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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-20394
COACTIVE MARKETING GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1340408
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
75 Ninth Avenue, New York, New York 10011
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 660-3800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $.001 par value
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated files. See
definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Yes [ ] No [X]
As of September 30, 2005, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $13,477,282.
As of June 15, 2006, 7,084,751 shares of Common Stock, $.001 par value, were
outstanding.
Documents Incorporated by Reference
Document Part of 10-K into which incorporated
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Definitive Proxy Statement relating to Part III
Registrant's 2006 Annual Meeting
of Stockholders
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PART I
This report contains certain "forward-looking statements" concerning the
Company's operations, economic performance and financial condition, which are
subject to inherent uncertainties and risks. Actual results could differ
materially from those anticipated in this report. When used in this report, the
words "estimate," "project," "anticipate," "expect," "intend," "believe" and
similar expressions are intended to identify forward-looking statements.
Item 1. Business.
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Corporate Overview
CoActive Marketing Group, Inc. (the "Company"), through its
wholly-owned subsidiaries Inmark Services LLC, Optimum Group LLC, U.S. Concepts
LLC and Digital Intelligence Group LLC, is an integrated sales promotional and
marketing services agency. 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 marketing, event marketing,
interactive marketing, ethnic 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 New York, New York; Cincinnati, Ohio; Chicago,
Illinois and San Francisco, California.
During our fiscal year ended March 31, 2006, we provided
marketing services targeting the Hispanic community through Garcia Baldwin,
Inc., doing business as MarketVision, an affiliate of ours of which we owned
49%. On May 22, 2006, we sold our 49% interest in MarketVision for $1,100,000 in
cash. Following that sale, we continue to provide services targeting Hispanic,
as well as African American and urban consumers, through our recently launched
Urban Concepts platform.
CoActive was formed under the laws of the State of Delaware in
March 1992 and is the successor to a sales promotion business originally founded
in 1972. CoActive began to engage in the promotion business following a merger
consummated on September 29, 1995 that resulted in Inmark becoming its
wholly-owned subsidiary.
Our corporate headquarters are located at 75 Ninth Avenue, New
York, New York 10011, and our telephone number is 212-660-3800. Our Web site is
www.coactivemarketing.com. Copies of all reports we file with the Securities and
Exchange Commission are available on our Web site.
Subsidiaries
The services offered by our subsidiaries are complementary
with each other and have allowed us to achieve positive results from our
cross-selling efforts.
Optimum and Inmark provide traditional promotional services,
primarily consisting of strategic planning (including marketing positioning,
brand strategy and marketing/promotion plan development), creative marketing,
visual communications and graphic design services as well as developing radio
and television promotional programs for manufacturers of packaged goods. The
promotional programs developed often include additional components, such as
coupons and sweepstakes. In many instances where we are contracted to develop
radio and television promotional programs, we also purchase the broadcast media
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and administer the program on behalf of our client. In media related programs,
the programs frequently include the participation of retailers who are allocated
a portion of the purchased media, at no cost, for their support of the promotion
and prominent featuring of the manufacturer's products.
U.S. Concepts provides event and experiential marketing
programs, entertainment marketing and on-premise liquor promotion services. U.S.
Concepts provides a "turnkey" approach for the execution of its programs.
Digital Intelligence, formerly known as TrikMedia, Inc.,
acquired on October 29, 2003, provides digital marketing and advertising
services, interactive software development and content creation.
What We Do
We execute a wide range of precision strategies and tactics to
achieve specific and measurable objectives for our clients. Our programs are
designed to increase sales to targeted consumers and retailers while enhancing
brand image. In contrast with general advertising agencies that promote brand
awareness, as a promotions agency, we provide specialized services with the goal
of increasing sales of our client's products and services as a direct and
verifiable consequence of our programs.
In recent years, companies increasingly are utilizing
promotions as an integral part of their overall marketing strategy. Participants
in the 2006 Promo Magazine Industry Trends Report revealed that whether
marketers "are relying on promotions to drive sales within a specific timetable,
or help build loyalty and brand equity over the longer term, more and more
marketers are building in promotion elements into the DNA of their branding
efforts."
As domestic manufacturers and their channels of distribution
consolidate and re-align, and as a result of changes in lifestyles and
demographics, reaching marketing targets to achieve bottom line return on
investment of marketing funds has become more specialized and demanding than in
the past. We have an array of in-house core competencies which enable us to
integrate a wide range of tools and tactics on our clients' behalf. These
competencies, some of which are more fully described below, include interactive,
customized e-marketing, targeted broadcast, account specific co-marketing,
experiential marketing and "buzz" marketing, strategic planning, concept
development, and graphic design.
Experiential Marketing
U.S. Concepts is among the nation's most awarded event,
experiential, mobile and field marketing resources. U.S. Concepts' experiential
programs include concerts, tours and festivals, sales driven sampling
activities, demonstration programs and other events that introduce and promote
its clients' brands, services and products. U.S. Concepts designs and executes
brand experiences based on the philosophy that "continuous consumer contact
drives brand growth."
Interactive Marketing
An increasing number of consumers are using the Internet as a
resource for purchasing decisions. According a survey conducted by PROMO
Magazine (Industry Trends Report), interactive promotional spending was cited by
32% and 24%, in 2005 and 2004, respectively, of marketers as their highest
spending priority. Our Digital Intelligence group delivers technological and
creative interactive programs for its client base.
3
Ethnic Marketing
In 2005, we launched our Urban Concepts platform through our
U.S. Concepts subsidiary. Urban Concepts is our multicultural experiential
initiative dedicated to providing clients with resources for event marketing
opportunities and customer acquisition targeting Hispanic, African American and
urban consumers.
Strategic Planning and Sales Promotion
Taking into account each client's unique needs for brand
positioning, message creation and the selection of the appropriate communication
channels to be employed, we immerse ourselves in our client's business and
collaborate with their marketing team to develop a strategic and sales promotion
plan. Once the plan is developed, we focus on creative and program development
and implementation, recognizing that successful execution is as important as the
plan.
Trade Marketing
We have extensive experience in developing customized programs
for retailers in a variety of channels. We are active in all major retail
channels, including mass, grocery, drug, do-it-yourself (or "DIY") and
convenience. With our clients, we present marketing and promotional programs to
retailers, capitalizing on established relationships we have cultivated with
these retailers over many years.
The Industry
The industry is composed of hundreds of large and small
companies, and is dominated by affiliates of advertising agencies.
Promotional Magazine's 2005 Annual Report of the U.S.
Promotion Industry reported promotional marketing spending of $342 billion in
2005, up 9% over 2004. This follows a reported 9% increase in promotional
marketing spending in 2004 over 2003. The revenues in this segment consisted
primarily of event marketing; premiums and incentives; direct mail; retail;
sponsorship; coupons; specialty printing; licensing; fulfillment; agency
revenues; interactive/online; games, contests and sweepstakes; and samplings.
While promotional marketing spend has increased, profit margins in the industry
have recently declined.
Historically, most of the industry's revenues originate from
specific assignments on a project-by-project basis from continuing client
relationships. As the credibility and recognized value of integrated marketing
and promotional services have increased, a number of clients are designating
more promotion and related specialty marketing firms as their specific promotion
agency of record, thereby establishing the designated agency as an exclusive
promotion service supplier with regard to a particular niche area. Consistent
with this trend, we have been formally designated as an agency of record or have
similar long standing relationships with several of our clients. In an industry
that has historically generated assignments on a project-by-project basis, these
relationships tend to provide their recipients with a more secure client and
revenue base.
Premier Client Roster
Our principal clients are large manufacturers of packaged
goods and other consumer products. Our client partners are actively engaged in
promoting their products to both the consumer as well as trade partners, (i.e.,
retailers, distributors, etc.), and include, among others, Diageo North America,
Inc., Fresh Express, Inc., Nintendo of America, Kikkoman International, Inc.,
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Diageo-Guinness USA, Inc., Moet Hennessy, The Procter & Gamble Company, HBO,
Coca-Cola, AOL, Fisher-Price, T-Mobile, The Valvoline Company, Pfizer Corp.,
Coty, Best Buy and ACH Food Cos. Our trade partners include Albertsons, Safeway,
Kroger, Ralph's, Wal-Mart, Target, Walgreens, Rite Aid, Eckerd, CVS, Lowe's and
Fasmart.
For our fiscal years ended March 31, 2006, 2005 and 2004,
Diageo North America, Inc. ("Diageo") accounted for approximately 41%, 27% and
13%, respectively, of our revenues (inclusive of program reimbursable costs and
expenses). For our fiscal years ended March 31, 2005 and 2004, Schieffelin &
Somerset Co. and its successor companies ("S&S") accounted for approximately 13%
and 30%, respectively, of our revenues (inclusive of program reimbursable costs
and expenses). At March 31, 2006 and 2005, Diageo accounted for 41% and 9%,
respectively, of our accounts receivable, and at March 31, 2005, S&S accounted
for 1% of our accounts receivable.
To the extent that we continue to have a heavily weighted
sales concentration with one or more clients, the loss of any such client could
have a material adverse affect on our earnings. Unlike traditional general
advertising firms which are engaged as agents of record on behalf of their
clients, as a promotional company, we are typically engaged on a
product-by-product, or project-by-project basis. However, as a result of both
our agency of record designation and long standing relationships with certain of
our clients, we believe this exposure is partially mitigated.
Backlog
Excluding sales backlogs attributable to MarketVision and
reimbursable costs and expenses, at March 31, 2006, our sales backlog amounted
to approximately $22,781,000 compared to a sales backlog of approximately
$18,529,000 at March 31, 2005. As described further below our revenue patterns
are unpredictable and may vary significantly from period to period. Our backlog
at any given point in time is similarly subject to fluctuation.
Competition
The market for promotional services is highly competitive,
with hundreds of companies claiming to provide various services in the
promotions industry. In general, our competition is derived from two basic
groups: other full service promotion agencies, and companies which specialize in
providing one specific aspect of a general promotional program. Some of our
competitors are affiliated with larger general advertising agencies, and have
greater financial and marketing resources available than we do. These
competitors include Imperic (which is affiliated with Young & Rubicam), G2
(which is affiliated with Grey Advertising), Pierce, Radiate, GMR Marketing
(which are divisions of Omnicom Group, Inc.), ARC Worldwide (a subsidiary of
Publicis Group S.A.), Einson Freeman, Inc. (subsidiary of WPP), competitive
event marketing agencies Jack Morton and Momentum, as well as Market Drive and
Draft which are owned by the Interpublic Group. Niche competitors include Don
Jagoda, Inc., which specializes in sweepstakes, and Catalina Marketing, Inc.,
which specializes in cash register couponing programs.
Employees
We currently have 235 full-time and 3,810 part-time employees.
Our part-time employees are primarily involved in marketing support, program
management and in-store sampling and demonstration, and are employed on an as
needed basis. None of our employees are represented by a labor organization and
we consider our relationship with our employees to be good.
5
Item 1A. Risk Factors
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Outstanding Indebtedness; Security Interest. At March 31,
2006, loans outstanding from our secured lender amounted to $3,000,000, and we
had $3,000,000 of borrowing availability under our revolving credit facility. As
security for our obligations under our Credit Agreement, we have granted the
lender a first priority security interest in all of our 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. At March 31, 2006, we were not in compliance with the financial
covenants in the Credit Agreement; namely, the debt service coverage ratio, the
consolidated senior funded debt to consolidated EBITDA ratio and the prohibition
of incurring a consolidated net loss in two consecutive fiscal quarters or any
fiscal year. On July 12, 2006 our lender waived our defaults arising as a result
of such noncompliance and charged us a $10,000 waiver fee. Although we expect to
be able to comply with these financial covenants in future periods, there can be
no assurance that we will do so, and in the event we are not able to comply with
these covenants and are required to seek waivers from our lender, there can be
no assurance that our lender would grant us such a waiver.
Recent Losses. We sustained a net loss of approximately
$1,031,000 for our fiscal year ended March 31, 2006, and a net loss of
approximately $5,265,000 for our fiscal year ended March 31, 2004. These losses
were due in part to the unpredictable revenue patterns associated with our
business, as described below. There can be no assurances that we will be
profitable in the future.
Dependence on Key Personnel. Our business is managed by a
limited number of key management and operating personnel, none of whom are party
to a long-term employment agreement with us. The loss of any one of those
persons could have a material adverse impact on our business. In addition, our
agreement with Diageo, our largest client, requires us to continue to employ
Brain Murphy, the Chief Executive Officer of our U.S. Concepts subsidiary. We
believe that our future success will depend in large part on our continued
ability to attract and retain highly skilled and qualified personnel.
Customers. A substantial portion of our 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 we provide.
Unpredictable Revenue Patterns. A significant portion of our
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, our 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 we do. We compete on the basis of the quality and the
degree of comprehensive services which we provide to our clients. There can be
no assurance that we will be able to continue to compete successfully with
existing or future industry competitors.
6
Risks Associated with Acquisitions. An integral part of our
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, we have experienced periods of
rapid expansion. This growth has increased our operating complexity as well as
the level of responsibility for both existing and new management personnel and
operating systems. Our ability to manage our expansion effectively will require
us to continue to implement and improve our operational and financial systems
and to expand, train and manage our employee base. Our inability to effectively
manage expansion could have a material adverse effect on our business.
Control by Executive Officers and Directors. Our executive
officers and directors collectively beneficially own approximately 28% of our
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
power could also delay or prevent a change in control transaction in which our
stockholders could otherwise dispose of their shares of our Common Stock at a
substantial premium to its publicly traded share price. In addition, our Credit
Agreement requires certain individuals to collectively maintain, at a minimum, a
15% beneficial ownership of our Common Stock during the term of the Credit
Agreement.
Item 1B. Unresolved SEC Comments
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None
Item 2. Properties.
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We have the following leased facilities (1) (2):
Square Fiscal
Facility Location Feet 2006 Rent (3)
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Principal office of CoActive and
principal and sales office of
U.S. Concepts and Inmark New York, New York 33,400 $ 828,000
Principal and sales office of Optimum (4) Cincinnati, Ohio 17,000 $ 167,000
Other sales offices and warehouses of
Inmark, Optimum and U. S. Concepts Chicago, Illinois 10,400
Miami, Florida 1,300
San Francisco, California 900
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Total 12,600 $ 141,000
In addition to the above, from time to time we enter into short-term warehouse
leases for the storage of promotional materials that we use in connection with
our programs.
(1) The table above does not include space leased by of MarketVision. We
sold our interest in MarketVision in May 2006.
(2) The table above does not include the Company's Great Neck, New York
office, which the Company terminated in December 2005.
(3) Amounts listed are prior to any reimbursements from clients and does
not include the effect of any straight line rent adjustments recorded
for financial statement purposes.
(4) The Company leases this facility from Thomas Lachenman, a director of
the Company and the former owner of Optimum Group, Inc. This lease
expires in December 2010.
With the exception of the principal office leases in
Cincinnati, Ohio, and New York, New York, which at March 31, 2006 have remaining
terms of approximately five years and nine years, respectively, each of our
other facility leases are short term and renew annually. For a summary of our
minimal rental commitments under all non-cancelable operating leases with a
maturity date in excess of one year as of March 31, 2006, see note 5 to the
Notes to Consolidated Financial Statements.
7
We consider our facilities sufficient to maintain our current
operations.
Item 3. Legal Proceedings.
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None.
Item 4. Submission of Matters to a Vote of Security Holders.
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Not Applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
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Market Information
Our Common Stock is traded on the Nasdaq Capital Market under
the symbol CMKG. The following table sets forth for the periods indicated the
high and low trade prices for our Common Stock as reported by Nasdaq. The
quotations listed below reflect inter-dealer prices, without retail mark-ups,
mark-downs or commissions and may not necessarily represent actual transactions.
