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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-20394
COACTIVE MARKETING GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1340408
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
415 Northern Boulevard, Great Neck, New York 11021
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 622-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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, 2003, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $19,298,935.
As of July 12, 2004, 5,941,856 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
Registrant's 2004 Annual Meeting of Stockholders Part III
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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"), U.S. Concepts LLC ("U.S. Concepts"), and TrikMedia LLC
("TrikMedia"), together the "Company", with its affiliate Garcia Baldwin, Inc.
doing business as MarketVision ("MarketVision"), 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 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, multicultural 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. CoActive 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
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clients in varied industries in identifying the best and most complete solution
for their business communication needs. Optimum offers clients leading edge
visual communications technology and Internet development, interface and access,
interactive sales training and support solutions. In addition to its role in
providing the Company's clients with an integrated total resource range of
marketing solutions, Optimum serves as an independent resource for strategic
planning, creative development, production and implementation.
On December 29, 1998, U.S. Concepts, a Delaware corporation
and wholly-owned subsidiary of the Company acquired the business of U.S.
Concepts, Inc., a New York corporation. The U.S. Concepts 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 had been accounted for as an equity
investment on the Company's consolidated balance sheet through the Company's
fiscal year ended March 31, 2003. Pursuant to the equity method of accounting,
the Company's balance sheet carrying value of the investment was periodically
adjusted to reflect the Company's 49% interest in the operations of
MarketVision. Effective in the fourth quarter of fiscal year ended March 31,
2004, pursuant to the adoption of Financial Accounting Standards Board's
("FASB") Interpretation ("FIN") No. 46 (revised 2003), "Consolidation of
Variable Interest Entities - an Interpretation of ARB No. 51," the operations
and financial statements of MarketVision for the year ended March 31, 2004 are
included in the consolidated financial statements of the Company. 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.
On October 29, 2003, TrikMedia LLC, a newly formed
wholly-owned subsidiary of the Company acquired certain of the assets and
assumed certain of the liabilities of TrikMedia, Inc. for a purchase price in
the amount of $885,000, in a transaction accounted for as a purchase by the
Company. The TrikMedia business, founded in 2000, is a full service media agency
engaged in providing digital marketing and advertising services, interactive
software development and content creation. These services complement and add
value to the Company's interactive offerings.
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;
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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;
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.
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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
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 $288.3 billion in 2003 (an
increase of 9.7% compared with 2002) consisting of industry revenues segmented
as follows: Event Marketing, Premiums/Incentives, Retail (Point of Purchase)
In-Store Services, Sponsorship, Coupons, Licensing, Specialty Printing,
Fulfillment, Agency Net Revenues, Interactive, Games/Contests/Sweepstakes,
Sampling, Direct Mail to Consumer, and Loyalty Marketing. Historically, most of
the industry's annual revenues originate from specific assignments on a project
by project basis from continuing client relationships. As the credibility and
recognized value of integrated marketing and promotional services tend to
increase, a number of clients are designating more promotion and related
specialty marketing firms as their specific promotion agency of record thereby
establishing the designated agency as an exclusive promotion service supplier.
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
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significant inducement for Trade participation and support of a promotional
program because it provides to the Trade media which the Trade would otherwise
have to purchase.
o Promotional Television - Broadcast time purchased for the
Company's clients for their own use to achieve objectives similar to those of
promotional radio, and to create an incentive for Trade participation. The
Company also adds advertising value by editing clients' television commercials
to include a specific Trade customer's name, logo and other Trade specific
information, providing an incentive similar to promotional radio for Trade
participation in the promotional program.
o Dealer Loaders - Awards, of various types and value,
consisting of merchandise, travel, entertainment and or other services, offered
to the Trade in return for providing specific in-store merchandising on behalf
of a client's product.
o Special Events/Entertainment - 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
6
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.
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, General Motors, Diageo North America, Inc., Starkist Seafood Company,
Schieffelin & Somerset Co., Kelly Moore Paints, Ethicon Endo-Surgery, Inc., The
Scotts Company, The Valvoline Company, Heinz North America, Old Navy, Inc.,
Pfizer Corp., Coty Rimmel, College Television Network, Fresh Express, Inc.,
Nintendo, Kikkoman International, Inc., Schick Manufacturing Inc. and Lowes
Companies, Inc. For the fiscal years ended March 31, 2004, 2003 and 2002, the
Company had one client, Schieffelin & Somerset Co., which accounted for
approximately 29.9%, 34.8% and 29.6%, respectively, of its revenues, inclusive
of 21.0%, 19.2% and 13.6%, 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, 2004, 2003 and 2002, this client accounted for 35%, 38% and 13%,
respectively, of accounts receivable. In addition, for the fiscal year ended
March 31, 2004, the Company had another client, Diageo North America, Inc.,
which accounted for approximately 13% of revenues, inclusive of 4.6% of revenues
attributable to reimbursable costs and expenses. At March 31, 2004, this client
accounted for 12% 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".
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Employees
The Company currently has 246 full-time and 2,447 utilized as
needed part-time employees, including 26 full-time employees involved in sales,
164 full-time and 2,445 part-time employees in marketing support, program
management and in-store sampling and demonstration, 31 full-time employees in
interactive and information technology and 25 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,
2004, loans outstanding under the Company's credit agreement with its lender
(the "Credit Agreement") amounted to $4,984,500 and the Company had no borrowing
availability under the Credit Agreement revolving credit facility. As security
for all its obligations under the Credit Agreement, the Company granted the
lender a first priority security interest in all of its assets. In the event of
default under the Credit Agreement, at the lender's option, (i) the principal
and interest of the loans and all other obligations under the Credit Agreement
will immediately become due and payable, and (ii) the lender may exercise its
rights and remedies provided for in the Credit Agreement and the related
Security Agreements, the rights and remedies of a secured party under the
Uniform Commercial Code, and all other rights and remedies that may otherwise be
available to it under applicable law. At December 31, 2003, the Company was not
in compliance with three of the financial covenants of the Credit Agreement, and
on February 10, 2004, the bank granted a waiver of the Company's non-compliance
with respect to such financial covenants as at December 31, 2003. At March 31,
2004, the Company was again not in compliance with the financial covenants in
the Credit Agreement; namely, the maximum permitted ratio of consolidated senior
funded debt to earnings before interest, taxes, depreciation and amortization,
the minimum permitted debt service coverage ratio and the requirement of no net
loss for a fiscal quarter. On July 22, 2004 the bank waived the Company's
defaults arising as a result of such noncompliance and entered into an Amended
and Restated Credit Agreement with the Company, pursuant to which, among other
things, the financial covenants were amended with respect to future periods.
