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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-20394
COACTIVE MARKETING GROUP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1340408
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
75 Ninth Avenue
New York, New York 10011
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 622-2800
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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.
[X] Yes [ ] No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
As of August 5, 2005, 6,261,690 shares of the Registrant's Common Stock, par
value $.001 per share, were outstanding.
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Explanatory Note
This Amendment No. 1 on Form 10-Q/A to the Company's Quarterly Report on Form
10-Q for the three month period ended June 30, 2005, initially filed with the
Securities and Exchange Commission (the "SEC") on August 12, 2005, (the
"Original Filing") reflects a restatement of the consolidated financial
statements of CoActive Marketing Group, Inc. (the "Company") for the quarter
ended June 30, 2005, as discussed in Note 1 to the consolidated financial
statements. The determination to restate these financial statements was made as
a result of management's identification of the erroneous recording of $350,000
of revenues in the Company's prior year third quarter ended December 31, 2004
with respect to a customer contract under which the Company had been paid but
not yet rendered the services that would entitle it to recognize such revenues.
The restatement, without any affect on the Company's net income as originally
reported for the quarter ended June 30, 2005, reduced retained earnings and
stockholders' equity by $209,000, to $6,904,000 from $7,114,000 and to
$16,559,000 from $16,769,000, respectively. Further information on the
restatement adjustments can be found in Note 1 to the accompanying consolidated
financial statements. The Amendment No. 1 reflects the cumulative effect of the
Company's foregoing adjustments on its filings with the SEC of amendments to its
Quarterly Report on Form 10-Q for the three months ended December 31, 2004 and
Annual Report on Form 10-K for the fiscal year ended March 31, 2005 which the
Company is filing contemporaneously with this Amendment No. 1.
This Amendment No. 1 also includes related changes to the disclosures in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Controls and Procedures." Except as otherwise specifically
noted, all information contained herein is as of June 30, 2005 and does not
reflect any events or changes that have occurred subsequent to that date. For
the convenience of readers, this Amendment No. 1 restates in its entirety the
Original Filing.
2
INDEX
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COACTIVE MARKETING GROUP, INC. AND SUBSIDIARIES
Page
----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements of CoActive Marketing
Group, Inc. and Subsidiaries (Unaudited)
Consolidated Balance Sheets - June 30, 2005 (restated)
and March 31, 2005 (Audited) (restated) 4
Consolidated Statements of Operations - Three months
ended June 30, 2005 and June 30, 2004 5
Consolidated Statement of Stockholders' Equity -
Three months ended June 30, 2005 (restated) 6
Consolidated Statements of Cash Flows - Three months
ended June 30, 2005 and June 30, 2004 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
- ---------------------------
Items 1, 2, 3, 4 and 5. Not Applicable 20
Item 6. Exhibits 20
SIGNATURES 21
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3
PART I - FINANCIAL INFORMATION
COACTIVE MARKETING GROUP, INC.
Consolidated Balance Sheets
June 30, 2005 and March 31, 2005
June 30, 2005 March 31, 2005*
(restated) (restated)
------------- ---------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 683,315 $ 2,394,248
Accounts receivable, net of allowance for doubtful accounts of
$75,000 at June 30, 2005 and $69,000 at March 31, 2005 12,730,618 9,321,653
Unbilled contracts in progress 3,155,940 3,739,233
Deferred contract costs 1,311,799 656,577
Note and interest receivable from officer 796,751 -
Prepaid expenses and other current assets 461,547 533,421
Deferred taxes 37,145 -
Prepaid taxes and other receivables 37,500 123,902
------------ ------------
Total current assets 19,214,615 16,769,034
Property and equipment, net 4,230,986 4,252,327
Note and interest receivable from officer - 789,459
Goodwill, net 19,895,694 19,895,694
Intangible asset 200,000 200,000
Deferred financing costs, net 85,131 82,142
Other assets 464,070 386,601
------------ ------------
Total assets $ 44,090,496 $ 42,375,257
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,954,093 $ 5,013,409
Deferred revenue 8,612,264 7,870,082
Accrued job costs 3,386,411 2,174,885
Accrued compensation 1,612,963 425,855
Other accrued liabilities 684,328 1,192,141
Accrued taxes payable 178,650 144,396
Deferred taxes payable - 224,170
Notes payable bank - current 1,000,000 1,000,000
------------ ------------
Total current liabilities 20,428,709 18,044,938
Notes payable bank - long term 3,550,000 3,584,500
Deferred rent 2,652,114 2,649,091
Minority interest of consolidated subsidiary 643,960 645,971
Deferred taxes payable 256,104 325,129
------------ ------------
Total liabilities 27,530,887 25,249,629
------------ ------------
Stockholders' equity:
Class A convertible preferred stock, par value $.001;
authorized 650,000 shares; none issued and outstanding - -
Class B convertible preferred stock, par value $.001;
authorized 700,000 shares; none issued and outstanding - -
Preferred stock, undesignated; authorized 3,650,000 shares;
none issued and outstanding - -
Common stock, par value $.001; authorized 25,000,000 shares;
issued and outstanding 6,261,690 shares at June 30, 2005
and March 31, 2005 6,261 6,261
Additional paid-in capital 9,649,023 9,649,023
Retained earnings 6,904,325 7,470,344
------------ ------------
Total stockholders' equity 16,559,609 17,125,628
------------ ------------
Total liabilities and stockholders' equity $ 44,090,496 $ 42,375,257
============ ============
* The consolidated balance sheet as of March 31, 2005 has been summarized from
the Company's audited balance sheet as of that date.
See accompanying notes to unaudited consolidated financial statements.
4
COACTIVE MARKETING GROUP, INC.
