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UNITED STATES
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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-20394
COACTIVE MARKETING GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1340408
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
415 Northern Boulevard, Great Neck, New York 11021
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 622-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
Indicate by check mark whether the Registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of September 30, 2002, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $7,109,023.
As of June 10, 2003, 5,034,731 shares of Common Stock, $.001 par value, were
outstanding.
Documents Incorporated by Reference
Document Part of 10-K into which incorporated
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Definitive Proxy Statement relating to Part III
Registrant's 2003 Annual Meeting of
Stockholders
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PART I
This report contains certain "forward-looking statements" concerning the
Company's operations, economic performance and financial condition, which are
subject to inherent uncertainties and risks. Actual results could differ
materially from those anticipated in this report. When used in this report, the
words "estimate," "project," "anticipate," "expect," "intend," "believe" and
similar expressions are intended to identify forward-looking statements.
Item 1. Business.
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General Introduction
CoActive Marketing Group, Inc. ("CoActive"), through its
wholly-owned subsidiaries, Inmark Services LLC ("Inmark"), Optimum Group LLC
("Optimum"), and U.S. Concepts LLC ("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 is a multi-disciplined agency.
The full range of marketing and sales promotional services
offered by the Company consists of strategic marketing, creative services,
broadcast and print media, direct marketing, multi cultural marketing, event
marketing, entertainment marketing, in-store sampling and merchandising,
Internet web site designing and hosting, e-commerce tools, electronic sales
tools and computer based training. By providing a wide range of programs and
services, the Company affords its clients a total solutions resource for
strategic planning, creative development, production, implementation and sales
training aids, including in-store and special event activities, and enhanced
product brand name recognition on a multicultural basis.
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 as a result of
which Inmark, then 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. Inmark provides its consumer products clients
with a full range of promotional programs that are designed to target both a
client's sources of distribution and the retail consumer with the intent of
increasing in-store displays and purchases of the client's product as well as
enhanced product and brand recognition.
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 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
2
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 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 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. The MarketVision acquisition has been accounted for as an equity
investment on the Company's consolidated balance sheet. Pursuant to the equity
method of accounting, the Company's balance sheet carrying value of the
investment is periodically adjusted to reflect the Company's 49% interest in the
operations of MarketVision. The MarketVision business, founded in 1998, provides
marketing and promotional services comparable to those provided by the Company
with an emphasis on increasing sales of its clients' products in the Hispanic
community.
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 services
include:
o strategic planning, market research and analysis, product
positioning, 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;
o providing on-site and in-store personnel to conduct and
coordinate specifically created special events, promotional entertainment
activities and sampling and demonstration activities;
3
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;
o implementing turnkey training and incentive programs, which
provide detailed documentation, program manuals, artwork, the training of a
client's marketing and sales staffs:
o 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; and
o providing the above services to clients targeting Hispanic and
other ethnic consumers.
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, aiming
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
4
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 estimated promotional marketing spending of $233.7 billion in 2002 (an
increase of 9.7% compared with 2001) consisting of industry revenues segmented
as follows: Premiums/Promotions, Point of Purchase Displays, Sponsorships,
Coupons, Specialty Printing, Licensing, Fulfillment, Agency Net Revenues,
Interactive Marketing, Games inclusive of Contests and Sweepstakes, Research,
Product Sampling, In-Store Services, and Event Marketing. 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 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 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.
5
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 - Event and entertainment
marketing programs specifically designed and produced to support clients' 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-nine salespersons operating out of fully
staffed 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.
6
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, General Motors, Starkist Seafood Company, Schieffelin &
Somerset Co., Kelly Moore Paints, Adams Golf Company, Ethicon Endo-Surgery,
Inc., The Scotts Company, Denny's, The Valvoline Company, XM Radio, Heinz North
America, Old Navy, Inc., Pfizer Corp., Coty Rimmel, College Television Network,
Fresh Express, Inc., Nintendo, Kikkoman International, Inc. and Hasbro Inc. For
the fiscal years ended March 31, 2003, 2002 and 2001, the Company had one
client, Schieffelin & Somerset Co., which, accounted for approximately 34.8%,
29.6% and 32.5%, respectively of its revenues, including approximately 19.2%,
13.6%, and 16.7%, 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, 2003, 2002
and 2001, this client, accounted for 38%, 13% and 11%, 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 their clients, 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: (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), GMR Marketing and USM&P (which are divisions
of Omnicom Group, Inc.), CMI (which is a division of Clear Channel
Communications), Pierce Promotions, Inc., and Market Drive Worldwide (which is a
division of the FCB Group). Niche competitors include Don Jagoda, Inc., which
specializes in sweepstakes, and Catalina Marketing, Inc., which specializes in
cash register couponing programs. See "Risk Factors - Competition".
Employees
The Company currently has 241 full-time and 3,375 utilized as
needed part-time employees, including 29 full-time employees involved in sales,
148 full-time and 3,375 part-time employees in marketing support, program
management and in-store sampling and demonstration, 37 full-time employees in
interactive and information technology and 27 full-time employees in finance and
administration. None of the Company's employees is represented by a labor
organization and the Company considers the relationships with its employees to
be good.
Risk Factors
Outstanding Indebtedness; Security Interest. At March 31,
2003, loans outstanding under the Company's credit agreement with its lender
(the "Credit Agreement") amounted to $5,250,000 and the Company had no borrowing
7
availability under the Credit Agreement revolving credit facility. As security
for all its obligations under the Credit Agreement, the Company granted the
lender a first priority security interest in all of its assets. In the event of
default under the Credit Agreement, at the lender's option, (i) the principal
and interest of the loans and all other obligations under the Credit Agreement
will immediately become due and payable, and (ii) the lender may exercise its
rights and remedies provided for in the Credit Agreement and the related
Security Agreements, the rights and remedies of a secured party under the
Uniform Commercial Code, and all other rights and remedies that may otherwise be
available to it under applicable law.