Although the Company expects that it will comply with such amended financial
covenants, there can be no assurance in such regard.
Need for Additional Funding. At March 31, 2004, the Company
had no borrowing availability under its revolving line of credit. To satisfy
cash requirements during Fiscal 2004, the Company issued 652,000 shares of its
common stock to certain directors and officers to raise $1,630,000, and
temporarily increased its revolving loan facility by $500,000. The Company may
have to seek additional outside funding sources in the future to satisfy working
capital requirements if operations do not produce the level of revenue required
to operate the Company's business. There can be no assurance that outside
funding will be available to the Company at the time it is needed or in the
amount necessary to satisfy the Company's needs, or, that if such funds are
available, they will be available on terms that are favorable to the Company. If
the Company is unable to secure financing when needed, its businesses may be
adversely affected. If the Company issues additional shares of common stock or
securities convertible into common stock in order to secure additional funding,
current stockholders may experience dilution of their ownership. In the event
the Company issues securities or instruments other than common stock, the
Company may be required to issue such instruments with greater rights than those
currently possessed by holders of common stock.
Recent Loss. The Company sustained a net loss of approximately
$2,745,000 for Fiscal 2004. This loss was due in part to the unpredictable
revenue patterns associated with the Company's business, as described below.
Although the Company expects to be profitable for Fiscal 2005, there can be no
assurance in such regard or with respect to future periods.
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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
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.
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Item 2. Properties.
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The Company has the following leased facilities:
Square Annual
Facility Location Feet Base Rent
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Principal office of CoActive and
principal and sales office of Inmark Great Neck, New York 16,700 $338,000
Principal and sales office of Optimum (1) Cincinnati, Ohio 17,000 $160,000
Principal and sales office of
U.S. Concepts (2) New York, New York 33,200 $752,000
Principal office of MarketVision San Antonio, Texas 4,400 $ 57,000
Other sales offices of
Inmark, Optimum Chicago, Illinois 5,000
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 8,400 $123,000
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 1,300
Houston, Texas 350
Southfield, Michigan 350
Chicago, Illinois 5,500
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Total 10,300 $128,000
(1) The Company leases this facility at an annual rental of $160,000 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 which commenced on July 1, 2003, in
replacement of a lease for 11,500 square feet with an annual base rent of
$368,000 which terminated on August 31, 2003.
With the exception of the principal office leases for Great Neck, New York,
Cincinnati, Ohio, San Antonio, Texas and New York, New York, which at March 31,
2004 have remaining terms of five years, six years, four years and eleven 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, 2004, 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.
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Not Applicable.
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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 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
Fiscal Year 2004
- ----------------
First Quarter 3.700 1.900
Second Quarter 4.950 2.750
Third Quarter 4.900 2.640
Fourth Quarter 3.490 2.230
On June 10, 2004, there were 5,941,856 shares of CoActive
Common Stock outstanding, approximately 63 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, 2004.
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 2,130,229 $2.46 40,000
Equity compensation
plans not approved
by security holders 75,000 $4.00 --
------------- ----------- -------------
Total 2,205,229 $2.51 40,000
============= =========== =============
11
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, 2004. 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, 2000 March 31, 2001 March 31, 2002 March 31, 2003 2004(1)
-------------- -------------- -------------- -------------- --------------
Statement of Operations Data:
Sales (2) $ 46,379,282 $ 58,609,347 $ 59,264,617 $ 59,956,204 $ 69,715,457
Gross Profit 11,408,595 15,043,084 15,053,122 13,699,763 13,585,766
Income (Loss) before Cumulative Effect
of Change in Accounting Principle,
Provision (Benefit) for Income Taxes,
Equity in Loss of Affiliate and
Minority Interest in the Net Income of
Consolidated Subsidiary (1,382,476) 1,465,412 1,637,082 2,974,258 (490,120)
(Benefit) Provision for Income Taxes (508,774) 583,382 708,818 1,189,676 (33,008)
Equity in Loss of Affiliate -- -- (18,000) (11,500) --
Net Income (Loss) before Cumulative
Effect of Change in Accounting
Principle for Revenue Recognition and
Minority Interest in the Net Income of
Consolidated Subsidiary (873,702) 882,030 910,264 1,773,082 (457,112)
Cumulative Effect of Change in
Accounting Principle for Revenue
Recognition, Net of Income Taxes (3)(4) -- (502,800) -- -- (2,182,814)
Minority Interest in the Net Income
of Consolidated Subsidiary -- -- -- -- (105,359)
Net (Loss) Income (873,702) 379,230 910,264 1,773,082 (2,745,285)
Net (Loss) Income per Common and Common
Equivalent Share before Cumulative Effect
of Change in Accounting Principle for
Revenue Recognition:
Basic $ (.19) $ .18 $ .18 $ .35 $ (.11)
Diluted $ (.19) $ .16 $ .17 $ .32 $ (.11)
Cumulative Effect of Change in
Accounting Principle for Revenue
Recognition:
Basic -- $ (.10) -- -- $ (.41)
Diluted -- $ (.09) -- -- $ (.41)
Net Income (Loss):
Basic $ (.19) $ .08 $ .18 $ .35 $ (.52)
Diluted $ (.19) $ .07 $ .17 $ .32 $ (.52)
Pro Forma Amounts Assuming the Change
in Accounting Principle for Revenue
Recognition is Applied Retroactively:
Net Income (Loss) 727,828 796,496 1,128,478 224,679 (562,471)
Net Income (Loss) per Common Share:
Basic $ .16 $ .16 $ .22 $ .04 $ (.11)
Diluted $ .13 $ .15 $ .21 $ .04 $ (.11)
March 31, March 31, March 31, March 31, March 31,
2000 2001 2002 2003 2004(5)
--------- --------- --------- --------- ---------
Balance Sheet Data:
Working Capital (Deficiency) (1,671,668) (3,877,534) (2,749,170) (718,147) (4,683,066)
Total Assets 36,196,610 35,004,400 36,872,138 39,098,698 40,696,697
Current Debt 3,325,000 2,983,333 2,358,333 1,375,000 1,875,000
Long-Term Debt 6,160,000 3,801,667 3,333,333 4,500,000 3,534,500
Total Liabilities 23,490,282 21,886,012 22,831,586 23,277,864 25,518,867
Stockholders' Equity 12,706,328 13,118,388 14,040,552 15,820,834 15,177,830
(1) Includes the operations of the Company and the operations of TrikMedia,
which was acquired on October 29, 2003, for the five months ended March 31,
2004, and the operations of MarketVision, which is accounted for as a
variable interest entity, for the year ended March 31, 2004, pursuant to
Company's adoption of Financial Accounting Standards Board's ("FASB")
Interpretation ("FIN") No. 46 (revised 2003), "Consolidation of Variable
Interest Entities-an Interpretation of ARB No. 51," as the Company has
determined that it is the primary beneficiary of MarketVision.
