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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000 (FEE REQUIRED)
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO (NO FEE REQUIRED)
COMMISSION FILE NUMBER 0-20394
COACTIVE MARKETING GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 06-1340408
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
415 NORTHERN BOULEVARD, GREAT NECK, NEW YORK 11021
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 622-2800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001
PAR VALUE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of June 26, 2000, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $7,892,984.
As of June 26, 2000, 5,015,981 shares of Common Stock, $.001 par value,
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT PART OF 10-K INTO WHICH INCORPORATED
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Definitive Proxy Statement relating to Part III
Registrant's 2000 Annual Meeting of
Stockholders
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PART I
This report contains certain "forward-looking statements" concerning the
Company's operations, economic performance and financial condition, which are
subject to inherent uncertainties and risks. Actual results could differ
materially from those anticipated in this report. When used in this report, the
words "estimate," "project," "anticipate," "expect," "intend," "believe" and
similar expressions are intended to identify forward-looking statements.
ITEM 1. BUSINESS.
GENERAL INTRODUCTION
CoActive Marketing Group, Inc. ("CoActive"), together with its wholly-owned
subsidiaries, Inmark Services, Inc. ("Inmark"), Optimum Group, Inc. ("Optimum"),
and U.S. Concepts, Inc. ("U.S. Concepts") and, together with CoActive, Services
and Optimum, the ("Company"), is a full service marketing, sales promotion and
interactive new media services and e-commerce provider organization which
designs, develops and implements turnkey customized national, regional and local
consumer and trade promotion programs principally for Fortune 500 consumer
product companies. The Company's programs are designed to enhance the value of
its clients' budgeted expenditures and achieve, in an objectively measurable
way, its clients' specific marketing and promotional objectives. In the
industry, the Company's programs are commonly referred to as "account specific"
and/or "co-marketing", as they may target the participation and cooperation of a
specific retail chain or groups of retailers or other sources of distribution to
attain results in the form of increased in-store product displays, related
consumer purchases and enhanced product brand name recognition.
In addition to offering a full range of traditional marketing and sales
promotional services consisting of strategic marketing, creative services,
direct marketing, multi cultural marketing, event marketing, entertainment
marketing, and in-store sampling and merchandising; the Company is also a
provider of interactive new media services consisting of Internet web site
designing and hosting, e-commerce tools, electronic sales tools and computer
based training. By providing a wide range of programs and services, the Company
affords its clients a total solutions resource for strategic planning, creative
development, production, implementation and sales training aids, including
in-store and special event activities.
CoActive was initially formed under the laws of the State of Delaware in
March 1992 as Health Image Media, Inc. Its principal offices are located at 415
Northern Boulevard, Great Neck, New York 11021, and its telephone number is
516-622-2800.
The Company began to engage in its current operations on September 29, 1995
upon consummation of a merger transaction (the "Merger") as a result of which
Inmark Services, Inc., a New York corporation, became a wholly-owned subsidiary
of CoActive and the management of Inmark Services, Inc. became the executive
management of the Company. Previously, CoActive had been engaged in unrelated
activities which were discontinued in June 1993.
On March 31, 1998, Optimum, an indirect wholly-owned subsidiary of CoActive
acquired all of the assets and assumed certain liabilities of OG Holding
Corporation, formerly known as Optimum Group, Inc. (the "Optimum Acquisition").
The purchase price for the Optimum Acquisition consisted of $9,298,000 in cash
(including expenses), a subordinated note of CoActive in the principal amount of
$2,500,000, 565,385 shares of newly and validly issued common stock of CoActive
("CoActive Common Stock") and the payment or assumption of approximately
$1,900,000 of existing debt of the seller. Simultaneously with the closing of
the Optimum Acquisition, the Company entered into a loan agreement with a bank
(the "Loan Agreement") pursuant to which the Company obtained a $5,000,000
five-year term loan (the "Term Loan") and a $5,000,000 revolving loan credit
facility (the "Revolving Loan Facility", and together with the Term Loan, the
"Loan"). A portion of the proceeds of the Loan was used to finance the Optimum
Acquisition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations". The Optimum business, founded in 1973, provides
marketing, visual communications and graphic design services which complement
and add value to those services provided by other subsidiaries of the Company.
Optimum assists
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clients in varied industries in identifying the best and most complete solution
for their business communication needs. Optimum offers clients leading edge
visual communications technology and Internet development, interface and access,
interactive sales training and support solutions. In addition to its role in
providing the Company's clients with an integrated total resource range of
marketing solutions, Optimum serves as an independent resource for strategic
planning, creative development, production and implementation.
On December 29, 1998, U.S. Concepts, a Delaware corporation and
wholly-owned subsidiary of the Company acquired the business conducted by U.S.
Concepts, Inc., a New York corporation now known as Murphy Liquidating
Corporation (the "U.S. Concepts Acquisition"). The purchase price for the U.S.
Concepts Acquisition was $1,660,000, consisting of $1,410,000 in cash (including
expenses) and 30,000 newly issued shares of CoActive Common Stock valued at
$250,000. In the event that U.S. Concepts achieves specified pre-tax earnings
during the two year period ending December 31, 2000 and cumulatively during the
four-year period commencing on January 1, 1999, additional installments of
purchase price totaling up to $2,500,000 may be payable. At the option of the
recipient, 50% of such installments may be paid in shares of CoActive Common
Stock. In connection with the U.S. Concepts Acquisition, U.S. Concepts assumed
liabilities in the amount of $2,500,000. The cash portion of the U.S. Concepts
Acquisition was financed with proceeds from the Company's remaining unused
Revolving Loan Facility. The U.S. Concepts business founded in 1983, provides
event marketing and in-store promotion services, including brand creating and
execution of special event campaigns, tours and festivals, sales driven
sampling, demonstration programs and events. These services complement and add
value to the services provided by the other subsidiaries of the Company. U.S.
Concepts assists clients with the expertise and manpower to reach target
customers where they live, shop, play and study in a manner that integrates
client brands directly with customer lifestyles.
On January 14, 1999, the Loan Agreement was amended to increase the
principal amount available under the Revolving Loan Facility for the period from
January 14, 1999 to and including December 31, 1999 from $5,000,000 to
$7,000,000.
The Loan Agreement was subsequently amended on (i) June 30, 1999 to (a)
reduce the principal amount available under the Revolving Loan Facility from
$7,000,000 to $5,000,000, (b) require a payment so as to reduce the amount
outstanding under the Term Loan from $5,000,000 to $3,660,000 and (c) waive non-
compliance with, and amend certain financial covenants; (ii) November 19, 1999
to waive non-compliance with and amend certain financial covenants; (iii)
February 11, 2000 to (a) eliminate the revolving feature of the Revolving Loan
Facility and prohibit further borrowings on a revolving loan basis, (b) set
April 8, 2001 as the final maturity date of the loans outstanding under the Loan
Agreement, (c) require a principal payment of $500,000 to be made on or before
March 8, 2000, and thereafter on the eighth day of each month commencing on
April 8, 2000 a monthly payment of $200,000 to reduce the outstanding Term Loan,
(d) amend the interest rate provisions of the Loan Agreement so that all Loans
bear interest at a rate equal to two percent above lender's prime rate and (e)
grant a waiver of the Company's non-compliance at December 31, 1999 with respect
to certain financial covenants.
On June 15, 2000, the Loan Agreement was further amended to modify certain
financial covenants and to waive the Company's non-compliance with respect to
such financial covenants for the quarter ended March 31, 2000 and amend the
interest rate provisions of the Loan Agreement so that all loans bear interest
at a rate per annum equal to three percent above lender's prime rate and on June
26, 2000, the Loan Agreement was further amended to extend the final maturity
date of the loans outstanding under the Loan Agreement to July 8, 2001. See
"Risk Factors-Outstanding Indebtedness; Security Interest" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Effective March 1, 2000, the Company entered into a twelve month term
Retainer and Option Agreement, with a minority owned, predominantly Hispanic,
ethnically oriented promotion agency headquartered in San Antonio, Texas doing
business as Marketvision, which (i) established a strategic alliance with
respect to the cooperative marketing and support of services; (ii) provides for
a monthly retainer payment by the Company to Marketvision and (iii) granted the
Company an option, during the term of the agreement, to acquire a 49% ownership
interest in Marketvision for a fixed amount reduced by the retainer payments.
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DESCRIPTION OF BUSINESS
GENERAL. The Company is a full service marketing, sales promotion and
interactive new media services and e-commerce provider organization which
designs, develops and implements turnkey customized national, regional and local
consumer and trade promotion programs principally for Fortune 500 consumer
product companies. The Company's programs are designed to enhance the value of
its clients' budgeted expenditures and to achieve, in an objectively and
measurable way, its clients' specific marketing and promotional objectives. In
the industry, the Company's programs are commonly referred to as "account
specific" and or "co-marketing", as they may target the participation and
cooperation of a specific retail chain, group or groups of retailers or other
sources of distribution (the "Trade") to attain results in the form of increased
in-store product displays, related consumer purchases and enhanced product brand
name recognition.
The Company's customized and creative marketing, sales promotion,
interactive new media and e-commerce services generally include:
- strategic planning, market research and analysis, product positioning,
selling strategy and process, and direct marketing services which assist
clients in identifying, defining and achieving specific objectives;
- advising clients on the deployment of budgeted amounts to maximize value
and meet objectives;
- concept development, graphic design, conventional and computer
illustration, copy writing, 3-D graphics and animation, layout and
production, photography and video services which develop the concept and
subsequently create the consumer and trade promotional program;
- implementing turnkey training and incentive programs, including providing
documentation, program manuals and artwork, training a client's marketing
and sales staffs, buying media and merchandise, designing in-store
displays, commercial editing, coordination and trafficking of media and
total program administration;
- multimedia electronic sales tools and presentations, interactive computer
based sales training, Internet web site designing, hosting and e-commerce
software for business to consumer and business to business activities;
- on-site and in-store personnel to conduct and coordinate the
implementation of sampling and demonstration activities, specifically
created promotional entertainment or otherwise special events and
activities; and
- promotional and marketing campaigns geared specifically to ethnic groups
targeted by the Company's clients.
The Company combines the needs of its clients, its clients' sales forces
and Trade outlets with the Company's experience, in-house resources, techniques
and proprietary systems to develop and provide solutions, incremental value and
measurable results. A typical program may integrate numerous promotional
techniques which take into consideration various factors, including: (a) the
channel of Trade on which the client is focused and a determination of the most
effective manner to obtain distribution support for the client's product; (b)
the means by which to best educate the client's sales force in soliciting Trade
support for the client's products without creating excessive or burdensome
administrative details; and (c) the profile of the retail consumer of the
client's products. Distinct from many promotion and marketing companies which
may adopt specific promotional programs or techniques regardless of the product,
the Company's programs are tailored to the client's particular goals and may
include various components, including promotional broadcast media, premium
incentives to Trade employees and representatives, in-store merchandising and
sampling, commercial tagging, special events, specialty printing, licensing,
point-of-purchase displays, couponing, and interactive Internet and other
electronic services, including e-commerce tools, and video and computer based
sales and training aids.
INDUSTRY BACKGROUND. The industry is comprised of hundreds of large and
small companies, including affiliates of advertising agencies, many of which
tend to specialize in providing clients with one or more of a wide array of
Trade (a specific retail chain, group or groups of retailers or other channels
of distribution) and
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or consumer oriented promotional services and products. Although promotional
services may in certain circumstances duplicate, overlap or relate to
traditional advertising services, advertising agencies over the years have
considered these services as distinct auxiliary marketing services. Consumer
product manufacturers and service provider companies typically employ two
separate but related marketing programs to sell their products. Initially, a
general advertising campaign would be launched by an advertising agency engaged
to create an image for the product and to communicate the image to the consumer.
The campaign typically employs television, radio, print media, the Internet and
other forms of communication designed to generate brand recognition and product
awareness among consumers. Subsequently, a promotional advertising program would
be launched by a marketing services promotion agency, on either a local,
regional or national level, which aims to induce the Trade to order and display
the client's product while also inducing and targeting the consumer to purchase
the product and furthering brand name recognition. While promotional programs
also typically include the same communication media as an advertising campaign
and may employ or integrate portions of the image created through a general
advertising campaign, promotional programs are typically more focused and
directed to a point of purchase utilizing techniques such as couponing,
sampling, incentives for both retailers and consumers, events, entertainment,
merchandising and licensing among others. The basic distinction between the
services of promotion companies and those of advertising agencies is that
advertising agency services are used to create a positive image for a client's
product and communicate that image to consumers for continued product
recognition and awareness, while promotion company services, such as those
provided by the Company, are used to motivate consumers to take immediate
positive action while further increasing product recognition.
Promo Magazine's 1999 Annual Report on the Promotion Industry reported that
"an industry that was already growing at a healthy five to seven percent
increased in revenue in 1998 over 1997 by 7.6% to an unprecedented $85.4
billion". Among the factors which fueled and are expected to continue to support
this accelerated growth are (i) more core packaged goods firms, which have been
the drivers of activity for years, continue to direct more funds into activities
that provide marketing strategies with a clear and measurable return on
investment objective for their marketing expenditures and (ii) other categories
of non-packaged goods product and service companies, including deregulated
utilities, healthcare organizations, computer hardware and software
manufacturers, electronic firms, automobile marketers, communication and
entertainment companies and retailers, among others, which have increased their
promotion activities.
