a more active media. The Company's interactive
new media services include Internet Web site design, development, hosting,
support, e-commerce software for business to consumer and business to business
activities, providing reliable, high-speed access and maintenance through the
Company's own dedicated communication lines, computer based training and
electronic sales tools.
o Creative Services - A full range of services which include
concept development, graphic layout/design and production, copywriting, digital
imaging/retouching/film separation, illustration, animation, photography and
video.
Marketing Strategy. The Company's marketing strategy is to
offer its clients creative promotional programs intended to produce objectively
measurable results while removing from clients the significant burden of
administrative and logistical details associated with such programs. This
strategy has focused, and in the future will continue to focus, on clients in
the packaged goods industry, where ample opportunities continue to exist.
However, the Company also has broadened its strategy by offering its trade and
consumer promotion products to clients in other industries which the Company
believes can benefit from a comprehensive customized program on a turnkey
implementation basis.
The Company believes that its strategy of attempting to
provide comprehensive solutions to its clients' promotional advertising programs
distinguishes it from certain of its competitors, which provide only specific
promotional programs without office and field support (an integral part of the
Company's business). The Company also believes that its strategy is more attuned
to clients' needs, particularly as clients seek to contract out all promotional
advertising for a specific product as a result of downsizing their in-house
capabilities.
The Company's services are marketed directly by the Company's
sales force consisting of forty-one salespersons operating out of fully staffed
and/or sales offices located in Great Neck and New York, New York; Cincinnati,
Ohio; Chicago and Barrington, Illinois; Birmingham, Alabama; Los Angeles, Irvine
and San Francisco, California and Framingham, Massachusetts.
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Customers. The Company's principal clients are packaged goods
and other consumer products manufacturers, generally among the Fortune 500,
which are actively engaged in promoting their products both to the Trade and to
consumers. The Company's clients include, among others, Colgate-Palmolive
Company, General Mills, Inc., The Procter & Gamble Company, Nabisco Foods,
Hillshire Farm & Kahn's, Inc., Starkist Seafood Company, Hewlett-Packard
Company, Schieffelin & Somerset Co., Adams Golf Company, Ethicon Endo-Surgery,
Inc., Dairy Mart Convenience Stores, Inc., Rubbermaid Home Products, The Scotts
Company, Brown-Forman Beverage Worldwide, Denny's, Valvoline, XM Radio, Mrs.
Smith's Bakeries, Inc., Heinz North America, Old Navy, Inc., The Grand Group,
Novartis Consumer Health Inc., College Television Network, Fresh Express, Inc.,
Barbara's Bakery and The Gambrinus Company. For the fiscal years ended March 31,
2001 and 2000 the Company had one client, Schieffelin & Somerset Co., which
accounted for approximately 19% and 19.9%, respectively, of its revenues. During
the year ended March 31, 1999, the Company had another client which, before and
after giving effect to the U.S. Concepts Acquisition, accounted for
approximately 11.6% and 21.2%, respectively, of its revenues. At March 2001 and
2000, the Company had one client, Schieffelin & Somerset Co., which accounted
for 11% and 25%, respectively, of accounts receivable. To the extent that the
Company continues to have a heavily weighted sales concentration with one or
more clients, the loss of any such client could have a material adverse affect
on the earnings of the Company. Unlike traditional general advertising firms,
which are engaged as agents of record on behalf of consumer products
manufacturers, promotional companies, including the Company, typically are
engaged on a product-by-product, or project-by-project basis. However, the
relationship of the Company and its predecessors with certain of its clients has
continued for in excess of 20 years.
Competition. The market for promotional services is highly
competitive, with hundreds of companies claiming to provide various services in
the promotion industry. In general, the Company's competition is derived from
two basic groups (which market their services to consumer products
manufacturers): (a) other full service promotion agencies and (b) companies
which specialize in one specific aspect or niche of a general promotional
program. Other full service promotion agencies may be a part of or affiliated
with larger general advertising agencies which have greater financial and
marketing resources available than the Company. These competitors include
Imperic (which is affiliated with Young & Rubicam), J. Brown/LMC (which is
affiliated with Grey Advertising), and Market Drive Worldwide (which is a
division of True North Communications). Niche competitors include Don Jagoda,
Inc., which specializes in sweepstakes, and Catalina Marketing, Inc., which
specializes in cash register couponing programs. See "Risk Factors -
Competition".
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Employees
The Company currently has 241 full-time and 1,209 part-time
employees, including 43 full-time employees involved in sales, 151 full-time and
1,208 part-time employees in marketing support, program management and in-store
sampling and demonstration, 25 full-time employees and 1 part-time employee in
new media and information technology and 22 full-time employees in finance and
administration. None of the Company's employees is represented by a labor
organization and the Company considers the relationships with its employees to
be good.
Risk Factors
Outstanding Indebtedness; Security Interest. On May 17, 2001,
the Company replaced its then existing Loan Agreement and refinanced the
$4,510,000 then outstanding thereunder with the proceeds of the Loans under the
Credit Agreement, which consists of a $4,000,000 three-year term loan and a
$2,000,000 revolving loan credit facility. As security for all its obligations
under the Credit Agreement, the Company granted the lender a first priority lien
on and security interest in all of its assets. In the event of default under the
Credit Agreement, at the lender's option, (i) the principal and interest of the
loans and all other obligations under the Credit Agreement shall be immediately
due and payable, and (ii) the lender shall be entitled to exercise any and all
rights and remedies provided for in the Credit Agreement and in any document
delivered to the lender in connection with the Credit Agreement, all rights and
remedies of a secured party under the Uniform Commercial Code, and all other
rights and remedies that may otherwise be available to the lender by agreement
or at law or in equity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources".
Dependence on Key Personnel. The Company's business is managed
by a limited number of key management and operating personnel, the loss of
certain of whom could have a material adverse impact on the Company's business.
The Company believes that its future success will depend in large part on its
continued ability to attract and retain highly skilled and qualified personnel.
Each of the Company's key executives is a party to an employment agreement that
expires in either 2001 or 2002 and thereafter automatically renews for
additional successive terms of one year unless either party elects to terminate
the agreement upon at least 60 days notice prior to the expiration of the then
current term.
Customers. The Company's principal clients are consumer
product manufacturers, generally among the Fortune 500, which are actively
engaged in promoting their products both to specific retail chains, groups of
retailers or other sources of distribution and to consumers. As a substantial
portion of the Company's sales have been dependent on one client or a limited
concentration of clients, to the extent such dependency continues, significant
fluctuations in revenues, results of operations and liquidity could arise should
such client or clients reduce their budgets allocated to the Company's
activities. See "Description of Business - Customers".