(2) Restated for the years ended March 31, 2000, 2001 and 2002 to reflect the
adoption of EITF 01-14, Income Statement Characterization of Reimbursements
Received for "Out-of-Pocket" Expenses Incurred ("EITF 01-14"). EITF 01-14
requires reimbursements received for "out-of-pocket" expenses to be
characterized as revenues. The resulting costs are now recorded as 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 $5,794,323, $9,841,290,
$8,208,694, $11,669,664 and $18,088,851 for the years ended March 31, 2000,
2001, 2002, 2003 and 2004, respectively.
12
(3) For the year ended March 31, 2001, the cumulative effect of change in
accounting principle for revenue recognition is a one-time non-cash charge
relating to the Company's adoption of Staff Accounting Bulletin No. 101
("SAB 101"). SAB 101 was issued by the Securities and Exchange Commission
("SEC") in December 1999. SAB 101 provides guidance related to revenue
recognition policies based on interpretations and practices followed by the
SEC. The impact of the Company's adoption of SAB 101 was to defer revenue
recognition and the related expense for certain portions of revenue and
expense previously recognized by the Company under its project arrangements
with its clients into future accounting periods.
(4) For the year ended March 31, 2004, the cumulative effect of change in
accounting principle for revenue recognition is a one-time non-cash charge
relating to the Company's adoption of EITF 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables ("EITF 00-21") issued in May 2003.
The Company adopted the provisions of EITF 00-21 effective April 1, 2003,
the beginning of the Company's fiscal year ended March 31, 2004. EITF 00-21
provides guidance related to revenue recognition with respect to contracts
with multiple revenue generating activities. The impact of the Company's
adoption of EITF 00-21 was to defer revenue recognition and the related
expense for certain portions of revenue and expense previously recognized
by the Company under its project arrangements with its clients into future
accounting periods.
(5) Includes the accounts of MarketVision, pursuant to the Company's adoption
of FIN 46.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------ of Operations.
-----------------------------------------------------------------------
Forward Looking Statements.
This report contains forward-looking statements which the
Company believes to be within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, that are based on beliefs of the Company's management as well as
assumptions made by and information currently available to the Company's
management. When used in this report, the words "estimate," "project,"
"believe," "anticipate," "intend," "expect," "plan," "predict," "may," "should,"
"will," the negative thereof or other variations thereon or comparable
terminology are intended to identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events based on
currently available information and are subject to risks and uncertainties that
could cause actual results to differ materially from those contemplated in those
forward-looking statements. Factors that could cause actual results to differ
materially from the Company's expectations include but are not limited to those
described above in "Risk Factors". Other factors may be described from time to
time in the Company's public filings with the Securities and Exchange
Commission, news releases and other communications. The forward-looking
statements contained in this report speak only as of the date hereof. The
Company does not undertake any obligation to release publicly any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
Overview
Fiscal 2004 was a difficult year during which the Company's
expectations were not met. Independent of the effect of a non-cash charge taken
as a result of a change in accounting principle, the Company had a net loss of
$562,000 culminating primarily from the combined impact of (i) lower than
expected sales volume, due in part to a delay in the implementation of marketing
programs as a result of a grocers' strike in southern California which was
recently settled, and (ii) increased operating expenditures related to added
personnel, and increased spending for advertising and marketing in anticipation
of increased sales volume. Following the settlement of the strike, a number of
contracts that had been delayed have been entered into, and related revenues are
expected to be recognized in Fiscal 2005. In addition, to better align and
maintain the cost of the Company's operations with sales levels, management
initiated cost saving measures during Fiscal 2004 by cutting back on personnel
and reducing other operating costs. Sales are expected to improve in Fiscal
2005, and, coupled with the full impact of the reduction in costs initiated
during Fiscal 2004, the Company expects to realize a profit for Fiscal 2005.
13
In Fiscal 2004, to further enhance the performance of its
interactive activities, the Company acquired TrikMedia, a full service
multimedia agency engaged in providing complementary digital marketing and
advertising services, interactive software development and content creation.
During Fiscal 2004, the Company's working capital was
constrained due to the funding of the TrikMedia acquisition, together with
expenditures for fixed assets, incurred in connection with the relocation of the
Company's New York City office, and increased operating expenses. Between
January and February 2004, to provide added working capital, the Company raised
$1,630,000 through sales of its capital stock to a group of its directors and an
officer of one of its subsidiaries.
At March 31, 2004, the Company was not in compliance with
three of the financial covenants of its Credit Agreement. On July 22, 2004, the
bank waived the Company's noncompliance with such financial covenants and, as
described further under "Liquidity and Capital Resources" below, entered into an
Amended and Restated Credit Agreement with the Company, pursuant to which, among
other things, such financial covenants were amended for future periods.
The following information should be read together with the
consolidated financial statements and notes thereto included elsewhere herein.
Adoption of Accounting Standards
The Company adopted EITF 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21") in the fourth quarter of
Fiscal 2004. EITF 00-21, which became effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003, provides guidance on how
to determine when an arrangement that involves multiple revenue-generating
activities or deliverables should be divided into separate units of accounting
for revenue recognition purposes, and if this division is required, how the
arrangement consideration should be allocated among the separate units of
accounting. Prior to the adoption of EITF 00-21, the Company recognized revenue
on its broadcast media and special event contracts on the
percentage-of-completion method over the life of the contract as identifiable
phases of services, such as concept creation and development, media purchase,
production, media airing and event execution occurred. Under that method, the
Company generally recognized a portion of revenues attributable to those
contracts upon signing by the Company's clients. Pursuant to EITF 00-21, the
Company now recognizes all of the contract's revenue as the media is aired and
the events take place, without regard to the timing of the contracts' signing or
when cash is received under these contracts. The adoption of EITF 00-21
(effective April 1, 2003) resulted in a non-cash charge reported as a cumulative
effect of a change in accounting principle of $2,183,000. The pro forma amounts
presented in the consolidated statements of operations were calculated assuming
the change in accounting principal was made retroactively to all years
presented. For Fiscal 2004, the adoption of EITF 00-21 resulted in an increase
in sales of $2,479,000 and an increase in direct expenses of $1,639,000. After
giving effect to the implementation of EITF 00-21 and before the cumulative
effect of the change in method of accounting for revenue recognition, the
Company had a net loss of $(562,000) or $(.11) per common share for Fiscal 2004.