Promotion industry revenues are recognized under the following
classifications: Premium Incentives, Point of Purchase, Ad Specialties,
Couponing, Specialty Printing, Sponsorships, Broadcast Media, Promotion
Licensing, Promotion Fulfillment, Promotion Research, Interactive, Product
Sampling and In-Store Services. Historically, most of the industry's revenues
originate from continuing client relationships which give rise to specific
assignments on a project by project basis during the course of a year. With the
increasing credibility and recognized value of integrated marketing and
promotional services, a number of clients are designating various promotion and
related specialty marketing firms as their specific promotion agency of record
thereby establishing such designated agency as their exclusive promotion service
supplier.
THE COMPANY'S PROGRAMS. The Company, as a fully integrated marketing,
sales promotion, interactive new media and e-commerce service provider, believes
that it is well-positioned to meet the increasing demands of consumer product
manufacturers by offering a wide range of customized, rather than "off the
shelf", promotional programs. These programs provide turnkey implementation, and
utilize creative development tools, sales support, relationships with media
outlets, the Internet and other forms of visual communications, promotional
products and activities, and administrative services. The Company's services are
supported with an innovative management information system to gather, monitor,
track and report the implementation status of each program. The Company's
ability to capture data regarding sales activity and Trade acceptance of a
particular program on a real time basis enables the Company and its clients to
continually monitor and adjust the program to maximize its effectiveness. A
Company promotional program may promote a client's products on a uniform basis
nationwide or may be otherwise tailored for a particular regional or local
market for a specific product. A program, localized for specific markets or
products, can be coordinated with respect to both timing and expenditure, to run
simultaneously with individual and customized programs nationwide.
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The Company's promotional campaign strategies are typically implemented
with the use of one or more of the following promotional products:
- PROMOTIONAL RADIO -- Broadcast time purchased for the Company's clients
for their own use for traditional concept, image and brand recognition
advertising and provided on behalf of such clients to the Trade as an
incentive for "Trade participation". Trade participation for a client
often takes the form of tangible merchandising performance such as
additional display of a client's products within the Trade's stores, an
increase in the product inventory throughout the Trade's chain, a Trade's
coupon circular or solo-mailers referencing and promoting the client's
product. The Trade may also permit product sampling within one or more
stores in the chain. The value of broadcast time made available to the
Trade for its own discretionary use is a significant inducement for Trade
participation and support of a promotional program because it provides to
the Trade media which the Trade would otherwise have to purchase.
- PROMOTIONAL TELEVISION -- Broadcast time purchased for the Company's
clients for their own use to achieve objectives similar to those of
promotional radio, and to create an incentive for Trade participation.
The Company also adds advertising value by editing clients' television
commercials to include a specific Trade customer's name, logo and other
Trade specific information, providing an incentive similar to promotional
radio for Trade participation in the promotional program.
- DEALER LOADERS -- Awards, of various types and value, consisting of
merchandise, travel, entertainment and or other services, offered to the
Trade in return for providing specific in-store merchandising on behalf
of a client's product.
- SPECIAL EVENTS/ENTERTAINMENT -- Fully turnkey custom designed and
produced event and entertainment marketing programs in support of client
brand needs. These programs consist of creating, organizing, implementing
and/or participating in tours, concerts, comedy and music events,
competitions, fairs, festivals and college marketing events and, as
required, include talent negotiations/sponsorships, TV production and
public relations.
- IN-STORE SAMPLING AND DEMONSTRATIONS -- Trained personnel providing
sampling or demonstration of a client's product at various retail outlets
including grocery, mass merchandise, beverage and drug stores.
- TRADE/ACCOUNT SPECIFIC CONSUMER PROMOTIONS -- A full range of consumer
in-store promotional programs, integrated with Trade-directed promotion
programs, which are designed to increase consumer interest in a client's
products and increase brand name recognition. These promotions include
(a) merchandise giveaways in conjunction with product purchases; (b)
vacation and product sweepstakes (for which the Company designs display
materials, writes the rules, qualifies the winners and arranges travel
plans or product ordering); (c) product sampling in one or more stores;
and (d) traditional couponing.
- INTERACTIVE NEW MEDIA -- Use of the Internet and other forms of
interactive visual communication designed to augment traditional media
and reach audiences that prefer a more active media. The Company's
interactive new media services include Internet web site design,
development, hosting, support, e-commerce software for business to
consumer and business to business activities, providing reliable,
high-speed access and maintenance through the Company's own dedicated
communication lines, computer based training and electronic sales tools.
- CREATIVE SERVICES -- A full range of services which include concept
development, graphic layout/design and production, copywriting, digital
imaging/retouching/film separation, illustration, animation, photography
and video.
MARKETING STRATEGY. The Company's marketing strategy is to offer its
clients creative promotional programs intended to produce objectively measurable
results while removing from clients the significant burden of administrative and
logistical details associated with such programs. This strategy has focused, and
in the future will continue to focus, on clients in the packaged goods industry,
where ample opportunities
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continue to exist. However, the Company also has broadened its strategy by
offering its trade and consumer promotion products to clients in other
industries which the Company believes can benefit from a comprehensive
customized program on a turnkey implementation basis, such as Internet "dot.com"
and e-commerce companies, and financial services, entertainment, electronics,
healthcare and transportation companies.
The Company believes that its strategy of attempting to provide
comprehensive solutions to its clients' promotional advertising programs
distinguishes it from certain of its competitors, which provide only specific
promotional programs without office and field support (an integral part of the
Company's business). The Company also believes that its strategy is more attuned
to clients' needs, particularly as clients seek to contract out all promotional
advertising for a specific product as a result of downsizing their in-house
capabilities or, as with many of the Internet dot.com companies, in-house
capabilities are limited and by necessity marketing and promotional services are
required to be outsourced.
The Company's services are marketed directly by the Company's sales force
consisting of forty-one salespersons operating out of fully staffed and/or sales
offices located in Great Neck and New York, New York; Cincinnati, Ohio; Chicago
and Barrington, Illinois; Birmingham, Alabama; Bloomington, Minnesota; Los
Angeles, Laguna Hills and San Francisco, California; New Brunswick, New Jersey;
Boston, Massachusetts; and Worcester, Pennsylvania.
CUSTOMERS. The Company's principal clients are packaged goods and other
consumer products manufacturers, generally among the Fortune 500, which are
actively engaged in promoting their products both to the Trade and to consumers.
The Company's clients include, among others, Colgate-Palmolive Company, General
Mills, Inc., The Procter & Gamble Company, Bestfoods Corp., Hillshire Farm &
Kahn's, Inc., Starkist Seafood Company, Hewlett-Packard Company, Schieffelin &
Somerset Co., Adams Golf Company, Ethicon Endo-Surgery, Inc., Dairy Mart
Convenience Stores, Inc., Rubbermaid Home Products, Scotts Company, Domino Sugar
Company, The Chinet Company, The Campbell Group, Mrs. Smith's Bakeries, Inc.,
GovWorks Inc., MTM Entertainment, The Grand Group, Novartis Consumer Health
Inc., Excite Inc., Bristol-Myers Corp., Clif Bar Inc., and Duracell Corporation.
For the fiscal year ended March 31, 2000, the Company had one client,
Schieffelin & Somerset Co., which accounted for approximately 19.9% of its
revenues. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations". To the extent that the Company continues to have a
heavily weighted sales concentration with one or more clients, the loss of any
such client could have a material adverse affect on the earnings of the Company.
Unlike traditional general advertising firms, which are engaged as agents of
record on behalf of consumer products manufacturers, promotional companies,
including the Company, typically are engaged on a product-by-product, or
project-by-project basis. However, the relationship of the Company and its
predecessors with certain of its clients has continued for in excess of 20
years.
COMPETITION. The market for promotional services is highly competitive,
with hundreds of companies claiming to provide various services in the promotion
industry. In general, the Company's competition is derived from two basic groups
(which market their services to consumer products manufacturers): (a) other full
service promotion agencies and (b) companies which specialize in one specific
aspect or niche of a general promotional program. Other full service promotion
agencies may be a part of or affiliated with larger general advertising agencies
which have greater financial and marketing resources available than the Company.
These competitors include Cato Johnson (which is affiliated with Young &
Rubicam), J. Brown/LMC (which is affiliated with Grey Advertising), and Market
Growth Resources (which is a division of True North Communications). Niche
competitors include Don Jagoda, Inc., which specializes in sweepstakes; Act
Media, Inc., a subsidiary of Heritage Media, Inc., which specializes in a broad
range of in-store programs; and Catalina Marketing, Inc., which specializes in
cash register couponing programs. See "Risk Factors -- Competition".
EMPLOYEES
The Company currently has 222 full-time and 722 part-time employees,
including 41 full-time and 3 part-time employees involved in sales, 144
full-time and 719 part-time employees in marketing support, program management
and in-store sampling and demonstration, 15 full-time employees in new media and
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information technology and 22 full-time employees in finance and administration.
None of the Company's employees is represented by a labor organization and the
Company considers the relationships with its employees to be good.
RISK FACTORS
OUTSTANDING INDEBTEDNESS; SECURITY INTEREST. Inmark, Optimum and U.S.
Concepts are borrowers, and CoActive is a guarantor, under the Revolving Loan
Facility and the Term Loan, which are due on July 8, 2001. As of June 15, 2000,
the principal amounts outstanding under the Revolving Loan Facility and the Term
Loan were $5,000,000 and $1,710,000 respectively. As security for all of their
obligations under the Loan Agreement, (a) CoActive, Inmark, Optimum and U.S.
Concepts granted the lender a first priority lien on and security interest in
all of their assets, and (b) CoActive pledged its shares of stock of Inmark and
U.S. Concepts, and Inmark pledged its shares of stock of Optimum to the lender.
If an event of default occurs under the Loan Agreement, at the lender's option,
(i) the principal and interest of the Loan and all other obligations under the
Loan Agreement shall be immediately due and payable, and (ii) the lender shall
be entitled to exercise any and all rights and remedies provided for in the Loan
Agreement and in any document delivered to the lender in connection with the
Loan Agreement, all rights and remedies of a secured party under the Uniform
Commercial Code, and all other rights and remedies that may otherwise be
available to the lender by agreement or at law or in equity. At March 31, 2000,
the Company was not in compliance with the financial covenants contained in the
Loan Agreement; namely, the defined maximum senior debt leverage ratio, minimum
EBITDA, minimum fixed charge ratio and the maximum permitted capital
expenditures. On June 15, 2000, the Company and the lender executed an amendment
to the Loan Agreement wherein such financial covenants were modified and the
lender waived the Company's non-compliance with such financial covenants with
respect to the quarter ended March 31, 2000 and on June 26, 2000, the Loan
Agreement was further amended to extend the final maturity date of the loans
outstanding under the Loan Agreement to July 8, 2001. Management believes, based
on such modifications, that the Company will meet the covenants. However, there
can be no assurance that the Company will be able to satisfy, on an ongoing
basis, the amended financial covenants contained in the Loan Agreement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources".
DEPENDENCE ON KEY PERSONNEL. The Company's business is managed by a
limited number of key management and operating personnel, the loss of certain of
whom could have a material adverse impact on the Company's business. The Company
believes that its future success will depend in large part on its continued
ability to attract and retain highly skilled and qualified personnel. Each of
the Company's key executives is a party to an employment agreement that expires
in either 2001, 2002 or 2003 and thereafter automatically renews for an
additional term of one year unless either party elects to terminate the
agreement upon at least 60 days notice prior to the expiration of the then
current term.
CUSTOMERS. The Company's principal clients are consumer product
manufacturers, generally among the Fortune 500, which are actively engaged in
promoting their products both to specific retail chains, groups of retailers or
other sources of distribution and to consumers. As a substantial portion of the
Company's sales have been dependent on one client or a limited concentration of
clients, to the extent such dependency continues, significant fluctuations in
revenues, results of operations and liquidity could arise should such client or
clients reduce their budgets allocated to the Company's activities. See
"Description of Business -- Customers".
UNPREDICTABLE REVENUE PATTERNS. A significant portion of the Company's
revenues are derived from large promotional programs which originate on a
project by project basis. Since these projects are susceptible to change, delay
or cancellation as a result of specific client financial or other circumstantial
issues as well as changes in the overall economy, the Company's revenue is
unpredictable and may vary significantly from period to period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
COMPETITION. The market for promotional services is highly competitive,
with hundreds of companies claiming to provide various services in the promotion
industry. Certain of these companies may have greater
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financial and marketing resources than those available to the Company. The
Company competes on the basis of the quality and the degree of comprehensive
service which it provides to its clients. There can be no assurance that the
Company will be able to continue to compete successfully with existing or future
industry competitors. See "Description of Business -- Competition".