Dependence on Key Personnel. The Company's business is managed
by a limited number of key management and operating personnel, the loss of
certain of whom could have a material adverse impact on the Company's business.
The Company believes that its future success will depend in large part on its
continued ability to attract and retain highly skilled and qualified personnel.
Each of the Company's key executives is either a party to an employment
agreement that expires in 2006 or is expected to enter into an amendment to an
employment agreement that would extend the term thereof to expire in 2006.
Customers. A substantial portion of the Company's sales has
been dependent on one client or a limited concentration of clients. To the
extent such dependency continues, significant fluctuations in revenues, results
of operations and liquidity could arise should such client or clients reduce
their budgets allocated to the Company's activities.
Unpredictable Revenue Patterns. A significant portion of the
Company's revenues is derived from large promotional programs which originate on
a project by project basis. Since these projects are susceptible to change,
delay or cancellation as a result of specific client financial or other
marketing and manufacturing related circumstantial issues as well as changes in
the overall economy, the Company's revenue is unpredictable and may vary
significantly from period to period.
Competition. The market for promotional services is highly
competitive, with hundreds of companies claiming to provide various services in
the promotion industry. Certain of these companies may have greater financial
and marketing resources than those available to the Company. The Company
competes on the basis of the quality and the degree of comprehensive service
which it provides to its clients. There can be no assurance that the Company
will be able to continue to compete successfully with existing or future
industry competitors.
Risks Associated with Acquisitions. An integral part of the
Company's growth strategy is evaluating and, from time to time, engaging in
discussions regarding acquisitions and strategic relationships. No assurance can
be given that suitable acquisitions or strategic relationships can be
identified, financed and completed on acceptable terms, or that the Company's
future acquisitions, if any, will be successful.
Expansion Risk. The Company has in the past experienced
periods of rapid expansion. This growth has increased the operating complexity
of the Company as well as the level of responsibility for both existing and new
management personnel. The Company's ability to manage its expansion effectively
will require it to continue to implement and improve its operational and
financial systems and to expand, train and manage its employee base. The
Company's inability to effectively manage its expansion could have a material
adverse effect on its business.
Control by Executive Officers and Directors. The executive
officers of the Company collectively beneficially own a significant percentage
of the voting stock of CoActive and, in effect, have the power to influence
strongly the outcome of all matters requiring stockholder approval, including
8
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.
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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 $329,000
Principal and sales office of Optimum (1) Cincinnati, Ohio 17,000 $158,000
Principal and sales office of
U.S. Concepts (2) New York, New York 33,200 $679,000
Other sales offices of
Inmark, Optimum Chicago, Illinois 1,400
and U.S. Concepts Los Angeles, California 1,000
San Francisco, California 900
Irvine, California 1,400
Birmingham, Alabama 100
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Total 4,800 $109,000
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
Houston, Texas 350
Southfield, Michigan 350
Chicago, Illinois 800
------
Total 4,900 $ 88,000
(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.
(2) Represents a new lease with rent commencing on July 1, 2003 in replacement
of a lease for 11,500 square feet with an annual base rent of $368,000
which terminates on August 31, 2003.
With the exception of the principal office leases for Great Neck, New York,
Cincinnati, Ohio and New York, New York, which at March 31, 2003 have remaining
terms of six years, seven years and twelve years, respectively, each of the
Company's other facility leases are short term and renew annually. For a summary
of the Company's minimal rental commitments under all non-cancelable operating
leases as of March 31, 2003, see note 6 to the Notes to Consolidated Financial
Statements.
The Company considers its facilities sufficient to maintain its current
operations.
Item 3. Legal Proceedings.
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None.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
Not Applicable.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------- ---------------------------------------------------------------------
Market Information
The Company's Common Stock is traded on the Nasdaq SmallCap
Market under the symbol CMKG. The following table sets forth for the periods
indicated the high and low trade prices for CoActive Common Stock as reported by
Nasdaq. The quotations listed below reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
Common Stock
---------------------
High Low
---- ---
Fiscal Year 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
Fiscal Year 2003
- ----------------
First Quarter 2.690 1.600
Second Quarter 2.150 0.950
Third Quarter 2.990 1.450
Fourth Quarter 3.040 1.960
On June 10, 2003, there were 5,034,731 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.
No cash dividends have ever been declared or paid on CoActive
Common Stock. The Company intends to retain earnings, if any, to finance future
operations and expansion and does not expect to pay any cash dividends in the
foreseeable future. In addition, the Company is prohibited from paying any cash
dividends during the term of the Credit Agreement. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
Equity Compensation Plan Information
The following table sets forth information with respect to
equity compensation plans (including individual compensation arrangements) of
the Company as of March 31, 2003.
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 1,947,335 $2.40 255,000
Equity compensation
plans not approved
by security holders 75,000 $4.00 --
--------- ----- ---------
Total 2,022,335 $2.46 255,000
========= ===== =========
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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, 2003. The selected financial data
reported below should be read in conjunction with the consolidated financial
statements and related notes thereto and other financial information appearing
elsewhere herein.
