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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1999 (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
INMARK ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1340408
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
415 Northern Boulevard, Great Neck, New York 11021
(Address of principal executive offices) (Zip Code)
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. [X]
As of June 29, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $6,612,961.
As of June 29, 1999, 4,513,481 shares of Common Stock, $.001 par value, were
outstanding.
Documents Incorporated by Reference
Document Part of 10-K into which incorporated
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Definitive Proxy Statement relating to Part III
Registrant's 1999 Annual Meeting of Stockholders
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PART I
This report contains certain "forward-looking statements" concerning the
Company's operations, economic performance and financial condition, which are
subject to inherent uncertainties and risks. Actual results could differ
materially from those anticipated in this report. When used in this report, the
words "estimate," "project," "anticipate," "expect," "intend," "believe" and
similar expressions are intended to identify forward-looking statements.
Item 1. Business.
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General Introduction
Inmark Enterprises, Inc. ("Inmark"), together with its
wholly-owned subsidiaries, Inmark Services, Inc. ("Services"), Optimum Group,
Inc. ("Optimum"), U.S. Concepts, Inc. ("U.S. Concepts" and, together with
Inmark, 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 customized national,
regional and local consumer and trade promotion programs. The Company's clients
are principally Fortune 500 consumer product companies. The Company's
promotional 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 traditional marketing
and sales promotional services, the Company's services and programs include
interactive new media services consisting of Internet web site development,
E-commerce, electronic sales presentations and computer based training. By
providing a wide range of programs and services, the Company affords clients a
total solutions resource for strategic planning, creative development,
production and implementation, including in-store and special event activities.
Inmark 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 Inmark and the management of Inmark Services, Inc.
became the executive management of the Company. Previously, Inmark had been
engaged in unrelated activities which were discontinued in June 1993.
On March 31, 1998, Optimum, an indirect wholly-owned
subsidiary of Inmark acquired all of the assets and assumed certain liabilities
of OG Holding Corporation, formerly known
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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 Inmark in the principal amount of $2,500,000, 565,385
shares of newly and validly issued common stock of Inmark ("Inmark 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
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, and 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 Inmark Common Stock valued at
$250,000. In the event that U.S. Concepts achieves specified pre-tax earnings
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
Inmark 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 further amended on June 30,
1999 to reduce the principal amount available under the Revolving Loan Credit
Facility from $7,000,000 to $5,000,000 and to amend 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. See "Risk Factors-Outstanding Indebtedness;
Security Interest" and "Management's Discussion and Analysis of
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Financial Condition and Results of Operations".
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 customized, national,
regional and local consumer and trade promotion programs. The Company's clients
are principally Fortune 500 consumer product companies. The Company's
promotional programs are designed to enhance the value of its clients' budgeted
expenditures and to achieve, in an objective and measurable way, its clients'
specific marketing and promotional objectives. The Company's co-marketing
"Account Specific" programs often target the participation and cooperation of a
specific retail chain or group of retailers or other sources of distribution
(the "Trade") to attain results in the form of increased in-store product
display, related consumer purchases and enhanced product brand name recognition.
The Company's marketing, sales promotion, creative and new
media services generally include: (a) strategic planning, market research and
analysis, product positioning, selling strategy and process and direct marketing
services which assist clients in identifying and defining specific objectives;
(b) advising clients on the deployment of budgeted amounts to achieve their
objectives and maximize value; (c) 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;
(d) 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; (e) multimedia sales presentations, interactive computer based
sales training, and Internet web site development and access; and (f) provision
of on-site and in-store personnel to conduct and coordinate the implementation
of specifically created promotional special events, sampling and demonstration
activities and programs.
The Company combines the needs of its clients and it clients'
sales forces and Trade outlets with the Company's experience, techniques and
proprietary systems to provide solutions and measurable results. A typical
program will integrate numerous promotional techniques which take into
consideration a number of 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, Inmark'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 video and Internet services.
Industry Background. Consumer goods manufacturers typically
employ two separate
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but related marketing programs to sell their products. First, they undertake a
general advertising campaign, often engaging an advertising agency, to create an
image for their product and to communicate that image to the consumer. A general
advertising campaign typically employs television, radio, print media and other
forms of communication designed to generate brand recognition and product
awareness among consumers. Second, they undertake a promotional advertising
program, often on a local or regional rather than national level, which may aim
to induce the Trade to display and carry their products, and which may target
the consumer to promote purchases and further increase brand name recognition.
Promotion advertising may include broadcast media and may employ or integrate
portions of the image created through the general advertising campaign, but it
is typically more "directed" to the point of purchase, employing techniques such
as couponing, sampling, incentives to the Trade, events, merchandising and
licensing and similar efforts.
Promo Magazine's 1998 Annual Report on the Promotion Industry
reported that the promotion industry continued to grow as consumer promotion
expenditures increased $7.9 billion to $79.4 billion in 1997, reflecting an 11%
increase in such expenditures over the prior year. According to the Annual
Report, trends indicate a continuing increase in in-store and local market
account specific directed promotions and a continuing increase in the use of the
Internet to involve consumers. Additionally, packaged goods manufacturers
continue to downsize their in-house marketing and promotion personnel to reduce
general and administrative expenses, and correspondingly have increased their
use of third party promotions businesses, such as Inmark, to utilize cost
effective, innovative and efficient promotional programs maximizing budgeted
expenditures.
The Company's Programs. The Company believes that it is
well-positioned to meet the increasing demands of consumer product manufacturers
by offering a 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.
The Company's promotional campaign strategies are typically
implemented with the use of one or more of the following promotional products:
o Promotional Radio - Broadcast time for traditional concept,
image and brand recognition advertising and 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,
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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.
o Promotional Television - Broadcast time, to achieve
objectives similar to those of promotional radio, and to create an incentive for
Trade participation. The advertising value added through the Company's editing
of a client's television commercial to include a specific Trade customer's name,
logo and feature activity with the client's television advertising provides an
incentive similar to promotional radio for Trade participation in the
promotional program.
o 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.
o Special Events - Custom designed event marketing programs in
support of client brand needs. These programs consist of creating, organizing,
implementing and/or participating in tours, comedy and music events,
competitions, fairs, festivals and college marketing events.
o 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.
o 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.
o 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 new media services
include Internet web site design, support, and development and provision of
reliable, high-speed access and maintenance through the Company's own dedicated
pipeline, computer based training, E-commerce and electronic sales
presentations.
o Creative Services - A full range of services which include
concept development, graphic design, copywriting, 3-D graphics and animation,
illustration, 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
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strategy has focused, and in the future will continue to focus, on clients in
the packaged goods industry, where ample opportunities 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 financial services, entertainment, electronics,
health care and transportation.
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.