Consolidated Statements of Operations
Three Months Ended June 30, 2005 and 2004
(Unaudited)
2005 2004
------------ ------------
Sales $ 21,512,543 $ 19,403,094
Operating expenses:
Reimbursable costs and expenses 7,955,808 7,275,484
Outside production costs and expenses 5,942,080 4,398,868
Salaries, payroll taxes and benefits 5,884,683 5,243,156
General and administrative expenses 2,530,627 2,076,591
------------ ------------
Total operating expenses 22,313,198 18,994,099
------------ ------------
Operating (loss) income (800,655) 408,995
Interest expense, net (56,320) (57,122)
------------ ------------
(Loss) income before (benefit) provision for income taxes and
minority interest in net loss (income) of consolidated (856,975) 351,873
subsidiary
(Benefit) provision for income taxes (288,945) 115,343
------------ ------------
Net (loss) income before minority interest in net loss (income) of
consolidated subsidiary (568,030) 236,530
Minority interest in net loss (income) of consolidated subsidiary 2,011 (38,993)
------------ ------------
Net (loss) income $ (566,019) $ 197,537
============ ============
Net (loss) income per common share:
Basic $ (.09) $ .03
============ ============
Diluted $ (.09) $ .03
============ ============
Weighted average number of common shares outstanding:
Basic 6,261,690 5,941,856
Dilutive effect of options and warrants - 446,588
------------ ------------
Diluted 6,261,690 6,388,444
============ ============
See accompanying notes to unaudited consolidated financial statements.
5
COACTIVE MARKETING GROUP, INC.
Consolidated Statement of Stockholders' Equity
Three Months Ended June 30, 2005
(Unaudited)
Common Stock
par value $.001 Total
--------------------------- Additional Retained Stockholders'
Shares Amount Paid-in Capital Earnings Equity
------------ ------------ --------------- ------------ ------------
(restated) (restated)
Balance, March 31, 2005 (restated) 6,261,690 $ 6,261 $ 9,649,023 $ 7,470,344 $ 17,125,628
Net loss - - - (566,019) (566,019)
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2005 (restated) 6,261,690 $ 6,261 $ 9,649,023 $ 6,904,325 $ 16,559,609
============ ============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
6
COACTIVE MARKETING GROUP, INC.
Consolidated Statements of Cash Flows
Three Months Ended June 30, 2005 and 2004
(Unaudited)
2005 2004
------------ ------------
Cash flows from operating activities:
Net (loss) income $ (566,019) $ 197,537
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization 190,750 175,574
Deferred rent amortization (6,167) -
Provision (credit) for bad debt expense 6,000 (117,000)
Interest income on note receivable from officer (7,292) (7,299)
Deferred income taxes (330,340) 119,715
Minority interest of consolidated subsidiary (2,011) 38,993
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (3,414,965) 324,552
Decrease (increase) in unbilled contracts in progress 583,293 (189,890)
Increase in deferred contract costs (655,222) (213,898)
Decrease in prepaid expenses and other assets 3,595 106,547
Decrease in prepaid taxes and other receivables 86,402 -
Decrease in accounts payable (59,316) (117,185)
Increase (decrease) in deferred revenue 742,182 (1,113,045)
Increase (decrease) in accrued job costs 1,211,526 (375,503)
Increase in accrued compensation 1,187,108 2,484
Increase in accrued taxes payable 34,254 -
(Decrease) increase in other accrued liabilities (507,813) 979,052
------------ ------------
Net cash used in operating activities (1,504,035) (189,366)
------------ ------------
Cash flows from investing activities:
Purchases of fixed assets (163,914) (70,259)
------------ ------------
Net cash used in investing activities (163,914) (70,259)
------------ ------------
Cash flows from financing activities:
Borrowings of debt 800,000 -
Repayments of debt (834,500) (187,500)
Financing costs (8,484) -
Costs incurred in connection with sale of stock - (8,400)
------------ ------------
Net cash used in financing activities (42,984) (195,900)
------------ ------------
Net decrease in cash and cash equivalents (1,710,933) (455,525)
Cash and cash equivalents at beginning of period 2,394,248 3,164,158
------------ ------------
Cash and cash equivalents at end of period $ 683,315 $ 2,708,633
============ ============
Supplemental disclosures of cash flow information:
Interest paid during the period $ 51,163 $ 64,259
============ ============
Income tax paid during the period $ 7,453 $ 8,309
============ ============
Noncash activities relating to investing and financing activities:
Amortization of projected reimbursements from clients for straight lining of rent $ 9,190 $ -
============ ============
See accompanying notes to unaudited consolidated financial statements.
7
CoActive Marketing Group, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
June 30, 2005 and 2004
(1) Basis of Presentation
---------------------
The interim financial statements of CoActive Marketing Group, Inc. (the
"Company") for the three months ended June 30, 2005 and 2004 have been
prepared without audit. In the opinion of management, such consolidated
financial statements reflect all adjustments, consisting of normal
recurring accruals, necessary to present fairly the Company's results for
the interim periods presented. The results of operations for the three
months ended June 30, 2005 are not necessarily indicative of the results
for a full year.
The consolidated financial statements of the Company include the financial
statements of the Company and its wholly-owned subsidiaries. In addition,
the consolidated financial statements include the accounts of a variable
interest entity, Garcia Baldwin, Inc. d/b/a Market Vision ("Market
Vision"), an affiliate that provides ethnically oriented marketing and
promotional services. The Company has determined that it is the primary
beneficiary of this entity and has included the accounts of this entity,
pursuant to the requirements of Financial Accounting Standards Board's
("FASB") Interpretation No. 46 (revised 2003), "Consolidation of Variable
Interest Entities - an Interpretation of ARB No. 51" ("FIN 46R"). All
significant intercompany balances and transactions have been eliminated in
consolidation. The Company owns 49% of the common stock of Market Vision. A
third party owns the remaining 51%. The third party owned portion of Market
Vision is accounted for as minority interest in the Company's consolidated
financial statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended March 31, 2005.
Restatement
The consolidated financial statements as of and for the fiscal quarter
ended June 30, 2005 were restated as a result of the Company's
identification of the erroneous recording of $350,000 of revenues in the
Company's prior year third quarter ended December 31, 2004 with respect to
a customer contract under which the Company had been paid but not yet
rendered the services that would entitle it to recognize such revenues.
