VIA EDGAR and FEDERAL EXPRESS
- -----------------------------
February 2, 2007
Ms. Beverly A. Singleton
Staff Accountant
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: CoActive Marketing Group, Inc. (the "Company")
Item 4.01 Form 8-K filed January 16, 2007 (the "8-K")
File No. 0-20394
Dear Ms. Singleton:
This is to respond to your letter dated January 19, 2007 with respect
to the above referenced matter. The numbered paragraphs below correspond to the
numbered paragraphs in your letter.
1. On January 25, 2007 we filed an amendment to the 8-K,
providing the letter from Grant Thornton LLP ("Grant Thornton" or "GT"), dated
January 23, 2007, in which Grant Thornton responded to the disclosure in the
8-K. Such letter was filed as Exhibit 16.1 to the 8-K amendment.
2. The only formal written communications from either BDO or
Grant Thornton regarding the accounting issues referred to in the 8-K is the
discussion outline (the "Discussion Outline") received from Grant Thornton in
connection with a telephonic meeting of Grant Thornton with the Company's Audit
Committee on November 16, 2006, and a letter from Grant Thornton to the
Company's Audit Committee (the "GT Letter"). The Discussion Outline and the GT
Letter are attached to this letter as Exhibits A-1 and A-2, respectively.
Although the GT Letter is dated November 28, 2006, it was not provided to the
Company until January 12, 2007, two days after Grant Thornton's dismissal.
However, a draft of the GT Letter (labeled "Draft") in otherwise identical form
was provided by Grant Thornton to the Company on November 28, 2006. We are also
providing the Commission with a disk containing various emails between the
Company and Grant Thornton and BDO. We can provide the Commission with these
emails in electronic form upon request.
3. Steps Across America. Attached as Exhibit C-1 is the original
memorandum (the "Original SAA Memo") prepared by the Company detailing the
original accounting principles applied in connection with the Company's "Steps
Across America" program (the "SAA Program"). The Original SAA Memo was provided
by the Company to BDO Seidman LLP ("BDO") in January, 2006. In addition, there
were verbal discussions regarding the accounting for this program between the
Company and BDO prior to the final documentation of the revenue recognition
policies applied in connection with the SAA Program, as reflected by the
Original SAA Memo. BDO had reviewed the Original SAA Memo and informed the
Company that BDO agreed with its conclusions. The Company in that memo indicated
that it believed that the program was not a multi-deliverable covered by EITF
00-21, "Revenue Arrangements with Multi-Deliverables" and adhered to the
guidance of SAB 104 and in the Miller Revenue Recognition Guide for arrangements
that have multiple acts rather than multiple deliverables.
SAA Program Background. The client contract provided for three phases.
Phase 1 was constructed so that partner participants in the SAA Program
compensated the Company for the Company's development of the program, as well as
obtaining the participation of both Wal-Mart and a minimum number of partner
participants. The various promotional events associated with the SAA Program
would be executed, and the partner participant's products would be promoted, in
Wal-Mart stores across the United States. This milestone would be met, and
related fees earned only if the Company was able to contract with a certain
minimum amount of partners to participate in the SAA Program. The contract
provisions reflected this as well as the payment schedule contained therein. The
balance of the SAA Program could not occur without attaining such milestone. The
contract templates with the participants (a copy of which is attached as Exhibit
C-2) in the SAA Program contained language that clearly provided that Phase 1
fees were only recognized upon attaining the milestone provided for therein, and
that those fees were not contingent on any other items. The balance of the
payments to the Company under the contracts (excluding Phase 1 fees) were to be
used to plan and produce (Phase 2) as well as execute the program (Phase 3), as
described in the participant contracts. Most participant contracts were signed
in the Company's quarters ended September 30, 2005 and December 31, 2005.
The execution portion of the promotion consisted of a walk across the
country in which a single Sportline pedometer would be carried by individuals
pre-selected by the Company and would include national and local public
relations efforts, and certain wellness celebration events, of which
approximately 150 were to be at Wal-Mart stores, approximately 150 were to be at
local community venues and four would be public relations driven events in NY,
Washington DC, Arizona, and California. These events ("Events") were to be
executed by US Concepts (a wholly owned subsidiary of the Company) during the
April 2006 through July 2006 period. There were also approximately 2,000
in-store wellness demo events planned at Wal-Mart stores on or about April 29,
2006 and May 6, 2006 which were executed by a third party as contracted by the
Company.
Company's Original Accounting for SAA Program as agreed by BDO. The
purpose of the Company's allocating the SAA Program revenues among the phases of
this contract was to reflect the value that the client was receiving at
different points in time and reflect the Proportional Performance model. In so
doing, the Company concluded that the Events promotion (which was one of the
last acts of the SAA Program) was a separate act consistent with existing
accounting literature. US Concepts executes promotions on a regular basis and
develops a fee for programs by determining the specific requirements and
building a line item budget incorporating the desired elements. Simulating a
cost plus arrangement, the client always sees the line item budget, including
the Company's agency fee and staffing charges. The normal profit margin range is
consistently within a 25% -35% range, and averages approximately 30% - the
blended rate for the last two years has been approximately 31%. When US Concepts
developed the Events component of the SAA Program it built it derived the fee
for that component in the same way it constructs fees for other programs, and
the result was what the Company believed was the fair value of the Events
program that was going to be executed as part of the SAA Program. The amount
2
included in the overall SAA Program budget for the Events was based on the fair
value of what US Concepts would need to execute the Events component of the SAA
Program.
In accounting for this program, CA referred to the existing literature
and discussed it with its auditing firm. In particular it referred to Miller
GAAP guide, EITF 00-21 and the SEC speech of December 11, by Douglas Alkema.
In his speech, Mr. Alkema discussed the proportional performance model,
and indicated, "In determining whether delivery has occurred, registrants should
pay careful attention to the terms of the arrangement, specifically the rights
and obligations of the service provider and the customer. Provided all other
revenue recognition criteria have been met, the revenue recognition method
selected should reflect the pattern in which the obligations to the customer are
fulfilled."
In analyzing this program for revenue recognition utilizing the Miller
GAAP guide, the Company referred to Para 6.13 of the Miller GAAP guide (with
reference to a contract that has "one service and multiple acts"). To illustrate
this, Phase 1, Phases 2 and 3 are all part of one promotion - the creation, sell
in and actual execution of a promotional program. The three phases result in the
integrated promotion that was marketed to the clients and as such the Company
treated this as one service with multiple acts. The Company did not believe this
was a multi-deliverable contract, as addressed in EITF 00-21. Miller GAAP guide
Para 6.13 provides that
"if a service transaction involves a specialized number of defined acts
that are not identical or similar, revenue should be allocated based
upon the relative value of each of the acts. In substance, this type of
situation is treated like a multiple element arrangement, with revenue
being allocated to the different elements based on their relative fair
value. In substance, this type of arrangement is treated like a
multiple-element arrangement (see Chapter 4, "Multiple-Element
Arrangements"). If there is insufficient evidence of the fair values of
each of the individual acts, revenue should be recognized on a
systematic and rational basis over the estimated period during which
the acts will performed."
The Company's objective was to allocate revenue properly to each of the
"acts." The Company utilized the contractual value of Phase 1 to recognize
revenue when such milestone was met and the amount recorded was corroborated
when utilizing the residual method (coupled with related guidelines regarding
recording only non-contingent revenue) as described in EITF 00-21. It did this
by determining the fair value of the Events component of the SAA Program as it
would be marketed to third parties - utilizing a line item budget and applying,
as it does with all clients, staffing\agency fees (i.e. profit margin), as well
as the fair value of all other "acts" within the Promotion. It determined the
fair value of the other acts in the SAA Program by applying what is a typical
mark-up in the Promotions business, based on its experience. Promotions project
fee work is often (not always) quoted based on a mark up to budgets presented to
clients. This is different than other industries where a fixed dollar amount is
presented to clients without the back up of what drives those amounts. The
Company believed that this resulted in a "systematic and rational basis" for
determining the revenue attributable to the different acts, most notably the
Phase 1 fee. Thereafter, the bulk of the remaining revenue was deferred to Phase
3 of the SAA Program. The substance of this methodology results in allocating
the contract consideration among the acts and meeting the objective of the
3
Proportional Performance model. The Company recorded $905,000 of revenue
relating to this contract in fiscal 2006 as well as $64,000 in direct expenses,
resulting in a net pre-tax contribution of $841,000. Approximately $700,000
represents Phase 1 revenue allocation, and the balance relates to smaller acts
that occurred prior to the execution of the Events. This is detailed by quarter
in Exhibit C-3. If the Company's determination of fair value and the resulting
allocation of the SAA Program Revenue were incorrect, it would result in the
deferral of the amounts recorded in Fiscal 2006 to Fiscal 2007.
The Company believed that the fair value of the Events component of the
SAA Program was, from its experience, what it would charge to other parties if
it was asked to come up with such a program. It was determined by looking at the
available funds generated from partner participant contracts and the amount and
kind of events that it would need to execute. The partner participant contracts
were clear that the Phase 1 fee was not going to be used by the Company to fund
the promotional program. However, it should be noted that the Company does not
have an exact replica of this program to compare the overall metrics, and the
closest thing that the Company would be able to compare to is the gross margin
built into this SAA Program for the Events act versus other events promotional
programs that it executes. US Concepts has a long term and well known expertise
in building and executing event marketing programs. The original gross margin
budget for the Events component of the SAA Program was 35% which was within US
Concepts' normal margin earned on its programs (although to the higher end of
the "normal" range).
The Company believes that Question 16.2 in KPMG's "Accounting for
Revenue Arrangements with Multiple Deliverables an analysis of EITF Issue No
00-21" is also relevant. Question 16.2 deals with a similar issue with regard to
price ranges that companies may charge for services. The question raised was:
"What parameters should an entity follow when using separate selling
prices of a deliverable to establish VSOE of fair value if there is
some variability in the separate transaction prices?"
The answer was in part:
"Because the element is sold at varying amounts, there is no specific
amount that represents vendor - specific objective evidence. One
acceptable interpretation would be for a vendor to determine a
reasonable range of prices that would represent vendor specific
objective evidence for an element to meet the essence of the
requirement of VSOE. For example, we believe that a range of prices
that encompass at least 80 percent of the separate sales of an element,
and for which the lowest and highest price in the range do not vary
more than 15% from the median price (not average price) in the range,
would be a reasonable range of prices that represent vendor-specific
objective evidence of fair value for an element."
As noted above, the price charged by US Concepts and other agencies for
promotion work is often computed utilizing a range of mark-ups and profit
margins. While this is technically different than a specific price range as
included in KPMG's discussion below, the discussion is relevant and analogous to
the situation in determining the fair value of the Events component of the SAA
Program. In the same way that other companies utilize price ranges for their
services, US Concepts applies a normal profit margin range in determining prices
for the programs it executes.
4
Basis for Company's determination that its prior financial statements
should no longer be relied upon. Following their engagement, Grant Thornton
advised the Company that conclusions in the Original SAA Memo were incorrect,
and accounting literature cited therein not applicable to the SAA Program. Grant
Thornton cited primarily SAB 101 Frequently Asked Questions, which indicates a
company's normal profit margin does not provide evidence of fair value. Grant
Thornton also indicated that the SAA Program was governed in its entirety by
EITF 00-21. Accordingly, such literature would preclude the use of a normal
profit margin by the Company in determining the fair value of the Events
component of the SAA Program. Following additional analysis, and with
substantial input from Grant Thornton, the Company modified the Original Steps
Across Memo, citing literature referred to the Company by Grant Thornton, and
reaching a different conclusion as to the proper method for accounting for the
SAA Program. As the Events component of the SAA was executed near the end of the
SAA Program, if this program is governed by EITF 00-21 and much more
significantly, one would not be able to utilize a "normal profit margin" in
determining the fair value of any of the elements and particularly the
"undelivered element," all revenues would need to be deferred to after the
delivery of such element. As previously noted, this would result in all revenues
relating to the SAA Program being deferred to Phase 3 which occurred in the
first quarter ended June 30, 2006 and second quarter ended September 30, 2006,
of the Fiscal 2007 year.
The revised Company memo is attached as Exhibit C-4 (the "Revised SAA
Memo"). The Revised SAA Memo was provided by the Company to BDO, but BDO has
continued to assert that the Original SAA Memo is correct. BDO's assertion was
based on the aforementioned information previously provided it, recent
additional discussions that it had on this issue with Company personnel,
including sales personnel, as well as the provisions of SAB 104. In addition BDO
recently requested and received additional memos from the Company providing
insight on how the SAA Program was priced.
BDO cited again SAB 104 in that it provides that revenue should not be
recognized until it is realized or realizable and earned. Revenue is generally
realized or realizable and earned when the following criteria are met:
o Persuasive evidence of an arrangement exists
o Delivery has occurred or services have been rendered
o The seller's price to the buyer is fixed or determinable, and
o Collectibility is reasonably assured
Subsequent to our submission to BDO of the Revised SAA Memo, BDO
communicated to the Company that it further discussed the accounting for the SAA
Program with senior partners within their firm, including their national office
and continued to be of the belief that the Company had accounted for the SAA
Program correctly.
Attached as Exhibit C-3 are spreadsheets setting forth the amounts
involved in the SAA Program, and demonstrating the impact the different methods
of accounting (as set forth in the Original SAA Memo and Revised SAA Memo) have
on the Company's assets, liabilities, revenues and pre-tax income (loss) for the
affected periods, including each of the quarters of the Company's fiscal year
5
ended March 31, 2006, and on a cumulative basis, and for the subsequent quarters
of the Company's fiscal year ending March 31, 2007.
Sales/Use Taxes. Historically, Company management (including the
Company's prior Chief Financial Officer) has taken the position that as a
marketing company, the Company and its subsidiaries was exempt from sales and
use taxes ("sales taxes") pursuant to State exemptions typically afforded to
advertising/promotion companies. However, following an audit for the period
December 1, 1998 through November 30, 2004, New York State taxing officials
assessed a subsidiary of the Company with a tax obligation of $145,460.67 plus
interest of $52,446.50 (total of $197,907.17). The state's assessment was dated
November 15, 2005 and acknowledged on February 24, 2006 by a lower-level
employee employed by the Company as an office manager at that time. Such
employee had not been authorized to sign the tax assessment and did not
communicate the tax assessment to senior management. The Company's current Chief
Financial Officer and other accounting personnel were only made aware of the
assessment in July 2006. After analysis and discussion with BDO, management
determined that the assessment was not material to any of the respective periods
under audit (December 1, 1998 through November 30, 2004), the period in which
the assessment was dated, or the period in which the assessment was
acknowledged, without authorization, by an employee of the Company. Therefore,
the total assessment of $198,000 was charged in the Company's first fiscal
quarter of fiscal 2007.
