================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-20394
COACTIVE MARKETING GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1340408
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
415 Northern Boulevard, Great Neck, New York 11021
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 622-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $.001 par value
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of June 24, 2002, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $9,071,102.
As of June 24, 2002, 5,028,481 shares of Common Stock, $.001 par value, were
outstanding.
Documents Incorporated by Reference
Document Part of 10-K into which incorporated
-------- ------------------------------------
Definitive Proxy Statement relating to Part III
Registrant's 2002 Annual Meeting of
Stockholders
================================================================================
PART I
This report contains certain "forward-looking statements" concerning the
Company's operations, economic performance and financial condition, which are
subject to inherent uncertainties and risks. Actual results could differ
materially from those anticipated in this report. When used in this report, the
words "estimate," "project," "anticipate," "expect," "intend," "believe" and
similar expressions are intended to identify forward-looking statements.
Item 1. Business.
- ------ --------
General Introduction
CoActive Marketing Group, Inc. ("CoActive"), through its wholly-owned
subsidiaries, Inmark Services, Inc. ("Inmark"), Optimum Group, Inc. ("Optimum"),
and U.S. Concepts, Inc. ("U.S. Concepts"), together the "Company", with its
affiliate Garcia Baldwin, Inc. doing business as MarketVision ("MarketVision"),
is a full service multi-cultural marketing, sales promotion and interactive
media services and e-commerce provider organization which designs, develops and
implements turnkey customized national, regional and local consumer and trade
promotion programs principally for Fortune 500 consumer product companies. The
Company's programs are designed to enhance the value of its clients' budgeted
expenditures and achieve, in an objectively measurable way, its clients'
specific marketing and promotional objectives which include reinforcement of
product brand recognition and providing incentives which generate near term
sales. Having developed a wide variety of specialties, the Company as a
multi-disciplined agency is capable of offering and having its specialty
services compete on both a free standing and or an integrated basis.
The full range of marketing and sales promotional services offered by
the Company consist of strategic marketing, creative services, broadcast and
print media, direct marketing, multi cultural marketing, event marketing,
entertainment marketing, in-store sampling and merchandising, Internet web site
designing and hosting, e-commerce tools, electronic sales tools and computer
based training. By providing a wide range of programs and services, the Company
affords its clients a total solutions resource for strategic planning, creative
development, production, implementation and sales training aids, including
in-store and special event activities, and enhanced product brand name
recognition on a multicultural basis.
CoActive was initially formed under the laws of the State of Delaware
in March 1992. Its principal offices are located at 415 Northern Boulevard,
Great Neck, New York 11021, and its telephone number is 516-622-2800.
The Company began to engage in its current operations on September 29,
1995 upon consummation of a merger transaction (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.
Acquisitions
On March 31, 1998, Optimum acquired all of the assets and assumed
certain liabilities of OG Holding Corporation, formerly known as Optimum Group,
Inc. (the "Optimum Acquisition"). The purchase price for the Optimum Acquisition
consisted of $9,298,000 in cash, a subordinated note in the principal amount of
$2,500,000, 565,385 shares of CoActive common stock ("CoActive Common Stock")
and the payment or assumption of approximately $1,900,000 of debt. 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 of U.S. Concepts, Inc., a
New York corporation (the "U.S. Concepts Acquisition"). The purchase price for
the U.S. Concepts Acquisition consisted of $1,410,000 in cash, the assumption of
$2,500,000 of liabilities, and the issuance of 30,000 shares of CoActive Common
Stock. To date, pursuant to the terms of the U.S. Concepts Acquisition,
additional installments of purchase price totaling $1,000,000 have been paid
based on the performance of U.S. Concepts from January 1, 1999 to December 31,
2001, and up to an additional $1,500,000 of purchase price may similarly be paid
based on the performance of U.S. Concepts in the period ending December 31,
2002. The U.S. Concepts business, founded in 1983, provides event marketing,
entertainment marketing and in-store promotion services which include brand
creating and execution of special fully turnkey production of concerts, tours
and festivals, sales driven sampling, demonstration programs and events. These
services complement and readily integrate with the other services provided by
the Company. U.S. Concepts assists clients with the expertise and manpower to
reach target customers where they live, shop, play and study in a manner that
integrates client brands directly with customer lifestyles.
On February 27, 2001, the Company acquired 49% of the shares of capital
stock of MarketVision which is a minority owned, predominately Hispanic,
ethnically oriented promotion agency headquartered in San Antonio, Texas for a
purchase price of $300,000, and in connection therewith issued options to
purchase 35,000 shares of CoActive Common Stock with a fair value of $25,630
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 of which borrowings on the credit line amounted to $159,000 at
March 31, 2002. The MarketVision acquisition has been accounted for as an equity
investment on the Company's consolidated balance sheets whereby, pursuant to the
equity method of accounting, respective balance sheet carrying values of the
investment are periodically adjusted to reflect the Company's 49% interest in
and effect of the operations of MarketVision. The MarketVision business, founded
in 1998, provides marketing and promotional services on a multicultural basis
comparable to those provided by the Company.
On March 22, 2002, the Company entered into an Administration and
Marketing Services Agreement with MarketVision pursuant to which the Company
provides MarketVision with specific administrative, accounting, financial,
marketing and project support services for a monthly fee in the amount of
$35,000. In accordance with the agreement, the Company dedicates and allocates
certain of its resources and the specific time of certain of its personnel to
MarketVision. During fiscal 2002, prior to the effectiveness of this agreement,
3
the Company absorbed the cost of providing marketing support services to
MarketVision to further integrate the extended service offerings of both the
Company and MarketVision and enhance cross-selling opportunities.
On January 24, 2001, U.S. Concepts, pursuant to certain agreements (the
"ComedyLab Agreements"), 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 Brian
Murphy, a director of the Company who is also the chief executive officer of
both ComedyLab and U.S. Concepts, to continue business previously conducted by
iCast. ComedyLab owns and operates a Web site which provides comedy related
programming and content from which advertising and other revenue may be
realized. On June 19, 2001, Mr. Murphy executed a secured promissory note in
favor of U.S. Concepts pursuant to which he became obligated to reimburse the
Company for amounts advanced by the Company to ComedyLab ($296,000 and $267,000
during the years ended March 31, 2002 and 2001, respectively). As the Company is
no longer responsible for the liabilities and or losses, if any, of ComedyLab, a
share of ComedyLab's losses in the amount of $89,000 previously recorded for the
year ended March 31, 2001 has been reversed and included in other income for the
year ended March 31, 2002 and previous amounts related to advances to ComedyLab
recorded as due from affiliate have been reclassified as a note receivable from
officer. The $89,000 was recorded for the year ended March 31, 2001 because, as
of such time, the Company did not yet have the assurance of its ability to
collect such amount. During the year ended March 31, 2002, as provided for in
the promissory note, the Company applied an additional purchase price
installment due to Mr. Murphy in the amount of $500,000, in connection with the
U.S. Concepts Acquisition, to reduce the amounts owed by Mr. Murphy under the
promissory note. Accordingly, at March 31, 2002, the related note receivable
from officer amounted to $63,000. See "Management Discussion and Analysis of
Financial Condition and Results of Operations-Related Party Transactions".