In January 2003, the FASB issued Interpretation No. 46 ("FIN
46"),"Consolidation of Variable Interest Entities" with the objective of
improving financial reporting by companies involved with variable interest
entities. A variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights, or (b) has equity investors that do
not provide sufficient financial resources for the entity to support its
activities. Historically, entities generally were not consolidated unless the
entity was controlled through voting interests. FIN 46 changes that by requiring
a variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. A company that consolidates a variable interest entity is called the
"primary beneficiary" of that entity. The provisions regarding implementation
dates were revised by FIN 46 (revised) ("FIN 46R"). The consolidation
14
requirements of FIN 46R apply to variable interest entities in the first year or
interim period ending after March 15, 2004. Effective in the fourth quarter of
Fiscal 2004, the Company adopted FIN 46R as it relates to the activities of its
MarketVision affiliate. Accordingly, the operations and financial statements of
MarketVision for the year ended March 31, 2004 are included in the consolidated
financial statements of the Company, whereas for prior fiscal years, under the
equity method of accounting, the Company reported its investment in MarketVision
as adjusted for its share of net income or loss in the Company's financial
statements. The effect of the Company's adoption of FIN 46 did not impact the
Company's net loss.
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 $5,794,323, $9,841,290, $8,208,694,
$11,669,664 and $18,088,851 for the years ended March 31, 2000, 2001, 2002, 2003
and 2004, 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 then new
accounting method adopted retroactively to April 1, 2000, as modified by the
Company's adoption of EITF 00-21, absent payment for services actually rendered,
the Company will not recognize revenue without receipt of a definitive contract
executed by its clients. The cumulative effect of the change in accounting
principle on prior years resulted in an after tax charge to income of $502,800,
which is included in the net income for the fiscal year ended March 31, 2001.
Significant Customers
For the fiscal year ended March 31, 2004 ("Fiscal 2004"), the
Company had one client, Schieffelin & Somerset Co., which accounted for
approximately 29.9% of its revenues, inclusive of, pursuant to the adoption of
accounting standard EITF 01-14, approximately 21.0% of revenues attributable to
reimbursable costs and expenses for such client. In comparison, for the fiscal
year ended March 31, 2003 ("Fiscal 2003"), the same client accounted for 34.8%
of the Company's revenues, inclusive of, pursuant to the adoption of accounting
standard EITF 01-14, approximately 19.2% of revenues attributable to
reimbursable costs and expenses for such client. At both March 31, 2004 and
2003, the same client accounted for 35% and 38%, respectively, of accounts
receivable. In addition, at March 31, 2004, the Company had another client which
accounted for approximately 13% of its revenues, inclusive of 4.6% of revenues
attributable to reimbursable costs and expenses, and 12% of its accounts
receivable. To the extent the Company's sales are dependent on one client or a
limited concentration of clients, and such dependency continues, significant
fluctuations in revenues, results of operations and liquidity could arise should
such client or clients reduce their budgets allocated to the Company's
activities.
15
Critical Accounting Policies
The Company's significant accounting policies are described in
Note 1 to the consolidated financial statements included in Item 8 of this Form
10-K. The Company believes the following represent its critical accounting
policies:
Estimates and Assumptions
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires the
Company to make estimates and assumptions that affect the reported amounts of
assets and liabilities and of revenues and expenses during the reporting period.
Estimates are made when accounting for revenue (as discussed below under
"Revenue Recognition"), depreciation, amortization, bad debt reserves, income
taxes and certain other contingencies. The Company is subject to risks and
uncertainties that may cause actual results to vary from estimates. The Company
reviews all significant estimates affecting the financial statements on a
recurring basis and records the effect of any adjustments when necessary.
Revenue Recognition
The Company's revenues are generated from projects subject to
contracts requiring the Company to provide its services within specified time
periods generally ranging up to twelve months. As a result, on any given date,
the Company has projects in process at various stages of completion. Depending
on the nature of the contract, revenue is recognized as follows: (i) on time and
material service contracts, revenue is recognized as services are rendered and
the costs are incurred; (ii) on fixed price retainer contracts, revenue is
recognized on a straight-line basis over the term of the contract; (iii) on
fixed price multiple services contracts, revenue is recognized over the term of
the contract for the fair value of segments of the services rendered which
qualify as separate activities or delivered units of service, to the extent
multi-service arrangements are deemed inseparable, revenue on these contracts is
recognized as the contracts are completed. 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. In addition, on
contracts where costs are incurred prior to such contracts revenue recognition,
the Company records such costs on its balance sheet as deferred contract costs.
16
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, U.S. Concepts, MarketVision and TrikMedia, 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, 2004, the Company's balance sheet reflected goodwill in the amount
of approximately $19,896,000 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 2004 and 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 for the year ended March 31,
2002.