The Company's services are marketed directly by the Company's
sales force consisting of forty-two salespersons operating out of fully staffed
and/or sales offices located in Great Neck and New York, New York; Cincinnati
and Cleveland, 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, The Minute Maid
Company, Bestfoods Specialty Products, Bayer Corporation, Lamb Weston Inc.,
Hillshire Farm & Kahn's, Inc., Starkist Seafood Company, Hewlett-Packard
Company, Hunt Foods Company, Perdue Farms, Inc., The Quaker Oats Company,
American Home Products Corporation, Fender Musical Instruments Corporation and
Duracell Corporation. For the fiscal year ended March 31, 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 its year ended December 31, 1998, the Company had one client,
The Procter & Gamble Company, which accounted for approximately 11.6% and 21.2%
of its revenues, respectively. 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
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agencies may be a part of or affiliated with larger general advertising agencies
which have greater financial and marketing resources available than Inmark.
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 210 full-time and 722 part-time
employees, including 42 full-time and 3 part-time employees involved in sales,
134 full-time and 719 part-time employees in marketing support, program
management and in-store sampling and demonstration, 12 full-time employees in
new media and 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
Dependence on Key Personnel. The Company's business is managed
by a relatively small 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".
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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 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 is experiencing 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 Inmark 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
Inmark in which the holders of the Inmark Common Stock could receive a
substantial premium. In addition, the Loan Agreement requires the executive
officers of Inmark maintain a minimum percentage of beneficial ownership of
Inmark Common Stock during the term of the Loan Agreement.
Outstanding Indebtedness; Security Interest. Inmark, Services,
Optimum and U.S. Concepts are parties to the $5,000,000 Revolving Credit
Facility and to the $5,000,000 five-year Term Loan. The prompt and full payment
and other performance of all of the obligations of Services, Optimum and U.S.
Concepts under the Loan Agreement or otherwise to the lender or any affiliate of
the lender are guaranteed by Inmark. As security for all of its obligations
under the Loan Agreement, (a) Inmark, Services, Optimum and U.S. Concepts
granted the lender a first priority lien on and security interest in all of the
assets of Inmark, Services, Optimum and U.S. Concepts, including the stock of
Services, Optimum and U.S. Concepts and the right, title and interest of Inmark,
Services, Optimum and U.S. Concepts in and to the Optimum Agreement and the U.S.
Concepts Agreement, and (b) Inmark pledged its shares of Services and U.S.
Concepts, and Services pledged its shares of Optimum to the lender. If an event
of default occurs under the Loan Agreement, at the lender's option, (i) the
Revolving Credit Facility shall terminate, (ii) the principal and interest of
the Loan and all other obligations under the Loan Agreement shall be immediately
due and payable, and (iii) the lender shall be entitled to exercise any and all
rights and remedies provided for in the Loan Agreement
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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, 1999,
the principal amount of the Company's notes payable to the lender under the Loan
Agreement was $10,000,000 and, at that date, the Company was not in compliance
with three of the financial covenants contained in 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 Company and the
lender executed an amendment to the Loan Agreement pursuant to which the lender
waived the Company's non-compliance with respect to such financial covenants
with respect to the quarter ended March 31, 1999 and modifying such financial
covenants in a manner that is consistent with the Company's business plan. 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".
Shares Eligible for Future Sale. Future sales of shares of
Inmark 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 Inmark Common Stock
upon the exercise of options or warrants or conversion of convertible securities
could materially adversely affect the market price of shares of Inmark Common
Stock and could materially impair Inmark's future ability to raise capital
through an offering of equity securities. Substantially all outstanding shares
of Inmark 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 Inmark 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
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or to reflect the occurrence of unanticipated events.
Item 2. Properties.
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The Company has the following leased facilities:
Square Annual
Facility Location Feet Base Rent
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Principal office of Inmark
and principal and sales office of
Services Great Neck, New York 16,500 $292,000
Principal and sales office of
Optimum Cincinnati, Ohio 17,000 $144,000
Principal and sales office of
U.S. Concepts New York, New York 11,500 $167,000
Other sales offices of Barrington, Illinois 800
Services, Optimum, Chicago, Illinois 1,400
and U.S. Concepts Cleveland, Ohio 100
Los Angeles, California 800
San Francisco, California 2,650
Laguna Hills, California 300
Boston, Massachusetts 350
New Brunswick, New Jersey 300
Birmingham, Alabama 100
Minneapolis, Minnesota 300
Worcester, Pennsylvania 100
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Total 7,200 $149,000
Warehouses of Optimum, Cincinnati, Ohio 3,500
and U.S. Concepts used Los Angeles, California 1,000
for storage of promotional items New York, New York 400
Miami Beach, Florida 600
Boston, Massachusetts 200
San Diego, California 200
Chicago, Illinois 800
San Francisco, California 1,000
------
7,700 $107,000
With the exception of the principal office leases for Great Neck, New York,
Cincinnati, Ohio and New York, New York, which at March 31, 1999 have remaining
terms of ten years, eleven years and seventeen 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, 1999, see note 4 to the Notes to Consolidated
Financial Statements.
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Item 3. Legal Proceedings.
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On April 30, 1999, U.S. Concepts was sued in the Superior
Court of the State of California, County of San Francisco, by Ms. Star Norman
for damages in excess of $25,000 plus unspecified punitive and other damages.
The complaint arises out of plaintiff's 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.
All of the acts complained of took place prior to the date of
incorporation of U.S. Concepts in Delaware and at a time when the subject
business was being conducted by a New York corporation, then named U.S.
Concepts, Inc. and now named Murphy Liquidating Corporation ("Murphy
Liquidating"). The subject business was acquired by U.S. Concepts from Murphy
Liquidating on December 29, 1998. The Company intends to defend this case
vigorously on the grounds that U.S. Concepts has no liability for the acts
complained of because they all took place before the incorporation of U.S.
Concepts in Delaware. The Company will also vigorously assert that U.S. Concepts
never assumed the obligation of Murphy Liquidating, if there be one, in
connection with the acquisition of the subject business. Further, the Company
has notified Murphy Liquidating and its shareholder that it claims
indemnification from them for any loss arising from this matter pursuant to
indemnification agreements entered into in connection with the U.S. Concepts
Acquisition.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
Not Applicable.
-12-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ---------------------------------------------------------------------
Market Information
Effective December 17, 1996, Inmark Common Stock began trading
on the Nasdaq SmallCap Market under the symbol IMKE. Prior to that date, Inmark
Common Stock was traded over-the-counter on the OTC Electronic Bulletin Board
under the same symbol. Prior to October 20, 1997, in addition to Inmark Common
Stock, traded securities of Inmark included Units, Class A Warrants and Class B
Warrants. The Units, Class A Warrants and Class B Warrants ceased to trade as
the term of both the Class A Warrants and Class B Warrants expired. The
following table sets forth for the periods indicated the high and low trade
prices for Inmark Common Stock as reported by NASDAQ. The quotations listed
below reflect inter-dealer prices, without retail mark-ups, mark-downs or
commissions and may not necessarily represent actual transactions.