Description of Business
General. The Company is a full service multicultural marketing, sales
promotion and interactive media services and e-commerce provider organization
which designs, develops and implements turnkey customized national, regional and
local consumer and trade promotion programs principally for Fortune 500 consumer
product companies. The Company's programs are designed to enhance the value of
its clients' budgeted expenditures and to achieve, in an objectively and
measurable way, its clients' specific marketing and promotional objectives which
include reinforcement of product brand recognition and providing incentives
which generate near term sales. The Company's creative marketing, sales
promotion, interactive media and e-commerce services are generally customized on
a multicultural basis to 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;
o advising clients on the deployment of budgeted amounts to maximize
value and meet objectives;
o specifically created "account specific" and/or "co-marketing programs
which target the participation and cooperation of a specific retail chain, group
or groups of retailers or other sources of distribution (the "Trade") to attain
results in the form of increased in-store product displays, related consumer
purchases and product brand recognition;
4
o providing on-site and in-store personnel to conduct and coordinate
specifically created special events, promotional entertainment activities and
sampling and demonstration activities;
o Internet Web site designing, hosting and e-commerce software for
business to consumer and business to business activities, multimedia electronic
sales tools and presentations, and interactive computer based sales training;
o concept development, graphic design, conventional and computer
illustration, copy writing, 3-D graphics and animation, layout and production,
photography and video services which develop the concept and subsequently create
the consumer and trade promotional program; and
o implementing turnkey training and incentive programs, which provide
detailed documentation, program manuals, artwork, the training of a client's
marketing and sales staffs, the buying of broadcast and print media and
merchandise, the designing of in-store displays, commercial editing, and the
coordination and trafficking of media and total program administration.
A typical program may integrate numerous promotional services and
techniques which take into consideration various factors, including: (a) the
channel of Trade on which the client is focused and a determination of the most
effective manner to obtain distribution support for the client's product; (b)
the means by which to best educate the client's sales force in soliciting Trade
support for the client's products without creating excessive or burdensome
administrative details; and (c) the profile of consumers and the most effective
way of communicating with consumers of the client's products. Distinct from many
promotion and marketing companies which may adopt specific promotional programs
or techniques regardless of the product, the Company's programs are tailored to
the client's particular goals and may include various components, including
promotional broadcast media, premium incentives to Trade employees and
representatives, special events, in-store merchandising and sampling, commercial
tagging, specialty printing, licensing, point-of-purchase displays, couponing,
and interactive Internet and other electronic services, including e-commerce
tools, and video and computer based sales and training aids.
Industry Background. The industry is comprised of hundreds of large and
small companies, including affiliates of advertising agencies, many of which
tend to specialize in providing clients with one or more of a wide array of
retailers or other channels of distribution and/or consumer oriented promotional
services and products. Although promotional services may in certain
circumstances duplicate, overlap or relate to traditional advertising services,
advertising agencies over the years have considered these services as distinct
auxiliary marketing services. Consumer product manufacturers and service
provider companies typically employ two separate but related marketing programs
to sell their products. Initially, a general advertising campaign would be
launched by an advertising agency engaged to create an image for the product and
to communicate the image to the consumer. The campaign typically employs
television, radio, print media, the Internet and other forms of communication
designed to generate brand recognition and product awareness among consumers.
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
5
among others. The basic distinction between the services of promotion companies
and those of advertising agencies is that advertising agency services are used
to create a positive image for a client's product and communicate that image to
consumers for continued product recognition and awareness, while promotion
company services, such as those provided by the Company, are used to motivate
consumers to take immediate positive action while further increasing product
recognition.
Promo Magazine's Annual Report of the U.S. Promotion Industry reported
consumer promotion spending of $98.7 billion in 2001 consisting of industry
revenues segmented as follows: Premium Incentives, Promotional Products, Point
of Purchase Displays, Sponsorships, Coupons, Specialty Printing, Licensing,
Fulfillment, Agency Net Revenues, Interactive Marketing, Games inclusive of
Contests and Sweepstakes, Promotion Research, 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 an exclusive promotion service supplier.
The Company's Programs. The Company, as a fully integrated
multicultural marketing and sales promotion 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, event and entertainment genres and sponsorship, the Internet and other
forms of visual communications, promotional products and activities, and
administrative services. The Company's services are supported with an innovative
management information system to gather, monitor, track and report the
implementation status of each program. The Company's ability to capture data
regarding sales activity and Trade acceptance of a particular program on a real
time basis enables the Company and its clients to continually monitor and adjust
the program to maximize its effectiveness. The Company's promotional program may
promote a client's products on a uniform basis nationwide or may be tailored for
a particular regional or local market for a specific product. A program,
localized for specific markets or products, can be coordinated with respect to
both timing and expenditure, to run simultaneously with individual and
customized programs nationwide.
The Company's promotional campaign strategies are typically implemented
with the use or integration of one or more of the following promotional
products:
o Promotional Radio - Broadcast time purchased for the Company's
clients for their own use for traditional concept, image and brand recognition
advertising and provided on behalf of such clients to the Trade as an incentive
for "Trade participation". Trade participation for a client often takes the form
of tangible merchandising performance such as additional display of a client's
products within the Trade's stores, an increase in the product inventory
throughout the Trade's chain, a Trade's coupon circular or solo-mailers
referencing and promoting the client's product. The Trade may also permit
product sampling within one or more stores in the chain. The value of broadcast
time made available to the Trade for its own discretionary use is a 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
6
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.
o In-Store Sampling and Demonstrations - Trained personnel providing
sampling or demonstration of a client's product at various retail outlets
including grocery, mass merchandise, beverage and drug stores.
o Trade/Account Specific Consumer Promotions - A full range of
consumer in-store promotional programs, integrated with Trade-directed promotion
programs, which are designed to increase consumer interest in a client's
products and increase brand name recognition. These promotions include (a)
merchandise giveaways in conjunction with product purchases; (b) vacation and
product sweepstakes (for which the Company designs display materials, writes the
rules, qualifies the winners and arranges travel plans or product ordering); (c)
product sampling in one or more stores; and (d) traditional couponing.
o Interactive Media - Use of the Internet and other forms of
interactive visual communication designed to augment traditional media and reach
audiences that prefer a more active media. The Company's interactive new media
services include Internet Web site design, development, hosting, support,
e-commerce software for business to consumer and business to business
activities, providing reliable, high-speed access and maintenance through the
Company's own dedicated communication lines, computer based training and
electronic sales tools.
o Creative Services - A full range of services which include concept
development, graphic layout/design and production, copywriting, digital
imaging/retouching/film separation, illustration, animation, photography and
video.
Marketing Strategy. The Company's marketing strategy is to offer its
clients creative promotional programs intended to produce objectively measurable
results while removing from clients the significant burden of administrative and
logistical details associated with such programs. While continuing to focus on
ample opportunities which exist with clients in the packaged goods industry, the
Company has broadened its strategy by offering its promotion products to clients
in other industries, such as electronics, entertainment, lawn and gardening and
other sellers of do-it-yourself products, which the Company believes can benefit
from a comprehensive customized program on a turnkey implementation basis.
The Company believes that its strategy of attempting to provide
comprehensive solutions to its clients' promotional advertising programs
distinguishes it from certain of its competitors, which provide only specific
promotional programs without field and office support provided by the Company as
an integral part of its programs. The Company also believes that its strategy is
more attuned to clients' needs, particularly as clients seek to contract out all
promotional advertising for a specific product as a result of downsizing their
in-house capabilities.
The Company's services are marketed directly by the Company's sales
force consisting of twenty-seven salespersons operating out of fully staffed
7
and/or sales offices located in Great Neck and New York, New York; Cincinnati,
Ohio; Birmingham, Alabama; Los Angeles, Irvine and San Francisco, California and
San Antonio, Texas.
Customers. The Company's principal clients are packaged goods and other
consumer products manufacturers, generally among the Fortune 500, which are
actively engaged in promoting their products both to the Trade and to consumers.