Thereafter, based on the advice of BDO, the Company applied a similar
methodology to that applied by the State of New York in connection with its
audit, and management estimated its liability to the State of New York for the
period December 1, 2004 to June 30, 2006 (which was not covered by the New York
State audit) and recorded an additional $100,000 accrual in the period ended
June 30, 2006 for sales tax obligations due for the period December 1, 2004 to
June 30, 2006.
Following the closing of its books for the quarter ended June 30, 2006,
and in order to obtain a better understanding of sales\use taxes, the Company
consulted with tax personnel at several accounting firms, including Grant
Thornton, JH Cohn, BDO, and Anchin, Block & Anchin. Based on information
gathered, the Company performed additional analysis with respect to its
potential obligation for sales taxes to New York State as well as taxing
authorities in other jurisdictions where the Company operates, and estimated its
net liability for additional sales taxes for the period June 1, 2005 to
September 30, 2006 of $270,000 and $82,000 for the period January 1, 2004
through May 31, 2005.
A summary of the Company's total estimated liabilities for sales taxes
as of September 30, 2006 is as follows:
------------------------------------------------------------------- -----------------------------
Period covered Estimated liability
------------------------------------------------------------------- -----------------------------
NYS audit (12/98 - 11/04) - including interest of $52,446 $197,907
------------------------------------------------------------------- -----------------------------
10/1/03-11/30/04 (states other than NY) $ 96,245
------------------------------------------------------------------- -----------------------------
12/1/04-5/31/05 (all states based on results from in depth $ 81,520
analysis for 6/1/05-9/30/06 )
------------------------------------------------------------------- -----------------------------
6/1/05-9/30/06 (all states based on in depth analysis) - net of $269,762
Client reimbursement of $58,105
------------------------------------------------------------------- -----------------------------
Interest $ 48,893
------------------------------------------------------------------- -----------------------------
------------------------------------------------------------------- -----------------------------
Total $694,327
------------------------------------------------------------------- -----------------------------
6
As a result of the foregoing, the Company was required to determine the
relevant periods for which the sales taxes should be recorded. According to
Statement of Financial Accounting Concepts No. 2, the FASB stated the essence of
the concept of materiality as follows:
The omission or misstatement of an item in a financial report is
material if, in the light of surrounding circumstances, the magnitude
of the item is such that it is probable that the judgment of a
reasonable person relying upon the report would have been changed or
influenced by the inclusion or correction of the item.
This definition of materiality was also affirmed by the SEC's Staff
Accounting Bulletin No. 99, "Materiality". According to SAB No. 99, in the
context of a misstatement of a financial statement item, financial management
and the auditor must consider both "quantitative" and "qualitative" factors in
assessing an item's materiality. In addition, recently issued SAB No. 108
provides guidance on evaluating the effect of prior year misstatements in
quantifying current year misstatements for purposes of materiality assessment.
In accordance with SAB No. 108, a roll over analysis quantifies a misstatement
based on the amount of error originating in the current year income statement.
It would also analyze the prior period misstatement in terms at the respective
prior period income statements. The iron curtain approach quantifies a
misstatement in the current year's income statement regardless of the year of
the originating misstatement. The staff believes that both methods should be
used to evaluate misstatements.
BDO and Company Initial Conclusion
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The Company and BDO agreed that the pre-tax charge of $298,000 in its
first quarter ended June 30, 2006 was proper and reflected a change of estimate
pursuant to SFAS 154. The Company was recording prospectively, amounts relating
to an assessment that was deemed immaterial to any prior quarter and was
estimating any additional exposure based on its knowledge of existing sales tax
law. This was done based on an actual sales tax audit that was recently
completed. It had no other way to estimate any additional sales tax and was
advised that using such methodology for the one state that had raised sales tax
as an issue was appropriate. At that time the Company had no definitive
knowledge as to whether its business was subject to sales tax in other states
and determined it would be necessary to further analyze its exposure following
the filing of its June 30, 2006 10-Q.
Company Conclusion Following Engagement of Grant Thornton
- ---------------------------------------------------------
Following their engagement, the Company reviewed the issue with Grant
Thornton and concluded that in accordance with SFAS 154 (which amended APB 20),
this issue should be treated as a correction of an error, and due to the
materiality (SAB 99) of the amounts, the prior financial statements should be
restated to reflect the accrual of sales taxes during those periods. Paragraph
13 of APB No. 20 distinguishes the correction of an error from a change in
estimate:
Reporting a correction of an error in previously issued financial
statements concerns factors similar to those relating to reporting an
accounting change and is therefore discussed in the Opinion. Errors in
financial statements result from mathematical mistakes, mistakes in the
application of accounting principles, or oversight or misuse of facts
that existed at the time the financial statements were prepared. In
contrast, a change in accounting estimate results from new information
or subsequent developments and accordingly from better insight or
improved judgment. Thus, an error is distinguishable from a change in
estimate.
7
In Grant Thornton's review of this issue, they indicated that due to
the foregoing and the materiality of the dollar amounts, the aforementioned
sales tax adjustments should be treated as the correction of an error.
Thereafter, the Company requested that BDO consent to the restatement
of the Company's financial statements for the periods March 31, 2006 and
possibly March 31, 2005 and re-audit those financial statements to correct this
error. However, BDO continued to maintain that those financial statements
complied with GAAP and did not require restatement as the tax obligations
related to a change in estimate and not the correction of an error. Exhibit D-1
to this letter contains spreadsheets demonstrating the impact the different
methods for accounting for these sales taxes have on the Company's assets,
liabilities, revenues and pre-tax income (loss) for the affected periods,
including each of the quarters of the Company's fiscal year ended March 31,
2006, and on a cumulative basis, and for the subsequent quarters of the
Company's fiscal year March 31, 2007.
4. As noted in Grant Thornton's Exhibit 16.1 letter, GT indicated
that they questioned the revenue recognition with certain other contracts that
they reviewed and the applicability of EITF 00-21. We believe, but are not
certain, that GT is referring to certain contracts executed by US Concepts, as
well as certain media contracts, all of which are described below. In contrast
to GT's views with respect to the SAA Program, GT did not discuss these
contracts with the Company's Audit Committee.
As noted under the SAA Program description, US Concepts executes events
and promotional tours for its clients. The pricing for these events and
promotional tours are supported in the contracts by detailed line item budgets,
including the Company's administrative and internal staffing fees. These
contracts as a whole are different than the SAA Program, described in 3 above,
which contained an event promotional tour as an act within a greater program.
These contracts solely contain an event promotional tour as the promotional
component of the programs.
From time to time in connection with these programs, pursuant to the
underlying contract, US Concepts is required to make significant purchases of
physical assets or significantly refurbish existing assets. Such assets are
required for the program and are an integral part of the promotion for which the
client is contracting for. The Company has in certain situations identified the
procurement (or refurbishment) of such assets as a stand-alone milestone within
the contract with a separate budget, payment schedule and termination schedule
related to the purchase/refurbishment. As indicated above, US Concepts typically
provides its fee quotes to clients by indicating the elements to be included in
the program and the fixed fee add on charge. The Company does not believe any
part of these contracts, including the purchase or refurbishment of assets are
separate "deliverables" pursuant to accounting literature, but rather milestones
within the promotion. Upon reaching the milestone as provided for in the
contract, the Company recognized the contractual value of that milestone.
Generally, in this division's promotions and contracts, the Company has had
difficulty in identifying milestones within a contract that would enable it to
reflect the proportional performance provided to the client at any point in
time. However, with respect to six contracts executed during the fiscal years
2005-2007 in which the Company was able to identify and account for milestones
related to such hard costs, the Company applied SAB 104 and the proportional
performance model so that revenue was recognized as such milestones were met.
Such milestones were specified in the relevant contracts (in the payment
schedule, budget, and termination clauses). The Company believes that it has
accounted for such contracts properly under SAB 104 and the proportional
performance model and is reviewing such accounting with its current auditors,
8
Lazar Levine & Felix LLP ("Lazar"). Had the Company recorded revenues for such
contracts pursuant to EITF 00-21 as preliminarily suggested by GT, as opposed to
the aforementioned literature, it would result in a negative adjustments to
pre-tax income of approximately $280,000-$446,000 in Fiscal 2005 and a positive
adjustment of approximately $74,000-$240,000, and $206,000, for Fiscal 2006, and
Fiscal 2007, respectively.
In addition to the contracts described above, the Company had various
media related contracts under which it developed client specific programs and in
conjunction therewith purchased radio advertising spots. The Company recognized
revenue under such contracts under EITF 00-21. However, GT has preliminarily
questioned the Company's allocation of fair value to the different deliverables
under certain of these contracts. Specifically, it recorded approximately
$192,000 and $50,000 of pre-tax income in its fourth quarter ended March 31,
2005 and 2006, respectively, for various contracts that if incorrect would be
deferred and recognized in future quarters. The Company believes that it has
accounted for these contracts properly but is reviewing such contracts and its
accounting therefor with Lazar.
The Company believes that (i) the contracts described above in this
response 4 are dissimilar from that referred to in response 3 in connection
with the SAA Program, and (ii) in contrast to the SAA Program (as well as the
Company's accounting for sales/use taxes), GT has not conclusively communicated
its opinion to the Company with respect to its accounting for the contracts
referred to in the response 3. Notwithstanding the foregoing, as indicated
above, the Company is currently reviewing its accounting for these contracts
with Lazar.
5. The GT Letter attached as Exhibit A-2 to this letter details
the material weaknesses in internal controls cited by Grant Thornton, as well as
areas of "significant deficiencies". Grant Thornton noted these deficiencies
shortly following their engagement on September 27, 2006. All of Grant
Thornton's findings (to the extent accurate) relate to practices that had been
in place prior to their engagement. Set forth below is information responsive to
the Commission's comment 5 with respect to each such weakness cited. The Company
accepts some of Grant Thornton's findings and although not requested, the
Company has also provided information with respect to each deficiency cited by
GT:
Material Weaknesses
- -------------------
Lack of Effective Controls With Respect to Sales and Use Taxes. The
relevant amounts and periods implicated by this weakness are set forth above in
the Company's response to 3 above. To remedy this weakness, the Company has and
is retaining third-party consultants with expertise in State and local sales and
use taxes to further assist the Company in understanding and properly paying
these obligations and recording these obligations on its financial statements.
Lack of Effective Controls With Respect to Revenue Recognition. The
Company respectfully submits, contrary to Grant Thornton's assertions that the
Company had and continues to have effective internal controls with respect to
its accounting for revenue recognition. The Company spends a significant amount
of resources focused on the recognition of revenue on its contracts. It reviews
each material contract, and when necessary, after determining a preliminary
position, discusses it with its outside auditors for further guidance. The
Company spent significant amounts of time with senior partners of BDO reviewing
9
its revenue recognition policies and procedures with respect to the different
types of services it provides. With respect to the SAA Program, while the
Company acknowledges that its initial accounting treatment may have been
incorrect, the Company came to its initial conclusions following a full review
of the relevant accounting literature in conjunction with its then auditors, a
nationally recognized auditing firm. Of great import in this regard is BDO's
continued assertion that, in fact, the Company has properly reflected and
recorded revenue in the appropriate periods. Information with respect to the
relevant amounts and periods implicated by this putative weakness are set forth
above in the Company's response to 3 above.
GT referenced in its Material Weakness Letter, the company's usage of
guidance prescribed under AICPA Statement of Position (SOP) 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts, to
service contracts that are not within the scope of the SOP. As explained to GT
and as discussed thoroughly with BDO, the Company utilizes this literature for
one division to simulate the "Proportional Performance" model prescribed under
SAB 104. This was thoroughly reviewed with technical partners at BDO. However,
the Company is continuing to review and assess GT's comments in this regard.
The Company continues to be very sensitive on revenue recognition
issues and the need to carefully review contracts and account for the associated
revenues correctly. The Company will continue to focus on this area and use its
best efforts to allocate sufficient resources to ensure compliance with GAAP.
Significant Deficiencies
- ------------------------
Staffing Concerns. The Company acknowledges the need for additional
accounting personnel and is constantly engaged in seeking employees for its
finance department. Currently the Company employs approximately 15 people in its
finance and accounting departments as compared to approximately 11 about a year
ago. The Company is currently recruiting for three new hires.
Review of Financial and tax reconciliations. While not all financial
and tax reconciliations contain evidence of review and approval, all material
balance sheet accounts are reviewed by senior financial management on at least a
quarterly basis. Any unexpected variances in accounts or against the Company's
detailed financial models are further analyzed. The Company is in the process of
implementing a policy that requires all month end financial schedules, at a
minimum, to be signed off by preparers and where appropriate by supervisory
staff.
Income Taxes. The Company's agrees that on a quarterly basis it has
used a 40% estimated effective rate for the preparation of its interim financial
statements. However, management's reliance on a 40% estimated effective tax rate
for the preparation on interim financial statements is supported by the
Company's historical income tax obligations and accruals. In addition, usage of
the 40% effective tax rate was based on consultation with the Company's former
auditors, BDO, and reflects BDO's intimate understanding of the Company's tax
structure (BDO prepared the tax returns of the Company for several years).
Notwithstanding this, as a result of Grant Thornton's comments, the Company will
in the future perform a tax accrual for each interim quarter and will not rely
on a standard effective rate. With regard to the Company's oversight of the
balance sheet accounts, we respectfully disagree with Grand Thornton's
assertion, in this regard. The Company closely monitors the deferred tax asset
that is on its books and has provided when requested, supporting memos to
10
support such valuation. In its financial reviews with the Board of Directors and
internally, this asset is closely monitored and reviewed.
Use of Excel Spreadsheets. The Company's revenue recognition is at
times complex. Its current systems necessitate the use of financial models and
spreadsheets utilizing Excel. Without such usage and the related analysis
required therein, the Company would likely not record its revenue correctly.
However, the Company does believe there is an opportunity to further automate
its revenue recognition process to complement the usage of Excel worksheets and
where possible, reduce the reliance of them. The Company has begun an assessment
how to improve its processes in this area.