There were related adjustments to the Company's consolidated statement of
stockholders' equity and consolidated statement of cash flows, without any
affect on the Company's cash or net cash used in operating activities at
and for the three months ended June 30, 2005. The effect of the revised
presentation of the Company's consolidated balance sheet is below.
Balance Sheet as of June 30, 2005
As previously
reported As restated
-------- -----------
Deferred taxes - 37,145
Prepaid taxes and other receivables - 37,500
Total current assets 19,139,970 19,214,615
Total assets 44,015,851 44,090,496
Deferred revenue 8,225,108 8,612,264
Deferred taxes payable 102,717 -
Total current liabilities 20,144,270 20,428,709
Total liabilities 27,246,448 27,530,887
Retained earnings 7,114,119 6,904,325
Total stockholders' equity 16,769,403 16,559,609
Total liabilities and stockholders' equity 44,015,851 44,090,496
8
(2) Adoption of EITF 00-21
----------------------
The Company adopted EITF 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables" ("EITF 00-21"), in the fourth quarter of Fiscal
2004. EITF 00-21, which became effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003, provides guidance on
how to determine when an arrangement that involves multiple
revenue-generating activities or deliverables should be divided into
separate units of accounting for revenue recognition purposes, and if this
division is required, how the arrangement consideration should be allocated
among the separate units of accounting. Prior to the adoption of EITF
00-21, the Company recognized revenue on its broadcast media and special
event contracts on the percentage-of-completion method over the life of the
contract as identifiable phases of services, such as concept creation and
development, media purchase, production, media airing and event execution
occurred. Under that method, the Company generally recognized a portion of
the revenue attributable to those contracts upon signing by the Company's
clients. Pursuant to EITF 00-21, unless a separate unit of accounting is
identified, 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.
(3) Adoption of FIN 46R
-------------------
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities - an Interpretation of ARB No.
51," with the objective of improving financial reporting by companies
involved with variable interest entities. A variable interest entity is a
corporation, partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity investors with
voting rights, or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities. Historically,
entities generally were not consolidated unless the entity was controlled
through voting interests. FIN 46 changes that by requiring a variable
interest entity to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns or both. A company that consolidates a variable interest entity is
called the "primary beneficiary" of that entity. The provisions regarding
implementation dates were revised by FIN 46 (Revised) ("FIN 46R"). The
consolidation requirements of FIN 46R apply to variable interest entities
in the first year or interim period ending after March 15, 2004. Effective
in the fourth quarter of Fiscal 2004, the Company adopted FIN 46R as it
relates to the activities of its Market Vision affiliate. Accordingly, the
operations and financial statements of Market Vision for the quarter ended
June 30, 2005 and 2004 are included in the consolidated financial
statements of the Company, whereas for prior fiscal years, under the equity
method of accounting, the Company reported its investment in Market Vision
as adjusted for its share of net income or loss each fiscal year in the
Company's financial statements.
(4) Reimbursable Costs and Expenses
-------------------------------
The Company records reimbursements received for reimbursable program costs
and expenses as revenues, with the corresponding costs included in
operating expenses as reimbursable costs and expenses. Such costs may
include variable employee compensation costs.
(5) Revenue Recognition
-------------------
The Company's revenues are generated from projects subject to contracts
requiring the Company to provide its services within specified time periods
generally ranging up to twelve months. As a result, on any given date, the
Company has projects in process at various stages of completion. Depending
on the nature of the contract, revenue is recognized as follows: (i) on
time and material service contracts, revenue is recognized as services are
rendered and the costs are incurred; (ii) on fixed price retainer
contracts, revenue is recognized on a straight-line basis over the term of
the contract; (iii) on fixed price multiple services contracts, revenue is
recognized over the term of the contract for the fair value of segments of
the services rendered which qualify as separate activities or delivered
units of service; to the extent multi-service arrangements are deemed
inseparable, revenue on these contracts is recognized as the contracts are
completed; (iv) on certain fixed price contracts, revenue is recognized on
a percentage of completion basis, whereby the percentage of completion is
determined by relating the actual costs incurred to date to the estimated
total costs for each contract; (v) on other fixed price contracts, revenue
is recognized on the basis of proportional performance as certain key
milestones are delivered. Costs associated with the fulfillment of projects
are accrued and recognized proportionately to the related revenue in order
to ensure a matching of revenue and expenses in the proper period.
Provisions for anticipated losses on uncompleted projects are made in the
period in which such losses are determined.
9
(6) Goodwill and Intangible Asset
-----------------------------
Goodwill consists of the cost in excess of the fair value of the acquired
net assets of the Company's subsidiary companies. The Company's other
intangible asset consists of an Internet domain name and related
intellectual property rights.
In accordance with Statements of Financial Accounting Standards No. 141
("SFAS 141"), "Business Combinations," and No 142 ("SFAS 142"), "Goodwill
and Other Intangible Assets," goodwill and intangible assets deemed to have
indefinite lives are no longer amortized but are subject to annual
impairment tests. Goodwill impairment tests require the comparison of the
fair value and carrying value of reporting units. Measuring fair value of a
reporting unit is generally based on valuation techniques using multiples
of earnings. The Company assesses the potential impairment of goodwill
annually and on an interim basis whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Upon
completion of such annual review, if impairment is found to have occurred,
a corresponding charge will be recorded. Based on the guidance of SFAS 142,
the Company has determined that it has five reporting units representing
each of its subsidiaries. The Company has completed its impairment review
for each reporting unit as of March 31, 2005 and no impairment in the
recorded goodwill and intangible asset was identified. During the quarter
ended June 30, 2005, the Company has not identified any indication of
goodwill impairment. Goodwill and the intangible asset will be tested
annually at the end of each fiscal year to determine whether they have been
impaired. Upon completion of each annual review, there can be no assurance
that a material charge will not be recorded.
