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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 2 to Form 10-Q)
(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 __________
Commission file number 0-20394
COACTIVE MARKETING GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1340408
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
75 Ninth Avenue
New York, New York 10011
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 622-2800
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. 2 on Form 10-Q/A to the Company's Quarterly Report on Form
10-Q for the three months 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 the Company's review of the carrying value of goodwill associated
with each of its reporting units. In reviewing the carrying value of its
goodwill at December 31, 2005, for the purpose of determining if there was any
impairment in goodwill, the Company concluded that in prior periods a portion of
the intercompany amounts due from one of its operating units, Optimum Group LLC,
previously considered as working capital should have been included as part of
Optimum's carrying value for impairment valuation purposes. Accordingly, the
Company believes that the carrying value at September 30, 2005, June 30, 3005,
March 31, 2005, 2004 and 2003 of Optimum was greater than its fair value. As a
result, the Company recorded non-cash pre-tax charges of $4,131,000 and
$7,537,000 for the fiscal years ended March 31, 2004 and 2003, respectively, to
reflect such impairment and reduce the carrying value of goodwill associated
with Optimum. 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 $7,118,000. Further information on the
restatement adjustments can be found in Note 1 to the accompanying consolidated
financial statements. To reflect the cumulative effect of the foregoing
adjustments on its filings with the SEC, the Company is filing contemporaneously
with this Amendment No. 2, an amendment to its Annual Report on Form 10-K/A for
the year ended March 31, 2005 and an amendment to its Quarterly Report on Form
10-Q for the three and six months ended September 30, 2005.
This Amendment No. 2 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 excludes any
events or changes that have occurred subsequent to that date. For the
convenience of the reader, this Amendment No. 2 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 20
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
- ---------------------------
Items 1, 2, 3, 4 and 5. Not Applicable 20
Item 6. Exhibits 20
SIGNATURES 21
- ----------
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 tax assets 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 8,227,191 8,227,191
Intangible asset 200,000 200,000
Deferred financing costs, net 85,131 82,142
Other assets 464,070 386,601
Deferred tax asset 4,294,613 4,225,587
------------ ------------
Total assets $ 36,716,606 $ 34,932,341
============ ============
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 1,192,140
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 18,044,937
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
------------ ------------
Total liabilities 27,274,783 24,924,499
------------ ------------
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
(Accumulated deficit) retained earnings (213,461) 352,558
------------ ------------
Total stockholders' equity 9,441,823 10,007,842
------------ ------------
Total liabilities and stockholders' equity $ 36,716,606 $ 34,932,341
============ ============
* 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 subsidiary (856,975) 351,873
(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)
(Accumulated
Common Stock Deficit) Total
par value $.001 Additional Retained Stockholders'
--------------------------- Paid-in Earnings Equity
Shares Amount Capital (restated) (restated)
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2005 (restated) 6,261,690 $ 6,261 $ 9,649,023 $ 352,558 $ 10,007,842
Net loss -- -- -- (566,019) (566,019)
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2005 (restated) 6,261,690 $ 6,261 $ 9,649,023 $ (213,461) $ 9,441,823
============ ============ ============ ============ ============
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 quarters
ended September 30, 2005 and June 30, 2005, as well as the fiscal years
ended March 31, 2005, 2004 and 2003, were restated as a result of the
Company's review of the goodwill associated with each of its reporting
units. In reviewing the carrying value of its goodwill at December 31,
2005, for the purpose of determining if there was any impairment in
goodwill, the Company concluded that in prior periods a portion of the
intercompany amounts due from one of its reporting units, Optimum Group
LLC ("Optimum"), previously considered as working capital should have
been included as part of Optimum's carrying value for impairment
valuation purposes. Accordingly, the Company believes that the carrying
value at September 30, 2005, June 30, 2005, March 31, 2005, 2004 and
2003 of Optimum was greater than its fair value. As a result, the
Company recorded non-cash pre-tax charges of $4,131,000 and $7,537,000
for the years ended March 31, 2004 and 2003, respectively (net after
tax in the amount of $2,520,000 and $4,598,000, respectively), to
reflect such impairments and reduce the carrying value of goodwill
associated with Optimum. The adjustment required a restatement of the
Company's consolidated balance sheets and consolidated statements of
operations, as well as related adjustments to the Company's
consolidated statements of stockholders' equity and consolidated
statements of cash flows, without any effect on the Company's cash or
net cash provided from operations at and for the fiscal years ended
March 31, 2005, 2004 and 2003, as well as the fiscal quarters ended
September 30, 2005 and June 30, 2005. The effect of the restatement on
the Company's consolidated balance sheet at June 30, 2005 and March 31,
2005 is presented below:
8
June 30, 2005 March 31, 2005
----------------------------------- -----------------------------------
As previously As previously
reported As restated reported As restated
--------------- --------------- --------------- ---------------
Goodwill, net $ 19,895,694 $ 8,227,191 $ 19,895,694 $ 8,227,191
Deferred tax asset -- 4,294,613 -- 4,225,587
Total assets 44,090,496 36,716,606 42,375,257 34,932,341
Deferred taxes payable 256,104 -- 325,129 --
Total liabilities 27,530,887 27,274,783 25,249,629 24,924,499
Retained earnings (accumulated deficit)
6,904,325 (213,461) 7,470,344 352,558
Total stockholders' equity 16,559,609 9,441,823 17,125,628 10,007,842
Total liabilities and stockholders'
equity 44,090,496 36,716,606 42,375,257 34,932,341
(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.
