CoActive Marketing Group
http://www.coactivemarketinggroup.com
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Coactive Mktg (CMKG) - Description of business
Cor****ate Overview
CoActive Marketing Group, Inc. (the "Company"), through its wholly-owned
subsidiaries Inmark Services LLC, Optimum Group LLC, U.S. Concepts LLC and
Digital Intelligence Group LLC, is an integrated sales promotional and
marketing services agency. We develop, manage and execute sales promotion
programs at both national and local levels. Our programs help our clients
effectively promote their goods and services directly to retailers and
consumers and are intended to assist them in achieving a maximum impact
and
return on their marketing investment. Our activities reinforce brand
awareness, provide incentives to retailers to order and display our
clients'
products, and motivate consumers to purchase those products.
Our services include experiential marketing, event marketing, interactive
marketing, ethnic marketing, and all elements of consumer and trade
promotion and are marketed directly to our clients by our sales force
operating out of offices located in New York, New York; Cincinnati, Ohio;
Chicago, Illinois and San Francisco, California.
During our fiscal year ended March 31, 2006, we provided marketing
services
targeting the Hispanic community through Garcia Baldwin, Inc., doing
business as MarketVision, an affiliate of ours of which we owned 49%. On
May
22, 2006, we sold our 49% interest in MarketVision for $1,100,000 in cash.
Following that sale, we continue to provide services targeting Hispanic,
as
well as African American and urban consumers, through our recently
launched
Urban Concepts platform.
CoActive was formed under the laws of the State of Delaware in March 1992
and is the successor to a sales promotion business originally founded in
1972. CoActive began to engage in the promotion business following a
merger
consummated on September 29, 1995 that resulted in Inmark becoming its
wholly-owned subsidiary.
Our cor****ate headquarters are located at 75 Ninth Avenue, New York, New
York 10011, and our telephone number is 212-660-3800 .
Our Web site is www.coactivemarketing.com. Copies of all re****ts we file
with the Securities and Exchange Commission are available on our Web site.
Subsidiaries
The services offered by our subsidiaries are complementary with each other
and have allowed us to achieve positive results from our cross-selling
efforts.
Optimum and Inmark provide traditional promotional services, primarily
consisting of strategic planning (including marketing positioning, brand
strategy and marketing/promotion plan development), creative marketing,
visual communications and graphic design services as well as developing
radio and television promotional programs for manufacturers of packaged
goods. The promotional programs developed often include additional
components, such as coupons and sweepstakes. In many instances where we
are
contracted to develop radio and television promotional programs, we also
purchase the broadcast media
and administer the program on behalf of our client. In media related
programs, the programs frequently include the participation of retailers
who
are allocated a ****tion of the purchased media, at no cost, for their
sup****t of the promotion and prominent featuring of the manufacturer's
products.
U.S. Concepts provides event and experiential marketing programs,
entertainment marketing and on-premise liquor promotion services. U.S.
Concepts provides a "turnkey" approach for the execution of its programs.
Digital Intelligence, formerly known as TrikMedia, Inc., acquired on
October
29, 2003, provides digital marketing and advertising services, interactive
software development and content creation.
What We Do
We execute a wide range of precision strategies and tactics to achieve
specific and measurable objectives for our clients. Our programs are
designed to increase sales to targeted consumers and retailers while
enhancing brand image. In contrast with general advertising agencies that
promote brand awareness, as a promotions agency, we provide specialized
services with the goal of increasing sales of our client's products and
services as a direct and verifiable consequence of our programs.
In recent years, companies increasingly are utilizing promotions as an
integral part of their overall marketing strategy. Participants in the
2006
Promo Magazine Industry Trends Re****t revealed that whether marketers "are
relying on promotions to drive sales within a specific timetable, or help
build loyalty and brand equity over the longer term, more and more
marketers
are building in promotion elements into the DNA of their branding
efforts."
As domestic manufacturers and their channels of distribution consolidate
and
re-align, and as a result of changes in lifestyles and demographics,
reaching marketing targets to achieve bottom line return on investment of
marketing funds has become more specialized and demanding than in the
past.
We have an array of in-house core competencies which enable us to
integrate
a wide range of tools and tactics on our clients' behalf. These
competencies, some of which are more fully described below, include
interactive, customized e-marketing, targeted broadcast, account specific
co-marketing, experiential marketing and "buzz" marketing, strategic
planning, concept development, and graphic design.
Experiential Marketing
U.S. Concepts is among the nation's most awarded event, experiential,
mobile
and field marketing resources. U.S. Concepts' experiential programs
include
concerts, tours and festivals, sales driven sampling activities,
demonstration programs and other events that introduce and promote its
clients' brands, services and products. U.S. Concepts designs and executes
brand experiences based on the philosophy that "continuous consumer
contact
drives brand growth."
Interactive Marketing
An increasing number of consumers are using the Internet as a resource for
purchasing decisions. According a survey conducted by PROMO Magazine
(Industry Trends Re****t), interactive promotional spending was cited by
32%
and 24%, in 2005 and 2004, respectively, of marketers as their highest
spending priority. Our Digital Intelligence group delivers technological
and
creative interactive programs for its client base.