The Company's clients include, among others, The Procter & Gamble Company,
Nabisco Foods, Hillshire Farm & Kahn's, Inc., General Motors, Starkist Seafood
Company, Hewlett-Packard Company, Schieffelin & Somerset Co., Kelly Moore
Paints, Adams Golf Company, Ethicon Endo-Surgery, Inc., The Scotts Company,
Denny's, Valvoline, XM Radio, Mrs. Smith's Bakeries, Inc., Heinz North America,
Old Navy, Inc., Novartis Consumer Health Inc., Lowes, Coty Rimmel, College
Television Network, Fresh Express, Inc., Barbara's Bakery and The Gambrinus
Company. For the fiscal years ended March 31, 2002, 2001 and 2000, the Company
had one client, Schieffelin & Somerset Co., which, accounted for approximately
29.6%, 32.5% and 29.8%, respectively of its revenues, including approximately
13.6%, 16.7% and 12.4%, respectively, of revenues attributable to reimbursable
costs and expenses for such client pursuant to the adoption of accounting
standard EITF 01-14, Income Statement Characterization of Reimbursements
Received for "Out-of-Pocket" Expenses Incurred, in the fourth quarter of fiscal
2002 (see "Management Discussion and Analysis of Financial Condition and Results
of Operations-Adoption of Recent Accounting Standards"). At March 31, 2002, 2001
and 2000, this client, accounted for 13%, 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 and the Company
currently has a few agency of record relationships.
Competition. The market for promotional services is highly competitive,
with hundreds of companies claiming to provide various services in the promotion
industry. In general, the Company's competition is derived from two basic groups
(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".
Employees
The Company currently has 221 full-time and 1,173 part-time employees,
including 27 full-time employees involved in sales, 149 full-time and 1,173
part-time employees in marketing support, program management and in-store
sampling and demonstration, 23 full-time employees in interactive 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.
8
Risk Factors
Outstanding Indebtedness; Security Interest. At March 31, 2002, loans
outstanding under the Company's credit agreement with its lender (the "Credit
Agreement") amounted to $4,666,666 and the Company had no borrowing availability
under the Credit Agreement revolving credit facility. As security for all its
obligations under the Credit Agreement, the Company granted the lender a first
priority 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.
Dependence on Key Personnel. The Company's business is managed by a
limited number of key management and operating personnel, the loss of certain of
whom could have a material adverse impact on the Company's business. The Company
believes that its future success will depend in large part on its continued
ability to attract and retain highly skilled and qualified personnel. Each of
the Company's key executives is either a party to an employment agreement that
expires in 2004 or is expected to enter into an amendment to an employment
agreement that would extend the term thereof for a minimum of three years.
Customers. 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.
Unpredictable Revenue Patterns. A significant portion of the Company's
revenues is derived from large promotional programs which originate on a project
by project basis. Since these projects are susceptible to change, delay or
cancellation as a result of specific client financial or other marketing and
manufacturing related circumstantial issues as well as changes in the overall
economy, the Company's revenue is unpredictable and may vary significantly from
period to period.
Competition. The market for promotional services is highly competitive,
with hundreds of companies claiming to provide various services in the promotion
industry. Certain of these companies may have greater financial and marketing
resources than those available to the Company. The Company competes on the basis
of the quality and the degree of comprehensive service which it provides to its
clients. There can be no assurance that the Company will be able to continue to
compete successfully with existing or future industry competitors.
Risks Associated with Acquisitions. An integral part of the Company's
growth strategy is evaluating and, from time to time, engaging in discussions
regarding acquisitions and strategic relationships. No assurance can be given
that suitable acquisitions or strategic relationships can be identified,
financed and completed on acceptable terms, or that the Company's future
acquisitions, if any, will be successful.
Expansion Risk. The Company has in the past experienced periods of
rapid expansion. This growth has increased the operating complexity of the
Company as well as the level of responsibility for both existing and new
management personnel. The Company's ability to manage its expansion effectively
will require it to continue to implement and improve its operational and
financial systems and to expand, train and manage its employee base. The
Company's inability to effectively manage its expansion could have a material
adverse effect on its business.
9
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.
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 $320,000
Principal and sales office of Optimum (1) Cincinnati, Ohio 20,300 $198,000
Principal and sales office of
U.S. Concepts New York, New York 11,500 $368,000
Other sales offices of Dallas, Texas 300
Inmark, Optimum Chicago, Illinois 1,400
and U.S. Concepts Tampa, Florida 600
Los Angeles, California 1,000
San Francisco, California 1,400
Irvine, California 1,400
Framingham, Massachusetts 200
Birmingham, Alabama 100
Coral Gables, Florida 500
New York, New York 1,800
Summit, New Jersey 300
------
Total 9,000 $323,000
Warehouses of Optimum, San Francisco, California 800
and U.S. Concepts used Los Angeles, California 1,000
for storage of promotional items New York, New York 1,000
Miami Beach, Florida 600
Chicago, Illinois 800
------
4,200 $114,000
(1) The Company leases a portion of this facility at an annual rental of
$147,000 from Thomas Lachenman, a director of the Company and the former
owner of Optimum Group, Inc. This lease expires in December 2010.
With the exception of the principal office leases for Great Neck, New York,
Cincinnati, Ohio and New York, New York, which at March 31, 2002 have remaining
terms of seven years, eight years and one year, 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, 2002, see note 6 to the Notes to Consolidated Financial
Statements.
The Company considers its facilities sufficient to maintain its current
operations.
10
Item 3. Legal Proceedings.
- ------ -----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
Not Applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ---------------------------------------------------------------------
Market Information
The Company's Common Stock is traded on the Nasdaq SmallCap Market
under the symbol CMKG. The following table sets forth for the periods indicated
the high and low trade prices for CoActive Common Stock as reported by Nasdaq.
The quotations listed below reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
11
Common Stock
------------
High Low
---- ---
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
Fiscal Year 2002
- ----------------
First Quarter 3.000 1.063
Second Quarter 2.750 1.910
Third Quarter 2.120 1.510
Fourth Quarter 2.400 1.600
On June 19, 2002, there were 5,028,481 shares of CoActive Common Stock
outstanding, approximately 58 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".
Equity Compensation Plan Information
The following table sets forth information with respect to equity
compensation plans (including individual compensation arrangements) of the
Company which, except as noted below, is as of March 31, 2002.
Number of securities
Number of securities remaining available for
to be issued upon Weighted average future issuance under
exercise of outstanding exercise price of equity compensation plans
options, warrants outstanding options (excluding securities
Plan category and rights warrants and rights reflected in column (a))
- ------------- ----------------------- ------------------- ------------------------
Equity compensation
plans approved by
security holders 1,739,501 $ 2.84 - (1)
Equity compensation
plans not approved
by security holders 75,000 $ 4.00 -
--------- ------ ------
Total 1,814,501 $ 2.89 -
========= ====== ======
(1) The Company's 1992 Stock Option Plan expired on April 29, 2002. The
Company expects to adopt another stock compensation plan in the near
future and submit such plan to its stockholders for approval.
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, 2002. 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.