Journal Entries. The Company agrees with GT's comments that its current
process to monitor and control journal entries is decentralized and lacks proper
controls to validate the adjustments. In light of GT's comments on journal
entries and controls, the Company is in the process of implementing a process of
having journal entries monitored and reviewed by Finance team staff members.
IT Controls. As a general matter, the Company disagrees with Grant
Thornton's assertion that the Company does not maintain effective controls by
information technology personnel to information technology programs and systems.
Access to such programs is restricted to key trusted members of the technology
team, which in some cases must include managers in a backup role due to the
small size of the information technology team. The Company effectively reviews
and monitors systems, and as a result no business downtime has been experienced
over the fiscal year. The Company agrees that such monitoring should be more
systematic and formalized. The Company is in the process of adding signoffs and
reports that illustrate frequency and accountability for the monitoring. The
Company agrees that the CFO and some Controllers maintain administrator access
to the general ledger application. However, in light of the relatively small
size of its Finance team and the dependence on senior members of the team with
regard to the general ledger, the Company intends to review its current
processes and systems to determine what access limitations can be implemented
with its current systems.
Documentation of Revenue Recognition Policies. The Company has
approximately five basic types of service arrangements, of which three are
supported by documented revenue recognition policies that have been reviewed and
approved by the Company's prior auditors. The Company will begin the process of
formally documenting the policies for the remaining service arrangements which
it currently adheres to. All material revenue recognition policies (including
the undocumented policies) were reviewed with the Company's prior auditors, BDO.
6. Attached as Exhibit 6 is the schedule of adjustments proposed
by our former auditors BDO for our fiscal year ended March 31, 2006. This
schedule was prepared by BDO and submitted to the Company and represents those
adjustments that were not booked, and passed on by the Company and BDO as
immaterial. The schedule shows the impact on the balance sheet as well as
pre-tax and net income and is summarized accordingly. There were no audit
adjustments at the end of that audit that BDO presented to management which
necessitated an additional entry.
The Company hereby acknowledges:
11
o the Company is responsible for the adequacy and accuracy of
the disclosure in its filings;
o staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any
action with respect to Company filings; and
o the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
Should you require additional information, please contact the
undersigned at 212-366-3402.
Very truly yours,
CoActive Marketing Group, Inc.
By: /s/ ERWIN I. MEVORAH
----------------------------------
Erwin I. Mevorah
Chief Financial Officer
cc: Members of the Audit Committee of CoActive Marketing Group, Inc. (via email)
Ms. Nazeleen Sataur, Lazar Levine & Felix LLP (via email)
12
Exhibit A-1
CoActive Marketing Group, Inc.
Discussion Outline
Conference Call with Audit Committee - November 16, 2006
Update: Review Procedures for Quarter Ended September 30, 2006
================================================================================
o California Sales Tax Matter
o Company has not filed California Sales Tax Returns for the
first three quarters in the calendar year ending December 31,
2006 (all of which are due)
o Correspondence has been received from State of California
o Company has collected sales tax from a customer but has not
remitted as Company is questioning the amount actually due to
California
o Company has recorded a liability of $160,000 at September 30,
2006 ($50,000 was unpaid by the customer at September 30, 2006
and $16,000 if unpaid currently)
o Tax collected is deemed by the states as being held in trust
for the state - failure to remit is a serious matter and
Company may be subject to penalties and interest
o Internal Control Deficiencies and Material Weakness Letter
o Draft letter provided to management - Grant Thornton has
concluded that there are significant internal control
deficiencies that, in the aggregate, result in a material
weakness
o Internal control matters noted include resource constraints in
the accounting function (reactive rather than proactive), poor
controls in the area of taxation, including but not limited to
sales tax, information technology access matters, journal
entry control and overuse of Excel spreadsheets, controls over
revenue recognition (including application of percentage of
completion method accounting and accounting for multiple
element arrangements.
o Management is required to establish, maintain and regularly
evaluate the effectiveness of internal controls. In addition,
when evaluation is performed, it does not matter if
misstatements are intentional or unintentional.
o Requirement for Item 4 disclosure
o Overall Sales Tax Accrual
o Company has finalized its estimated liability for sales tax
for prior periods
o Accrual covers the 3 year prior period and includes an
estimate for interest but not penalties
o Based on accounting literature, this is deemed to be a
correction of an error and must be treated for accounting
purposes as a restatement.
o Since this misstatement was not identified in prior years, and
correcting this misstatement would materially misstate the
current year's income statement, the SEC staff indicates that
the prior year financial statements should be adjusted
Page 1
o Revenue Recognition and Steps Across America Contract
o Multiple element arrangement (EITF 00-21)
o Factors to consider when determining if reliable and objective
evidence of an undelivered item exists
o Evidence of fair value must exist
o Vendor specific objective evidence is preferable
o If VSOE is not available, third party evidence of
fair value may be acceptable
o Inappropriate measures of fair value
o Contractually stated prices
o Vendor's cost, including measures based on time or
effort involved in delivery
o Cost plus a "normal" profit margin
o SEC demanding evidence on choice
o Conclusion - Company has not established fair value for all of
the undelivered elements in this arrangement; therefore,
account for this as one arrangement and recognize revenue over
the event occurrences
Page 2
Exhibit A-2
Grant Thornton [LOGO OMITTED]
Accountants and Business Advisors
Audit Committee of the Board of Directors and Management
CoActive Marketing Group, Inc.
In planning and performing a review of the September 30, 2006 interim
financial statements of CoActive Marketing Group, Inc. ('the Company"),
we considered the Company's internal control over financial reporting
in order to determine our review procedures for the purpose of
providing a basis for communicating whether we are aware of any
material modifications that should be made to the interim financial
statements for them to be in conformity with accounting principles
generally accepted in the United States of America ("US GAAP") and not
to provide assurance on internal control. Accordingly, our
consideration of internal control would not necessarily disclose all
deficiencies in internal control over financial reporting that might be
significant deficiencies or material weaknesses. However, as discussed
below, we noted certain deficiencies involving internal control that we
consider to be significant deficiencies and material weaknesses under
the standards of the Public Company Accounting Oversight Board (United
States).
A control deficiency exists when the design or operation of a control
does not allow management or employees, in the normal course of
performing their assigned functions, to prevent or detect misstatements
on a timely basis. A significant deficiency is a control deficiency, or
combination of control deficiencies, that adversely affects a company's
ability to initiate, authorize, record, process, or report external
financial data reliably in accordance with US GAAP such that there is
more than a remote likelihood that a misstatement of the entity's
annual or interim financial statements that is more than
inconsequential will not be prevented or detected.
A material weakness is a significant deficiency, or combination of
significant deficiencies, that results in more than a remote likelihood
that a material misstatement of the annual or interim financial
statements will not be prevented or detected. We believe that the
following significant deficiencies constitute material weaknesses under
the standards of the Public Company Accounting Oversight Board (United
States).
o The Company did not maintain effective controls, including
monitoring, over the accounting for its sales and use taxes.
Specifically, the Company did not have a complement of
operations and accounting personnel aware of the sales and use
tax rules in various jurisdictions which resulted in
misstating accrued sales and use taxes. This control
deficiency resulted in a misstatement in the aforementioned
account that resulted in a material misstatement to the annual
and interim consolidated financial statements that was not
prevented or detected.
o The Company did not have appropriate internal controls related
to the recognition of revenue, including sufficient resources
in the accounting department to address the complicated
accounting issues surrounding revenue recognition on certain
of its arrangements (contracts). The Company's controls were
not adequate to capture and analyze the terms and conditions
of all arrangements to ensure that the arrangement was
accounted for under the appropriate accounting literature,
which can affect the timing and amount of revenue to be
recognized. Certain of the Company's revenue arrangements have
been
399 Thornall Street
Edison, NJ 08837
T 732.516.5500
F 732.516.5502
W www.grantthornton.com
Grant Thornton LLP
US Member of Grant Thornton International
Grant Thornton [LOGO OMITTED]
accounted for in accordance with the Emerging Issues Task
Force (EITF) Issue No. 00-21, Revenue Arrangements with
Multiple Deliverables ("EITF 00-21"), and the provisions of
such Issue were not always appropriately applied.
Additionally, the Company has applied the provisions of AICPA
Statement of Position (SOP) 81-1, "Accounting for Performance
of Construction-Type and Certain Production-Type Contracts"
("SOP 81-1"), to service contracts that are not within the
scope of the SOP. These weaknesses resulted in material
adjustments to the Company's interim consolidated financial
statements for the first and second quarters of fiscal 2007
and material adjustments to the Company's fiscal 2006
consolidated financial statements. This control deficiency
resulted in a misstatement in the aforementioned account that
resulted in a material misstatement to the annual and interim
consolidated financial statements that was not prevented or
detected.
Additionally, we believe that the following significant deficiencies that we
have identified to date, in the aggregate, constitute material weaknesses under
the standards of the Public Company Accounting Oversight Board (United States).
o During the interim review, we noted serious resource
constraints in the Company's accounting department. The
Company did not maintain a sufficient complement of personnel
with an appropriate level of accounting knowledge, experience
and training in the application of US GAAP commensurate with
the Company's financial reporting requirements to support the
size, complexity and operating activities of the Company. The
Company's financial and accounting organization are not
currently adequate to support its financial accounting and
reporting needs.
As a public registrant, the Company is subject to the rules
and regulation of the Securities and Exchange Commission and
the Public Company Accounting Oversight Board (United States).
The financial statements and the interim financial information
are the responsibility of management. Management is
responsible for the data and information set forth therein, as
well as for the evaluation of the capability and
integrity of the Company's personnel. Management is also
responsible for fairly presenting the financial statements
(and interim financial information) in conformity with US
GAAP, which includes adopting sound accounting practices and
complying with changes in accounting principles and related
guidance.
o During the interim review, we were provided with certain
financial and tax reconciliations and schedules which lacked
the appropriate evidence of review and approval. This control
deficiency could result in a material misstatement of
the Company's interim or annual financial statements that
would not be prevented or detected.
o The Company did not maintain effective controls over the
accounting for income taxes, including income taxes payable,
deferred income tax assets and liabilities and the related
income tax provision, with respect to interim period tax
allocations. With respect to the first quarter, the Company
utilized a 40% effective rate to calculate its income tax
provision without preparing the supporting working papers.
With respect to the second quarter, the Company engaged an
outside tax person to assist with the preparation of the
interim accruals, but only after it was recommended by the
outside auditors. Additionally, there was
Page 2
Grant Thornton [LOGO OMITTED]
a lack of oversight and review over the income taxes payable,
deferred income tax assets and liabilities and the related
income tax provision accounts by accounting personnel with
appropriate expertise in income tax accounting.
o There is an overuse of Excel spreadsheets by the Company, in
key areas, including as support for revenue recognition on
certain key contracts. There is a core problem with using
spreadsheets, especially if used for operational processes and
reporting: the inherent lack of controls resulting from the
"ease of use" and availability significantly increase the risk
of a material misstatement on financial reporting. A recent
study by Professor Raymond R. Parko at the University of
Hawaii found that of 54 spreadsheets audited, 91% of them had
errors. Further:
o Spreadsheets with more than 200 lines have almost
100% probability of error
o Easy access to spreadsheet applications allows
increased risk and errors.
The key to reducing these errors and managing risk are to
understand how the Company uses spreadsheets and the
complexity of these spreadsheets.
o The Company's current process to monitor and control journal
entries is decentralized and lacks proper controls to validate
the adjustments. Currently, controllers and senior accountants
can authorize and post adjusting journal entries; however, no
review or check is required to verify the accuracy and
validity of the journal entry before it is posted or to ensure
the supporting documentation exists and is complete.
o The Company did not maintain effective controls over access by
information technology personnel to information technology
programs and systems. In addition, accounting personnel
(including the Chief Financial Officer and Controllers)
inappropriately maintained administrator privileges to the
Company's general ledger application. The Company did not have
adequate policies and procedures to control security and
access, there were inadequate controls restricting access to
such programs and systems by information technology and
accounting personnel and there was a lack of periodic,
independent review and monitoring of such access.
o The Company has not appropriately documented its accounting
policies related to revenue recognition. While certain
memoranda have been prepared to address certain specific
arrangements or types of arrangements in many cases such
memoranda refer to inappropriate literature sources or no
longer adequately describe the Company's accounting procedures
and policies. Furthermore, a number of the Company's revenue
streams (and therefore the arrangements included therein) are
not supported by any comprehensive documentation of the
revenue methodology for such arrangements.
We recommend that the Company consider the following actions:
o Consider hiring a Director of Taxation, to upgrade the tax expertise
and to ensure that future tax positions and calculations are complete
and accurate.
o With respect to revenue recognition, the Company should consider
whether they have appropriate technical resources in the accounting
department and consider whether there is
Page 3
Grant Thornton [LOGO OMITTED]
adequate and timely communication between the sales and the accounting
staff. In addition, the Company should implement a procedure that would
require a review of each significant sale transaction for compliance
with the applicable authoritative accounting standard including, but
not limited to EITF 00-21, AICPA Statement of Position No. 97-2,
Software Revenue Recognition, SOP 81-1, etc. The initial revenue
recognition determination should be made, and then reviewed by a member
of the accounting/ finance department at a director or higher level. In
addition, the Chief Financial Officer should review both randomly
selected contracts, as well as those related to large and/or complex
transactions. All of the revenue recognition conclusions should be made
based on appropriate accounting literature and documented in the
Company's files. The Company should also consider engaging an outside
consultant to assist the Company in performing additional review
procedures for revenue transactions. The scope of the consultant's
review should be designed to ensure a comprehensive review of all large
transactions, as well as certain types of transactions that have
previously resulted in adjustments to the timing of revenue
recognition. The outside consultant's scope could also include
reviewing a sample of contracts from the general population for proper
revenue recognition.
o Conduct an assessment of the accounting organization in order to
develop detailed plans to improve it, including the addition of
experienced accounting personnel to provide additional oversight and
supervision within the Finance organization.
o Consider hiring additional personnel and/or engage service providers on
a temporary basis to address shortfalls in staffing and assist the
Company with accounting and finance.
o Initiate programs providing ongoing training and professional education
and development plans for the accounting organization and improve
internal communications procedures throughout the Company.
o Consider segregating the duties of administrator responsibilities to
individuals who are not the end users of the application. While each
department should be responsible for determining which access rights
each employee should be granted, the process of administering access to
the Company's information systems should be outside of the end user
departments. Further, administrative access to the systems should not
be granted to information technology management since their
responsibility is to oversee the administration of user access.
o Consider upgrading the current system to perform the processes
currently performed using the Excel system or adding additional
alternative software programs such as report writers and other add-ons
that are more reliable than Excel.
o With respect to journal entry control, we recommend the Company
implement the following controls:
o A junior person in the accounting department should be
responsible for assembling documentation and posting journal
entries.
o The Divisional Controllers and/or Vice President of Finance
should ensure that each journal entry has a full explanation
and attaches all supporting documentation before being posted.