Year Ended Year Ended Year Ended Year Ended Year Ended
March 31, March 31, March 31, March 31, March 31,
1999 (1) 2000 2001 2002 2003
------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
Sales (3) $ 39,470,987 $ 46,379,282 $ 58,609,347 $ 59,264,617 $ 59,956,204
Gross Profit 12,469,901 11,408,595 15,043,084 15,053,122 13,699,763
Income (Loss) before Provision
(Benefit) for Income Taxes 2,230,900 (1,382,476) 1,465,412 1,637,082 2,974,258
Provision (Benefit) for Income Taxes 892,361 (508,774) 583,382 708,818 1,189,676
Net Income (Loss) before Cumulative
Effect of Change in Accounting
Principle for Revenue Recognition 1,338,539 (873,702) 882,030 910,264 1,773,082
Cumulative Effect of Change in
Accounting Principle for Revenue
Recognition, Net of Income Taxes (2) -- -- (502,800) -- --
Net Income (Loss) 1,338,539 (873,702) 379,230 910,264 1,773,082
Net Income (Loss) per Common and Common
Equivalent share* before Cumulative Effect
of Change in Accounting Principle for Revenue
Recognition:
Basic $ .30 $ (.19) $ .18 $ .18 $ .35
Diluted $ .24 $ (.19) $ .16 $ .17 $ .32
Cumulative Effect of Change in
Accounting Principle for Revenue
Recognition:
Basic -- -- $ (.10) -- --
Diluted -- -- $ (.09) -- --
Net Income (Loss):
Basic $ .30 $ (.19) $ .08 $ .18 $ .35
Diluted $ .24 $ (.19) $ .07 $ .17 $ .32
Pro Forma Amounts Assuming the Change
in Accounting Principle for Revenue
Recognition is Applied Retroactively:
Net Income (Loss) 977,339 (873,702) -- -- --
Net Income (Loss) per Common Share:
Basic $ .22 $ (.19) -- -- --
Diluted $ .17 $ (.19) -- -- --
* Adjusted for the five-for-four stock split effective May 14, 1998
March 31, March 31, March 31, March 31, March 31,
1999 2000 2001 2002 2003
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Working Capital (deficiency) 3,146,441 (1,671,668) (3,877,534) (2,749,170) (718,147)
Total Assets 42,452,443 36,196,610 35,004,400 36,872,138 39,098,698
Current Debt 625,000 3,325,000 2,983,333 2,358,333 1,375,000
Long-Term Debt 11,875,000 6,160,000 3,801,667 3,333,333 4,500,000
Total Liabilities 29,875,338 23,490,282 21,886,012 22,831,586 23,277,864
Stockholders' Equity 12,577,105 12,706,328 13,118,388 14,040,552 15,820,834
(1) 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.
(2) 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.
(3) 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
$689,851, $5,794,323 $9,841,290, $8,208,694 and $11,669,664 for the years
ended March 31, 1999, 2000, 2001, 2002 and 2003, respectively.
11
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 $689,851, $5,794,323, $9,841,290, $8,208,694 and
$11,669,664 for the years ended March 31, 1999, 2000, 2001, 2002 and 2003,
respectively.
Effective in the fourth quarter of its fiscal year ended March
31, 2001 ("Fiscal 2001"), the Company changed its method of accounting for
revenue recognition in accordance with the Securities and Exchange Commission's
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). Previously, the Company had recognized revenue relating to certain
promotional projects in accordance with a client's written letter of
authorization instructing the Company to proceed with a project's required
services. In most instances, the letters of authorization contained language
which provided that the letter would be followed by a definitive contract
incorporating the terms of the letter of authorization. Under the new accounting
method adopted retroactively to April 1, 2000, the Company now recognizes
revenue on its projects at such time as it receives the definitive contract
executed by its clients. The cumulative effect of the change in accounting
12
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. 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.
Significant Customer
For the fiscal year ended March 31, 2003 ("Fiscal 2003"), the
Company had one client, Schieffelin & Somerset Co., which accounted for
approximately 34.8% of its revenues, including, pursuant to the adoption of
accounting standard EITF 01-14, approximately 19.2% of revenues attributable to
reimbursable costs and expenses for such client. In comparison, for the fiscal
year ended March 31, 2002 ("Fiscal 2002"), the same client accounted for 29.6%
of the Company's 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. At March 31, 2003 and 2002, the
same client accounted for 38% and 13% 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
accounting principles generally accepted in the United States requires the
Company to make estimates and assumptions that affect the reported amounts of
assets and liabilities and of revenues and expenses during the reporting period.
Estimates are made when accounting for revenue (as discussed below under
"Revenue Recognition"), depreciation, amortization, bad debt reserves, income
taxes and certain other contingencies. The Company is subject to risks and
uncertainties that may cause actual results to vary from estimates. The Company
reviews all significant estimates affecting the financial statements on a
recurring basis and records the effect of any adjustments when necessary.
Revenue Recognition
The Company's revenues are generated from projects subject to
contracts requiring the Company to provide its services within specified time
periods generally ranging up to twelve months. As a result, 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 estimated cost of such project. In addition, the Company also has a
contract with a client that is a cost plus fee contract. Revenues from this
13
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.
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.
In many instances, revenue recognition will not result in
related billings throughout the duration of a contract due to timing differences
between the contracted billing schedule and the time such revenue is recognized.
In such instances, when revenue is recognized in an amount in excess of the
contracted billing amount, the Company records such excess on its balance sheet
as unbilled contracts in progress. Alternatively, on a scheduled billing date,
should the billing amount exceed the amount of revenue recognized, the Company
records such excess on its balance sheet as deferred revenue.
Goodwill and Other Intangible Asset
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 consists of the cost in excess of the
fair market value of the acquired net assets of its subsidiary companies,
Inmark, Optimum and U.S. Concepts, which have been identified as the Company's
reporting units. The Company also has an intangible asset consisting of an
Internet domain name and related intellectual property. At March 31, 2003, the
Company's balance sheet reflected goodwill in the amount of approximately
$18,785,000 and an intangible asset (the domain name) in the amount of $200,000.
In accordance with SFAS 142, the Company did not amortize goodwill or intangible
assets in Fiscal 2003 and will not do so in future periods. Prior to Fiscal
2003, the Company amortized goodwill on a straight-line basis over a period of
twenty five years, recording goodwill amortization expense of approximately
$1,042,000 and $995,000 for the years ended March 31, 2002 and 2001,
respectively.
14
The Company has completed its annual impairment review for
each reporting unit as of March 31, 2003 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.