The Company has completed its annual impairment review for
each reporting unit as of March 31, 2004 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 tables reflect selected pro forma financial data
for the fiscal years ended March 31, 2003 and 2002 retroactively adjusted for
the EITF 00-21 accounting change effective April 1, 2003, exclusive (i) of the
associated cumulative effect of the change in accounting principle compared to
fiscal year ended March 31, 2004 operating results as reported and (ii) the pro
forma operating results of MarketVision for the fiscal years ended March 31,
2003 and 2002:
17
Year Ended March 31,
--------------------------------------------
As Reported Pro Forma
------------- ----------------------------
2004 2003 2002
------------ ------------ ------------
Operations Data:
Sales $ 69,715,457 $ 53,500,998 $ 59,887,678
Direct expenses 56,129,691 42,381,906 44,470,866
Gross profit 13,585,766 11,119,092 15,416,812
Salaries, payroll taxes and benefits 6,134,248 5,454,695 6,646,730
Selling, general and administrative expenses 7,701,350 5,232,689 6,391,304
Total operating expenses 13,835,598 10,687,384 13,038,034
Operating (loss) income (249,832) 431,708 2,378,778
Interest expense, net (240,288) (293,471) (466,972)
Other income -- 255,350 88,966
(Loss) income before cumulative effect of change in
accounting principle, (benefit) provision for
income taxes, equity in loss of affiliate and
minority interest in net income of consolidated
subsidiary (490,120) 393,587 2,000,772
(Benefit) provision for income taxes (33,008) 157,408 854,294
Equity in loss of affiliate -- (11,500) (18,000)
Minority interest in net income of consolidated
subsidiary (105,359) -- --
Net (loss) income (562,471) 224,679 1,128,478
Per Share Data
Basic (loss) income per share applicable to
common shareholders $ (.11) $ .04 $ .22
Diluted (loss) income per share applicable to
common shareholders $ (.11) $ .04 $ .21
Weighted Average Shares Outstanding
Basic 5,257,241 5,029,303 5,024,390
Diluted 5,257,241 5,522,784 5,502,448
As Reported Pro Forma As Reported
-------------- -------------- --------------
March 31, 2004 April 1, 2003 March 31, 2003
-------------- -------------- --------------
Financial Position
Unbilled contracts in progress $ 2,083,507 $ 956,435 $ 5,127,526
Deferred contract costs 339,100 2,089,043 --
Total assets 40,696,697 37,016,650 39,098,698
Deferred revenue 7,932,115 8,818,710 2,941,547
Accrued job costs 2,860,550 750,000 5,071,187
Deferred taxes payable 63,016 172,933 1,628,143
Retained earnings 6,318,723 6,881,194 9,064,008
Stockholders' equity 15,177,830 13,638,020 15,820,834
Total liabilities and stockholders' equity 40,696,697 37,016,650 39,098,698
The following table presents as reported and pro forma
operating data expressed as a percentage of sales for each of the fiscal years
ended March 31, 2004, 2003 and 2002, respectively, retroactively adjusted for
the EITF 00-21 accounting change effective April 1, 2003, exclusive (i) of the
associated cumulative effect of the change in accounting principle and (ii) the
pro forma operating results of MarketVision for the fiscal years ended March 31,
2003 and 2002:
18
Year Ended March 31,
---------------------------------------
As Reported Pro Forma
---------- ------------------------
2004 2003 2002
---------- ---------- ----------
Statement of Operations Data:
Sales 100.0% 100.0% 100.0%
Direct expenses 80.5% 79.2% 74.3%
Gross profit 19.5% 20.8% 25.7%
Salaries, payroll taxes and benefits 8.8% 10.2% 11.1%
Selling, general and administrative expenses 11.0% 9.8% 10.7%
Total operating expenses 19.8% 20.0% 21.8%
Operating (loss) income (0.4)% 0.8% 4.0%
Interest expense, net 0.3% 0.5% 0.8%
Other income -- 0.5% 0.1%
(Loss) income before (benefit) provision for income
taxes, equity in loss of affiliate and minority
interest in net income of consolidated subsidiary (0.7)% 0.7% 3.3%
(Benefit) provision for income taxes -- 0.3% 1.4%
Minority interest in net income of consolidated
subsidiary (0.2)% -- --
Net (loss) income (0.8)% 0.4% 1.9%
The following table presents as reported and pro forma
operating data expressed as a comparative percentage of change from the
immediately preceding fiscal year for each of the fiscal years ended March 31,
2004, 2003 and 2002, respectively, retroactively adjusted for the EITF 00-21
accounting change effective April 1, 2003, exclusive of (i) the associated
cumulative effect of the change in accounting principle and (ii) the pro forma
operating results of MarketVision for the fiscal years ended March 31, 2003 and
2002:
Year Ended March 31,
--------------------------------------------------
As Reported Pro Forma
------------ -------------------------------
2004 2003 2002
------------ ------------ ------------
Statement of Operations Data:
Sales 30.3% (10.7)% (1.8)%
Direct expenses 32.4% (4.7)% (3.5)%
Gross profit 22.2% (27.9)% 3.5%
Salaries, payroll taxes and benefits 12.5% (17.9)% (1.8)%
Selling, general and administrative expenses 47.2% (18.1)% 7.7%
Total operating expenses 29.5% (18.0)% 2.6%
Operating (loss) income (157.9)% (81.9)% 8.2%
Interest expense, net (18.1)% (37.2)% (40.6)%
Other income (100.0)% 187.0% (200.0)%
(Loss) income before (benefit) provision for income
taxes, equity in loss of affiliate and minority
interest in net income of consolidated subsidiary (224.5)% (80.3)% 51.2%
(Benefit) provision for income taxes (121.0)% (81.6)% 62.3%
Minority interest in net income of consolidated
subsidiary 100.0% -- --
Equity in (loss) of affiliate (100.0)% (36.1)% 100.0%
Net (loss) income (350.3)% (80.1)% 41.7%
19
Fiscal Year 2004 Compared to Fiscal Year 2003
Sales. Sales for Fiscal 2004 were $69,715,000, compared to
sales of $59,956,000 for Fiscal 2003, an increase of $9,759,000. Included in
Fiscal 2004 sales were (i) $18,089,000 of reimbursable costs and expenses in
accordance with EITF 01-14, (ii) $2,479,000 of sales applicable to the net
effect of sales included in Fiscal 2004 and sales deferred to Fiscal 2005 of
$10,048,000 and $7,569,000, respectively, resulting from the adoption of EITF
00-21, (iii) $4,743,000 of sales of MarketVision resulting from the adoption of
FIN 46R and (iv) $1,059,000 of sales of TrikMedia acquired on October 29, 2003.
In comparison, sales for Fiscal 2003 included $11,670,000 of sales solely
applicable to the adoption of EITF 01-14. Without the adoption of EITF 01-14,
EITF 00-21, FIN 46R and the acquisition of TrikMedia, the recorded sales for
Fiscal 2004 would have been approximately $4,941,000 less than in Fiscal 2003.
This net decrease in sales for Fiscal 2004 was primarily attributable to a
shortfall in the contracting of new sales, a part of which was due to a delay
caused by the extended period of a grocer's strike in southern California.
Direct Expenses. Direct expenses for Fiscal 2004 were
$56,130,000 compared to direct expenses of $46,256,000 for Fiscal 2003, an
increase of $9,874,000. Included in Fiscal 2004 direct expenses were (i)
$18,089,000 of reimbursable costs and expenses in accordance with EITF 01-14,
(ii) $1,639,000 of direct expenses applicable to the net effect of direct
expenses included in Fiscal 2004 and direct expenses deferred to Fiscal 2005 of
$6,410,000 and $4,771,000, respectively, resulting from the adoption of EITF
00-21, (iii) $3,393,000 of direct expenses of MarketVision resulting from the
adoption of FIN 46R and (iv) $835,000 of direct expenses of TrikMedia. In
comparison, direct expenses for Fiscal 2003 included $11,670,000 of direct
expenses solely applicable to the adoption of EITF 01-14. Without the adoption
of EITF 01-14, EITF 00-21, FIN 46R and the acquisition of TrikMedia, the
recorded direct expenses for Fiscal 2004 would have been approximately
$2,412,000 less than in Fiscal 2003. This net decrease in direct expenses for
Fiscal 2004 was primarily due to the net decrease in sales for the year.