Ethnic Marketing
In 2005, we launched our Urban Concepts platform through our U.S. Concepts
subsidiary. Urban Concepts is our multicultural experiential initiative
dedicated to providing clients with resources for event marketing
op****tunities and customer acquisition targeting Hispanic, African
American
and urban consumers.
Strategic Planning and Sales Promotion
Taking into account each client's unique needs for brand positioning,
message creation and the selection of the appropriate communication
channels
to be employed, we immerse ourselves in our client's business and
collaborate with their marketing team to develop a strategic and sales
promotion plan. Once the plan is developed, we focus on creative and
program
development and implementation, recognizing that successful execution is
as
im****tant as the plan.
Trade Marketing
We have extensive experience in developing customized programs for
retailers
in a variety of channels. We are active in all major retail channels,
including mass, grocery, drug, do-it-yourself (or "DIY") and convenience.
With our clients, we present marketing and promotional programs to
retailers, capitalizing on established relation****ps we have cultivated
with
these retailers over many years.
The Industry
The industry is composed of hundreds of large and small companies, and is
dominated by affiliates of advertising agencies.
Promotional Magazine's 2005 Annual Re****t of the U.S. Promotion Industry
re****ted promotional marketing spending of $342 billion in 2005, up 9%
over
2004. This follows a re****ted 9% increase in promotional marketing
spending
in 2004 over 2003. The revenues in this segment consisted primarily of
event
marketing; premiums and incentives; direct mail; retail; sponsor****p;
coupons; specialty printing; licensing; fulfillment; agency revenues;
interactive/online; games, contests and sweepstakes; and samplings. While
promotional marketing spend has increased, profit margins in the industry
have recently declined.
Historically, most of the industry's revenues originate from specific
assignments on a project-by-project basis from continuing client
relation****ps. As the credibility and recognized value of integrated
marketing and promotional services have increased, a number of clients are
designating more promotion and related specialty marketing firms as their
specific promotion agency of record, thereby establi****ng the designated
agency as an exclusive promotion service supplier with regard to a
particular niche area. Consistent with this trend, we have been formally
designated as an agency of record or have similar long standing
relation****ps with several of our clients. In an industry that has
historically generated assignments on a project-by-project basis, these
relation****ps tend to provide their recipients with a more secure client
and
revenue base.
Premier Client Roster
Our principal clients are large manufacturers of packaged goods and other
consumer products. Our client partners are actively engaged in promoting
their products to both the consumer as well as trade partners, (i.e.,
retailers, distributors, etc.), and include, among others, Diageo North
America, Inc., Fresh Express, Inc., Nintendo of America, Kikkoman
International, Inc.,
Diageo-Guinness USA, Inc., Moet Hennessy, The Procter & Gamble Company,
HBO,
Coca-Cola, AOL, Fisher-Price, T-Mobile, The Valvoline Company, Pfizer
Corp.,
Coty, Best Buy and ACH Food Cos. Our trade partners include Albertsons,
Safeway, Kroger, Ralph's, Wal-Mart, Target, Walgreens, Rite Aid, Eckerd,
CVS, Lowe's and Fasmart.
For our fiscal years ended March 31, 2006, 2005 and 2004, Diageo North
America, Inc. ("Diageo") accounted for approximately 41%, 27% and 13%,
respectively, of our revenues (inclusive of program reimbursable costs and
expenses). For our fiscal years ended March 31, 2005 and 2004, Schieffelin
&
Somerset Co. and its successor companies ("S&S") accounted for
approximately
13% and 30%, respectively, of our revenues (inclusive of program
reimbursable costs and expenses). At March 31, 2006 and 2005, Diageo
accounted for 41% and 9%, respectively, of our accounts receivable, and at
March 31, 2005, S&S accounted for 1% of our accounts receivable.
To the extent that we continue to have a heavily weighted sales
concentration with one or more clients, the loss of any such client could
have a material adverse affect on our earnings. Unlike traditional general
advertising firms which are engaged as agents of record on behalf of their
clients, as a promotional company, we are typically engaged on a
product-by-product, or project-by-project basis. However, as a result of
both our agency of record designation and long standing relation****ps with
certain of our clients, we believe this exposure is partially mitigated.
Backlog
Excluding sales backlogs attributable to MarketVision and reimbursable
costs
and expenses, at March 31, 2006, our sales backlog amounted to
approximately
$22,781,000 compared to a sales backlog of approximately $18,529,000 at
March 31, 2005. As described further below our revenue patterns are
unpredictable and may vary significantly from period to period. Our
backlog
at any given point in time is similarly subject to fluctuation.
Competition
The market for promotional services is highly competitive, with hundreds
of
companies claiming to provide various services in the promotions industry.