Common Stock
------------
High Low
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Fiscal Year 2005
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First Quarter 3.02 1.38
Second Quarter 2.65 1.36
Third Quarter 4.24 2.20
Fourth Quarter 4.64 3.06
Fiscal Year 2006
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First Quarter 3.73 2.71
Second Quarter 3.54 2.72
Third Quarter 3.05 2.20
Fourth Quarter 2.88 2.05
On June 1, 2006, there were 7,084,751 shares of our Common
Stock outstanding, approximately 56 shareholders of record and approximately 800
beneficial owners of shares held by a number of financial institutions.
No cash dividends have ever been declared or paid on our
Common Stock. We intend to retain earnings, if any, to finance future operations
and expansion and do not expect to pay any cash dividends in the foreseeable
future. In addition, we are prohibited from paying any cash dividends during the
term of the Credit Agreement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
Equity Compensation Plan Information
The following table sets forth information with respect to
equity compensation plans (including individual compensation arrangements) of
the Company as of March 31, 2006.
8
(a) (b) (c)
Number of securities
Number of securities remaining available for
to be issued upon Weighted average future issuance under
exercise of outstanding exercise price of equity compensation plans
options, warrants outstanding options, (excluding securities
Plan category and rights warrants and rights reflected in column (a))
- ------------- ----------------------- -------------------- -------------------------
Equity compensation
plans approved by
security holders(1) 1,766,305 $2.65 237,500
Equity compensation
plans not approved
by security holders(2) 81,533 $3.68 --
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Total 1,847,838 $2.69 237,500
================= ================== =====================
(1) Includes options to purchase 802,500 shares of Common Stock granted under
our 2002 Long-Term Incentive Plan, options to purchase 375,000 shares Common
Stock granted under our 1997 Executive Officer Stock Option Plan and options to
purchase 588,805 shares of Common Stock granted under our 1992 Stock Option
Plan.
(2) Consists of warrants to purchase shares of Common Stock issued in 1997 to
two persons, one of whom is a director of ours, in connection with our entry
into a financial advisory services agreement.
9
Item 6. Selected Financial Data.
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The selected financial data reported below has been derived
from our audited financial statements for each fiscal year ended March 31 within
the five year period ended March 31, 2006. The selected financial data reported
below should be read in conjunction with the consolidated financial statements
and related notes thereto and other financial information appearing elsewhere
herein.
Year Ended Year Ended Year Ended Year Ended Year Ended
March 31, March 31, March 31, March 31, March 31,
2002 2003(1) 2004(1) (2) 2005(2)(3) 2006(2)
------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
Sales (4) $ 59,264,617 $ 59,956,204 $ 69,280,484 $ 83,950,561 $ 98,038,354
Operating Expenses 57,249,529 64,481,104 73,661,540 80,977,737 99,182,113
Operating Income (Loss) 2,015,088 (4,524,900) (4,381,056) 2,972,824 (1,143,759)
Income (Loss) before Provision
(Benefit) for Income Taxes, Equity
in Loss of Affiliate, Minority
Interest in Net Income of
Consolidated Subsidiary and 1,637,082 (4,563,021) (4,621,344) 2,746,341 (1,362,521)
Cumulative Effect of Change in
Accounting Principle
Provision (Benefit) for Income Taxes 708,818 (1,749,863) (1,644,186) 1,100,555 (409,150)
Equity in Loss of Affiliate (18,000) (11,500) -- -- --
Minority Interest in Net Income of
Consolidated Subsidiary -- -- (105,359) (494,165) (77,856)
Net Income (Loss) before Cumulative
Effect of Change in Accounting
Principle for Revenue Recognition 910,264 (2,824,658) (3,082,517) 1,151,621 (1,031,227)
Cumulative Effect of Change in
Accounting Principle for Revenue
Recognition, Net of Income Taxes(5) -- -- (2,182,814) -- --
Net Income (Loss) 910,264 (2,824,658) (5,265,331) 1,151,621 (1,031,227)
Net Income (Loss) per Common Share
before Cumulative Effect of Change
in Accounting Principle for
Revenue Recognition:
Basic $ .18 $ (.56) $ (.54) $ .19 $ (.16)
Diluted $ .17 $ (.56) $ (.54) $ .18 $ (.16)
Cumulative Effect of Change in
Accounting Principle for Revenue
Recognition, Net of Income Taxes:
Basic $ -- $ -- $ (.38) $ -- $ --
Diluted $ -- $ -- $ (.38) $ -- $ --
Net Income (Loss):
Basic $ .18 $ (.56) $ (.92) $ .19 $ (.16)
Diluted $ .17 $ (.56) $ (.92) $ .18 $ (.16)
Pro Forma Amounts Assuming the
Change in Accounting Principle for
Revenue Recognition is Applied
Retroactively:
Net Income (Loss) 1,128,478 (4,373,061) -- -- --
Net Income (Loss) per Common Share:
Basic $ .22 $ (.87) -- -- --
Diluted $ .21 $ (.87) -- -- --
March 31, March 31, March 31, March 31, March 31,
2002 2003(1) 2004(1) (2) 2005(1)(2)(3) 2006(2)
------------ ------------ ------------ ------------ ------------
Balance Sheet Data:
Working Capital Deficiency (2,749,170) (718,147) (4,767,993) (1,275,903) (2,919,459)
Total Assets 36,872,138 33,420,912 33,663,838 34,932,341 41,981,180
Current Debt 2,358,333 1,375,000 1,875,000 1,000,000 1,000,000
Long-Term Debt 3,333,333 4,500,000 3,534,500 3,584,500 2,000,000
Total Liabilities 22,831,586 22,197,818 25,603,794 24,924,499 32,403,015
Stockholders' Equity 14,040,552 11,223,094 8,060,044 10,007,842 9,578,165
(1) Restated to reflect the recording of non-cash impairment charges of
$4,131,000 and $7,537,000, respectively, in the fiscal years ended March
31, 2004 and 2003, respectively, in connection with the Company's review of
the carrying value of its goodwill. The Company concluded that a portion of
the intercompany amounts due from one of its reporting units previously
considered as working capital should have been considered as part of its
carrying value for impairment valuation purposes. Accordingly, the Company
10
believes that the carrying value at March 31, 2005, 2004 and 2003 of
Optimum was greater than its fair value. The impact of the restatements
increased the Company's net loss as originally reported for the fiscal year
ended March 31, 2004 by $2,520,000 to ($5,265,000) from ($2,745,000) and
decreased the Company's net income as originally reported for the fiscal
year ended March 31, 2003 by $4,598,000 to a net loss of ($2,825,000) from
net income of $1,773,000.
(2) Includes the operations and accounts of the Company and the operations and
accounts of Digital Intelligence, which was acquired on October 29, 2003,
for the twelve months ended March 31, 2006 and 2005 and the five months
ended March 31, 2004, and the operations and accounts of MarketVision,
which is a variable interest entity, for the years ended March 31, 2006,
2005 and 2004, pursuant to Company's adoption of Financial Accounting
Standards Board's Interpretation No. 46 (revised 2003), Consolidation of
Variable Interest Entities-an Interpretation of ARB No. 51, as the Company
determined it was the primary beneficiary of MarketVision. The Company
disposed of its interest in MarketVision in May 2006.
(3) Restated for the year ended March 31, 2005 to reflect the correction of the
erroneous recording of $350,000 of revenues in the 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 impact of the restatement reduced the
Company's net income by $209,000 to $1,152,000 from $1,361,000.
(4) Restated for the year ended March 31, 2002 to reflect the adoption of EITF
01-14, Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred ("EITF 01-14"). EITF 01-14 requires
reimbursements received for "out-of-pocket" expenses to be characterized as
revenues. The resulting costs are now recorded as reimbursable expenses
resulting in no change in operating income. The impact of the Company's
adoption of EITF 01-14 was to increase both revenues and operating expenses
by $8,208,694, $11,669,664, $20,002,471, $29,999,150 and $38,338,254 for
the years ended March 31, 2002, 2003, 2004, 2005 and 2006, respectively.
(5) For the year ended March 31, 2004, the cumulative effect of change in
accounting principle for revenue recognition is a one-time non-cash charge
relating to the Company's adoption of EITF 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables ("EITF 00-21") issued in May 2003.
The Company adopted the provisions of EITF 00-21 effective April 1, 2003,
the beginning of the Company's fiscal year ended March 31, 2004. EITF 00-21
provides guidance related to revenue recognition with respect to contracts
with multiple revenue generating activities. The impact of the Company's
adoption of EITF 00-21 was to defer revenue recognition and the related
expense for certain portions of revenue and expense previously recognized
by the Company under its project arrangements with its clients into future
accounting periods.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations.
-------------
Forward Looking Statements.
This report contains forward-looking statements which the
Company believes to be within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, that are based on beliefs of the Company's management as well as
assumptions made by and information currently available to the Company's
management. When used in this report, the words "estimate," "project,"
"believe," "anticipate," "intend," "expect," "plan," "predict," "may," "should,"
"will," the negative thereof or other variations thereon or comparable
terminology are intended to identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events based on
currently available information and are subject to risks and uncertainties that
could cause actual results to differ materially from those contemplated in those
forward-looking statements. Factors that could cause actual results to differ
materially from the Company's expectations include but are not limited to those
described above in "Risk Factors." Other factors may be described from time to
time in the Company's public filings with the Securities and Exchange
Commission, news releases and other communications. The forward-looking
statements contained in this report speak only as of the date hereof. The
Company does not undertake any obligation to release publicly any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
Overview
In Fiscal 2006, a disappointing year for us, we realized a net
loss of $1,031,000 as compared to net income of $1,152,000 in Fiscal 2005. Sales
and profitability from each of our major units were lower than expected. In
addition, significantly reducing profitability in Fiscal 2006 was lower
profitability from MarketVision as well as significantly lower revenues from our
trade media programs. Fiscal 2006 results also reflect a one time pre-tax charge
of approximately $542,000 associated with the buyout of our Great Neck, NY
office lease. In addition, our fourth quarter Fiscal 2006 results include a
pre-tax impairment charge of approximately $626,000 associated with the
reduction of the carrying value of goodwill of one of our reporting units,
Optimum Group. In light of recent results, management has taken active steps to
reduce operating and administrative costs, including the buyout of its Great
Neck, NY office lease and reduction in staffing levels in targeted areas. In
11
particular, the buyout of the Great Neck, NY offices is expected to reduce
operating expenses by approximately $1,200,000 over the 31 month period of
January 1, 2006 to July 31, 2008, the original termination date of the lease. In
addition, in the fourth quarter of Fiscal 2006 we incurred severance and other
employee termination costs of $300,000 as we attempt to further align our
staffing costs to match expected revenues.
The following information should be read together with the
consolidated financial statements and notes thereto included elsewhere herein.
Restatements
The consolidated financial statements as of and for the fiscal
years ended March 31, 2005, 2004 and 2003 were restated as the result of our
review of the carrying value of goodwill associated with each of our reporting
units. In reviewing the carrying value of our goodwill at December 31, 2005 for
the purpose of determining if there was any impairment in goodwill, we concluded
that in prior periods a portion of the intercompany amounts due from one of our
operating units, Optimum, previously considered as working capital should have
been included as part of Optimum's carrying value for impairment valuation
purposes. Accordingly, we believe that the carrying value at March 31, 2005,
2004 and 2003 of Optimum was greater than its fair value. The restatement
increased our net loss as originally reported for the fiscal year ended March
31, 2004 by $2,520,000 to ($5,265,000) or $(.92) per diluted share from
($2,745,000) or $(.48) per diluted share and reduced our net income as
originally reported for the fiscal year ended March 31, 2003 by $4,598,000 to a
net loss of ($2,825,000) or ($.56) per diluted share from net income of
$1,773,000 or $.32 per diluted share.
The consolidated financial statements as of and for the fiscal
year ended March 31, 2005 were further restated as the result of the our
identification of the erroneous recording of $350,000 of revenues in our third
quarter ended December 31, 2004 with respect to a customer contract under which
we had been paid but not yet rendered the services that would entitle us to
recognize such revenues. The restatement reduced our net income as originally
reported for the fiscal year ended March 31, 2005 by $209,000 to $1,152,000
($.18 per diluted share) from $1,361,000 ($.21 per diluted share).
After reviewing the circumstances leading up to the
restatements, management believes that the errors were inadvertent and
unintentional. In addition, following the discovery of these errors, we
implemented procedures intended to strengthen our internal control processes and
prevent a recurrence of future errors of this nature.
Adoption of Accounting Standards
Revenue Arrangements with Multiple Deliverables
- -----------------------------------------------
We 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, we recognized revenue on our
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
12
event execution occurred. Under that method, we generally recognized a portion
of revenues attributable to those contracts upon signing by our clients.
Pursuant to EITF 00-21, with regard to contracts with multiple deliverables, we
now recognize income for each deliverable identified within a contract. In
contracts with multiple deliverables where separate deliverables can not be
identified under applicable accounting guidelines, all of the contract's revenue
is recognized as the media is aired and the events take place, without regard to
the timing of the contracts' signing or when cash is received under these
contracts. The adoption of EITF 00-21 (effective April 1, 2003) resulted in a
non-cash charge in Fiscal 2004 reported as a cumulative effect of a change in
accounting principle of $2,183,000. For Fiscal 2004, the adoption of EITF 00-21
resulted in an increase in sales of $2,479,000 and an increase in outside
production costs and expenses of $1,639,000. After giving effect to the
implementation of EITF 00-21 and before the cumulative effect of the change in
method of accounting for revenue recognition, we had a net loss of $(3,083,000)
or $(.54) per common share for Fiscal 2004.
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, we adopted FIN 46R as it related
to the activities of MarketVision. Accordingly, the operations and financial
statements of MarketVision for the fiscal years ended March 31, 2006, 2005 and
2004 are included in our consolidated financial statements, whereas for prior
fiscal years, under the equity method of accounting, we reported our investment
in MarketVision as adjusted for our share of net income or loss in our financial
statements. The effect of our adoption of FIN 46R did not impact our Fiscal 2004
net loss. We disposed of our interest in MarketVision in May 2006.
Lease Accounting Correction
- ---------------------------
Until the fourth quarter of Fiscal 2005, we recognized certain
lease obligations as they became due and payable. In light of announcements made
by a number of public companies regarding lease accounting and SEC clarification
on the subject, we corrected our lease accounting. As a result with regard to
one of its office leases, we corrected our computation of rent expense,
depreciation of leasehold improvements and the classification of landlord
allowances related to leasehold improvements. The correction does not affect our
historical or future cash flows or the timing of payments under the related
lease. The effect on our prior years' earnings (loss) per share, cash flow from
operations and stockholders' equity were deemed to be immaterial requiring no
restatement.
We historically have 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, we recorded a deferred asset for the estimated portion allocable
to these clients as of March 31, 2005. At March 31, 2005, the projected future
13
reimbursements from these clients for the effect of the straight line adjustment
amounted to approximately $371,000 and is included in other assets. This asset
was amortized over the period of the clients' expected reimbursement.
We recorded the correction in the fourth quarter of Fiscal
2005, which resulted in a non-cash pre-tax reduction in earnings of
approximately $299,000. In addition, in connection with the correction, we
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.
In the fourth quarter of Fiscal 2006, we determined that the
amount of projected client reimbursements could not be estimated with the
necessary degree of accuracy and should no longer be carried as an asset on our
balance sheets. Our determination results in part from a trend in our customer
contract away from direct reimbursements and towards fixed negotiated fees for
services provided. As a result of our determination, we recorded a non-cash
pre-tax reduction in earnings of approximately $218,000 to write off the
remaining balance of projected client rent reimbursements. In addition, in
connection with the adjustment, we recorded an increase in property and
equipment - leasehold improvements of $190,000, a decrease in other assets of
$408,000 and a decrease in deferred taxes payable of $85,000.