(7) Net (Loss) Income Per Share
---------------------------
For the quarter ended June 30, 2005, options and warrants, which expire
through April 30, 2014, to purchase 2,226,133 shares of common stock at
prices ranging from $1.12 to $10.00 per share were excluded from the
computation of diluted earnings per share due to the Company incurring a
net loss for the quarter ended June 30, 2005, as such their effect would
have been anti-dilutive. For the quarter ended June 30, 2004, options and
warrants, which expire through April 30, 2014, to purchase 1,673,741 shares
of common stock at prices ranging from $2.48 to $10.00 were excluded from
the computation of diluted earnings per share because the exercise prices
exceeded the then fair market value of the Company's common stock.
(8) Unbilled Contracts in Progress
------------------------------
Unbilled contracts in progress represent revenue recognized in advance of
billings rendered based on work performed to date on certain contracts.
Accrued job costs are also recorded for such contracts to properly match
costs and revenue.
(9) Deferred Contract Costs
-----------------------
Deferred contract costs represent direct contract costs and expenses
incurred prior to the Company's related revenue recognition on such
contracts.
(10) Deferred Revenue
----------------
Deferred revenue represents contract amounts billed and client advances in
excess of revenues earned.
(11) Deferred Rent
-------------
Deferred rent consists of (i) the excess of the allocable straight line
rent expense to date as compared to the total amount of rent due and
payable through such period, (ii) the capitalization of rent during any
build out period during which the Company has the right to occupy the space
but pays no rent or a reduced rate of rent, and (iii) funds received from
landlords to reimburse the Company for the cost, or a portion of the cost,
of leasehold improvements. Deferred rent is amortized as a reduction to
rent expense over the term of the lease.
10
(12) Notes Payable Bank
------------------
At June 30, 2005, the Company's bank borrowings of $4,550,000 consist of an
amortizing term loan with an outstanding principal balance of $3,750,000
and a revolving credit loan with an outstanding principal balance of
$800,000 (exclusive of a letter of credit outstanding in the amount of
$500,000). Pursuant to an Amended and Restated Credit Agreement ("Credit
Agreement") entered into with a bank on March 24, 2005, the maximum amount
available for borrowing under the revolving credit line is $3,000,000, and
the term loan is repayable in monthly installments of principal in the
amount of $83,333. The Credit Agreement provides for a number of
affirmative and negative covenants which the Company was in compliance with
at June 30, 2005.
(13) Income Taxes
------------
The (benefit) provision for income taxes for the three months ended June
30, 2005 and 2004 is based upon the Company's estimated effective tax rate
for the respective fiscal years.
(14) Accounting for Stock-Based Compensation
---------------------------------------
The Company applies the intrinsic-value based method of accounting
prescribed by Accounting Principles Board (APB) No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, in accounting for
its stock-based compensation plans and accordingly, no compensation cost
has been recognized for the issuance of stock options in the consolidated
financial statements. The Company has elected not to implement the fair
value based accounting method for employee stock options under SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), but has
elected to disclose the pro forma net (loss) income per share for employee
stock option grants as if such method had been used to account for
stock-based compensation costs described in SFAS No. 148 "Accounting for
Stock Based Compensation-Transition and Disclosure an amendment of SFAS
Statement No. 123."
The following table illustrates the effects on net income (loss) and
earnings (loss) per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to its stock based incentive plans:
Three Months Three Months
Ended Ended
June 30, 2005 June 30, 2004
------------- -------------
Net (loss) income as reported $ (566,019) $ 197,537
Less compensation expense determined under the fair value
method, net of tax (1) 9,550 54,694
------------ ------------
Pro forma net (loss) income $ (575,569) $ 142,843
============ ============
Net (loss) income per share - Basic:
As reported $ (.09) $ .03
Pro forma $ (.09) $ .02
Net (loss) income per share - Diluted:
As reported $ (.09) $ .03
Pro forma $ (.09) $ .02
(1) Compensation expense for the quarter ended June 30, 2004 has been
restated to reflect net of tax amounts. The effect of this restatement
was not material.
(15) Recent Accounting Standards
---------------------------
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No.
3." This statement replaces APB Opinion No. 20 and FASB No. 3 and changes
the requirements for the accounting for and reporting of a change in
accounting principle. This statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
11
pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. This statement requires
retrospective application to prior periods' financial statements of changes
in accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. When it is
impracticable to determine the period-specific effects of an accounting
change on one or more individual prior periods presented, the statement
requires that the new accounting principle be applied to the balances of
assets and liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding
adjustment be made to the opening balance of retained earnings (or other
appropriate components of equity or net assets in the statement of
financial position) for that period rather than being reported in an income
statement. When it is impracticable to determine the cumulative effect of
applying a change in accounting principle to all prior periods, the
statement requires that the new accounting principle be applied as if it
were adopted prospectively from the earliest date practicable. This
statement is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Earlier adoption is
permitted for accounting changes and corrections of errors made in fiscal
years beginning after the date the statement is issued. The adoption of
this statement is not expected to have a material effect on the Company's
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS No. 123R"), that addresses the accounting for share-based
payment transactions in which a company receives employee services in
exchange for (a) equity instruments of the company or (b) liabilities that
are based on the fair value of the company's equity instruments or that may
be settled by the issuance of such equity instruments. SFAS No. 123R
addresses all forms of share-based payment awards, including shares issued
under employee stock purchase plans, stock options, restricted stock and
stock appreciation rights. SFAS No. 123R eliminates the ability to account
for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees," that was provided in Statement
123 as originally issued. Under SFAS No. 123R companies are required to
record compensation expense for all share-based payment award transactions
measured at fair value. This statement is effective for fiscal years
beginning after June 15, 2005. The Company anticipates that the adoption of
SFAS No. 123R will impact the reported financial results of the Company in
a manner similar to the effects shown in the pro forma disclosure included
in Note 14 above under the caption "Accounting for Stock-Based
Compensation."