RISKS ASSOCIATED WITH ACQUISITIONS. An integral part of the Company's
growth strategy is evaluating and, from time to time, engaging in discussions
regarding acquisitions and strategic relationships. No assurance can be given
that suitable acquisitions or strategic relationships can be identified,
financed and completed on acceptable terms, or that the Company's future
acquisitions, if any, will be successful.
EXPANSION RISK. The Company has experienced a period of rapid expansion.
This growth has increased the operating complexity of the Company as well as the
level of responsibility for both existing and new management personnel. The
Company's ability to manage its expansion effectively will require it to
continue to implement and improve its operational and financial systems and to
expand, train and manage its employee base. The Company's inability to
effectively manage its expansion could have a material adverse effect on its
business.
CONTROL BY EXECUTIVE OFFICERS AND DIRECTORS. The executive officers of the
Company collectively beneficially own a significant percentage of the voting
stock of CoActive and, in effect, have the power to influence strongly the
outcome of all matters requiring stockholder approval, including the election or
removal of directors and the approval of significant corporate transactions.
Such voting could also delay or prevent a change in the control of CoActive in
which the holders of the CoActive Common Stock could receive a substantial
premium. In addition, the Loan Agreement requires the executive officers of
CoActive maintain a minimum percentage of beneficial ownership of CoActive
Common Stock during the term of the Loan Agreement.
SHARES ELIGIBLE FOR FUTURE SALE. Future sales of shares of CoActive Common
Stock by existing stockholders under Rule 144 of the Securities Act of 1933, as
amended (the "Securities Act"), or through the exercise of outstanding
registration rights or the issuance of shares of CoActive Common Stock upon the
exercise of options or warrants or conversion of convertible securities could
materially adversely affect the market price of shares of CoActive Common Stock
and could materially impair CoActive's future ability to raise capital through
an offering of equity securities. Substantially all outstanding shares of
CoActive Common Stock, other than those held by affiliates, are transferable
without restriction under the Securities Act. No predictions can be made as to
the effect, if any, that market sales of such shares or the availability of such
shares for future sale will have on the market price of shares of CoActive
Common Stock prevailing from time to time.
FORWARD LOOKING STATEMENTS
This report contains or incorporates by reference forward-looking
statements which the Company believes to be within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, that are based on beliefs of the Company's
management as well as assumptions made by and information currently available to
the Company's management. When used in this report, the words "estimate,"
"project," "believe," "anticipate," "intend," "expect," "plan," "predict,"
"may," "should," "will," the negative thereof or other variations thereon or
comparable terminology are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events based on currently available information and are subject to risks and
uncertainties that could cause actual results to differ materially from those
contemplated in those forward-looking statements. Factors that could cause
actual results to differ materially from the Company's expectations, include but
are not limited to those described above in "Risk Factors". Other factors may be
described from time to time in the Company's public filings with the Securities
and Exchange Commission, news releases and other communications. The
forward-looking statements contained in this report speak only as of the date
hereof. The Company does not undertake any obligation to release publicly any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
8
<PAGE> 10
ITEM 2. PROPERTIES.
The Company has the following leased facilities:
<TABLE>
<CAPTION>
SQUARE ANNUAL
FACILITY LOCATION FEET BASE RENT
-------- -------- ------ ---------
<S> <C> <C> <C>
Principal office of CoActive and Great Neck, New York 16,700 $298,000
principal and sales office of
Inmark
Principal and sales office of Cincinnati, Ohio 17,000 $151,000
Optimum
Principal and sales office of U.S. New York, New York 11,500 $167,000
Concepts
Other sales offices of Inmark, Barrington, Illinois 800
Optimum, and U.S. Concepts
Chicago, Illinois 1,400
Tampa, Florida 600
Los Angeles, California 800
San Francisco, California 2,600
Laguna Hills, California 1,400
Boston, Massachusetts 200
New Brunswick, New Jersey 300
Birmingham, Alabama 100
Minneapolis, Minnesota 500
Coral Gables, Florida 500
Worcester, Pennsylvania 100
------
Total 9,300 $184,000
Warehouses of Optimum, and U.S. Cincinnati, Ohio 3,500
Concepts used for storage of
promotional items
Los Angeles, California 1,000
New York, New York 400
Miami Beach, Florida 600
Chicago, Illinois 1,000
San Francisco, California 1,000
------
7,500 $114,000
</TABLE>
With the exception of the principal office leases for Great Neck, New York,
Cincinnati, Ohio and New York, New York, which at March 31, 2000 have remaining
terms of nine years, ten years and five months respectively, each of the
Company's other facility leases is short term and annually renewable. For a
summary of the Company's minimal rental commitments under all noncancelable
operating leases as of March 31, 2000, see note 4 to the Notes to Consolidated
Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
None. In May 2000, the previously reported suit brought in California
against U.S. Concepts, Inc. and the Company for a claim of sex discrimination in
violation of California Fair Employment and Housing Act and the California
constitution and wrongful discharge in violation of public policy was settled
with a release of U.S. Concepts, Inc. and the Company of all claims without U.S.
Concepts, Inc. and or the Company having to incur any cost or legal expense.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Effective October 1, 1999, in connection with the approval of the Company's
shareholders to change the Company name to CoActive Marketing Group, Inc. from
Inmark Enterprises, Inc., CoActive's Common
9
<PAGE> 11
Stock trading symbol on the Nasdaq SmallCap Market was changed to CMKG. Prior to
that date, since December 17, 1996, the Company's Common Stock had been trading
on the Nasdaq SmallCap Market under the symbol IMKE. The following table sets
forth for the periods indicated the high and low trade prices for CoActive
Common Stock as reported by Nasdaq and gives effect to the twenty-five percent
stock dividend paid on June 14, 1998. The quotations listed below reflect
inter-dealer prices, without retail mark-ups, mark-downs or commissions and may
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR 1999
First Quarter............................................... 12 1/2 5 1/32
Second Quarter.............................................. 10 4 7/8
Third Quarter............................................... 8 15/16 5 10/32
Fourth Quarter.............................................. 9 10/32 3 15/16
FISCAL YEAR 2000
First Quarter............................................... 4 3/8 2 1/4
Second Quarter.............................................. 4 1/4 2 7/16
Third Quarter............................................... 2 15/16 1 27/32
Fourth Quarter.............................................. 4 1/2 1 27/32
</TABLE>
On June 26, 2000, there were 5,015,981 shares of CoActive Common Stock
outstanding, approximately 55 shareholders of record and approximately 700
beneficial owners whose shares are held by a number of financial institutions.
CoActive has never declared or paid cash dividends on CoActive Common
Stock. The Company intends to retain earnings, if any, to finance future
operations and expansion and does not expect to pay any cash dividends on
CoActive Common Stock in the foreseeable future. In addition, pursuant to the
terms of the Loan Agreement, the Company may only pay a cash dividend one time
in each fiscal year subsequent to the fiscal year ended March 31, 2000 and may
only pay such dividend (a) in an amount not in excess of 25% of the Company's
net income for the immediately preceding fiscal year, (b) if no event of default
shall have occurred and be continuing or will occur as a result of making such
dividend, and (c) if the Company has made the mandatory prepayments of
outstanding principal required by the Loan Agreement. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
RECENT SALES OF NONREGISTERED SECURITIES
On January 31, 2000, the Company sold 500,000 newly issued unregistered
shares of CoActive Common Stock together with five year warrants to purchase an
additional 250,000 shares of CoActive Common Stock at an exercise price of $2.50
for an aggregate purchase price of $1,000,000. The purchasers of such securities
included Special Situations Private Equity Fund, L.P., which purchased
approximately 85% of the securities sold in such offering, and certain
affiliates of a director of the Company. On February 1, 2000, the Company used
$500,000 of the proceeds of the private placement to reduce its Term Loan, and
used the remaining proceeds to increase its working capital and provide for the
funding required in connection with the strategic alliance with Marketvision.
The securities were sold only to "accredited investors" and were issued in
reliance upon the exemption from registration contained in Section 4(2) of the
Securities Act, as a transaction not involving a public offering within the
meaning of the Securities Act. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data reported below has been derived from the
Company's audited financial statements for each fiscal year ended March 31
within the five year period ended March 31, 2000. The
10
<PAGE> 12
selected financial data reported below should be read in conjunction with the
consolidated financial statements and related notes thereto and other financial
information appearing elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1996(1) 1997 1998(2) 1999(3) 2000
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales............................ $14,645,990 $18,901,730 $25,965,780 $38,781,136 40,584,959
Gross Profit..................... 4,497,192 6,291,821 8,403,363 12,469,901 11,408,595
Income (Loss) before Income 461,486 2,129,579 3,579,445 2,230,900 (1,382,476)
Taxes..........................
Provision (Benefit) for Income (506,161) (159,924) 1,300,000 892,361 (508,774)
Taxes..........................
Net Income (Loss)................ 967,647 2,289,503 2,279,445 1,338,539 (873,702)
Net Income (Loss) per Common and
Common Equivalent share*:
Basic............................ $.46 $.64 $.63 $.30 $(.19)
Diluted.......................... $.38 $.51 $.50 $.24 $(.19)
</TABLE>
---------------
* Adjusted for the five-for-four stock split effective May 14, 1998
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1996 1997 1998(4) 1999 2000
--------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital
(deficiency)............ $(846,489) $1,859,868 $ 2,446,502 $ 3,146,441 $(1,671,668)
Total Assets.............. 5,118,569 8,559,840 30,818,389 42,452,443 36,196,610
Current Debt.............. 750,000 -- -- 625,000 3,325,000
Long-Term Debt............ -- -- 9,500,000 11,875,000 6,160,000
Total Liabilities......... 3,104,792 4,022,459 20,145,423 29,875,338 23,490,282
Stockholders Equity....... 2,013,777 4,537,381 10,672,966 12,577,105 12,706,328
</TABLE>
---------------
(1) Includes operations of Inmark Services, Inc. for the entire year and the
Company from the September 29, 1995 Merger date.
(2) Represents operations of the Company excluding the operations of Optimum
Group, Inc. acquired on March 31, 1998.
(3) Represents operations of the Company and the operations of U.S. Concepts,
Inc., which was acquired on December 29, 1998, for the three months ended
March 31, 1999.
(4) Includes assets and liabilities of Optimum Group, Inc. acquired on March 31,
1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
On March 31, 1998, Optimum, an indirect wholly-owned subsidiary of the
Company, acquired the Optimum business for a purchase price of $15,743,000. The
Optimum Acquisition has been accounted for as a purchase by the Company as at
March 31, 1998. Accordingly, as discussed below, results of operations for the
year ended March 31, 1998 represent the operations of the Company excluding
Optimum. However, the consolidated balance sheet of the Company at March 31,
1998 includes the Optimum balance sheet at that date.
On December 29, 1998, U.S. Concepts, a Delaware corporation and a
wholly-owned subsidiary of the Company, acquired the business conducted by U.S.
Concepts, Inc., a New York corporation, for a purchase price of $1,660,000.
Accordingly, as discussed below, results of operations for the year ended March
31, 1999 represent the operations of the Company including the operations of
U.S. Concepts for the three months ended March 31, 1999. The following
information should be read together with the consolidated financial statements
and notes thereto included elsewhere herein.
11
<PAGE> 13
GENERAL
The Company's sales are generated from projects subject to contracts which
require the Company to provide its services within specified time periods
generally ranging up to twelve months. As a result, the Company has projects in
process at various stages of completion. With respect to each project, sales are
recognized based upon the estimated percentage-of-completion of the project. On
any given date, the estimated percentage-of-completion of a project is measured
by the cost of the Company's services expended to such date on such project
compared to the total cost of such project required to be incurred in connection
with such project. The Company's business is such that sales may vary
considerably from quarter to quarter.
The Company's direct expenses consist primarily of direct labor costs;
costs to purchase media and program merchandise; cost of production, merchandise
warehousing and distribution, and third party contract fulfillment; and other
directly related program expenses. Direct expenses do not include the salaries
and benefits of the employees of Inmark servicing or otherwise involved in the
administration of promotional programs or overhead expenses which could
otherwise be allocated to such programs.
For the fiscal year ended March 31, 2000 ("Fiscal 2000"), the Company had
one client, Schieffelin & Somerset Co., which accounted for approximately 19.9%
of its revenues. In comparison, for the fiscal year ended March 31, 1999
("Fiscal 1999"), before giving effect to the U.S. Concepts Acquisition, and on a
pro forma basis giving effect to the U.S. Concepts Acquisition by including the
revenues of the predecessor of U.S. Concepts for the year ended December 31,
1998, the Company had one client, The Procter & Gamble Company, which accounted
for approximately 11.6% and 21.2%, respectively, of its revenues. To the extent
the Company's sales are dependent on one client or a limited concentration of
clients, and such dependency continues, significant fluctuations in revenues,
results of operations and liquidity could arise should such client or clients
reduce their budgets allocated to the Company's activities.