Significant Customers
For the fiscal years ended March 31, 2006, 2005 and 2004,
Diageo accounted for approximately 41%, 27% and 13%, respectively, of our
revenues (inclusive of program reimbursable costs and expenses). For the fiscal
years ended March 31, 2005 and 2004, S&S accounted for approximately 13% and
30%, respectively, of our revenues (inclusive of program reimbursable costs and
expenses). These revenues included revenues attributable to reimbursable costs
and expenses for Diageo of 26%, 17% and 5%, respectively, for the years ended
March 31, 2006, 2005 and 2004, and 9% and 21% for S&S, respectively, for the
years ended March 31, 2005 and 2004. At March 31, 2006 and 2005, Diageo
accounted for 41% and 9%, respectively, of our accounts receivable. At March 31,
2005, S&S accounted for 1% of our accounts receivable.
To the extent our sales are dependent on one client or a
limited concentration of clients, and such dependency continues, significant
fluctuations in revenues, results of operations and liquidity could arise should
such client or clients reduce their budgets allocated to our activities.
Critical Accounting Policies
Our significant accounting policies are described in Note 1 to
the consolidated financial statements included in Item 8 of this Form 10-K. We
believe the following represent our critical accounting policies:
Estimates and Assumptions
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and of revenues and expenses during the reporting period. Estimates
are made when accounting for revenue (as discussed below under "Revenue
Recognition"), depreciation, amortization, bad debt reserves, income taxes and
certain other contingencies. We are subject to risks and uncertainties that may
cause actual results to vary from estimates. We review all significant estimates
affecting the financial statements on a recurring basis and records the effect
of any adjustments when necessary.
14
Revenue Recognition
Our revenues are generated from projects subject to contracts
requiring us to provide its services within specified time periods generally
ranging up to twelve months. As a result, on any given date, we have 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 cost of labor performed to date
to the estimated total cost of labor for each contract; (v) on certain 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. Our
business is such that progress towards completing projects may vary considerably
from quarter to quarter.
If we do not accurately estimate the resources required or the
scope of work to be performed, or do not manage our projects properly within the
planned periods of time to satisfy our obligations under the contracts, then
future profit margins may be significantly and negatively affected or losses on
existing contracts may need to be recognized. Our outside production costs
consist primarily of costs to purchase media and program merchandise; costs of
production, merchandise warehousing and distribution, third party contract
fulfillment costs; and other costs directly related to marketing programs. Any
such resulting reductions in margins or contract losses could be material to our
results of operations.
In many instances, revenue recognition will not result in
related billings throughout the duration of a contract due to timing differences
between the contracted billing schedule and the time such revenue is recognized.
In such instances, when revenue is recognized in an amount in excess of the
contracted billing amount, we record such excess on our balance sheet as
unbilled contracts in progress. Alternatively, on a scheduled billing date,
should the billing amount exceed the amount of revenue recognized, we record
such excess on our balance sheet as deferred revenue. In addition, on contracts
where costs are incurred prior to the time revenue is recognized on such
contracts, we record such costs as deferred contract costs on our consolidated
balance sheet. Notwithstanding this, labor costs for permanent employees are
expensed as incurred.
Goodwill and Other Intangible Asset
Our goodwill consists of the cost in excess of the fair market
value of the acquired net assets of our subsidiary companies, Inmark, Optimum,
U.S. Concepts, MarketVision and Digital Intelligence, which have been identified
as our reporting units. We also have an intangible asset consisting of an
Internet domain name and related intellectual property rights. At March 31, 2006
and 2005, our balance sheet reflected goodwill in the amount of approximately
$7,601,000 and $8,227,000, respectively, and an intangible asset in the amount
of $200,000.
Goodwill and intangible assets deemed to have indefinite lives
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. We assess the potential impairment of goodwill and
15
intangible assets 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 review, if impairment is found to have occurred, a
corresponding charge will be recorded.
As a result of our annual test to determine whether goodwill
has been impaired, we concluded that at March 31, 2006, the carrying value of
the goodwill associated with one of our reporting units, Optimum, was greater
than its fair value. As a result, we recorded a non-cash pre-tax charge of
$626,000 for the year ended March 31, 2006 (net after tax in the amount of
$382,000) to reflect such impairment and reduce the carrying value of the
goodwill associated with Optimum.
The consolidated financial statements as of and for the fiscal
years ended March 31, 2005, 2004 and 2003 were restated as a result of our
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, we concluded
that in prior periods a portion of the intercompany amounts due from one of our
reporting units, Optimum, previously considered as working capital should have
been considered as part of Optimum's carrying value for impairment valuation
purposes. Accordingly, we believe that the carrying value at March 31, 2005,
2004 and 2003 of Optimum was greater than its fair value. As a result, we
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 were restated as a result of our 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 year ended March 31, 2006, we have not identified any indication of goodwill
impairment in our reporting units.
Accounting for Income Taxes
Our ability to recover the reported amounts of deferred income
tax assets is dependent upon our ability to generate sufficient taxable income
during the periods over which net temporary tax differences become deductible.
In assessing the realizability of deferred tax assets and liabilities,
management considers whether it is more likely than not that some or all of them
will not be realized. As of March 31, 2006 and 2005, we determined that a
valuation allowance against our deferred tax asset was not necessary. We must
generate approximately $12,803,000 of taxable income, exclusive of any reversals
of timing differences, to fully utilize our deferred tax assets. Management
believes it is more likely than not that the results of future operations will
generate sufficient taxable income to realize the net deferred tax assets.
Results of Operations
The following table presents the reported operating results
for the fiscal years ended March 31, 2006, 2005 and 2004:
16
Year Ended March 31,
--------------------------------------------
2006 2005 2004
------------ ------------ ------------
Operations Data:
Sales $ 98,038,354 $ 83,950,561 $ 69,280,484
Reimbursable costs and expenses 38,338,254 29,999,150 20,002,471
Outside production costs and expenses 24,706,743 21,218,373 19,366,050
Salaries, payroll taxes and benefits 24,183,806 20,593,053 19,989,835
General and administrative expenses 11,327,701 9,167,161 10,171,960
Impairment charge 625,609 -- 4,131,224
Total operating expenses 99,182,113 80,977,737 73,661,540
Operating (loss) income (1,143,759) 2,972,824 (4,381,056)
Interest expense, net (218,762) (226,483) (240,288)
(Loss) income before (benefit) provision for income
taxes, minority interest in net income of
consolidated subsidiary and cumulative effect of
change in accounting principle (1,362,521) 2,746,341 (4,621,344)
(Benefit) provision for income taxes (409,150) 1,100,555 (1,644,186)
Minority interest in net income of consolidated
subsidiary (77,856) (494,165) (105,359)
Net (loss) income before cumulative effect of
change in accounting principle for revenue
recognition, net of taxes (1,031,227) 1,151,621 (3,082,517)
Cumulative effect of change in accounting principle
for revenue recognition, net of income taxes -- -- (2,182,814)
Net (loss) income (1,031,227) 1,151,621 (5,265,331)
Per Share Data
Basic (loss) income per share applicable to common
shareholders $ (.16) $ .19 $ (.92)
Diluted (loss) income per share applicable to
common shareholders $ (.16) $ .18 $ (.92)
Weighted Average Shares Outstanding
Basic 6,452,847 6,004,948 5,700,144
Diluted 6,452,847 6,391,435 5,700,144
The following table presents operating data expressed as a
percentage of sales for each of the fiscal years ended March 31, 2006, 2005 and
2004, respectively:
17
Year Ended March 31,
----------------------------------------
2006 2005 2004
---------- ---------- ----------
Statement of Operations Data:
Sales 100.0% 100.0% 100.0%
Reimbursable costs and expenses 39.1% 35.7% 28.9%
Outside production costs and expenses 25.2% 25.3% 28.0%
Salaries, payroll taxes and benefits 24.7% 24.5% 28.9%
General and administrative expenses 11.6% 10.9% 14.7%
Impairment charge 0.6% -- 6.0%
Total operating expenses 101.2% 96.5% 106.3%
Operating (loss) income (1.2%) 3.5% (6.3%)
Interest expense, net (0.2%) (0.3%) (0.3%)
(Loss) income before (benefit) provision for income
taxes and minority interest in net income of
consolidated subsidiary (1.4%) 3.3% (6.7%)
(Benefit) provision for income taxes (0.4%) 1.3% (2.4%)
Minority interest in net income of consolidated
subsidiary (0.1%) (0.6%) (0.2%)
Net (loss) income before cumulative effect of
change in accounting principle for revenue
recognition, net of taxes (1.1%) 1.4% (4.4%)
Cumulative effect of change in accounting principle
for revenue recognition, net of income taxes -- -- (3.2%)
Net (loss) income (1.1%) 1.4% (7.6%)
Fiscal Year 2006 Compared to Fiscal Year 2005
Sales. Sales for Fiscal 2006 were $98,038,000, compared to
sales of $83,951,000 for Fiscal 2005, an increase of $14,087,000, or 17%. The
following table presents a comparative summary of the components of sales for
Fiscal 2006 and 2005:
Year Ended March 31,
---------------------------------------------------------
Sales 2006 % 2005 %
----- ------------ ------------ ------------ ------------
Core business $ 54,261,070 55.4 $ 49,099,988 58.5
MarketVision 5,439,030 5.5 4,851,423 5.8
Reimbursable program costs and
expenses (1) 38,338,254 39.1 29,999,150 35.7
------------ ------------ ------------ ------------
Total sales $ 98,038,354 100.0 $ 83,950,561 100.0
============ ============ ============ ============
(1) Includes reimbursable costs both from the core business and MarketVision
18
Core revenues were positively affected by the continued growth
of sales to our existing clients. The net increase in our core business sales
for Fiscal 2006 reflects higher sales from experiential programs and sales
promotion marketing programs. In addition, while revenues from interactive
marketing programs increased, the increase was largely due to revenues
associated with outside production costs that we pass on to our customers at low
mark-ups. The increases in revenues from experiential programs, sales promotion
marketing programs and interactive marketing programs were partially offset by
decreased revenues from our media promotional programs. Lower media program
revenues reflect a continuing industry trend of clients purchasing media from
large advertising agencies.
While MarketVision's revenues, excluding reimbursable program
cost and expenses, increased by approximately $600,000 in Fiscal 2006, this was
substantially lower than what we had expected. In addition, the increase was
substantially offset by higher outside production costs. In May 2006 we sold our
interest in MarketVision for $1,100,000 in cash.
In the delivery of certain services to our clients, we
purchase a variety of items and services on their behalf for which we are
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. The increase in Fiscal 2006 is primarily due
to increased programs executed for both experiential and sales promotion
clients.
Operating Expenses. Operating expenses for Fiscal 2006
increased by $18,204,000, or 22%, and amounted to $99,182,000, compared to
$80,978,000 for Fiscal 2005. The increase in operating expenses resulted from
the aggregate of the following:
Reimbursable Program Costs and Expenses. In the delivery of
certain services to our clients, we purchase a variety of items and services on
their behalf for which we are reimbursed. The amount of reimbursable program
costs and expenses will vary from period to period, based on the type and scope
of the promotional service being provided. Reimbursable program costs and
expenses for Fiscal 2006 and 2005 were $38,338,000 and $29,999,000,
respectively. The increase in reimbursable program costs and expenses of
approximately $8,339,000, or 28%, in Fiscal 2006 was primarily due to
experiential and sales promotion programs. The increase in reimbursable program
costs and expenses included an increase of approximately $800,000 relating to
MarketVision programs. Such core programs, as well as those executed by
MarketVision, often include reimbursed costs and expense components.
Outside Production Costs and Expenses. Outside production
costs and expenses consist of the cost of purchased materials, media, services
and other expenditures incurred in connection with and directly related to
sales. Outside production costs for Fiscal 2006 were $24,707,000 compared to
$21,218,000 for Fiscal 2005, an increase of $3,489,000, or 16%. Outside
production costs and expenses increased in Fiscal 2006 primarily as a result of
increased revenues we earned for experiential, interactive and sales promotion
programs. The weighted mix of outside production costs and the mark-up related
to these cost components may vary significantly from project to project based on
the type and scope of the service being provided. For the year ended March 31,
19
2006, outside production costs and expenses as a percentage of sales (exclusive
of reimbursements of costs and expenses), increased to 41% from 39% in Fiscal
2005. The increase is due to lower margins earned on media promotional programs,
MarketVision programs and experiential sales offset by higher margins earned on
sales promotion programs. Experiential program client mix in the current year
shifted to programs that contained a higher average sale price, but included a
higher percentage of outside production costs, thereby yielding a lower margin.
In the prior year, media programs contained a higher percentage of fee only
programs that did not contain an outside production cost element. Lastly, unlike
the prior year, interactive programs in the current year included many projects
that contained an outside production cost element. In such programs, the margins
earned on such production costs are relatively low.
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 Fiscal 2006, salaries, payroll taxes and benefits were
$24,184,000, compared to $20,593,000 for Fiscal 2005, an increase of $3,591,000,
or 17%. Salaries, payroll taxes and benefits as a percentage of sales (exclusive
of reimbursable costs and expenses) amounted to 41% for the year ended March 31,
2006, compared to 38% for the year ended March 31, 2005. The increase was
primarily attributable to increased staffing to support an anticipated Fiscal
2006 increase in the level of operations to service our core business activities
and projected increased MarketVision sales, which did not fully materialize, as
well as the launch of our Urban Concept platform, and severance and other
employee termination costs of $300,000.
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 Fiscal
2006 were $11,328,000, compared to $9,167,000 for Fiscal 2005, an increase of
$2,161,000, or 24%. The increase in these expenses was primarily the result of
$542,000 of costs associated with the termination of our Great Neck, New York
office lease, $218,000 of costs associated with the write off in the fourth
quarter of Fiscal 2006 of projected future client rent reimbursements, increased
marketing and creative expenses, professional fees, as well as other general and
administrative expenses. In addition, as a result of MarketVision's office
relocation in the prior year, occupancy costs for MarketVision increased
$160,000 in Fiscal 2006. Lastly, during Fiscal 2006, due to the uncertainty
regarding the collectability of certain receivables, we recorded an additional
bad debt reserve of approximately $272,000. This includes a bad debt allowance
of $137,000 for one customer that was reserved for in the fourth quarter of
Fiscal 2006. Our bad debt expense (credit) amounted to $291,000 and ($66,000)
for Fiscal 2006 and 2005, respectively.
As a result of the termination of the Great Neck, NY lease, we
expect to reduce operating expenses by approximately $1,200,000 over the 31
month period of January 1, 2006 to July 31, 2008, the original termination date
of this lease.
Included in general and administrative expenses in the fourth
quarter of Fiscal 2005 is a non-cash charge of $299,000 representing the
cumulative rent adjustment applicable to a correction of our accounting for the
rent expense of our New York City offices in prior periods. Previously, we
recognized lease payment obligations as rent expense in amounts to be paid as
such obligations became due and payable, in lieu of amortizing such obligations
on a straight-line basis over the term of the lease.
General and administrative expenses as a percentage of sales
(exclusive of reimbursable program costs) amounted to 19% and 17% for Fiscal
2006 and 2005, respectively. Exclusive of the effects of Great Neck, Long Island
office lease termination costs in Fiscal 2006 such percentage amounted to 18%
for Fiscal 2006.
20
Impairment Charge. As a result of our annual test to determine
whether goodwill has been impaired, we concluded that at March 31, 2006, the
carrying value of the goodwill associated with one of our reporting units,
Optimum, was greater than its fair value. As a result, we recorded a non-cash
pre-tax charge of $626,000 (net after tax in the amount of $382,000) in the
fourth quarter of Fiscal 2006 to reflect such impairment and reduce the carrying
value of the goodwill associated with Optimum to zero.
Operating (Loss) Income. As a result of the above changes, our
operating loss for Fiscal 2006 amounted to $1,144,000, as compared to operating
income of $2,973,000 for Fiscal 2005. Operating loss for the year ended March
31, 2006 included $267,000 of operating income attributable to MarketVision,
compared to $1,385,000 of operating income attributable to MarketVision for the
year ended March 31, 2005.