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,
2003, 2002 and 2001:
Year Ended March 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Statement of Operations Data:
Sales (1) 100.0% 100.0% 100.0%
Direct expenses (1) 77.2% 74.6% 74.3%
Gross profit 22.8% 25.4% 25.7%
Salaries, payroll taxes and benefits 9.1% 11.2% 11.6%
Selling, general and administrative expenses 8.7% 10.8% 10.1%
Total operating expenses 17.8% 22.0% 21.7%
Operating income 5.0% 3.4% 4.0%
Interest expense, net 0.5% 0.8% 1.3%
Other income (expense) 0.4% 0.1% (0.2)%
Income before provision for income taxes and
equity in loss of affiliate 5.0% 2.7% 2.5%
Provision for income taxes 2.0% 1.2% 1.0%
Equity in loss of affiliate -- -- n/a
Net income before cumulative effect of change in
accounting principle for revenue recognition 3.0% 1.5% 1.5%
Cumulative effect of change in accounting
principle for revenue recognition, net of
income taxes -- -- (1.0)%
Net income 3.0% 1.5% 0.5%
Other Data:
Pro forma amounts assuming the change in
accounting principle for revenue
recognition is applied retroactively:
Net income before effect of change in accounting
principle for revenue recognition 3.0% 1.5% 1.5%
Net income 3.0% 1.5% 0.5%
(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 $11,669,664, $8,208,694 and $9,841,290 for
the years ended March 31, 2003, 2002 and 2001, respectively, and to
decrease gross profit margins for such years.
15
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, 2003, 2002 and 2001:
Year Ended March 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Statement of Operations Data:
Sales (1) 1.2% 1.1% 26.4%
Direct expenses (1) 4.6% 1.5% 24.6%
Gross profit (9.0)% 0.1% 31.9%
Salaries, payroll taxes and benefits (17.9)% (1.8)% 14.0%
Selling, general and administrative expenses (18.1)% 7.7% (1.7)%
Total operating expenses (18.0)% 2.6% 6.1%
Operating income 49.5% (13.9)% n/a
Interest expense, net 37.2% (40.6)% (3.8)%
Other income (expense) 187.0% -- --
Income before provision for income taxes and
equity in loss of affiliate 81.7% 11.7% n/a
Provision for income taxes 67.8% 21.5% n/a
Net income before cumulative effect of change in
accounting principle for revenue recognition 94.8% 3.2% n/a
Cumulative effect of change in accounting
principle for revenue recognition n/a n/a n/a
Net income 94.8% 140.0% n/a
Other Data:
Pro forma amounts assuming the change in
accounting principle for revenue recognition is
applied retroactively:
Net income before effect of change in
accounting principle for revenue recognition 94.8% 3.2% n/a
Effect of change in accounting principle for
revenue recognition n/a n/a (30.5)%
Net income 94.8% 140.0% n/a
(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 $11,669,664, $8,208,694 and $9,841,290 for
the years ended March 31, 2003, 2002 and 2001, respectively, and to
decrease gross profit margins for such years.
Fiscal Year 2003 Compared to Fiscal Year 2002
Sales. Sales for Fiscal 2003 were $59,956,000, compared to
sales of $59,265,000 for Fiscal 2002, an increase of $691,000. Included in sales
for Fiscal 2003 and Fiscal 2002 were $11,670,000 and $8,209,000, respectively,
of reimbursable costs and expenses in accordance with EITF 01-14. Although sales
increased slightly for Fiscal 2003, without the adoption of EITF 01-14, recorded
sales for Fiscal 2003 would have been approximately $2,770,000 less than in
Fiscal 2002. The Company believes that the lack of growth in the Company's sales
in Fiscal 2003 was due primarily to the general weakness in the economy. The
Company anticipates an increase in sales in fiscal 2004 (both before and after
giving effect to EITF 01-14), as the economy continues to recover, although
there can be no assurance in that regard.
At March 31, 2003, the Company's sales backlog amounted to
approximately $20,619,000 compared to a sales backlog of approximately
$18,373,000 at March 31, 2002. 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.
16
Direct Expenses. Direct expenses for Fiscal 2003 were
$46,256,000 compared to direct expenses of $44,211,000 for Fiscal 2002, an
increase of $2,045,000. Included in direct expenses for Fiscal 2003 and Fiscal
2002 were $11,670,000 and 8,209,000, respectively, of reimbursable costs and
expenses in accordance with EITF 01-14. The increase in direct expenses in
Fiscal 2003 was primarily due to an increase in the amount of reimbursable costs
and expenses incurred by the Company on behalf of its clients.
As a result of these changes in sales and direct expenses, the
Company's gross profit for Fiscal 2003 decreased to $13,700,000 from $15,053,000
for Fiscal 2002 and gross profit as a percentage of sales decreased to 22.8% for
Fiscal 2003, compared with 25.4% for Fiscal 2002.
Operating Expenses. Operating expenses for Fiscal 2003
decreased by $2,351,000 and amounted to $10,687,000, compared to $13,038,000 for
Fiscal 2002. The decrease in operating expenses for Fiscal 2003 was primarily
the result of respective decreases in (i) salaries, related payroll taxes and
benefits in the amount of $1,192,000 and (ii) selling, general and
administrative expenses in the amount of $1,159,000. The decrease in salaries
and related payroll expenses was primarily attributable to a reduction in
personnel and, to a lesser extent, the reimbursement by MarketVision of the cost
of personnel deployed by the Company in support of MarketVision's operations.
The decrease in selling, general and administrative expenses was primarily the
result of the elimination of approximately $1,033,000 of goodwill amortization
expense in accordance with SFAS 142, which was adopted on April 1, 2002.
Interest Expense. Interest expense for Fiscal 2003 decreased
by $174,000 to $293,000, compared with interest expense in the amount of
$467,000 for Fiscal 2002. The decrease in interest expense was primarily related
to a reduction in interest rates applicable to the Company's borrowings under
its bank loans.
Other Income. Other income for Fiscal 2003 increased by
$166,000 to $255,000, compared with other income in the amount of $89,000 for
Fiscal 2002. Other income in Fiscal 2003 primarily resulted from the Company's
sale of certain of its Internet domain names (which had limited value to the
Company) for $250,000.