Where appropriate, based on the value of the entry, the
Company should consider establishing thresholds for review
such
Page 4
Grant Thornton [LOGO OMITTED]
that significant entries are approved by the regional
controller or department head.
o Upon reviewing and approving a journal entry, the accounting
department supervisor should initial the journal voucher
documentation and maintain a centralized listing of all
journal entry support.
o The accounting personnel who post the journal entry should be
independent of those who prepare the entries.
o With respect to revenue recognition policies and procedures the Company
should begin a process to review the revenue recognition streams and
types that exist within its business lines and ensure that its revenue
recognition process is appropriately documented in the Company's files
with the appropriate references to accounting literature.
This report is intended solely for the information and use of the audit
committee, board of directors, management, and others within the organization
and is not intended to be and should not be used by anyone other than these
specified parties.
/s/ Grant Thornton LLP
Edison, New Jersey
November 28, 2006
Page 5
Exhibit C-1 - Company\BDO's - Original Position
SEC Comment Letter Dated 1/19/07
Comment #3
CoActive - Revenue Recognition - Steps Across America ("SAA") Program
- ---------------------------------------------------------------------
Attached is the original CA write up on the Steps Across contract and the
related excel document (the latter updated in 11/06 with more specific info -
but arriving at the same result).
The contract provided for three phases. Phase 1 was built in a way that would
compensate the Company for the value for developing the program, the sell in to
Wal-Mart and to tie - in partners (all collectively Phase 1). This revenue would
only be earned if a milestone of certain amount of partners was achieved. The
contracts (copy of template attached - Exhibit 2.1) with the tie in partners
contained language that clearly provided that the Phase 1 deliverable was only
recognized upon such milestones and not contingent on any other items. The
balance (excluding Phase 1 fees) of the proceeds were to be used to plan and
produce (Phase 2) as well as execute the program (Phase 3), as described in the
tie- in partner contracts.
The execution portion of the promotion consisted of a walk across the country in
which a single Sportline pedometer will be carried by individuals pre-selected
by CoActive and includes national and local PR efforts, and certain wellness
celebration events, of which approximately 150 will be at Wal-Mart stores,
approximately 150 will be at local community venues and four will be PR driven
events in NY, Washington DC, Arizona, and California. These events were to be
executed by US Concepts ("USC, a wholly owned CoActive subsidiary). There was
also approximately 2000 in-store wellness demo events planned at Wal-Mart stores
on or about April 29, 2006 and May 6, 2006. The in-store events were covered by
the tie-in partner contracts and were the responsibility of CoActive, but the
actual execution was performed by a third party vendor as contracted by
CoActive.
The basis of allocating the revenues amongst the parts of this contract was to
reflect the value that the client was receiving at different points in time. One
of the significant assumptions in determining such value was done on the belief
that isolating the US Concepts Events promotion as a separate act was in
accordance with existing accounting literature. USC does promotions on a regular
basis and does the programs by determining the specific requirements and
building a line item budget that is almost always presented to the client. The
client always sees the line item budget, including the Company's agency fee and
staffing charges. The normal profit margin range is consistently within a 25%
- -35% range and averages approximately 30% - the blended rate for the last two
years has been approximately 31%. When USC developed the contract and the
related budget for this program it built it in a way typical of how it builds
all its budgets and the result was what the Company believe was the fair value
of the events program that was going to be executed. The amount included in the
budget and the amounts chargeable to clients was based on the fair value of what
USC would need to execute the events program and other parts of Phase 2 and 3.
In accounting for this program, CA referred to the existing literature and
discussed it with its auditing firm. In particular it referred to Miller GAAP
guide, EITF 00-21 and the SEC speech of 12/03 by Douglas Alkema.
In the speed of Mr. Alkema, where he discussed the proportional performance
model, he indicated "In determining whether delivery has occurred, registrants
should pay careful attention to the terms of the arrangement, specifically the
rights and obligations of the service provider and the customer. Provided all
other revenue recognition criteria have been met, the revenue recognition method
selected should reflect the pattern in which the obligations to the customer are
fulfilled."
In analyzing this program for revenue recognition utilizing the Miller GAAP
guide - the Company referred to Para 6.13 of the Miller GAAP guide (with
reference to a contract that has "one service and multiple acts"). To illustrate
this Phase 1, Phases 2 and 3 are all part of one promotion - the creation, sell
in and the actual execution. Phase 1 can be done either by CA or others and
Phase 2 and Phase 3 are dependent on Phase 1. The three phases result in the
integrated promotion that was marketed to the clients and as such the Company
treated this as one service with multiple acts. The Company does not believe
this is a multi-deliverable contract. Miller GAAP guide Para 6.13 provides that
"if a service transaction involves a specialized number of defined acts that are
not identical or similar, revenue should be allocated based upon the relative
value of each of the acts. In substance this type of situation is treated like a
multiple element arrangement, with revenue being allocated to the different
elements based on their relative fair value. In substance, this type of
arrangement is treated like a multiple-element arrangement (see Chapter 4,
"Multiple-Element Arrangements). If there is insufficient evidence of the fair
values of each of the individual acts, revenue should be recognized on a
systematic and rational basis over the estimated period during which the acts
will performed."
The Company's objective was to allocate revenue properly to each of the "acts."
The Company utilized the residual method in determining the fair value of the
Phase 1 fee and recognized revenue accordingly. It did this by determining the
Fair Value of the Events program as it would be marketed to third parties -
utilizing a line item budget and applying, as it does with all clients'
staffing\agency fees, as well as the Fair Value of all other "acts" within the
Promotion. It also determined the fair value of the other acts by applying what
is a typical mark-up in the Promotions business. Promotions work is often (not
always) quoted based a mark up to budgets presented to clients. This is
different than other industries where the a fixed dollar amount is presented to
clients without the back up of what drives those amounts. It believed that this
resulted in a "systematic and rational basis" for determining the revenue
attributable to the different acts, most notably the Phase 1 fee. The substance
of this methodology results in allocating the contract consideration amongst the
acts and meeting the objective of the Proportional Performance model.
The Company believed that the fair value of the Events program was from its
experience, what it would charge to other parties if it was asked to come up
with such a budget. It was determined by looking at the available funds and the
amount and kind of events that it would need to execute. However, it has does
not have an exact replica of this program to compare the overall metrics and the
closest thing that the company would be able to compare to is the gross margin
built into this events program versus its others, as well as its long term
expertise in building and executing experiential event marketing programs. The
gross margin budget for this job was 35% which was on a little on the high side
- - but to help substantiate the amount attributable to Phase 1 on a macro basis,
reducing the margin to zero would only allocate more to Phase 1, but Phase 1
because of contract provisions was limited to a certain amount in any event -
the contract value (which was what was recorded as revenue). Conversely, based
on its historical norms and that 35% while in the average range, is on the high
side and it would be reasonable to say that a margin much higher could not be
charged. The Company would have had to been able to achieve a gross margin of
about 40% for the Events promotion, before the residual value computation would
result in an amount lower than that recorded for Phase 1. Such a margin, is not
regularly achieved in the normal course of USC's business.
In reference to such analysis - Question 16.2 in KPMG's "Accounting for Revenue
Arrangements with Multiple Deliverables an analysis of EITF Issue No 00-21" is
referred to. While not the exact situation as the one covered in this memo, a
relevant question was raised. The question raised was:
"What parameters should an entity follow when using separate selling
prices of a deliverable to establish VSOE of fair value if there is
some variability in the separate transaction prices?"
The answer was in part:
"Because the element is sold at varying amounts, there is no specific
amount that represents vendor - specific objective evidence. One
acceptable interpretation would be for a vendor to determine a
reasonable range of prices that would represent vendor specific
objective evidence for an element to meet the essence of the
requirement of VSOE. For example, we believe that a range of prices
that encompass at least 80 percent of the separate sales of an element,
and for which the lowest and highest price in the range do not vary
more than 15% from the median price (not average price) in the range,
would be a reasonable range of prices that represent vendor-specific
objective evidence of fair value for an element."
BDO and Initial Company Conclusion
- ----------------------------------
SAB 104 provides that revenue should not be recognized until it is realized or
realizable and earned. Revenue is generally realized or realizable and earned
when the following criteria are met:
o Persuasive evidence of an arrangement exists
o Delivery has occurred or services have been rendered
o The seller's price to the buyer is fixed or determinable, and
o Collectibility is reasonably assured
Based on all the different literature and that the Company having met the
requirements of SAB 104, the Company accounted for this contract under the
proportional performance model and recognized revenue upon the completion of
Phase 1 of the partner contracts.
Company Addendum to Reflect why the financial statements affects should no
- --------------------------------------------------------------------------
longer be relied upon
- ---------------------
However, with reference to fair value computations under EITF 00-21, GT has
cited "SAB 101 Frequently asked questions that indicates that a company's normal
profit margin does not provide evidence of fair value. In addition, it believed
that EITF 00-21 applies to this contract and that Proportional Performance model
does not apply here to the program in its entirety, but would only apply to the
event execution portion of the program once the revenue was allocated between
each of the elements and the Company does not have an exact replica of this
program for comparison purposes which would prevent an allocation of revenue to
the different acts, most notably the Event component of the program - thus
resulting in all revenue being deferred to the end of the program and recognized
as the individual actual events were executed.
As previously indicated, the Company did not believe that this contract is a
multi-deliverable and had applied a systematic and relevant approach to apply
the proportional performance model. However, if it is determined, that this
contract is in fact a multi-deliverable contract and thus falls under EITF
00-21, or regardless of whether it was a multi-deliverable or not, it would need
to allocate revenue to each act consistent with EITF 00-21's Fair Value
methodology, one would need to determine if Fair Value of each of the
deliverables were met. In such a situation, in determining Fair Value, EITF
00-21 provides guidance which as noted in the preceding paragraph has been
expounded on in SAB 101. if it is necessary to interpret the overall available
literature with a strict interpretation of SAB 101 in its literal form
("company's normal profit margin) and if the need is for an exact (very close)
replica of this program, the Company would not have achieved Fair Value for the
Events component of the promotion utilizing a normal profit margin. This is
notwithstanding that the Company in delivering Event programs to other
customers, consistently provides them with a detailed budget and then negotiates
its profit margin. Accordingly, all revenue\expenses of the contract would need
to be deferred to the execution of the events.
The Company recorded $905,000 of revenue relating to this contract in its fiscal
2006 as well as 64,000 in expenses, resulting in a net pre-tax contribution of
$841,000 that would be deferred to fiscal 2007. Approximately $700,000 relates
to the above discussion on the Phase 1 revenue allocation and the balance,
relates to smaller acts that occurred prior to the execution of the actual
events. This is detailed out, by quarter in Exhibit 3.
As a result of the above, the Company is continuing its assessment of its
accounting for this promotional program and applicable accounting literature and
has deemed that the prior financial statements should no longer be relied upon.
Inmark Services, LLC
Revenue Recognition: SAA Contract
(Note this is the original memo that was written on this program)
1/07 note - based on revisiting this contract, the fair value of the above items
changed, but such revision (not shown below) did not affect the amount recorded
for Phase (Act) 1.
Memo to File
Date: January 23, 2006
In general, the key to determining when service transaction revenue has been
earned is determining the pattern of delivery or performance. Performance
determines the extent to which the earnings process is complete and the extent
to which the customer has received value from the service. The delivery or
performance condition in a service transaction is often evaluated under the
Proportional Performance model, which results in delivery being considered to
occur over a period of time. However, the pattern of delivery is not always
clear. In addition, delivery for certain service transactions should be
evaluated under the Completed Performance model because the customer does not
receive any value from the service until it is completed. One factor that should
be considered in evaluating performance in a service transaction is whether
performance involves a single act or multiple acts.
When performance involves more than one act and spans more than one accounting
period, it is necessary to determine whether the Completed Performance model or
Proportional Performance model should be used to determine when the delivery
criterion has been met and revenue has been earned.
Determining whether to use the Completed Performance model rather than the
Proportional Performance model requires significant judgment. However, the
following factors, if present in a service arrangement, may indicate that the
Completed Performance model should be used:
1. If the seller fails to perform the final act, the customer would
need to "start over," rather than just pick up where the original
vendor left off.
2. Payment terms indicate that no payment is due until the final act
is performed.
3. The final act is significantly different in nature than the other
acts to be performed.
4. The contracts underlying the transaction specify only the final
act and other acts are performed at the seller's discretion.
5. There is significant uncertainty as to whether the vendor can
complete all of the acts in the arrangement.
If delivery in a service transaction is to be evaluated under the Proportional
Performance model, the pattern of performance must be determined. The
determination of the pattern of performance should focus on the pattern in which
service is provided to the customer, rather than on the pattern in which money
or effort is expended by the service provider. Only those acts that actually
provide value to the customer should be considered acts that trigger revenue
recognition in a service transaction. Selecting which acts in a service
arrangement should trigger revenue recognition is very similar to identifying
the various deliverables in a multiple-element arrangement.
Some service transactions involve a number of different acts, even though they
are all part of the same service. If a service transaction involves a specified
number of defined acts that are not identical or similar, revenue should be
allocated based upon the relative value of each of the acts. In substance, this
type of situation is treated like a multiple-element arrangement, with revenue
being allocated to the different acts based on their relative fair values. If
there is insufficient evidence of the fair values of each of the individual
acts, revenue should be recognized on a systematic and rational basis over the
estimated period during which the acts will be performed. One such systematic
and rational basis may be the use if the residual method. Another basis might be
straight-line if no other systematic and rational basis is more representative
of the pattern in which the performance takes place.