Interest Expense, Net. Net interest expense, consisting of
interest expense of $282,000 offset by interest income of $63,000, for Fiscal
2006, amounted to $219,000, a decrease of $7,000, compared to net interest
expense of $226,000, consisting of interest expense of $276,000 offset by
interest income of $50,000, for Fiscal 2005. Interest expense consists primarily
of interest on our outstanding bank debt. Interest income consists primarily of
interest on our note receivable from an officer. Interest charges on the bank
debt and interest income on the note receivable are computed based on the prime
interest rate in effect. While our average bank debt has decreased as compared
to the prior year, rising interest rates have substantially offset the effect of
this decrease on our interest expense.
(Loss) Income Before (Benefit) Provision for Income Taxes and
Minority Interest in Net Income of Consolidated Subsidiary. As a result of the
items discussed above, our (loss) income before (benefit) provision for income
taxes and minority interest in net income of consolidated subsidiary for Fiscal
2006 was ($1,363,000), compared to income of $2,746,000 for Fiscal 2005.
(Benefit) Provision For Income Taxes. The (benefit) provision
for federal, state and local income taxes for Fiscal 2006 and Fiscal 2005 were
based upon our estimated effective tax rate for the respective fiscal years.
Minority Interest in Net Income of Consolidated Subsidiary.
For Fiscal 2006, we reflected a non-cash charge of $78,000, representing a third
party's 51% ownership interest in the net income of MarketVision, compared to a
non-cash charge of $494,000 for such third party's interest in the net income of
MarketVision for Fiscal 2005. The change between Fiscal 2006 and 2005, reflects
the reduced profitability of MarketVision during Fiscal 2006.
Net (Loss) Income. As a result of the items discussed above,
net (loss) income for Fiscal 2006 and 2005 was ($1,031,000) and $1,152,000,
respectively. Fully diluted (loss) earnings per share amounted to ($.16) for
Fiscal 2006, compared to $.18 for Fiscal 2005.
Fiscal Year 2005 Compared to Fiscal Year 2004
Sales. Sales for Fiscal 2005 were $83,951,000, compared to
sales of $69,280,000 for Fiscal 2004, an increase of $14,671,000. The following
table presents a comparative summary of the components of sales for Fiscal 2005
and 2004:
21
Year Ended March 31,
---------------------------------------------------------
Sales 2005 % 2004 %
----- ------------ ------------ ------------ ------------
Core business $ 49,099,988 58.5 $ 46,883,538 67.7
MarketVision 4,851,423 5.8 2,394,475 3.4
Reimbursable program costs and
expenses 29,999,150 35.7 20,002,471 28.9
------------ ------------ ------------ ------------
Total sales $ 83,950,561 100.0 $ 69,280,484 100.0
============ ============ ============ ============
The net increase in our core business sales for Fiscal 2005
reflects (i) an increase in cross-sold services provided on behalf of
MarketVision, and (ii) increased event and interactive marketing services
revenues.
The increase in sales attributable to MarketVision was due to
an increase in client demand for our Hispanic marketing services.
In the delivery of certain services to our clients, we
purchase a variety of items and services on their behalf for which we are
reimbursed. The amount of reimbursable program 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 Fiscal 2005
increased by $7,316,000 and amounted to $80,978,000, compared to $73,662,000
for Fiscal 2004. The increase in operating expenses resulted from the aggregate
of the following:
Reimbursable Program Costs and Expenses. In the delivery of
certain services to our clients, we purchase a variety of items and services on
their behalf for which we are reimbursed. The amount of reimbursable program
costs and expenses will vary from period to period, based on the type and scope
of the promotional service being provided. Reimbursable program costs and
expenses for Fiscal 2005 and Fiscal 2004 were $29,999,000 and $20,002,000,
respectively. The increase in reimbursable program costs and expenses of
approximately $9,997,000 in Fiscal 2005 was primarily due to increases from
MarketVision customers as well as one U. S. Concepts customer. This was
partially offset by lower reimbursable program costs and expenses from S&S in
Fiscal 2005.
Outside Production Costs and Expenses. Outside production
costs and expenses consist of the cost of purchased materials, media, services
and other expenditures incurred in connection with and directly related to
sales. Outside production costs for Fiscal 2005 were $21,218,000 compared to
$19,366,000 for Fiscal 2004, an increase of $1,852,000. 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 fiscal years ended March 31, 2005 and 2004,
outside production costs as a percentage of sales are reflective of the
aggregate mix of client projects during such periods. Outside production costs
as a percentage of sales (exclusive of reimbursements of costs and expenses) for
the fiscal years ended March 31, 2005 and 2004 amounted to 39%.
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 Fiscal 2005, salaries, payroll taxes and benefits were
$20,593,000, compared to $19,990,000 for Fiscal 2004. The increase in these
costs of $603,000 was primarily attributable to added personnel in support of
MarketVision's increased level of operations.
22
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 Fiscal
2005 were $9,167,000, compared to $10,172,000 for Fiscal 2004, a decrease of
$1,005,000. The decrease in these expenses was primarily the result of our
continuing effort to more effectively manage and control costs, offset by the
inclusion of increased expenses of $255,000 at MarketVision. The increased costs
at MarketVision were primarily related to travel and entertainment, rent and
other general and administrative expenses incurred in connection with
MarketVision's growth in Fiscal 2005. General and administrative expense for
Fiscal 2005 includes a net credit of $66,000 for bad debt expense. This was
primarily the result of reversals of bad debt allowances that were previously
established for certain doubtful accounts which were collected during the first
quarter.
In the fourth quarter of Fiscal 2005, we corrected our lease
accounting practices to account for rent expense on a straight line basis, the
depreciation of leasehold improvements and the classification of landlord
allowances related to leasehold improvements. As a result of the correction of
this error and included in general and administrative expenses, we recorded a
non-cash charge of $299,000 in the fourth quarter representing the cumulative
rent adjustment applicable to a correction of our accounting for the rent
expense of its New York City offices in prior periods. Previously, we recognized
lease payment obligations as rent expense in amounts to be paid as such
obligations became due and payable, in lieu of amortizing such obligations on a
straight-line basis over the term of the lease.
Impairment Charge. In reviewing the carrying value of its
goodwill at December 31, 2005, for the purpose of determining if there was any
impairment in goodwill, we concluded that in prior periods a portion of the
intercompany amounts due from one of our reporting units, Optimum, previously
considered as working capital should have been considered as part of Optimum's
carrying value for impairment valuation purposes. Accordingly, we believe that
the carrying value at March 31, 2005, 2004 and 2003 of Optimum was greater than
its fair value. As a result, we 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 to $626,000. The consolidated financial statements as of and for the
fiscal years ended March 31, 2005, 2004 and 2003 were restated as a result of
the change in our methodology of valuing goodwill for impairment.
Operating Income (Loss). As a result of the above changes,
operating income for Fiscal 2005 increased to $2,973,000, from an operating loss
of $4,381,000 for the year ended March 31, 2004. The operating income (loss) for
the years ended March 31, 2005 and 2004 included operating income $1,385,000 and
$275,000 attributable to MarketVision, respectively.
Interest Expense, Net. Net interest expense, consisting of
interest expense of $276,000 offset by interest income of $50,000, for Fiscal
2005, amounted to $226,000, a decrease of $14,000, compared to net interest
expense of $240,000, consisting of interest expense of $314,000 offset by
interest income of $74,000, for Fiscal 2004. The decrease in interest expense
for Fiscal 2005 was primarily related to the decrease in outstanding bank
borrowings, offset by an increase in interest rates.
Income (Loss) Before Provision (Benefit) for Income Taxes,
Equity in Loss of Affiliate, Minority Interest in Net Income of Consolidated
Subsidiary and Cumulative Effect of Change in Accounting Principle for Revenue
Recognition. Income (loss) before provision (benefit) for income taxes, equity
in loss of affiliate, minority interest in net income of consolidated subsidiary
23
and cumulative effect of change in accounting principle for revenue recognition
for Fiscal 2005 was $2,746,000, compared to a loss of $4,621,000 for Fiscal
2004.
Provision (Benefit) For Income Taxes. The provision (benefit)
for federal, state and local income taxes for Fiscal 2005 and Fiscal 2004 were
based upon our estimated effective tax rate for the respective fiscal years.
Minority Interest in Net Income of Consolidated Subsidiary.
For Fiscal 2005, we reflected a non-cash charge of $494,000, representing a
third party's 51% ownership interest in the net income of MarketVision, compared
to a non-cash charge of $105,000 for such third party's interest in the net
income of MarketVision for Fiscal 2004.
Cumulative Effect of Change in Accounting Principle for
Revenue Recognition. For Fiscal 2004, we incurred a non-cash charge of
$2,183,000 representing the cumulative effect of a change in accounting
principle related to its adoption of EITF 00-21 on a cumulative basis as of
April 1, 2003.
Net Income (Loss). As a result of the items discussed above,
net income (loss) for Fiscal 2005 and Fiscal 2004 was $1,152,000 and
$(5,265,000), respectively.
Liquidity and Capital Resources
On March 24, 2005, we 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 $2.4 million to $3.0 million, and
the term loan portion of the credit facility was increased by $1.1 million to
$4.0 million. On March 25, 2005, Signature Bank advanced us 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 our
assets. We pay 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 made in 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 was
extended from July 22, 2006 to March 24, 2008.
o Interest on the revolving loans was reduced to Signature's prime rate
(7.75% at March 31, 2006) from its prime rate plus .50%, and interest
on the term loan was 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, (vi) limitation on annual
capital expenditures, and (vii) maintenance of 15% of beneficially owned shares
of our Common Stock by certain members of our management. At March 31, 2006, we
were not in compliance with certain financial covenants of our Credit Agreement,
namely the debt service coverage ratio, the consolidated senior funded debt to
consolidated EBITDA ratio and the prohibition of incurring a consolidated net
24
loss in two consecutive fiscal quarters or any fiscal year. On July 12, 2006,
the bank waived the defaults arising as a result of such noncompliance and
charged us a $10,000 waiver fee. On the same date, and in connection with this
waiver, the Credit Agreement was amended by reducing the revolving credit line
to $2.0 million from $3.0 million.
As a condition to providing its consent to the sale of our
interest in MarketVision in May 2006, our secured lender required us to deposit
the proceeds of such sale, in the amount of approximately $1.1 million, in a
cash collateral account as security for our obligations under the Credit
Agreement. As part of the July 12, 2006 amendment to the Credit Agreement, our
lender released the cash collateral to us.
At March 31, 2006, we had cash and cash equivalents of
$5,892,000, a working capital deficit of $2,919,000, outstanding bank loans of
$3,000,000 and an outstanding bank letter of credit of $475,000, $3,000,000
available for borrowing under the revolving credit line, and stockholders'
equity of $9,578,000. In comparison, At March 31, 2005, we had cash and cash
equivalents of $2,394,000, a working capital deficit of $1,276,000, outstanding
bank loans of $4,584,500 and 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.
Summarized financial information of MarketVision for Fiscal
2006 and Fiscal 2005, which is reflected in the foregoing analysis, is as
follows:
March 31, March 31,
2006 2005
-------------- --------------
Cash $ 1,962,000 $ 223,000
Current assets 3,891,000 5,698,000
Current liabilities 2,715,000 4,563,000
Working capital 1,176,000 1,135,000
Net cash provided by operating activities 1,910,000 176,000
Net income 153,000 969,000
Operating Activities. Net cash provided by operating
activities was $5,093,000 for Fiscal 2006. The net cash provided by operating
activities was primarily attributable to increases in the deferred revenue
balance as well as other current liabilities. Such increases were partially
offset by higher accounts receivable and deferred contract costs balances at
March 31, 2006.
Investing Activities. For Fiscal 2006, net cash used in
investing activities amounted to $411,000 as a result of the purchase of fixed
assets. Of this amount, $171,000 related to MarketVision and was primarily the
result of costs incurred with MarketVision's new office. Additionally,
approximately $50,000 of capital expenditures was incurred in Fiscal 2006 as a
result of the relocation of our corporate offices to New York City. We do not
expect to make material investments in fixed assets in Fiscal 2007.
Financing Activities. For Fiscal 2006, net cash used in
financing activities amounted to $1,185,000 resulting primarily from a net use
of $1,585,000 to reduce bank borrowings, offset by $429,000 from proceeds for
the exercise of options and warrants.
For Fiscal 2006, we funded our activities from cash provided
by operating activities, loan borrowings under the Credit Agreement and cash
provided from the exercise of stock options and warrants. Management believes
that cash generated from operations together with available cash generated from
the sale of our interest in MarketVision and amounts currently available for
borrowing under our revolving credit line will be sufficient to meet cash
requirements for Fiscal 2007, although there can be no assurance in this regard.
To the extent that we are required to seek additional external financing, there
can be no assurance that we will be able to obtain such additional funding to
satisfy its cash requirements for Fiscal 2007 or as subsequently required to
repay loans under the Credit Agreement.
25
Off-Balance Sheet Transactions
We are not a party to any "off-balance sheet transactions" as
defined in Item 301 of Regulation S-K.
Contractual Obligations
The table below sets forth as of March 31, 2006, future
minimum payments we are required to make in respect of debt obligations and
operating leases.
Payments Due Fiscal Year Ending March 31,
------------------------------------------------------------------------------------------------------
Total 2007 2008 2009 2010 2011 Thereafter
------------ ------------ ------------ ------------ ------------ ------------ ------------
Contractual
Obligations
- -----------
Bank Term
Loan $ 3,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ -- $ -- $ --
Bank Revolving
Credit Loan -- -- -- -- -- -- --
Operating
Leases 11,123,000 1,215,000 1,278,000 1,247,000 1,198,000 1,179,000 5,006,000
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total $ 14,123,000 $ 2,215,000 $ 2,278,000 $ 2,247,000 $ 1,198,000 $ 1,179,000 $ 5,006,000
============ ============ ============ ============ ============ ============ ============
Note: In connection with our New York City lease, we have provided the landlord
of such facilities with a security deposit in the form of a letter of credit in
the amount of $475,000. The letter of credit, which was issued by Signature Bank
under the Credit Agreement, is reduced annually by $25,000.
Impact of Recently Issued 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" ("SFAS No. 154"). 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. SFAS No. 154 applies to all voluntary changes in
accounting principle and 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. SFAS No. 154 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 our consolidated financial statements.
26
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. We anticipate that the
adoption of SFAS No. 123R will impact our reported financial results in a manner
similar to the effects shown in the pro forma disclosure included in Note 1 of
the accompanying audited financial statements under the caption "Accounting for
Stock Based Compensation."
Certain Transactions
Resignation of President and Chief Executive Officer
On June 14, 2006, the Board of Directors of accepted the
resignation of John Benfield, our Chief Executive Officer, and appointed Marc C.
Particelli, a member of our Board of Directors, to serve as Chief Executive
Officer and Chairman of the Board on an interim basis. Both Mr. Benfield's
resignation and Mr. Particelli's appointment will be effective as of July 1,
2006, or if later, the date on which we file with the Securities and Exchange
Commission our Annual Report on Form 10-K for the year ended March 31, 2006.
In connection with his appointment as interim Chief Executive
Officer, the Board and Mr. Particelli entered into an Employment Agreement
pursuant to which Mr. Particelli will be paid an annual salary of $250,000 for
devoting approximately 50% of his working time to the Company. In addition, for
his agreement to serve as interim Chief Executive Officer, the Board approved
the grant to Mr. Particelli of a five-year stock option to purchase 80,000
shares of our Common Stock at a price of $1.57 per share (the market price of
the common stock on the date the grant was authorized).