As a result of the changes in sales and direct expenses,
inclusive of $840,000 and $1,350,000, respectively, of gross profit applicable
to the adoption of EITF 00-21 and FIN 46R, the Company's gross profit for Fiscal
2004 decreased to $13,586,000 from $13,700,000 for Fiscal 2003 and gross profit
as a percentage of sales decreased to 19.5% for Fiscal 2004, compared with 22.8%
for Fiscal 2003. Without the impact of the adoption of EITF 01-14, EITF 00-21,
FIN 46R and the acquisition of TrikMedia, gross profit as a percentage of sales
for Fiscal 2004 was 25.8% compared to 28.4% for Fiscal 2003 as a result of the
aggregate mix of Fiscal 2004 client projects having a lower margin of gross
profit.
Operating Expenses. Operating expenses for Fiscal 2004
increased by $3,148,000, inclusive of $1,076,000 applicable to MarketVision, and
amounted to $13,835,000, compared to $10,687,000 for Fiscal 2003. The increase
in operating expenses for Fiscal 2004 was primarily the result of increases in
(i) salaries, related payroll taxes and benefits in the amount of $679,000,
inclusive of $136,000 applicable to MarketVision and (ii) selling, general and
administrative expenses in the amount of $2,469,000 inclusive of $940,000
applicable to MarketVision, to support an anticipated increase in the level of
operations that did not materialize. Excluding MarketVision, the increase in
salaries and related payroll expenses was primarily attributable to the cost of
added personnel. The increase in selling, general and administrative expenses
was primarily the result of the increases in expenses incurred for (i)
marketing, advertising and related travel and entertainment expenses in the
amount of $538,000, (ii) professional fees, inclusive of personnel recruitment
fees, in the amount of $197,000, (iii) other selling, general and administration
expenses in the amount of $579,000 and (iv) the provision for bad debts, for
potentially non-collectible accounts receivable, in the amount of $215,000.
20
Interest Expense. Interest expense for Fiscal 2004, inclusive
of $40,000 of interest expense applicable to MarketVision, decreased by $53,000
to $240,000, compared with interest expense in the amount of $293,000 for Fiscal
2003. The decrease in interest expense was primarily related to the $466,000
reduction in the Company's overall debt together with lower interest rates on
the Company's bank borrowings.
Other Income. Other income in Fiscal 2003 primarily resulted
from the Company's sale of certain of its Internet domain names, of limited
value to the Company, for $250,000.
(Benefit) Provision for Income Taxes. The (benefit) for
federal, state and local income taxes for Fiscal 2004 in the amount of $(33,000)
was net of a provision for income taxes for MarketVision in the amount of
$35,000 compared with a provision for federal, state and local income taxes in
the amount of $1,190,000 for Fiscal 2003. Both the (benefit) and provision for
income taxes for Fiscal 2004 and 2003 were based upon the Company's estimated
effective tax rate for each respective fiscal year.
Equity in Loss of Affiliate. For Fiscal 2004, the Company
includes the operations of its affiliate in its consolidated financial
statements, whereas for Fiscal 2003 the Company recorded a loss of $12,000 as
its share of losses from its 49% equity investment in MarketVision.
Net (Loss) Income Before Cumulative Effect of Change in
Accounting Principle for Revenue Recognition and Minority Interest in the Net
Income of Consolidated Subsidiary. The Company's net loss before the effect of
the change in accounting principle for revenue recognition and minority interest
in the net income of consolidated subsidiary for Fiscal 2004 was $(562,000)
compared with net income of $1,773,000 for Fiscal 2003.
Cumulative Effect of Change in Accounting Principle for
Revenue Recognition. For Fiscal 2004, the Company incurred a non-cash charge
of $2,183,000 representing the cumulative effect of a change in accounting
principle related to its adoption of EITF 00-21 on a cumulative basis as of
April 1, 2003.
Minority Interest in the Net Income of Consolidated
Subsidiary. For Fiscal 2004, the Company reflected a non-cash charge of
$105,000 representing a third party's owned interest in the net income of
MarketVision related to the Company's adoption of FIN 46R.
Net (Loss) Income. As a result of the items discussed above,
net loss for Fiscal 2004 was $(2,745,000), compared with net income of
$1,773,000 for Fiscal 2003.
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.
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.
21
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.
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)
22
maintenance of minimum quarterly earnings, (v) compliance with senior debt
leverage ratio and debt service ratio covenants, and (vi) maintenance of 15% of
beneficially owned shares of the Company held by certain members of the
Company's management. On July 18, 2003, the Credit Agreement was amended
pursuant to which the revolving loan credit facility was increased by $500,000
to $3,500,000. To provide for anticipated near term additional working capital
needs, on November 24, 2003, the Credit Agreement was further amended pursuant
to which the revolving loan credit facility was temporarily increased by
$500,000 to $4,000,000 until January 31, 2004. Such additional $500,000 was
borrowed on November 24, 2003 and pursuant to the amendment, the Company repaid
such amount on January 29, 2004.
At December 31, 2003, the Company was not in compliance with
three of the financial covenants of the Credit Agreement, namely: (i) the
maximum permitted ratio of consolidated senior funded debt to earnings before
interest, taxes, depreciation and amortization, (ii) the minimum permitted debt
service coverage ratio and (iii) the requirement of no net loss for a fiscal
quarter. On February 10, 2004, the Lender granted a waiver of the Company's
non-compliance with respect to such financial covenants as at December 31, 2003.
At March 31, 2004, the Company was again not in compliance
with the same three financial covenants of the Credit Agreement, and in
addition, the Lender determined that the Company's Revolving Loan borrowings
exceeded the amount of such borrowings permitted under the Credit Agreement. On
July 22, 2004 the Lender waived the Company's defaults arising as a result of
such noncompliance and entered into an Amended and Restated Credit Agreement
with the Company. The Amended and Restated Credit Agreement subjects the Company
to the following financial covenants:
o beginning June 30, 2005 and on the last day of each succeeding
fiscal quarter, the Company's ratio of consolidated senior
funded debt to earnings before interest, taxes, depreciation
and amortization (calculated in accordance with the Amended
and Restated Credit Agreement), cannot exceed 1.50:1.00;
o beginning June 30, 2005 and on the last day of each succeeding
fiscal quarter, the Company's debt service coverage ratio
(calculated in accordance with the Amended and Restated Credit
Agreement), cannot be less than 2.00:1.00;
o the Company is required to have a minimum net worth
(calculated in accordance with the Amended and Restated Credit
Agreement), of at least $15,500,000 on March 31, 2005 and
March 31, 2006; and
o the Company is required to generate net income before taxes
(calculated in accordance with the Amended and Restated Credit
Agreement) of at least $250,000 for the fiscal quarter ended
June 30, 2004 and at least $1,000,000 for each succeeding
fiscal quarter.