RESULTS OF OPERATIONS
The following table presents operating data of the Company, expressed as a
percentage of sales for each of the fiscal years ended March 31, 2000, 1999 and
1998:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales....................................................... 100.0% 100.0% 100.0%
Direct expenses............................................. 71.9% 67.8% 67.6%
Gross profit................................................ 28.1% 32.2% 32.4%
Salaries.................................................... 13.2% 13.1% 12.1%
Selling, general and administrative expense................. 16.3% 11.4% 7.0%
Total operating expenses.................................... 29.5% 24.6% 19.2%
Operating income (loss)..................................... (1.4)% 7.6% 13.2%
Interest expense (income), net.............................. 2.0% 1.9% (0.6)%
Income (loss) before provision for taxes.................... (3.4)% 5.8% 13.8%
Provision (benefit) for income taxes........................ (1.2)% 2.3% 5.0%
Net income (loss)........................................... (2.2)% 3.5% 8.8%
OTHER DATA:
EBITDA...................................................... 2.4% 10.6% 14.6%
</TABLE>
12
<PAGE> 14
The following table presents operating data of the Company, expressed as a
comparative percentage of change from the immediately preceding fiscal year for
each of the fiscal years ended March 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
2000 1999 1998
------ ----- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales....................................................... 4.7% 49.4% 37.4%
Direct expenses............................................. 10.9% 49.8% 39.3%
Gross profit................................................ (8.5)% 48.4% 33.6%
Salaries.................................................... 5.6% 61.4% 26.2%
Selling, general and administrative expense................. 48.8% 142.9% 8.8%
Total operating expenses.................................... 25.8 91.3% 19.2%
Operating income............................................ (119.2)% (13.9)% 61.9%
Interest expense (income), net.............................. 13.8% 568.9% (1,058.0)%
Income before provision for income taxes.................... (162.0)% (37.7)% 68.1%
Provision (benefit) for income taxes........................ (157.0)% (31.4)% 912.9%
Net income.................................................. (165.3)% (41.3)% (0.4)%
OTHER DATA:
EBITDA...................................................... (76.6)% 9.0% 54.5%
</TABLE>
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
SALES. Sales for Fiscal 2000 were $40,585,000, compared to sales of
$38,781,000 for Fiscal 1999, an increase of $1,804,000. The increase was
primarily attributable to the inclusion of sales of U.S. Concepts for a full
year in the amount of $14,823,000 for Fiscal 2000, compared to three months of
sales of U.S. Concepts in the amount of $2,266,000 included in Fiscal 1999. Such
increase was for the most part offset by a decrease in sales due to a lesser
than anticipated amount of contracted sales during the first three quarters of
the Company's fiscal year. At March 31, 2000, the Company's sales backlog
amounted to approximately $18,100,000 compared to a sales backlog of
approximately $16,600,000 at March 31, 1999.
DIRECT EXPENSES. Direct expenses for Fiscal 2000 were $29,176,000 compared
to direct expenses of $26,311,000 for Fiscal 1999, an increase of $2,865,000.
The increase was primarily attributable to the inclusion of direct expenses of
U.S. Concepts for a full year in the amount of $11,627,000 for Fiscal 2000,
compared to three months of direct expenses of U.S. Concepts in the amount of
$1,793,000 included in Fiscal 1999. Such increase was for the most part offset
by the reduction of direct expenses related to the Company's decrease in sales.
The increase in direct expenses as a percentage of sales for Fiscal 2000 was
primarily the result of client programs in the aggregate having a lower gross
profit margin than the mix of client programs in Fiscal 1999.
As a result of the changes in sales and direct expenses, the Company's
gross profit for Fiscal 2000 decreased to $11,409,000 from $12,470,000 for
Fiscal 1999.
OPERATING EXPENSES. Operating expenses for Fiscal 2000 increased by
$2,453,000 and amounted to $11,974,000, compared to $9,521,000 for Fiscal 1999.
The increase in operating expenses for Fiscal 2000 was primarily the result of
(i) the additional nine month inclusion in Fiscal 2000 of $1,846,000 of
operating expenses of U.S. Concepts and (ii) non-related U.S. Concepts increases
of approximately $344,000 in salaries, non-executive employee bonuses and
related employee payroll expenses and approximately $263,000 in selling, general
and administrative expenses in the aggregate primarily related to supporting and
maintaining an anticipated increase in the level of operations.
INTEREST EXPENSE. Interest expense for Fiscal 2000 increased by $99,000
and amounted to $817,000, compared to interest expense of $718,000 for Fiscal
1999. The increase in interest expense for Fiscal 2000 was primarily related to
the increased bank borrowings in conjunction with the U.S. Concepts Acquisition
and to a lesser extent, increased rates of interest.
13
<PAGE> 15
(LOSS)/INCOME BEFORE PROVISION FOR INCOME TAXES. For Fiscal 2000, the
Company had a loss before provision for income taxes equal to $(1,382,000). In
comparison, for Fiscal 1999, the Company's income before provision for income
taxes was $2,231,000.
(BENEFIT)/PROVISION FOR INCOME TAXES. For Fiscal 2000, the Company
recorded a tax benefit of $(509,000) for income taxes, based upon the Company's
ability to recover previously paid income taxes. In comparison, for Fiscal 1999,
the Company made a provision for federal, state and local income taxes in the
amount of $892,000, based upon the Company's effective tax rate for Fiscal 1999.
NET (LOSS)/INCOME. As a result of the items discussed above, the Company's
net loss for Fiscal 2000 was $(874,000), compared to net income of $1,339,000
for Fiscal 1999.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
SALES. Sales for the fiscal year ended March 31, 1999 were $38,781,000,
compared to sales of $25,966,000 for the fiscal year ended March 31, 1998
("Fiscal 1998"), an increase of $12,815,000. The increase was primarily
attributable to the inclusion of the sales of Optimum for the full fiscal year
and the sales of U.S. Concepts for the three month period ended March 31, 1999
which combined totaled $14,300,000. Such increase was partially offset by a
decrease in sales of Inmark for the fourth quarter primarily resulting from the
reduction and cancellation of certain sales contracts and a deferral by
customers of anticipated sales.
DIRECT EXPENSES. Direct expenses for Fiscal 1999 were $26,311,000,
compared to direct expenses of $17,562,000 for Fiscal 1998, an increase of
$8,749,000. The increase was primarily attributable to the inclusion of the
direct expenses of Optimum for the full fiscal year and of the direct expenses
of U.S. Concepts for the three months ended March 31, 1999, which combined
totaled $9,356,000. Such increase was partially offset by the reduction of
direct expenses of Inmark related to its fourth quarter decrease in sales. The
increase in direct expenses as a percentage of sales for Fiscal 1999 was
primarily the result of client programs in the aggregate having a slightly lower
gross profit margin than the mix of client programs in Fiscal 1998.
As a result of the changes in sales and direct expenses, the Company's
gross profit for Fiscal 1999 increased to $12,470,000 from $8,403,000 for Fiscal
1998.
OPERATING EXPENSES. Operating expenses for Fiscal 1999 increased by
$4,544,000 and amounted to $9,521,000, compared to operating expenses of
$4,977,000 for Fiscal 1998. The increase in operating expenses for Fiscal 1999
was primarily the result of (i) the inclusion of the operating expenses of
Optimum and U.S. Concepts totaling $3,433,000, and (ii) an increase of
approximately $1,111,000 primarily related to the overall expansion and increase
in the level of operations. The $3,433,000 of operating expenses of Optimum and
U.S. Concepts included in Fiscal 1999 consisted of approximately (i) $1,443,000
in salaries, bonuses and related employee payroll expenses and (ii) $1,990,000
of selling, general and administrative expenses (which included approximately
$647,000 of amortization of goodwill and deferred financing costs associated
with the Optimum Acquisition and the U.S. Concepts Acquisition).
INTEREST INCOME/EXPENSE. For Fiscal 1999, the Company incurred net
interest expense of $718,000, as a result of bank borrowings for the Optimum
Acquisition and the U.S. Concepts Acquisition and notes issued in connection
with the Optimum Acquisition. For Fiscal 1998, the Company had interest income
of $153,000 and was debt free.
INCOME BEFORE PROVISION FOR INCOME TAXES. For Fiscal 1999, the Company had
income before provision for income taxes equal to $2,231,000. In comparison, for
Fiscal 1998, the Company's income before provision for income taxes was
$3,579,000.
PROVISION FOR INCOME TAXES. For Fiscal 1999, the Company made a provision
for federal, state and local income taxes in the amount of $892,000, based upon
the Company's effective tax rate for Fiscal 1999. However, such provision does
not give effect to the exercise of stock options and warrants during Fiscal 1998
by two former officers and directors of the Company which resulted in a tax
benefit of approximately $310,000 which was recorded as additional paid-in
capital in Fiscal 1999. For Fiscal 1998, the Company made a
14
<PAGE> 16
provision for federal, state and local income taxes in the amount of $1,300,000
based upon the Company's estimated effective tax rate for the fiscal year.
NET INCOME. As a result of the items discussed above, the Company's net
income for Fiscal 1999 was $1,339,000 compared to $2,279,000 for Fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Effective March 31, 1998, the Company entered into the Loan Agreement
pursuant to which the Company obtained the $5,000,000 five-year Term Loan and
the $5,000,000 Revolving Loan Facility. On March 31, 1998, the Company borrowed
$5,000,000 under the Term Loan and $2,000,000 under the Revolving Loan Facility
to finance the Optimum Acquisition.
On December 29, 1998, to finance the U.S. Concepts Acquisition, the Company
utilized the Revolving Loan Facility, increasing its outstanding borrowings to
the maximum amount then available. On January 14, 1999, in order to provide for
short term financing needs, the Loan Agreement was amended to increase the
principal amount available under the Revolving Loan Facility from $5,000,000 to
$7,000,000 for the period from January 14, 1999 through December 31, 1999. At
March 31, 1999, the Company's principal outstanding indebtedness to the bank
amounted to $10,000,000 and, at that date, the Company was not in compliance
with three of the financial covenants of the Loan Agreement; namely, the defined
maximum senior debt leverage ratio, the minimum EBITDA and the maximum permitted
capital expenditures.
On June 30, 1999, the Loan Agreement was amended to (i) reduce the
principal amount available under the Revolving Loan Facility from $7,000,000 to
$5,000,000; (ii) require the Company's prepayment of $1,340,000 of the
$5,000,000 outstanding under the Term Loan; and (iii) modify certain financial
covenants. In connection with the June 30, 1999 amendment, the bank granted
waivers of the Company's non-compliance with respect to such financial covenants
with respect to the quarter ended March 31, 1999.
On November 19, 1999, the Loan Agreement was further amended to modify
financial covenants with respect to minimum EBITDA requirements, the defined
maximum senior debt leverage ratio and the fixed charge coverage ratio. In
connection with the November 19, 1999 amendment, the bank granted waivers of the
Company's non-compliance with respect to such financial covenants as of
September 30, 1999.
On January 31, 2000, the Company, in a private placement for $1,000,000
sold 500,000 newly issued shares of its common stock together with five year
warrants to purchase an additional 250,000 shares of its common stock at an
exercise price of $2.50. The Company used $500,000 of the proceeds of the
placement to reduce the Term Loan and the remaining proceeds to increase its
working capital and provide for the funding required in connection with the
strategic alliance in a predominantly Hispanic, minority-owned promotion and
marketing services company.
On February 11, 2000, the Loan Agreement was further amended to (i)
eliminate the revolving feature of the Revolving Loan Facility and prohibit
further borrowings on a revolving credit basis; (ii) set April 8, 2001 as the
final maturity date of the loans outstanding under the Loan Agreement; (iii)
require reductions of the principal outstanding balance of the Term Loan with an
initial payment of $500,000 on or before March 8, 2000 and thereafter a monthly
payment of $200,000 on the eighth day of each month commencing April 8, 2000;
and (iv) amend the interest rate provisions of the Loan Agreement so that all
Loans bear interest at a rate equal to two percent above lender's prime rate. In
connection with the February 11, 2000 amendment, the bank granted a waiver of
the Company's non-compliance of its Loan Agreement EBITDA financial covenant as
of December 31, 1999.
At March 31, 2000, the Company's principal outstanding indebtedness to the
bank under the Loan Agreement amounted to $7,310,000 and, at that date, the
Company was not in compliance with the financial covenants of the Loan
Agreement; namely, the defined maximum senior debt leverage ratio, minimum
EBITDA, minimum fixed charge ratio and the maximum permitted capital
expenditures. On June 15, 2000, the Loan Agreement was further amended to modify
such financial covenants and in connection with the amendment, the bank granted
a waiver of the Company's non-compliance with such financial covenants with
respect to the quarter ended March 31, 2000 and on June 26, 2001, the Loan
Agreement was further amended
15
<PAGE> 17
to extend the final maturity date of the loans outstanding under the Loan
Agreement to July 8, 2001. Management believes, based on such modifications,
that the Company will meet the covenants. However, there can be no assurance
that the Company will be able to satisfy, on an ongoing basis, the modified
financial covenants of the Loan Agreement. See note 5 to "Notes to Consolidated
Financial Statements -- Long-Term Debt."