In addition, in connection with his resignation, we entered
into an agreement with Mr. Benfield pursuant to which Mr. Benfield will, for the
one-year period beginning July 1, 2006, continue to be compensated at his
current rate of $300,000 per annum and receive the same benefits currently
provided to him by us. In consideration of the foregoing, Mr. Benfield will
remain employed by us on a full-time basis to assist in the transition for a
period of three-months. We expect to record a pre-tax charge of approximately
$265,000 in our second fiscal quarter ending September 30, 2006 in connection
with our obligations under the Agreement with Mr. Benfield.
MarketVision
On February 27, 2001, we acquired 49% of the shares of capital
stock of MarketVision, a minority owned, predominately Hispanic, ethnically
oriented promotion agency headquartered in San Antonio, Texas. The MarketVision
acquisition had been accounted for as an equity investment on our consolidated
balance sheet through our fiscal year ended March 31, 2003. Pursuant to the
equity method of accounting, the balance sheet carrying value of the investment
was periodically adjusted to reflect our 49% interest in the operations of
MarketVision. Effective in the fourth quarter of our fiscal year ended March 31,
2004, we included in our consolidated financial statements the operations of
MarketVision pursuant to FIN 46R.
27
In connection with the acquisition, we extended a working
capital credit line to MarketVision in the amount of $200,000. At March 31, 2006
and 2005, there were no borrowings by MarketVision outstanding under this line
of credit. In addition, from time to time we provided promotional and related
services for customers of MarketVision on MarketVision's behalf. In these
situations, the customers' contracts were with MarketVision, and we recorded
amounts owed to us for these services and related expenses on our balance sheet
as due from affiliate. All intercompany transactions with MarketVision are
eliminated upon consolidation. Furthermore, pursuant to an Administration and
Marketing Services Agreement (the "Services Agreement"), we provided
MarketVision with specific administrative, accounting, collection, financial,
marketing and project support services for a monthly fee in the amount of
$60,000. In accordance with the Services Agreement, we dedicated and allocated
certain of our resources and the specific time of certain of our personnel to
MarketVision. The Services Agreement was terminated effective April 1, 2006.
On May 22, 2006, we sold our 49% interest in MarketVision back
to MarketVision for $1,100,000 in cash and terminated the working capital credit
line previously provided to MarketVision.
Officer Loan
We made loans to Paul A. Amershadian, a director and our
Executive Vice President-Marketing and Sales, aggregating $550,000, which are
evidenced by an Amended and Restated Promissory Note dated May 24, 2001. The
Amended and Restated Promissory Note is secured by (i) a first lien and security
interest in 163,196 shares of our Common Stock owned by Mr. Amershadian (after
giving effect to the surrender of 153,052 shares described below), (ii) a second
mortgage on Mr. Amershadian's home and (iii) collateral assignments of $550,000
of life insurance policies. The Amended and Restated Promissory Note provides
for payment of interest at a floating rate equal to the highest rate at which we
pay interest on our bank borrowings, monthly payment of one-half of the interest
that accrued over the preceding month, payment of accrued interest and principal
from one-half of the after-tax amount, if any, of bonuses paid to Mr.
Amershadian by us, and payment of the remaining balance of principal and accrued
interest on May 24, 2006. Mr. Amershadian did not make any of the required
monthly interest payments under the Amended and Restated Promissory Note. On
April 26, 2006, Mr. Amershadian surrendered to us for cancellation 153,052
shares of Common Stock as payment in full of interest in the amount of $283,147
accrued through May 24, 2006.
At March 31, 2006, the Amended and Restated Promissory Note is
recorded on our consolidated balance sheet as a note receivable from officer in
the amount of $826,000, which includes accrued interest at March 31, 2006 in the
amount of $276,000, of which approximately $78,500 was past due and owing at
such date. Since we believe that the expected repayment date on the Amended and
Restated Promissory Note will extend beyond one year, we classified the full
balance of the note receivable as long-term at March 31, 2006.
Optimum Lease
In connection with our acquisition of Optimum, we entered into
a lease agreement with Thomas Lachenman, a director of ours and former owner of
Optimum, for the lease of the Cincinnati principal office of Optimum. The lease
provides for an annual rental, which approximated $167,000 in Fiscal Year 2006,
to be adjusted annually based upon changes in the local consumer price index.
The lease expires in December 2010.
28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our 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 our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. See note 6 to "Notes to
Consolidated Financial Statements-Debt."
Item 8. Consolidated Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of CoActive Marketing Group, Inc.
Report of Independent Registered Public Accounting Firm..................29
Consolidated Balance Sheets as of March 31, 2006 and 2005................30
Consolidated Statements of Operations for the years ended
March 31, 2006, 2005 and 2004........................................31
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 2006, 2005 and 2004........................................32
Consolidated Statements of Cash Flows for the years ended
March 31, 2006, 2005 and 2004........................................33
Notes to Consolidated Financial Statements...............................34
29
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
CoActive Marketing Group, Inc.
We have audited the accompanying consolidated balance sheets of CoActive
Marketing Group, Inc. and subsidiaries as of March 31, 2006 and 2005, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 2006. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CoActive Marketing
Group, Inc. and subsidiaries as of March 31, 2006 and 2005, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 2006, in conformity with accounting principles generally
accepted in the United States.
BDO SEIDMAN, LLP
Melville, New York
June 30, 2006
except for Note 6, as to
which is dated July 12, 2006
30
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2006 AND 2005
2006 2005
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 5,891,544 $ 2,394,248
Accounts receivable, net of allowance for doubtful accounts of
$325,000 in 2006 and $69,000 in 2005 11,629,916 9,321,653
Unbilled contracts in progress 3,330,728 3,739,233
Deferred contract costs 2,452,141 656,577
Prepaid expenses and other current assets 689,176 533,421
Prepaid taxes and other receivables 152,683 123,902
------------ ------------
Total current assets 24,146,188 16,769,034
Property and equipment, net 4,063,657 4,252,327
Note and interest receivable from officer 826,341 789,459
Goodwill 7,601,582 8,227,191
Intangible asset 200,000 200,000
Deferred financing costs, net of amortization of $524,500 in 2006 and
$499,600 in 2005 86,616 82,142
Other assets 63,771 386,601
Deferred tax asset 4,993,025 4,225,587
------------ ------------
Total assets $ 41,981,180 $ 34,932,341
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 5,745,259 $ 5,013,409
Deferred revenue 15,580,832 7,870,082
Accrued job costs 1,613,625 2,174,885
Accrued compensation 1,507,932 734,479
Other accrued liabilities 1,370,727 883,516
Deferred taxes payable 247,272 224,170
Accrued taxes payable -- 144,396
Notes payable bank - current 1,000,000 1,000,000
------------ ------------
Total current liabilities 27,065,647 18,044,937
Notes payable bank - long term 2,000,000 3,584,500
Deferred rent 2,613,541 2,649,091
Minority interest of consolidated subsidiary 723,827 645,971
------------ ------------
Total liabilities 32,403,015 24,924,499
------------ ------------
Commitments and contingencies
Stockholders' equity:
Class A convertible preferred stock, par value $.001; authorized
650,000 shares; none issued and outstanding -- --
Class B convertible preferred stock, par value $.001; authorized
700,000 shares; none issued and outstanding -- --
Preferred stock, undesignated; authorized 3,650,000 shares; none
issued and outstanding -- --
Common stock, par value $.001; authorized 25,000,000 shares;
issued and outstanding 6,831,423 shares and 6,261,690 shares at
March 31, 2006 and 2005, respectively 6,831 6,261
Additional paid-in capital 10,250,003 9,649,023
(Accumulated deficit) retained earnings (678,669) 352,558
------------ ------------
Total stockholders' equity 9,578,165 10,007,842
------------ ------------
Total liabilities and stockholders' equity $ 41,981,180 $ 34,932,341
============ ============
See accompanying notes to consolidated financial statements
31
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2006, 2005 AND 2004
2006 2005 2004
------------ ------------ ------------
Sales $ 98,038,354 $ 83,950,561 $ 69,280,484
Operating expenses:
Reimbursable costs and expenses 38,338,254 29,999,150 20,002,471
Outside production costs and expenses 24,706,743 21,218,373 19,366,050
Salaries, payroll taxes and benefits 24,183,806 20,593,053 19,989,835
General and administrative expenses 11,327,701 9,167,161 10,171,960
Impairment charge 625,609 -- 4,131,224
------------ ------------ ------------
Total operating expenses 99,182,113 80,977,737 73,661,540
------------ ------------ ------------
Operating (loss) income (1,143,759) 2,972,824 (4,381,056)
Interest expense, net (218,762) (226,483) (240,288)
------------ ------------ ------------
(Loss) income before (benefit) provision for income taxes,
minority interest in net income of consolidated subsidiary
and cumulative effect of change in accounting principle
for revenue recognition (1,362,521) 2,746,341 (4,621,344)
(Benefit) provision for income taxes (409,150) 1,100,555 (1,644,186)
------------ ------------ ------------
Net (loss) income before minority interest in net
income of consolidated subsidiary and cumulative
effect of change in accounting principle for (953,371) 1,645,786 (2,977,158)
revenue recognition
Minority interest in net income of consolidated (77,856) (494,165) (105,359)
subsidiary
------------ ------------ ------------
Net (loss) income before cumulative effect of change in
accounting principle for revenue recognition (1,031,227,) 1,151,621 (3,082,517)
Cumulative effect of change in accounting principle for
revenue recognition, net of income taxes -- -- (2,182,814)
------------ ------------ ------------
Net (loss) income $ (1,031,227) $ 1,151,621 $ (5,265,331)
============ ============ ============
Net (loss) income per common share before cumulative effect
of change in accounting principle for revenue recognition:
Basic $ (.16) $ .19 $ (.54)
============ ============ ============
Diluted $ (.16) $ .18 $ (.54)
============ ============ ============
Cumulative effect of change in accounting principle for
revenue recognition, net of income taxes $ -- $ -- $ (.38)
------------ ------------ ------------
Net (loss) income per common share after cumulative effect of
change in accounting principle for revenue recognition:
Basic $ (.16) $ .19 $ (.92)
============ ============ ============
Diluted $ (.16) $ .18 $ (.92)
============ ============ ============
Weighted average number of shares outstanding:
Basic 6,452,847 6,004,948 5,700,144
Dilutive effect of options and warrants -- 386,487 --
------------ ------------ ------------
Diluted 6,452,847 6,391,435 5,700,144
============ ============ ============
See accompanying notes to consolidated financial statements.
32
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2006, 2005 AND 2004
Common Stock Additional Retained Total
par value $.001 Paid-in Earnings Stockholders'
Capital (Accumulated Equity
--------------------------- Deficit)
Shares Amount
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2003 5,034,731 $ 5,034 $ 6,751,792 $ 4,466,268 $ 11,223,094
Stock issued in payment of earn out 100,000 100 217,900 -- 218,000
Exercise of options 2,625 2 6,560 -- 6,562
Exercise of warrants and related tax
benefit 152,500 153 247,566 -- 247,719
Sale of stock 652,000 652 1,629,348 -- 1,630,000
Net loss -- -- -- (5,265,331) (5,265,331)
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2004 5,941,856 5,941 8,853,166 (799,063) 8,060,044
Costs incurred in connection with sale
of stock -- -- (8,400) -- (8,400)
Exercise of options and warrants 319,834 320 783,806 -- 784,126
Tax benefit of exercised options -- -- 20,451 -- 20,451
Net income -- -- -- 1,151,621 1,151,621
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2005 6,261,690 6,261 9,649,023 352,558 10,007,842
Exercise of options and warrants 379,733 380 428,361 -- 428,741
Tax benefit of exercised options -- -- 172,809 -- 172,809
Issuance of non-vested stock 190,000 190 (190) -- --
Net loss -- -- -- (1,031,227) (1,031,227)
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2006 6,831,423 $ 6,831 $ 10,250,003 $ (678,669) $ 9,578,165
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
33
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2006, 2005 AND 2004
2006 2005 2004
------------ ------------ ------------
Cash flows from operating activities:
Net (loss) income $ (1,031,227) $ 1,151,621 $ (5,265,331)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization 869,523 975,795 806,251
Deferred rent amortization 90,986 (41,645) --
Provision (credit) for bad debt expense 290,952 (66,044) 215,569
Interest income on note receivable from officer (36,882) (27,183) (29,276)
Deferred income taxes (571,527) 486,284 (1,564,876)
Minority interest of consolidated subsidiary 77,856 494,165 101,724
Impairment charge 625,609 -- 4,131,224
Cumulative effect of change in accounting principle -- -- 2,182,814
for revenue recognition
Other -- -- 3,635
Changes in operating assets and liabilities, net of
effects of acquisitions:
(Increase) decrease in accounts receivable (2,599,215) 1,249,364 (764,925)
Decrease (increase) in unbilled contracts in progress 408,505 (1,655,726) (290,425)
(Increase) decrease in deferred contract costs (1,795,564) (317,477) 1,749,943
(Increase) decrease in prepaid expenses and other (204,376) 77,002 302,265
assets
(Increase) decrease in prepaid taxes and other (28,781) 325,680 (449,582)
receivables
Increase (decrease) in accounts payable 731,850 2,652,488 (4,089,716)
Increase (decrease) in deferred revenue 7,710,750 (5,226,795) 4,108,049
(Decrease) increase in accrued job costs (561,260) (685,665) 1,286,287
Increase (decrease) in accrued compensation 773,453 283,205 385,807
Increase (decrease) in other accrued liabilities 487,211 (241,407) (217,656)
(Decrease) increase in accrued taxes payable (144,396) 164,847 23,596
------------ ------------ ------------
Net cash provided by (used in) operating activities 5,093,467 (401,491) 2,625,377
------------ ------------ ------------
Cash flows from investing activities:
Purchases of fixed assets (411,031) (269,116) (1,372,351)
Acquisitions, net of cash acquired -- -- (700,000)
Increase in cash for consolidation of variable -- -- 35,691
interest entity
------------ ------------ ------------
Net cash used in investing activities (411,031) (269,116) (2,036,660)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 428,741 784,126 98,062
Borrowings of debt 5,450,000 1,050,000 1,200,000
Payments of debt (7,034,500) (1,875,000) (1,665,500)
Financing costs (29,381) (50,029) (24,007)
Costs incurred in connection with sale of stock -- (8,400) --
Proceeds from sale of stock -- -- 1,630,000
------------ ------------ ------------
Net cash (used in) provided by financing activities (1,185,140) (99,303) 1,238,555
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 3,497,296 (769,910) 1,827,272
Cash and cash equivalents at beginning of year 2,394,248 3,164,158 1,336,886
------------ ------------ ------------
Cash and cash equivalents at end of year $ 5,891,544 $ 2,394,248 $ 3,164,158
============ ============ ============
Supplemental disclosures of cash flow information:
Interest paid during the period $ 262,491 $ 289,010 $ 274,273
============ ============ ============
Income taxes paid during the period $ 306,569 $ 323,208 $ 340,865
============ ============ ============
Non-cash transactions relating to investing and financing
activities consist of:
Tax benefit of exercised options $ 172,809 $ 20,451 $ --
============ ============ ============
Capitalization of leasehold improvements previously
classified as client reimbursements $ 244,915 $ -- $ --
============ ============ ============
Lease accounting correction $ -- $ 2,690,736 $ --
============ ============ ============
Stock issued in payment of earn out $ -- $ -- $ 218,000
============ ============ ============
See accompanying notes to consolidated financial statements.
34
COACTIVE MARKETING GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006, 2005, 2004
(1) Organization and Nature of Business
-----------------------------------
CoActive Marketing Group, Inc. (the "Company") is a full service
marketing, sales promotion and interactive media services and
e-commerce provider organization which designs, develops and implements
turnkey customized national, regional and local consumer and trade
promotion programs primarily for consumer product client companies. The
Company's operations consist solely of this single segment. The
Company's programs are designed to enhance the value of its clients'
budgeted expenditures and achieve, in an objectively measurable way,
its client's specific marketing and promotional objectives.