Common Stock
------------
High Low
---- ---
Fiscal Year 1998
- ----------------
First Quarter 5 1/8 4
Second Quarter 6 1/2 4 1/2
Third Quarter 7 15/16 5 3/8
Fourth Quarter 7 3/16 4 3/4
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
On May 4, 1998, Inmark's Board of Directors declared a
five-for-four stock split of Inmark Common Stock in the form of a twenty-five
percent stock dividend payable on June 14, 1998 to stockholders of record as of
May 14, 1998. On June 29, 1999, giving effect to the stock dividend, there were
4,513,481 shares of Inmark Common Stock outstanding, approximately 47
shareholders of record and approximately 700 beneficial owners whose shares are
held by a number of financial institutions.
Inmark has never declared or paid cash dividends on Inmark
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 Inmark
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, 1999 and may only pay
such dividend
-13-
(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 December 29, 1998, 30,000 unregistered shares of Inmark
Common Stock were issued to Murphy Liquidating in partial payment of the
purchase price for the U.S. Concepts Acquisition. The shares were issued in
reliance upon the exemption from registration contained in Section 4(2) of the
Securities Act as the U.S. Concepts Acquisition was a transaction not involving
a public offering within the meaning of the Securities Act.
Item 6. Selected Financial Data.
- ------ -----------------------
The Merger on September 29, 1995 of Inmark Services, Inc. into
a newly-formed wholly-owned subsidiary of Inmark was accounted for as a reverse
purchase of Inmark by Inmark Services, Inc., and for financial accounting and
reporting purposes, Inmark Services, Inc. is treated as the acquirer.
Accordingly, the selected financial data reported below for periods prior to
April 1, 1995 is that of Inmark Services, Inc. and its predecessors. The
financial statements of the Company and of Inmark Services, Inc. are not
comparable to those of its predecessors due to the application of purchase
accounting adjustments as a result of the Inmark Services, Inc. management-led
buyout of Spar, one of those predecessors.
Year Ended Year Ended Year Ended Year Ended Year Ended
March 31, March 31, March 31, March 31, March 31,
1995 (1) 1996 (2) 1997 1998 (3) 1999 (4)
------------ ------------ ----------- ------------ -----------
Statement of Operations Data:
Sales $13,670,938 $14,645,990 $18,901,730 $25,965,780 $38,781,136
Gross Profit 4,453,233 4,497,192 6,291,821 8,403,363 12,469,901
Income before Income Taxes 1,248,886 461,486 2,129,579 3,579,445 2,230,900
Provision (Benefit) for Income Taxes 19,495 (506,161) (159,924) 1,300,000 892,361
Net Income 1,229,391 967,647 2,289,503 2,279,445 1,338,539
Net Income per Common and Common Equivalent Share*:
Basic ** $.46 $.64 $.63 $.30
Diluted ** $.38 $.51 $.50 $.24
* Adjusted for the five-for-four stock split effective May 14, 1998
** Not applicable as companies were privately owned
-14-
March 31, March 31, March 31, March 31, March 31,
1995 1996 1997 1998 (5) 1999
--------- --------- --------- --------- ---------
Balance Sheet Data:
Working Capital (deficiency) $(2,204,473) $ (846,489) $1,859,868 $ 2,446,502 $ 3,146,441
Total Assets 5,242,136 5,118,569 8,559,840 30,818,389 42,452,443
Long-Term Debt - - - 9,500,000 11,875,000
Total Liabilities 5,241,986 3,104,792 4,022,459 20,145,423 29,875,338
Stockholders Equity 150 2,013,777 4,537,381 10,672,966 12,577,105
(1) Represents operations of Spar which was acquired by Inmark Services, Inc.
on April 3, 1995 in a transaction accounted for as a purchase.
(2) Includes operations of Inmark Services, Inc. for the entire year and the
Company from the September 29, 1995 Merger date.
(3) Represents operations of the Company excluding the operations of Optimum
Group, Inc. acquired on March 31, 1998.
(4) 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.
(5) Includes assets and liabilities of Optimum Group, Inc. acquired on March
31, 1998. See consolidated financial statements of the Company appearing
elsewhere herein.
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
consisting of $9,298,000 in cash (including expenses), a subordinated note of
the Company in the principal amount of $2,500,000 and 565,385 shares of newly
issued Inmark Common Stock valued at $3,675,000. In connection with the Optimum
Acquisition, Optimum assumed liabilities in the amount of $1,884,000. 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 Inmark, acquired the business conducted by U.S.
Concepts, Inc., a New York corporation, for a purchase price of $1,660,000
consisting of $1,410,000 in cash (including expenses) and 30,000 shares of newly
issued Inmark Common Stock valued at $250,000. In the event that U.S. Concepts
achieves specified pre-tax earnings 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 the Inmark Common Stock. In connection
with the U.S. Concepts Acquisition, U.S. Concepts assumed liabilities in the
amount of $2,500,000. 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.
-15-
General
The Company's sales are generated from projects subject to contracts
which require the Company to provide its services within specified time periods
of 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 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 Services servicing or otherwise involved in the
administration of promotional programs or overhead expenses which could
otherwise be allocated to such programs.
For 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. In comparison, in Fiscal 1998, the Company had one client,
Colgate-Palmolive Company, which accounted for approximately 34.4% of the
Company's sales. 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.
-16-
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, 1999, 1998
and 1997:
Year Ended March 31,
------------------------------------------------------------
1999 1998 1997
---------------- ------------------ ----------------
Statement of Operations Data:
Sales 100.0% 100.0% 100.0%
Direct expenses 67.8% 67.6% 66.7%
Gross profit 32.2% 32.4% 33.3%
Salaries 13.1% 12.1% 13.2%
Selling, general and administrative expense 11.4% 7.0% 8.9%
Total operating expense 24.6% 19.2% 22.1%
Operating income 7.6% 13.2% 11.2%
Interest expense (income), net 1.9% (0.6%) (0.1%)
Income before provision for taxes 5.8% 13.8% 11.3%
Provision (benefit) for income taxes 2.3% 5.0% (0.8%)
Net income 3.5% 8.8% 12.1%
Other Data:
EBITDA 10.6% 14.6% 13.0%
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, 1999, 1998 and 1997:
Year Ended March 31,
------------------------------------------------------------
1999 1998 1997
---------------- ------------------ ----------------
Statement of Operations Data:
Sales 49.4% 37.4% 29.1%
Direct expenses 49.8% 39.3% 24.3%
Gross profit 48.4% 33.6% 39.9%
Salaries 61.4% 26.2% 17.8%
Selling, general and administrative expense 142.9% 8.8% (16.4%)
Total operating expense 91.3% 19.2% 1.2%
Operating income (13.9%) 61.9% 472.1%
Interest expense (income), net 568.9% (1,058.0%) (85.6%)
Income before provision for income taxes (37.7%) 68.1% 361.5%
Provision (benefit) for income taxes (31.4%) 912.9% (68.4%)
Net income (41.3%) (0.4%) 136.6%
Other Data:
EBITDA 9.0% 54.5% 169.0%
-17-
Fiscal Year 1999 Compared to Fiscal Year 1998
Sales. Sales for the fiscal year ended March 31, 1999 ("Fiscal 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 for the fourth quarter primarily resulting from
the reduction and cancellation of certain sales contracts and a deferral by
customers of anticipated sales to the fiscal year ending March 31, 2000 ("Fiscal
2000"). At March 31, 1999, the Company's sales backlog, inclusive of
approximately $8,700,000 attributable to U.S. Concepts, amounted to
approximately $16,600,000, compared to a sales backlog of approximately
$6,200,000 at March 31, 1998.