In addition, pursuant to the Amended and Restated Credit
Agreement (i) the revolving loan facility was reduced from $3,500,000 to
$1,100,000, and $2,400,000 of outstanding Revolving Loans were converted to a
term loan, requiring principal monthly repayments in the amount of $100,000 each
commencing September 1, 2004, (ii) interest on term loans (including the
$2,400,000 of Revolving Loans converted to a term loan) was increased to the
Lender's prime rate plus 1.0%, and interest on Revolving Loans was increased to
the Lender's prime rate plus .50%, (iii) the Company's cash deposits maintained
with the Lender cannot be less than $3,000,000 at any time, and (iv) the Company
paid the Lender a $25,000 amendment fee.
23
The following analysis of the Company's statements of cash
flows compares (i) the Company's March 31, 2004 balance sheet with its pro forma
balance sheet at April 1, 2003, after recording the cumulative effect of the
change in accounting principle for revenue recognition and (ii) the Company's
statement of operations as of March 31, 2004 with its pro forma statement of
operations as of March 31, 2003, after recording the cumulative effect of the
change in accounting principle for revenue recognition. The aforementioned
financial statements as of March 31, 2004 include the balance sheet accounts and
operations of MarketVision whereas the pro forma financial statements exclude
such balance sheet accounts and operations of MarketVision. Summarized financial
information of MarketVision for the year ended March 31, 2004 is as follows:
Balance sheet information:
Cash $ 107,000
Accounts receivable 845,000
Unbilled contracts in progress 287,000
Prepaid expenses and other current assets 86,000
Deferred taxes 22,000
Property and equipment, net 110,000
Accounts payable 64,000
Deferred revenue 141,000
Accrued job costs 938,000
Accrued compensation 15,000
Statement of operations information:
Sales $ 4,743,000
Direct expenses 3,393,000
Gross profit 1,350,000
Operating expenses 1,076,000
Interest expense 40,000
Provision for income taxes 35,000
Net income 199,000
At March 31, 2004, the Company had cash and cash equivalents
of $3,164,000, a working capital deficit of $(4,683,000), which includes
approximately $7,900,000 of deferred revenue, outstanding bank loans of
$4,985,000 and an outstanding bank letter of credit of $500,000 under the
Revolving Loan, with no additional availability under the Revolving Loan,
indebtedness of $425,000 under a subordinated note (the "Subordinated Note") and
stockholders' equity of $15,178,000. In comparison, at April 1, 2003, after
recording the cumulative effect of change in accounting principle for revenue
recognition, the Company had cash and cash equivalents of $1,337,000, a working
capital deficit of $(3,981,000), 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 and stockholders' equity of $13,638,000. The comparative
increase in the working capital deficit at March 31, 2004 was primarily
attributable to the Company's net loss for the year before the cumulative effect
of change in accounting principle for revenue recognition and the increase in
the current maturity of the Company's note payable to the bank.
For Fiscal 2004, the Company funded its activities from cash
provided by operating activities, Revolving Loan borrowings under the Credit
Agreement and cash provided from the sale of shares of the Company's capital
stock, as described further below. With no borrowing ability currently available
under the Revolving Loan, management believes cash generated from operations
will be sufficient to meet the Company's cash requirements for Fiscal 2005,
although there can be no assurance in this regard. To the extent that the
Company is required to seek additional external financing, there can be no
assurance that the Company will be able to obtain such additional funding to
satisfy its cash requirements for Fiscal 2005 or as subsequently required to
repay Loans under the Credit Agreement.
24
The $1,827,000 increase in the Company's cash and cash
equivalents at March 31, 2004 resulted primarily from the aggregate of the
Company's net cash from operating activities and net financing activities
exceeding the net cash used in investing activities.
Net cash provided by operating activities during Fiscal 2004
was $2,646,000, which was attributable to the net loss of $(2,745,000),
inclusive of $199,000 of net income of MarketVision, offset by the net of (i)
non-cash charges for depreciation and amortization of $798,000, inclusive of
$25,000 applicable to MarketVision, the provision for bad debt expense of
$215,000, the provision for deferred income taxes of $46,000, other of $4,000
and the cumulative effect for the change in accounting principle of $2,183,000;
(ii) the minority interest in the net income of consolidated subsidiary of
$102,000; and (iii) cash provided by the change in operating assets and
liabilities of $2,043,000. The change in operating assets and liabilities was
due to the net effect of the aggregate of the following:
(i) an increase in accounts payable of $1,075,000, net of
$283,000 attributable to MarketVision,
(ii) an increase in accrued job costs of $1,286,000 (as a
result of a balance of $750,000 at April 1, 2003,
after recording the amount of change in accounting
principle for revenue recognition of $4,321,000)
increasing to $2,861,000 at March 31, 2004, inclusive
of $114,000 attributable to MarketVision,
(iii) a decrease in deferred contract costs of $1,750,000
(as a result of a $2,089,000 balance at April 1,
2003, the effect of recording $2,089,000 for the
amount of change in accounting principle for revenue
recognition) decreasing to $339,000 at March 31,
2004,
(iv) a decrease in prepaid expenses and other assets of
$302,000 and increases in other accrued liabilities,
accrued compensation and accrued taxes payable
totaling $192,000, net of $22,000 of prepaid expenses
and inclusive of $50,000 of accrued liabilities
attributable to MarketVision, offset by
(i) an increase in accounts receivable of $765,000, net
of $49,000 attributable to MarketVision,
(ii) an increase in unbilled contracts in progress of
$290,000 (as a result of a $956,000 balance at April
1, 2003, after recording the amount of change in
accounting principle for revenue recognition of
$4,171,000) increasing to $2,083,000 at March 31,
2004, net of $550,000 attributable to MarketVision,
(iii) a decrease in deferred revenue of $1,057,000 (as a
result of a $8,819,000 balance at April 1, 2003,
after recording the amount of change in accounting
principle for revenue recognition of $5,877,000)
decreasing to $7,932,000 at March 31, 2004, net of
$137,000 attributable to MarketVision,
(iv) an increase in prepaid taxes of $450,000.
For Fiscal 2004, net cash used in investing activities
amounted to $2,057,000 as a result of $1,364,000 used for the purchase of fixed
assets, inclusive of $25,000 applicable to MarketVision, $700,000 used for the
TrikMedia acquisition, and $29,000 accrued as interest on a note from an officer
offset by $36,000 of cash in consolidation of MarketVision. In comparison 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. The Company does not expect to make material investments
in fixed assets in Fiscal 2005.