Summary of Significant Accounting Policies
(a) Principles of Consolidation
---------------------------
The consolidated financial statements 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 MarketVision ("MarketVision"), 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 ("FIN")
No. 46 (Revised) ("FIN46R"), "Consolidation of Variable
Interest Entities - an Interpretation of ARB No. 51." All
significant intercompany balances and transactions have been
eliminated in consolidation. The Company owns 49% of the
common stock of MarketVision. A third party owns the remaining
51%. The third party owned portion of MarketVision is
accounted for as minority interest in the Company's
consolidated financial statements. As disclosed in Note 2, the
Company sold its interest in MarketVision in May 2006.
35
(b) 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 revenues attributable to those contracts upon
signing by the Company's clients. Pursuant to EITF 00-21, with
regard to contracts with multiple deliverables, the Company
now recognizes income for each unit of accounting, as defined,
identified within a contract. In contracts with multiple
deliverables where separate units of accounting can not be
defined, all of the contract's revenue is recognized as the
media is aired and the events take place, without regard to
the timing of the contracts' signing or when cash is received
under these contracts. The adoption of EITF 00-21 (effective
April 1, 2003) resulted in a non-cash charge reported as a
cumulative effect of a change in accounting principle of
$2,183,000 in Fiscal 2004. For Fiscal 2004, the adoption of
EITF 00-21 resulted in an increase in sales of $2,479,000 and
an increase in outside production and expenses of $1,639,000.
After giving effect to the implementation of EITF 00-21 and
before the cumulative effect of the change in method of
accounting for revenue recognition, the Company had a net loss
of ($3,082,517) or $(.54) per common share for Fiscal 2004.
(c) 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,
36
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
MarketVision affiliate. Accordingly, the operations and
financial statements of MarketVision for the fiscal years
ended March 31, 2006, 2005 and 2004 (in its entirety) are
included in the consolidated financial statements of the
Company, whereas for prior fiscal years, under the equity
method of accounting, the Company reported its investment in
MarketVision as adjusted for its share of net income or loss
each fiscal year in the Company's financial statements. The
effect of the Company's adoption of FIN 46R did not impact the
Company's net loss in Fiscal 2004.
(d) 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.
(e) 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 cost of labor
performed to date to the estimated total cost of labor for
each contract; (v) on certain 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. The
Company's revenue recognition policy reflects the adoption of
EITF 00-21 effective April 1, 2003.
37
(f) Cash Equivalents
----------------
Investments with original maturities of three months or less
at the time of purchase are considered cash equivalents. Due
to the short-term nature of the cash equivalents, the carrying
value approximates fair value.
(g) Accounts Receivable and Credit Policies
---------------------------------------
The carrying amount of accounts receivable is reduced by a
valuation allowance that reflects management's best estimate
of the amounts that will not be collected. In addition to
reviewing delinquent accounts receivable, management considers
many factors in estimating its general allowance, including
historical data, experience, customer types, credit
worthiness, and economic trends. From time to time, management
may adjust its assumptions for anticipated changes in any of
those or other factors expected to affect collect ability.
(h) Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is
computed on the straight-line method over the estimated useful
lives of the assets, which are three to ten years. Leasehold
improvements are amortized over the shorter of the lease term
or the estimated useful life of the asset. Funds received from
a landlord to reimburse the Company for the cost, or a portion
of the cost, of leasehold improvements are recorded as
deferred rent and amortized as reductions to rent expense over
the lease term. Prior to January 1, 2006, to the extent that
the Company leased a property, but did not move in until
construction was complete it was the Company's policy to
capitalize the lease's straight line rent expense allocable to
the construction period as part of leasehold improvements and
amortize such rent expense over the term of the lease.
Effective January 1, 2006, in accordance with FASB Staff
Position No. 13-1, "Accounting for Rental Costs Incurred
During a Construction Period" ("FSP 13-1"), rental costs
associated with any new ground or building operating leases
that are incurred during a construction period will be
recognized as rental expense.
(i) Deferred Contract Costs
-----------------------
Deferred contract costs represent direct contract costs and
expenses incurred prior to the Company's related revenue
recognition on such contracts. Notwithstanding the Company's
accounting policy with regard to deferred contract cots, labor
costs for permanent employees are expensed as incurred.
(j) Long-Lived Assets
-----------------
The Company's long-lived assets include goodwill, intangible
assets and property and equipment. The Company periodically
reviews its property and equipment whenever events or changes
in circumstances indicate that the carrying amount of the
assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets,
or if their depreciation periods should be accelerated. When
any such impairment exists, the related assets will be written
down to fair value. Other than an impairment to goodwill, as
discussed under footnote 1(k), no impairments were identified
as of March 31, 2006.
(k) Goodwill and Other 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
38
domain name and related intellectual property rights. At March
31, 2006 the Company had approximately $7,601,000 of goodwill
and $200,000 as an intangible asset. At March 31, 2005 the
Company had approximately $8,227,000 of goodwill and $200,000
as an intangible asset.
Goodwill and intangible assets deemed to have indefinite lives
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. The Company has
determined that it has five reporting units representing each
of its subsidiaries.
As a result of the Company's annual test to determine whether
goodwill has been impaired, the Company concluded that at
March 31, 2006, the carrying value of the goodwill associated
with one of its reporting units, Optimum, was greater than its
fair value. As a result, the Company recorded a non-cash
pre-tax charge of $626,000 for the year ended March 31, 2006
(net after tax in the amount of $382,000) to reflect such
impairment and reduce the carrying value of the goodwill
associated with Optimum.
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
year ended March 31, 2006, the Company has not identified any
indication of goodwill impairment in its other reporting
units.
(l) Deferred Financing Costs
------------------------
Deferred financing costs consist of bank fees and legal costs
incurred with respect to the Company's bank credit agreement,
the amounts of which are being amortized over the remaining
term of the credit agreement which expires in March 2009.
(m) 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) prior
to January 1, 2006, 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. Effective January 1,
2006, in accordance with FASB Staff Position No. 13-1,
"Accounting for Rental Costs Incurred During a Construction
Period" ("FSB 13-1"), rental costs associated with any new
ground or building operating leases that are incurred during a
construction period will be recognized as rental expense.
(n) Net (Loss) Income Per Common Share
----------------------------------
The computation of basic earnings per common share is based
upon the weighted average number of common shares outstanding
during the year. The computation of diluted earnings per
common and common equivalent share is based upon the weighted
average number of common shares outstanding during the year,
plus the assumed exercise of stock options and warrants, less
the number of treasury shares assumed to be purchased from the
39
proceeds of such exercises using the average market price of
the Company's common stock. For the fiscal years ended March
31, 2006, 2005 and 2004, stock options and warrants to
purchase approximately 1,847,838, 1,127,221 and 2,620,093
shares of common stock, at exercise prices ranging from $1.20
to $10.00 for Fiscal 2006, $2.31 to $10.00 for Fiscal 2005 and
$1.12 to $10.00 for Fiscal 2004, respectively, were excluded
from the calculation of diluted earnings per share as their
inclusion would be anti-dilutive. These options and warrants
expire through March 2016.
(o) Income Taxes
------------
The (benefit) provision for income taxes includes federal,
state and local income taxes that are currently payable.
Deferred income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the estimated future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
(p) 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 its 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 123"), but has elected to disclose the
pro forma net income (loss) per share for employee stock
option grants as if such method had been used to account for
stock-based compensation costs described in SFAS 148
"Accounting for Stock Based Compensation-Transition and
Disclosure an amendment of SFAS Statement No. 123."
The following table illustrates the effects on net (loss)
income 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:
40
Fiscal 2006 Fiscal 2005 Fiscal 2004
------------- ------------- -------------
Net (loss) income as reported $ (1,031,227) $ 1,151,621 $ (5,265,331)
Less compensation expense
determined under the fair value
method, net of tax 110,545 215,476 260,235
------------- ------------- -------------
Pro forma net (loss) income $ (1,141,772) $ 936,145 $ (5,525,566)
============= ============= =============
Net (loss) income per share - Basic:
As reported $ (.16) $ .19 $ (.92)
Pro forma $ (.18) $ .16 $ (.97)
Net (loss) income per share -
Diluted:
As reported $ (.16) $ .18 $ (.92)
Pro forma $ (.18) $ .15 $ (.97)
The per share weighted-average fair value of stock options
granted on their respective date of grant using the modified
Black-Scholes option-pricing model and their related
weighted-average assumptions are as follows:
Fiscal 2006 Fiscal 2005 Fiscal 2004
------------- ------------- -------------
Risk-free interest rate 4.53% 4.90% 1.67%
Expected life - years 10.00 10.00 5.54
Expected volatility 51.6% 67.3% 50.0%
Expected dividend yield 0% 0% 0%
Fair value of option grants $ 1.89 $ 1.93 $ 1.34
(q) Fair Value of Financial Instruments
-----------------------------------
The carrying value of all financial instruments classified as
a current asset or liability, and long term debt, is deemed to
approximate fair value due to the short maturity of these
instruments and interest rates that approximate current market
rates.
(r) Use of Estimates
----------------
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of the contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Management bases its estimates on certain assumptions,
which they believe are reasonable in the circumstances, and
does not believe that any change in those assumptions would
have a significant effect on the financial position or results
of operations of the Company. Actual results could differ from
those estimates.
(s) Recent Accounting Standards
---------------------------
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes
and Error Corrections - A Replacement of APB Opinion No. 20
41
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 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 1 above under the
caption "Accounting for Stock Based Compensation."
(t) 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
42
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' earnings (loss) per
share, cash flow from operations and stockholders' equity were
deemed to be immaterial requiring no restatement.
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 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 March 31, 2005, the projected future reimbursements from
these clients for the effect of the straight line adjustment
amounted to approximately $371,000 and is included in other
assets. This asset was expected to be amortized over the
period of the clients' expected reimbursement.
The Company recorded the correction as an operating expense in
the fourth quarter of Fiscal 2005 resulting in a non-cash
pre-tax charge to earnings of approximately $299,000. In
addition, in connection with the correction, 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.
In the fourth quarter ended March 31, 2006, the Company
determined that the amount of projected client rent
reimbursements could not be estimated with the necessary
degree of accuracy and should no longer be carried as an asset
on its balance sheet. The Company's determination results in
part from a trend in its customer contract away from direct
reimbursements and towards fixed negotiated fees for services
provided. As a result of the determination, the Company
recorded a non-cash pre-tax charge to earnings of
approximately $218,000, of which $163,000 was charged to rent
expense and $55,000 was charged to amortization expense, to
write off the remaining balance of projected client rent
reimbursements. In addition, in connection with the
adjustment, the Company recorded an increase in property and
equipment - leasehold improvements of $190,000, a decrease in
other assets of $408,000 and a decrease in deferred taxes
payable of $85,000.
(u) Reclassifications
-----------------
Certain amounts as previously reported have been reclassified
to conform to current year classifications.
(2) Investment in MarketVision
--------------------------
On February 27, 2001, the Company acquired 49% of the shares of capital
stock of MarketVision which is a minority owned, predominately
Hispanic, ethnically oriented promotion agency headquartered in San
Antonio, Texas. Following its acquisition, the Company extended a line
of credit to MarketVision in the amount of $200,000. At March 31, 2006,
2005 and 2004, there were no advances outstanding under this line of
credit. Effective in the fourth quarter of fiscal year ended March 31,
2004, the Company included in its consolidated financial statements the
financial statements of MarketVision, pursuant to the adoption of FIN
46R.
On March 22, 2002, MarketVision entered into an Administration and
Marketing Services Agreement with the Company pursuant to which the
Company provides MarketVision with specific administrative, accounting,
43
financial, marketing and project support services for a monthly fee of
$35,000. This fee was adjusted periodically by the Company and
MarketVision and as of October 1, 2005 the monthly fee was $60,000. In
accordance with the agreement, the Company dedicated and allocated
certain of its resources and the specific time of certain of its
personnel to MarketVision. For Fiscal 2006, 2005 and 2004, the Company
recorded fees in the amount of $690,000, $655,000 and $570,000,
respectively, which were eliminated in the consolidation of
MarketVision. The agreement was terminated effective April 1, 2006.
For the years ended March 31, 2006, 2005 and 2004, sales (inclusive of
reimbursable program costs and expenses) from MarketVision amounted to
$15,438,000, $14,022,000 and $4,743,000, respectively. MarketVision's
operating income for the years ended March 31, 2006, 2005 and 2004
amounted to $267,000, $1,385,000 and $275,000, respectively.
On May 22, 2006, the Company sold its 49% interest in MarketVision back
to MarketVision for $1,100,000 and the working capital credit line was
terminated. As a condition to providing its consent to that, the
Company's secured lender required the Company to deposit the proceeds
of such sale, in the amount of approximately $1.1 million, in a cash
collateral account as security for the Company's obligations under the
Credit Agreement. On July 12, 2006, the lender released the cash
collateral to the Company. The Company expects to record a pre-tax gain
of approximately $175,000 in connection with this sale in the first
quarter of Fiscal 2007.
(3) Note Receivable From Officer
----------------------------
Note receivable from officer at March 31, 2006 and 2005 consists of an
Amended and Restated Promissory Note (the "Amended Note") from an
officer of the Company dated May 24, 2001 in the principal amount of
$550,000 which (i) amended and restated two notes evidencing prior
loans to such officer in the aggregate amount of $225,000 (which at
March 31, 2001 had unrecorded accrued interest of $119,299) and (ii)
reflected an additional loan in the amount of $325,000. The Amended
Note provides for (i) monthly interest payments at a floating rate
equal to the highest rate at which the Company pays interest on its
bank borrowings, (ii) monthly payment of one-half of the interest that
accrue over the preceding month, (iii) payment of accrued interest and
principal from one-half of the after-tax amount, if any, of bonuses
paid to the officer by the Company, and (iii) payment of the remaining
balance of principal and accrued interest on May 24, 2006. As of March
31, 2006, the officer has not made any of the required monthly interest
payments under the Amended Note. The Amended Note is secured by (i) a
first lien and security interest in 163,196 shares of the Company's
common stock owned by the officer (after giving effect to the surrender
of 153,052 shares described below), (ii) a second mortgage on the
officer's home and (iii) collateral assignments of $550,000 of life
insurance policies. At March 31, 2006 and 2005, the note due from
officer with respect to the Amended Note of $826,341 and $789,459,
respectively, included accrued interest in the amount of $276,000 and
$239,000, respectively, of which $78,500 and $60,000 were past due and
owing on such dates.
On April 26, 2006, the officer surrendered to the Company for
cancellation 153,052 shares of the Company's common stock as payment in
full of interest in the amount of $283,147 accrued through May 24,
2006.
Since the Company believes that the expected repayment date on the
Amended Note will extend beyond one year, the Company classified the
full balance of the note receivable as long-term at March 31, 2006.
(4) Property and Equipment
----------------------
Property and equipment consist of the following:
March 31, 2006 March 31, 2005
----------------- ----------------
Furniture, fixtures and computer equipment $ 4,476,780 $ 4,219,441
Leasehold improvements 4,224,143 3,856,098
Capitalized leases 21,748 21,748
--------------- ---------------
8,722,671 8,097,287
Less: accumulated depreciation and amortization 4,659,014 3,844,960
--------------- ---------------
$ 4,063,657 $ 4,252,327
=============== ===============
44
Depreciation and amortization expense on property and equipment for the
years ended March 31, 2006, 2005 and 2004 amounted to $844,616,
$935,003 and $656,270, respectively.
During the fourth quarter of Fiscal 2006, the Company recorded
leasehold improvements, net of accumulated amortization, in the amount
of $190,000 pursuant to the write off of future projected client
reimbursements (note 1(t)). As a result of the adjustment, the Company
recorded leasehold amortization expense of $55,000 during the fourth
quarter of Fiscal 2006.