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 Services 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 (A) the inclusion of the operating expenses of
Optimum and U.S. Concepts totaling $3,433,000, and (B) 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. The Company's note obligation and bank borrowings
have principal payments scheduled to commence on March 31, 2000 and June 30,
2000 respectively. The Company anticipates that it will continue to incur
significant interest expense for the Fiscal 2000 and thereafter.
-18-
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 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 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.
Fiscal Year 1998 Compared to Fiscal Year 1997
Sales. Sales for Fiscal 1998 were $25,966,000 compared to sales of
$18,902,000 for the fiscal year ended March 31, 1997 ("Fiscal 1997"), an
increase of $7,064,000. The increase was the result of an overall increase in
sales contracts primarily from new clients. At both March 31, 1998 and 1997, the
Company's sales backlog amounted to approximately $6,200,000.
Direct Expenses. Direct expenses for Fiscal 1998 were $17,562,000
compared to direct expenses of $12,610,000 for Fiscal 1997. The increase in the
amount of direct expenses for Fiscal 1998 principally relates to the increase in
sales for Fiscal 1998, whereas the increase in direct expenses as a percentage
of sales for Fiscal 1998 primarily resulted from client programs which in the
aggregate had a lower gross profit margin than the mix of client programs in
Fiscal 1997.
As a result of the changes in sales and direct expenses, the Company's
gross profit for Fiscal 1998 increased to $8,403,000 from $6,292,000 for Fiscal
1997.
Operating Expenses. Operating expenses for Fiscal 1998 increased by
$802,000 and amounted to $4,977,000 compared to operating expenses of $4,175,000
for Fiscal 1997. The increase in operating expenses for Fiscal 1998 resulted
primarily from (i) the aggregate increase of approximately $691,000 attributable
to increases in salaries and related payroll taxes principally related to the
employment of additional personnel and an overall increase in base salaries,
management bonuses and employee benefits such as medical insurance and 401K
Retirement Plan contributions; and (ii) the increase in selling, general and
administrative expenses related to the overall increase in the level of
operations.
Interest Income. For Fiscal 1998, the Company had interest income from
short term investments of $153,000 without incurring any interest expense,
whereas for Fiscal 1997, the Company had net interest income of $13,000.
-19-
Income Before Provision for Income Taxes. For Fiscal 1998, the Company
had income before provision for income taxes equal to $3,579,000. In comparison,
for Fiscal 1997, the Company's income before provision for income taxes was
$2,130,000.
Provision for Income Taxes. For Fiscal 1998, the Company made a
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. The
provision takes into account approximately $110,000 of deferred tax benefits
expected to be realized from the reduction in the valuation allowance for
deferred tax assets. For Fiscal 1997, the Company's provision for income taxes
reflected a tax benefit of $160,000.
Net Income. As a result of the items discussed above, the Company's net
income for Fiscal 1998 was $2,279,000 compared to $2,290,000 for Fiscal 1997.
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. In connection with the Loan, the Company
paid a one-time closing fee of $100,000 and pays quarterly in arrears (i) a
commitment fee at the rate of one-quarter of one percent per annum on the unused
portion of the Revolving Loan Facility and (ii) interest on the unpaid principal
amount of each loan outstanding during the quarter at a rate per annum which,
conditioned upon the Company's satisfying certain defined debt to equity ratios
is, at the option of the Company, equal to either the rate applicable to an
equivalent term Eurodollar loan rate plus between one and one-half percent and
two percent or the bank's prime rate plus up to an additional two percent. The
Term Loan requires quarterly payments commencing on June 30, 2000 and to end on
March 31, 2003. The Loan is secured by a first priority lien and security
interest in all the assets of the Company. In addition, the Loan Agreement
provides for a number of negative and affirmative covenants, restrictions and
limitations and other conditions including among others, (i) limitations
regarding the payment of cash dividends, (ii) use of proceeds, (iii) maintenance
of minimum quarterly earnings, (iv) compliance with a defined maximum senior
debt leverage ratio and fixed charge coverage ratio, and (v) maintenance of a
minimum percentage of beneficially owned shares of the Company held by the
Company's management.
On December 29, 1998, to finance the U.S. Concepts Acquisition, the
Company utilized the Revolving Credit 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 Credit 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 notes payable 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.
-20-
On June 30, 1999, the Loan Agreement was further amended to reduce the
principal amount available under the Revolving Loan Facility from $7,000,000 to
$5,000,000 and to 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. 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."
For the period from April 24, 1996 until March 31, 1998, the Company's
activities were funded with internally generated cash flow primarily from
operations.
At March 31, 1999, the Company had 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 compared
to cash and cash equivalents of $1,460,000, working capital of $2,447,000, bank
loans of $7,000,000, subordinated debt of $2,500,000 and stockholders' equity of
$10,673,000 at March 31, 1998. Management believes that the Company's existing
cash position and credit facility combined with internally generated cash flow
will satisfy its cash requirements for Fiscal 2000, subject to the Company
obtaining satisfactory modifications of the Loan Agreement as discussed above.
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.
The $1,228,000 increase in the Company's cash and cash equivalents at
March 31, 1999 resulted primarily from the Company's net cash provided by
operating activities and the proceeds from bank borrowings reduced by funds used
to finance the U.S. Concepts Acquisition and to purchase fixed assets.
Net cash provided by operating activities during Fiscal 1999 was
$127,000, due principally to $1,339,000 of net income, $1,179,000 of
depreciation and amortization expense, $542,000 of deferred income taxes, an
increase of $1,525,000 in deferred revenue 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. In comparison,
net cash provided by operating activities in Fiscal 1998 was $1,933,000 which
was principally derived from net income of $2,279,000 and the addition of
non-cash charges of $1,361,000, offset by net changes in operating assets and
liabilities of $1,708,000 primarily attributable to increases in accounts
receivable, unbilled contracts in progress and prepaid taxes and offsetting
increases in accrued costs and expenses.
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. In
comparison, for Fiscal 1998 net cash used in investing activities amounted to
$9,242,000 of which $9,192,000 was used in connection with the Optimum
Acquisition and $51,000 was used for the purchase of fixed assets.
-21-
For Fiscal 1999, financing activities, consisting of bank borrowings of
$3,000,000 and proceeds of $6,000 from the exercise of stock options, provided
net cash of $3,006,000 which was primarily used for the cash requirements of the
U.S. Concepts Acquisition and to supplement short term working capital. For
Fiscal 1998, financing activities provided cash of $7,057,000 principally from
(i) bank borrowings of $7,000,000 used for a portion of the Optimum Acquisition
purchase price and (ii) proceeds of $181,000 from the exercise of stock options
and warrants of which $125,000 was used for financing costs related to the
Optimum Acquisition.