12
Year Ended Year Ended Year Ended Year Ended Year Ended
March 31, March 31, March 31, March 31, March 31,
1998 (1) 1999 (2) 2000 2001 2002
------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
Sales (5) $ 25,965,780 $ 39,470,987 $ 46,379,282 $ 58,609,347 $ 59,264,617
Gross Profit 8,403,363 12,469,901 11,408,595 15,043,084 15,053,122
Income (Loss) before Provision
(Benefit) for Income Taxes 3,579,445 2,230,900 (1,382,476) 1,465,412 1,637,082
Provision (Benefit) for Income Taxes 1,300,000 892,361 (508,774) 583,382 708,818
Net Income (Loss) before Cumulative Effect of
Change in Accounting Principle for Revenue
Recognition 2,279,445 1,338,539 (873,702) 882,030 910,264
Cumulative Effect of Change in Accounting
Principle for Revenue Recognition, Net of
Income Taxes (3) -- -- -- (502,800) --
Net Income (Loss) 2,279,445 1,338,539 (873,702) 379,230 910,264
Net Income (Loss) per Common and Common
Equivalent share* before Cumulative Effect
of Change in Accounting Principle for Revenue
Recognition:
Basic $ .63 $ .30 $ (.19) $ .18 $ .18
Diluted $ .50 $ .24 $ (.19) $ .16 $ .17
Cumulative Effect of Change in Accounting
Principle for Revenue Recognition:
Basic -- -- -- $ (.10) --
Diluted -- -- -- $ (.09) --
Net Income (Loss):
Basic $ .63 $ .30 $ (.19) $ .08 $ .18
Diluted $ .50 $ .24 $ (.19) $ .07 $ .17
Pro Forma Amounts Assuming the Change in
Accounting Principle for Revenue Recognition
is Applied Retroactively:
Net Income (Loss) 2,139,045 977,339 (873,702) -- --
Net Income (Loss) per Common Share:
Basic $ .59 $ .22 $ (.19) -- --
Diluted $ .47 $ .17 $ (.19) -- --
* Adjusted for the five-for-four stock split effective May 14, 1998
March 31, March 31, March 31, March 31, March 31,
1998 (4) 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
Balance Sheet Data:
Working capital (deficiency) 2,446,502 3,146,441 (1,671,668) (3,877,534) (2,749,170)
Total Assets 30,818,389 42,452,443 36,196,610 35,004,400 36,872,138
Current Debt -- 625,000 3,325,000 2,983,333 2,358,333
Long-Term Debt 9,500,000 11,875,000 6,160,000 3,801,667 3,333,333
Total Liabilities 20,145,423 29,875,338 23,490,282 21,886,012 22,831,586
Stockholders' Equity 10,672,966 12,577,105 12,706,328 13,118,388 14,040,552
(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 non-cash charge relating to the Company's
adoption of Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 was
issued by the Securities and Exchange Commission ("SEC") in December 1999.
SAB 101 provides guidance related to revenue recognition policies based on
interpretations and practices followed by the SEC. The impact of the
Company's adoption of SAB 101 was to defer revenue recognition and the
related expense for certain portions of revenue and expense previously
recognized by the Company under its project arrangements with its clients
into future accounting periods.
(4) Includes assets and liabilities of Optimum acquired on March 31, 1998.
(5) Restated to reflect the adoption of EITF 01-14, Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred ("EITF 01-14"). EITF 01-14 requires reimbursements received for
"out-of-pocket" expenses to be characterized as revenues. The resulting
costs are now recorded as direct expenses resulting in no change in gross
profit but a decrease in gross profit margins. The impact of the Company's
adoption of EITF 01-14 was to increase revenues and direct expenses by $0,
$689,851, $5,794,323 $9,841,290 and $8,208,694 for the years ended March
31, 1998, 1999, 2000, 2001 and 2002, respectively.
13
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 thereto included elsewhere herein.
Adoption of Recent Accounting Standards
Effective in the fourth quarter of fiscal 2002, the Company adopted
EITF 01-14, Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred ("EITF 01-14"). EITF 01-14, which became
effective in the fourth quarter of fiscal 2002 (and requires retroactive
application), requires reimbursements received for "out-of-pocket" expenses to
be characterized as revenues. The resulting costs are now recorded as direct
expenses resulting in no change in gross profit but a reduction in gross profit
margins. The impact of the Company's adoption of EITF 01-14 was to increase
revenues and direct expenses by $0, $689,851, $5,794,323, $9,841,290 and
$8,208,694 for the years ended March 31, 1998, 1999, 2000, 2001 and 2002,
respectively.
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 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 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 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.
14
Significant Customer
For the fiscal year ended March 31, 2002 ("Fiscal 2002"), the Company
had one client, Schieffelin & Somerset Co., which accounted for approximately
29.6% of its revenues, including, pursuant to the adoption of accounting
standard EITF 01-14, approximately 13.6% of revenues attributable to
reimbursable costs and expenses for such client. In comparison, for the fiscal
year ended March 31, 2001 ("Fiscal 2001"), the same client accounted for 32.5%
of the Company's revenues, including, pursuant to the adoption of accounting
standard EITF 01-14, approximately 16.7% of revenues attributable to
reimbursable costs and expenses for such client. At March 31, 2002 and 2001, the
same client accounted for 13% and 11% 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.
Critical Accounting Policies
The Company's significant accounting policies are described in Note 1
to the consolidated financial statements included in Item 8 of this Form 10-K.
The Company believes the following represent its critical accounting policies:
Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and of
revenues and expenses during the reporting period. Estimates are made when
accounting for revenue, depreciation, amortization and certain other
contingencies. The Company is subject to risks and uncertainties that may cause
actual results to vary from estimates. The Company reviews all significant
estimates affecting the financial statements on a recurring basis and records
the effect of any adjustments when necessary.
Revenue Recognition
The Company's revenues are generated from projects subject to contracts
requiring the Company to provide its services within specified time periods
generally ranging up to twelve months. As a result, 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, depending on the nature of the contract, the estimated
percentage-of-completion of a project is measured by the Company's time expended
on the project to such date compared with the total time required to be incurred
in connection with such project or, alternatively, 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. In
addition, the Company also has a contract with a client that is a cost plus fee
contract. Revenues from this contract are recognized on the basis of costs
incurred during the period plus the fee earned, measured by the costs incurred
to total budgeted costs. The Company's business is such that progress towards
completing projects may vary considerably from quarter to quarter.
15
If the Company does not accurately estimate the resources required or
the scope of work to be performed, or does not manage its projects properly
within the planned periods of time to satisfy its obligations under the
contracts, then future profit margins may be significantly and negatively
affected or losses on existing contracts may need to be recognized. The
Company's direct expenses consist primarily of direct labor costs; costs to
purchase media and program merchandise; cost of production, merchandise
warehousing and distribution, and third party contract fulfillment; and other
directly related program expenses. Any such resulting reductions in margins or
contract losses could be material to the Company's results of operations.
With respect to the aforementioned methodologies of revenue
recognition, in many instances, revenue recognition will not result in related
billings throughout the duration of a contract due to timing differences between
the contracted billing schedule and such revenue recognition. In such instances,
when revenue is recognized in an amount in excess of the contracted billing
amount, such excess is recorded by the Company as unbilled contracts in
progress. Alternatively, on a scheduled billing date, should the billing amount
exceed the amount of revenue recognized, such excess is recorded as deferred
revenue by the Company.
Goodwill and Other Intangible Asset
The Company's goodwill consists of the cost in excess of the fair
market value of the acquired net assets of its subsidiary companies. The
Company's other intangible asset consists of the cost of an Internet domain name
and any and all related intellectual property rights associated therewith which
are used in the Company's operations. At March 31, 2002, the Company had
$17,491,000 of goodwill and $200,000 as an intangible asset. For the year ended
March 31, 2002 and for the prior fiscal years, the Company has amortized
goodwill on a straight-line basis over a period of twenty five years. In
assessing the recoverability of the Company's goodwill and intangible asset, the
Company must make assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. No impairment in
the recorded goodwill was identified as of March 31, 2002.
On April 1, 2002, the Company adopted Statements of Financial
Accounting Standards No. 141 ("SFAS 141"), "Business Combinations," and No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 141 requires the use
of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that the Company recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria. It also requires, upon adoption of SFAS 142, that the Company
reclassify, if necessary, the carrying amounts of intangible assets and goodwill
based on the criteria in SFAS 141. The Company has determined that the
classification and useful lives utilized for its intangible assets are
appropriate. SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life.