During the fourth quarter of Fiscal 2005, the Company recorded
leasehold improvements, net of accumulated amortization, in the amount
of $1,979,000 pursuant to a correction of an error relating to its
lease accounting practices (note 1(t)). As a result of the correction,
the Company recorded leasehold amortization expense of $340,000 during
the fourth quarter of Fiscal 2005.
(5) Leases
------
The Company has several non-cancelable operating leases, primarily for
property, that expire through 2015. Rent expense for the years ended
March 31, 2006, 2005 and 2004, net of reimbursements from clients,
amounted to $1,862,178, $1,071,178 and $965,310, respectively. One of
the Company's facilities is leased from the former owner of Optimum,
who is also a director of the Company. This lease expires in December
2010. The Company incurred rent expense under this lease in Fiscal 2006
and 2005 in the amount of approximately $167,000 and $160,000,
respectively. Another facility is leased by MarketVision from an entity
owned and controlled by MarketVision's President and principal owner,
with a current annual base rent of $166,000 and additional rent of
$45,000 for maintenance, taxes and insurance, which expires in May
2010. Future non-cancelable minimum lease payments under all of the
leases as of March 31, 2006 are as follows:
Year ending March 31,
2007 $ 1,215,000
2008 1,278,000
2009 1,247,000
2010 1,198,000
2011 1,179,000
Thereafter 5,006,000
--------------
$ 11,123,000
==============
During the fourth quarter of Fiscal 2006, the Company recorded a
non-cash pre-tax charge of $163,000 to rent expense pursuant to the
write off of future projected client reimbursements (note 1(t)). This
amount is classified as a rental cost and is included in general and
administrative expenses.
Effective January 1, 2006, the Company entered into a termination of
lease agreement which terminated the lease of its Great Neck, New York
office for a consideration in the amount of $520,000 which is
classified as a rental cost and included in general and administrative
expenses for Fiscal 2006. After the application of its security deposit
for such office to the termination consideration, the net payment to
the landlord under the terminated lease amounted to approximately
$478,000.
As a result of the termination of the lease, approximately $22,000 of
fixed assets, consisting of $15,000 of the remaining unamortized
leasehold improvement balance, as well as $7,000 in other equipment,
45
were written off during Fiscal 2006 and included in general and
administrative expenses in the Company's consolidated statement of
operations.
(6) Debt
----
Notes Payable, Bank
-------------------
At March 31, 2006, the Company's bank borrowings of $3,000,000
(exclusive of a letter of credit outstanding in the amount of $475,000)
reflect the terms and conditions of an Amended and Restated Credit
Agreement ("Credit Agreement") entered into with a bank on March 24,
2005. Pursuant to the Credit Agreement, amounts available for borrowing
under its revolving credit line were increased by $2,415,500 to
$3,000,000, and the term loan portion of the credit facility was
increased by $1,050,000 to $4,000,000. On March 25, 2005, the bank
advanced the Company the increased portion of the term loan. The Credit
Agreement also provides a separate $475,000 letter of credit facility
to support the Company's lease obligations with respect to its New York
City offices. The Company utilized $425,000 of the proceeds of the
increased term loan to pay in full its remaining obligations on the 9%
subordinated note it issued in connection with its 1998 acquisition of
Optimum. Remaining loan proceeds will be used for working capital
purposes. Borrowings under the term loan and revolving credit facility
are evidenced by promissory notes and are secured by all the Company's
assets. Pursuant to the Credit Agreement:
o Principal payments on the term loan are made in equal monthly
installments of $83,333, with the final payment due in March
2009. Prior to the amendment, principal payments on the term
loan portion of the facility were $162,500 per month.
o The maturity date of the loans made under the revolving credit
line was extended from July 22, 2006 to March 24, 2008.
o Interest on the revolving loans was reduced to the bank's
prime rate (7.75% at March 31, 2006) from its prime rate plus
.50%, and interest on the term loan was reduced to the bank's
prime rate plus .50% (8.25% at March 31, 2006) from its prime
rate plus 1.0%.
Further, the Credit Agreement provides for a number of affirmative and
negative covenants, restrictions, limitations and other conditions
including, among others, (i) limitations regarding the payment of cash
dividends, (ii) use of proceeds, (iii) 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) limitation on annual capital expenditures and (vi) maintenance of
15% of beneficially owned shares of the Company held by the Company's
management. At March 31, 2006, the Company was not in compliance with
certain financial covenants of its Credit Agreement, namely the debt
service coverage ratio, the consolidated senior funded debt to
consolidated EBITDA ratio and the prohibition of incurring a
consolidated net loss in two consecutive fiscal quarters or any fiscal
year. On July 12, 2006, the bank waived the Company's defaults arising
as a result of such noncompliance and charged the Company a $10,000
waiver fee. On the same date, and in connection with the waiver, the
Credit Agreement was amended by reducing the revolving credit line to
$2.0 million from $3.0 million.
As a condition to providing its consent to the sale of the Company's
interest in MarketVision in May 2006, the bank required the Company to
deposit the proceeds of such sale, in the amount of approximately $1.1
million, in a cash collateral account as security for the Company's
obligations under the Credit Agreement. As part of the July 12, 2006
amendment to the Credit Agreement, the bank released the cash
collateral to the Company.
Total debt as of March 31, 2006 and 2005 is summarized as follows:
46
2006 2005
------------ ------------
Term loan note payable $ 3,000,000 $ 4,000,000
Revolving loan note payable -- 584,500
------------ ------------
Total debt 3,000,000 4,584,500
Less current portion 1,000,000 1,000,000
------------ ------------
Total long-term debt $ 2,000,000 $ 3,584,500
============ ============
Maturities of notes payable are as follows:
Term Loan
Note Payable
------------
2007 $ 1,000,000
2008 1,000,000
2009 1,000,000
------------
$ 3,000,000
============
(7) Stockholders' Equity
--------------------
Common Stock Reserved for Issuance
(i) Stock Options
-------------
Under the Company's 1992 Stock Option Plan (the "1992 Plan"),
employees of the Company and its affiliates and members of the
Board of Directors were granted options to purchase shares of
common stock of the Company. The 1992 Plan terminated in 2002,
although options issued thereunder remain exercisable until
the termination dates provided in such options. Options
granted under the 1992 Plan were either intended to qualify as
incentive stock options under the Internal Revenue Code of
1986, or non-qualified options. Grants under the 1992 Plan
were awarded by a committee of the Board of Directors, and are
exercisable over periods not exceeding ten years from date of
grant. The option price for incentive stock options granted
under the 1992 Plan must be at least 100% of the fair market
value of the shares on the date of grant, while the price for
non-qualified options granted to employees and employee
directors is determined by the committee of the Board of
Directors. The 1992 Plan was amended on May 11, 1999 to
increase the maximum number of shares of common stock for
which options may be granted to 1,500,000 shares.
On May 11, 1999, the Company established the 1997 Executive
Officer Stock Option Plan (the "1997 Plan"), pursuant to which
(i) a maximum of 375,000 non-qualified stock options may be
granted to purchase shares of common stock, (ii) three
officers of the Company were each granted 125,000
non-qualified stock options to purchase shares of common stock
in exchange for the surrender by each of their incentive stock
options to purchase 125,000 shares of common stock issued on
May 2, 1997 pursuant to the Company's 1992 Stock Option Plan
and (iii) the exercise price and other terms and conditions of
the options granted are identical to those of the options
surrendered.
On July 1, 2002, the Company established the 2002 Long-Term
Incentive Plan (the "2002 Plan") providing for the grant of
options or other awards to employees, officers or directors
of, consultants to, the Company or its subsidiaries to acquire
up to an aggregate of 750,000 shares of Common Stock. In
September 2005, the 2002 Plan was amended so as to increase
the number of shares of common stock available under the plan
to 1,250,000. Options granted under the 2002 Plan may either
be intended to qualify as incentive stock options under the
Internal Revenue Code of 1986, or may be non-qualified
47
options. Grants under the 2002 Plan are awarded by a committee
of the Board of Directors, and are exercisable over periods
not exceeding ten years from date of grant. The option price
for incentive stock options granted under the 2002 Plan must
be at least 100% of the fair market value of the shares on the
date of grant, while the price for non-qualified options
granted is determined by the Committee of the Board of
Directors.
Changes in options outstanding and options exercisable and
shares reserved for issuance at March 31, 2006 under all plans
are as follows:
Weighted
average
price per Exercisable
share Outstanding (D)
------------ ------------ ------------
Balance at March 31, 2003 $ 2.40 1,947,335 1,445,649
Became exercisable $ 2.44 -- 193,146
Granted (A) $ 2.93 255,000 171,252
Exercised $ 2.50 (2,625) (2,625)
Canceled $ 2.72 (69,481) (35,775)
------------ ------------ ------------
Balance at March 31, 2004 $ 2.46 2,130,229 1,771,647
Became exercisable $ 2.60 -- 293,585
Granted (B) $ 2.48 27,500 13,752
Exercised $ 2.31 (68,750) (68,750)
Canceled $ 3.38 (96,741) (96,741)
------------ ------------ ------------
Balance at March 31, 2005 $ 2.42 1,992,238 1,913,493
Became exercisable $ 2.49 -- 46,248
Granted (C) $ 2.76 100,000 50,000
Exercised $ 1.13 (277,370) (277,370)
Canceled $ 2.02 (48,563) (48,563)
------------ ------------ ------------
Balance at March 31, 2006 $ 2.65 1,766,305 1,683,808
============ ============ ============
(A) Represents options granted to purchase 227,500 shares
at an exercise price of $3.00 and 27,500 shares at an
exercise price of $2.33. Of the options granted,
171,252 became exercisable prior to March 31, 2004
and of the balances, 13,748 are exercisable on April
30, 2004 and 70,000 are exercisable on March 31,
2005.
(B) Represents options granted to purchase 27,500 shares
at an exercise price of $2.48. Of the options
granted, 13,752 became exercisable prior to March 31,
2005 and 13,748 are exercisable on April 30, 2005.
(C) Represents options granted to purchase 50,000 shares
at an exercise price of $3.39 and 50,000 shares at an
exercise price of $2.13. Of the options granted,
50,000 became exercisable prior to March 31, 2006,
25,000 are exercisable on April 30, 2006 and 25,000
are exercisable on March 31, 2007.
(D) Options exercisable at March 31, 2006, 2005 and 2004
had a weighted average exercise price of $2.65,
$2.41and $2.43, respectively.
The options outstanding and exercisable as of March 31, 2006
are summarized in ranges as follows:
48
Weighted
Weighted Weighted average
Number of average average exercise
Range of options exercise remaining Exercisable price
exercise price outstanding price life shares of shares
- -------------- ------------ ------------ ------------ ------------ ------------
$1.12 - 2.50 1,094,430 $ 2.02 0.98 1,036,933 $ 2.00
$3.00 - 4.00 665,000 $ 3.61 2.13 640,000 $ 3.62
more than $4.00 6,875 $ 10.00 2.08 6,875 $ 10.00
------------ ------------ ------------ ------------ ------------
1,766,305 $ 2.65 1.42 1,683,808 $ 2.65
============ ============ ============ ============ ============
(ii) Warrants
--------
At March 31, 2006, outstanding warrants to purchase shares of
the Company's common stock in the amount of 81,533 were
exercisable at a weighted average price per share of $3.68.
These warrants expire April 30, 2007. During Fiscal 2006,
warrants to purchase 102,364 shares of the Company's common
stock were exercised at $1.12. At March 31, 2005, outstanding
warrants to purchase shares of the Company's common stock in
the amount of 246,396 were exercisable at a weighted average
price per share of $1.90. In January 2005, warrants to
purchase 251,084 shares of the Company's common stock were
exercised at $2.49. During Fiscal 2005, pursuant to
anti-dilution provisions contained in the warrants, the
warrants became exercisable for an additional 7,616 shares of
the Company's common stock. The value of the additional
warrants granted was deemed to be immaterial. At March 31,
2004, outstanding warrants to purchase shares of the Company's
common stock in the amount of 489,864 were exercisable at a
weighted average price per share of $2.23.
(iii) Non-Vested Stock
----------------
On March 31, 2006, pursuant to certain Restricted Stock
Agreements, the Company awarded 190,000 shares of common stock
under the Company's 2002 Plan to certain employees. The value
of the shares at the grant date amounted to approximately
$351,000 and will be recognized ratably over the vesting
period. The shares of common stock granted pursuant to such
agreements vest as follows:
20% on March 31, 2007
30% on March 31, 2008
20% on March 31, 2009
20% on March 31, 2010
10% on March 31, 2011
The shares awarded under the restricted stock agreements vest
on the applicable vesting dates only to the extent the
recipient of the shares is then an employee of the Company or
one of its subsidiaries, and each recipient will forfeit all
of the shares that have not vested on the date his or her
employment is terminated (if prior to March 31, 2011). Of the
shares awarded in March 2006, 25,000 were forfeited in April
2006 as a result of the termination of employment of a
recipient.
In addition, these shares are subject to accelerated vesting
upon a change of control of the Company, as defined in the
Restricted Stock Agreements.
49
In May 2006, the Company awarded an additional 70,000 shares
of common stock pursuant to certain Restricted Stock
Agreements.
(8) Income Taxes
------------
The components of income tax (benefit) provision for the years ended
March 31, 2006, 2005, and 2004 are as follows:
March 31, 2006 March 31, 2005 March 31, 2004*
--------------------------- --------------------------- ---------------------------
Current:
State and local $ 58,142 $ 54,953 $ 25,440
Federal 104,235 162,377 559,318 614,271 (126,516) (101,076)
------------ ------------ ------------
Deferred:
Federal and State (571,527) 486,284 (2,998,320)
------------ ------------ ------------
$ (409,150) $ 1,100,555 $ (3,099,396)
============ ============ ============
*Income tax benefit before cumulative
effect of the change in accounting
principle for revenue recognition $ (1,644,186)
Cumulative effect of change in
accounting principle for
revenue recognition (1,455,210)
------------
$ (3,099,396)
============
The differences between the (benefit) provision for income taxes
computed at the federal statutory rate and the reported amount of tax
expense attributable to (loss) income before (benefit) provision for
income taxes, minority interest in net income of consolidated
subsidiary and cumulative effect of a change in accounting principle
for the years ended March 31, 2006, 2005 and 2004 are as follows:
Rate
------------------------------------------
2006 2005 2004
------------ ------------ ------------
Statutory Federal income tax (34.0)% 34.0% (34.0)%
State and local taxes, net of Federal
benefit (.4) 3.0 (5.2)
Under accrual from prior year -- 1.6 1.7
Permanent differences 2.7 .9 .5
Other 1.7 .6 1.4
------------ ------------ ------------
Effective tax rate (30.0)% 40.1 % (35.6) %
============ ============ ============
50
The tax effects of temporary differences between the financial
reporting and tax bases of assets and liabilities that are included in
net deferred tax asset are as follows:
March 31, March 31, March 31,
2006 2005 2004
------------ ------------ ------------
Deferred tax (liabilities) assets:
Current:
Unbilled revenue $ (247,272) $ (224,170) $ (147,943)
------------ ------------ ------------
Long-term:
Goodwill, principally due to differences
in amortization 1,657,893 2,053,441 2,701,481
Net operating loss carryforwards 3,169,113 2,297,092 2,046,163
Other 166,019 (124,946) (112,000)
------------ ------------ ------------
4,993,025 4,225,587 4,635,644
------------ ------------ ------------
Net deferred tax asset $ 4,745,753 $ 4,001,417 $ 4,487,701
============ ============ ============
At March 31, 2006, the Company has federal net operating loss
carry-forwards of approximately $7,838,000, of which approximately
$897,000 was generated from stock-based compensation charges, that
begin to expire March 31, 2024. The Company's wholly-owned subsidiaries
are single-member limited liability companies that are disregarded for
federal income tax return purposes. As such, the Company is not
required to file a federal consolidated income tax return.
The Company provides for income taxes under the provision of SFAS No.