Provision for Income Taxes: The provision for federal, state
and local income taxes in the amount of $1,190,000 and $709,000 respectively for
Fiscal 2003 and 2002 were based upon the Company's estimated effective tax rate
for the respective fiscal year.
Equity in Loss of Affiliate. For Fiscal 2003 and 2002, the
Company recorded a loss of $12,000 and $18,000, respectively, as its share of
losses from its 49% equity investment in MarketVision.
Net Income. As a result of the items discussed above, net
income for Fiscal 2003 was $1,773,000, compared with net income of $910,000 for
Fiscal 2002.
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. Included in sales
for Fiscal 2002 and Fiscal 2001 were $8,209,000 and $9,841,000, respectively, of
reimbursable costs and expenses in accordance with EITF 01-14. The increase in
sales 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.
17
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 in accordance with EITF 01-14. The 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.
As a result of the 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 decreased to 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 $455,000 in selling, general and
administrative expenses incurred in supporting and maintaining an anticipated
increase in the level of operations and (ii) the decrease of $120,000 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 other income
resulting from a previously recorded $89,000 share of losses of an entity that
it previously had an interest in, as recoverable from a director of the Company.
Equity in Loss of Affiliate. The Company recorded $18,000 as
its share of losses from its 49% equity investment in MarketVision in Fiscal
2002.
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.
18
Liquidity and Capital Resources
On October 31, 2002, the Company entered into a Credit
Agreement (the "Credit Agreement") with Signature Bank (the "Lender") pursuant
to which the Company obtained a $3,000,000 term loan (the "Term Loan") and a
$3,000,000 three year revolving loan credit facility (the "Revolving Loan" and
together with the Term Loan, the "Loans"). The principal amount of the Term Loan
is repayable in equal installments over 48 months, with the final payment due
October 30, 2006. Contemporaneously with the closing of the Credit Agreement,
the Company borrowed $3,000,000 under the Term Loan and $1,200,000 under the
Revolving Loan and used approximately $3,700,000 of the proceeds of the Loans to
repay in full the Company's indebtedness under its prior credit agreement. The
remaining loan proceeds were used to increase the Company's working capital.
Borrowings under the Credit Agreement are evidenced by promissory notes and are
secured by all of the Company's assets. The Company paid a $60,000 closing fee
to the Lender plus its legal costs and expenses and will pay the Lender a
quarterly fee equal to .25% per annum on the unused portion of the credit
facility. Interest on the Loans is due on a monthly basis at an annual rate
equal to the Lender's prime rate plus .25% with respect to Revolving Loans and
..50% with respect to the Term Loan. The Credit Agreement provides for a number
of affirmative and negative covenants, restrictions, limitations and other
conditions including among others, (i) limitations regarding the payment of cash
dividends, (ii) use of proceeds, (iii) maintenance of minimum net worth, (iv)
maintenance of minimum quarterly earnings, (v) compliance with senior debt
leverage ratio and debt service ratio covenants, and (vi) maintenance of 15% of
beneficially owned shares of the Company held by certain members of the
Company's management.
At March 31, 2003, the Company had cash and cash equivalents
of $1,337,000, a working capital deficit of $(718,000), outstanding bank loans
of $5,250,000 and an outstanding bank letter of credit of $500,000 under the
Revolving Loan, with no additional availability under the Revolving Loan,
indebtedness of $625,000 under a subordinated note (the "Subordinated Note") and
stockholders' equity of $15,821,000. In comparison, 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 availability under
revolving loans, indebtedness under the Subordinated Note of $1,025,000 and
stockholders' equity of $14,041,000. The decrease in the working capital deficit
at March 31, 2003 was primarily attributable to the Company's net income for the
fiscal year. Although the Company currently has no borrowing availability under
the Revolving Loan, management believes cash generated from operations will be
sufficient to meet the Company's cash requirements for fiscal 2004. 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 2004 or as subsequently
required to repay Loans under the Credit Agreement.
The $623,000 decrease in the Company's cash and cash
equivalents at March 31, 2003 resulted primarily from the aggregate of the
Company's net cash used in investing activities exceeding the net cash provided
from operating and financing activities.
Net cash provided by operating activities during Fiscal 2003
was $1,433,000, due principally to the net effect of the aggregate of net income
of $1,733,000, the non-cash charges for depreciation and amortization of
$642,000, deferred income taxes of $788,000, the provision for bad debt expense
of $5,000 and share in the equity loss of an affiliate of $12,000, a decrease in
accounts receivable of $1,011,000, a decrease in prepaid expenses and other
assets of $146,000, an increase accrued job costs of $195,000, an increase in
other accrued liabilities and taxes payable totaling $372,000 and an increase in
accrued compensation of $11,000, as offset by decreases in unbilled contracts in
progress of $1,967,000, accounts payable of $831,000 and deferred revenue of
$865,000. In comparison, 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.
19
For Fiscal 2003, net cash used in investing activities
amounted to $2,150,000 as a result of $607,000 used for the purchase of fixed
assets, $700,000 used to pay an earnout in connection with the U.S. Concepts
Acquisition, the net increase of $120,000 in notes receivable from officers
resulting from $183,000 of accrued interest on a note from an officer offset by
a $63,000 repayment of another officer's loan, and $723,000 used as a working
capital advance to the Company's MarketVision affiliate. In comparison, 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.
For Fiscal 2003, financing activities provided net cash of
$94,000 resulting from increased borrowing of $183,000 and the proceeds from the
exercise of stock options in the amount of $7,000, offset by an increase in
financing costs of $96,000 incurred in connection with the Company's refinancing
of its bank debt. In comparison, for Fiscal 2002, financing activities used net
cash of $1,313,000 resulting from the repayment of borrowings and related
refinancing costs totaling $1,320,000 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, 2003, future
minimum payments required to be made by the Company in respect of its debt
obligations, operating leases, employment agreements, and earnout obligation
pursuant to the acquisition of U.S. Concepts.