25
For Fiscal 2004, financing activities provided net cash of
$1,238,000 resulting from proceeds of $1,630,000 from the sale of shares of the
Company's common stock, proceeds of $98,000 from the exercise of stock options
and warrants and the issuance of stock in payment of an earnout pertaining to
the Company's acquisition of U.S. Concepts, offset by payment of $466,000 to
reduce the Company's overall debt and payment of financing costs of $24,000 in
connection with the Company's bank borrowings. In comparison, for Fiscal 2003,
financing activities provided net cash of $94,000 resulting from increased
borrowings 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.
Off-Balance Sheet Transactions
The Company is not a party to any "off-balance sheet
transactions" as defined in Item 301 of Regulation S-K.
Contractual Obligations
The table below sets forth as of March 31, 2004, future
minimum payments required to be made by the Company in respect of its debt
obligations, operating leases, and employment agreements.
Payments Due Fiscal Year Ending March 31,
------------------------------------------------------------------------------------------------------
TOTAL 2005 2006 2007 2008 2009 Thereafter
------------ ------------ ------------ ------------ ------------ ------------ ------------
Contractual
Obligations
- -----------
Bank Term Loan $ 4,400,000 $ 1,450,000 $ 1,950,000 $ 1,000,000 -- -- --
Bank Revolving
Credit Loan 584,500 -- 584,500 -- -- -- --
Subordinated Note 425,000 425,000 -- -- -- -- --
Capital Lease
Obligations -- -- -- -- -- -- --
Operating Leases 15,592,000 1,526,000 1,605,000 1,580,000 1,632,000 1,309,000 7,940,000
Employment
Agreements 4,240,000 2,120,000 2,120,000 -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total $ 25,241,500 $ 5,521,000 $ 6,259,500 $ 2,580,000 $ 1,632,000 $ 1,309,000 $ 7,940,000
============ ============ ============ ============ ============ ============ ============
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.
Impact of Recently Issued Accounting Standards
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity". This statement establishes standards for how a company classifies and
26
measures certain financial instruments with characteristics of both liabilities
and equity. This statement is effective for financial instruments entered into
or modified after May 31, 2003 and otherwise is effective at the beginning of
the first interim period beginning after December 15, 2004. The statement is to
be implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the period of adoption. The
effect of this pronouncement did not have an impact on the Company's financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149")
which amends and clarifies financial accounting and reporting derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. In particular, SFAS
No. 149 clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative discussed in SFAS No.133,
clarifies when a derivative contains a financing component, amends the
definition of an underlying (as initially defined in SFAS No 133) to conform it
to language used in FIN No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others", and amends other existing pronouncements. The effect of this
pronouncement did not have an impact on the financial statements of the Company.
Certain Transactions
Sales of Capital Stock
On January 26, 2004, Brian Murphy, a director of the Company,
and the chief executive officer of the Company's U.S. Concepts subsidiary,
purchased from the Company 150,000 shares of a newly designated class of the
Company's preferred stock for an aggregate purchase price of $600,000.
Thereafter, on February 9, 2004, the Company sold an aggregate of 412,000 shares
of the Company's common stock, at a price of $2.50 per share, to five
individuals, consisting of the Company's President and Chief Executive Officer,
three of the Company's other directors and an officer of one of the Company's
subsidiaries, resulting in an additional $1,030,000 of cash proceeds to the
Company. In connection with such sale of common stock, and pursuant to the terms
upon which Mr. Murphy purchased the shares of preferred stock described above,
Mr. Murphy was issued an additional 240,000 shares of common stock in exchange
for the cancellation of such shares of preferred stock.
Earnout Payment
On April 14, 2003, the Company issued 100,000 shares of its
common stock, with an aggregate contract value, based on the U.S. Concepts
acquisition agreement, of $218,000 at such date, in partial satisfaction of the
Company's earnout obligations in connection with its acquisition of its U.S.
Concepts subsidiary. The amount of such obligation was previously reflected on
the Company's financial statements for the periods ended March 31, 2003 as
additional purchase price payable pursuant to the terms of the U.S. Concepts
acquisition agreement.
MarketVision
On February 27, 2001, the Company acquired 49% of the shares
of capital stock of MarketVision which is a minority owned, predominately
Hispanic, ethnically oriented promotion agency headquartered in San Antonio,
Texas. The MarketVision acquisition had been accounted for as an equity
investment on the Company's consolidated balance sheet through the Company's
fiscal year ended March 31, 2003. Pursuant to the equity method of accounting,
27
the Company's balance sheet carrying value of the investment was periodically
adjusted to reflect the Company's 49% interest in the operations of
MarketVision. Effective in the fourth quarter of fiscal year ended March 31,
2004, the Company included in its consolidated financial statements the
operations of MarketVision pursuant to the adoption of FIN 46R.
In connection with the acquisition, the Company extended a
working capital credit line to MarketVision in the amount of $200,000. 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
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 $50,000. 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, 2004, there were no borrowings under credit line available to
MarketVision.
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, monthly payment of one-half of the interest
that accrued over the preceding month, payment of accrued interest and principal
from one-half of the after-tax amount, if any, of bonuses paid to Mr.
Amershadian by the Company, and payment of the remaining balance of principal
and accrued interest on May 24, 2006. To date, Mr. Amershadian has not made any
of the required monthly interest payments under the Amended and Restated
Promissory Note. At March 31, 2004, the Amended and Restated Promissory Note is
recorded in the Company's accounts as a note receivable from officer in the
amount of $762,000, which includes accrued interest at March 31, 2004 in the
amount of $212,000, of which $46,500 was past due and owing at such date.
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
$160,000, 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."
28
Item 8. Consolidated Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of CoActive Marketing Group, Inc.
Report of Independent Registered Public Accounting Firm.......................30
Consolidated Balance Sheets as of March 31, 2004 and 2003.....................31
Consolidated Statements of Operations for the years ended
March 31, 2004, 2003 and 2002.............................................32
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 2004, 2003 and 2002.............................................33
Consolidated Statements of Cash Flows for the years ended
March 31, 2004, 2003 and 2002 ............................................34
Notes to Consolidated Financial Statements....................................35
29
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
CoActive Marketing Group, Inc.
We have audited the accompanying consolidated balance sheets of CoActive
Marketing Group, Inc. and subsidiaries as of March 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Accounting Oversight Board (United States). Those standards require that we plan
and perform