The Company's goodwill relates to its prior acquisitions of Inmark,
Optimum and U.S. Concepts , which have been identified as the Company's
reporting units. For the years ended March 31, 2002, 2001 and 2000 the Company
recorded amortization of approximately $1,042,000, $995,000 and $1,021,000,
respectively. The Company has completed its initial impairment review as of
April 1, 2002 and no impairment in the recorded goodwill was identified.
Goodwill will be tested annually at the end of the fiscal year to identify if an
impairment has occurred. However, in the future, upon completion of the annual
review, there can be no assurance that a material charge will not be recorded.
16
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, 2002, 2001
and 2000:
Year Ended March 31,
-------------------------
2002 2001 2000
------ ------ ------
Statement of Operations Data:
Sales (1) 100.0% 100.0% 100.0%
Direct expenses (1) 74.6% 74.3% 75.4%
Gross profit 25.4% 25.7% 24.6%
Salaries 8.9% 9.5% 11.6%
Selling, general and administrative expenses 13.1% 12.2% 14.2%
Total operating expenses 22.0% 21.7% 25.8%
Operating income (loss) 3.4% 4.0% (1.2)%
Interest expense, net 0.8% 1.3% 1.8%
Other 0.1% (0.2)% --
Income (loss) before provision (benefit) for
income taxes and equity in loss of affiliate 2.7% 2.5% (3.0)%
Provision (benefit) for income taxes 1.2% 1.0% (1.1)%
Equity in loss of affiliate -- n/a n/a
Net income (loss) before cumulative effect of
change in accounting principle for revenue
recognition 1.5% 1.5% (1.9)%
Cumulative effect of change in accounting
principle for revenue recognition, net of income
taxes -- (1.0)% --
Net income (loss) 1.5% 0.5% (1.9)%
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 1.5% 1.5% (1.9)%
Net income (loss) 1.5% 0.5% (1.9)%
--
(1) Restated to reflect the adoption of EITF 01-14, Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred ("EITF 01-14"). EITF 01-14 requires reimbursements received for
"out-of-pocket" expenses to be characterized as revenues. The resulting
costs are now recorded as direct expenses resulting in no change in gross
profit. The impact of the Company's adoption of EITF 01-14 was to increase
revenues and direct expenses by $8,208,694, $9,841,290 and $5,794,323 for
the years ended March 31, 2002, 2001 and 2000, respectively, and to
decrease gross profit margins for such years.
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, 2002, 2001 and 2000:
17
Year Ended March 31,
-------------------------
2002 2001 2000
------ ------ ------
Statement of Operations Data:
Sales (1) 1.1% 26.4% 17.5%
Direct expenses (1) 1.5% 24.6% 29.5%
Gross profit 0.1% 31.9% (8.5)%
Salaries (5.7)% 4.0% 5.6%
Selling, general and administrative expenses 9.2% 7.8% 48.8%
Total operating expenses 2.6% 6.1% 25.8%
Operating income (loss) (13.9)% n/a (119.2)%
Interest expense, net (40.6)% (3.8)% 13.8%
Income (loss) before provision (benefit) for
income taxes and equity in loss of affiliate 11.7% n/a (162.0)%
Provision (benefit) for income taxes 21.5% n/a (157.0)%
Net income (loss) before cumulative effect of
change in accounting principle for revenue
recognition 3.2% n/a (165.3)%
Cumulative effect of change in accounting
principle for revenue recognition n/a n/a --
Net income (loss) 140.0% n/a (165.3)%
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 3.2% n/a (165.3)%
Effect of change in accounting principle for
revenue recognition n/a (30.5)% (34.2)%
Net income (loss) 140.0% n/a (199.5)%
(1) Restated to reflect the adoption of EITF 01-14, Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred ("EITF 01-14"). EITF 01-14 requires reimbursements received for
"out-of-pocket" expenses to be characterized as revenues. The resulting
costs are now recorded as direct expenses resulting in no change in gross
profit. The impact of the Company's adoption of EITF 01-14 was to increase
revenues and direct expenses by $8,208,694, $9,841,290 and $5,794,323 for
the years ended March 31, 2002, 2001 and 2000, respectively, and to
decrease gross profit margins for such years.
Fiscal Year 2002 Compared to Fiscal Year 2001
Sales. Sales for Fiscal 2002 were $59,265,000, compared to sales of
$58,609,000 for Fiscal 2001, an increase of $656,000, after including $8,209,000
and $9,841,000, respectively, of reimbursable costs and expenses pursuant to the
Company's adoption of EITF 01-14. Excluding the impact of these amounts, the
resulting increase was primarily due to an increase in the amount of new
business contracted during the year. At March 31, 2002, the Company's sales
backlog amounted to approximately $18,373,000, compared to a sales backlog of
approximately $22,971,000 at March 31, 2001. At any given time, comparative
differences in the Company's sales backlog may vary due to timing differences in
the receipt of executed contracts from clients with respect to project
assignments being finalized.
Direct Expenses. Direct expenses for Fiscal 2002 were $44,211,000
compared to direct expenses of $43,566,000 for Fiscal 2001, an increase of
$645,000, after including $8,209,000 and 9,841,000, respectively, of
reimbursable costs and expenses pursuant to the Company's adoption of EITF
01-14. Excluding the impact of these amounts, the resulting increase was
primarily attributable to the increase in sales for the year. The increase in
direct expenses as a percentage of sales for Fiscal 2002 was primarily the
result of the net effect of (i) a reclassification, in Fiscal 2002, of the
salaries of certain employees and other expenses as direct expenses rather than
as a selling, general and administrative expense and (ii) the offsetting
increase in sales with larger profit margins in Fiscal 2002 compared to Fiscal
2001.
18
As a result of the aforementioned changes in sales and direct expenses,
gross profit for Fiscal 2002 increased to $15,053,000 from $15,043,000 for
Fiscal 2001 and the gross profit as a percentage of sales was 25.4% for Fiscal
2002, compared with 25.7% for Fiscal 2001.
Operating Expenses. Operating expenses for Fiscal 2002 increased by
$335,000 and amounted to $13,038,000, compared to $12,703,000 for Fiscal 2001.
The increase in operating expenses for Fiscal 2002 was primarily attributable to
(i) an increase of $655,000 in selling, general and administrative expenses
incurred in supporting and maintaining an anticipated increase in the level of
operations and (ii) the decrease of $320,000 in salaries, related employee
payroll expenses and benefits primarily the result of a reclassification, in
Fiscal 2002, of certain salaries otherwise included in selling, general and
administrative expense as a direct expense.
Interest Expense, Net. Net interest expense, consisting of interest
expense of $489,000 offset by interest income of $22,000, for Fiscal 2002
amounted to $467,000, a decrease of $319,000, compared to net interest expense,
consisting of interest expense of $929,000 offset by interest income of
$143,000, amounting to $786,000 for Fiscal 2001. The decrease of $319,000 in net
interest expense for Fiscal 2002 was primarily related to the Company's bank
borrowings incurring lower interest rates and the overall reduction of the
Company's borrowings.
Other. For Fiscal 2002, the Company recorded income resulting from
recording a previously recorded share of the losses of ComedyLab in the amount
of $89,000 as recoverable from a director of the Company pursuant to a secured
promissory note from such director.
Equity in Loss of Affiliate. The Company recorded $18,000 as its share
of losses from its 49% equity investment in MarketVision.
Provision for Income Taxes. The Fiscal 2002 and 2001 provision for
federal, state and local income taxes in the amount of $709,000 and $583,000,
respectively, were based upon the Company's estimated effective tax rate for the
respective fiscal years.