109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and
liability based approach in accounting for income taxes. In assessing
the realizability of deferred tax assets and liabilities, management
considers whether it is more likely than not that some or all of them
will not be realized. As of March 31, 2006 and 2005, the Company
determined that a valuation allowance against its deferred tax asset
was not necessary. The Company must generate approximately $12,803,000
of taxable income, exclusive of any reversals of timing differences, to
fully utilize its deferred tax assets. Management believes it is more
likely than not that the results of future operations will generate
sufficient taxable income to realize the net deferred tax assets.
(9) Significant Customers
---------------------
For the fiscal years ended March 31, 2006, 2005 and 2004, Diageo North
America, Inc. ("Diageo") accounted for approximately 41%, 27% and 13%,
respectively, of the Company's revenues. For the fiscal years ended
March 31, 2005 and 2004, Schieffelin & Somerset Co. and its successor
entities ("S&S"), accounted for approximately 13% and 30%,
respectively, of its revenues. These revenues respectively included
revenues attributable to program reimbursable costs and expenses for
Diageo of 26% and 17% of revenues for the years ended March 31, 2006,
2005 and 2004, and 9% and 21% for S&S, respectively, for the years
ended March 31, 2005 and 2004. At March 31, 2006 and 2005, Diageo
accounted for 41% and 9%, respectively, of the Company's accounts
receivable. At March 31, 2005, S&S accounted for 1% of accounts
receivable.
(10) Employee Benefit Plan
---------------------
The Company has a savings plan available to substantially all salaried
employees which is intended to qualify as a deferred compensation plan
under Section 401(k) of the Internal Revenue Code (the "401(k) Plan").
Pursuant to the 401(k) Plan, employees may contribute up to 15% of
their eligible compensation, up to the maximum amount allowed by law.
The Company at its sole discretion may from time to time make
discretionary matching contributions as it deems advisable. For the
years ended March 31, 2006, 2005 and 2004, the Company made
discretionary contributions of approximately $208,000, $251,000 and
$313,000, respectively.
(11) Related Party Transactions
--------------------------
(a) On January 26, 2004, Brian Murphy, a director of the Company
and the chief executive officer of the Company's U.S. Concepts
subsidiary, purchased from the Company 150,000 shares of a
newly designated class of the Company's preferred stock for an
aggregate purchase price of $600,000. Thereafter, on February
9, 2004, the Company sold an aggregate of 412,000 shares of
the Company's common stock, at a price of $2.50, to five
individuals, consisting of the Company's president and chief
executive officer, three of the Company's other directors and
an officer of one of the Company's subsidiaries, resulting in
an additional $1,030,000 of cash proceeds to the Company. In
connection with such sale of common stock, and pursuant to the
terms upon which Mr. Murphy purchased the shares of preferred
stock described above, Mr. Murphy was issued an additional
240,000 shares of common stock in exchange for the
cancellation of such preferred stock.
51
(b) In connection with the Company's acquisition of Optimum, the
Company entered into a lease agreement with Thomas Lachenman,
a director of the Company and former owner of Optimum, for the
lease of the Cincinnati principal office of Optimum. The lease
provides for an annual rental, adjusted annually based upon
changes in the local consumer price index. Rent expense under
this lease amounted to approximately $167,000 and $160,000 in
Fiscal 2006 and 2005, respectively. The lease expires in
December 2010.
(c) On May 20, 2005, MarketVision entered into a five year lease
agreement with an entity owned and controlled by Yvonne
Garcia, MarketVision's President and 51% owner. The lease
provides for an annual base rental of $166,000 and additional
rent of $45,000 for maintenance fees, taxes and insurance. The
additional rent is adjusted annually for increases in the
landlord's cost of maintenance fees, taxes and insurance. The
lease expires in May 2010.
(d) On June 14, 2006, the Board of Directors accepted the
resignation of John Benfield, the Company's Chief Executive
Officer, and appointed Marc C. Particelli, a member of the
Company's Board of Directors, to serve as Chief Executive
Officer and Chairman of the Board on an interim basis. Both
Mr. Benfield's resignation and Mr. Particelli's appointment
will be effective as of July 1, 2006, or if later, the date on
which the Company files with the Securities and Exchange
Commission its Annual Report on Form 10-K for the year ended
March 31, 2006.
In connection with his appointment as interim Chief Executive
Officer, the Board and Mr. Particelli entered into an
Employment Agreement pursuant to which Mr. Particelli will be
paid an annual salary of $250,000 for devoting approximately
50% of his working time to the Company. In addition, for his
agreement to serve as interim Chief Executive Officer, the
Board approved the grant to Mr. Particelli of a five-year
stock option to purchase 80,000 shares of the Company's common
stock at a price of $1.57 per share (the market price of the
common stock on the date the grant was authorized).
In addition, in connection with his resignation, the Company
entered into an agreement with Mr. Benfield pursuant to which
Mr. Benfield will, for the one-year period beginning July 1,
2006, continue to be compensated at his current rate of
$300,000 per annum and receive the same benefits currently
provided to him by the Company. In consideration of the
foregoing, Mr. Benfield will remain employed by the Company on
a full-time basis to assist in the transition for a period of
three-months. The Company expects to record a pre-tax charge
of approximately $265,000 in its second fiscal quarter ending
September 30, 2006 in connection with its obligations under
the Agreement with Mr. Benfield.
(12) Summarized Quarterly Consolidated Financial Data (Unaudited)
------------------------------------------------------------
The quarterly information for the quarter ended December 31, 2005, as
provided in the table below, reflects the Company's correction of a
misclassification of reimbursable expenses. The adjustment of $918,490
is recorded as an increase to sales and reimbursable expenses, with no
effect on net loss for the quarter or year-to-date.
52
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
First Second Third Fourth
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
June 30, September 30, December 31, March 31,
2005 2005 2005 2006
(restated)
------------ ------------ ------------ ------------
Sales $ 21,512,543 $ 27,186,383 $ 25,837,066 $ 23,502,362
Operating expenses 22,313,198 26,416,082 25,657,671 24,795,162
------------ ------------ ------------ ------------
Operating (loss) income (800,655) 770,301 179,395 (1,292,800)
------------ ------------ ------------ ------------
Net (loss) income $ (566,019) $ 401,438 $ (21,165) $ (845,481)
Net (loss) income per common share:
Basic $ (.09) $ .06 $ .00 $ (.13)
Diluted $ (.09) $ .06 $ .00 $ (.13)
Weighted average common shares:
Basic 6,261,690 6,325,443 6,605,303 6,618,951
Diluted 6,261,690 6,947,979 6,605,303 6,618,951
First Second Third Fourth
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
June 30, September 30, December 31, March 31,
2004 2004 2004 2005
------------ ------------ ------------ ------------
Sales $ 19,403,094 $ 23,223,187 $ 21,203,984 $ 20,120,296
Operating expenses 18,994,099 21,993,843 20,065,741 19,924,054
------------ ------------ ------------ ------------
Operating income 408,995 1,229,344 1,138,243 196,242
------------ ------------ ------------ ------------
Net income (loss) $ 197,537 $ 659,826 $ 448,594 $ (154,336)
Net income (loss) per common share:
Basic $ .03 $ .11 $ .08 $ (.02)
Diluted $ .03 $ .10 $ .07 $ (.02)
Weighted average common shares:
Basic 5,941,856 5,941,856 5,943,255 6,192,823
Diluted 6,388,444 6,355,295 6,609,114 6,192,823
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure.
---------------------
None.
Item 9A. 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
Rules13a-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 adequate and effective, as of the end of the period covered
53
by this Annual Report on Form 10-K for the year ended March 31, 2006 (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.
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.
PART III
The information required to be disclosed in Part III (Items 10, 11, 12, 13 and
14, and fees and services) will be incorporated by reference from the Company's
definitive proxy statement if filed by July 31, 2006 or, if such proxy statement
is not filed by such date, such information will be disclosed by amendment to
this Form 10-K prior to August 1, 2006.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
- ------- ------------------------------------------
(a) The following documents are filed as part of this Report.
1. Financial Statements:
---------------------
Page
-----------------------------------------------------------------------------
Index to Financial Statements 28
Consolidated Financial Statements of CoActive Marketing Group, Inc.
Report of Independent Registered Public Accounting Firm 29
Consolidated Balance Sheets as of March 31, 2006 and 2005 30
Consolidated Statements of Operations for the years ended
March 31, 2006, 2005 and 2004 31
Consolidated Statements of Stockholders' Equity
for the years ended March 31, 2006, 2005 and 2004 32
Consolidated Statements of Cash Flows for the years ended
March 31, 2006, 2005 and 2004 33
Notes to Consolidated Financial Statements 34
2. Financial Statement Schedules:
------------------------------
S-1 Report of Independent Registered Public Accounting Firm 56
S-2 Allowance for Doubtful Accounts 57
3. Exhibits:
--------
Exhibit
Number Description of Exhibits.
------ -----------------------
3.1 Certificate of Incorporation, as amended, of the
Registrant (incorporated by reference to Exhibit 3.1
to the Registrant's Quarterly Report on Form 10-Q for
the three month period ended September 30, 1999,
initially filed with the Securities and Exchange
Commission on November 22, 1999).
3.2 Bylaws of the Registrant (incorporated by reference
to Exhibit 3.2 to the Registrant's Quarterly Report
on Form 10-Q for the three month period ended
September 30, 1999, initially filed with the
Securities and Exchange Commission on November 22,
1999).
54
10.1 Employment Agreement dated September 29, 1995 between
Registrant and John P. Benfield (incorporated by
reference to Exhibit 10.3 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March
31, 1996, initially filed with the Securities and
Exchange Commission on July 1, 1996).
10.2 Fifth Amendment to Employment Agreement dated March
31, 2006 between the Registrant and John P. Benfield
(incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated March
29, 2006, filed with the Securities and Exchange
Commission on April 3, 2006).
10.3 Employment Agreement dated September 29, 1995 between
Registrant and Paul A. Amershadian (incorporated by
reference to Exhibit 10.5 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March
31, 1996, initially filed with the Securities and
Exchange Commission on July 1, 1996).
10.4 Fifth Amendment to Employment Agreement dated March
31, 2006 between Registrant and Paul A. Amershadian
(incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K dated March
29, 2006, filed with the Securities and Exchange
Commission on April 3, 2006).
10.5 Employment Agreement dated April 1, 2005 between
Registrant and Erwin Mevorah (incorporated by
reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K dated September 29, 2005, filed
with the Securities and Exchange Commission on
October 3, 2005).
10.6 Restricted Stock Agreement dated March 31, 2006
between Registrant and Erwin Mevorah (incorporated by
reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K dated March 31, 2006, filed with
the Securities and Exchange Commission on April 4,
2006).
10.7 Amended and Restated Promissory Note, dated as of May
24, 2001, in the principal amount of $550,000, by
Paul A. Amershadian in favor of the Company
(incorporated by reference to Exhibit 10.5 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 2001, initially filed
with the Securities and Exchange Commission on July
13, 2001).
10.8 Amended and Restated Pledge Agreement, dated as of
May 24, 2001, between Paul A. Amershadian and the
Company (incorporated by reference to Exhibit 10.6 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 2001, initially filed
with the Securities and Exchange Commission on July
13, 2001).
10.9 Amended and Restated Credit Agreement dated as of
March 24, 2005, by and among CoActive Marketing
Group, Inc., Inmark Services LLC, Optimum Group LLC,
U.S. Concepts LLC, Grupo Hacerlo LLC and Signature
Bank (incorporated by reference to Exhibit 10.1 to
Registrant's Current Report on Form 8-K dated March
24, 2005, filed with the Securities and Exchange
Commission on March 30, 2005).
10.10 Form of Security Agreement, dated as of October 31,
2002 between each of CoActive Marketing Group, Inc.,
Inmark Services, Inc., Optimum Group, Inc., U.S.
Concepts, Inc. and Grupo Hacerlo LLC and Signature
Bank (incorporated by reference to Exhibit 10.1 to
Registrant's Current Report on Form 8-K dated October
31, 2002, initially filed with the Securities and
Exchange Commission on November 4, 2002).
55
10.11 CoActive Marketing Group, Inc. 2002 Long-Term
Incentive Plan (incorporated by reference to Exhibit
A to Registrant's Definitive Proxy Statement
initially filed with the Securities and Exchange
Commission on July 29, 2002).
10.12 Stock Purchase Agreement, dated as of May 22, 2006,
by and between the Registrant, Yvonne Garcia and
Market Vision (incorporated by reference to Exhibit
10.1 to the Registrant's Current Report on Form 8-K
dated May 22, 2006, filed with the Securities and
Exchange Commission on May 22, 2006).
10.13 Employment Agreement dated June 20, 2006 between
Registrant and Marc C. Particelli (incorporated by
reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K dated June 14, 2006, filed with
the Securities and Exchange Commission on June 20,
2006).
10.14 Agreement dated June 19, 2006 between Registrant and
John P. Benfield (incorporated by reference to
Exhibit 10.2 to the Registrant's Current Report on
Form 8-K dated June 14, 2006, filed with the
Securities and Exchange Commission on June 20, 2006).
14 Registrant's Code of Ethics (incorporated by
reference to Exhibit 14 to Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31,
2004, initially filed with the Securities and
Exchange Commission on July 22, 2004).
21 Subsidiaries of the Registrant
23 Consent of BDO Seidman, LLP
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.
56
S-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
CoActive Marketing Group, Inc.
The audits referred to in our report dated June 30, 2006, except for Note 6, as
to which is dated July 12, 2006, relating to the consolidated financial
statements of CoActive Marketing Group, Inc. and Subsidiaries, which is
contained in Item 8 of the Form 10-K, included the audits of the financial
statement schedule for the years ended March 31, 2006, 2005 and 2004. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statement schedule
based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
- -------------------------------
BDO Seidman, LLP
Melville, New York
June 30, 2006
57
S-2
Allowance for Doubtful Accounts
Balance Balance
at beginning at end
of period Additions Deductions of period
------------ ------------ ------------ ------------
Year ended March 31, 2006 $ 68,944 $ 301,985 $ 45,719 $ 325,210
Year ended March 31, 2005 $ 295,981 $ 63,500 $ 290,537 $ 68,944
Year ended March 31, 2004 $ 80,412 $ 256,000 $ 40,431 $ 295,981
The amounts listed in the deductions column above, represent reductions to the
allowance for doubtful accounts resulting from either a) write offs of certain
identified uncollectible accounts receivables or b) a reduction of bad debt
expense previously provided for.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ ERWIN I. MEVORAH
-------------------------------------
Erwin I. Mevorah
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Dated: July 12, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
Signature and Title Signature and Title
------------------- -------------------
By: /s/ JOHN P. BENFIELD By: /s/ ERWIN I. MEVORAH
------------------------------ --------------------------------
John P. Benfield Erwin I. Mevorah
President and Chief Financial Officer
Chief Executive Officer (Principal Financial and
and Director Accounting Officer)
(Principal Executive Officer)
Dated: July 12, 2006 Dated: July 12, 2006
By: /s/ PAUL A. AMERSHADIAN By: /s/ HERBERT M. GARDNER
------------------------------ --------------------------------
Paul A. Amershadian Herbert M. Gardner
Executive Vice President Director
- Marketing and Sales and
Director
Dated: July 12, 2006 Dated: July 12, 2006
By: /s/ MARC PARTICELLI By: /s/ BRIAN MURPHY
------------------------------ --------------------------------
Marc Particelli Brian Murphy
Director Director
Dated: July 12, 2006 Dated: July 12, 2006
By: /s/ THOMAS E. LACHENMAN By: /s/ JOHN A. WARD, III
------------------------------ --------------------------------
Thomas E. Lachenman John A. Ward, III
Director Director
Dated: July 12, 2006 Dated: July 12, 2006
By: /s/ JAMES FEENEY
------------------------------
James Feeney
Director
Dated: July 12, 2006
59