(16) Lease Accounting Correction
---------------------------
Until the fourth quarter of Fiscal 2005, the Company recognized certain
lease obligations as they became due and payable. In light of recent
announcements made by a number of public companies regarding lease
accounting and a Securities and Exchange Commission ("SEC") clarification
on the subject, the Company corrected its lease accounting. As a result,
with regard to one of its office leases, the Company corrected its
computation of rent expense, depreciation of leasehold improvements and the
classification of landlord allowances related to leasehold improvements.
The correction does not affect the Company's historical or future cash
flows or the timing of payments under the related lease. The effect on the
Company's prior years' (including the quarter ended June 30, 2004) earnings
(loss) per share, cash flow from operations and stockholders' equity were
deemed to be immaterial requiring no restatement.
In connection with the correction, at March 31, 2005, the Company recorded
an increase in property and equipment - leasehold improvements, of
$1,979,000, an increase in other assets of $371,000, an increase in
deferred rent of $2,649,000 and a decrease in deferred taxes payable of
$119,000.
The Company has historically received reimbursements from certain clients
for expenses, including, but not limited to, rent. Such reimbursements are
made based on current rental payments payable independent of any
straight-lining accounting methodology. Accordingly, in order to match the
effect of the straight line rent adjustment to projected future
reimbursements from clients, the Company has recorded a deferred asset for
the estimated portion allocable to these clients as of March 31, 2005 as a
result of the correction of this error. At June 30, 2005 and March 31,
2005, the projected reimbursements from these clients for the effect of the
straight line adjustment amounted to approximately $381,000 and $371,000,
respectively, and are included in other assets. This asset will be
amortized over the period of the clients' expected reimbursement. Should
any of these clients elect not to renew their contracts with the Company
prior to the payment of such amounts; the remaining asset or portion
thereof may result in a charge to earnings.
12
(17) Reclassifications
-----------------
Certain amounts as previously reported have been reclassified to conform to
current year classifications.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
-----------------------------------------------------------------------
This report contains forward-looking statements 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 are set forth under the caption "Risk Factors," in addition to
other information set forth herein and elsewhere in our other public filings
with the Securities and Exchange Commission. 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
CoActive Marketing Group, Inc., through its wholly-owned subsidiaries
Inmark Services LLC, Optimum Group LLC, U. S. Concepts LLC and Digital
Intelligence Group LLC, together with its affiliate Garcia Baldwin, Inc. doing
business as Market Vision, is a multicultural, integrated sales promotional and
marketing services agency. We enjoy a client base predominantly consisting of
Fortune 500 companies. We develop, manage and execute sales promotion programs
at both national and local levels. Our programs help our clients effectively
promote their goods and services directly to retailers and consumers and are
intended to assist them in achieving a maximum impact and return on their
marketing investment. Our activities reinforce brand awareness, provide
incentives to retailers to order and display our clients' products, and motivate
consumers to purchase those products.
Our services include experiential and event marketing, interactive
marketing, Hispanic marketing, and all elements of consumer and trade promotion
and are marketed directly to our clients by our sales force operating out of
offices located in Great Neck and New York, New York; Cincinnati, Ohio; Atlanta,
Georgia; Chicago, Illinois; San Francisco, California and San Antonio, Texas.
Restatement
The consolidated financial statements as of and for the fiscal quarter
ended June 30, 2005 were restated as a result of the Company's identification of
the erroneous recording of $350,000 of revenues in the Company's prior year
third quarter ended December 31, 2004 with respect to a customer contract under
which the Company had been paid but not yet rendered the services that would
entitle it to recognize such revenues. The restatement reduces retained earnings
and stockholders' equity by $209,000, to $6,904,000 from $7,114,000 and to
$16,559,000 from $16,769,000, respectively. The restatements do not affect the
Company's net income as originally reported for the quarter ended June 30, 2005.
After reviewing the circumstances leading up to the restatement, management
believes that the errors were inadvertent and unintentional. In addition,
following the discovery of these errors, the Company implemented procedures
intended to strengthen its internal control processes and prevent a recurrence
of future errors of this nature.
Lease Accounting Correction
Until the fourth quarter of Fiscal 2005, the Company recognized certain
lease obligations as they became due and payable. In light of recent
announcements made by a number of public companies regarding lease accounting
and a SEC clarification on the subject, the Company corrected its lease
accounting. As a result, with regard to one of its office leases, the Company
corrected its computation of rent expense, depreciation of leasehold
improvements and the classification of landlord allowances related to leasehold
improvements. The correction does not affect the Company's historical or future
cash flows or the timing of payments under the related lease. The effect on the
Company's prior years' (including the quarter ended June 30, 2004) earnings
(loss) per share, cash flow from operations and stockholders' equity were deemed
to be immaterial requiring no restatement.
13
In connection with the correction, at March 31, 2005, the Company recorded
an increase in property and equipment - leasehold improvements, of $1,979,000,
an increase in other assets of $371,000, an increase in deferred rent of
$2,649,000 and a decrease in deferred taxes payable of $119,000.
The Company has historically received reimbursements from certain clients
for expenses, including, but not limited to, rent. Such reimbursements are made
based on current rental payments payable independent of any straight-lining
accounting methodology. Accordingly, in order to match the effect of the
straight line rent adjustment to projected future reimbursements from clients,
the Company has recorded a deferred asset for the estimated portion allocable to
these clients as of March 31, 2005 as a result of the correction of this error.
At June 30, 2005 and March 31, 2005, the projected reimbursements from these
clients for the effect of the straight line adjustment amounted to approximately
$381,000 and $371,000, respectively, and are included in other assets. This
asset will be amortized over the period of the clients' expected reimbursement.
Should any of these clients elect not to renew their contracts with the Company
prior to the payment of such amounts; the remaining asset or portion thereof may
result in a charge to earnings.
The information herein should be read together with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended March 31, 2005.