Net Income Before Cumulative Effect of Change in Accounting Principle
for Revenue Recognition. As the Company did not have a cumulative effect of
change in accounting principle for revenue recognition for Fiscal 2002, the
Company's net income for Fiscal 2002 was $910,000, compared with net income
before the cumulative effect of the change in accounting principle for revenue
recognition of $882,000 for Fiscal 2001.
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.
Net Income. As a result of the items discussed above, net income for
Fiscal 2002 was $910,000, compared with net income of $379,000 for fiscal 2001.
Fiscal Year 2001 Compared to Fiscal Year 2000
Sales. Sales for Fiscal 2001 were $58,609,000, compared to sales of
$46,379,000 for Fiscal 2000, an increase of $12,230,000, after including
$9,841,000 and $5,794,000, respectively, of reimbursable costs and expenses
pursuant to the Company's adoption of EITF 01-14. Excluding the impact of these
amounts, the resulting 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.
19
Direct Expenses. Direct expenses for Fiscal 2001 were $43,566,000,
compared to direct expenses of $34,970,000 for Fiscal 2000, an increase of
$8,596,000, after including $9,841,000 and $5,794,000, respectively, of
reimbursable costs and expenses pursuant to the Company's adoption of EITF
01-14. Excluding the impact of these amounts, the resulting 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 and the gross profit as a percentage of sales was 25.7% for Fiscal
2001, compared with 24.6% for Fiscal 2000.
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, Net. Net interest expense, consisting of interest
expense of $929,000 offset by interest income of $143,000, for Fiscal 2001
amounted to $786,000, compared to net interest expense, consisting of interest
expense of $941,000 offset by interest income of $124,000 amounting to $817,000
for Fiscal 2000. The decrease of $31,000 in net interest expense for Fiscal 2001
was primarily related to the decrease in the Company's bank borrowings.
Other. For Fiscal 2001, the Company recorded $89,000 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.
20
Liquidity and Capital Resources
On May 17, 2001, the Company entered into the Credit Agreement pursuant
to which the Company obtained a $4,000,000 Term Loan and a $2,000,000 Revolving
Loan. Contemporaneously with the closing of the Credit Agreement, the Company
borrowed $4,000,000 under the Term Loan and $1,000,000 under the Revolving Loan
and used $4,510,000 of the proceeds of the Loans to repay in full the Company's
indebtedness under its then existing bank loans and the remaining proceeds were
used to increase the Company's working capital. Borrowings under the Term Loan
and Revolving Loan are evidenced by promissory notes and are secured by all the
Company's assets. Principal payments commenced June 30, 2001 on the Term Loan
are to be made in twelve equal quarterly installments of $333,333. 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 2.0%, on outstanding amounts based on
certain defined debt to earnings ratios. Interest rates at March 31, 2002 on the
Company's Loans and at March 31, 2001 pursuant to the Company's prior loan
agreement were 5.75% and 10.0%, 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, 2002, the Company had cash and cash equivalents of
$1,960,000, a working capital deficit of $2,749,000, outstanding bank loans of
$4,667,000 with no additional availability under the Revolving Loan, outstanding
subordinated debt of $1,025,000 and stockholders' equity of $14,041,000. In
comparison, at March 31, 2001, the Company had cash and cash equivalents of
$855,000, a working capital deficit of $3,878,000, outstanding bank loans of
$4,910,000 with no availability under revolving loans, outstanding subordinated
debt of $1,875,000 and stockholders' equity of $13,118,000. The decrease in the
working capital deficit at March 31, 2002 was primarily attributable to the
Company's net income for the fiscal year. Management believes cash generated
from operations together with borrowings under its Credit Agreement will be
sufficient to meet the Company's cash requirements for fiscal 2003. 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 2003 or as subsequently
required under the Credit Agreement.
The $1,104,000 increase in the Company's cash and cash equivalents at
March 31, 2002 resulted primarily from the Company's aggregate net cash provided
from operating activities after being offset by net cash used in investing and
financing activities.
Net cash provided by operating activities during Fiscal 2002 was
$3,585,000, due principally to the net effect of the aggregate of net income of
$910,000, the non-cash charges for depreciation and amortization of $1,748,000,
deferred income taxes of $579,000 and the reduction in provision for bad debt
expense of $25,000, a decrease in accounts receivable of $1,285,000, an increase
in accounts payable of $2,907,000 and an increase in deferred revenue, as offset
by an increase in unbilled contracts in progress of $2,340,000, a decrease in
accrued job costs of $1,397,000 and decreases in other accrued liabilities and
accrued compensation totaling $328,000. In comparison, 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
21
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.
For Fiscal 2002, net cash used in investing activities amounted to
$1,168,000 as a result of $347,000 used for the purchase of fixed assets,
$200,000 used to purchase an intangible asset and $888,000 used for advances to
officers offset by the recovery of advances from an affiliate in the amount of
$267,000. In comparison, 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.
For Fiscal 2002, financing activities used net cash of $1,313,000
resulting from the repayment of borrowings and the related refinancing costs
totaling $1,320,000 offset by proceeds from the exercise of stock options in the
amount of $7,000. In comparison, for Fiscal 2001, financing activities used net
cash of $2,839,000 resulting from the repayment of borrowings and payment of
related refinancing costs totaling $2,847,000, offset by proceeds from the
exercise of stock options in the amount of $7,000.
The Company does not expect to make material investments in fixed
assets in Fiscal 2003.
Contractual Obligations and Commitments
The table below sets forth as of March 31, 2002, future minimum
payments required to be made by the Company under loan agreements, operating
leases, and employment agreements, the potential future maximum annual earnout
payment the Company may be obligated to make, subject to established pre-tax
earnings criteria being achieved, under the U.S. Concepts Acquisition agreement,
and the amount the Company is committed to provide to MarketVision under a line
of credit the Company has made available to it follows:
Year Ending
March 31, 2003 2004 2005 2006 2007 Thereafter Total
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Contractual
Obligations
- -----------
Bank Term Loan $ 1,333,333 $ 1,333,333 $ 2,666,666
Bank Revolving
Credit Loan -- $ 2,000,000 2,000,000
Subordinated Debt 1,025,000 1,025,000
Operating Leases 1,259,095 698,206 508,255 $ 505,005 $ 514,583 $ 1,054,819 4,539,963
Employment
Agreements 1,985,000 825,000 412,500 3,222,500
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 5,602,428 $ 2,856,539 $ 2,920,755 $ 505,005 $ 514,583 $ 1,054,819 $13,454,129
=========== =========== =========== =========== =========== =========== ===========
Commitments
-----------
U.S. Concepts
Earnout $ 1,500,000 $ 1,500,000
Line of Credit to
MarketVision 200,000 200,000
----------- -----------
Total $ 1,700,000 $ 1,700,000
=========== ===========
22
Management believes the Company will be able to satisfy the above contractual
obligations and commitments from its cash generated from operations together
with borrowings under its Credit Agreement.
Impact of Recently Issued Accounting Standards
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting
for the Impairment or Disposal of Long-Lived Assets." This statement supersedes
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of " and amends Accounting Principles Board Opinion No. 30, "Reporting Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
SFAS 144 retains the fundamental provisions of SFAS 121 for recognition and
measurement of impairment, but amends the accounting and reporting standards for
segments of a business to be disposed of. SFAS 144 is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
The provisions of SFAS 144 generally are to be applied prospectively. The
Company believes that the adoption of SFAS 144 will not have a material impact
on the Company's financial position or results of operations.
Related Party Transactions
On November 14, 2001, the Company's Board of Directors extended the
lives of two immediately exercisable warrants to purchase the Company's common
stock previously issued to a current outside director and a consultant to the
Company in 1997. The warrants (37,500 each), which maintain the exercise price
of $4.00 per share, were due to expire on April 30, 2002 and will now expire on
April 30, 2007. The fair value ascribed to the modification of the terms of the
warrants were not material.