In the case of the Steps Across program ("SAA"), CoActive was engaged to develop
the promotion, solicit and confirm all sponsors, plan, and execute the
Promotion. The promotion consists of a walk across the country in which a single
Sportline pedometer will be carried by individuals pre-selected by CoActive and
includes national and local PR efforts, and certain wellness celebration events,
of which approximately 150 will be at Wal-Mart stores, approximately 150 will be
at local community venues and four will be PR driven events in NY, Washington
DC, Arizona, and California. There will also be approximately 2000 in-store
wellness demo events at Wal-Mart stores on or about April 29, 2006 and May 6,
2006. Note that there is no contract between CoActive and Wal-Mart, the
contracts are between CoActive and the participating retailers. Although there
is no contract between CoActive and Wal-Mart, there is e-mail approval whereby
Wal-Mart confirms CoActive's inclusion on their Master Calendar.
The total fee for the project is $5,845,000.
Based upon the above, Inmark believes that although the contract is for one
service - the walk across america program - there are multiple acts within the
contract and a rational method of allocating revenues would be based upon the
relative value of each of the acts. The client is clearly receiving "value"
during this process, and once the allocation of the purchase price (revenue) to
each of the acts are completed, this revenue should be recognized utilizing the
appropriate revenue recognition methodology for each of the acts.
Note: Account management does not represent a single or individual act. It is
part of the process of managing and executing the entire program - in essence it
represents an additional fee for each of the elements. Therefore, it would be
reasonable to allocate the value of this piece amongst the entire program. In
the interest of conservatism, and on the premise that the Account Management
services pertain to the program as a whole, Inmark will allocate the value of
the Account Management on a proportional basis over the separate acts. This is
believed to be very conservative, but would not materially affect revenue
recognized on each of the acts. On a go forward basis for other projects,
"Account Management" fees will need to be allocated on a case by case basis.
Therefore, the value of the separate acts as explained hereafter, will be as
follows:
Allocated Rev Rec
Price Method
(see attached)
-------------- ----------------
Act 1: Sponsorship Fees $ 675,000 Comp Perf
Act 2: In-Store Demos: Promoworks 1,478,380 Comp Perf
Act 3: Wal-Mart TV 387,831 % Comp/Prop Perf
Act 4: Local Radio & DJ Endorsements 216,062 % Comp/Prop Perf
Act 5: Pins & Fans 39,971 Comp Perf
Act 6: Brochures 113,432 Comp Perf
Act 7: President's Challenge 141,790 Comp Perf
Act 8: Creative Development 115,531 % Comp/Prop Perf
Act 9: Free-Lance 51,855 % Comp/Prop Perf
Act 10: Travel, OOP, Misc. Costs 108,031 Comp Perf
Act 11: In-Store Standees 108,031 Comp Perf
Act 12: Event Execution - USC 2,409,086 % Comp/Prop Perf
--------------
Total $ 5,845,000
==============
1/07 note - based on revisiting this contract, the fair value of the above items
changed, but such revision (not shown above) did not affect the amount recorded
for Phase (Act) 1.
CoActive Comment Letter Dated 1/19/07
Comment # 3 - Steps Across America Revenue Recognition
Exhibit C-1
original calc by JRC
Fair Value Allocation: Stand Alone Allocated
FV Price
-------------------- ---------
In-Store Demos - Promoworks 1,368,480 pass thru 1,478,380
Wal-Mart TV 359,000 pass thru 387,831
Local Radio promo & DJ endorsements 200,000 pass thru 216,062
Pins & fans 37,000 pass thru 39,971
Brochure 105,000 pass thru 113,432
President's Challenge 131,250 pass thru 141,790
Creative Development 106,943 see above 115,531
Sponsorship Fee 675,000 recog previously
Kate Jacobs 48,000 pass thru 51,855
Travel, OOP, Misc. costs etc 100,000 pass thru 108,031
In-Store standees 100,000 pass thru 108,031
Event Execution - USC 2,230,000 Note 2,409,086
----------
Total Fair Value of Acts: 5,460,673
Less: Sponsorship Fee 675,000
---------- ----------
FV of Remaining Acts for rev rec 4,785,673 5,170,000
========== ==========
Total Contract Value 5,845,000
Less: Sponsorship Fee 675,000
----------
Contract Value, excluding Sponsor Fee 5,170,000
==========
- --------------------------------------------------------------------------------
updated calculation
11/9/06 - em/bm - based on current understanding (back in time to original
budge) update has no effect on amts recorded for sponsorship fee, but helps
again validate it more prececisely
1,610,017 what vendors charges typically little or no profit - a client could
work directly with promoworks at CA's cost, but if they needed
somebody to manage promoworks - i.e. an agency, the typical agency
fee would be a 17.65% mark up - assume as here a 3rd party is needed
to manage
309,000 pass through for 300k of wlamrt tv, proof is that we gave rebates on
used $s anybody can buy walmart radio - very minimal mark ups avail
- assume zero
29,413 $50k is prod that we were going to charge per internal budget- what
we would normally charge for prod normally radio prod is marked up
20% - 40%, typically ad agencies markup elements by 17.65% - we try
to get much higher - used 17.65% against real cost $est spend was
25k - 30k would be for two flights - 1 script 15 second spot this is
conservative as we would normall cahrge 20% - 40% margin
200,000 what we would normally charge - repersents 25% margin, that is our
margin
12,942 $37k is pins and fans that we were going to charge per internal
budget- what we would normally charge for prod normally premiums is
a margin of 35%, typically ad agencies markup elements by 17.65% -
we try to get much higher - used 17.65% against real cost est spend
was approx $11k this is conservative as we would normall cahrge 35%
margin
103,500 est cost budget for printed element was 90k - typically ISI make
20%-40% margin industry norm through printing brokers and agencies
is 15% - 30% OG makes 15% mark up on FEX projects est spend in
budget was 90k say 15% as average to reflect what we charge other
clients - diff in % not material
105,885 pass through - would have little or no profit
3rd party notifies us of people who have walked x steps over 3 weeks
and registered for the program - we then send notification to a 3rd
party fulfullment center to send that person a certificate and pach
- the president's challenge - developed the certifciate\patch
and we pay then about $1.20 eahc - but only as we need them and
then a small charge to the fulfillment house- total aggregate chg
about 1.55 per recepient
Much fewer people have participated than expected - irrelveant
though in allocating original budget - original budget assumed 75000
recepients Nomral chage by an agency for something like this would
be 17.65% above the actual costs
106,943 see above
this is an employee should not be in fv calc - this is a cost to the
job, not a deliverable
100,000 treat as pass throug cost
122,500 printed element - typically we make 20%-40% margin
industry norm through printing brokers and agencies is 15% - 30% est
spend was 100k
say 22.5% as blended average
2,230,000 priced out usc budget what they would charge for a programs usch as
this
- -----------
4,930,199
===========
914,801 residual
675,000 capp this fee covers the creataive dev and getting into
walmart stors and partnerse all these major items.
- --------------------------------------------------------------------------------
Exhibit C-2
Steps Across America Promotion
National Sponsor Letter of Agreement
This Agreement is entered into by and between CoActive Marketing Group (herein
referred to as "CoActive "), and _____Insert Parent Company Name_______ (herein
to referred to as "Sponsor") for ___Insert Product Name/category_______ (herein
to referred to as "Brand") National Sponsorship of the 2006 Steps Across America
Promotion (herein to referred to as "Promotion"). CoActive agrees to provide
services related to the development, sponsorships, planning and execution of
this Promotion pursuant to this Agreement.
1. SCOPE OF ASSIGNMENT
CoActive will develop the Promotion, solicit and confirm all sponsors,
plan, and execute the Promotion as detailed in this Agreement. The
Promotion consists of a walk across the country in which a single Sportline
pedometer will be carried by individuals preselected by CoActive and
includes national and local PR efforts, and the following wellness
celebration events (each an "Event"):
o Along the route taken by the Pedometer: approximately 304 wellness
celebrations, of which approximately 150 will be at Wal-Mart stores,
approximately 150 will be at local community venues and four will be
PR-driven events in New York, NY, Washington DC, Bentonville, AR and
Los Angeles, CA
o Nationwide: approximately 2,000 in-store wellness demo events at
Wal-Mart stores on or about April 29, 2006 (1,000 stores) and May 6,
2006 (1,000 stores)
Each of the Events will be open to the general public and will position
Brand as a National Sponsor of the Promotion as detailed in this Agreement.
The Services ("Services") provided by CoActive (and for which CoActive is
compensated under Section 5 of this Agreement) pursuant to this Agreement
consist of three distinct phases, each being outlined in greater detail in
Section 3 hereof. The three deliverables are:
o Phase 1: Concept Development, Wal-Mart Acceptance and Sponsor
Commitments. This phase is to be completed no later than Sept. 23,
2005.
o Phase 2: Planning & Production. This Phase commences on September 24,
2005 and is to be completed no later than April 16, 2006.
o Phase 3: Execution. This Phase commences on April 17, 2006 and is to
be completed on or about July 17, 2006.
2. CONTINGENCY
The services outlined in paragraph 3 below and Sponsor's binding commitment
to participate in the Promotion is contingent upon successful completion of
(a) Phase 1 of this Agreement: securing one Title Sponsor, two Presenting
Sponsors, ten National Sponsors, and up to two Regional Sponsors by
CoActive or a combination of sponsorship levels which provides equivalent
revenues for the program, and b) Sponsor's inclusion in Wal-Mart's Master
Calendar. The securing of sponsors will be evidenced by non-cancelable
signed Sponsor Letters of Agreement with each respective Sponsor.
3. SERVICES PROVIDED BY COACTIVE
Sponsor hereby engages CoActive to develop, secure all sponsors, plan and
execute the Promotion on their behalf. Any deviation from the services
outlined below shall require Sponsor and CoActive's prior written consent.
o Phase 1: Concept Development, Wal-Mart Acceptance & Sponsor
Commitments. CoActive shall develop and refine the Promotion concept
and present communications as needed to gain approval by Wal-Mart's
marketing team as well as obtain signed sponsor agreements with one
Title Sponsor, two Presenting Sponsors, ten National Sponsors, and up
to two Regional Sponsors (or revenue equivalent as noted in paragraph
2 above).
o Phase 2: Planning and Production. During this phase CoActive shall be
responsible for scheduling, coordinating, managing, supervising and
planning all logistics necessary to produce the Promotion. This
includes client communication, budget management, securing all Event
venues and Wal-Mart store locations, recruitment and training of all
touring and local staffing, selection and contracting of talent to
serve as Promotion spokesperson, and procurement of all Promotion
support materials, vehicles and equipment. This phase also includes
creative development and production of Promotion support and
materials, and Promotion website with Sponsor input and approvals of
the portions related to Sponsor's Brand(s). CoActive shall work with
Sponsor to secure Sponsor's inclusion on Wal-Mart's Master Calendar.
Page 1/4
Page two
SAA Agreement
o Phase 3: Execution Phase. The Execution phase consists of CoActive
executing the following Events for the Promotion: a national walk
across the country featuring 12 pre-selected walkers and a national
spokesperson; four publicity events in New York metro area;
Washington, DC; Bentonville, AR; and Los Angeles, CA, approximately
fifteen (15) four-hour events ("Tier One Events") in parking lots of
Wal-Mart stores along the walking route; approximately one-hundred
thirty-five (135) two-hour events in parking lots ("Tier Two Events")
of Wal-Mart stores along the route; approximately one-hundred fifty
(150) community and opportunistic events ("Local Events") along the
walking route to last up to one and one-half hours each, and
approximately 2,000 six-hour in-store demo events ("Well-tailtainment
Celebration Events") to be conducted at Wal-Mart stores across the
United States. CoActive will execute the Events during the period from
approximately April 17, 2006 through July 17, 2006. This agreement
will terminate on July 30, 2006. Subsequent to July 30, 2006, CoActive
will not be obligated to perform any additional Services pursuant to
this Agreement and will have been deemed as completing all Services
required to be performed under this Agreement. CoActive will execute
its Services as provided herein, utilizing materials to be provided by
Sponsor unless otherwise provided for in this Agreement. All Events
will be held in the continental United States.
As a National Sponsor of the Promotion, Sponsor will receive the following
benefits:
o Sponsor's wellness message will be reflected in the editorial content
of program
o Placement of a full-page, four-color ad in the Official Promotion
Guide to be distributed at all Events; ad to be provided by Sponsor as
per specifications to be issued by CoActive. Sponsor logo
identification on back cover; Sponsor to provide appropriate art.
o Logo identification on attire worn by the Walkers and Staff
o Logo identification included on all program vehicles and support
materials
o Inclusion of Sponsor in all press materials
o At four (4) PR Events: Logo placement on either side of stage,
sampling of Brand if desired (quantities and additional fees to be
determined by CoActive and Sponsor) and opportunity to contribute to
sweepstakes prize package
o At Tier 1 Events: Logo inclusion on Step & Repeat banner, 10' x 10'
promotional area to be shared with another National Sponsor; premiums
and printed collateral (supplied by Sponsor) distributed (quantities
distributed to be determined by CoActive) if desired; opportunity for
radio station giveaways (product or premiums; quantities tbd by
CoActive)
o At Tier 2 Events: Sponsor display area; printed collateral material
(supplied by Sponsor) distributed (quantities distributed to be
determined by CoActive)
o At Local Events: printed collateral material (supplied by Sponsor)
distributed (quantities distributed to be determined by CoActive)
o Logo placement, inclusion of Brand benefit information, and link to
Sponsor web site from the official Promotion website
o Brand to be displayed at Well-tailtainment Celebration Events
o Rights to use official program logo and national spokesperson's image
and name on Sponsor's Brand packaging, displays and/or advertising
developed exclusively for use in Wal-Mart stores
Sponsor shall have five (5) business days to review and approve all
materials developed for the Promotion by CoActive that include the Sponsor
and/or Brand name, logo, and/or trademarks.
4. SPONSOR RESPONSIBILITIES
Sponsor shall have the following responsibilities, and provide the
following materials relevant to the execution of the Promotion:
o At its discretion, Sponsor will provide printed Brand literature,
Brand premiums and/or other materials (amounts to be determined by
CoActive) for CoActive to utilize and/or distribute for the execution
of the Promotion, or will provide CoActive with funds as determined by
CoActive to procure such Materials
o Coordinate and execute creation of all Sponsor Brand advertising,
packaging, displays and Brand-specific promotional materials as part
of the Promotion; this includes Brand ad in Official Program Guide
o Create, provide, arrange and pay for shipping for all Sponsor branded
premium items, Brand literature and promotional materials to be used
in connection with the Promotion
Page 2/4
Page three
SAA Agreement
o Pay for, provide and/or arrange and pay for transportation and
warehousing for all Sponsor products to be used as part of the
Promotion.