Results of Operations
The following table presents operating data of the Company expressed as a
percentage of sales for the three months ended June 30, 2005 and 2004:
Three Months Ended
June 30,
--------------------
2005 2004
------ ------
Statement of Operations Data:
Sales 100.0% 100.0%
Reimbursable costs and expenses 37.0% 37.5%
Outside production costs and expenses 27.6% 22.7%
Salaries, payroll taxes and benefits 27.4% 27.0%
General and administrative expenses 11.8% 10.7%
Total operating expenses 103.7% 97.9%
Operating (loss) income (3.7)% 2.1%
Interest expense, net (0.3)% (0.3)%
(Loss) income before (benefit) provision for income
taxes and minority interest in net loss (income)
of consolidated subsidiary (4.0)% 1.8%
(Benefit) provision for income taxes (1.3)% 0.6%
Minority interest in net loss (income) of consolidated
subsidiary - (0.2)%
Net (loss) income (2.6)% 1.0%
The following table presents operating data of the Company, expressed as a
comparative percentage of change for the three months ended June 30, 2005
compared to the three months ended June 30, 2004 and the three months ended June
30, 2004 compared to the three months ended June 30, 2003, retroactively
adjusted for (i) the EITF 00-21 accounting change effective April 1, 2003,
exclusive of the associated cumulative effect of the change in accounting
principle and (ii) the operating results of Market Vision effective April 1,
2003.
14
Three Months Ended
June 30,
------------------------
2005 2004
-------- --------
Statement of Operations Data:
Sales 10.9% (4.0)%
Reimbursable costs and expenses 9.4% 66.7%
Outside production costs and expenses 35.1% (41.8)%
Salaries, payroll taxes and benefits 12.2% 16.1%
General and administrative expenses 21.9% (7.1)%
Total operating expenses 17.5% 1.7%
Operating (loss) income (295.8)% (73.3)%
Interest expense, net (1.4)% (9.8)%
(Loss) income before (benefit) provision for
income taxes and minority interest in net
loss (income) of consolidated subsidiary (343.5)% (76.1)%
(Benefit) provision for income taxes (350.5)% (81.1)%
Minority interest in net loss (income) of
consolidated subsidiary (105.2)% (315.7)%
Net (loss) income (386.5)% (77.5)%
Sales. Sales for the quarter ended June 30, 2005 were $21,513,000, compared
to sales of $19,403,000 for the quarter ended June 30, 2004, an increase of
$2,110,000. The following table presents a comparative summary of the components
of sales for the three months ended June 30, 2005 and 2004:
Three Months Ended June 30,
----------------------------------------------------------------
Sales 2005 % 2004 %
----- ----------- ----------- ----------- ------------
Core business $12,339,414 57.4 $11,305,834 58.3
MarketVision 1,217,321 5.6 821,776 4.2
Reimbursable costs and expenses 7.955,808 37.0 7,275,484 37.5
----------- ----------- ----------- ------------
Total sales $21,512,543 100.0 $19,403,094 100.0
=========== =========== =========== ============
The Company's increase in its core business sales for the quarter ended
June 30, 2005 reflects (i) an increase in cross-sold services provided on behalf
of MarketVision, and (ii) increased overall marketing services provided to
clients.
The increase in sales attributable to MarketVision was due to an increase
in demand for Hispanic marketing services.
In the delivery of certain services to our clients, the Company purchases a
variety of items and services on their behalf for which it is reimbursed. The
amount of reimbursable costs and expenses, which are included in revenues, will
vary from period to period, based on the type and scope of the promotional
service being provided.
Operating Expenses. Operating expenses for three months ended June 30, 2005
increased by $3,319,000 and amounted to $22,313,000, compared to $18,994,000 for
the three months ended June 30, 2004. The increase in operating expenses
resulted from the aggregate of the following:
Reimbursable Costs and Expenses. In the delivery of certain services to our
clients, the Company purchases a variety of items and services on their behalf
for which it is reimbursed. The amount of reimbursable costs and expenses will
vary from period to period, based on the type and scope of the promotional
service being provided. Reimbursable costs and expenses for the three months
ended June 30, 2005 and 2004 were $7,956,000 and $7,275,000, respectively.
Reimbursable costs and expenses as a percentage of sales for the quarter ended
June 30, 3005 was 37.0% compared to 37.5% for the quarter ended June 30, 2004.
The increase in reimbursable costs and expenses of $681,000 was primarily due to
an increase of approximately $871,000 in reimbursable costs and expenses
attributable to Market Vision clients offset by a decrease of approximately
$190,000 in reimbursable costs and expenses attributable to other clients.
Outside Production Costs and Expenses. Outside production costs and
expenses consist of the costs of purchased materials, media, services and other
expenditures incurred in connection with and directly related to sales. Outside
production costs for the three months ended June 30, 2005 were $5,942,000
compared to $4,399,000 for the three months ended June 30, 2004, an increase of
15
$1,543,000. Outside production costs as a percentage of sales (exclusive of
reimbursements of costs and expenses) amounted to 43.8% and 36.3%, respectively,
in the quarters ended June 30, 2005 and 2004. The weighted mix of outside
production costs and the mark-up related to these components may vary
significantly from project to project based on the type and scope of the service
being provided. Accordingly, for the quarters ended June 30, 2005 and 2004,
outside production costs as a percentage of sales are reflective of the
aggregate mix of client projects during such periods. For the three months ended
June 30, 2005, outside production costs and expenses as a percentage of the
revenue earned on the associated contracts, were higher than during the three
months ended June 30, 2004.
Salaries, Payroll Taxes and Benefits. Salaries, payroll taxes and benefits,
exclusive of program reimbursable costs, consist of the salaries, payroll taxes
and benefit costs related to all direct labor, indirect labor and overhead
personnel. For the quarter ended June 30, 2005, salaries, payroll taxes and
benefits were $5,885,000, compared to $5,243,000 for the quarter need June 30,
2004. The increase in these costs of $642,000 was primarily attributable to
increased staffing to support an anticipated Fiscal 2006 increase in the level
of operations. Salaries, payroll taxes and benefits as a percentage of sales
(exclusive of reimbursable costs and expenses) amounted to 43.4% and 43.2%,
respectively, in the quarters ended June 30, 2005 and 2004.