Unpredictable Revenue Patterns. A significant portion of the
Company's revenues is derived from large promotional programs which originate on
a project by project basis. Since these projects are susceptible to change,
delay or cancellation as a result of specific client financial or other
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marketing and manufacturing related circumstantial issues as well as changes in
the overall economy, the Company's revenue is unpredictable and may vary
significantly from period to period. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
Competition. The market for promotional services is highly
competitive, with hundreds of companies claiming to provide various services in
the promotion industry. Certain of these companies may have greater financial
and marketing resources than those available to the Company. The Company
competes on the basis of the quality and the degree of comprehensive service
which it provides to its clients. There can be no assurance that the Company
will be able to continue to compete successfully with existing or future
industry competitors. See "Description of Business - Competition".
Risks Associated with Acquisitions. An integral part of the
Company's growth strategy is evaluating and, from time to time, engaging in
discussions regarding acquisitions and strategic relationships. No assurance can
be given that suitable acquisitions or strategic relationships can be
identified, financed and completed on acceptable terms, or that the Company's
future acquisitions, if any, will be successful.
Expansion Risk. The Company has experienced periods of rapid
expansion. This growth has increased the operating complexity of the Company as
well as the level of responsibility for both existing and new management
personnel. The Company's ability to manage its expansion effectively will
require it to continue to implement and improve its operational and financial
systems and to expand, train and manage its employee base. The Company's
inability to effectively manage its expansion could have a material adverse
effect on its business.
Control by Executive Officers and Directors. The executive
officers of the Company collectively beneficially own a significant percentage
of the voting stock of CoActive and, in effect, have the power to influence
strongly the outcome of all matters requiring stockholder approval, including
the election or removal of directors and the approval of significant corporate
transactions. Such voting could also delay or prevent a change in the control of
CoActive in which the holders of the CoActive Common Stock could receive a
substantial premium. In addition, the Credit Agreement requires the executive
officers of CoActive maintain, at a minimum, a 15% beneficial ownership of
CoActive Common Stock during the term of the Credit Agreement.
Shares Eligible for Future Sale. Future sales of shares of
CoActive Common Stock by existing stockholders under Rule 144 of the Securities
Act of 1933, as amended (the "Securities Act"), or through the exercise of
outstanding registration rights or the issuance of shares of CoActive Common
Stock upon the exercise of options or warrants or conversion of convertible
securities could materially adversely affect the market price of shares of
CoActive Common Stock and could materially impair CoActive's future ability to
raise capital through an offering of equity securities. Substantially all
outstanding shares of CoActive Common Stock, other than those held by
affiliates, are transferable without restriction under the Securities Act. No
predictions can be made as to the effect, if any, that market sales of such
shares or the availability of such shares for future sale will have on the
market price of shares of CoActive Common Stock prevailing from time to time.
12
Item 2. Properties.
- ------- ----------
The Company has the following leased facilities:
Square Annual
Facility Location Feet Base Rent
- ------------------------------------- ------------------------- ------ ---------
Principal office of CoActive and
principal and sales office of Inmark Great Neck, New York 16,700 $310,000
Principal and sales office of Optimum Cincinnati, Ohio 17,000 $152,000
Principal and sales office of
U.S. Concepts New York, New York 11,500 $368,000
Other sales offices of Barrington, Illinois 800
Inmark, Optimum Chicago, Illinois 1,400
and U.S. Concepts Tampa, Florida 600
Los Angeles, California 800
San Francisco, California 2,600
Irvine, California 1,400
Framingham, Massachusetts 200
Birmingham, Alabama 100
Coral Gables, Florida 500
------
Total 8,400 $184,000
Warehouses of Optimum, Cincinnati, Ohio 3,500
and U.S. Concepts used Los Angeles, California 1,000
for storage of promotional items New York, New York 400
Miami Beach, Florida 600
Chicago, Illinois 1,000
San Francisco, California 1,000
------
7,500 $114,000
With the exception of the principal office leases for Great Neck, New York,
Cincinnati, Ohio and New York, New York, which at March 31, 2001 have remaining
terms of eight years, nine years and two 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, 2001, see note 6 to the Notes to Consolidated Financial
Statements.
Item 3. Legal Proceedings.
- ------- -----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
Not Applicable.
13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ---------------------------------------------------------------------
Market Information
Effective October 1, 1999, in connection with the change of
the Company's name to CoActive Marketing Group, Inc. from Inmark Enterprises,
Inc., CoActive's Common Stock trading symbol on the NASDAQ SmallCap Market was
changed to CMKG. Prior to that date, the Company's Common Stock had been trading
on the NASDAQ SmallCap Market under the symbol IMKE. 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 2000
- ----------------
First Quarter 4.375 2.250
Second Quarter 4.250 2.438
Third Quarter 2.938 1.844
Fourth Quarter 4.500 1.844
Fiscal Year 2001
- ----------------
First Quarter 2.938 1.531
Second Quarter 2.750 1.750
Third Quarter 2.250 0.750
Fourth Quarter 1.500 0.969
14
On June 29, 2001, there were 5,022,231 shares of CoActive
Common Stock outstanding, approximately 55 shareholders of record and
approximately 700 beneficial owners of shares held by a number of financial
institutions.
CoActive has never declared or paid cash dividends 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 on
CoActive Common Stock in the foreseeable future. In addition, pursuant to the
terms of the Credit Agreement, the Company is precluded from paying any cash
dividends during the term of the agreement. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
Item 6. Selected Financial Data.