Year Ending
March 31, 2004 2005 2006 2007 2008 Thereafter Total
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Contractual
Obligations
- -----------
Bank Term Loan $ 750,000 $ 750,000 $ 750,000 $ 500,000 -- -- $ 2,750,000
Bank Revolving
Credit Loan -- -- 2,500,000 -- -- -- 2,500,000
Subordinated Note 625,000 625,000
Operating Leases 1,289,000 1,342,000 1,387,000 1,386,000 1,455,000 9,371,000 16,230,000
U.S. Concepts
Earnout 593,750 -- -- -- -- -- 593,750
Employment
Agreements 2,228,000 1,806,500 1,385,000 -- -- 5,419,500
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 5,485,750 $ 3,898,500 $ 6,022,000 $ 1,886,000 $ 1,455,000 $ 9,371,000 $28,118,250
=========== =========== =========== =========== =========== =========== ===========
Commitments
- -----------
Bank Letter of
Credit (Note) -- -- $ 500,000 -- -- -- $ 500,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Line of Credit to
MarketVision $ 200,000 -- -- -- -- -- 200,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 200,000 -- $ 500,000 -- -- -- $ 700,000
=========== =========== =========== =========== =========== =========== ===========
Note: In connection with U.S. Concepts' lease of New York office facilities, the
Company has provided the landlord of such facilities with a security deposit in
the form of a letter of credit in the amount of $500,000. The letter of credit,
which was issued by the Lender under the Credit Agreement, expires October 30,
2006, at which time the Company will be required to provide a replacement letter
of credit or provide the landlord with a $500,000 cash deposit.
20
Management believes the Company will be able to satisfy its contractual
obligations and commitments from cash generated from operations together with
borrowings under its Credit Agreement and, if necessary, replacements thereof.
Impact of Recently Issued Accounting Standards
In June 2002, the FASB finalized SFAS No. 146 "Accounting for
the Costs Associated with Exit or Disposal Activities", which requires the
Company to recognize costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. The provisions of SFAS No. 146 are to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. It is anticipated that
the financial impact of SFAS No. 146 will not have a material effect on the
Company.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation," which amends SFAS No. 123 "Stock Based Compensation,"
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No.123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The disclosure provisions of SFAS
No. 148 are effective for fiscal years ending after December 15, 2002. The
Company has decided to continue to use the intrinsic value method for valuation
of stock options, but has incorporated all necessary expanded fair value
disclosures into the footnotes of the consolidated financial statements.
In September 2002, the EITF reached a consensus on issue
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables", ("EITF
00-21"). EITF 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue generating activities.
Those arrangements could involve the delivery or performance of multiple
products, services, or rights to use assets, and the performance could occur at
different points in time or over different periods of time. The issue addresses
when and, if so, how a company should divide an arrangement involving multiple
deliverables into separate units of accounting. EITF 00-21 is effective for
revenue arrangements entered into in fiscal years beginning after December 15,
2002. The Company does not expect the adoption of EITF 00-21 to have a material
impact on its financial position or results of operations.
Certain Transactions
MarketVision
On February 27, 2001, the Company acquired 49% of the shares
of capital stock of MarketVision. The MarketVision acquisition is accounted for
as an equity investment on the Company's consolidated balance sheet. Pursuant to
the equity method of accounting, the Company's balance sheet carrying value of
this investment is periodically adjusted to reflect the Company's 49% interest
in the operations of MarketVision.
In connection with the acquisition, the Company extended a
working capital credit line to MarketVision in the amount of $200,000. In
addition, from time to time the Company provides promotional and related
services for customers of MarketVision on MarketVision's behalf. In these
situations, the customers' contract is with MarketVision, and the Company
records amounts owed to it for these services and related expenses on its
balance sheet as due from affiliate. Furthermore, pursuant to an Administration
21
and Marketing Services Agreement (the "Services Agreement") between the Company
and MarketVision, the Company provides MarketVision with specific
administrative, accounting, collection, financial, marketing and project support
services for a monthly fee currently in the amount of $45,000. In accordance
with the Services Agreement, the Company dedicates and allocates certain of its
resources and the specific time of certain of its personnel to MarketVision.
At March 31, 2003, MarketVision was obligated to the Company
in the aggregate amount of $723,000 in respect of borrowings on the credit line,
services performed and expenses incurred for MarketVision's customers and
amounts due under the Services Agreement.
Officer Loan
The Company has made loans to Paul A. Amershadian, a director
of the Company and its Executive Vice President-Marketing and Sales, aggregating
$550,000, which are evidenced by an Amended and Restated Promissory Note dated
May 24, 2001. The Amended and Restated Promissory Note 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, 2003, the Amended and Restated Promissory
Note is recorded in the Company's accounts as a note receivable from officer in
the amount of $733,000, which includes accrued interest at March 31, 2003 in the
amount of $183,000.
Optimum Lease
In connection with the Company's acquisition of Optimum, the
Company entered into a lease agreement with Thomas Lachenman, a director of the
Company and former owner of Optimum, for the lease of the Cincinnati principal
office of Optimum. The lease provides for an annual rental, currently at
$147,000, adjusted annually based upon changes in the local consumer price
index. The lease expires in December 2010.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
The Company's earnings and cash flows are subject to
fluctuations due to changes in interest rates primarily from its investment of
available cash balances in money market funds with portfolios of investment
grade corporate and U.S. government securities and, secondarily, from its
long-term debt arrangements. Under its current policies, the Company does not
use interest rate derivative instruments to manage exposure to interest rate
changes. See note 7 to "Notes to Consolidated Financial Statements-Debt."
Item 8. Consolidated Financial Statements.
22
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of CoActive Marketing Group, Inc.
Reports of Independent Certified Public Accountants ..................24-25
Consolidated Balance Sheets as of March 31, 2003 and 2002................26
Consolidated Statements of Operations for the years ended
March 31, 2003, 2002 and 2001........................................27
Consolidated Statements of Stockholders' Equity for the years
ended March 31, 2003, 2002 and 2001..................................28
Consolidated Statements of Cash Flows for the years ended
March 31, 2003, 2002 and 2001 .......................................29
Notes to Consolidated Financial Statements...............................30
23
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
CoActive Marketing Group, Inc.
We have audited the accompanying consolidated balance sheets of CoActive
Marketing Group, Inc. and subsidiaries as of March 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
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, 2003 and 2002, and the results of
their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 1, the Company changed its policy of accounting for
goodwill in fiscal 2003 as required by Financial Accounting Standards Board
Statement No. 142, "Goodwill and Other Intangible Assets".
BDO SEIDMAN, LLP
Melville, New York
May 30, 2003
24
Independent Auditors' Report
The Board of Directors and Stockholders
CoActive Marketing Group, Inc.:
We have audited the consolidated statement of operations, stockholders' equity
and cash flows of CoActive Marketing Group, Inc. (formerly Inmark Enterprises,
Inc.) and subsidiaries, for the year ended March 31, 2001. 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 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 results of operations and cash flows of
CoActive Marketing Group, Inc. and subsidiaries for the year ended March 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
KPMG LLP
Melville, New York
July 3, 2001, except for
notes 1(b) and 1(m), which
are as of June 27, 2002, and
note 1(i) which is as of
June 17, 2003
25
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2002
2003 2002
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 1,336,886 $ 1,959,617
Accounts receivable, net of allowance for doubtful accounts
of $80,412 in 2003 and $75,000 in 2002 9,061,305 10,077,770
Unbilled contracts in progress 5,127,526 3,160,372
Due from affiliate 722,989 --
Prepaid taxes -- 141,831
Prepaid expenses and other current assets 730,965 878,603
----------- -----------
Total current assets 16,979,671 16,218,193
Property and equipment, net 1,781,226 1,721,176
Investment in MarketVision 296,130 307,630
Notes and interest receivable from officers 733,000 613,000
Goodwill 18,784,946 17,491,196
Intangible asset 200,000 200,000
Deferred financing costs, net of amortization of $461,145 in 2003
and $366,160 in 2002 190,353 189,029
Other assets 133,372 131,914
----------- -----------
Total assets $39,098,698 $36,872,138
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 6,103,068 $ 6,934,320
Deferred revenue 2,941,547 3,807,017
Accrued job costs 5,071,187 4,876,089
Accrued compensation 65,467 54,923
Other accrued liabilities 1,560,579 725,086
Accrued taxes payable 32,873 --
Deferred taxes payable 548,097 211,595
Notes payable bank - current 750,000 1,333,333
Subordinated notes payable - current 625,000 1,025,000
----------- -----------
Total current liabilities 17,697,818 18,967,363
Notes payable bank - long term 4,500,000 3,333,333
Deferred taxes payable 1,080,046 530,890
----------- -----------
Total liabilities 23,277,864 22,831,586
----------- -----------
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 5,034,731 shares at March 31, 2003
and 5,028,481 shares at March 31, 2002 5,034 5,028
Additional paid-in capital 6,751,792 6,744,598
Retained earnings 9,064,008 7,290,926
----------- -----------
Total stockholders' equity 15,820,834 14,040,552
----------- -----------
Total liabilities and stockholders' equity $39,098,698 $36,872,138
=========== ===========
See accompanying notes to consolidated financial statements
26
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------ ------------
Sales $ 59,956,204 $ 59,264,617 $ 58,609,347
Direct expenses 46,256,441 44,211,495 43,566,263
------------ ------------ ------------
Gross profit 13,699,763 15,053,122 15,043,084
------------ ------------ ------------
Operating Expenses:
Salaries, payroll taxes and benefits 5,454,695 6,646,730 6,766,796
Selling, general and administrative expenses 5,232,689 6,391,304 5,935,740
------------ ------------ ------------
Total operating expenses 10,687,384 13,038,034 12,702,536
------------ ------------ ------------
Operating income 3,012,379 2,015,088 2,340,548
Interest expense, net (293,471) (466,972) (786,170)
Other income (expense) 255,350 88,966 (88,966)
------------ ------------ ------------
Income before provision for income taxes
and equity in loss of affiliate 2,974,258 1,637,082 1,465,412
Provision for income taxes 1,189,676 708,818 583,382
Equity in loss of affiliate 11,500 18,000 --
------------ ------------ ------------
Net income before cumulative effect of change in
accounting principle for revenue recognition 1,773,082 910,264 882,030
Cumulative effect of change in accounting principle
for revenue recognition, net of income taxes -- -- (502,800)
------------ ------------ ------------
Net income $ 1,773,082 $ 910,264 $ 379,230
============ ============ ============
Net income per common share before cumulative
effect of change in accounting principle for revenue
recognition, Basic $ .35 .18 .18
Cumulative effect of change in accounting
principle for revenue recognition -- -- (.10)
------------ ------------ ------------
Net income $ .35 $ .18 $ .08
============ ============ ============
Net income per common share before cumulative
effect of change in accounting principle for revenue
recognition, Diluted $ .32 $ .17 $ .16
Cumulative effect of change in accounting
principle for revenue recognition -- -- (.09)
------------ ------------ ------------
Net income $ .32 $ .17 $ .07
============ ============ ============
Weighted average number of shares outstanding:
Basic 5,029,303 5,024,390 5,018,635
============ ============ ============
Diluted 5,522,784 5,502,448 5,433,708
============ ============ ============
Reconciliation of weighted average shares used for basic
and diluted computation is as follows:
Weighted average shares - Basic 5,029,303 5,024,390 5,018,635
Dilutive effect of options and warrants 493,481 478,058 415,073
------------ ------------ ------------
Weighted average shares - Diluted 5,522,784 5,502,448 5,433,708
============ ============ ============
Pro forma amounts assuming the change in accounting
principle for revenue recognition is applied retroactively:
Net income $ 882,030
============
Net income per common share:
Basic $ .18
============
Diluted $ .16
============
See accompanying notes to consolidated financial statements.