General and Administrative Expenses. General and administrative expenses
consist of office and equipment rent, depreciation and amortization,
professional fees and other overhead expenses which for the three months ended
June 30, 2005 were $2,531,000, compared to $2,077,000 for the three months ended
June 30, 2004, an increase of $454,000. The increase in these expenses was
primarily the result of increased costs in professional fees, the relocation of
Market Vision's office and the inclusion of the effect of a $126,000 benefit
realized in the three months ended June 30, 2004 due to the reversal of an
allowance for bad debt provision previously provided for. General and
administrative expenses as a percentage of sales (exclusive of reimbursable
costs and expenses and the effect of the prior year's quarter benefit realized
for the reversal of an allowance for bad debt provision) amounted to 18.7% and
18.2%, respectively, in the quarters ended June 30, 2005 and 2004.
Interest Expense, Net. Net interest expense, consisting of interest expense
of $65,000 offset by interest income of $9,000, for the quarter ended June 30,
2005 amounted to $56,000, a decrease of $1,000, compared to net interest expense
of $57,000, consisting of interest expense of $64,000 offset by interest income
of $7,000 for the quarter ended June 30, 2004.
(Loss) Income Before (Benefit) Provision for Income Taxes and Minority
Interest in Net Loss (Income) of Consolidated Subsidiary. The Company's (loss)
income before the (benefit) provision for income taxes and minority interest in
net loss (income) of consolidated subsidiary for the quarter ended June 30, 2005
was $(857,000) compared to income of $352,000 for the quarter ended June 30,
2004.
(Benefit) Provision For Income Taxes. The (benefit) provision for federal,
state and local income taxes for the quarters ended June 30, 2005 and 2004 were
based upon the Company's estimated effective tax rate for the respective fiscal
years.
Minority Interest in the Net Loss (Income) of Consolidated Subsidiary. For
the quarter ended June 30, 2005, the Company reflected a non-cash benefit of
$2,000, representing a third party's 51% ownership interest in the net loss of
Market Vision for the period, compared to a non-cash charge of $(39,000) for
such third party's interest in the net income of Market Vision for the quarter
ended June 30, 2004.
Net (Loss) Income. As a result of the items discussed above, net loss for
the quarter ended June 30, 2005 was $(566,000) compared with net income of
$198,000 for the quarter ended June 30, 2004.
Liquidity and Capital Resources
On March 24, 2005, the Company entered into an Amended and Restated Credit
Agreement with Signature Bank, under which amounts available for borrowing under
its revolving credit line were increased by $2,415,500 to $3 million, and the
term loan portion of the credit facility was increased by $1,050,000 to $4
million. On March 25, 2005, Signature advanced the Company the increased portion
of the term loan, a portion of which was used to repay the remaining $425,000 in
principal outstanding under its 9% subordinated note issued in connection with
its acquisition of Optimum. Borrowings under the Credit Agreement are evidenced
by promissory notes and are secured by all of the Company's assets. The Company
pays Signature a quarterly fee equal to .25% per annum on the unused portion of
the revolving credit line. Pursuant to the Amended and Restated Credit
Agreement:
16
o Principal payments on the term loan are to be made in 48 equal monthly
installments of $83,333, with the final payment due in March 2009.
Prior to the amendment, principal payments to Signature on the term
loan portion of the facility were $162,500 per month.
o The maturity date of loans made under the revolving credit line has
been extended from July 22, 2006 to March 24, 2008.
o Interest on the revolving loans has been reduced to Signature's prime
rate from its prime rate plus .50%, and interest on the term loan has
been reduced to Signature's prime rate plus .50% from its prime rate
plus 1.0%.
The Credit Agreement provides for a number of affirmative and negative
covenants, restrictions, limitations and other conditions including, among
others, (i) limitations regarding the payment of cash dividends, (ii)
restriction on the use of proceeds, (iii) prohibition on incurring a
consolidated net loss, as defined in the Credit Agreement, in two consecutive
fiscal quarters or any fiscal year, (iv) compliance with a defined senior debt
leverage ratio and debt service ratio covenants, (v) maximum annual capital
expenditures, (vi) limitation on annual capital expenditures, and (vii)
maintenance of 15% of beneficially owned shares of the Company held by certain
members of the Company's management. At June 30, 2005, the Company was in
compliance with its covenants in the Credit Agreement.
The analysis of the Company's statements of cash flows following the table
below is inclusive of the cash flows of Market Vision. Summarized financial
information of Market Vision at June 30, 2005 is as follows:
Cash $ 668,000
Current assets 4,252,000
Current liabilities 3,154,000
Working capital 1,098,000
Net cash provided by operating activities 490,000
Net loss (4,000)
At June 30, 2005, the Company had cash and cash equivalents of $683,000, a
working capital deficit of $1,214,000, which includes approximately $8,612,000
of deferred revenue, outstanding bank loans of $4,550,000, an outstanding bank
letter of credit of $500,000, stockholders' equity of $16,560,000 and $2,200,000
available for borrowing under its revolving credit line. In comparison, at March
31, 2005, the Company had cash and cash equivalents of $2,394,000, a working
capital deficit of $1,276,000, which included approximately $7,870,000 of
deferred revenue, outstanding bank loans of $4,584,500, an outstanding bank
letter of credit of $500,000, $2,415,500 available for borrowing under the
revolving credit line, and stockholders' equity of $17,126,000.
Operating Activities. Net cash used in operating activities was $1,504,000
for the three months ended June 30, 2005. The net cash used in operating
activities was primarily attributable to the Company's net loss of $566,000 for
the quarter ended June 30, 2005, increased by (i) $789,000 related to the net
effect resulting from changes in working capital and (ii) a net of $149,000
related to other non-cash items.