At March 31, 1998, the Company had cash and cash equivalents of
$1,460,000, working capital of $2,447,000, bank loans of $7,000,000,
subordinated debt of $2,500,000 and stockholders' equity of $10,673,000 compared
to cash and cash equivalents of $1,713,000, working capital of $1,860,000, no
bank loans or subordinated debt and stockholders' equity of $4,537,000 at March
31, 1997. The incurrence of bank loans and subordinated debt during Fiscal 1998
and the increase in shareholders' equity to the extent in excess of the
Company's net income for Fiscal 1998 were related solely to the Optimum
Agreement.
Primarily as a result of the use of funds for the Optimum Acquisition
which offset the net cash provided by operating activities during Fiscal 1998,
the Company's cash and cash equivalents balances decreased by $253,000 and
amounted to $1,460,000 at March 31, 1998.
Operating activities during Fiscal 1998 provided $1,933,000 in cash,
principally from net income of $2,279,000 and the addition of non-cash
adjustments of $1,361,000. Such amounts were offset by net changes in operating
assets and liabilities of $1,708,000 primarily attributable to increases in
accounts receivable, unbilled contracts in progress and prepaid taxes and
offsetting increases in accrued costs and expenses. In comparison, operating
activities in Fiscal 1997 provided $841,000 in cash, principally from net income
of $2,290,000. Such net income was offset by non-cash adjustments of $106,000
and net changes in operating assets and liabilities of $1,343,000 primarily
attributable to an increase in accounts receivable and an offsetting increase in
accrued costs and expenses.
For Fiscal 1998, cash used in investing activities amounted to
$9,242,000 of which $9,192,000 was used in connection with the Optimum
Acquisition $51,000 was used for the purchase of fixed assets. This compares to
the net cash provided from investing activities of $109,000 for Fiscal 1997
which resulted from the release to the Company of $250,000 of restricted cash
held by a factor pursuant to its then expiring factoring agreement and the use
of $141,000 for the purchase of fixed assets.
For Fiscal 1998, financing activities provided cash of $7,057,000
compared to cash of $63,000 for Fiscal 1997. In Fiscal 1998, the cash provided
was principally the result of bank borrowings of $7,000,000, pursuant to the
Company's loan agreement (used for a portion of the Optimum Acquisition purchase
price) and, to a lesser extent proceeds of $181,000 from the exercise of stock
options and warrants. In comparison, for Fiscal 1997, the net cash provided by
financing activities included a decrease of $579,000 in the amount due from
factor, receipt of $288,000 of proceeds from the exercise of stock options, the
repayment of notes payable to Spar of $750,000 and the repurchase of Inmark
Common Stock for $54,000.
-22-
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."
Recent Accounting Developments
Effective April 1, 1998, the Company adopted SFAS 130 "Reporting
Comprehensive Income" which requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in the financial statements. The adoption of SFAS 130 did not have an
impact on the Company's financial position or results of operations.
On April 1, 1998, the Company adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information", which established standards
to report information about operating segments and related disclosures about
products and services, geographic areas and major customers. The adoption of
SFAS 131 did not have an impact on the Company's reporting of its results of
operations and financial position since the Company operates in one segment.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), which is effective for all
quarters of fiscal years beginning after June 15, 1999. SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
In accordance with SFAS 133, an entity is required to recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. SFAS 133 requires that changes in the
derivatives' fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. The Company does not believe that the implementation of SFAS 133
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.
State of Readiness - The Company has evaluated its computer systems and
has determined that its systems require software upgrades to make them Year 2000
compliant. The Company has
-23-
purchased vendor software which is Year 2000 compliant and is currently in the
installation process. The Company does not have any significant in-house
developed software. The Company's computer systems are not interdependent with
the computer systems of its vendors and others with which the Company transacts
business.
Costs - Based on its assessment to date, the Company's incremental
costs to modify or upgrade it P.C. based systems should not be material.
Risks - The most reasonably likely worst case Year 2000 scenario would
be failures beyond the control of the Company such as telecommunications or
electrical failures. In addition, Year 2000 problems may effect its customers
and others with which the Company transacts business. The Company believes its
primary business risks would include, but not be limited to, delays in
implementing customer marketing programs, lost customers and increased operating
costs.
Company Plan - The Company is discussing year 2000 issues with its
customers and vendors but has not yet formalized any contingency plans.
-24-
Item 8. Financial Statements.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of Inmark Enterprises, Inc.
Independent Auditors' Report .........................................................26
Consolidated Balance Sheets as of March 31, 1999 and 1998.............................27
Consolidated Statements of Operations for the years ended
March 31, 1999, 1998 and 1997.................................................... 28
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1999, 1998 and 1997.................................................... 29
Consolidated Statements of Cash Flows for the years ended
March 31, 1999, 1998 and 1997 ....................................................30
Notes to Consolidated Financial Statements............................................31
-25-
Independent Auditors' Report
The Board of Directors and Stockholders
Inmark Enterprises, Inc.
We have audited the consolidated financial statements of 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 Inmark Enterprises,
Inc. and subsidiaries as of March 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Melville, New York
June 10, 1999, except as to
note 5, which is as of
June 30, 1999
-26-
INMARK ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 1998
1999 1998
------------ -----------
Assets
Current assets:
Cash and cash equivalents $ 2,687,575 1,459,909
Accounts receivable 7,042,640 5,648,555
Unbilled contracts in progress 9,537,540 5,284,686
Deferred tax asset - 83,442
Prepaid taxes 1,502,431 452,291
Prepaid expenses and other current assets 376,593 163,042
------------ -----------
Total current assets 21,146,779 13,091,925
------------ -----------
Furniture, fixtures and equipment, at cost 1,820,479 1,006,779
Less accumulated depreciation 453,341 191,522
------------ -----------
1,367,138 815,257
------------ -----------
Notes receivable from officer 225,000 225,000
Goodwill, net of amortization of $1,744,155 and $851,377 19,548,929 16,534,950
Deferred financing costs, net of amortization of $24,900 and $0 99,600 124,500
Other assets 64,997 26,757
------------ -----------
Total assets $ 42,452,443 30,818,389
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,499,388 1,601,751
Deferred revenue 3,096,698 642,223
Accrued job costs 8,841,958 7,693,522
Accrued compensation 320,273 314,876
Other accrued liabilities 991,137 298,791
Deferred taxes payable 625,884 -
Subordinated notes payable - current 625,000 -
Accrued taxes payable - 94,260
------------ ----------
Total current liabilities 18,000,338 10,645,423
Notes payable bank - long term 10,000,000 7,000,000
Subordinated notes payable - long term 1,875,000 2,500,000
------------ -----------
Total liabilities 29,875,338 20,145,423
------------ -----------
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 4,513,481 shares at March 31,
1999 and 4,475,326 shares at March 31, 1998 4,513 4,475
Additional paid-in capital 5,697,458 5,131,896
Retained earnings 6,875,134 5,536,595
------------ -----------
Total stockholders' equity 12,577,105 10,672,966
------------ -----------
Total liabilities and stockholders' equity $ 42,452,443 30,818,389
============ ===========
See accompanying notes to consolidated financial statements.