The Company has made loans to Paul A. Amershadian, a director of the
Company and its Executive Vice President-Marketing and Sales, aggregating
$550,000, which are evidenced by an Amended and Restated Promissory Note dated
May 24, 2001. The Amended and Restated Promissory Note provides for payment of
interest at a floating rate equal to the highest rate at which the Company pays
interest on its bank borrowings, payment of accrued interest and principal from
one-half of the after-tax amount, if any, of bonuses paid to Mr. Amershadian by
the Company, and payment of the remaining balance of principal and accrued
interest on May 24, 2006. At March 31, 2002, the Amended and Restated Promissory
Note is recorded in the Company's accounts as a note receivable from officer in
the amount of $550,000 without recognition of the accrued interest at March 31,
2002 in the amount of $151,695.
In November 2000, Brian Murphy, a director of the Company and the Chief
Executive Officer of U.S. Concepts, together with other former employees of
iCast Comedy Corporation ("iCast"), organized ComedyLab Productions, Inc.
("ComedyLab") for the purpose of acquiring certain assets from, and continuing
business previously conducted by iCast. Mr. Murphy is also a director and the
Chief Executive Officer of ComedyLab, which currently operates a Web site
providing comedy related programming and content. In January 2001, ComedyLab
acquired certain assets from iCast, including event sponsorship agreements
relating to events which U.S. Concepts had been retained by iCast to manage and
23
execute. By agreement dated January 24, 2001, U.S. Concepts agreed to (i) to
allow ComedyLab to occupy a portion of its premises in exchange for monthly
rental and utility charges, (ii) to provide ComedyLab for a fee, with sales and
consulting services and (iii) to fund a limited amount of ComedyLab's expenses.
By separate agreement of the same date between the Company, U.S. Concepts and
Mr. Murphy, the parties agreed that all equity in ComedyLab issued or issuable
to Mr. Murphy would be transferred and/or issued, as applicable, to U.S.
Concepts, and that Mr. Murphy would participate in any gain realized by U.S.
Concepts on its disposition of such entity to the extent of 25% of the first
$500,000 of such gain increasing up to 50% of all gain realized in excess of
$1,500,000. At March 31, 2002, for the facilities provided and services rendered
by U.S. Concepts pursuant to the aforementioned January 24, 2001 agreement, the
Company has not recognized as income the fees in the amount of $193,000 which
are due from ComedyLab. The Company will recognize these fees as income at such
time, if and when, they are deemed collectible.
On June 19, 2001, Mr. Murphy executed a non-interest bearing secured
promissory note in favor of U.S. Concepts pursuant to which he is obligated to
reimburse U.S. Concepts for the amount of ComedyLab expenses funded by U.S.
Concepts on or before March 31, 2002. The promissory note is secured by (i) all
amounts payable to Mr. Murphy pursuant to the U.S. Concepts Acquisition
agreement and the bonus provisions of Mr. Murphy's employment agreement, and
(ii) all indebtedness of ComedyLab to Mr. Murphy. Through the year ended March
31, 2002, U.S. Concepts funded ComedyLab expenses aggregating $563,000 and
applied a $500,000 additional purchase price installment due to Mr. Murphy
pursuant to U.S. Acquisition agreement to reduce the promissory note.
Accordingly, at March 31, 2002, the accounts of the Company include a currently
due note receivable from officer in the amount of $63,000.
On February 27, 2001, the Company acquired 49% of the shares of capital
stock of MarketVision which is a minority owned, predominately Hispanic,
ethnically oriented promotion agency headquartered in San Antonio, Texas, for a
purchase price of $300,000, and in connection therewith issued options to
purchase 35,000 shares of CoActive Common Stock with a fair value of $25,630
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 of which borrowings on the credit line amounted to $159,000 at
March 31, 2002. The MarketVision acquisition has been accounted for as an equity
investment on the Company's consolidated balance sheets whereby, pursuant to the
equity method of accounting, respective balance sheet carrying values of the
investment are periodically adjusted to reflect the Company's 49% interest in
and effect of the operations of MarketVision. The MarketVision business, founded
in 1998, provides marketing and promotional services on a multicultural basis
comparable to those provided by the Company.
On March 22, 2002, MarketVision entered into an Administration and
Marketing Services Agreement with the Company pursuant to which, commencing
April 1, 2002 the Company is to provide MarketVision with specific
administrative, accounting, financial, marketing and project support services
for a monthly fee in the amount of $35,000. In accordance with the agreement,
the Company dedicates and allocates certain of its resources and the specific
time of certain of its personnel to MarketVision. During fiscal 2002, prior to
the effectiveness of this agreement, the Company absorbed the cost of providing
marketing support services to MarketVision to further integrate the extended
service offerings of both the Company and MarketVision and enhance cross-selling
opportunities.
In connection with the Company's acquisition of Optimum, the Company
entered into a lease agreement with Thomas Lachenman, a director of the Company
and former owner of Optimum, for the lease of the Cincinnati principal office of
Optimum. The lease provides for an annual rental, currently at $147,000,
adjusted annually based upon changes in the local consumer price index. The
lease expires in December 2010.
24
Item 7A Quantitative and Qualitative Disclosures About Market Risk
The Company's earnings and cash flows are subject to fluctuations due
to changes in interest rates primarily from its investment of available cash
balances in money market funds with portfolios of investment grade corporate and
U.S. government securities and, secondarily, from its long-term debt
arrangements. Under its current policies, the Company does not use interest rate
derivative instruments to manage exposure to interest rate changes. See note 5
to "Notes to Consolidated Financial Statements-Long Term Debt."
25
Item 8. Consolidated Financial Statements.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of CoActive Marketing Group, Inc.
Reports of Independent Certified Public Accountants ..................27-28
Consolidated Balance Sheets as of March 31, 2002 and 2001.............29
Consolidated Statements of Operations for the years ended
March 31, 2002, 2001 and 2000.....................................30
Consolidated Statements of Stockholders' Equity for the years
ended March 31, 2002, 2001 and 2000...............................31
Consolidated Statements of Cash Flows for the years ended
March 31, 2002, 2001 and 2000 ....................................32
Notes to Consolidated Financial Statements............................33
26
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
CoActive Marketing Group, Inc.
We have audited the accompanying consolidated balance sheet of CoActive
Marketing Group, Inc. and subsidiaries as of March 31, 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These 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 audit.
We conducted our audit 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 audit provides 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, 2002, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ BDO SEIDMAN, LLP
-----------------------------
BDO SEIDMAN, LLP
Melville, New York
May 30, 2002
27
Independent Auditors' Report
The Board of Directors and Stockholders
CoActive Marketing Group, Inc.:
We have audited the consolidated balance sheet of CoActive Marketing Group, Inc.