27
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001
Common Stock
par value $.001 Additional Total
------------------------- Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
----------- ----------- ----------- ----------- -----------
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
Exercise of options 6,250 6 7,194 7,200
Net income -- -- -- 1,773,082 1,773,082
----------- ----------- ----------- ----------- -----------
Balance, March 31, 2003 5,034,731 $ 5,034 $ 6,751,792 $ 9,064,008 $15,820,834
=========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
28
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 1,773,082 $ 910,264 $ 379,230
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 642,195 1,747,682 1,700,855
Provision for bad debt expense (credit) 5,412 (25,000) 100,000
Equity in loss of affiliate 11,500 18,000 --
Other -- (84,266) 88,966
Cumulative effect of change in accounting principle for revenue recognition -- -- 502,800
Deferred income taxes 788,232 579,473 125,145
Changes in operating assets and liabilities, net of effects of acquisitions:
Decrease (increase) in accounts receivable 1,011,053 1,284,754 (2,017,482)
(Increase) decrease in unbilled contracts in progress (1,967,154) (2,340,159) 295,337
Decrease (increase) in prepaid expenses and other assets 146,180 17,724 (205,699)
Decrease in prepaid taxes 141,831 17,039 97,218
(Decrease) increase in accounts payable (831,252) 2,906,957 1,911,459
Increase (decrease) in accrued job costs 195,098 (1,397,285) 718,287
Increase (decrease) in other accrued liabilities 241,743 (184,150) 173,469
Increase in accrued taxes payable 130,299 -- --
(Decrease) increase in deferred revenue (865,470) 207,114 697,984
Increase (decrease) in accrued compensation 10,544 (73,201) 15,586
----------- ----------- -----------
Net cash provided by operating activities 1,433,293 3,584,946 4,583,155
----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (607,260) (346,930) (928,436)
Purchase of intangible asset -- (200,000) --
Acquisitions, net of cash acquired (700,000) -- (500,000)
Purchase of equity investment -- -- (300,000)
Increase in notes receivable from officers (120,000) (888,000) --
Advances (to) from affiliate (722,989) 266,897 (266,897)
----------- ----------- -----------
Net cash used in investing activities (2,150,249) (1,168,033) (1,995,333)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 7,200 7,200 7,200
Financing costs (96,309) (226,381) (146,626)
Borrowings (payments) of debt, net 183,334 (1,093,334) (2,700,000)
----------- ----------- -----------
Net cash provided (used) in financing activities 94,225 (1,312,515) (2,839,426)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (622,731) 1,104,398 (251,604)
Cash and cash equivalents at beginning of year 1,959,617 855,219 1,106,823
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,336,886 $ 1,959,617 $ 855,219
=========== =========== ===========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 278,664 $ 485,735 $ 876,458
=========== =========== ===========
Income taxes paid (refunded) during the period $ 303,695 $ 82,793 $ (43,589)
=========== =========== ===========
Noncash transaction relating to investing activities consists of:
Accrued balance of earnout $ 593,750 $ -- $ --
Earnout applied to notes receivable from officers $ -- $ 500,000 $ --
=========== =========== ===========
See accompanying notes to consolidated financial statements.
29
(1) Organization and Nature of Business
-----------------------------------
CoActive Marketing Group, Inc. ("the Company") is a full service
marketing, sales promotion and interactive media services and e-commerce
provider organization which designs, develops and implements turnkey
customized national, regional and local consumer and trade promotion
programs primarily for consumer product client companies. The Company's
operations consist solely of this single segment. The Company's programs
are designed to enhance the value of its clients' budgeted expenditures
and achieve, in an objectively measurable way, its client's specific
marketing and promotional objectives.
Acquisition of U.S. Concepts, Inc.
On December 29, 1998, a wholly-owned subsidiary of the Company, U.S.
Concepts, Inc., a Delaware corporation, ("U.S. Concepts") purchased
substantially all of the assets and business from and assumed certain of
the liabilities of Murphy Liquidating Corporation formerly known as U.S.
Concepts, Inc., a New York corporation in a transaction accounted for as
a purchase for $1,660,000. The purchase price was increased by an
additional $2,293,750 (which included 100,000 shares of the Company's
common stock with an aggregate value of 218,000 at the time of
issuance), as a result of U.S. Concepts achieving specified pre-tax
earnings targets during the four year period ended December 31, 2002.
The acquisition of U.S. Concepts has been accounted for as a purchase
whereby the excess of the purchase price, including costs of the
acquisition, over the fair value of assets acquired less liabilities
assumed of $3,881,000 has been classified as goodwill and through March
31, 2002 was being amortized on a straight-line basis over a twenty-five
year period. At March 31, 2003, as specified pre-tax earning for the
respective periods through December 31, 2002 were achieved, the Company
paid additional installments of purchase price totaling $1,700,000,
which includes $1,000,000 for amounts related to prior years, and has
accrued as a current liability an additional final payment due of
$593,750. For Fiscal 2003, Fiscal 2002 and Fiscal 2001, an additional
purchase price of $1,293,750, $500,000 and $500,000, respectively, was
reflected as additional goodwill.
Acquisition of Optimum Group, Inc.
On March 31, 1998, an indirect wholly-owned subsidiary of the Company,
Optimum Group, Inc ("Optimum") purchased all of the assets and business
from and assumed substantially all of the liabilities of OG Holding
Corporation in a transaction accounted for as a purchase for
$15,743,000. The acquisition of Optimum has been accounted for as a
purchase whereby the excess of the purchase price, including the costs
of the acquisition, over the fair value of assets acquired less
liabilities assumed of $14,581,000 has been classified as goodwill and
through March 31, 2002 was being amortized over a twenty-five year
period.
Summary of Significant Accounting Policies
------------------------------------------
(a) Principles of Consolidation
---------------------------
The consolidated financial statements include the financial
statements of the Company and its wholly-owned subsidia