9
(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.
(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 initially identified.
The consolidated financial statements as of and for the fiscal years
ended March 31, 2005, 2004 and 2003, as well as the fiscal quarters
ended September 30, 2005 and June 30, 2005, were restated as a result
of the Company's review of the goodwill associated with each of its
reporting units. In reviewing the carrying value of its goodwill at
December 31, 2005, for the purpose of determining if there was any
impairment in goodwill, the Company concluded that in prior periods a
portion of the intercompany amounts due from one of its reporting
units, Optimum, previously considered as working capital should have
been considered as part of Optimum's carrying value for impairment
valuation purposes. Accordingly, the Company believes that the carrying
value at September 20, 2005, June 30, 2005, March 31, 2005, 2004, and
2003 of Optimum was greater than its fair value. As a result, the
Company recorded non-cash pre-tax charges of $4,131,000 and $7,537,000
for the years ended March 31, 2004 and 2003, respectively (net after
tax in the amount of $2,520,000 and $4,598,000, respectively) to
reflect such impairments and reduce the carrying value of goodwill
associated with Optimum. The consolidated financial statements as of
and for the fiscal years ended March 31, 2005, 2004 and 2003, as well
for the fiscal quarters ended June 30, 2005 and September 30, 2005,
were restated as a result of the Company's change in the methodology of
valuing its goodwill for impairment.
Goodwill and the intangible asset will continue to 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. Other than as
set forth above, during the three months ended June 30, 2005, the
Company has not identified any indication of goodwill impairment in its
other reporting units.
10
(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.
(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."
11
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 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
12
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.
(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
13
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 years
ended March 31, 2005, 2004 and 2003, as well as the fiscal quarters ended
September 30, 2005 and June 30, 2005, were restated as a result of the Company's
review of the goodwill associated with each of its reporting units. In reviewing
the carrying value of its goodwill at December 31, 2005, for the purpose of
determining if there was any impairment in goodwill, the Company concluded that
in prior periods a portion of the intercompany amounts due from one of its
reporting units, Optimum, previously considered as working capital should have
been included as part of Optimum's carrying value for impairment valuation
purposes. Accordingly, the Company believes that the carrying value at September
30, 2005, June 30, 2005, March 31, 2005, 2004 and 2003 of Optimum was greater
than its fair value. As a result, the Company recorded non-cash pre-tax charges
of $4,131,000 and $7,537,000 for the years ended March 31, 2004 and 2003,
respectively (net after tax in the amount of $2,520,000 and $4,598,000,
respectively) to reflect such impairments and reduce the carrying value of
goodwill associated with Optimum. The adjustment required a restatement of the
Company's consolidated balance sheets and consolidated statements of operations,
as well as related adjustments to the Company's consolidated statements of
stockholders' equity and consolidated statements of cash flows, without any
effect on the Company's cash or net cash provided from operations at and for the
fiscal years ended March 31, 2005, 2004 and 2003, as well as the fiscal quarters
ended September 30, 2005 and 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.
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.
14
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.
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)%
15
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
$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
16
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:
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.
17
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
$9,442,000 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 $10,008,000.
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.
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/A 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.
18
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.
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
19
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.
In reviewing its carrying value of goodwill at December 31, 2005, for
the purpose of determining if there was any impairment in goodwill, the Company
concluded that in prior periods a portion of the intercompany amounts due from
one of its reporting units, Optimum, previously considered as working capital
should have been included as part of Optimum's carrying value for impairment
valuation purposes. Accordingly, the Company believes that the carrying value at
September 30, 2005, June 30, 2005, March 31, 2005, 2004 and 2003 of Optimum was
greater than its fair value. As a result, the Company recorded non-cash pre-tax
charges of $4,131,000 and $7,537,000 for the years ended March 31, 2004 and
2003, respectively, to reflect such impairments and reduce the carrying value of
goodwill associated with Optimum. The adjustment required a restatement of the
Company's consolidated balance sheets and consolidated statements of operations,
as well as related adjustments to the Company's consolidated statements of
stockholders' equity and consolidated statements of cash flows, without any
effect on the Company's cash or net cash provided from operations at and for the
fiscal years ended March 31, 2005, 2004 and 2003, as well as the fiscal quarters
ended September 30, 2005 and June 30, 2005. After reviewing the circumstances
leading up to the restatements, during the quarter ended December 31, 2005, the
Company implemented procedures intended to strengthen its internal control
processes and prevent a recurrence of future errors of this nature.
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: June 26, 2006 By: /s/ JOHN P. BENFIELD
-----------------------------------------
John P. Benfield, President
(Principal Executive Officer)
and Director
Dated: June 26, 2006 By: /s/ ERWIN I. MEVORAH
-----------------------------------------
Erwin I. Mevorah, Chief Financial Officer
(Principal Accounting and Financial
Officer)
21
EXHIBIT 31.1
CERTIFICATION
I, John P. Benfield, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CoActive Marketing
Group, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared; and
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusion about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal controls over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls over financial reporting that are reasonable likely to
adversely affect the registrant's ability to record, process, summarize
and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
Dated: June 26, 2006 /s/ JOHN P. BENFIELD
-----------------------------------------
John P. Benfield
President and Chief Executive Officer
22