In general, our competition is derived from two basic groups: other full
service promotion agencies, and companies which specialize in providing
one
specific aspect of a general promotional program. Some of our competitors
are affiliated with larger general advertising agencies, and have greater
financial and marketing resources available than we do. These competitors
include Imperic (which is affiliated with Young & Rubicam), G2 (which is
affiliated with Grey Advertising), Pierce, Radiate, GMR Marketing (which
are
divisions of Omnicom Group, Inc.), ARC Worldwide (a subsidiary of Publicis
Group S.A.), Einson Freeman, Inc. (subsidiary of WPP), competitive event
marketing agencies Jack Morton and Momentum, as well as Market Drive and
Draft which are owned by the Interpublic Group. Niche competitors include
Don Jagoda, Inc., which specializes in sweepstakes, and Catalina
Marketing,
Inc., which specializes in cash register couponing programs.
Employees
We currently have 235 full-time and 3,810 part-time employees. Our
part-time
employees are primarily involved in marketing sup****t, program management
and in-store sampling and demonstration, and are employed on an as needed
basis. None of our employees are represented by a labor organization and
we
consider our relation****p with our employees to be good.
Item 1A. Risk Factors
Outstanding Indebtedness; Security Interest. At March 31, 2006, loans
outstanding from our secured lender amounted to $3,000,000, and we had
$3,000,000 of borrowing availability under our revolving credit facility.
As
security for our obligations under our Credit Agreement, we have granted
the
lender a first priority security interest in all of our assets. In the
event
of a default under the Credit Agreement, at the lender's option, (i) the
principal and interest of the loans and all other obligations under the
Credit Agreement will immediately become due and payable, and (ii) the
lender may exercise its rights and remedies provided for in the Credit
Agreement and the related security agreements, and the rights and remedies
of a secured party under applicable law. At March 31, 2006, we were not in
compliance with the financial covenants in the Credit Agreement; namely,
the
debt service coverage ratio, the consolidated senior funded debt to
consolidated EBITDA ratio and the prohibition of incurring a consolidated
net loss in two consecutive fiscal quarters or any fiscal year. On July
12,
2006 our lender waived our defaults arising as a result of such
noncompliance and charged us a $10,000 waiver fee. Although we expect to
be
able to comply with these financial covenants in future periods, there can
be no assurance that we will do so, and in the event we are not able to
comply with these covenants and are required to seek waivers from our
lender, there can be no assurance that our lender would grant us such a
waiver.
Recent Losses. We sustained a net loss of approximately $1,031,000 for our
fiscal year ended March 31, 2006, and a net loss of approximately
$5,265,000
for our fiscal year ended March 31, 2004. These losses were due in part to
the unpredictable revenue patterns associated with our business, as
described below. There can be no assurances that we will be profitable in
the future.
Dependence on Key Personnel. Our business is managed by a limited number
of
key management and operating personnel, none of whom are party to a
long-term employment agreement with us. The loss of any one of those
persons
could have a material adverse impact on our business. In addition, our
agreement with Diageo, our largest client, requires us to continue to
employ
Brain Murphy, the Chief Executive Officer of our U.S. Concepts subsidiary.
We believe that our future success will depend in large part on our
continued ability to attract and retain highly skilled and qualified
personnel.
Customers. A substantial ****tion of our sales has been dependent on one
client or a limited concentration of clients. To the extent such
dependency
continues, significant fluctuations in revenues, results of operations and
liquidity could arise if a particular client reduces its budget allocated
to
the services we provide.
Unpredictable Revenue Patterns. A significant ****tion of our revenues is
derived from large promotional programs which originate on a
project-by-project basis. Since these projects are susceptible to change,
delay or cancellation as a result of specific client financial or other
marketing and manufacturing related cir***stantial issues, as well as
changes in the overall economy, our revenue is unpredictable and may vary
significantly from period to period.
Competition. The market for promotional services is highly competitive,
with
hundreds of companies claiming to provide various services in the
promotion
industry. Some of these companies have greater financial and marketing
resources than we do. We compete on the basis of the quality and the
degree
of comprehensive services which we provide to our clients. There can be no
assurance that we will be able to continue to compete successfully with
existing or future industry competitors.
Risks Associated with Acquisitions. An integral part of our growth
strategy
is evaluating and, from time to time, engaging in discussions regarding
acquisitions and strategic relation****ps. No assurance can be given that
suitable acquisitions or strategic relation****ps can be identified,
financed
and completed on acceptable terms, or that future acquisitions, if any,
will
be successful.
Expansion Risk. In the past, we have experienced periods of rapid
expansion.
This growth has increased our operating complexity as well as the level of
responsibility for both existing and new management personnel and
operating
systems. Our ability to manage our expansion effectively will require us
to
continue to implement and improve our operational and financial systems
and
to expand, train and manage our employee base. Our inability to
effectively
manage expansion could have a material adverse effect on our business.
Control by Executive Officers and Directors. Our executive officers and
directors collectively beneficially own approximately 28% of our voting
stock and, in effect, have the power to influence strongly the outcome of
all matters requiring stockholder approval, including the election or
removal of directors and the approval of significant cor****ate
transactions.
Such voting power could also delay or prevent a change in control
transaction in which our stockholders could otherwise dispose of their
shares of our Common Stock at a substantial premium to its publicly traded
share price. In addition, our Credit Agreement requires certain
individuals
to collectively maintain, at a minimum, a 15% beneficial owner****p of our
Common Stock during the term of the Credit Agreement.
Item 1B. Unresolved SEC Comments
None.
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