-27-
INMARK ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1999, 1998, 1997
1999 1998 1997
--------------- -------------- ---------------
Sales $ 38,781,136 25,965,780 18,901,730
Direct expenses 26,311,235 17,562,417 12,609,909
--------------- -------------- ---------------
Gross profit 12,469,901 8,403,363 6,291,821
--------------- -------------- ---------------
Salaries 5,084,098 3,150,751 2,497,325
Selling, general and administrative expense 4,436,934 1,826,278 1,678,139
--------------- -------------- ---------------
Total operating expenses 9,521,032 4,977,029 4,175,464
--------------- -------------- ---------------
Operating income 2,948,869 3,426,334 2,116,357
Interest income (expense), net (717,969) 153,111 13,222
--------------- -------------- ---------------
Income before income taxes 2,230,900 3,579,445 2,129,579
Provision for income taxes (benefit) 892,361 1,300,000 (159,924)
--------------- -------------- ---------------
Net income $ 1,338,539 2,279,445 2,289,503
=============== ============== ===============
Net income per share:
Basic $ .30 $ .63 $ .64
=============== ============== ===============
Diluted $ .24 $ .50 $ .51
=============== ============== ===============
Weighted average number of shares outstanding:
Basic 4,487,763 3,590,935 3,584,375
=============== ============== ==============
Diluted 5,671,702 4,587,106 4,494,267
=============== ============== ==============
Reconciliation of weighted average shares used for basic and diluted computation
is as follows:
Weighted average shares - Basic 4,487,763 3,590,935 3,584,375
Dilutive effect of options and warrants 1,183,939 996,171 909,892
---------------- -------------- --------------
Weighted average shares - Diluted 5,671,702 4,587,106 4,494,267
================ ============== ==============
See accompanying notes to consolidated financial statements.
-28-
INMARK ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
Additional Total
Common Stock Paid-in Retained Stockholders'
par value $.001 Capital Earnings Equity
--------------------------------- -------------- ------------- ---------------
Shares Amount
--------------- --------------
Balance, March 31, 1996 3,255,314 $ 3,255 $ 1,042,875 $ 967,647 $ 2,013,777
Exercise of warrants and options 351,875 352 287,249 - 287,601
Repurchase of common stock (62,500) (63) (53,437) - (53,500)
Net income - - - 2,289,503 2,289,503
--------------- -------------- -------------- ------------- ---------------
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
=============== ============== ============== ============= ===============
See accompanying notes to consolidated financial statements.
-29-
INMARK ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
1999 1998 1997
--------------- ---------------- -----------------
Cash flows from operating activities:
Net income $ 1,338,539 2,279,445 2,289,503
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,179,497 362,658 335,985
Deferred income taxes 542,442 998,691 (442,133)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Increase in accounts receivable (667,014) (846,606) (2,780,866)
Increase in unbilled contracts in progress (4,252,854) (5,284,686) -
Increase in notes receivable - officer - (25,000) -
(Increase) decrease in prepaid expenses and other assets (171,337) 144,592 (229,403)
Increase in prepaid taxes (1,050,140) (452,291) -
Increase (decrease) in accounts payable 226,486 221,451 (331,135)
Increase in accrued job costs 1,148,436 3,841,528 1,921,867
Increase (decrease) in other accrued liabilities 396,435 (18,113) (42,732)
Increase in deferred revenue 1,524,909 642,223
Increase (decrease) in accrued compensation 5,397 69,347 119,667
Decrease in accrued taxes payable (94,260) (133) -
--------------- ---------------- -----------------
Net cash provided by operating activities 126,536 1,933,106 840,753
--------------- ---------------- -----------------
Cash flows from investing activities:
Purchases of fixed assets (627,284) (50,554) (141,426)
Release of restricted cash from factor - - 250,000
Acquisitions, net of cash acquired* (1,277,186) (9,191,932) -
--------------- ---------------- -----------------
Net cash (used in) provided by investing activities (1,904,470) (9,242,486) 108,574
--------------- ---------------- -----------------
Cash flows from financing activities:
Decrease in due from factor, net - - 578,725
Repayment of notes payable to Spar - - (750,000)
Proceeds from exercise of stock options and warrants 5,600 181,038 287,601
Repurchase of common stock - - (53,500)
Proceeds from borrowings 3,000,000 7,000,000 -
Financing costs related to purchase of Optimum Group, Inc. - (124,500) -
--------------- ---------------- -----------------
Net cash provided by financing activities 3,005,600 7,056,538 62,826
--------------- ---------------- -----------------
Net increase (decrease) in cash 1,227,666 (252,842) 1,012,153
Cash and cash equivalents at beginning of period 1,459,909 1,712,751 700,598
--------------- ---------------- -----------------
Cash and cash equivalents at end of period $ 2,687,575 1,459,909 1,712,751
=============== ================ =================
Supplemental disclosures of cash flow information:
Interest paid during the period $ 783,669 - 38,294
=============== ================ =================
Income taxes paid during the period $ 989,387 768,457 298,936
=============== ================ =================
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 -
=============== ================ =================
Supplemental disclosures of noncash financing activities:
Debt payable to shareholders converted to equity $ - - 163,783
=============== ================ =================
Restricted cash of Health Image Media, Inc. acquired in $
reverse purchase - - 500,000
=============== ================ =================
See accompanying notes to consolidated financial statements.
-30-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(1) Organization and Nature of Business
-----------------------------------
The Company is a full service marketing, sales promotion and new age
communications company which designs, develops and implements sales,
marketing and promotional programs primarily for consumer product client
companies. The Company assists its clients in realizing product
recognition and sales by providing promotional programs at both national
and local levels, which are created to address identified trade, sales
and consumer needs.
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 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 year period. Deferred financing costs
incurred in connection with the loan agreement in the amount of $124,500
are being amortized on a straight-line basis over a five-year period.
-31-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
Pro forma results of operations of the Company had the acquisition of
U.S. Concepts and OG Holding occurred on April 1, 1997 would be as
follows:
1999 1998
---- ----
Sales $51,931,686 $55,983,276
Net income 1,473,745 752,358
Basic earnings per share .33 .17
Diluted earnings per share .26 .14
(2) Summary of Significant Accounting Policies
------------------------------------------
(a) Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its 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
------------------
Effective April 1, 1997, the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 128, "Earnings Per Share".
Statement 128 replaces the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per
share. The computation of basic earnings per common share is
-32-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
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,
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 and for the fiscal year ended March 31, 1998, the
computation of weighted average number of common shares
outstanding for the year included a one day inclusion of the
shares of common stock issued for the Optimum 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. Among the more significant estimates
included in these financial statements is the estimated valuation
allowance reducing the Company's deferred tax asset and the
estimated costs to fulfill contracts. Actual results could differ
from these and other estimates.