Investing Activities. For the three months ended June 30, 2005, net cash
used in investing activities amounted to $164,000 as a result of the purchase of
fixed assets. The Company does not expect to make material investments in fixed
asset purchases during the remainder of Fiscal 2006.
Financing Activities. For the three months ended June 30, 2005, net cash
used in financing activities amounted to $43,000 resulting from a net use of
$35,000 to reduce bank borrowings and $8,000 used to pay costs associated with
the Amended and Restated Credit Agreement.
Outlook
Despite the loss for the quarter ended June 30, 2005, primarily as a result
of lower profit margins on sales in the quarter and increased operating
expenses, business trends appear favorable with the Company anticipating
improvement in its profit margins and a return to profitability for the balance
of the year, notwithstanding potential quarterly fluctuations in profit margins
from varied projects. Management believes that cash generated from operations
together with the amount currently available for borrowing under the revolving
credit line will be sufficient to meet the Company's cash requirements for
Fiscal 2006, although there can be no assurance in this regard. To the extent
that the Company is required to seek additional external financing, there can be
no assurance that the Company will be able to obtain such additional funding to
satisfy its cash requirements for Fiscal 2006 or as subsequently required to
repay loans under the Credit Agreement.
17
Critical Accounting Policies
The preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to use judgment in making estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. Certain of the
estimates and assumptions required to be made relate to matters that are
inherently uncertain as they pertain to future events. While management believes
that the estimates and assumptions used were the most appropriate, actual
results could differ significantly from those estimates under different
assumptions and conditions.
Please refer to the Company's 2005 Annual Report on Form 10-K for a
discussion of the Company's critical accounting policies relating to revenue
recognition and goodwill and other intangible asset. During the three months
ended June 30, 2005, there were no material changes to these policies.
Risk Factors
Any investment in the Company's common stock involves a high degree of risk.
Investors should consider carefully the risks described below, together with the
other information contained in this report. Due to the following risks, our
business, financial condition and results of operations may suffer materially.
As a result, the market price of our common stock could decline, and you could
lose all or part of your investment in our common stock.
Outstanding Indebtedness; Security Interest. At June 30, 2005, loans
outstanding from the Company's secured lender amounted to $4,550,000, and the
Company had $2,200,000 of borrowing availability under its revolving credit
facility. As security for its obligations under the Credit Agreement, the
Company has granted the lender a first priority security interest in all of its
assets. In the event of a default under the Credit Agreement, at the lender's
option, (i) the principal and interest of the loans and all other obligations
under the Credit Agreement will immediately become due and payable, and (ii) the
lender may exercise its rights and remedies provided for in the Credit Agreement
and the related security agreements, and the rights and remedies of a secured
party under applicable law. In the past the Company has been required to obtain
waivers with respect to its non-compliance with financial covenants provided for
in the Credit Agreement, and the Company may be required to do so in the future.
However, there can be no assurance that the lender would waive any future
non-compliance with these covenants.
Recent Loss. The Company sustained a net loss of approximately $566,000 for
the quarter ended June 30, 2005. This loss was due in part to the unpredictable
revenue patterns associated with the Company's business, as described below.
There can be no assurance the Company will be profitable in future periods.
Dependence on Key Personnel. The Company's business is managed by a limited
number of key management and operating personnel. The loss of any one of those
persons could have a material adverse impact on 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.
Several of the Company's key executives are a party to an employment agreement
that expires 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 if a particular client reduces its budget
allocated to the services the Company provides.
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. Some of these companies have greater financial and marketing resources
than the Company. The Company competes on the basis of the quality and the
degree of comprehensive services 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.
18
Risks Associated with Acquisitions. 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 future acquisitions, if any, will be
successful.
Expansion Risk. In the past, the Company has experienced periods of rapid
expansion. This growth has increased the Company's operating complexity 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 the
Company 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 expansion could have a material adverse effect
on its business.
Control by Executive Officers and Directors. The Company's executive
officers and directors collectively beneficially own a significant percentage of
the Company's voting stock 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
the Company in which the holders of Common Stock could receive a substantial
premium. In addition, the Company's Credit Agreement requires certain of its
executive officers to maintain, at a minimum, a 15% beneficial ownership of the
Company's Common Stock during the term of the Credit Agreement.
Item 3. 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.
Item 4. Controls and Procedures
-----------------------
Evaluation of Disclosure Controls and Procedures
An evaluation was performed, under the supervision of, and with the
participation of, the Company's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-(e) to the Securities and Exchange Act of 1934). Based
on that evaluation, the Company's management, including the Chief Executive
Officer and Chief Financial Officer, concluded that the Company's disclosure
controls and procedures were not effective, as of the end of the period covered
by this Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (the
"Report"), in timely alerting them to all material information relating to the
Company and its consolidated subsidiaries that is required to be included in
this Report, see below Changes in Internal Controls.
Changes in Internal Controls
There have been no significant changes in the Company's internal controls
over financial reporting that occurred during the most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
During the quarter ended September 30, 2005,, the Company determined that
it had erroneously recorded $350,000 of revenues in the quarter ended December
31, 2004 with respect to a customer contract under which the Company had been
paid but not yet rendered the services that would entitle it to recognize such
revenues. After reviewing the circumstances leading up to the restatement,
during the quarter ended September 30, 2005, the Company implemented procedures
intended to strengthen its internal control processes and prevent a recurrence
of future errors of this nature.
19
PART II - OTHER INFORMATION
---------------------------
Items 1, 2, 3, 4 and 5. Not Applicable
Item 6. Exhibits
--------
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of
the Exchange Act.
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of
the Exchange Act.
32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of
the Exchange Act
32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of
the Exchange Act
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COACTIVE MARKETING GROUP, INC.
Dated: December 6, 2005 By: /s/ JOHN P. BENFIELD
-----------------------------------------
John P. Benfield, President
(Principal Executive Officer)
and Director
Dated: December 6, 2005 By: /s/ ERWIN I. MEVORAH
-----------------------------------------
Erwin I. Mevorah, Chief Financial Officer
(Principal Accounting and Financial
Officer)
21