5. COMPENSATION
CoActive shall be compensated by Sponsor a total of $385,000 in
consideration of performing the following services:
o Phase 1 fee: Concept Development, Wal-Mart Acceptance
and Sponsor Commitments: $ 38,500
o Phase 2 fee: Planning and Production 38,500
o Phase 3 fee: Execution $ 308,000
Sampling at Tier 1, Tier 2 events and Well-tailtainment Events is available
and will be estimated separately. The Phase 1 fee is not contingent on any
other CoActive services and shall be considered fully earned upon the
completion of this Phase.
6. PAYMENT SCHEDULE
CoActive shall be paid according to the following schedule. CoActive shall
invoice Sponsor no earlier than 45 days prior to each respective due date.
Due Sep. 23, 2005: $ 38,500
Due Nov. 1, 2005 $ 150,000
Due by Jan. 15, 2006 $ 150,000
Due by March 15, 2006 $ 46,500
7. DURATION
The terms of this Agreement are effective upon the execution of this
Agreement by Sponsor and CoActive, and will terminate on July 30, 2006.
8. INDEMNIFICATION
Each party shall defend, indemnify, and hold harmless, the other, and its
parent, subsidiaries, and affiliate corporations, and their respective
officers, directors, employees and agents from and against any claim, cost,
loss, damage, expense or liability, including without limitation reasonable
attorneys' fees, disbursements and court costs, arising out of or relating
to any breach of the terms of this agreement that it incurs.
9. TERMINATION
This Agreement is non-cancelable by either party and assumes that a
sufficient number sponsors are committed to the Program as described in
paragraph 2 of this Agreement and as evidenced by signed Sponsor Letter of
Agreements. Should an insufficient number of sponsor Letter of Agreements
not be signed by September 23, 2005, any amounts paid by Sponsor to
CoActive will be refunded by CoActive in a timely manner.
10. GOVERNING LAW
This agreement shall be governed by the laws of the State of New York.
The parties by their duly authorized representatives have read and agreed to
this Agreement as of the date set forth below.
For Sponsor: For CoActive:
Company CoActive Marketing Group
-------------------------- ---------------------------------
Title
-------------------------- ---------------------------------
Signature
-------------------------- ---------------------------------
Date
-------------------------- ---------------------------------
Page 3/4
CoActive Marketing Group, Inc.
SEC Comment Letter dated 1/19/07
Exhibit C-3
Steps Across America - Impact of Potential Adjustment quarters\categories
FY 06
-----
Q1 Q2 Q3 Q4 total
------------------------------------------------------------
Amount Actually Recorded
Inmark (wholly owned sub):
- --------------------------
Revenue -- 478,000 260,417 16,587 755,004
Expenses 5,274 19,768 26,325 10,709 62,076
------------------------------------------------------------
Operating Revenue (5,274) 458,232 234,092 5,878 692,928
------------------------------------------------------------
Optimum (wholly owned sub):
- ---------------------------
Revenue 50,500 99,500 150,000
Expenses 92 1,182 583 1,857
------------------------------------------------------------
Operating Revenue (92) -- 49,318 98,917 148,143
------------------------------------------------------------
Total Recorded by CoAcive:
- --------------------------
Revenue -- 478,000 310,917 116,087 905,004
Expenses 5,366 19,768 27,507 11,292 63,933
------------------------------------------------------------
Operating Revenue (5,366) 458,232 283,410 104,795 841,071
------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Amount that s/b recorded event exec
based on event exec if restaement were to occur - P&L Effect %
Rev 0 0 0 0 --
Exp 0 0 0 0 --
------------------------------------------------------------
Operating Rev -- -- -- -- --
------------------------------------------------------------
Diff - Adj
Rev -- (478,000) (310,917) (116,087) (905,004)
Exp (5,366) (19,768) (27,507) (11,292) (63,933)
------------------------------------------------------------
Operating Rev 5,366 (458,232) (283,410) (104,795) (841,071)
============================================================
ck -- -- -- -- --
Tax effect at 40% 3,220 (274,939) (170,046) (62,877) (504,643)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Effect of restatement on:
Assets 3,220 203,061 140,871 53,210 400,361
Liabilities 478,000 310,917 116,087 905,004
------------------------------------------------------------
Retained Earnings 3,220 (274,939) (170,046) (62,877) (504,643)
============================================================
proof s/b 0 -- -- -- -- --
- -----------------------------------------------------------------------------------------------
FY 07
-----
Q1 Q2 Q3 Q4 total Total
-------------------------------------------------------- ----------
Amount Actually Recorded
Inmark (wholly owned sub):
- --------------------------
Revenue 2,593,965 (7,980) 2,585,985 3,340,989
Expenses 2,261,655 69,285 2,330,940 2,393,016
-------------------------------------------------------- ----------
Operating Revenue 332,310 (77,265) -- -- 255,045 947,973
-------------------------------------------------------- ----------
Optimum (wholly owned sub):
- ---------------------------
Revenue (10,000) (10,000) 140,000
Expenses (139) (139) 1,718
-------------------------------------------------------- ----------
Operating Revenue (9,861) -- -- -- (9,861) 138,282
-------------------------------------------------------- ----------
Total Recorded by CoAcive:
- --------------------------
Revenue 2,583,965 (7,980) -- -- 2,575,985 3,480,989
Expenses 2,261,516 69,285 -- -- 2,330,801 2,394,734
-------------------------------------------------------- ----------
Operating Revenue 322,449 (77,265) -- -- 245,184 1,086,255
-------------------------------------------------------- ----------
- -----------------------------------------------------------------------------------------------------
Amount that s/b recorded
based on event exec if restaement were to occur -
P&L Effect 0.83 0.17
Rev 2,889,221 591,768 3,480,989 3,480,989
Exp 1,987,629 407,105 2,394,734 2,394,734
-------------------------------------------------------- ----------
Operating Rev 901,592 184,663 -- -- 1,086,255 1,086,255
-------------------------------------------------------- ----------
Diff - Adj
Rev 305,256 599,748 -- -- 905,004 --
Exp (273,887) 337,820 -- -- 63,933 --
-------------------------------------------------------- ----------
Operating Rev 579,143 261,928 -- -- 841,071 --
======================================================== ----------
ck -- -- -- -- -- (0)
Tax effect at 40% 347,486 157,157 -- -- 504,643 --
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Effect of restatement on:
Assets (91,083) (309,278) (400,361) --
Liabilities (438,569) (466,435) (905,004) --
-------------------------------------------------------- ----------
Retained Earnings 347,486 157,157 -- -- 504,643 --
======================================================== ----------
proof s/b 0 -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------
CoActive - Revenue Recognition - Steps Across Program
Exhibit C-4
November 16, 2006
Attached is the original CA write up on the Steps Across contract and the
related excel document (the latter updated in 11/06 with more specific info -
but arriving at the same result).
The contract provided for three phases. Phase 1 was built in a way that would
compensate the Company for the value for developing the program, the sell in to
Wal-Mart and to tie - in partners (all collectively Phase 1). This revenue would
only be earned if a milestone of certain amount of partners was achieved. The
contracts with the tie in partners contained language that clearly provided that
the Phase 1 deliverable was only recognized upon such milestones and not
contingent on any other items. The balance (excluding Phase 1 fees) of the
proceeds were to be used to execute the program (Phase 2 and Phase 3) as
described in the tie- in partner contracts.
The basis of allocating the revenues amongst the parts of this contract was to
reflect the value that the client was receiving at different points in time. One
of the significant assumptions in determining such value was done on the belief
that isolating the USC Events promotion as a separate deliverable was in
accordance with existing accounting literature. USC does promotions on a regular
basis and does the programs by determining the specific requirements and
building a line item budget that is almost always presented to the client. The
client always sees the line item budget, including the Company's agency fee and
staffing charges. The normal profit margin range is consistently within a 25%
- -35% range and averages approximately 30% - the blended rate for the last two
years has been approximately 31%. When USC developed the contract and the
related budget for this program it built it in a way typical of how it builds
all its budgets and the result was what the Company believe was the fair value
of the events program that was going to be executed. The amount included in the
budget and the amounts chargeable to clients was based on the fair value of what
USC would need to execute the events program and other parts of Phase 2 and 3.
In accounting for this program, CA referred to the existing literature and
discussed it with its then auditing firm. In particular CA referred to Miller
GAAP guide, EITF 00-21 and the SEC speech of 12/03 by Douglas Alkema.
In the speed of Mr. Alkema, where he discussed the proportional performance
model, he indicated "In determining whether delivery has occurred, registrants
should pay careful attention to the terms of the arrangement, specifically the
rights and obligations of the service provider and the customer. Provided all
other revenue recognition criteria have been met, the revenue recognition method
selected should reflect the pattern in which the obligations to the customer are
fulfilled."
In analyzing this program for revenue recognition utilizing the Miller GAAP
guide - the Company referred to Para 6.13 of the Miller GAAP guide (with
reference to a contract that has "one service and multiple acts"). To illustrate
this Phase 1, Phases 2 and 3 are all part of one promotion - the creation, sell
in and the actual execution. Phase 1 can be done either by CA or others and
Phase 2 and Phase 3 are dependent on Phase 1. The three phases result in the
integrated promotion that was marketed to the clients and as such the Company
treated this as one service with multiple acts. Miller GAAP guide Para 6.13
provides that "if a service transaction involves a specialized number of defined
acts that are not identical or similar, revenue should be allocated based upon
the relative value of each of the acts. In substance this type of situation is
treated like a multiple element arrangement, with revenue being allocated to the
different elements based on their relative fair value. In substance, this type
of arrangement is treated like a multiple-element arrangement (see Chapter 4,
"Multiple-Element Arrangements). If there is insufficient evidence of the fair
values of each of the individual acts, revenue should be recognized on a
systematic and rational basis over the estimated period during which the acts
will performed."
However, we subsequently determined, with reference to fair value computations
under EITF 00-21, that there exists literature "SAB 101 Frequently asked
questions that indicates that a company's normal profit margin does not provide
evidence of fair value. In addition, the Proportional Performance model does not
apply here to the program in its entirety, but would only apply to the event
execution portion of the program once the revenue was allocated between each of
the elements and the Company does not have an exact replica of this program for
comparison purposes.
As such, in determining Fair Value, with the guidance of SAB 101 and the need
for an exact (very close) replica of this program, the Company would not have
achieved Fair Value for the Events component of the promotion had these metrics
been applied. Accordingly, the revenue of the contract should have been deferred
as of March 31, 2006 and recognized upon execution of the events and a
restatement of the prior year financial statements is necessary. In restating
the financial statements we will be applying the error correction methodology
below, contained in SFAS 154 (Para 25 and 26)
FAS154, Par 25. Any error in the financial statements of a prior period
discovered subsequent to their issuance shall be reported as a prior-period
adjustment by restating the prior-period financial statements. Restatement
requires that:
a. The cumulative effect of the error on periods prior to those presented
shall be reflected in the carrying amounts of assets and liabilities as of the
beginning of the first period presented.
b. An offsetting adjustment, if any, shall 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.
c. Financial statements for each individual prior period presented shall be
adjusted to reflect correction of the period-specific effects of the error.
Disclosures
FAS154, Par. 26
26. When financial statements are restated to correct an error, the entity
shall disclose that its previously issued financial statements have been
restated, along with a description of the nature of the error. The entity also
shall disclose the following:
a. The effect of the correction on each financial statement line item and any
per-share amounts affected for each prior period presented
b. The cumulative effect of the change on retained earnings or other
appropriate components of equity or net assets in the statement of financial
position, as of the beginning of the earliest period presented.
In addition, the entity shall make the disclosures of prior-period adjustments
and restatements required by paragraph 26 of APB Opinion No. 9, Reporting the
Results of Operations. Financial statements of subsequent periods need not
repeat the disclosures required by this paragraph.
Summary of amounts previously recorded
- ------------------------------------------------------------------------------------------------------
Q1 Q2 FY 06 Q3 FY 06 Q4 FY 06 Total
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Pre tax Contribution (5,000) 458,000 283,000 105,000 841,000
Recorded
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Amount that should be 0 0 0 0
recorded
- ------------------------------------------------------------------------------------------------------
Adjustment pre-tax 5,000 (458,000) (283,000) (105,000) (841,000)
- ------------------------------------------------------------------------------------------------------
Net of tax (40% rate) 3,000 (275,000) (170,000) (63,000) (505,000)
- ------------------------------------------------------------------------------------------------------
Effect on Diluted EPS 0 ($.04) ($.03) ($.01) ($.09)
- ------------------------------------------------------------------------------------------------------
This will result in approximately $579,000 and $262,000 of additional pre-tax
contribution to be recorded in Q1 and Q2 of FY 07, respectively. On an after tax
basis, this results in $347,000 (.05) and $157,000 ($.02) of additional net
contribution in Q1 and Q2, respectively.
The amounts originally recorded in FY 06 were a result primarily of amounts
recorded for Phase 1 revenue that is now determined to not be separable. In an
analogous manner, it includes approximately $148k pre tax contribution relating
to creative work that is also now determined to be not separable.
CoActive Marketing Group, Inc.
SEC Comment Letter dated 1/19/07
Exhibit D-1
Sales Tax Analysis - Summary with Interest
CoActive Fiscal Quarter ended
9/30/2006 6/30/2006 3/31/2006 12/31/2005 9/30/2005 6/30/2005 3/31/2005 12/31/2004
Sales tax liability (net
of Diageo reimb) 44,746 44,702 57,652 54,325 51,036 40,374 42,810 37,779
Interest @ 8% -- 894 2,329 3,325 4,207 4,712 6,105 6,728
---------------------------------------------------------------------------------------------
Sales tax liability
with interest 44,746 45,596 59,981 57,650 55,243 45,085 48,915 44,507
Total pre 1q 06
assesment booked
---------------------------------------------------------------------------------------------
Total adj per period -
pre tax - by quarter 44,746 45,596 59,981 57,650 55,243 45,085 48,915 44,507
=============================================================================================
Amount actually recorded 396,420 297,907
curr bked 269 reflected in bd q 2 - we are porposign before restating to bk anoher 126k
---------------------------------------------------------------------------------------------
Amount over (under) accrued 351,674 252,311 (59,981) (57,650) (55,243) (45,085) (48,915) (44,507)
=============================================================================================
the addl 126689 is int plus stub accr for non ny would have a tax effect of
- ----------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Effect of Adj - net of Tax -
stand alone qtr 26,848 27,358 35,988 34,590 33,146 27,051 29,349 26,704
=============================================================================================
---------------------------------------------------------------------------------------------
Amount over (under)
net of tax 211,004 151,387 (35,988) (34,590) (33,146) (27,051) (29,349) (26,704)
=============================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
P&L Impact
Sales 7,659 11,234 8,560 8,668 15,788 6,197
Reimbursable program expeses 7,659 11,234 23,979 16,377 31,207 13,906
Outside production exp -
Events 41,450 41,303 38,663 35,924 28,625 27,481 36,731 23,347
Outside production exp -
W&S (non-reimb) 1,999 2,418 2,288
Compensation exp
G&A 3,297 3,399 3,570 10,692 6,992 3,184 3,661 12,144
---------------------------------------------------------------------------------------------
Total Operating Exp 52,405 55,936 66,212 62,993 66,824 46,570 42,810 37,779
Operating income (loss) (44,746) (44,702) (57,652) (54,325) (51,036) (40,374) (42,810) (37,779)
Interest exp -- 894 2,329 3,325 4,207 4,712 6,105 6,728
---------------------------------------------------------------------------------------------
NIBT (44,746) (45,596) (59,981) (57,650) (55,243) (45,085) (48,915) (44,507)
Provision (benefit) for taxes (17,899) (18,238) (23,992) (23,060) (22,097) (18,034) (19,566) (17,803)
---------------------------------------------------------------------------------------------
Net Income Impact (26,848) (27,358) (35,988) (34,590) (33,146) (27,051) (29,349) (26,704)
---------------------------------------------------------------------------------------------
Balance Sheet Effect
Assets - tax effect -
creates an asset 17,899 18,238 23,992 23,060 22,097 18,034 19,566 17,803
Liabilities 44,746 45,596 59,981 57,650 55,243 45,085 48,915 44,507
---------------------------------------------------------------------------------------------
Retained Earnings (26,848) (27,358) (35,988) (34,590) (33,146) (27,051) (29,349) (26,704)
=============================================================================================
proof s/b 0 -- -- -- -- -- -- -- --
CoActive Marketing Group, Inc.
SEC Comment Letter dated 1/19/07
Exhibit D-1
Sales Tax Analysis - Summary with Interest
9/30/2004 6/30/2004 3/31/2004 12/31/2003 9/30/2003 6/30/2003 3/31/2003 12/31/2002
Sales tax liability (net
of Diageo reimb) 30,587 27,531 25,383 27,340 8,358 8,945 7,662 8,176
Interest @ 8% 6,483 6,295 6,115 6,614 1,732 2,081 1,971 2,326
---------------------------------------------------------------------------------------------
Sales tax liability
with interest 37,070 33,826 31,498 33,955 10,090 11,025 9,633 10,502
Total pre 1q 06
assesment booked
---------------------------------------------------------------------------------------------
Total adj per period -
pre tax - by quarter 37,070 33,826 31,498 33,955 10,090 11,025 9,633 10,502
=============================================================================================
Amount actually recorded
---------------------------------------------------------------------------------------------
Amount over (under) accrued (37,070) (33,826) (31,498) (33,955) (10,090) (11,025) (9,633) (10,502)
=============================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Effect of Adj - net of Tax -
stand alone qtr 22,242 20,295 18,899 20,373 6,054 6,615 5,780 6,301
=============================================================================================
---------------------------------------------------------------------------------------------
Amount over (under)
net of tax (22,242) (20,295) (18,899) (20,373) (6,054) (6,615) (5,780) (6,301)
=============================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
P&L Impact
Sales
Reimbursable program expeses
Outside production exp -
Events 14,607 14,607 14,607 14,607
Outside production exp -
W&S (non-reimb) 2,369 2,369 2,369 2,369
Compensation exp
G&A 13,612 10,555 8,407 10,365 8,358 8,945 7,662 8,176
---------------------------------------------------------------------------------------------
Total Operating Exp 30,587 27,531 25,383 27,340 8,358 8,945 7,662 8,176
Operating income (loss) (30,587) (27,531) (25,383) (27,340) (8,358) (8,945) (7,662) (8,176)
Interest exp 6,483 6,295 6,115 6,614 1,732 2,081 1,971 2,326
---------------------------------------------------------------------------------------------
NIBT (37,070) (33,826) (31,498) (33,955) (10,090) (11,025) (9,633) (10,502)
Provision (benefit) for taxes (14,828) (13,530) (12,599) (13,582) (4,036) (4,410) (3,853) (4,201)
---------------------------------------------------------------------------------------------
Net Income Impact (22,242) (20,295) (18,899) (20,373) (6,054) (6,615) (5,780) (6,301)
---------------------------------------------------------------------------------------------
Balance Sheet Effect
Assets - tax effect -
creates an asset 14,828 13,530 12,599 13,582 4,036 4,410 3,853 4,201
Liabilities 37,070 33,826 31,498 33,955 10,090 11,025 9,633 10,502
---------------------------------------------------------------------------------------------
Retained Earnings (22,242) (20,295) (18,899) (20,373) (6,054) (6,615) (5,780) (6,301)
=============================================================================================
proof s/b 0 -- -- -- -- -- -- -- --
CoActive Marketing Group, Inc.
SEC Comment Letter dated 1/19/07
Exhibit D-1
Sales Tax Analysis - Summary with Interest
9/30/2002 6/30/2002 3/31/2002 12/31/2001 9/30/2001 6/30/2001 3/31/2001 12/31/2000 9/30/2000
Sales tax liability (net
of Diageo reimb) 7,336 5,383 5,316 5,091 4,952 5,337 4,426 3,826 4,200
Interest @ 8% 2,240 1,772 1,895 1,934 2,025 2,347 2,082 1,957 2,325
----------------------------------------------------------------------------------------------------
Sales tax liability
with interest 9,576 7,155 7,211 7,025 6,977 7,683 6,507 5,783 6,525
Total pre 1q 06
assesment booked
----------------------------------------------------------------------------------------------------
Total adj per period -
pre tax - by quarter 9,576 7,155 7,211 7,025 6,977 7,683 6,507 5,783 6,525
====================================================================================================
Amount actually recorded
----------------------------------------------------------------------------------------------------
Amount over (under) accrued (9,576) (7,155) (7,211) (7,025) (6,977) (7,683) (6,507) (5,783) (6,525)
====================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Effect of Adj - net of Tax -
stand alone qtr 5,745 4,293 4,327 4,215 4,186 4,610 3,904 3,470 3,915
====================================================================================================
----------------------------------------------------------------------------------------------------
Amount over (under)
net of tax (5,745) (4,293) (4,327) (4,215) (4,186) (4,610) (3,904) (3,470) (3,915)
====================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
P&L Impact
Sales
Reimbursable program expeses
Outside production exp -
Events
Outside production exp -
W&S (non-reimb)
Compensation exp
G&A 7,336 5,383 5,316 5,091 4,952 5,337 4,426 3,826 4,200
----------------------------------------------------------------------------------------------------
Total Operating Exp 7,336 5,383 5,316 5,091 4,952 5,337 4,426 3,826 4,200
Operating income (loss) (7,336) (5,383) (5,316) (5,091) (4,952) (5,337) (4,426) (3,826) (4,200)
Interest exp 2,240 1,772 1,895 1,934 2,025 2,347 2,082 1,957 2,325
----------------------------------------------------------------------------------------------------
NIBT (9,576) (7,155) (7,211) (7,025) (6,977) (7,683) (6,507) (5,783) (6,525)
Provision (benefit) for taxes (3,830) (2,862) (2,884) (2,810) (2,791) (3,073) (2,603) (2,313) (2,610)
----------------------------------------------------------------------------------------------------
Net Income Impact (5,745) (4,293) (4,327) (4,215) (4,186) (4,610) (3,904) (3,470) (3,915)
----------------------------------------------------------------------------------------------------
Balance Sheet Effect
Assets - tax effect
- creates an asset 3,830 2,862 2,884 2,810 2,791 3,073 2,603 2,313 2,610
Liabilities 9,576 7,155 7,211 7,025 6,977 7,683 6,507 5,783 6,525
----------------------------------------------------------------------------------------------------
Retained Earnings (5,745) (4,293) (4,327) (4,215) (4,186) (4,610) (3,904) (3,470) (3,915)
====================================================================================================
proof s/b 0 -- -- -- -- -- -- -- -- --
CoActive Marketing Group, Inc.
SEC Comment Letter dated 1/19/07
Exhibit D-1
Sales Tax Analysis - Summary with Interest
Total
6/30/2000 3/31/2000 12/31/1999 9/30/1999 6/30/1999 3/31/1999 12/31/1998 Accr
Sales tax liability
(net of Diageo reimb) 5,451 4,480 3,569 4,500 6,041 4,512 1,163 592,987
Interest @ 8% 3,255 2,833 2,415 3,238 4,589 3,574 944 101,340
----------------------------------------------------------------------------------------------------
Sales tax liability with interest 8,705 7,313 5,984 7,737 10,630 8,085 2,107 694,327
Total pre 1q 06 assesment booked
----------------------------------------------------------------------------------------------------
Total adj per period -
pre tax - by quarter 8,705 7,313 5,984 7,737 10,630 8,085 2,107 694,327
====================================================================================================
Amount actually recorded 694,327
----------------------------------------------------------------------------------------------------
Amount over (under) accrued (8,705) (7,313) (5,984) (7,737) (10,630) (8,085) (2,107) (0)
====================================================================================================
----------------------------------------------------------------------------------------------------
Effect of Adj - net of Tax -
stand alone qtr 5,223 4,388 3,591 4,642 6,378 4,851 1,264 416,596
====================================================================================================
----------------------------------------------------------------------------------------------------
Amount over (under) net of tax (5,223) (4,388) (3,591) (4,642) (6,378) (4,851) (1,264) (0)
====================================================================================================
P&L Impact
Sales 58,105
Reimbursable program expeses 104,361
Outside production exp - Events 331,951
Outside production exp -
W&S (non-reimb) 16,180
Compensation exp --
G&A 5,451 4,480 3,569 4,500 6,041 4,512 1,163 198,600
----------------------------------------------------------------------------------------------------
Total Operating Exp 5,451 4,480 3,569 4,500 6,041 4,512 1,163 651,092
Operating income (loss) (5,451) (4,480) (3,569) (4,500) (6,041) (4,512) (1,163) (592,987)
Interest exp 3,255 2,833 2,415 3,238 4,589 3,574 944 101,340
----------------------------------------------------------------------------------------------------
NIBT (8,705) (7,313) (5,984) (7,737) (10,630) (8,085) (2,107) (694,327)
Provision (benefit) for taxes (3,482) (2,925) (2,394) (3,095) (4,252) (3,234) (843) (277,731)
----------------------------------------------------------------------------------------------------
Net Income Impact (5,223) (4,388) (3,591) (4,642) (6,378) (4,851) (1,264) (416,596)
====================================================================================================
Balance Sheet Effect
Assets - tax effect - creates an
asset 3,482 2,925 2,394 3,095 4,252 3,234 843 277,731
Liabilities 8,705 7,313 5,984 7,737 10,630 8,085 2,107 694,327
----------------------------------------------------------------------------------------------------
Retained Earnings (5,223) (4,388) (3,591) (4,642) (6,378) (4,851) (1,264) (416,596)
====================================================================================================
proof s/b -- -- -- -- -- -- -- --
CoActive Marketing Group, Inc.
SEC Comment Letter dated 1/19/07
Exhibit D-1
Sales Tax Analysis - Summary with Interest
By Fiscal Year
FY 07 FY 06 FY 05 FY 04 FY 03 FY 02 FY 01 FY 00 FY 99 Total
---------------------------------------------------------------------------------------------------------
Sales tax liability
(net of Diageo reimb) 89,448 203,386 138,707 70,026 28,557 20,696 17,902 18,591 5,674 592,987
Interest @ 8% 894 14,573 25,611 16,542 8,308 8,201 9,619 13,074 4,518 101,340
---------------------------------------------------------------------------------------------------------
Sales tax liability
with interest 90,342 217,959 164,318 86,569 36,865 28,896 27,521 31,665 10,192 694,327
Total pre 1q 06
assesment booked -- -- -- -- -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------
Total adj per
period - pre tax
- by quarter 90,342 217,959 164,318 86,569 36,865 28,896 27,521 31,665 10,192 694,327
=========================================================================================================
Amount actually
recorded 694,327 -- -- -- -- -- -- -- -- 694,327
---------------------------------------------------------------------------------------------------------
Amount over
(under) accrued 603,985 (217,959) (164,318) (86,569) (36,865) (28,896) (27,521) (31,665) (10,192) (0)
=========================================================================================================
---------------------------------------------------------------------------------------------------------
Effect of Adj -
net of Tax -
stand alone 54,205 130,775 98,591 51,941 22,119 17,338 16,513 18,999 6,115 416,596
=========================================================================================================
---------------------------------------------------------------------------------------------------------
Amount over
(under) net
of tax 362,391 (130,775) (98,591) (51,941) (22,119) (17,338) (16,513) (18,999) (6,115) (0)
=========================================================================================================
P&L Impact
Sales 18,892 39,213 -- -- -- -- -- -- -- 58,105
Reimbursable program
expeses 18,892 85,469 -- -- -- -- -- -- -- 104,361
Outside production
exp - Events 82,752 130,693 89,292 29,214 -- -- -- -- -- 331,951
Outside production
exp - W&S
(non-reimb) -- 1,999 9,443 4,737 -- -- -- -- -- 16,180
Compensation exp -- -- -- -- -- -- -- -- -- --
G&A 6,696 24,438 39,972 36,075 28,557 20,696 17,902 18,591 5,674 198,600
---------------------------------------------------------------------------------------------------------
Total Operating
Exp 108,341 242,599 138,707 70,026 28,557 20,696 17,902 18,591 5,674 651,092
Operating income
(loss) (89,448) (203,386) (138,707) (70,026) (28,557) (20,696) (17,902) (18,591) (5,674) 592,987)
Interest exp 894 14,573 25,611 16,542 8,308 8,201 9,619 13,074 4,518 101,340
---------------------------------------------------------------------------------------------------------
NIBT (90,342) (217,959) (164,318) (86,569) (36,865) (28,896) (27,521) (31,665) (10,192) (694,327)
Provision
(benefit)
for taxes (36,137) (87,184) (65,727) (34,627) (14,746) (11,558) (11,008) (12,666) (4,077) (277,731)
---------------------------------------------------------------------------------------------------------
Net Income Impact (54,205) (130,775) (98,591) (51,941) (22,119) (17,338) (16,513) (18,999) (6,115) (416,596)
Balance Sheet
Effect
Assets -
tax effect -
creates an asset 36,137 87,184 65,727 34,627 14,746 11,558 11,008 12,666 4,077 277,731
Liabilities 90,342 217,959 164,318 86,569 36,865 28,896 27,521 31,665 10,192 694,327
--------------------------------------------------------------------------------------------- ---------
Retained Earnings (54,205) (130,775) (98,591) (51,941) (22,119) (17,338) (16,513) (18,999) (6,115) (416,596)
============================================================================================= =========
proof s/b 0 -- -- -- -- -- -- -- -- -- --
CoActive Marketing Group, Inc.
SEC Comment Letter dated 1/19/07
Exhibit 6
Comment 6
PROPOSED ADJUSTING JOURNAL ENTRIES
Client Coactive Consolidated Client No. 119319 Year End March 31, 2006
------------------------------------ ------------------ ------------------------------
Balance Sheet Effect
-----------------------------------
Proposed
Journal Entry Assets Liabilities Equity
------------------- ----------- ------------ ---------
PAJE Adjustment Workpaper Increase Increase Increase
# Description Type* E** Reference Debit Credit (Decrease) (Decrease) (Decrease)
- -----------------------------------------------------------------------------------------------------------------------------
Current Year PAJEs
- -----------------------------------------------------------------------------------------------------------------------------
1 Deferred Revenue K 7 USC-C-4 229,994 (229,994)
- -----------------------------------------------------------------------------------------------------------------------------
Accounts recievable K 5 USC-C-4 229,994 (229,994)
- -----------------------------------------------------------------------------------------------------------------------------
To adjust AR and Deferred
revenue for a contract
that was not signed.
- -----------------------------------------------------------------------------------------------------------------------------
2 Accrued Job Costs k 7 INM 10-1 (10-1-7) 16,787 (16,787)
- -----------------------------------------------------------------------------------------------------------------------------
Prepaid Job Costs k 5 INM 10-1 (10-1-7) 16,787 (16,787)
- -----------------------------------------------------------------------------------------------------------------------------
To reclass due to erroneous
coding.
- -----------------------------------------------------------------------------------------------------------------------------
3 intercompany Receivable K 5 DI C-1 86,200 86,200
- -----------------------------------------------------------------------------------------------------------------------------
Accounts Receiable K 5 DI C-1 86,200 (86,200)
- -----------------------------------------------------------------------------------------------------------------------------
To relcass intercompany
receivable from A/R
- -----------------------------------------------------------------------------------------------------------------------------
4 Accrued Vacation K 7 USC HH-2-1 22,411 (22,411)
- -----------------------------------------------------------------------------------------------------------------------------
Vacation Expense K 2 USC HH-2-1 22,411 22,411
- -----------------------------------------------------------------------------------------------------------------------------
To adjust trial balance to
schedule and remove
general accrual
- -----------------------------------------------------------------------------------------------------------------------------
5 Deferred Revenue K 7 MKV C-4 53,762 (53,762)
- -----------------------------------------------------------------------------------------------------------------------------
Sales K 1 MKV C-4 5,171 (5,171)
- -----------------------------------------------------------------------------------------------------------------------------
AR K 5 MKV C-4 63,901 (63,901)
- -----------------------------------------------------------------------------------------------------------------------------
Minority interest K 8 MKV C-4 4,968 (4,968)
- -----------------------------------------------------------------------------------------------------------------------------
To adjust for credit memo
recorded after year end
relating to amounts prior
to year end.
- -----------------------------------------------------------------------------------------------------------------------------
6 Deferred Revenue K 7 INM 10-1 (10-1-2) 16,996 (16,996)
- -----------------------------------------------------------------------------------------------------------------------------
Customer Overpayments K 7 INM 10-1 (10-1-2) 16,996 16,996
- -----------------------------------------------------------------------------------------------------------------------------
To reclass out of deferred
into customer overpayments.
- -----------------------------------------------------------------------------------------------------------------------------
7 Fixed Assets K 6 USC HH-3 16,328 16,328
- -----------------------------------------------------------------------------------------------------------------------------
Depreciation K 2 USC HH-3 39,976 (39,976)
- -----------------------------------------------------------------------------------------------------------------------------
Sales Tax Accural 7 USC HH-3 56,304
- -----------------------------------------------------------------------------------------------------------------------------
To record Sales tax for
NYS on computers
purchased
- -----------------------------------------------------------------------------------------------------------------------------
8 Legal Expense K 2 COA V-1 32,527 (32,527)
- -----------------------------------------------------------------------------------------------------------------------------
Legal Accrued K 7 COA V-1 32,527 32,527
- -----------------------------------------------------------------------------------------------------------------------------
To adjust for under accrual
of Legal Expenses
- -----------------------------------------------------------------------------------------------------------------------------
9 Accrued Job Costs K 7 MKV KK-2 29,240 (29,240)
- -----------------------------------------------------------------------------------------------------------------------------
Misc. Expense K 2 MKV KK-2 29,240 29,240
- -----------------------------------------------------------------------------------------------------------------------------
To reverse P/Y accrued
job cost
- -----------------------------------------------------------------------------------------------------------------------------
10 Revenue K 1 OPT 10-3 13,336 (13,336)
- -----------------------------------------------------------------------------------------------------------------------------
Expense K 2 OPT 10-3 13,336 13,336
- -----------------------------------------------------------------------------------------------------------------------------
(to record rev and exp
in the proper period -
FY 05)
- -----------------------------------------------------------------------------------------------------------------------------
11 Unbilled K 5 OPT K-2 109,000 109,000
- -----------------------------------------------------------------------------------------------------------------------------
Deferred Revenue K 7 OPT K-2 109,000 109,000
- -----------------------------------------------------------------------------------------------------------------------------
(to properly reclass
to unbilled)
- -----------------------------------------------------------------------------------------------------------------------------
PAJE
Totals 676,695 676,696 (185,354) (215,635) (26,022)
==========================================================
Pre-Tax Net Gross Working (Memo)
Income Income*** Profit Capital Non-
---------- ---------- ---------- ---------- ---------
PAJE Adjustment Workpaper Increase Increase Increase Increase Taxable
# Description Type* E** Reference (Decrease) (Decrease) (Decrease) (Decrease) Items
- ----------------------------------------------------------------------------------------------------------------------------
Current Year PAJEs
- ----------------------------------------------------------------------------------------------------------------------------
1 Deferred Revenue K 7 USC-C-4 229,994
- ----------------------------------------------------------------------------------------------------------------------------
Accounts recievable K 5 USC-C-4 (229,994)
- ----------------------------------------------------------------------------------------------------------------------------
To adjust AR and Deferred
revenue for a contract
that was not signed.
- ----------------------------------------------------------------------------------------------------------------------------
2 Accrued Job Costs k 7 INM 10-1 (10-1-7) 16,787
- ----------------------------------------------------------------------------------------------------------------------------
Prepaid Job Costs k 5 INM 10-1 (10-1-7) (16,787)
- ----------------------------------------------------------------------------------------------------------------------------
To reclass due to erroneous
coding.
- ----------------------------------------------------------------------------------------------------------------------------
3 intercompany Receivable K 5 DI C-1 86,200
- ----------------------------------------------------------------------------------------------------------------------------
Accounts Receiable K 5 DI C-1 (86,200)
- ----------------------------------------------------------------------------------------------------------------------------
To relcass intercompany
receivable from A/R
- ----------------------------------------------------------------------------------------------------------------------------
4 Accrued Vacation K 7 USC HH-2-1 22,411
- ----------------------------------------------------------------------------------------------------------------------------
Vacation Expense K 2 USC HH-2-1 22,411 22,411
- ----------------------------------------------------------------------------------------------------------------------------
To adjust trial balance to
schedule and remove
general accrual
- ----------------------------------------------------------------------------------------------------------------------------
5 Deferred Revenue K 7 MKV C-4 53,762
- ----------------------------------------------------------------------------------------------------------------------------
Sales K 1 MKV C-4 (5,171) (5,171) (5,171)
- ----------------------------------------------------------------------------------------------------------------------------
AR K 5 MKV C-4 (63,901)
- ----------------------------------------------------------------------------------------------------------------------------
Minority interest K 8 MKV C-4
- ----------------------------------------------------------------------------------------------------------------------------
To adjust for credit memo
recorded after year end
relating to amounts prior
to year end.
- ----------------------------------------------------------------------------------------------------------------------------
6 Deferred Revenue K 7 INM 10-1 (10-1-2) 16,996
- ----------------------------------------------------------------------------------------------------------------------------
Customer Overpayments K 7 INM 10-1 (10-1-2) (16,996)
- ----------------------------------------------------------------------------------------------------------------------------
To reclass out of deferred
into customer overpayments.
- ----------------------------------------------------------------------------------------------------------------------------
7 Fixed Assets K 6 USC HH-3
- ----------------------------------------------------------------------------------------------------------------------------
Depreciation K 2 USC HH-3 (39,976) (39,976)
- ----------------------------------------------------------------------------------------------------------------------------
Sales Tax Accural 7 USC HH-3
- ----------------------------------------------------------------------------------------------------------------------------
To record Sales tax for
NYS on computers
purchased
- ----------------------------------------------------------------------------------------------------------------------------
8 Legal Expense K 2 COA V-1 (32,527) (32,527)
- ----------------------------------------------------------------------------------------------------------------------------
Legal Accrued K 7 COA V-1 (32,527)
- ----------------------------------------------------------------------------------------------------------------------------
To adjust for under accrual
of Legal Expenses
- ----------------------------------------------------------------------------------------------------------------------------
9 Accrued Job Costs K 7 MKV KK-2 29,240
- ----------------------------------------------------------------------------------------------------------------------------
Misc. Expense K 2 MKV KK-2 29,240 29,240
- ----------------------------------------------------------------------------------------------------------------------------
To reverse P/Y accrued
job cost
- ----------------------------------------------------------------------------------------------------------------------------
10 Revenue K 1 OPT 10-3 (13,336) (13,336) (13,336)
- ----------------------------------------------------------------------------------------------------------------------------
Expense K 2 OPT 10-3 13,336 13,336
- ----------------------------------------------------------------------------------------------------------------------------
(to record rev and exp
in the proper period -
FY 05)
- ----------------------------------------------------------------------------------------------------------------------------
11 Unbilled K 5 OPT K-2 109,000
- ----------------------------------------------------------------------------------------------------------------------------
Deferred Revenue K 7 OPT K-2 (109,000)
- ----------------------------------------------------------------------------------------------------------------------------
(to properly reclass
to unbilled)
- ----------------------------------------------------------------------------------------------------------------------------
PAJE
Totals (26,022) (26,022) (18,507) 8,985 --
========================================================
* Indicate whether PAJE is estimated (E), known (K) or projected sampling
error (P)
** Enter effect code: 1 = Sales or CGS, 2 = Other taxable income or deductible
expense (except income tax), 3 = Other non-taxable income or non-deductible
expense (permanent difference), 4 = Income tax expense (or benefit), 5 =
Current asset, 6 = Long-term asset, 7 = Current liability, 8 = Long-term
liability, 9 = Equity
*** Tax effect of PAJEs, where applicable, is reflected on the Totals sheet
with an offsetting effect on current liabilities. If a significant PAJE
would affect current assets or long-term deferred tax assets or liabilities
instead of current liabilities, manual override should be considered
PROPOSED ADJUSTING JOURNAL ENTRIES
Client Coactive Consolidated Client No. 119319 Year End March 31, 2006
------------------------------------ ------------------ ------------------------------
Balance Sheet Effect
-----------------------------------------------
Proposed
Journal Entry Assets Liabilities Equity
--------------------- --------------- -------------- --------------
Increase Increase Increase
Description Debit Credit (Decrease) (Decrease) (Decrease)
- ---------------------------------------------------------------------------------------------------------------------------------
Total current year PAJEs: 676,695 676,696 (185,354) (215,635) (26,022)
- ---------------------------------------------------------------------------------------------------------------------------------
Tax effect of PAJEs: Assumed Tax Rate: (10,149) 10,149
- ---------------------------------------------------------------------------------------------------------------------------------
Total PAJEs before rollover effect (185,354) (225,784) (15,874)
- ---------------------------------------------------------------------------------------------------------------------------------
Total per financial statement caption 41,981,180 32,403,015 9,578,165
- ---------------------------------------------------------------------------------------------------------------------------------
Percent to total financial statement
caption per above 0.4% 0.7% 0.2%
- ---------------------------------------------------------------------------------------------------------------------------------
Prior year's rollover effect
Total PAJEs with rollover effect (185,354) (225,784) (15,874)
- ---------------------------------------------------------------------------------------------------------------------------------
Percent to total financial statement
caption per above 0.4% 0.7% 0.2%
- ---------------------------------------------------------------------------------------------------------------------------------
Total PAJEs to roll forward
- ---------------------------------------------------------------------------------------------------------------------------------
Pre-Tax Net Gross Working (Memo)
Income Income Profit Capital Non-
-------------- ------------ -------------- ------------------------
Increase Increase Increase Increase Taxable
Description (Decrease) (Decrease) (Decrease) (Decrease) Items
- ---------------------------------------------------------------------------------------------------------------------------
Total current year PAJEs: (26,022) (26,022) (18,507) 8,985 --
- ---------------------------------------------------------------------------------------------------------------------------
Tax effect of PAJEs: Assumed Tax Rate: 10,149 10,149
- -------------------------------------------------------------------------------------------------------------
Total PAJEs before rollover effect (26,022) (15,874) (18,507) 19,134
- -------------------------------------------------------------------------------------------------------------
Total per financial statement caption (1,362,521) (1,031,227) 35,026,130 (2,919,459)
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Percent to total financial statement
caption per above 1.9% 1.5% 0.1% 0.7%
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Prior year's rollover effect
Total PAJEs with rollover effect (26,022) (15,874) (18,507) 19,134
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Percent to total financial statement
caption per above 1.9% 1.5% 0.1% 0.7%
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Total PAJEs to roll forward
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