At March 31, 2000, the Company had cash and cash equivalents of $1,107,000,
a working capital deficit of $1,672,000, bank loans of $7,310,000, subordinated
debt of $2,175,000 and stockholders' equity of $12,706,000; compared to cash and
cash equivalents of $2,688,000, working capital of $3,146,000, bank loans of
$10,000,000, subordinated debt of $2,500,000 and stockholders' equity of
$12,577,000 at March 31, 1999. The working capital deficit at March 31, 2000
resulted primarily from the inclusion of $2,400,000 as a current liability at
that date, reflecting the monthly payments of $200,000 in respect of the Term
Loan required to be made in fiscal year 2001 under the February 11, 2000
amendment to the Loan Agreement. Although the Company cannot make future
borrowings under the Revolving Loan Facility, management believes that the
Company's existing cash position and internally generated cash flow will satisfy
its cash requirements for fiscal 2001. While management believes cash generated
from operations will be sufficient to meet its cash requirements, to the extent
that the Company is required to seek additional external financing in the form
of a revised or replacement credit facility, equity or debt, there can be no
assurance that the Company will be able to obtain such additional funding to
satisfy its cash requirements for fiscal 2001 or as subsequently required under
the Loan Agreement.
The $1,581,000 decrease in the Company's cash and cash equivalents at March
31, 2000 resulted primarily from the Company's repayment of the Term Loan and
purchase of fixed assets, offset by the total of net cash provided by operating
activities and the proceeds from the sale of common stock.
Net cash provided by operating activities during Fiscal 2000 was
$1,148,000, due principally to a decrease of $5,373,000 in unbilled contracts in
progress and a decrease of $1,246,000 in prepaid taxes which amounts were offset
by a net loss of $874,000, a decrease in deferred income taxes of $624,000, an
increase in accounts receivable of $2,377,000, a decrease in accounts payable of
$1,048,000, a decrease of $1,076,000 in accrued job costs and a net decrease of
$1,003,000 in other operating assets and liabilities. In comparison, net cash
provided by operating activities in Fiscal 1999 was $127,000 which was
principally derived from net income of $1,339,000, deferred income taxes of
$542,000, an increase in deferred revenue of $1,525,000 and an increase of
$1,682,000 in accounts payable and accrued liabilities which amounts were offset
by an increase of $667,000 in accounts receivable, an increase of $4,253,000 in
unbilled contracts in progress, an increase of $1,050,000 in prepaid taxes and a
net change of $30,000 in other operating assets and liabilities.
For Fiscal 2000, net cash used in investing activities consisted solely of
$659,000 used for the purchase of fixed assets. In comparison, for Fiscal 1999,
net cash used in investing activities amounted to $1,904,000 of which $1,277,000
was used in connection with the U.S. Concepts Acquisition and $627,000 was used
for the purchase of fixed assets.
For Fiscal 2000, financing activities used net cash of $2,070,000 resulting
from the repayment of borrowings and payment of related refinancing costs
totaling $3,073,000 offset by the receipt of $1,003,000 from the proceeds from
the sale of common stock and exercise of stock options. For Fiscal 1999, net
cash from financing activities of $3,006,000 was provided by the proceeds of
borrowings and exercise of stock options.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to
changes in interest rates primarily from its investment of available cash
balances in money market funds with portfolios of investment grade corporate and
U.S. government securities and, secondarily, from its Long-Term debt
arrangements. Under its current policies, the Company does not use interest rate
derivative instruments to manage exposure to interest rate changes. See note 5
to "Notes to Consolidated Financial Statements -- Long Term Debt."
16
<PAGE> 18
RECENT ACCOUNTING DEVELOPMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133." SFAS 137 amends SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," which was issued in June 1998 and was to be effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS 137
defers the effective date of SFAS 133 to all fiscal quarters of fiscal years
beginning after June 15, 2000. Earlier application is permitted. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measures
those instruments at fair value. The Company does not believe that the
implementation of SFAS 133 will have a material effect on its financial position
or results of operations.
On December 3, 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 -- "Revenue Recognition in Financial
Statements" (SAB No. 101). SAB No. 101 provides the SEC staff's views in
applying generally accepted accounting principles to revenue recognition in the
financial statements. SAB 101A, which amends the implementation date for SAB
101, requires registrants with a fiscal year that begins between December 16,
1999 and March 15, 2000 to adopt the accounting guidance contained therein by no
later than the second fiscal quarter of the fiscal year beginning after December
15, 1999. The Company is currently assessing the financial impact of complying
with SAB No. 101 and has not yet determined whether applying the accounting
guidance of SAB 101 will have a material effect on its financial position or
results of operations.
OTHER MATTERS
Year 2000 issues relate to the potential for system and processing failures
of date related data as a result of computer controlled systems using two digits
rather than four to define the applicable year. The result could be system
failure or miscalculations which could cause disruptions to operations. As a
result of the Company's assessment and preparation of its computer systems in
anticipation of Year 2000 issues, the Company has not experienced any
significant interruptions in its operations or in its financial or non-financial
activities resulting from Year 2000 issues. Incremental costs to modify or
upgrade the Company's systems for Year 2000 compliance have not been material.
As the Year 2000 progresses, the Company will continue to monitor its systems
for potential Year 2000 issues.
To date, the Company has not been adversely affected by the failure of
third parties, either customers or vendors, with whom it has dealings to
adequately address their Year 2000 issues. The Company's computer systems are
not interdependent with the computer systems of its vendors and others with
which the Company transacts business. The Company has not had to formalize
contingency plans to address the failure of its or other third parties systems.
However, in the event any such Year 2000 issue failure were to materialize,
there can be no assurance that the implementation of such plans will mitigate in
whole or in part the primary business risks of the Company which would include,
but not be limited to, delays in implementing customer marketing programs, lost
customers and increased operating costs.
17
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of CoActive Marketing
Group, Inc.
Independent Auditors' Report.............................. 19
Consolidated Balance Sheets as of March 31, 2000 and
1999................................................... 20
Consolidated Statements of Operations for the years ended
March 31, 2000, 1999 and 1998.......................... 21
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 2000, 1999 and 1998.............. 22
Consolidated Statements of Cash Flows for the years ended
March 31, 2000, 1999 and 1998.......................... 23
Notes to Consolidated Financial Statements................ 24
</TABLE>
18
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CoActive Marketing Group, Inc.
We have audited the consolidated financial statements of CoActive Marketing
Group, Inc. (formerly Inmark Enterprises, Inc.) and subsidiaries, as listed in
the accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CoActive
Marketing Group, Inc. and subsidiaries as of March 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 2000, in conformity with generally accepted
accounting principles.
KPMG LLP
Melville, New York
May 15, 2000, except as to
note 5, which is as of
June 26, 2000
19
<PAGE> 21
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 1,106,823 2,687,575
Accounts receivable......................................... 9,420,042 7,042,640
Unbilled contracts in progress.............................. 4,164,550 9,537,540
Prepaid taxes............................................... 256,088 1,502,431
Prepaid expenses and other current assets................... 711,111 376,593
----------- ----------
Total current assets........................................ 15,658,614 21,146,779
----------- ----------
Furniture, fixtures and equipment, at cost.................. 2,479,868 1,820,479
Less accumulated depreciation............................... 928,998 453,341
----------- ----------
1,550,870 1,367,138
----------- ----------
Notes receivable from officer............................... 225,000 225,000
Goodwill, net of amortization of $2,765,157 and
$1,744,155................................................ 18,527,928 19,548,929
Deferred financing costs, net of amortization of $59,414 and
$24,900................................................... 122,767 99,600
Other assets................................................ 111,431 64,997
----------- ----------
Total assets................................................ $36,196,610 42,452,443
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 2,451,104 3,499,388
Deferred revenue............................................ 2,901,919 3,096,698
Accrued job costs........................................... 7,766,087 8,841,958
Accrued compensation........................................ 112,538 320,273
Other accrued liabilities................................... 771,355 991,137
Deferred taxes payable...................................... 2,279 625,884
Notes payable bank -- current............................... 2,400,000 --
Subordinated notes payable -- current....................... 925,000 625,000
----------- ----------
Total current liabilities................................... 17,330,282 18,000,338
Notes payable bank -- long term............................. 4,910,000 10,000,000
Subordinated notes payable -- long term..................... 1,250,000 1,875,000
----------- ----------
Total liabilities........................................... 23,490,282 29,875,338
----------- ----------
Stockholders' equity:
Class A convertible preferred stock, par value $.001;
authorized 650,000 shares; none issued and outstanding.... -- --
Class B convertible preferred stock, par value $.001;
authorized 700,000 shares; none issued and outstanding.... -- --
Preferred stock, undesignated; authorized 3,650,000 Shares;
none issued and outstanding............................... -- --
Common stock, par value $.001; authorized 25,000,000 shares;
issued and outstanding 5,015,981 shares at March 31, 2000
and 4,513,481 shares at March 31, 1999.................... 5,016 4,513
Additional paid-in capital.................................. 6,699,880 5,697,458
Retained earnings........................................... 6,001,432 6,875,134
----------- ----------
Total stockholders' equity.................................. 12,706,328 12,577,105
----------- ----------
Total liabilities and stockholders' equity.................. $36,196,610 42,452,443
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 22
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2000, 1999, 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- ---------- ----------
<S> <C> <C> <C>
Sales................................................. $40,584,959 38,781,136 25,965,780
Direct expenses....................................... 29,176,364 26,311,235 17,562,417
----------- ---------- ----------
Gross profit.......................................... 11,408,595 12,469,901 8,403,363
----------- ---------- ----------
Salaries.............................................. 5,369,577 5,084,098 3,150,751
Selling, general and administrative expense........... 6,604,124 4,436,934 1,826,278
----------- ---------- ----------
Total operating expenses.............................. 11,973,701 9,521,032 4,977,029
----------- ---------- ----------
Operating income (loss)............................... (565,106) 2,948,869 3,426,334
Interest income (expense), net........................ (817,370) (717,969) 153,111
----------- ---------- ----------
Income (loss) before income taxes..................... (1,382,476) 2,230,900 3,579,445
Provision for income taxes (benefit).................. (508,774) 892,361 1,300,000
----------- ---------- ----------
Net income (loss)..................................... $ (873,702) 1,338,539 2,279,445
=========== ========== ==========
Net income (loss) per share:
Basic................................................. $ (.19) .30 .63
=========== ========== ==========
Diluted............................................... $ (.19) .24 .50
=========== ========== ==========
Weighted average number of shares outstanding:
Basic................................................. 4,598,476 4,487,763 3,590,935
=========== ========== ==========
Diluted............................................... 4,598,476 5,671,702 4,587,106
=========== ========== ==========
Reconciliation of weighted average shares used for
basic and diluted computation is as follows:
Weighted average shares -- Basic...................... 4,598,476 4,487,763 3,590,935
Dilutive effect of options and warrants............... -- 1,183,939 996,171
----------- ---------- ----------
Weighted average shares -- Diluted.................... 4,598,476 5,671,702 4,587,106
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 23
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK
PAR VALUE $.001 ADDITIONAL TOTAL
------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1997......... 3,544,689 $3,544 $1,276,687 $3,257,150 $ 4,537,381
Exercise of warrants and
options....................... 223,906 224 180,814 -- 181,038
Acquisition of Optimum
Group, Inc. .................. 706,731 707 3,674,395 -- 3,675,102
Net income...................... -- -- -- 2,279,445 2,279,445
--------- ------ ---------- ---------- -----------
Balance, March 31, 1998......... 4,475,326 4,475 5,131,896 5,536,595 10,672,966
Exercise of warrants and
options....................... 8,155 8 5,592 -- 5,600
Acquisition of U.S. Concepts,
Inc........................... 30,000 30 249,970 -- 250,000
Tax benefit from exercised
options....................... -- -- 310,000 -- 310,000
Net income...................... -- -- -- 1,338,539 1,338,539
--------- ------ ---------- ---------- -----------
Balance, March 31, 1999......... 4,513,481 4,513 5,697,458 6,875,134 12,577,105
Exercise of options............. 2,500 3 2,922 -- 2,925
Sale of common stock............ 500,000 500 999,500 -- 1,000,000
Net loss........................ -- -- -- (873,702) (873,702)
--------- ------ ---------- ---------- -----------
Balance, March 31, 2000......... 5,015,981 $5,016 $6,699,880 $6,001,432 $12,706,328
========= ====== ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 24
COACTIVE MARKETING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $ (873,702) 1,338,539 2,279,445
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization....................... 1,531,172 1,179,497 362,658
Deferred income taxes............................... (623,605) 542,442 998,691
Changes in operating assets and liabilities, net of
effects of acquisitions:
Increase in accounts receivable.................. (2,377,402) (667,014) (846,606)
Decrease (increase) in unbilled contracts in
progress....................................... 5,372,990 (4,252,854) (5,284,686)
Increase in notes receivable -- officer.......... -- -- (25,000)
(Increase) decrease in prepaid expenses and other
assets......................................... (380,952) (171,337) 144,592
Decrease (increase) in prepaid taxes............. 1,246,343 (1,050,140) (452,291)
(Decrease) increase in accounts payable.......... (1,048,284) 226,486 221,451
(Decrease) increase in accrued job costs......... (1,075,871) 1,148,436 3,841,528
(Decrease) increase in other accrued
liabilities.................................... (219,782) 396,435 (18,113)
(Decrease) increase in deferred revenue.......... (194,779) 1,524,909 642,223
(Decrease) increase in accrued compensation...... (207,735) 5,397 69,347
Decrease in accrued taxes payable................ -- (94,260) (133)
----------- ---------- ----------
Net cash provided by operating activities............. 1,148,393 126,536 1,933,106
----------- ---------- ----------
Cash flows from investing activities:
Purchases of fixed assets........................... (659,389) (627,284) (50,554)
Acquisitions, net of cash acquired*................. -- (1,277,186) (9,191,932)
----------- ---------- ----------
Net cash used in investing activities................. (659,389) (1,904,470) (9,242,486)
----------- ---------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options and
warrants......................................... 2,925 5,600 181,038
Financing costs..................................... (57,681) -- --
Proceeds from sale of common stock.................. 1,000,000 -- --
(Repayment of) proceeds from borrowings............. (3,015,000) 3,000,000 7,000,000
Financing costs related to purchase of Optimum
Group, Inc....................................... -- -- (124,500)
----------- ---------- ----------
Net cash (used in) provided by financing activities... (2,069,756) 3,005,600 7,056,538
----------- ---------- ----------
Net (decrease) increase in cash....................... (1,580,752) 1,227,666 (252,842)
Cash and cash equivalents at beginning of period...... 2,687,575 1,459,909 1,712,751
----------- ---------- ----------
Cash and cash equivalents at end of period............ $ 1,106,823 2,687,575 1,459,909
=========== ========== ==========
Supplemental disclosures of cash flow information:
Interest paid during the period....................... $ 896,312 783,669 --
=========== ========== ==========
Income taxes (refunded) paid during the period........ $(1,168,306) 989,387 768,457
=========== ========== ==========
Supplemental schedule of noncash investing activities:
*Details of acquisitions
Fair value of assets acquired....................... $ -- 1,127,051 2,775,467
Cost in excess of net assets of companies
acquired......................................... -- 3,881,214 14,580,852
Liabilities assumed................................. -- (3,347,969) (1,883,775)
Stock and note issued............................... -- (250,000) (6,175,003)
----------- ---------- ----------
Cash paid........................................... -- 1,410,296 9,297,541
Less: cash acquired................................. -- (133,110) (105,609)
----------- ---------- ----------
Net cash paid for acquisitions...................... $ -- 1,277,186 9,191,932
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 25
COACTIVE MARKETING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
(1) ORGANIZATION AND NATURE OF BUSINESS
CoActive Marketing Group, Inc. (formerly Inmark Enterprises, Inc.) ("the
Company") is a full service marketing, sales promotion and interactive new media
services and e-commerce provider organization which designs, develops and
implements turnkey customized national, regional and local consumer and trade
promotion programs primarily for consumer product client companies. The
Company's programs are designed to enhance the value of its clients' budgeted
expenditures and achieve, in an objectively measurable way, its client's
specific marketing and promotional objectives.
At March 31, 2000, the Company had negative working capital of
approximately $1,672,000 resulting primarily from the acceleration of the
payment terms of the Company's bank loans and the net loss incurred in fiscal
2000. In addition to the $2,400,000 of loan payments due in fiscal 2001 to the
bank, the remaining loan balance of $4,910,000 is due in July 2001 (see note 5).
While there can be no assurance that additional funding will be obtained,
management is currently discussing alternative financing plans with lenders and
others to meet its cash needs. For fiscal 2001, management believes cash
generated from operations will be sufficient to meet its cash requirements.
Acquisition of U.S. Concepts, Inc.
On December 29, 1998, a wholly-owned subsidiary of the Company, U.S.
Concepts, Inc., a Delaware corporation, ("U.S. Concepts") purchased
substantially all of the assets and business from and assumed certain of the
liabilities of Murphy Liquidating Corporation formerly known as U.S. Concepts,
Inc., a New York corporation (the "U.S. Concepts Acquisition") in a transaction
accounted for as a purchase. The purchase price was $1,660,000 and consisted of
cash of $1,410,000, including expenses, and 30,000 shares of common stock of the
Company valued at $250,000. The purchase price could increase with payments of
up to an additional $2,500,000 (50% of which, at the option of the recipient,
may be paid in shares of the Company's common stock) to the extent that U.S.
Concepts achieves specified pre-tax earnings during the two year period ending
December 31, 2000 and cumulatively during the four year period subsequent to
December 31, 1998. The cash portion of the purchase price was financed with
proceeds from the Company's remaining unused bank revolving loan credit
facility. The U.S. Concepts Acquisition has been accounted for as a purchase
whereby the excess of the purchase price, including costs of the acquisition, of
$3,881,000 over the fair value of assets acquired less liabilities assumed has
been classified as goodwill and will be amortized on a straight-line basis over
a twenty-five year period.
Acquisition of Optimum Group, Inc.
On March 31, 1998, an indirect wholly-owned subsidiary of the Company,
Optimum Group, Inc ("Optimum") purchased all of the assets and business from and
assumed substantially all of the liabilities of OG Holding Corporation (the
"Optimum Acquisition") in a transaction accounted for as a purchase. The
purchase price was $15,743,000 and consisted of cash of $9,298,000, including
expenses, a subordinated note in the principal amount of $2,500,000 with
interest at the rate of 9% per annum and 565,385 shares of common stock of the
Company valued at $3,675,000. The cash portion of the purchase price included
$7,000,000 provided pursuant to a loan agreement between the Company and a bank
and $1,700,000 provided from the Company's cash balances. Pursuant to the
purchase agreement between Optimum and OG Holding Corporation, both the 565,385
shares of the Company's common stock and the $2,500,000 subordinated note have
been put in escrow as collateral for the Company should the Company be entitled
to indemnification pursuant to the purchase agreement. The Optimum Acquisition
has been accounted for as a purchase whereby the excess of the purchase price,
including the costs of the acquisition, of $14,581,000 over the fair value of
assets acquired less liabilities assumed has been classified as goodwill and
will be amortized over a twenty-five
24
<PAGE> 26
COACTIVE MARKETING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999 -- (CONTINUED)
year period. Deferred financing costs incurred in connection with the loan
agreement in the amount of $124,500 are being amortized over the term of the
loan.
Pro forma results of operations of the Company had the acquisition of U.S.
Concepts occurred on April 1, 1998 would be as follows:
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
Sales....................................................... $51,931,686
Net income.................................................. 1,473,745
Basic earnings per share.................................... .33
Diluted earnings per share.................................. .26
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) Revenue Recognition
The Company recognizes revenue on the percentage-of-completion method,
measured by the cost for services expended to date compared to the total
services required to be performed on the respective project. Costs associated
with the fulfillment of projects are accrued and recognized proportionately to
the related revenue in order to ensure a matching of revenue and expenses in the
proper period. Provision for anticipated losses on uncompleted projects are made
in the period in which such losses are determined.
(c) Cash Equivalents
Investments with original maturities of three months or less at the time of
purchase are considered cash equivalents.
(d) Long-Lived Assets
Furniture, fixtures and equipment are stated at cost. Depreciation is
computed by the straight-line method over the estimated useful lives of the
assets, which are three to ten years. Goodwill represents the excess of cost
over the fair value of net assets of businesses acquired and is amortized over
periods ranging from ten years to twenty-five years on a straight-line basis.
The period of amortization of long-lived assets is evaluated at least annually
to determine whether events and circumstances warrant revised estimates of
useful lives or adjustment to the carrying value. This evaluation considers,
among other factors, expected cash flows and profits of the business to which
the asset relates. Based upon the periodic analysis, long-lived assets are
written down if it appears that future profits or cash flows will be
insufficient to recover such asset.
(e) Earnings Per Share
The computation of basic earnings per common share is based upon the
weighted average number of common shares outstanding during the year and the
computation of diluted earnings per common and common equivalent share is based
upon the weighted average number of common shares outstanding during the year,
plus the assumed exercise of stock options and warrants, less the number of
treasury shares assumed to be purchased from the proceeds of such exercises
using the average market price of the Company's common stock. For the fiscal
year ended March 31, 2000, 2,244,238 stock options and warrants have been
excluded from the calculation of diluted earnings as their inclusion would be
antidilutive. For the fiscal year
25
<PAGE> 27
COACTIVE MARKETING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999 -- (CONTINUED)
ended March 31, 1999, the computation of weighted average number of common
shares outstanding for the year included a ninety-three day inclusion of the
shares of common stock issued for the U.S. Concepts Acquisition. All earnings
per share calculations and share information have been adjusted for the
five-for-four stock dividend paid June 15, 1998.
(f) Income Taxes
The Company uses the asset and liability method of accounting for income
taxes under which deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(g) Fair Value of Financial Instruments
The carrying value of financial instruments including cash and cash
equivalents, restricted cash, contracts and other receivables, and notes and
accounts payable approximate estimated market values due to short maturities and
or interest rates that approximate current rates.
(h) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period, to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
(i) Reclassifications
Certain reclassifications have been made to amounts reported in the prior
year to conform to the 2000 presentation.
(j) Reporting Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which requires companies to report all changes in equity during a period, except
those resulting from investment by owners and distribution to owners, for the
period in which they are recognized. Comprehensive income is the total of net
income and all other nonowner changes in equity (or other comprehensive income)
such as unrealized gains/losses on securities classified as available-for-sale,
foreign currency translation adjustments and minimum pension liability
adjustments.
Comprehensive and other comprehensive income must be reported on the face
of annual financial statements or in the case of interim reporting, the footnote
approach may be utilized. The Company's operations did not give rise to items
includible in comprehensive income which were not already included in net
income. Accordingly, the Company's comprehensive income is the same as its net
income for all periods presented.
26
<PAGE> 28
COACTIVE MARKETING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999 -- (CONTINUED)
(3) NOTES RECEIVABLE FROM OFFICER
The notes receivable from officer totaling $225,000 at March 31, 2000 and
1999 consist of a $200,000 Promissory Note dated January 10, 1996 and a $25,000
Promissory Note dated April 7, 1997 issued to the Company by one of its officers
in exchange for loans from the Company. The Promissory Notes provide for
interest at an annual rate of 10% with the principal and accrued interest on the
notes originally payable on January 10, 1998 and April 7, 1999, respectively.
The Company has agreed to extend the payment date of principal and accrued
interest on the notes to April 7, 2001. The Promissory Notes are secured by a
Pledge Agreement which provides the Company with collateral security consisting
of a first lien and security interest in 112,851 shares of the Company's common
stock owned by the officer.
(4) LEASES
The Company has several noncancellable operating leases, primarily for
property, that expire within ten years. Rent expense for the years ended March
31, 2000, 1999 and 1998 amounted to $574,331, $456,312 and $118,092,
respectively. Future noncancellable minimum lease payments under all of the
leases as of March 31, 2000 are as follows:
<TABLE>
<S> <C>
Year ending March 31,
2001............................................. $ 906,693
2002............................................. 765,275
2003............................................. 599,489
2004............................................. 493,217
2005............................................. 494,432
Thereafter....................................... 1,938,002
----------
$5,197,108
==========
</TABLE>
(5) DEBT
Notes Payable, Bank
The Company has a loan agreement with its principal bank which initially
provided for a five year revolving line of credit in the amount of $5,000,000,
expiring on March 31, 2003, and a term loan in the amount of $5,000,000,
expiring on March 31, 2003. Borrowings under the revolving line of credit and
the term loan are evidenced by promissory notes and are secured by all of the
Company's assets. In addition, the Company, on a quarterly basis, pays interest
on outstanding amounts, at the option of the Company, based on various formulas
which relate to the prime rate or other prescribed rates (10.3% and 6.97% at
March 31, 2000 and 1999, respectively). The loan agreement contains certain
covenants, in addition to the calculation of the Company's total leverage ratio,
which among other things, limits the distribution of dividends and other
payments. On February 11, 2000, the loan agreement was amended to (i) eliminate
the revolving feature of the revolving line of credit; (ii) have interest
payments due on a monthly basis at a rate of 2% above the bank's prime lending
rate; (iii) commencing in April 2000, have monthly principal payments on the
term note in the amount of $200,000 be due and payable; and (iv) establish April
8, 2001 as the final maturity date of both the revolving credit and term loans.
At March 31, 2000 and 1999, respectively, the Company was not in compliance with
certain covenants in the loan agreement. On June 15, 2000 and June 30, 1999,
respectively, the Company and the bank executed an amendment to the loan
agreement pursuant to which the bank waived the Company's non-compliance with
respect to such financial covenants as of March 31, 2000 and 1999, respectively,
and the financial covenants were modified. The June 15, 2000 amendment also
increased monthly interest payments to 3% above the bank's prime lending rate.
On June 26, 2000, the Loan Agreement
27
<PAGE> 29
COACTIVE MARKETING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999 -- (CONTINUED)
was further amended to extend the final maturity date of the loans outstanding
under the Loan Agreement to July 8, 2001. Management believes, based on such
modifications, that the Company will meet the covenants. However, there can be
no assurance that the Company will be able to satisfy, on an ongoing basis, the
amended financial covenants.
Total debt as of March 31, 2000 and 1999 is summarized as follows:
<TABLE>
<CAPTION>
2000 1999
---------- -----------
<S> <C> <C>
Term and revolving note payables to bank in monthly
installments with a final payment of interest and
principal outstanding on July 8, 2001.................... $7,310,000 $10,000,000
9% subordinated note payable to OG Holding Corporation with
interest payable in quarterly installments and principal
payments in annual installments of $625,000 commencing
March 31, 2000 through March 31, 2003.................... 2,175,000 2,500,000
---------- -----------
Total debt............................................... 9,485,000 12,500,000
Less current portion..................................... 3,325,000 625,000
---------- -----------
Total long-term debt..................................... $6,160,000 $11,875,000
========== ===========
</TABLE>
Long term maturities and payment requirements on debt are as follows:
<TABLE>
<CAPTION>
NOTES PAYABLE SUBORDINATED
BANK NOTE
------------- ------------
<S> <C> <C>
2002....................................................... $4,910,000 $ 625,000
2003....................................................... -- 625,000
---------- ----------
$4,910,000 $1,250,000
========== ==========
</TABLE>
(6) STOCKHOLDERS' EQUITY
(a) Common Stock Issuance
On January 31, 2000, the Company, in a private placement for $1,000,000,
sold 500,000 newly issued shares of its common stock together with five year
warrants to purchase an additional 250,000 shares of its common stock at an
exercise price of $2.50 per share. The Company used $500,000 of the proceeds to
reduce its bank debt.
(b) Common Stock Reserved for Issuance
(i) Stock Options
Under the Company's 1992 Stock Option Plan (the Plan), employees of the
Company and its affiliates, and members of the Board of Directors, may be
granted options to purchase shares of common stock of the Company. Options
granted under the Plan may either be intended to qualify as incentive stock
options under the Internal Revenue Code of 1986, or may be non-qualified
options. Grants under the Plan are awarded by a committee of the Board of
Directors, and are exercisable over periods not exceeding ten years from date of
grant. The option price for incentive stock options granted under the Plan must
be at least 100% of the fair market value of the shares on the date of grant,
while the price for non-qualified options granted to employees and employee
directors is determined by the committee of the Board of Directors. The Plan was
amended on May 11, 1999 to increase the maximum number of shares of common stock
for which options may be granted to 1,500,000 shares.
28
<PAGE> 30
COACTIVE MARKETING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999 -- (CONTINUED)
On May 11, 1999, the Company also established the 1997 Executive Officer
Stock Option Plan (the 1997 Plan), pursuant to which (i) a maximum of 375,000
non-qualified stock options may be granted to purchase shares of common stock,
(ii) three officers of the Company were each granted 125,000 non-qualified stock
options to purchase shares of common stock in exchange for the surrender by each
of their incentive stock options to purchase 125,000 shares of common stock
issued on May 2, 1997 pursuant to the Company's 1992 Stock Option Plan and (iii)
the exercise price and other terms and conditions of the options granted are
identical to those of the options surrendered.
Changes in options outstanding under the Plan and the 1997 Plan, during
each of the years ended March 31, 2000, 1999 and 1998, and options exercisable
and shares reserved for issuance at March 31, 2000 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE PRICE
PER SHARE OUTSTANDING EXERCISABLE
------------- ----------- -----------
<S> <C> <C> <C>
Balance at March 31, 1997........................ $1.51 861,250 455,000
Became exercisable............................... $1.68 -- 268,749
Granted(A)....................................... $5.91 627,250 90,208
Exercised........................................ $1.43 (5,156) (5,156)
Canceled......................................... $2.84 (107,594) (104,531)
----- --------- ---------
Balance at March 31, 1998........................ $2.88 1,375,750 704,270
Became exercisable............................... $3.27 -- 344,948
Granted(B)....................................... $8.88 171,850 50,508
Exercised........................................ $1.12 (8,155) (8,155)
Canceled......................................... $8.52 (6,595) (3,137)
----- --------- ---------
Balance at March 31, 1999........................ $3.54 1,532,850 1,088,434
Became exercisable............................... $5.29 -- 240,533
Granted(C)....................................... $3.02 100,250 48,124
Exercised........................................ $1.17 (2,500) (2,500)
Canceled......................................... $7.11 (28,726) (19,236)
----- --------- ---------
Balance at March 31, 2000........................ $3.45 1,601,874 1,355,355
===== ========= =========
</TABLE>
---------------
(A) Represents 402,250 options, inclusive of 375,000 1997 Plan options, granted
at an exercise price of $4.00, 12,500 options granted at an exercise price
of $4.30 and 212,500 options granted at an exercise price of $5.60 per
share. Of the options granted, 90,208 were immediately exercisable and the
balance exercisable in either one, two or three year annual installments.
(B) Represents options granted to purchase 13,750 shares at an exercise price of
$10.00, 62,500 options granted at an exercise price of $9.60 per share, and
an aggregate of 95,600 options granted to employees of U.S. Concepts at an
exercise price of $8.25. Of the options granted, 50,508 were immediately
exercisable and the balance exercisable in one or two annual installments.
(C) Represents options granted to purchase 56,500 shares at an exercise price of
$3.00, 15,000 shares at an exercise price of $2.94, 13,750 shares at an
exercise price of $3.38 and an aggregate of 15,000 shares consisting of
5,000 shares at $3.25, $2.88 and $2.31, respectively. Of the options
granted, 48,124 were immediately exercisable and the balance exercisable in
one, two or three annual installments.
29
<PAGE> 31
COACTIVE MARKETING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999 -- (CONTINUED)
(ii) Warrants
At March 31, 2000, outstanding warrants to purchase shares of the Company's
common stock are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE PRICE
PER SHARE OUTSTANDING EXERCISABLE
------------- ----------- -----------
<S> <C> <C> <C>
Balance at March 31, 1997........................ $0.82 536,114 536,114
Granted(A)....................................... $4.00 75,000 75,000
Exercised........................................ $1.00 (218,750) (218,750)
----- -------- --------
Balance at March 31, 1998 and 1999............... $1.43 392,364 392,364
Granted(B)....................................... $2.50 250,000 250,000
----- -------- --------
Balance at March 31, 2000........................ $1.85 642,364 642,364
===== ======== ========
</TABLE>
---------------
(A) In fiscal 1998, concurrent with the Company entering into a financial
advisory services agreement with an investment banking firm with which a
director is associated, the Company issued immediately exercisable warrants
to purchase 37,500 shares of the Company's common stock at an exercise price
of $4.00 to each of the new director and another associate of the investment
banking firm.
(B) In January 2000, in connection with the Company's sale of common stock, the
Company issued immediately exercisable warrants to purchase 250,000 shares
of the Company's common stock at an exercise price of $2.50.
At March 31, 2000, outstanding warrants in the amount of 642,364 are
exercisable over the next six years.
The Company applies APB 25 and related interpretations in accounting for
its stock option plan. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options and warrants under SFAS No.
123, Accounting for Stock-Based Compensation, the Company's net (loss) income
and net (loss) income per share for fiscal 2000, 1999 and 1998 would have been
as follows:
<TABLE>
<CAPTION>
FISCAL 2000 FISCAL 1999 FISCAL 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net (loss) income:
As reported................................. $ (873,702) $1,338,539 $2,279,000
Pro forma................................... (1,382,339) 887,298 2,023,000
Basic (loss) income per share:
As reported................................. $ (0.19) $ 0.30 $ 0.63
Pro forma................................... (0.30) 0.20 0.56
Diluted (loss) income per share:
As reported................................. $ (0.19) $ 0.24 $ 0.50
Pro forma................................... (0.30) 0.15 0.44
</TABLE>
However, such pro forma net income reflects only options and warrants
granted since April 1, 1995. Therefore, the full impact of calculating
compensation cost for stock options and warrants under SFAS No. 123 is not
reflected in the pro forma net income amounts for fiscal 2000, fiscal 1999 and
fiscal 1998 discussed above because compensation cost is reflected over the
options' and warrants' vesting periods of up to 10 years and compensation cost
of options and warrants granted prior to April 1, 1995 is not considered.
30
<PAGE> 32
COACTIVE MARKETING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999 -- (CONTINUED)
The options outstanding as of March 31, 2000 are summarized in ranges as
follows:
<TABLE>
<CAPTION>
RANGE OF EXERCISE WEIGHTED AVERAGE NUMBER OF OPTIONS WEIGHTED AVERAGE
PRICE EXERCISE PRICE OUTSTANDING REMAINING LIFE
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
$1.12- 4.00 $2.30 1,174,500 6.12
$4.01- 7.00 $5.34 280,333 2.76
$7.01-10.00 $8.88 147,042 3.93
</TABLE>
The per share weighted-average fair value of stock options and warrants
granted on their respective date of grant using the modified Black-Scholes
option-pricing model and their related weighted-average assumptions are as
follows:
<TABLE>
<CAPTION>
FISCAL 2000 FISCAL 1999 FISCAL 1998
----------- ----------- -----------
<S> <C> <C> <C>
Risk-free interest rate........................... 5.00% 5.07% 6.41%
Expected life -- years............................ 5.27 5.16 6.07
Expected volatility............................... 118% 82% 35%
Expected dividend yield........................... 0% 0% 0%
Fair value........................................ $2.49 $6.15 $2.04
</TABLE>
(7) INCOME TAXES
The Company and its subsidiaries, which are wholly-owned, file consolidated
Federal income tax returns.
The components of income tax expense (benefit) for the years ended March
31, 2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
-------------------- ------------------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
Current:
State and local........ $113,159 $83,785 $129,954
Federal................ 1,672 114,831 17,445 101,230 256,139 386,093
-------- ------- --------
Deferred:
Federal and State...... (623,605) 791,131 913,907
--------- -------- ----------
$(508,774) $892,361 $1,300,000
========= ======== ==========
</TABLE>
The differences between the provision (benefit) for income taxes computed
at the statutory rate and the reported amount of tax expense (benefit)
attributable to (loss) income before income tax for the years ended March 31,
2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
RATE
---------------------
2000 1999 1998
----- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax................................ (34.0) 34.0% 34.0%
State and local taxes, net of Federal benefit............... (4.2) 5.9 5.1
Other....................................................... 1.4 0.1 (2.8)
----- ---- ----
Effective tax rate.......................................... (36.8)% 40.0% 36.3%
===== ==== ====
</TABLE>
31
<PAGE> 33
COACTIVE MARKETING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999 -- (CONTINUED)
The tax effects of temporary differences between the financial reporting
and tax basis of assets and liabilities that are included in net deferred tax
assets are as follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
--------- ----------
<S> <C> <C>
Deferred tax assets (liabilities):
Goodwill, principally due to differences in amortization.... $(159,339) (23,486)
Net operating loss carryforwards............................ 563,718 550,582
Unbilled revenue............................................ (382,478) (1,124,037)
Other....................................................... (24,180) (28,943)
--------- ----------
Net deferred tax asset (liability).......................... $ (2,279) (625,884)
========= ==========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion, or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment.
Current taxes payable at March 31, 1999 were reduced by approximately
$310,000 to reflect the Federal tax benefit relating to compensation expense for
non-qualified stock options and, accordingly, additional paid-in capital was
increased by this amount.
(8) SIGNIFICANT CUSTOMERS
During the year ended March 31, 2000, the Company had one client which
accounted for approximately 19.9% of its revenues. During the year ended March
31, 1999, the Company had another client which, before and after giving effect
to the U.S. Concepts Acquisition, accounted for approximately 11.6% and 21.2%,
respectively, of its revenues. During the year ended March 31, 1998, the Company
had one other client which, before and after giving effect to the Optimum
Acquisition, accounted for approximately 34.4% and 24.5%, respectively, of its
revenues.
(9) EMPLOYEE BENEFIT PLAN
The Company has a savings plan available to substantially all salaried
employees which is intended to qualify as a deferred compensation plan under
Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). Pursuant to the
401(k) Plan, employees may contribute up to 15% of their eligible compensation
not in excess of $10,000 and the Company at its sole discretion may from time to
time make a discretionary matching contribution as it deems advisable. For the
years ended March 31, 2000, 1999 and 1998, the Company has charged approximately
$349,000, $246,000 and $66,000 to expense as a matching employer contribution.
(10) COMMITMENTS
Employment Agreements
The Company has entered into four year employment agreements with three of
its officers which at March 31, 2000 provide for base salaries in the aggregate
amount of $750,000 per year through September 29, 2001 and a covenant not to
compete. In connection with the Optimum Acquisition, Optimum has entered into
four year employment contracts with seven of its management personnel which at
March 31, 2000 provide for annual base salaries in the aggregate amount of
$1,042,000 and a covenant not to compete. In connection with the U.S. Concepts
Acquisition, U.S. Concepts has entered into four year employment contracts with
two of its
32
<PAGE> 34
COACTIVE MARKETING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999 -- (CONTINUED)
management personnel which at March 31, 2000 provide for annual base salaries in
the aggregate amount of $375,000 and a covenant not to compete.
(11) RELATED PARTY TRANSACTION
On January 31, 2000, the Company sold 500,000 newly issued unregistered
shares of the Company's common stock together with five year warrants to
purchase an additional 250,000 shares of the Company's common stock at an
exercise price of $2.50 for an aggregate purchase price of $1,000,000. The
purchasers of such securities included Special Situations Private Equity Fund,
L.P., which purchased approximately 85% of the securities sold in such offering,
and certain affiliates of a director of the Company.
33
<PAGE> 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
The information required to be disclosed by Part III (Items 10, 11, 12 and
13) will be incorporated by reference from the Company's definitive proxy
statement if filed by July 29, 2000 or, if such proxy statement is not filed by
such date, the information required to be disclosed by Part III will be
disclosed by amendment to this Form 10-K prior to July 30, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report.
1. FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Index to Financial Statements............................... 18
Consolidated Financial Statements of CoActive Marketing
Group, Inc.
Independent Auditors' Report........................... 19
Consolidated Balance Sheets as of March 31, 2000 and
1999.................................................. 20
Consolidated Statements of Operations for the years
ended March 31, 2000, 1999 and 1998................... 21
Consolidated Statement of Stockholders' Equity for the
three years ended March 31, 2000...................... 22
Consolidated Statements of Cash Flows for the years
ended March 31, 2000, 1999 and 1998................... 23
Notes to Consolidated Financial Statements............. 24
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES:
No financial statement schedules are provided herein because they are not
required or not applicable or the required information is shown in the
consolidated financial statements or in the notes thereto.
3. EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS.
------- ------------------------
<S> <C>
2.1 Asset Purchase Agreement, dated as of December 8, 1998, by
and among OG Holding Corporation (formerly known as Optimum
Group, Inc.), James H. Ferguson, Michael J. Halloran,
Christina M. Heile, David E. Huddleston, Thomas E.
Lachenman, Thomas L. Wessling, Optimum Group, Inc. (formerly
known as OG Acquisition Corp.) and Inmark Enterprises, Inc.
(incorporated by reference to Exhibit 2.1 to the
Registrant's Report on Form 8-K dated March 31, 1998, File
No. 000-20394, initially filed with the Securities and
Exchange Commission on April 13, 1998).
2.2 Amendment No. 1 to the Asset Purchase Agreement, dated as of
March 31, 1998 (incorporated by reference to Exhibit 2.2 to
the Registrant's Report on Form 8-K dated March 31, 1998,
File No. 000-20394, initially filed with the Securities and
Exchange Commission on April 13, 1998).
2.3 Asset Purchase Agreement, dated as of December 29, 1998, by
and among U.S. Concepts, Inc., a New York corporation, Brian
Murphy, U.S. Concepts, Inc., a Delaware corporation, and
Inmark Enterprises, Inc. (incorporated by reference to Exhibit 2.3 to
the Registrant's Annual Report on 10-K for the fiscal year ended
March 31, 1999, initially filed with the Securities and Exchange
Commission on July 6, 1999).
</TABLE>
34
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS.
------- ------------------------
<S> <C>
3.1 Certificate of Incorporation, as amended, of the Registrant
(incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the three
month period ended September 30, 1999, initially filed with
the Securities and Exchange Commission on November 22,
1999).
3.2 Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrant's Quarterly Report on Form
10-Q for the three month period ended September 30, 1999,
initially filed with the Securities and Exchange Commission
on November 22, 1999).
10.1 Health Image Media, Inc. 1992 Stock Option Plan
(incorporated by reference to Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1, File No.
33-47932, initially filed with the Securities and Exchange
Commission on May 14, 1992).
10.2 Employment Agreement dated September 29, 1995 between
Registrant and John P. Benfield (incorporated by reference
to Exhibit 10.3 to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1996, initially
filed with the Securities and Exchange Commission on July 1,
1996).
10.3 Employment Agreement dated September 29, 1995 between the
Registrant and Donald A. Bernard (incorporated by reference
to Exhibit 10.4 to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1996, initially
filed with the Securities and Exchange Commission on July 1,
1996).
10.4 Employment Agreement dated September 29, 1995 between
Registrant and Paul A. Amershadian (incorporated by
reference to Exhibit 10.5 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1996,
initially filed with the Securities and Exchange Commission
on July 1, 1996).
10.5 Promissory Note and Pledge Agreement dated January 10, 1996
between Inmark Services, Inc. and Paul A. Amershadian
(incorporated by reference to Exhibit 10.6 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1996, initially filed with the Securities
and Exchange Commission on July 1, 1996).
10.6 First Amendment to Employment Agreement dated May 2, 1997
between the Registrant and John P. Benfield (incorporated by
reference to Exhibit 10.7 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1997,
initially filed with the Securities and Exchange Commission
on June 27, 1997).
10.7 First Amendment to Employment Agreement dated May 2, 1997
between the Registrant and Donald A. Bernard (incorporated
by reference to Exhibit 10.8 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31,
1997, initially filed with the Securities and Exchange
Commission on June 27, 1997).
10.8 First Amendment to Employment Agreement dated May 2, 1997
between the Registrant and Paul A. Amershadian (incorporated
by reference to Exhibit 10.9 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31,
1997, initially filed with the Securities and Exchange
Commission on June 27, 1997).
10.9 Promissory Note, dated April 7, 1997, in the principal
amount of $25,000, by Paul A. Amershadian in favor of Inmark
Services, Inc. (incorporated by reference to Exhibit 10.10
to Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1997, initially filed with the
Securities and Exchange Commission on June 27, 1997).
10.10 Amendment to Pledge Agreement, dated as of April 7, 1997,
between Paul A. Amershadian and Inmark Services, Inc.
(incorporated by reference to Exhibit 10.11 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1997, initially filed with the Securities
and Exchange Commission on June 27, 1997).
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS.
------- ------------------------
<S> <C>
10.11 Escrow Agreement, dated as of March 31, 1998 by and among OG
Holding Corporation, formerly known as Optimum Group, Inc.,
Electing Small Business Trust f/b/o James H. Ferguson,
Electing Small Business Trust f/b/o Michael J. Halloran,
Electing Small Business Trust f/b/o Christina M. Heile,
Electing Small Business Trust f/b/o David E. Huddleston,
Electing Small Business Trust f/b/o Thomas E. Lachenman,
Electing Small Business Trust f/b/o Roderick S. Taylor,
Electing Small Business Trust f/b/o Thomas L. Wessling,
Steven Clements, Kimberly Longshore, Terry Steding, Optimum
Group, Inc., formerly known as OG Acquisition Corp., Inmark
Enterprises, Inc., and Kronish, Lieb, Weiner & Hellman LLP
(incorporated by reference to Exhibit 2.3 to the
Registrant's Report on Form 8-K dated March 31, 1998, File
No. 000-20394, initially filed with the Securities and
Exchange Commission on April 13, 1998).
10.12 Loan Agreement, dated as of March 31, 1998, by and among PNC
Bank, National Association, Inmark Enterprises, Inc., Inmark
Services, Inc., and Optimum Group, Inc. (formerly OG
Acquisition Corp.) (incorporated by reference to Exhibit
99.2 to the Registrant's Report on Form 8-K dated March 31,
1998, File No. 000-20394, initially filed with the
Securities and Exchange Commission on April 13, 1998).
10.13 Guaranty, dated as of March 31, 1998, by Inmark Enterprises,
Inc. in favor of PNC Bank, National Association
(incorporated by reference to Exhibit 99.3 to the
Registrant's Report on Form 8-K dated March 31, 1998, File
No. 000-20394, initially filed with the Securities and
Exchange Commission on April 13, 1998).
10.14 Pledge Agreement, dated as of March 31, 1998, by Inmark
Enterprises, Inc., Inmark Services, Inc. and Optimum Group,
Inc. (formerly OG Acquisition Corp.) in favor of PNC Bank,
National Association (incorporated by reference to Exhibit
99.4 to the Registrant's Report on Form 8-K dated March 31,
1998, File No. 000-20394, initially filed with the
Securities and Exchange Commission on April 13, 1998).
10.15 Security Agreement, dated as of March 31, 1998, by Inmark
Enterprises, Inc., Inmark Services, Inc. and Optimum Group,
Inc. (formerly OG Acquisition Corp.) in favor of PNC Bank,
National Association (incorporated by reference to Exhibit
99.5 to the Registrant's Report on Form 8-K dated March 31,
1998, File No. 000-20394, initially filed with the
Securities and Exchange Commission on April 13, 1998).
10.16 First Amendment to Loan Agreement, Security Agreement and
Pledge Agreement, dated as of December 29, 1998, by and
among PNC Bank National Association, Inmark Enterprises,
Inc., U.S. Concepts, Inc., Inmark Services, Inc. and Optimum
Group, Inc. (incorporated by reference to Exhibit 10.16 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1999, initially filed with the
Securities and Exchange Commission on July 6, 1999).
10.17 Second Amendment to Loan Agreement, Security Agreement and
Pledge Agreement, dated as of January 14, 1999, by and among
PNC Bank National Association, Inmark Enterprises, Inc.,
U.S. Concepts, Inc., Inmark Services, Inc. and Optimum
Group, Inc. (incorporated by reference to Exhibit 10.17 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1999, initially filed with the
Securities and Exchange Commission on July 6, 1999).
10.18 Third Amendment to Loan Agreement, Security Agreement and
Pledge Agreement, dated as of June 30, 1999, by and among
PNC Bank National Association, Inmark Enterprises, Inc.,
U.S. Concepts, Inc., Inmark Services, Inc. and Optimum
Group, Inc. (incorporated by reference to Exhibit 10.18 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1999, initially filed with the
Securities and Exchange Commission on July 6, 1999).
10.19 Fourth Amendment to Loan Agreement, Security Agreement and
Pledge Agreement, dated as of November 19,1999, by and among
PNC Bank National Association, CoActive Marketing Group,
Inc., U.S. Concepts, Inc., Inmark Services, Inc. and Optimum
Group, Inc. (incorporated by reference to Exhibit 1 to
Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 29, 1999).
</TABLE>
36
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS.
------- ------------------------
<S> <C>
10.20 Agreement for Consent dated as of January 28, 2000, by and
among PNC Bank National Association, CoActive Marketing
Group, Inc., U.S. Concepts, Inc., Inmark Services, Inc. and
Optimum Group, Inc.
10.21 Fifth Amendment to Loan Documents, dated February 11, 2000,
by and among PNC Bank National Association, CoActive
Marketing Group, Inc., U.S. Concepts, Inc., Inmark Services,
Inc. and Optimum Group, Inc. (incorporated by reference to
Exhibit 1 to Registrant's Current Report on Form 8-K filed
with the Securities and Exchange Commission on February 23,
2000).
10.22 Guaranty, dated as of February 11, 2000, by CoActive
Marketing Group, Inc. in favor of PNC Bank National
Association.
10.23 Sixth Amendment to Loan Documents dated June 15, 2000, by
and among PNC Bank National Association, CoActive Marketing
Group, Inc., U.S. Concepts, Inc., Inmark Services, Inc. and
Optimum Group, Inc.
10.24 Seventh Amendment to Loan Documents dated June 26, 2000, by
and among PNC Bank National Association, CoActive Marketing
Group, Inc., U.S. Concepts, Inc., Inmark Services, Inc. and
Optimum Group, Inc.
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
On February 23, 2000, the Company filed a report on Form 8-K announcing
that on February 11, 2000, the Company, its subsidiaries and PNC Bank
National Association ("Lender") executed an amendment to the Registrant's
Company's loan documents, pursuant to which Lender waived compliance with
certain financial covenants and the terms of certain other financial
covenants were amended.
37
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
COACTIVE MARKETING GROUP, INC.
By: /s/ DONALD A. BERNARD
------------------------------------
Donald A. Bernard
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
Dated: June 26, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE AND TITLE SIGNATURE AND TITLE
------------------- -------------------
<S> <C>
By: /s/ JOHN P. BENFIELD By: /s/ DONALD A. BERNARD
--------------------------------------------- ---------------------------------------------
John P. Benfield Donald A. Bernard
President and Executive Vice President and
Chief Executive Officer and Director Chief Financial Officer and Director
(PRINCIPAL EXECUTIVE OFFICER) (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Dated: June 26, 2000 Dated: June 26, 2000
By: /s/ PAUL A. AMERSHADIAN By: /s/ HERBERT M. GARDNER
--------------------------------------------- ---------------------------------------------
Paul A. Amershadian Herbert M. Gardner
Executive Vice President -- Marketing Director
and Sales and Director
Dated: June 26, 2000 Dated: June 26, 2000
By: /s/ JOSEPH S. HELLMAN By: /s/ BRIAN MURPHY
--------------------------------------------- ---------------------------------------------
Joseph S. Hellman Brian Murphy
Director Director
Dated: June 26, 2000 Dated: June 26, 2000
By: /s/ THOMAS E. LACHENMAN
---------------------------------------------
Thomas E. Lachenman
Director
Dated: June 26, 2000
</TABLE>
38