- ------- -----------------------
The selected financial data reported below has been derived
from the Company's audited financial statements for each fiscal year ended March
31 within the five year period ended March 31, 2001. 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,
1997 1998 (1) 1999 (2) 2000 2001
------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
Sales $ 18,901,730 $ 25,965,780 $ 38,781,136 $ 40,584,959 $ 48,768,057
Gross Profit 6,291,821 8,403,363 12,469,901 11,408,595 15,043,084
Income (Loss) before Income Taxes 2,129,579 3,579,445 2,230,900 (1,382,476) 1,465,412
Provision (Benefit) for Income Taxes (159,924) 1,300,000 892,361 (508,774) 583,382
Net Income (Loss) before Cumulative Effect
of Change in Accounting Principle for
Revenue Recognition 2,289,503 2,279,445 1,338,539 (873,702) 882,030
Cumulative Effect of Change in Accounting
Principle for Revenue Recognition, Net of
Income Taxes (3) -- -- -- -- (502,800)
Net Income (Loss) 2,289,503 2,279,445 1,338,539 (873,702) 379,230
Net Income (Loss) per Common and Common
Equivalent share* before Cumulative Effect
of Change in Accounting Principle for
Revenue Recognition:
Basic $ .64 $ .63 $ .30 $ (.19) $ .18
Diluted $ .51 $ .50 $ .24 $ (.19) $ .16
Cumulative Effect of Change in Accounting
Principle for Revenue Recognition:
Basic -- -- -- -- $ (.10)
Diluted -- -- -- -- $ (.09)
Net Income (Loss):
Basic $ .64 $ .63 $ .30 $ (.19) $ .08
Diluted $ .51 $ .50 $ .24 $ (.19) $ .07
Pro Forma Amounts Assuming the Change in
Accounting Principle for Revenue Recognition
is Applied Retroactively:
Net Income (Loss) 2,289,503 2,139,045 977,339 (874,902) 882,030
Net Income (Loss) per Common Share:
Basic $ .64 $ .59 $ .22 $ (.19) $ .18
Diluted $ .51 $ .47 $ .17 $ (.19) $ .16
* Adjusted for the five-for-four stock split effective May 14, 1998
15
March 31, March 31, March 31, March 31, March 31,
1997 1998 (4) 1999 2000 2001
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Working capital (deficiency) $ 1,859,868 $ 2,446,502 3,146,441 (1,671,668) (3,877,534)
Total Assets 8,559,840 30,818,389 42,452,443 36,196,610 35,004,400
Current Debt -- -- 625,000 3,325,000 2,983,333
Long-Term Debt -- 9,500,000 11,875,000 6,160,000 3,801,667
Total Liabilities 4,022,459 20,145,423 29,875,338 23,490,282 21,886,012
Stockholders Equity 4,537,381 10,672,966 12,577,105 12,706,328 13,118,388
(1) Represents operations of the Company excluding the operations of Optimum
acquired on March 31, 1998.
(2) Includes operations of the Company and the operations of U.S. Concepts,
which was acquired on December 29, 1998, for the three months ended March
31, 1999.
(3) The cumulative effect of change in accounting principle for revenue
recognition is a one-time noncash 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) Includes assets and liabilities of Optimum acquired on March 31, 1998.
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.
The following information should be read together with the
consolidated financial statements and notes there to included elsewhere herein.
Effective in the fourth quarter of Fiscal 2001, the Company
changed its method of accounting for revenue recognition in accordance with the
Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue
16
Recognition in Financial Statements" (SAB 101). Previously, the Company had
recognized revenue relating certain promotional projects in accordance with a
client's written letter of authorization instructing the Company to proceed with
a project's required services. In most instances, the letters of authorization
contained language which provided that the letter would be followed by a
definitive contract incorporating the terms of the letter of authorization.
Under the new accounting method adopted retroactively to April 1, 2000, the
Company now recognizes revenue on its projects at such time as it receives the
definitive contract executed by its clients. The cumulative effect of the change
in accounting principle on prior years resulted in a after tax charge to income
of $502,800, which is included in the net income for the fiscal year ended March
31, 2001. The pro forma amounts presented in the consolidated statements of
operations were calculated assuming the change in accounting principle was made
retroactively to prior years (see Item 8). For fiscal 2001, the adoption of SAB
101 resulted in an increase in sales of $407,000 and an increase in direct
expenses of $507,000. After giving effect to the implementation of SAB 101 and
before the cumulative effect of the change in accounting principle for revenue
recognition, the Company had net income of $882,030 or $.18 per common share for
fiscal 2001.
Pursuant to the ComedyLab Agreements dated as of January 24,
2001, among other things, (i) U.S. Concepts agreed to provide certain services
and support to ComedyLab for which it is entitled to be compensated, and (ii)
U.S. Concepts became entitled to receive all equity in ComedyLab that would have
otherwise been issued to the ComedyLab CEO. At March 31, 2001, U.S. Concepts had
advanced ComedyLab $267,000 to fund its operating expenses and further
development of its business. The Company is accounting for the investment under
the equity method of accounting. Funds advanced to ComedyLab totaling $177,931
have been recorded as due from an affiliate on the accompanying balance sheets
and have been reduced for the Company's share of ComedyLab's loss of
approximately $89,000 which have been included in the accompanying consolidated
statements of operations.
Subsequent to March 31, 2001, the Company advanced an
additional $289,000 to ComedyLab. In June,2001, the ComedyLab CEO executed a
secured promissory note in favor of U.S. Concepts pursuant to which he is
obligated to reimburse U.S. Concepts for its advances to ComedyLab in the amount
of $556,000.
General
The Company's sales are generated from projects subject to
contracts which require the Company to provide its services within specified
time periods generally ranging up to twelve months. As a result, the Company has
projects in process at various stages of completion. With respect to each
project, sales are recognized based upon the estimated percentage-of-completion
of the project. On any given date, the estimated percentage-of-completion of a
project is measured by the cost of the Company's services expended to such date
on such project compared to the total cost of such project required to be
incurred in connection with such project. The Company's business is such that
sales may vary considerably from quarter to quarter.
The Company's direct expenses consist primarily of direct
labor costs; costs to purchase media and program merchandise; cost of
production, merchandise warehousing and distribution, and third party contract
fulfillment; and other directly related program expenses. Direct expenses do not
include the salaries and benefits of the employees of Inmark servicing or
17
otherwise involved in the administration of promotional programs or overhead
expenses which could otherwise be allocated to such programs.
For the fiscal year ended March 31, 2001 ("Fiscal 2001"), the
Company had one client, Schieffelin & Somerset Co., which accounted for
approximately 19% of its revenues. In comparison, for the fiscal year ended
March 31, 2000 ("Fiscal 2000"), the same client accounted for 19.9% of the
Company's revenues. At March 31, 2001 and 2000, the same client accounted for
11% and 25% of accounts receivable, respectively. 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.
Results of Operations
The following table presents operating data of the Company,
expressed as a percentage of sales for each of the fiscal years ended March 31,
2001, 2000 and 1999:
Year Ended March 31,
--------------------------------------------
2001 2000 1999
-------- -------- --------
Statement of Operations Data:
Sales 100.0% 100.0% 100.0%
Direct expenses 69.2% 71.9% 67.8%
Gross profit 30.8% 28.1% 32.2%
Salaries 11.4% 13.2% 13.1%
Selling, general and administrative expense 14.6% 16.3% 11.4%
Total operating expenses 26.0% 29.5% 24.6%
Operating income (loss) 4.8% (1.4)% 7.6%
Interest expense, net (1.6)% (2.0)% (1.9)%
Equity in loss of affiliate (0.2)% -- --
Income (loss) before provision for income taxes 3.0% (3.4)% 5.8%
Provision (benefit) for income taxes 1.2% (1.2)% 2.3%
Net income (loss) before cumulative effect of change
in accounting principle for revenue recognition 1.8% (2.2)% 3.5%
Cumulative effect of change in accounting principle
for revenue recognition, net of income taxes (1.0)% -- --
Net income 0.8% (2.2)% 3.5%
Other Data:
Pro forma amounts assuming the change in accounting
principle for revenue recognition is applied
retroactively:
Net income (loss) before effect of change in
accounting principle for revenue recognition 1.8% (2.2)% 3.5%
Effect of change in accounting principle for revenue
recognition (1.0)% -- --
Net income .8% (2.2)% 3.5%
EBITDA 8.2% 1.37% 10.6%
18
The following table presents operating data of the Company,
expressed as a comparative percentage of change from the immediately preceding
fiscal year for each of the fiscal years ended March 31, 2001, 2000 and 1999:
Year Ended March 31,
-----------------------------------------------
2001 2000 1999
---------- ---------- ----------
Statement of Operations Data:
Sales 20.2% 4.7% 49.4%
Direct expenses 15.6% 10.9% 49.8%
Gross profit 31.9% (8.5)% 48.4%
Salaries 4.0% 5.6% 61.4%
Selling, general and administrative expense 7.8% 48.8% 142.9%
Total operating expenses 6.1% 25.8% 91.3%
Operating income n/a (119.2)% (13.9)%
Interest expense, net (3.8)% 13.8% 568.9%
Equity in loss of affiliate n/a -- --
Income (loss) before income taxes n/a (162.0)% (37.7)%
Provision (benefit) for income taxes n/a (157.0)% (31.4)%
Net income (loss) before cumulative effect of change
in accounting principle for revenue recognition n/a (165.3)% (41.3)%
Cumulative effect of change in accounting principle
for revenue recognition n/a -- --
Net income n/a (165.3)% (41.3)%
Other Data:
Pro forma amounts assuming the change in accounting
principle for revenue recognition is applied
retroactively:
Net income (loss) before effect of change in
accounting principle for revenue recognition n/a (165.3)% (41.3)%
Effect of change in accounting principle for
revenue recognition (30.5)% (34.2)% --
Net income n/a (199.5)% (41.3)%
EBITDA 655.0% (76.6)% 9.0%
Fiscal Year 2001 Compared to Fiscal Year 2000
Sales. Sales for Fiscal 2001 were $48,768,000, compared to
sales of $40,585,000 for Fiscal 2000, an increase of $8,183,000. The increase
was primarily the result of the net increase in the amount of new business
contracted during the year. At March 31, 2001, the Company's sales backlog
amounted to approximately $22,971,000 compared to a sales backlog of
approximately $18,100,000 at March 31, 2000.
Direct Expenses. Direct expenses for Fiscal 2001 were
$33,725,000 compared to direct expenses of $29,176,000 for Fiscal 2000, an
increase of $4,549,000. The increase was primarily attributable to the increase
in sales for the year. The decrease in direct expenses as a percentage of sales
for Fiscal 2001 was primarily the result of client programs in the aggregate
having a higher gross profit margin than the mix of client programs in Fiscal
2000.
As a result of the changes in sales and direct expenses, the
Company's gross profit for Fiscal 2001 increased to $15,043,000 from $11,409,000
for Fiscal 2000.
19
Operating Expenses. Operating expenses for Fiscal 2001
increased by $729,000 and amounted to $12,703,000, compared to $11,974,000 for
Fiscal 2000. The increase in operating expenses for Fiscal 2001 was primarily
attributable to (i) an increase of $239,000 in salaries, related employee
payroll expenses and benefits and (ii) an increase of $189,000 in office rent
and $301,000 in other selling, general and administrative expenses incurred in
supporting and maintaining an anticipated increase in the level of operations.
Interest Expense. Interest expense for Fiscal 2001 decreased
by $31,000 and amounted to $786,000, compared to interest expense of $817,000
for Fiscal 2000. The decrease in interest expense for Fiscal 2001 was primarily
related to the decrease in the Company's bank borrowings.
Equity in Loss of Affiliate. For fiscal 2001, the Company
recorded $88,966 as its share of losses from its 33% equity investment in
ComedyLab.
Income/(Loss) Before Provision for Income Taxes. For Fiscal
2001, the Company's income before provision for income taxes was $1,465,000. In
comparison for Fiscal 2000, the Company had a loss before provision for income
taxes equal to $(1,382,000).
Provision/(Benefit) for Income Taxes. For Fiscal 2001, the
Company made a provision for federal, state and local income taxes in the amount
of $583,000, based upon the Company's effective tax rate for Fiscal 2001. In
comparison, for Fiscal 2000, the Company recorded a tax benefit of $(509,000)
for income taxes, based upon the Company's ability to recover previously paid
income taxes.
Net Income/(Loss) Before Cumulative Effect of Change in
Accounting Principle for Revenue Recognition. The Company's net income before
the effect of the change in accounting principle for revenue recognition for
Fiscal 2001 was $882,000, compared with a net loss of $(874,000) for Fiscal
2000.
Cumulative Effect of Change in Accounting Principle for
Revenue Recognition. For Fiscal 2001, the Company recognized $(502,800) as the
cumulative effect of the change in accounting principle for revenue recognition
(note 1).
Net Income/(Loss). As a result of the aforementioned, the
Company's net income for Fiscal 2001 was $379,000, compared with a net loss of
$(874,000) for Fiscal 2000.
Fiscal Year 2000 Compared to Fiscal Year 1999
Sales. Sales for Fiscal 2000 were $40,585,000, compared to
sales of $38,781,000 for the fiscal year ended March 31, 1999 ("Fiscal 1999"),
an increase of $1,804,000. The increase was primarily attributable to the
inclusion of the sales of U.S. Concepts for a full fiscal year in the amount of
$14,823,000 for Fiscal 2000, compared to three months of sales of U.S. Concepts
in the amount of $2,266,000 included in Fiscal 1999. Such increase was for the
most part offset by a decrease in sales due to a lesser than anticipated amount
of contracted sales during the first three quarters of the Company's fiscal
year. At March 31, 2000, the Company's sales backlog amounted to approximately
$18,100,000 compared to a sales backlog of approximately $16,600,000 at March
31, 1999.
20
Direct Expenses. Direct expenses for Fiscal 2000 were
$29,176,000, compared to direct expenses of $26,311,000 for Fiscal 1999, an
increase of $2,865,000. The increase was primarily attributable to the inclusion
of the direct expenses of U.S. Concepts for a full year in the amount of
$11,627,000 for Fiscal 2000, compared to three months of direct expenses of U.S.
Concepts in the amount of $1,793,000 included in Fiscal 1999. Such increase was
for the most part offset by the reduction of direct expenses related to the
Company's decrease in sales. The increase in direct expenses as a percentage of
sales for Fiscal 2000 was primarily the result of client programs in the
aggregate having a lower gross profit margin than the mix of client programs in
Fiscal 1999.
As a result of the changes in sales and direct expenses, the
Company's gross profit for Fiscal 2000 decreased to $11,409,000 from $12,470,000
for Fiscal 1999.
Operating Expenses. Operating expenses for Fiscal 2000
increased by $2,453,000 and amounted to $11,974,000, compared to $9,521,000 for
Fiscal 1999, The increase in operating expenses for Fiscal 2000 was primarily
the result of (i) the additional nine month inclusion in Fiscal 2000 of
$1,846,000 of operating expenses of U.S. Concepts and (ii) non-related U.S.
Concepts increases of approximately $344,000 in salaries, non-executive employee
bonuses and related employee payroll expenses and approximately $263,000 in
selling, general and administrative expenses in the aggregate primarily related
to supporting and maintaining an anticipated increase in the level of
operations.
Interest Expense. Interest expense for Fiscal 2000 increased
by $99,000 and amounted to $817,000, compared to interest expense of $718,000
for Fiscal 1999. The increase in interest expense for Fiscal 2000 was primarily
related to the increased borrowings in conjunction with the U.S. Concepts
Acquisition and to a lesser extent, increased rates of interest.
(Loss)/Income Before Provision for Income Taxes. For Fiscal
2000, the Company had a loss before provision for income taxes equal to
$(1,382,000). In comparison, for Fiscal 1999, the Company's income before
provision for income taxes was $2,231,000.
(Benefit)/Provision For Income Taxes. For Fiscal 2000, the
Company recorded a tax benefit of $(509,000) for income taxes, based upon the
Company's ability to recover previously paid income taxes. In comparison, for
Fiscal 1999, the Company made a provision for federal, state and local income
taxes in the amount of $892,000, based upon the Company's effective tax rate for
Fiscal 1999.
Net Loss/Income. As a result of the items discussed above, the
Company's net loss for Fiscal 2000 was $(874,000) compared to net income of
$1,339,000 for Fiscal 1999.
Liquidity and Capital Resources
Effective March 31, 1998, the Company entered into the Loan
Agreement pursuant to which the Company obtained the $5,000,000 five-year Term
Loan and the $5,000,000 Revolving Loan Facility. On March 31, 1998, the Company
21
borrowed $5,000,000 under the Term Loan and $2,000,000 under the Revolving Loan
Facility to finance the Optimum Acquisition.
On December 29, 1998, to finance the U.S. Concepts
Acquisition, the Company utilized the Revolving Loan Facility, increasing its
outstanding borrowings to the maximum amount then available.
On January 31, 2000, the Company, in a private placement for
$1,000,000 sold 500,000 newly issued shares of its common stock together with
five year warrants to purchase an additional 250,000 shares of its common stock
at an exercise price of $2.50. The Company used $500,000 of the proceeds of the
placement to reduce the Term Loan and the remaining proceeds to increase its
working capital and provide for the funding required in connection with the
strategic alliance in a predominantly Hispanic, minority-owned promotion and
marketing services company.
At March 31, 2001, the Company had a loan agreement with a
bank pursuant to which at March 31, 2001 the Company had borrowings of
$4,910,000 which amount was the maximum credit facility available. At March 31,
2001, the Company was not in compliance with certain of the financial covenants
of the loan agreement. As discussed below, subsequent to March 31, 2001, the
loan agreement was replaced with a new credit agreement and the amounts
outstanding under the loan agreement were paid in full.
At March 31, 2001, the Company's bank borrowings of $4,910,000
reflect the terms and conditions of a credit agreement entered into with a bank
on May 17, 2001 in replacement of the Company's prior bank loan agreement.
Pursuant to the credit agreement, the Company obtained a $4,000,000 three year
amortizing term loan expiring on March 31, 2004 and a three year $2,000,000
revolving loan credit facility expiring on March 31, 2004. On May 17, 2001, the
Company borrowed $4,000,000 under the term loan and $1,000,000 under the
revolving credit facility and used $4,510,000 of the proceeds to refinance the
loan balance of its prior loan agreement and the balance of the proceeds to
increase its working capital. Borrowings under the term loan and revolving
credit facility are evidenced by promissory notes and are secured by all the
Company's assets. Principal payments on the term loan are to be made in twelve
equal quarterly installments of $333,333 commencing on June 30, 2001. In
addition, the Company, on a monthly basis, pays interest, at a rate of between
the bank's prime rate and the bank's prime rate plus 1.5%, on outstanding
amounts based on certain defined debt to earnings ratios. Interest rates at
March 31, 2001 and 2000 pursuant to the Company's prior loan agreement were 10%
and 10.3%, respectively. Further, the credit agreement provides for a number of
negative and affirmative covenants, restrictions, limitations and other
conditions including among others, (i) limitations regarding the payment of cash
dividends, (ii) use of proceeds, (iii) maintenance of minimum net worth, (iv)
maintenance of minimum quarterly earnings, (v) compliance with a defined senior
debt leverage ratio and debt service ratio, and (vi) maintenance of 15% of
beneficially owned shares of the Company held by the Company's management. The
Company will pay a fee on the unused portion of the credit facility equal to
.25%.
At March 31, 2001, the Company had cash and cash equivalents
of $855,000, a working capital deficit of $3,878,000, bank loans of $4,910,000,
subordinated debt of $1,875,000 and stockholders' equity of $13,118,000;
22
compared to cash and cash equivalents of $1,107,000, a working capital deficit
of $1,672,000, bank loans of $7,310,000, subordinated debt of $2,175,000 and
stockholders' equity of $12,706,000 at March 31, 2000. The working capital
deficit at March 31, 2001 resulted primarily from (i) a decrease in current
assets primarily attributable to a decrease in unbilled contracts in progress
offset by an increase in accounts receivable and (ii) an increase in current
liabilities primarily attributable to an increase in accounts payable, deferred
revenue and the current amount of subordinated debt offset by a decrease in
accrued job costs and the current amount of notes payable to bank. In light of
borrowings and availability under the Credit Agreement entered into May 17,
2001, management believes cash generated from operations together with such
borrowings, will be sufficient to meet the Company's cash requirements for
fiscal 2002. 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 2002
or as subsequently required under the Credit Agreement.
The $252,000 decrease in the Company's cash and cash
equivalents at March 31, 2001 resulted primarily from the Company's aggregate
decrease in cash from cash used in investing activities and in financing
activities, which amounts were offset by the net increase in cash provided by
operating activities and the proceeds from the exercise of stock options and
warrants.
Net cash provided by operating activities during Fiscal 2001
was $4,583,000, due principally to the net effect of the aggregate of net income
of $379,000, the non-cash charges for depreciation and amortization of
$1,701,000, decreases in unbilled contracts in progress of $295,000 and prepaid
taxes of $97,000, and increases in accounts payable of $1,911,000, accrued job
costs of $718,000, deferred revenue of $698,000 and other accrued liabilities of
$173,000, as offset by increases of $2,017,000 in accounts receivable and
$206,000 in prepaid expenses and other assets. In comparison, net cash provided
by operating activities in Fiscal 2000 was $1,148,000, due principally to a
decrease of $5,373,000 in unbilled contracts in progress and a decrease of
$1,246,000 in prepaid taxes which amounts were offset by a net loss of $874,000,
a decrease in deferred income taxes of $624,000, and an increase in accounts
receivable of $2,377,000, a decrease in accounts payable of $1,048,000, a
decrease of $1,076,000 in accrued job costs and a net decrease of $1,003,000 in
other operating assets and liabilities.
For Fiscal 2001, net cash used in investing activities
amounted to $1,995,000 of which $928,000 was used for the purchase of fixed
assets, $500,000 was used to pay an earnout in connection with the U.S. Concepts
Acquisition, $300,000 was used for the Company's investment in MarketVision and
$267,000 was used for an advance to an affiliate. In comparison, for Fiscal
2000, net cash used in investing activities consisted of $659,000 used solely
for the purchase of fixed assets.
For Fiscal 2001, financing activities used net cash of
$2,839,000 resulting from the repayment of borrowings and the related
refinancing costs totaling $2,847,000 offset by proceeds from the exercise of
stock options in the amount of $7,000. In comparison, for Fiscal 2000, financing
activities used net cash of $2,070,000 resulting from the repayment of
borrowings and payment of related refinancing costs totaling $3,073,000 offset
by the receipt of $1,003,000 from the proceeds from the sale of common stock and
exercise of stock options.
23
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 5 to "Notes to Consolidated Financial Statements-Long Term
Debt."
Impact of Recently Issued Accounting Standards
In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133." SFAS 137 amends SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which was issued in June 1998. SFAS 137
defers the effective date of SFAS 133 to all fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
June 2000, SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an Amendment of FASB Statement 133," was issued,
which amended certain provisions of SFAS 133. The Company implemented SFAS 133,
as amended on April 2001. Implementation did not have an impact on the Company's
financial position and results of operations.
Item 8. Consolidated Financial Statements and Supplementary Data.
The consolidated financial statements of the Company as of
March 31, 2001 and 2000 and for each of the years in the three-year period ended
March 31, 2001, together with the independent auditors' report thereon of KPMG
LLP, independent auditors, are filed under this Item 8.
Selected unaudited quarterly financial data of the Company, as
restated for the first three quarters for the year ended March 31, 2001 (note
Note 14), and for the year ended March 31, 2000 appears below:
24
QUARTER ENDED
----------------------------------------------------------
2000 June 30, 1999 Sept. 30, 1999 Dec. 31, 1999 Mar. 31, 2000
- ---- ------------- -------------- ------------- -------------
Sales 8,783,430 9,159,310 12,044,635 10,597,584
Gross Profit 2,587,654 2,859,810 3,063,058 2,898,073
Operating income (loss) (328,289) (271,065) 331,924 (297,676)
Income (Loss) before Income Taxes (538,191) (454,605) 97,157 (486,837)
Provision (Benefit) for Income Taxes (215,277) (181,842) 38,864 (150,519)
Net Income (Loss) (322,914) (272,763) 58,293 (336,318)
Net Income (Loss) per Common Share:
Basic (.07) (.06) .01 (.07)
Diluted (.07) (.06) .01 (.07)
QUARTER ENDED
----------------------------------------------------------
2001 June 30, 2000 Sept. 30, 2000 Dec. 31, 2000 Mar. 31, 2001
- ---- ------------- -------------- ------------- -------------
Sales 12,662,564 11,686,717 11,064,034 13,354,742
Gross Profit 4,101,915 3,338,394 3,408,259 4,194,516
Operating income 1,029,363 229,832 339,576 741,777
Income before Income Taxes 818,773 31,459 147,058 468,122
Provision for Income Taxes 327,510 12,581 58,828 184,463
Income before Cumulative Effect of
Change in Accounting Principle for
Revenue Recognition 491,263 18,878 88,230 283,659
Cumulative Effect of Change in
Accounting Principle for Revenue
Recognition Net of Income Taxes (502,800) -- -- --
Net Income (Loss) (11,537) 18,878 88,230 283,659
Net Income (Loss) per Common Share
before Cumulative Effect of Change in
Accounting Principle for Revenue
Recognition:
Basic .10 .00 .02 .06
Diluted .09 .00 .02 .06
Net Income (Loss) per Common Share
Basic .00 .00 .02 .06
Diluted .00 .00 .02 .06
25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of CoActive Marketing Group, Inc.
Independent Auditors' Report .......................................... 27
Consolidated Balance Sheets as of March 31, 2001 and 2000.............. 28
Consolidated Statements of Operations for the years ended
March 31, 2001, 2000 and 1999.................................... 29
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 2001, 2000 and 1999.................................... 30
Consolidated Statements of Cash Flows for the years ended
March 31, 2001, 2000 and 1999 ................................... 31
Notes to Consolidated Financial Statements............................. 32
26
Independent Auditors' Report
The Board of Directors and Stockholders
CoActive Marketing Group, Inc.
We have audited the consolidated financial statements of CoActive Marketing
Group, Inc. (formerly Inmark Enterprises, Inc.) and subsidiaries, as listed in
the accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CoActive Marketing
Group, Inc. and subsidiaries as of March 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Melville, New York
July 3, 2001
27
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND 2000
2001 2000
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 855,219 1,106,823
Accounts receivable, net of allowance for
doubtful accounts of $100,000 in 2001 11,337,524 9,420,042
Unbilled contracts in progress 820,213 4,164,550
Due from affiliate 177,931 --
Prepaid taxes 158,870 256,088
Prepaid expenses and other current assets 857,054 711,111
----------- -----------
Total current assets 14,206,811 15,658,614
----------- -----------
Property and equipment, net 1,944,041 1,550,870
Investment in MarketVision 325,630 --
Notes receivable from officers 225,000 225,000
Goodwill, net 18,033,257 18,527,928
Deferred financing costs, net of amortization
of $230,333 and $59,414 98,474 122,767
Other assets 171,187 111,431
----------- -----------
Total assets $35,004,400 36,196,610
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,027,363 2,451,104
Deferred revenue 3,599,903 2,901,919
Accrued job costs 6,273,374 7,766,087
Accrued compensation 128,124 112,538
Other accrued liabilities 944,824 771,355
Deferred taxes payable 127,424 2,279
Notes payable bank - current 1,733,333 2,400,000
Subordinated notes payable - current 1,250,000 925,000
----------- -----------
Total current liabilities 18,084,345 17,330,282
Notes payable bank - long term 3,176,667 4,910,000
Subordinated notes payable - long term 625,000 1,250,000
----------- -----------
Total liabilities 21,886,012 23,490,282
----------- -----------
Stockholders' equity:
Class A convertible preferred stock, par value $.001;
Authorized 650,000 shares; none issued and outstanding -- --
Class B convertible preferred stock, par value $.001;
Authorized 700,000 shares; none issued and outstanding -- --
Preferred stock, undesignated; authorized 3,650,000
Shares; none issued and outstanding -- --
Common stock, par value $.001; authorized 25,000,000
Shares; issued and outstanding 5,022,231 shares at
March 31, 2001 and 5,015,981 shares at March 31, 2000 5,022 5,016
Additional paid-in capital 6,732,704 6,699,880
Retained earnings 6,380,662 6,001,432
----------- -----------
Total stockholders' equity 13,118,388 12,706,328
----------- -----------
Total liabilities and stockholders' equity $35,004,400 36,196,610
=========== ===========
See accompanying notes to consolidated financial statements.
28
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2001, 2000, 1999
2001 2000 1999
------------ ------------ ------------
Sales $ 48,768,057 40,584,959 38,781,136
Direct expenses 33,724,973 29,176,364 26,311,235
------------ ------------ ------------
Gross profit 15,043,084 11,408,595 12,469,901
------------ ------------ ------------
Operating Expenses:
Salaries 5,583,464 5,369,577 5,084,098
Selling, general and administrative expense 7,119,072 6,604,124 4,436,934
------------ ------------ ------------
Total operating expenses 12,702,536 11,973,701 9,521,032
------------ ------------ ------------
Operating income (loss) 2,340,548 (565,106) 2,948,869
Interest expense, net (786,170) (817,370) (717,969)
Equity in loss of affiliate (88,966) -- --
------------ ------------ ------------
Income (loss) before income taxes 1,465,412 (1,382,476) 2,230,900
Provision (benefit) for income taxes 583,382 (508,774) 892,361
------------ ------------ ------------
Net income (loss) before cumulative effect of change in
accounting principle for revenue recognition 882,030 (873,702) 1,338,539
Cumulative effect of change in accounting for revenue
recognition, net of income taxes (502,800) -- --
------------ ------------ ------------
Net income (loss) $ 379,230 (873,702) 1,338,539
============ ============ ============
Net income (loss) per common share before cumulative
effect of change in accounting principle for revenue
recognition, Basic: $ .18 (.19) .30
Cumulative effect on of change in accounting
principle for revenue recognition $ (.10) -- --
------------ ------------ ------------
Net income (loss) $ .08 (.19) .30
============ ============ ============
Net income (loss) per common share before cumulative
effect of change in accounting principle for revenue
recognition, Diluted $ .16 (.19) .24
Cumulative effect on change in accounting
principle for revenue recognition $ (.09) -- --
------------ ------------ ------------
Net income (loss) $ .07 (.19) .24
============ ============ ============
Weighted average number of shares outstanding:
Basic 5,018,635 4,598,476 4,487,763
============ ============ ============
Diluted 5,433,708 4,598,476 5,671,702
============ ============ ============
Reconciliation of weighted average shares used for basic
and diluted computation is as follows:
Weighted average shares - Basic 5,018,635 4,598,476 4,487,763
Dilutive effect of options and warrants 415,073 -- 1,183,939
------------ ------------ ------------
Weighted average shares - Diluted 5,433,708 4,598,476 5,671,702
============ ============ ============
Pro forma amounts assuming the change in accounting
principal for revenue recognition is applied retroactively:
Net income (loss) 882,030 (874,902) 977,339
============ ============ ============
Net income (loss) per common share:
Basic $ .18 (.19) .22
============ ============ ============
Diluted $ .16 (.19) .17
============ ============ ============
See accompanying notes to consolidated financial statements.
29
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999
Common Stock
par value $.001 Additional Total
-------------------------- Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
----------- ----------- ----------- ----------- -----------
Balance, March 31, 1998 4,475,326 $ 4,475 $ 5,131,896 $ 5,536,595 $10,672,966
Exercise of warrants and options 8,155 8 5,592 -- 5,600
Acquisition of U.S. Concepts, Inc. 30,000 30 249,970 -- 250,000
Tax benefit from exercised options -- -- 310,000 -- 310,000
Net income -- -- -- 1,338,539 1,338,539
----------- ----------- ----------- ----------- -----------
Balance, March 31, 1999 4,513,481 4,513 5,697,458 6,875,134 12,577,105
Exercise of options 2,500 3 2,922 -- 2,925
Sale of common stock 500,000 500 999,500 -- 1,000,000
Net loss (873,702) (873,702)
----------- ----------- ----------- ----------- -----------
Balance, March 31, 2000 5,015,981 $ 5,016 $ 6,699,880 $ 6,001,432 $12,706,328
----------- ----------- ----------- ----------- -----------
Exercise of options 6,250 6 7,194 -- 7,200
Value of options granted for MarketVision
investment 25,630 -- 25,630
Net income -- -- -- 379,230 379,230
----------- ----------- ----------- ----------- -----------
Balance, March 31, 2001 5,022,231 5,022 6,732,704 6,380,662 13,118,388
=========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
30
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ 379,230 (873,702) 1,338,539
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 1,700,855 1,531,172 1,179,497
Provision for bad debt expense 100,000 -- --
Equity in loss of affiliate 88,966 -- --
Cumulative effect of change in accounting principle for revenue recognition 502,800 -- --
Deferred income taxes 125,145 (623,605) 542,442
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable (2,017,482) (2,377,402) (667,014)
Decrease (increase) in unbilled contracts in progress 295,337 5,372,990 (4,252,854)
(Increase) decrease in prepaid expenses and other assets (205,699) (380,952) (171,337)
Decrease (increase) in prepaid taxes 97,218 1,246,343 (1,050,140)
Increase (decrease) in accounts payable 1,911,459 (1,048,284) 226,486
Increase (decrease) in accrued job costs 718,287 (1,075,871) 1,148,436
Increase (decrease) in other accrued liabilities 173,469 (219,782) 396,435
Increase (decrease) in deferred revenue 697,984 (194,779) 1,524,909
Increase (decrease) in accrued compensation 15,586 (207,735) 5,397
Decrease in accrued taxes payable -- -- (94,260)
----------- ----------- -----------
Net cash provided by operating activities 4,583,155 1,148,393 126,536
----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (928,436) (659,389) (627,284)
Acquisitions, net of cash acquired (500,000) -- (1,277,186)
Purchase of equity investment (300,000) -- --
Advances to affiliate (266,897) -- --
----------- ----------- -----------
Net cash used in investing activities (1,995,333) (659,389) (1,904,470)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 7,200 2,925 5,600
Financing costs (146,626) (57,681) --
Proceeds from sale of common stock -- 1,000,000 --
(Repayment of) proceeds from borrowings (2,700,000) (3,015,000) 3,000,000
----------- ----------- -----------
Net cash (used in) provided by financing activities (2,839,426) (2,069,756) 3,005,600
----------- ----------- -----------
Net (decrease) increase in cash (251,604) (1,580,752) 1,227,666
Cash and cash equivalents at beginning of period 1,106,823 2,687,575 1,459,909
----------- ----------- -----------
Cash and cash equivalents at end of period $ 855,219 1,106,823 2,687,575
=========== =========== ===========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 876,458 896,312 783,669
=========== =========== ===========
Income taxes (refunded) paid during the period $ (43,589) (1,168,306) 989,387
=========== =========== ===========
See accompanying notes to consolidated financial statements.
31
(1) Organization and Nature of Business
-----------------------------------
CoActive Marketing Group, Inc. (formerly Inmark Enterprises, Inc.)
("the Company") is a full service marketing, sales promotion and
interactive new 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 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.
At March 31, 2001, the Company had negative working capital of
approximately $3,878,000. For Fiscal 2002, management believes that
borrowings available pursuant to the Company's May 17, 2001 bank credit
facility together with cash generated from operations will be
sufficient to meet the Company's cash requirements through March 31,
2002.
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.
All significant intercompany balances and transactions have
been eliminated in consolidation.
(b) Adoption of SAB No. 101
-----------------------
Effective in the fourth quarter of Fiscal 2001, the Company
changed its method of accounting for revenue recognition in
accordance with the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101). Previously, the Company had recognized
revenue relating to certain promotional projects in accordance
with a client's written letter of authorization instructing the
Company to proceed with a project's required services. In most
instances, the letters of authorization contained language
which provided that the letter would be followed by a
definitive contract incorporating the terms of the letter of
authorization. Under the new accounting method adopted
retroactively to April 1, 2000, the Company now recognizes
revenue on its projects at such time as it receives the
definitive contract executed by its client. The cumulative
effect of the change in accounting principle resulted in an
after tax charge to income of $502,800, which is included in
the net income for the fiscal year ended March 31, 2001. The
pro forma amounts presented in the consolidated statements of
operations were calculated assuming the accounting change was
made retroactively to prior periods. For fiscal 2001, the
adoption of SAB 101 resulted in an increase in sales of
$407,000 and an increase in direct expenses of $507,000. The
amount of sales and related direct expenses to be deferred to
future periods as a result of the adoption of SAB 101 are
$3,049,000 and $2,211,000, respectively. After giving effect to
the implementation of SAB 101, and prior to the cumulative
effect of a change in accounting principle for revenue
recognition the Company reported net income of $882,038 or $.18
per common share for fiscal 2001.
32
(c) Revenue Recognition
-------------------
The Company recognizes revenue on the percentage-of-completion
method, measured by the cost for services expended to date
compared to the total services required to be performed on the
respective project. The Company's revenue is comprised of sales
amounts and or fee income for the services it renders. 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.
Provision for anticipated losses on uncompleted projects are
made in the period in which such losses are determined. Such
revenue is recognized in accordance with the guidelines set
forth in the Securities and Exchange Commissions Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements".
(d) Cash Equivalents
----------------
Investments with original maturities of three months or less
at the time of purchase are considered cash equivalents.
(e) 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 use of the asset.
(f) Goodwill
--------
Goodwill consists of the excess cost over fair value of net
assets acquired for subsidiary companies and equity investment.
Goodwill is being amortized, on a straight-line basis, over a
period of twenty five years. Accumulated amortization
approximated $3,760,000 and $2,765,000 at March 31, 2001 and
2000, respectively, and amortization expense for the years
ended March 31, 2001, 2000 and 1999, approximated $995,000,
$1,021,000 and $893,000, respectively.
The recoverability of goodwill is assessed by determining
whether the amortization over its remaining life can be
recovered through undiscounted future operating cash flows of
the acquired operation. If such amounts are not fully
recoverable, impairment is indicated. The amount of impairment,
if any, is measured based upon projected discounted operating
cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of recoverability of
goodwill will be impacted if estimated future operating cash
flows are not achieved. The goodwill will be tested for
impairment when events or changes in circumstances indicate
that an impairment test is necessary.
33
(g) Net Income (Loss) Per Common Share
----------------------------------
The computation of basic earnings (loss) per common share is
based upon the weighted average number of common shares
outstanding during the year. The computation of diluted
earnings (loss) 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, 2001, 2000 and 1999, 1,168,375, 2,444,238
and 741,275, stock options and warrants, respectively, have
been excluded from the calculation of diluted earnings as their
inclusion would be antidilutive. For the fiscal year ended
March 31, 1999, the computation of weighted average number of
common shares outstanding for the year included a ninety-three
day inclusion of the shares of common stock issued for the U.S.
Concepts Acquisition. All earnings per share calculations and
share information have been adjusted for the five-for-four
stock dividend paid June 15, 1998.
(h) Income Taxes
------------
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.
(i) Accounting for Stock-Based Compensation
---------------------------------------
The Com