(i) Reclassifications
-----------------
Certain reclassifications have been made to amounts reported in
the prior year to conform to the 1999 presentation.
(3) Notes Receivable From Officer
-----------------------------
The notes receivable from officer totaling $225,000 at March 31,
1999 and 1998 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
-33-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
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 eleven years. Rent expense for the years
ended March 31, 1999, 1998 and 1997 amounted to $456,312, $118,092 and
$105,598, respectively. Future noncancellable minimum lease payments
under all of the leases as of March 31, 1999 are as follows:
Year ending March 31,
2000 $ 771,181
2001 547,892
2002 487,084
2003 472,846
2004 482,736
Thereafter 3,046,518
------------
$ 5,808,257
============
(5) Long-Term Debt
--------------
Notes Payable, Bank
-------------------
The Company has a loan agreement with its principal bank which provides
for a five year revolving line of credit in the amount of $5,000,000,
which expires on March 31, 2003, and a term loan in the amount of
$5,000,000, which expires 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 a commitment fee of one-quarter of
one percent per annum on the unused revolving line of credit and
interest on outstanding amounts, at the option of the Company, based on
various formulas which relate to the prime rate or other prescribed
rates (6.97% and 7.50% at March 31, 1999 and 1998, 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. At
March 31, 1999, the Company was not in compliance with certain
covenants in the loan agreement. On June 30, 1999, 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
covenant as of March 31, 1999 and the financial covenants were modified
to be consistent with the Company's business plan.
-34-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
Long-Term debt as of March 31, 1999 and 1998 is summarized as follows:
1999 1998
----------- ----------
Revolving line of credit note payable in quarterly installments
of interest only with a final payment of interest and principal
outstanding on March 31,
2003. $ 5,000,000 $ 2,000,000
Term loan note payable in quarterly installments of interest only
through March 31, 2000 and interest and principal payments
increasing from $312,500 from June 30, 2000 through March 31,
2001 to $468,750 from June 30, 2001 through
March 31, 2003. 5,000,000 5,000,000
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,
2001 through March 31, 2003 1,875,000 -
----------- ----------
Total Long-Term debt $ 11,875,000 $ 7,000,000
=========== ==========
Maturities and payment requirements on Long-Term debt are as
follows:
Notes Payable Subordinated
Bank Note
---------- ----------
2001 $ 1,250,000 $ 625,000
2002 1,875,000 625,000
2003 6,875,000 625,000
---------- ----------
$ 10,000,000 $ 1,875,000
========== ==========
(6) Stockholders' Equity
--------------------
(a) 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.
-35-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
The Plan was amended on September 29, 1995 to increase the
maximum number of shares of common stock for which options may
be granted to 1,125,000 shares. Changes in options
outstanding, inclusive of options not issued under the Plan,
during each of the years ended March 31, 1999, 1998 and 1997,
and options exercisable and shares reserved for issuance at
March 31, 1999 are as follows:
Weighted
average price Outstanding Exercisable
per share
--------------- --------------- ----------------
Balance at March 31, 1996 $1.73 451,875 333,125
Granted (A) $1.31 418,750 131,250
Exercised $1.12 (8,125) (8,125)
Canceled $1.40 (1,250) (1,250)
--------------- --------------- ----------------
Balance at March 31, 1997 $1.51 861,250 455,000
Became exercisable $1.68 - 268,749
Granted (B) $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 (C) $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
=============== ================ ================
(A) Represents 400,000 options granted at an exercise
price of $1.20 per share and 6,250 options granted
to each of three new employees at an exercise price
of $2.80, $3.60 and $4.40, respectively. Of the
options granted, 131,250 were immediately
exercisable and the balance exercisable either in
one, two or three annual installments.
(B) Represents 402,250 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.
(C) 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.
-36-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(ii) Warrants
--------
At March 31, 1999, warrants to purchase shares of the
Company's common stock are as follows:
Weighted
average price Outstanding Exercisable
per share
----------------- --------------- ----------------
Balance at March 31, 1996 $0.81 1,129,864 942,364
Became exercisable $0.80 - 187,500
Exercised $0.80 (343,750) (343,750)
Canceled (A) $0.80 (250,000) (250,000)
----------------- --------------- ----------------
Balance at March 31, 1997 $0.82 536,114 536,114
Granted (B) $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
================= =============== ================
(A) Concurrently with the resignations in fiscal
1997 of two directors of the Company,
warrants to purchase 250,000 shares of the
Company's common stock were returned to the
Company and 62,500 shares of the Company's
common stock which previously had been
issued on exercise of warrants at prices of
$1.00 and $1.07 per share were repurchased
by the Company for $53,500, the aggregate
amount of the proceeds received by the
Company when the 62,500 warrants were
initially exercised.
(B) 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.
At March 31, 1999, outstanding warrants in the amount of
392,364 are exercisable over the next eight years.
-37-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
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 income and net income per share for fiscal 1999, 1998 and 1997
would have been as follows:
Fiscal 1999 Fiscal 1998 Fiscal 1997
--------------- ---------------- ----------------
Net income:
As reported $ 1,338,539 $ 2,279,000 $ 2,290,000
Pro forma 887,298 2,023,000 2,277,000
Basic income per share:
As reported $ 0.30 $ 0.63 $ 0.64
Pro forma 0.20 0.56 0.64
Diluted income per share:
As reported $ 0.24 $ 0.50 $ 0.51
Pro forma 0.15 0.44 0.51
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 1999, fiscal 1998 and fiscal
1997 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.
The options outstanding as of March 31, 1999 are summarized in
ranges as follows:
Range of Weighted Number of Weighted average
exercise price average options remaining life
exercise outstanding
price
- --------------------- ------------- ------------------ -----------------
$1.12-4.00 $2.24 1,080,750 9.79
$4.01-7.00 $5.35 284,625 5.97
$7.01-10.00 $8.86 167,475 5.41
-38-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
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:
Fiscal 1999 Fiscal 1998 Fiscal 1997
--------------- -------------- --------------
Risk-free interest rate 5.07% 6.41% 6.85%
Expected life - years 5.16 6.07 6.91
Expected volatility 82% 35% 25%
Expected dividend yield 0% 0% 0%
Fair value $6.15 $2.04 $1.30
(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, 1999, 1998 and 1997 are as follows:
March 31, 1999 March 31, 1998 March 31, 1997
----------------------------- --------------------------- ----------------------------------
Current:
State and local $ 83,785 $ 129,954 $ 242,209
Federal 17,445 101,230 256,139 386,093 40,000 282,209
---------- --------- -----------
Deferred:
Federal and State 791,131 913,907 (442,133)
------------ -------------- ---------------
$ 892,361 $ 1,300,000 $ (159,924)
============ ============== ===============
The differences between the provision for income taxes computed at the
statutory rate and the reported amount of tax expense (benefit)
attributable to income before income tax for the years ended March 31,
1999, 1998 and 1997 are as follows:
Rate
--------------
1999 1998 1997
-------------- -------------- --------------
Statutory Federal income tax 34.0% 34.0% 34.0%
State and local taxes, net of Federal benefit 5.9 5.1 6.6
Items not deductible, primarily amortization
of goodwill 0.8 0.5 0.4
Valuation allowance adjustment - - 48.8)
Other (0.7) (3.3) 0.3
-------------- -------------- --------------
Effective tax rate 40.0% 36.3% (7.5)%
-39-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
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:
March 31, 1999 March 31, 1998
--------------- ---------------
Deferred tax assets (liabilities):
Goodwill, principally due to differences in amortization $ (23,486) 104,616
Net operating loss carryforwards 235,495 -
Unbilled revenue (1,124,037) -
Other (28,943) (21,174)
--------------- ---------------
Net deferred tax asset (liability) $ (940,971) 83,442
=============== ===============
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, 1999, the Company had one 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 another
client which, before and after giving effect to the Optimum
Acquisition, accounted for approximately 34.4% and 24.5%, respectively,
of its revenues and such client during the year ended March 31, 1997
represented 48.9% of 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, 1999,
1998 and 1997, the Company has charged approximately $246,000, $66,000
and $32,000 to expense as a matching employer contribution.