(formerly Inmark Enterprises, Inc.) and subsidiaries, as of March 31, 2001, and
the related statements of operations, stockholders' equity and cash flows for
each of the years in the two-year period then ended. 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 the results of their
operations and their cash flows for each of the years in the two-year period
then ended in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG, LLP
- --------------------------
KPMG, LLP
Melville, New York
July 3, 2001, except for
notes 1(b) and 7(b(i)), which are as of
June 27, 2002
28
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND 2001
2002 2001
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 1,959,617 855,219
Accounts receivable, net of allowance for doubtful accounts
of $75,000 in 2002 and $100,000 in 2001 10,077,770 11,337,524
Unbilled contracts in progress 3,160,372 820,213
Due from affiliate -- 177,931
Prepaid taxes 141,831 158,870
Prepaid expenses and other current assets 878,603 857,054
----------- -----------
Total current assets 16,218,193 14,206,811
Property and equipment, net 1,721,176 1,944,041
Investment in MarketVision 307,630 325,630
Notes receivable from officers 613,000 225,000
Goodwill, net 17,491,196 18,033,257
Intangible asset 200,000 --
Deferred financing costs, net of amortization of $366,160 in 2002 and
$230,333 in 2001 189,029 98,474
Other assets 131,914 171,187
----------- -----------
Total assets $36,872,138 35,004,400
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 6,934,320 4,027,363
Deferred revenue 3,807,017 3,599,903
Accrued job costs 4,876,089 6,273,374
Accrued compensation 54,923 128,124
Other accrued liabilities 725,086 944,824
Deferred taxes payable 211,595 127,424
Notes payable bank - current 1,333,333 1,733,333
Subordinated notes payable - current 1,025,000 1,250,000
----------- -----------
Total current liabilities 18,967,363 18,084,345
Notes payable bank - long term 3,333,333 3,176,667
Deferred taxes payable 530,890 --
Subordinated notes payable - long term -- 625,000
----------- -----------
Total liabilities 22,831,586 21,886,012
----------- -----------
Commitments and contingencies
Stockholders' equity:
Class A convertible preferred stock, par value $.001;
authorized 650,000 shares; none issued and outstanding -- --
Class B convertible preferred stock, par value $.001;
authorized 700,000 shares; none issued and outstanding -- --
Preferred stock, undesignated; authorized 3,650,000
shares; none issued and outstanding -- --
Common stock, par value $.001; authorized 25,000,000
shares; issued and outstanding 5,028,481 shares at March 31, 2002
and 5,022,231 shares at March 31, 2001 5,028 5,022
Additional paid-in capital 6,744,598 6,732,704
Retained earnings 7,290,926 6,380,662
----------- -----------
Total stockholders' equity 14,040,552 13,118,388
----------- -----------
Total liabilities and stockholders' equity $36,872,138 35,004,400
=========== ===========
See accompanying notes to consolidated financial statements.
29
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2002, 2001 AND, 2000
2002 2001 2000
------------ ------------ ------------
Sales $ 59,264,617 58,609,347 46,379,282
Direct expenses 44,211,495 43,566,263 34,970,687
------------ ------------ ------------
Gross profit 15,053,122 15,043,084 11,408,595
------------ ------------ ------------
Operating Expenses:
Salaries 5,263,857 5,583,464 5,369,577
Selling, general and administrative expenses 7,774,177 7,119,072 6,604,124
------------ ------------ ------------
Total operating expenses 13,038,034 12,702,536 11,973,701
------------ ------------ ------------
Operating income (loss) 2,015,088 2,340,548 (565,106)
Interest expense, net (466,972) (786,170) (817,370)
Other 88,966 (88,966) --
------------ ------------ ------------
Income (loss) before provision (benefit) for
income taxes and equity in loss of affiliate 1,637,082 1,465,412 (1,382,476)
Provision (benefit) for income taxes 708,818 583,382 (508,774)
Equity in loss of affiliate 18,000 -- --
------------ ------------ ------------
Net income (loss) before cumulative effect of change in
accounting principle for revenue recognition 910,264 882,030 (873,702)
Cumulative effect of change in accounting principle for
revenue recognition, net of income taxes -- (502,800) --
------------ ------------ ------------
Net income (loss) $ 910,264 379,230 (873,702)
============ ============ ============
Net income (loss) per common share before cumulative
effect of change in accounting principle for revenue
recognition, Basic $ .18 .18 (.19)
Cumulative effect of change in accounting
principle for revenue recognition $ -- (.10) --
------------ ------------ ------------
Net income (loss) $ .18 .08 (.19)
============ ============ ============
Net income (loss) per common share before cumulative
effect of change in accounting principle for revenue
recognition, Diluted $ .17 .16 (.19)
Cumulative effect of change in accounting
principle for revenue recognition $ -- (.09) --
------------ ------------ ------------
Net income (loss) $ .17 .07 (.19)
============ ============ ============
Weighted average number of shares outstanding:
Basic 5,024,390 5,018,635 4,598,476
============ ============ ============
Diluted 5,502,448 5,433,708 4,598,476
============ ============ ============
Reconciliation of weighted average shares used for basic
and diluted computation is as follows:
Weighted average shares - Basic 5,024,390 5,018,635 4,598,476
Dilutive effect of options and warrants 478,058 415,073 --
------------ ------------ ------------
Weighted average shares - Diluted 5,502,448 5,433,708 4,598,476
============ ============ ============
Pro forma amounts assuming the change in accounting
principle for revenue recognition is applied retroactively:
Net income (loss) $ 882,030 $ (874,902)
============ ============
Net income (loss) per common share:
Basic $ .18 $ (.19)
============ ============
Diluted $ .16 $ (.19)
============ ============
See accompanying notes to consolidated financial statements.
30
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2002, 2001 AND 2000
Common Stock
par value $.001 Additional Total
--------------------------- Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
------------ ------------ ------------ ------------ ------------
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
Exercise of options 6,250 6 7,194 -- 7,200
Stock compensation for services -- -- 4,700 -- 4,700
Net income -- -- -- 910,264 910,264
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2002 5,028,481 $ 5,028 $ 6,744,598 $ 7,290,926 $ 14,040,552
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
31
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ 910,264 379,230 (873,702)
Adjustments to reconcile net income (loss) to net cash
Provided by operating activities:
Depreciation and amortization 1,747,682 1,700,855 1,531,172
Provision for bad debt expense (25,000) 100,000 --
Equity in loss of affiliate 18,000 -- --
Other (84,266) 88,966 --
Cumulative effect of change in accounting principle for revenue recognition -- 502,800 --
Deferred income taxes 579,473 125,145 (623,605)
Changes in operating assets and liabilities, net of effects of acquisitions:
Decrease (increase) in accounts receivable 1,284,754 (2,017,482) (2,377,402)
(Increase) decrease in unbilled contracts in progress (2,340,159) 295,337 5,372,990
Decrease (increase) in prepaid expenses and other assets 17,724 (205,699) (380,952)
Decrease in prepaid taxes 17,039 97,218 1,246,343
Increase (decrease) in accounts payable 2,906,957 1,911,459 (1,048,284)
(Decrease) increase in accrued job costs (1,397,285) 718,287 (1,075,871)
(Decrease) increase in other accrued liabilities (184,150) 173,469 (219,782)
Increase (decrease) in deferred revenue 207,114 697,984 (194,779)
(Decrease) increase in accrued compensation (73,201) 15,586 (207,735)
----------- ----------- -----------
Net cash provided by operating activities 3,584,946 4,583,155 1,148,393
----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (346,930) (928,436) (659,389)
Purchase of intangible asset (200,000) -- --
Acquisitions, net of cash acquired -- (500,000) --
Purchase of equity investment -- (300,000) --
Advances to officers (888,000) -- --
Advances from (to) affiliate 266,897 (266,897) --
----------- ----------- -----------
Net cash used in investing activities (1,168,033) (1,995,333) (659,389)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 7,200 7,200 2,925
Financing costs (226,381) (146,626) (57,681)
Proceeds from sale of common stock -- -- 1,000,000
Payments of debt, net (1,093,334) (2,700,000) (3,015,000)
----------- ----------- -----------
Net cash used in financing activities (1,312,515) (2,839,426) (2,069,756)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents 1,104,398 (251,604) (1,580,752)
Cash and cash equivalents at beginning of year 855,219 1,106,823 2,687,575
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,959,617 855,219 1,106,823
=========== =========== ===========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 485,735 876,458 896,312
=========== =========== ===========
Income taxes paid (refunded) during the period $ 82,793 (43,589) (1,168,3