-40-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(10) Commitments
-----------
Employment Agreements
---------------------
The Company has entered into four year employment agreements with three
of its officers which at March 31, 1999 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, 1999 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 management personnel which at March 31, 1999
provide for annual base salaries in the aggregate amount of $375,000
and a covenant not to compete.
-41-
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure.
--------------------
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Company.
- ------- -----------------------------------------------
Pursuant to the Company's by-laws, Directors are elected to a one-year
term of office by the stockholders of the Company at its annual meeting.
Information regarding the Directors and Executive Officers of the
Company is listed in the following table:
Positions with the Company and Principal
Occupation or Employment during the past
Age Five Years Director Since
Paul A. Amershadian 51 Executive Vice President-Marketing and 1996
Sales of the Company since September 29,
1995 and of the Company's respective
predecessors, Spar and Meadows, from 1986
to September 29, 1995; Secretary of the
Company since October 16, 1996; Director of
the Company since May 1996.
John P. Benfield 48 Director, President and Chief Executive Officer 1995
of the Company since September 29, 1995;
Chairman of the Board of the Company since
October 16, 1996; Executive Vice President
of Operations of both Spar and Meadows, the
Company's respective predecessors, from 1988
to September 29, 1995.
Donald A. Bernard 66 Director, Executive Vice President and Chief 1995
Financial Officer of the Company since
September 29, 1995; Executive Vice President
of Finance of both Spar and Meadows, the
Company's respective predecessors, from 1990
to September 29, 1995.
Herbert M. Gardner 59 Director of the Company since May 1, 1997; 1997
Senior Vice President of Janney Montgomery
Scott Inc., an investment banking firm, since
1978; Presently serves as Chairman of Board of
Directors of Supreme Industries, Inc. and as a
director of Nu Horizons Electronics Corp.; Transmedia
Network, Inc.; TGC Industries, Inc.; and Hirsch
International Corp.
-42-
Joseph S. Hellman 68 Director of the Company since May 1, 1997; 1997
Partner in the law firm of Kronish Lieb Weiner
& Hellman LLP during the past five years.
Thomas E. Lachenman 48 President of Optimum Group, Inc., a wholly- 1998
owned subsidiary of the Company, from
March 31, 1998 until May 31, 1999, and of
such company's predecessor from 1963
through March 31, 1998; Director of the
Company since
March 31, 1998.
Brian Murphy 42 President of U.S. Concepts, Inc., a wholly-owned 1998
subsidiary of the Company, since December 28, 1998,
and of such company's predecessor from 1992 through
December 29, 1998. Director of the Company since
December 29, 1998.
Item 11. Executive Compensation.
- ------- ----------------------
Information required by this item is contained in the section
"Executive Compensation" in the Company's definitive Proxy Statement for its
1999 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under
the Securities Exchange Act of 1934 and is hereby incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------- --------------------------------------------------------------
Information required by this item is contained in the sections entitled
"Election of Directors" and "Security Ownership and Certain Beneficial Owners
and Management" in the Company's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934 and is hereby incorporated herein by reference.
-43-
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
Information required by this item is contained in the section entitled
"Certain Relationships and Related Transactions" in the Company's definitive
Proxy Statement for its 1999 Annual Meeting of Stockholders to be filed pursuant
to Regulation 14A under the Securities Exchange Act of 1934 and is hereby
incorporated herein by reference.
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:
Page
Index to Financial Statements. 25
Consolidated Financial Statements of Inmark Enterprises, Inc.
Independent Auditors' Report 26
Consolidated Balance Sheets as of March 31, 1999 and 1998 27
Consolidated Statements of Operations for the years ended
March 31, 1999, 1998 and 1997 28
Consolidated Statement of Stockholders' Equity
for the three years ended March 31, 1999 29
Consolidated Statements of Cash Flows for the years ended
March 31, 1999, 1998 and 1997 30
Notes to Consolidated Financial Statements 31
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:
Exhibit
Number Description of Exhibits.
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).
-44-
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.
3.1 Certificate of Incorporation, as amended, of the
Registrant (incorporated by reference to Exhibit
3.1 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).
3.2 Bylaws of the Registrant (incorporated by
reference to Exhibit 3.2 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).
10.1 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).
-45-
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).
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.
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.,
-46-
U.S. Concepts, Inc., Inmark Services, Inc.
and Optimum Group, Inc.
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.
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the last
quarter of the fiscal year covered by this report.
-47-
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.
INMARK ENTERPRISES, INC.
By: /s/ Donald A. Bernard
---------------------
Donald A. Bernard
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: June 30, 1999
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated:
Signature and Title Signature and Title
By:/s/ John P. Benfield By:/s/ Donald A. Bernard
-------------------- ---------------------
John P. Benfield Donald A. Bernard
President and Executive Vice President and
Chief Executive Officer and Director Chief Financial Officer and
(Principal Executive Officer) Director
(Principal Financial and
Accounting Officer)
Dated: June 30, 1999 Dated: June 30, 1999
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 30, 1999 Dated: June 30, 1999
By:/s/ Joseph S. Hellman By:/s/ Brian Murphy
--------------------- ----------------
Joseph S. Hellman Brian Murphy
Director Director
Dated: June 30, 1999 Dated: June 30, 1999
-48-
EXHIBIT INDEX
Exhibit
Number Description of Exhibits.
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.
3.1 Certificate of Incorporation, as amended, of the
Registrant (incorporated by reference to Exhibit
3.1 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).
3.2 Bylaws of the Registrant (incorporated by
reference to Exhibit 3.2 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).
10.1 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 the 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.
-49-
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 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).
10.10 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).
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 32, 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).
-50-
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 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.
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.
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.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule