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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997 (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.)
One Plaza Road, Greenvale, New York 11548
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 625-3500
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
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(Title of Class)
Class A Warrants
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(Title of Class)
Class B Warrants
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(Title of Class)
Units
-----
(Title of Class)
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 24, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $9,009,136.50.
As of June 24, 1997, 2,835,751 shares of Common Stock, $.001 par value,
were outstanding.
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PART I
Item 1. Business.
General Introduction
Inmark Enterprises, Inc., together with its wholly-owned subsidiaries,
Inmark Services, Inc. and North American Holding Corp. (collectively, the
"Company" or "Inmark"), is a marketing and sales promotion organization which
develops and implements customized, national, regional and local consumer and
trade promotion programs principally for Fortune 500 manufacturers. Inmark'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. The Company's programs in many
instances 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.
The Company 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 One
Plaza Road, Greenvale, New York 11548, and its telephone number is 516-625-3500.
The Company began to engage in its current operations on September 29, 1995
upon consummation of its merger transaction (the "Merger") as a result of which
Inmark Services, Inc., a New York corporation, became a wholly-owned subsidiary
of the Company and the management of Inmark Services, Inc. became the executive
management of the Company. Previously, the Company had been engaged in unrelated
activities. See "Prior Activities".
Description of Business
General. Inmark is a marketing and sales promotion organization which
develops and implements customized, national, regional and local consumer and
trade promotion programs principally for Fortune 500 packaged goods
manufacturers. Inmark's promotional programs are designed to enhance the value
of its clients' budgeted expenditures and achieve, in an objective and
measurable way, its clients' specific marketing and promotional objectives.
Inmark's programs in many instances 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.
Inmark's services generally include: (a) assisting its clients in
identifying and defining specific objectives and advising on the deployment of
budgeted amounts to achieve its objective and maximize value; (b) developing the
concept and subsequently creating the consumer and trade promotional program and
(c) implementing turnkey 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 trafficing of media and total program administration.
- -2-
Inmark combines the needs of its clients and those of their sales forces
and the needs of its clients' Trade outlets with Inmark'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 ultimate consumer of the client's products. Distinct from many promotion
and marketing companies which may have adopted a specific promotional program or
technique 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,
specialty printing, licensing and point-of-purchase displays.
Industry Background. Packaged goods manufacturers typically employ two
separate but related marketing programs to sell their products. First they will
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, typically employing television and radio as well as print media and
other forms of communication designed to generate brand recognition and product
awareness among consumers. Second, they will undertake a promotional advertising
program, often on a local or regional rather than national level, which may be
targeted to the retail trade or other point of consumer distribution to induce
the Trade to display and carry their products, and targeted to the consumer to
promote purchases and further increase brand name recognition. Promotion
advertising may include broadcast media and employ or integrate portions of the
image created through the general advertising campaign, but it will typically be
more "directed" to the point of purchase, employing techniques such as
couponing, sampling, incentives to the Trade, merchandising and licensing and
similar efforts.
According to Promo Magazine's 1996 Annual Report on the Promotion Industry,
the promotion industry grew by a healthy 6.7% as consumer and trade promotion
expenditures reached $200.3 billion during 1995, of which trade promotion
expenditures accounted for $130.3 billion, or 65% of the total, and consumer
promotion expenditures accounted for $70.0 billion, or 35% of the total.
According to the Annual Report, trends indicate a continuing increase in
in-store and local market directed promotions. 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.
Inmark's Programs. Inmark 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, providing turnkey
implementation, and utilizing its creative development tools, sales support,
relationships with media outlets, promotional products, and administrative
services, supported with an innovative management information system, to gather,
monitor, track and report the implementation status of each program. Inmark's
ability to capture data regarding sales activity and Trade acceptance of a
particular program on a real time basis enables Inmark and its clients to
continually monitor and adjust the program to maximize its effectiveness. An
Inmark promotional program promotes 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.
- -3-
Inmark'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. 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 as it represents media
which the Trade would otherwise have to purchase. Trade participation for a
client often takes the form of tangible merchandising performance such as
additional display of a client's products within the Trade's stores, an
increase in the product inventory throughout the Trade's chain, a Trade's
coupon circular or solo-mailers referencing and promoting the client's
product, or the Trade permitting product sampling within one or more stores
in the chain.
o Promotional Television - Broadcast time, to achieve the objectives
similar to that of promotional radio, to create an incentive for Trade
participation. Added advertising value for the Trade in having a client's
television commercial edited and integrated by Inmark to include a specific
Trade customer's name, logo and feature activity in 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, are offered to
the Trade in return for providing specific in-store merchandising on behalf
of a client's product.
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, such as: (a)
merchandise giveaways in conjunction with product purchases; (b) vacation
and product sweepstakes (Inmark will design display materials, write the
rules, qualify the winners and arrange travel plans or product ordering);
(c) product sampling in one or more stores; and (d) traditional couponing.
Marketing Strategy. Inmark'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 necessarily associated with such programs. This strategy has
focused, and in the future will continue to focus, toward clients in the
packaged goods industry, where ample opportunities continue to exist. However,
Inmark also has broadened its strategy and intends to offer its trade and
consumer promotion products to clients in other industries, such as financial
services, health care and transportation to name a few, which also are expected
to benefit from a comprehensive customized program on a turnkey implementation
basis.
Inmark believes that its strategy of attempting to provide comprehensive
solutions to its client's promotional advertising programs not only
distinguishes it from certain of its competitors, which provide only specific
promotional programs without the office and field support (an integral part of
Inmark Services' business) but also is more attuned to the client's needs,
particularly as clients seek to contract out all promotional advertising for a
specific product as a result of downsizing their in-house capabilities.
- -4-
Inmark's sales and marketing activities are conducted by its direct sales
force of eleven people. Inmark's marketing and sales activities are directed
from Inmark's headquarters located in Greenvale, New York and additional sales
offices in Barrington, Illinois, Birmingham, Alabama, Bloomington, Minnesota,
Irvine and San Francisco, California, Phoenix, Arizona and Worcester,
Pennsylvania.
Customers. Inmark's principal clients are packaged goods manufacturers,
generally among the Fortune 500, which are actively engaged in promoting their
products to both the Trade and consumer. Inmark's clients include, among others,
Colgate-Palmolive Company, The Pillsbury Company, Coca-Cola Foods, CPC Specialty
Markets, CIBA Consumer Pharmaceuticals, Kikkoman International Inc. and Perrier
Group of America. For the fiscal years ended March 31, 1997 and March 31, 1996,
Inmark had one client, Colgate-Palmolive Company, which accounted for
approximately 48.9% and 51.6%, respectively, of its revenues. For the fiscal
year ended March 31, 1995, Spar, Inmark's predecessor, had one client, The
Pillsbury Company, which accounted for approximately 55.9% of its revenues. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Inmark". Unlike traditional general advertising firms, which are
engaged as agents of record on behalf of packaged goods manufacturers,
promotional companies, including Inmark, typically are engaged on a
product-by-product, or project-by-project basis. Although Inmark's contracts
with its clients are executed on a project-by-project basis, the relationship of
Inmark and its predecessors with certain of their 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, Inmark's competition is derived from two basic groups
(which market their services to packaged goods manufacturers): (a) other full
service promotion agencies and (b) companies which specialize in one specific
aspect or niche of a general promotional program. Other full service promotion
agencies may be a part of or affiliated with larger general advertising agencies
such as the Cato Johnson relationship with Young & Rubicam, Impact with Foote
Cone Belding and J. Brown/LMC with Grey Advertising, all of which have greater
financial and marketing resources available than Inmark. 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. Certain of these niche companies may have greater
financial and marketing resources than those available to Inmark. Inmark
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 Inmark will be
able to continue to compete successfully with existing or future industry
competitors.
Prior Activities
The Company was formed initially as Health Image Media, Inc. to publish and
distribute a free, controlled circulation magazine, Rx REMEDY, which was devoted
primarily to health, pharmacy and drug concerns with a focus directed to
consumers aged 55 and over. The inaugural issue of Rx REMEDY was launched during
July 1992, with additional issues published through April 1993.
In light of ongoing concerns expressed by the Board of Directors regarding
disappointing operating results and lower than anticipated advertising revenues,
as well as a determination to preserve the Company's then existing cash
resources, the Company ceased publication of the magazine in April
- -5-
1993. On June 18, 1993, the Company assigned all of its assets relating to the
Company's magazine to KSP, Inc. ("KSP"), a corporation formed by certain of the
Company's then stockholders (including its then President and Chief Executive
Officer), in consideration for the transfer by KSP to the Company of
approximately 19% of the Company's then issued and outstanding Common Stock then
owned by KSP (which had been contributed to KSP by its stockholders) (the "KSP
Transaction"). As part of the KSP Transaction, KSP assumed all of the
liabilities of the Company relating to the magazine, and the Company paid
$656,735 in cash to KSP. Additionally, certain stockholders of the Company (all
of whom also were the stockholders of KSP, including the former executive
officers of the Company) and the Company executed mutual general releases, and
certain pending litigation was dismissed.
Following the KSP Transaction, the Company had no operating business and
its assets consisted principally of cash and marketable securities. During the
remainder of fiscal year 1994 and during fiscal year 1995 until the Merger in
September 1995, the Company's Board of Directors evaluated a number of potential
acquisition opportunities. In two instances, the Company executed letters of
intent; however, in both cases, negotiations were terminated by the Company
prior to execution of definitive agreements, principally as a result of certain
issues which had been raised in the course of the Company's due diligence
investigations. In another proposed transaction, the Company entered into an
Agreement and Plan of Merger with Rx Returns, Inc. ("Rx Returns"), pursuant to
which the Company's wholly-owned subsidiary would have merged into Rx Returns
and the Company would have issued shares of the Company's Common Stock to the Rx
Returns stockholders representing approximately 25% of the shares to be then
issued and outstanding. Rx Returns is a privately-held national return goods
service organization covering the pharmaceutical, over-the-counter and health
and beauty aid industries. On May 18, 1994, the Company terminated the merger
agreement on the basis of, among other things, a material adverse change in the
business of Rx Returns. Immediately following the termination by the Company, Rx
Returns also terminated the merger agreement. Thereafter, litigation was
instituted against the Company and its directors by Rx Returns and certain of
its stockholders as well as certain purported stockholders of the Company, in
connection with the terminated merger transaction. The Company also commenced
litigation in connection with a default by Rx Returns in repaying certain
indebtedness owed to the Company. See "Legal Proceedings."
Following the termination of the merger agreement with Rx Returns, the
Company continued to seek other potential acquisition opportunities. As a result
of its continuing investigation, on April 25, 1995, the Company entered into an
Agreement and Plan of Merger and Plan of Reorganization (the "Merger Agreement")
with Inmark Services, Inc. and its three stockholders. On September 29, 1995
Inmark Services, Inc. was merged into a newly formed wholly-owned subsidiary of
the Company, InMark Acquisition Corp., a Delaware corporation, and the
stockholders of Inmark Services, Inc. received shares of Common Stock of the
Company constituting 26% of the Common Stock issued and outstanding immediately
following the Merger in exchange for their shares of Inmark Services, Inc.
Inmark Services, Inc. was a new corporation formed on February 11, 1995 to
acquire the assets and assume certain liabilities of SPAR Promotion & Marketing
Services, Inc. ("Spar"), a sales promotion and marketing firm, pursuant to a
management led buy-out by the Inmark stockholders which was consummated as of
April 3, 1995. As a result of the acquisition of Spar, Inmark Services, Inc.
succeeded to Spar's business which is the business in which the Company
currently is engaged. Following the Merger, InMark Acquisition Corp. changed its
name to Inmark Services, Inc. and the Company (formerly Health Image Media,
Inc.) changed its name to Inmark Enterprises, Inc.
- -6-
Employees
The Company currently employs 37 persons, eleven of whom are engaged in
sales, sixteen in marketing support programs and program management and ten in
finance and administration. None of Company's employees is represented by a
labor organization and the Company considers the relationships with its
employees to be good.
Item 2. Properties.
Upon consummation of its Merger, the Company's principal offices were
relocated from 405 Park Avenue, New York, New York to approximately 5,500 sq.
ft. of leased office space at One Plaza Road, Greenvale, New York. The Company
also leases sales offices in office buildings for approximately 800 sq. ft. at
50 N. Ela Street, Barrington, Illinois 60010, approximately 900 sq. ft. at 870
Market Street, San Francisco, California 94102 and approximately 200 sq. ft at
One Park Plaza, Irvine, California 92614. Each of the Company's office leases is
short term and annually renewable with current annual rent fixed at
approximately $77,000, $12,000, $17,000 and $6,500 for Greenvale, New York,
Barrington, Illinois, San Francisco and Irvine, California, respectively.
Item 3. Legal Proceedings.
On November 8, 1994, the Company was served with a complaint filed in the
Court of Common Pleas in Berks County, Pennsylvania by Rx Returns, Inc., a
Pennsylvania corporation ("Rx Returns") and certain of its stockholders against
the Company, its then directors, including Robert F. Hussey and Courtlandt G.
Miller, and its wholly-owned subsidiary, North American Holding Corp., alleging,
among other things, that the Company had breached obligations owing the
plaintiffs in terminating the merger agreement with Rx Returns. The plaintiffs
were joined by three alleged stockholders of the Company, purportedly owning an
aggregate of 1,600 shares, alleging that the directors breached their fiduciary
duty to the Company's stockholders by terminating the merger agreement prior to
a vote of stockholders. The plaintiffs sought the Court to compel the Company to
call a special meeting of its stockholders to vote upon the merger and to pursue
the merger if so approved. On November 28, 1994, the Company filed preliminary
objections to the complaint.
On November 14, 1994, a $1,270,000 loan provided by the Company to Rx
Returns in connection with the proposed merger agreement became due and payable.
Rx Returns defaulted in payment of the amount due plus accrued interest and on
November 21, 1994, the Company entered judgment against Rx Returns in the
Federal District Court of the Eastern District of Pennsylvania placing a lien
against assets of Rx Returns. The Company notified the guarantors of the loan of
the default by Rx Returns and exercised its right to take possession of the
pledged shares constituting approximately 40% of the outstanding shares of Rx
Returns. The Company also informed Rx Returns that it intended to take
appropriate action to collect the loan, including, if necessary, causing a
liquidation of Rx Returns.
The foregoing was superseded when, on December 18, 1995, the Court of
Common Pleas of Berks County, Pennsylvania signed an order approving the
Company's settlement agreement with Rx Returns, certain of its stockholders and
certain stockholders of the Company. Under the settlement agreement Rx Returns
agreed to pay the Company $1,075,000 over a period of time in satisfaction of
- -7-
the loan and to discontinue, with prejudice, all claims filed against the
Company, including the stockholder derivative claims. As part of the settlement,
the Company also received as collateral 30% of the outstanding capital stock of
Rx Returns which is redeemable by Rx Returns only after all amounts due the
Company in the settlement are paid. As a result of the settlement agreement, all
pending litigation against the Company and certain of its current and former
directors, including the derivative stockholder claims, and all pending
litigation brought by the Company against Rx Returns in Federal District Court
in the Eastern District of Pennsylvania was dismissed.
Except for repayment of approximately $200,000, Rx Returns has failed to
make the installment payments of its loan to the Company as required by the
settlement agreement and, therefore, is in default of the settlement agreement.
As a result of the default, the total payment due to the Company from Rx Returns
increased to $1,325,000. The Company has notified Rx Returns of the default and
the Company currently is considering its available remedies, including, but not
limited to exercising its rights as a secured creditor of the assets of Rx
Returns and exercising its rights against Rx Returns' guarantors and taking
possession of the shares of Rx Returns capital stock pledged by them as
collateral security of their guarantee obligations. There can be no assurance,
however, that any of these remedies will result in the Company being repaid in
full, or otherwise. In its financial statements, the Company carries the Rx
Return loan at a zero valuation.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
- -8-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
From the Company's initial public offering on October 20, 1992 until
September 28, 1994, the Company's Units, Common Stock, Class A Warrants and
Class B Warrants were traded in the over-the-counter market and included for
quotation on the Nasdaq SmallCap Market under the symbols RXRXU, RXRX, RXRXW and
RXRXZ, respectively. On September 28, 1994, the Company's securities were
delisted from the SmallCap Market for failure to meet certain qualification
criteria. From September 28, 1994, until December 17, 1996, the Company's
securities were traded over-the-counter on the OTC Electronic Bulletin Board. On
completion of the Company's Merger, the Company's name was changed to Inmark
Enterprises, Inc. and accordingly, as of October 19, 1995, the Company's Units,
Common Stock, Class A Warrants and Class B Warrants began trading over- the-
counter on the OTC Electronic Bulletin Board under the symbols IMKEU, IMKE,
IMKEW and IMKEZ, respectively. As of December 17, 1996, the Company's Units,
Common Stock, Class A Warrants and Class B Warrants were approved for quotation
and trading on the Nasdaq SmallCap Market under the same symbols. The following
table sets forth for the periods indicated, through December 16, 1996, the high
and low bid prices and as of December 17, 1996 the high and low trade prices for
the Units, Common Stock, Class A Warrants and Class B Warrants 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.
Class A Class B
Units Common Stock Warrants Warrants
----- ------------ -------- --------
High Low High Low High Low High Low
---- --- ---- --- ---- --- ----- ---
Fiscal Year 1996
- ----------------
First Quarter 3 1 5/8 2 1/8 1 5/8 9/16 1/4 1/4 1/8
Second Quarter 4 3/4 1 1/8 3 1/4 1 1/4 7/8 1/8 1/2 1/8
Third Quarter 4 1/2 1 1/2 3 1/2 1 1/4 1 3/8 5/8 1/4
Fourth Quarter 3 1/4 1 1/8 3 1 1/4 1/2 1/4 1/8 1/8
Fiscal Year 1997
- ----------------
First Quarter 3 1/2 1 1/2 3 1 1/2 1/2 1/4 1/8 1/8
Second Quarter 4 2 1/4 3 5/8 2 1/2 3/16 1/8 1/16
Third Quarter 4 1/2 3 3/8 4 1/8 3 1/4 3/8 1/8 1/8 1/32
Fourth Quarter 7 3 3/4 6 3/4 3 5/8 1 7/64 1/8 3/16 1/32
On June 24, 1997, there were 2,835,751 shares of Common Stock outstanding
and approximately 50 shareholders of record. The Company has never declared or
paid cash dividends on its 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 its Common Stock in the foreseeable future.
- -9-
Item 6. Selected Financial Data.
The Merger on September 29, 1995 of Inmark Services, Inc. into a
newly-formed wholly- owned subsidiary of Health Image Media, Inc. was accounted
for as a reverse purchase of Health Image Media, Inc. 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 Spar due to the application of purchase
accounting adjustments as a result of the management-led buyout of Spar.
Year Ended 3 Mos.Ended Year Ended Year Ended Year Ended Year Ended
December 31, March 31, March 31, March 31, March 31, March 31,
1992 (3) 1993 (3) 1994 (2) 1995 (2) 1996 (1) 1997 (5)
-------- -------- -------- -------- -------- --------
Statement of Operations Data:
Sales $ 4,452,886 $ 852,730 $ 6,676,355 $13,670,938 $14,645,990 $18,901,730
Gross Profit 1,535,911 296,374 1,699,725 4,453,233 4,497,192 6,291,821
Net Income (Loss) (2,442,347) (397,942) (458,230) 1,229,391 967,647 2,289,503
Net Income (Loss) per
Common and Common
Equivalent Share
Primary ** ** ** ** $.56 $.65
Fully diluted ** ** ** ** $.47 $.64
- ----------
** Not applicable as companies were privately owned
December 31, December 31, March 31, April 3, March 31, March 31,
1992 1993 1994 1995 (4) 1996 1997
---- ---- ---- -------- ---- ----
Balance Sheet Data:
Working Capital (deficiency) $ 2,063,180 $(2,336,821) $ (784,384) $(2,204,473) $ (846,489) $ 1,859,868
Total Assets 478,751 346,806 1,282,758 5,242,136 5,118,569 8,559,840
Total Liabilities 2,416,630 2,683,627 1,735,956 5,241,986 3,104,792 4,022,459
Stockholders Equity (deficiency) (1,968,874) (2,336,821) (458,158) 150 2,013,777 4,537,381
- ----------
(1) Includes operations of Inmark Services, Inc. for the entire year and Health
Image Media, Inc. from the September 29, 1995 acquisition date.
(2) Represents operations of SPAR Promotion & Marketing Services, Inc. which
was acquired by Inmark Services, Inc. on April 3, 1995 in a transaction
accounted for as a purchase.
(3) Represents operations of MGR Promo Associates, Inc. (formerly R.G. Meadows,
Inc.), a predecessor of SPAR Promotion & Marketing Services, Inc.
(4) Balance sheet information of Inmark Services, Inc. upon acquisition of the
business of SPAR Promotion & Marketing Services, Inc.
(5) See consolidated financial statements of the Company appearing elsewhere
herein.
- -10-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
On September 29, 1995, the Company completed the Merger whereby Inmark
Services, Inc., a New York corporation, was merged with and into the Company's
wholly-owned subsidiary, InMark Acquisition Corp., a Delaware corporation.
Following the Merger, InMark Acquisition Corp. changed its name to Inmark
Services, Inc. and the Company changed its name from Health Image Media, Inc. to
Inmark Enterprises, Inc. Inmark Services, Inc. is the successor to SPAR
Promotion & Marketing Services, Inc. ("Spar"), a sales promotion and marketing
firm, as a result of a management led buyout of that company's net assets and
business on April 3, 1995.
The Merger has been accounted for as a reverse purchase of the Company by
Inmark Services, Inc. and, for financial accounting and reporting purposes,
Inmark Services, Inc. is treated as the acquirer of the Company. Accordingly
results of operations discussed below represent, for the year ended March 31,
1995, the operations of Spar; for the year ended March 31, 1996, solely the
operations of Inmark Services, Inc. until the September 29, 1995 acquisition of
Health Image Media, Inc. and thereafter the consolidated operations of the
Company and its subsidiaries; and for the year ended March 31, 1997, the
consolidated operations of the Company and its subsidiaries. The following
information should be read together with the consolidated financial statements
and notes thereto included elsewhere herein. The financial statements of the
Company and Inmark Services, Inc. are not comparable to those of Spar due to the
application of purchase accounting adjustments as a result of the management-led
buyout of Spar.
Results of Operations
Sales. The Company's sales for the fiscal year ended March 31, 1997
("Fiscal 1997") were $18,902,000, compared to sales of $14,646,000 for the
fiscal year ended March 31, 1996 ("Fiscal 1996"), an increase of $4,256,000 or
29.1%. The increase in sales in Fiscal 1997 resulted primarily from an overall
increase in sales contract volume generated from larger contract amounts from
continued client relationships and contracts with new clients.
The Company's sales for Fiscal 1996 were $14,646,000, compared to Spar's
sales of $13,671,000 for the fiscal year ended March 31, 1995 ("Fiscal 1995"),
an increase of $975,000 or 7.1%. The increase in sales in Fiscal 1996 resulted
primarily from an overall increase in sales contracts in place.
For Fiscal 1997 and Fiscal 1996, the Company had one client which accounted
for approximately 48.9% and 51.6%, respectively, of the Company's sales and for
Fiscal 1995, Spar had another client which accounted for approximately 55.9% of
its sales. 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 is not otherwise overcome, 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.
Direct Expenses. Direct expenses consist primarily of costs to purchase
media, program merchandise, production, merchandise warehousing and
distribution, third-party contract fulfillment and
- -11-
other directly related program expenses. Direct expenses do not include salaries
and benefits of employees servicing or otherwise involved in the administration
of promotional programs or overhead expenses which could otherwise be allocated
to such programs. The Company's direct expenses for Fiscal 1997 were $12,610,000
or 66.7% of sales, compared to direct expenses for Fiscal 1996 which were
$10,149,000 or 69.3% of sales. The increase in the amount of direct expenses for
Fiscal 1997 principally relates to the increase in sales for the fiscal year,
whereas the decrease in direct expenses as a percentage of sales for Fiscal 1997
primarily resulted from client programs which in the aggregate have a higher
gross profit margin than the mix of programs contracted for in Fiscal 1996.
As a result of the changes in sales and direct expenses, the Company's
gross profit for Fiscal 1997 increased to $6,292,000 from $4,497,000 for Fiscal
1996 and, as a percentage of sales, gross profit increased to 33.3% in Fiscal
1997 compared to 30.7% in Fiscal 1996.
The Company's direct expenses for Fiscal 1996 were $10,149,000 or 69.3% of
sales, compared to the direct expenses of Spar for Fiscal 1995 which were
$9,218,000 or 67.4% sales. The increase in direct expenses was principally
related to the increase in sales in Fiscal 1996, whereas the increase in direct
expenses as a percentage of sales was principally the result of the mix of
client programs which, in the aggregate, had a lower gross profit margin than
the mix of client programs executed in the prior fiscal year.
As a result of the changes in sales and direct expenses, the Company's
gross profit for Fiscal 1996 increased to $4,497,000 from $4,453,000 during
Spar's Fiscal 1995 and, as a percentage of sales, gross profit decreased to
30.7% in Fiscal 1996 compared to 32.6% in Fiscal 1995.
Operating Expenses. Operating expenses for Fiscal 1997 increased by
$48,000, or 1.2% to $4,175,000 compared to $4,127,000 for Fiscal 1996. As a
percentage of sales, operating expenses for Fiscal 1997 were 22.1% compared to
28.2% for Fiscal 1996.
The increase in operating expenses for Fiscal 1997 resulted primarily from
the net effect of the following increases and offsetting decreases: increases of
approximately (i) $378,000 in salaries and related payroll taxes, which increase
is principally attributable to the employment of additional personnel and an
overall increase in base salaries; (ii) $170,000 in marketing and selling
expenses, inclusive of commissions, principally attributable to the increase in
sales volume and amounts budgeted for marketing and advertising; (iii) $65,000
in licensing fees required for license use in certain client programs; (iv)
$89,000 in employee benefits principally for the increased cost of employer
provided medical insurance and contribution to Company's 401K Retirement Plan;
and (iv) increase in various other expenses related to the overall increase in
level of operations; and decreases of approximately (i) $397,000 of
non-recurring merger and acquisition expenses and (ii) $361,000 of factoring
facility and administrative fees resulting from the significant reduction in use
of the factoring agreement facility.
Operating expenses for Fiscal 1996 increased by $951,000, or 29.9%, to
$4,127,000 compared to $3,177,000 for Fiscal 1995 of Spar. Operating expenses as
a percentage of sales for Fiscal 1996 were 28.2% compared to 23.2% for the
Fiscal 1995.
The increase in total operating expenses for Fiscal 1996 was principally
the result of the substantial increase in selling, general and administrative
expenses, which increase was primarily attributable to non-capitalized expenses
incurred in connection with the acquisition by Inmark Services,
- -12-
Inc. of the business of Spar, the financing obtained both in connection with the
Spar acquisition and for ongoing operations, and the costs and expenses
associated with the Merger. Of the approximately $1,174,000 of such costs and
expenses, the Company, during Fiscal 1996 (i) amortized approximately $236,000
of deferred legal and accounting fees and costs incurred in connection with the
origination of the factoring agreement, (ii) incurred expenses of approximately
$430,000 for fees in connection with the factoring agreement, (iii) amortized
approximately $290,000 of goodwill, compared to $115,283 of goodwill amortized
during Fiscal 1995, and (iv) wrote off approximately $218,000 of legal and
accounting costs and expenses incurred in connection with the Spar acquisition
and the Merger.
Salaries, which include bonuses and incentive compensation, decreased by
$364,000 in Fiscal 1996 compared to Fiscal 1995. The Fiscal 1996 decrease was
primarily the result of a $816,000 decrease in management bonuses and incentive
compensation, offset by a $452,000 increase in base salaries. For Fiscal 1996,
there were no contracted management bonus arrangements in effect whereas for
Fiscal 1995, management bonuses amounted to $464,000. The increase in base
salaries principally relates to costs associated with an increase in personnel
and increased base salaries.
Other Income. For Fiscal 1997, the Company did not have any other income,
compared to $177,000 of other income for Fiscal 1996 which was primarily the
result of a $150,000 payment received from Rx Returns, Inc. in partial payment
of amounts due to the Company in connection with a court approved settlement of
legal proceedings. There can be no assurance that the Company will continue to
receive additional payments from Rx Returns as set forth in the settlement
agreement and accordingly, the Company has not recorded any additional amounts
due from Rx Returns, Inc. Spar had no other income in Fiscal 1995.
Interest Income/Expense. For Fiscal 1997, the Company earned interest
income in excess of interest expense of approximately $13,000 compared to Fiscal
1996 when it incurred net interest expense of approximately $86,000. The
favorable change of approximately $99,000 is primarily the result of reduced
interest expense due to the reduction and final payment in Fiscal 1997 of the
Spar notes payable balances outstanding at the end of Fiscal 1996 and an
increase in interest income from the Company's short term cash equivalent
investments.
The Company's interest expense, net of interest income earned primarily on
a cash deposit securing the Company's obligations under its factoring agreement,
increased by $58,000 to $86,000 for Fiscal 1996 compared to Fiscal 1995. The
increase was the result of interest paid and accrued on the promissory notes
issued to Spar in connection with the Spar acquisition, compared to Spar's net
interest expense of $28,000 for Fiscal 1995, which was primarily the result of
interest paid on a Spar affiliated company loan.
Provision For Income Taxes. The provision for income taxes for Fiscal 1997
reflects a net benefit of $160,000, the components of which consist of a net
provision ( after utilization of prior years' net operating loss carryforwards
as an offset against Federal taxable income for the year) for current Federal,
state and local taxes of $282,000, offset by $442,000 of deferred tax benefits,
arising principally from a reduction of the valuation allowance for deferred tax
assets as a result of management's belief that it is more likely than not that a
portion of such assets will be realized. The provision for income taxes for
Fiscal 1996 reflects a net benefit of $506,000, the components of which consist
of a net provision (after utilization of prior years' net operating loss
carryforwards as an offset against Federal taxable income for the year) for
current Federal, state and local taxes of $36,000, offset by $542,000
- -13-
of deferred tax benefits, arising principally from a reduction of the valuation
allowance for deferred tax assets as a result of management's belief that it is
more likely than not that a portion of such assets will be realized. As of March
31, 1997, the Company has approximately $1,924,000 of net operating loss
carryovers available to reduce future taxable income. However, while such
carryovers will, upon utilization, reduce future income tax payments, they will
not significantly impact future tax expense, since substantially all of the
benefits of these carryovers have already been reflected in the Company's
financial statements as deferred tax assets. The provisions for income taxes for
Fiscal 1997 and 1996 are not comparable with Spar's provision for Fiscal 1995,
since Spar, as an S corporation, was not subject to Federal and most state
income taxes.
Net Income. As a result of the items discussed above, the Company's net
income for Fiscal 1997 was $2,290,000 compared to $968,000 for Fiscal 1996 and
Spar's net income of $1,229,000 for Fiscal 1995.
Liquidity and Capital Resources.
The Company's operating activities and other commitments, until April 24,
1996, were funded with the sale of accounts receivable pursuant to a factoring
agreement described below and with net cash provided from operations.
Effective April 24, 1996, the Company entered into a one year factoring
agreement, which replaced its prior factoring agreement, pursuant to which the
Company could receive advances of up to 75% of those of its accounts receivable
which the Company, at its discretion, elected to sell to the factor. Total
advances could not exceed $2,000,000 at any given time during the term of the
factoring agreement. Subsequent to April 24, 1996, the Company's operating
activities did not require it to utilize the factoring agreement to receive
advances against its accounts receivable or otherwise incur any related
factoring agreement fees.
For Fiscal 1997, the Company's financial position continued to strengthen
with an increase of $1,012,000 in cash and cash equivalents.
Operating activities in Fiscal 1997 provided $841,000 in cash, principally
from net income of $2,290,000, offset by net 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 offsetting increase in
accrued costs. This compares to use of cash of $456,000 for operations in Fiscal
1996, principally as a result of net income of $968,000, offset by net non-cash
adjustments of $98,000 and by net changes in operating assets and liabilities of
$1,326,000, primarily attributable to decreases in accounts payable and accrued
compensation offset in part by increases in accrued job costs and other accrued
liabilities.
Investing activities for Fiscal 1997 provided net cash of $109,000 as the
result of the release to the Company of the $250,000 of restricted cash from the
factor and the use of $141,000 for the purchase of fixed assets. For Fiscal
1996, investing activities provided net cash of $366,000 as a result of $388,000
of cash provided from the reverse purchase of Health Image Media, Inc., and the
release of $250,000 of restricted cash from the factor, offset by cash payments
of acquisition costs of $202,000 related to the management buy-out of Spar and
by $70,000 for purchases of fixed assets.
- -14-
For Fiscal 1997, financing activities provided net cash of $63,000 compared
to $790,000 for Fiscal 1996. The reduction in cash provided was the result of
(i) the Company's cash position reducing the need to sell accounts receivable
pursuant to the factoring agreement thereby resulting in a decrease of $579,000
in the amount due from factor for Fiscal 1997 compared to a decrease of
$1,712,000 for Fiscal 1996; (ii) receipt in Fiscal 1997 of $288,000 of proceeds
from the exercise of stock options compared to none for Fiscal 1996; (iii) the
repayment of notes payable to Spar of $750,000 in Fiscal 1997 compared to
$922,000 in Fiscal 1996; and the repurchase of stock for $54,000 in Fiscal 1997
compared to none for Fiscal 1996.
At March 31, 1997, the Company had cash and cash equivalents of $1,713,000,
working capital of $1,860,000 and stockholders' equity of $4,537,000 compared to
cash and cash equivalents of $701,000, negative working capital of $846,000 and
stockholders' equity of $2,014,000 at March 31, 1996.
The Company's cash and cash equivalents at March 31, 1997, as well as
anticipated cash flows from operations, are expected to be sufficient to fund
planned future operating requirements. Otherwise, the Company will be required
to seek external financing, either through additional equity or debt financing.
There can be no assurance that the Company will be able to obtain such
additional funding, if required.
Item 8. Financial Statements.
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of Inmark Enterprises, Inc.
Independent Auditors' Report 16
Consolidated Balance Sheets as of March 31, 1997 and 1996 17
Consolidated Statements of Operations for the years ended March 31, 1997 and 1996 18
Consolidated Statement of Stockholders' Equity
for the two years ended March 31, 1997 19
Consolidated Statements of Cash Flows for the years ended March 31, 1997 and 1996 20
Notes to Consolidated Financial Statements 21
Financial Statements of SPAR Promotion & Marketing Services, Inc. (a predecessor company)
Independent Auditors' Report 36
Balance Sheets as of March 31, 1995 and 1994 37
Statements of Operations and Retained Earnings (Deficit)
for the years ended March 31, 1995 and 1994 38
Statements of Cash Flows for the years ended March 31, 1995 and 1994 39
Notes to Financial Statements 40
- -15-
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 examinining, 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, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
May 19, 1997
- -16-
INMARK ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
1997 1996
---- ----
Assets
Current assets:
Cash and cash equivalents $ 1,712,751 700,598
Restricted cash -- 250,000
Accounts receivable 2,780,866 --
Due from factor -- 578, 725
Interest and other receivables 6,725 31,040
Deferred tax asset 1,082,133 640,000
Prepaid expenses and other current assets 299,852 57,940
----------- -----------
Total current assets 5,882,327 2,258,303
----------- -----------
Furniture, fixtures and equipment, at cost 326,293 184,868
Less accumulated depreciation 119,144 63,709
----------- -----------
207,149 121,159
----------- -----------
Goodwill, net of amortization of $561,097 and $280,548 2,244,378 2,524,927
Note receivable from officer 200,000 200,000
Other assets 25,986 14,180
----------- -----------
Total assets 8,559,840 5,118,569
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 520,763 851,898
Accrued job costs 3,209,771 1,287,904
Accrued compensation 151,811 32,144
Other accrued liabilities 140,114 182,846
Notes payable - SPAR -- 750,000
----------- -----------
Total current liabilities 4,022,459 3,104,792
----------- -----------
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 2,835,751 shares and
2,604,251 shares 2,835 2,604
Additional paid-in capital 1,277,396 1,043,526
Retained earnings 3,257,150 967,647
----------- -----------
Total stockholders' equity 4,537,381 2,013,777
----------- -----------
Total liabilities and stockholders' equity 8,559,840 5,118,569
=========== ===========
See accompanying notes to consolidated financial statements.
- -17-
INMARK ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1997 AND 1996
1997 1996
---- ----
Sales $ 18,901,730 14,645,990
Direct expenses 12,609,909 10,148,798
------------ ------------
Gross profit 6,291,821 4,497,192
------------ ------------
Salaries 2,497,325 2,119,425
Selling, general and administrative expense 1,678,139 2,007,845
------------ ------------
Total operating expense 4,175,464 4,127,270
------------ ------------
Operating income 2,116,357 369,922
Other income -- 177,277
Interest income (expense), net 13,122 (85,713)
------------ ------------
Income before income taxes 2,129,579 461,486
Provision for income taxes (benefit) (159,924) (506,161)
------------ ------------
Net income 2,289,503 967,647
============ ============
Net income per common and common equivalent share:
Primary $ .65 $ .56
============ ============
Fully diluted $ .64 $ .47
============ ============
Weighted average number of common and
common equivalent shares outstanding:
Primary 3,519,545 1,715,396
============ ============
Fully diluted 3,595,414 2,061,057
============ ============
See accompanying notes to consolidated financial statements.
- -18-
INMARK ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TWO YEARS ENDED MARCH 31, 1997
Capital Stock Common Stock
no par value par value $.001 Additional
-------------------- ------------------------ Paid - in Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
------ ------ ------ ------ ------- -------- ------
Balance, April 3, 1995 150 $ 150 -- $ -- $ -- $ -- $ --
Recapitalization by issuance of
common stock in exchange for
capital stock of
Inmark Services, Inc. (150) (150) 677,106 677 (527) -- --
Acquisition of monetary assets of
Health Image Media, Inc. by
issuance of common stock -- -- 1,927,145 1,927 880,270 -- 882,197
Debt payable to stockholders
converted to warrants -- -- -- -- 163,783 -- 163,783
Net income -- -- -- -- -- 967,647 967,647
-------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 1996 -- -- 2,604,251 2,604 1,043,526 967,647 2,013,777
Exercise of warrants and options -- -- 281,500 281 287,320 -- 287,601
Repurchase of common stock -- -- (50,000) (50) (53,450) -- (53,500)
Net income -- -- -- -- 2,289,503 2,289,503
-------- ----------- ----------- ----------- ----------- ----------- -----------
Balance March 31, 1997 -- $ -- 2,835,751 $ 2,835 $ 1,277,396 $ 3,257,150 $ 4,537,381
======== =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
- -19-
INMARK ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1997 AND 1996
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 2,289,503 967,647
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 335,985 541,708
Deferred income taxes (442,133) (640,000)
Changes in operating assets and liabilities:
Increase in accounts receivable (2,780,866) --
Increase in note receivable - officer -- (200,000)
Increase in prepaid expenses and other current assets (229,403) (74,335)
Decrease in accounts payable (331,135) (881,028)
Increase in accrued job costs 1,921,867 320,296
(Decrease) increase in other accrued liabilities (42,732) 168,571
Increase (decrease) in accrued compensation 119,667 (659,250)
----------- -----------
Net cash provided by (used in) operating activities 840,753 (456,391)
----------- -----------
Cash flows from investing activities:
Cash resulting from reverse purchase of Health Image Media, Inc. -- 387,780
Acquisition costs related to management led buy-out of SPAR -- (202,062)
Purchases of fixed assets (141,426) (69,701)
Release of restricted cash from factor 250,000 250,000
----------- -----------
Net cash provided by investing activities 108,574 366,0177
----------- -----------
Cash flows from financing activities:
Decrease in due from factor, net 578,725 1,711,722
Repayment of notes payable to SPAR (750,000) (922,000)
Proceeds from exercise of stock options and warrants 287,601 --
Repurchase of common stock (53,500) --
----------- -----------
Net cash provided by financing activities 62,826 789,722
----------- -----------
Net increase in cash 1,012,153 699,348
Cash and cash equivalents at beginning of period 700,598 1,250
----------- -----------
Cash and cash equivalents at end of period 1,712,751 700,598
=========== ===========
Supplemental disclosure:
Interest paid during the period $ 38,294 42,090
=========== ===========
Income tax paid during the period $ 298,936 16,497
=========== ===========
Non-cash financing and investing 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.
- -20-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997 and 1996
(1) Organization and Nature of Business
Inmark Enterprises, Inc. (formerly Health Image Media, Inc.) (the
"Company") completed a merger on September 29, 1995 whereby Inmark Services,
Inc., a New York corporation, was merged with and into the Company's
newly-formed wholly-owned subsidiary, InMark Acquisition Corp., a Delaware
corporation (the "Merger"). Following the Merger, InMark Acquisition Corp.
changed its name to Inmark Services, Inc. and Health Image Media, Inc. changed
its name to Inmark Enterprises, Inc.
At the time of the Merger, Health Image Media, Inc., which sold its
business in June 1993, no longer had an operating business and its assets
consisted of cash, cash equivalents and restricted cash.
The Company is a marketing and sales promotional organization which
designs, develops and coordinates 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.
Management-Led Buyout Transaction - April, 1995
Inmark Services, Inc. is the successor to SPAR Promotion & Marketing
Services, Inc. ("Spar") as a result of a management-led buyout transaction,
accounted for as a purchase, as of April 3, 1995 whereby Inmark Services, Inc.
acquired from Spar all of Spar's assets and business and assumed substantially
all of Spar's liabilities. The purchase price was $3,500,000, which consisted of
cash of $1,828,000 and subordinated notes totaling $1,672,000 consisting of (i)
a note in the principal amount of $1,000,000 payable on October 1, 1995 together
with interest at the rate of 7.5% per annum, (ii) a note in the principal amount
of $500,000 payable on October 1, 1996 together with interest at the rate of
7.5% per annum, and (iii) a note in the principal amount of $172,000 payable in
monthly installments of principal of $25,000 together with interest at the rate
of 1.5% above the Citibank quoted prime rate commencing May 1, 1995. At the
option of Inmark Services, Inc., payment of $250,000 of the principal amount of
the $1,000,000 note could be deferred until the maturity date of the $500,000
note, provided that there was an increase in the interest rate to 10% per annum
(see note 6). The cash portion of the purchase price was provided pursuant to a
$2,000,000 factoring agreement between Inmark Services, Inc. and Access Trade
Funding, Inc. The factoring agreement provided for the factor to purchase,
without recourse, substantially all of Inmark Services, Inc.'s existing accounts
receivable, and amounts to be invoiced by Inmark Services, Inc. for services
provided by Inmark Services, Inc. to its customers, and for the factor to
advance to Inmark Services, Inc. 75% of the face amount of such purchased
accounts receivable. Upon collection of the amounts due with respect to
purchased accounts receivable, and after application of such collected amounts
to reimburse the factor for amounts advanced to Inmark Services, Inc. and for
the payment of fees due the factor under the factoring agreement, the balance
- -21-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997 and 1996
collected was tendered to Inmark Services, Inc. in satisfaction of the purchase
price for the accounts receivable. The factoring agreement was for a fixed term
of one year and thereafter renewable for consecutive one year terms, and
provided for the factor to receive (i) an origination fee of $50,000 upon
execution of the factoring agreement, (ii) an administration fee payable monthly
in the amount of 1.5% of the accounts receivable purchased, subject to a minimum
fee of $225,000 for the year, and a facility fee payable monthly in the amount
of 1% of the outstanding facility balance for each month or portion thereof. The
performance obligations of Inmark Services, Inc. to the factor under the
factoring agreement were personally guaranteed by management of Inmark Services,
Inc. and further secured by the guarantees of the Company and its then two
directors at the time of origination of the factoring agreement. The guarantees
of the Company and its two directors were supported with and limited to cash
collateral pledged in the amounts of $500,000 provided by the Company and
$250,000 by each director, respectively. The Company paid a fee of $25,000 and
granted warrants to purchase 50,000 shares of the Company's common stock at a
price of $1.07 per share to each of these two directors in connection with their
guarantees. As of March 31, 1996, $250,000 of the collateral amount pledged by
the Company and the $250,000 collateral pledged by each director had been
released and returned by the factor to the respective provider. The remaining
cash collateral of $250,000 was released and returned to the Company in Fiscal
1997.
The $2,805,475 excess of the purchase price in the management-led buyout
plus costs of acquisition over the fair value of assets acquired less
liabilities assumed has been classified as goodwill and is being amortized over
a ten year period. Deferred financing costs incurred in connection with the
factoring agreement in the amount of $231,171 were amortized over a one year
amortization period.
Proforma results of operations of Inmark Services, Inc. as if the
management-led buyout had occurred on April 1, 1994 are as follows:
Year ended
March 31, 1995
--------------
(Unaudited)
Sales $13,670,938
Net income 197,345
Earnings per share $ .29
- -22-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997 and 1996
Merger with Health Image Media, Inc. - September, 1995
On September 29, 1995, the effective date of the Merger, the Company issued
to the Inmark Services, Inc. stockholders, in exchange for their 100% interest
in the common stock of Inmark Services, Inc., 677,106 shares of its common stock
and granted options to these stockholders to purchase an aggregate of 180,000
shares of its common stock at a price of $1.40 per share. The Company also
issued warrants to the Inmark Services, Inc. stockholders to purchase an
aggregate of 81,891 shares of the Company's common stock at a price of $1.40 per
share, which warrants were granted based on the Inmark Services, Inc.
stockholders' waiver of a $163,783 management bonus which they were otherwise
entitled to receive. In addition, the Company granted options to purchase an
aggregate of 50,000 shares of its common stock at a price of $1.40 per share to
the employees of Inmark Services, Inc. The common stock issued in the Merger
represented 26% of the issued and outstanding common stock of the Company
immediately following the Merger, assuming that none of the Company's issued and
outstanding options or warrants immediately following the Merger were exercised.
The Merger has been accounted for as the issuance of common stock by Inmark
Enterprises, Inc. in exchange for the net assets (principally cash) of Health
Image Media, Inc. Accordingly, the net assets of Health Image Media, Inc.,
totaling $882,197, which consisted of cash of $387,780 and restricted cash of
$500,000 less minor liabilities, were recorded at their fair values. The net
assets of Inmark Services, Inc., including the pre-existing goodwill which arose
upon consummation of the management-led buyout transaction in April 1995, were
reflected at their book value (historical cost) and no additional goodwill was
recorded as a result of the Merger.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The Merger has been accounted for as a reverse purchase of the Company by
Inmark Services, Inc. and, for financial accounting and reporting purposes,
Inmark Services, Inc. is treated as the acquirer of the Company. No goodwill was
recognized in the Merger. The consolidated financial statements for the fiscal
year ended March 31, 1996 include the operations of Inmark Services, Inc. for
the full fiscal year and those of the Company for the post Merger six month
period ended March 31, 1996.
(b) 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.
- -23-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997 and 1996
(c) Revenue Recognition
The Company recognizes revenue upon billing in accordance with contract
terms, which in general provide for billing as services are rendered and
accepted. Costs associated with the fulfillment of the contracts are accrued and
recognized proportionately to the related revenue in order to ensure a matching
of revenue and expenses in the proper period.
(d) Cash Equivalents
Investments with original maturities of three months or less at the time of
purchase are considered cash equivalents.
(e) Furniture, Fixtures and Equipment
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 five years.
(f) Goodwill
Goodwill represents the excess of cost over the fair value of net assets of
businesses acquired and is amortized over ten years on a straight-line basis.
The period of amortization of goodwill is evaluated at least annually to
determine whether events and circumstances warrant revised estimates of useful
lives. This evaluation considers, among other factors, expected cash flows and
profits of the business to which the goodwill relates. Based upon the periodic
analysis, goodwill is written down if it appears that future profits or cash
flows will be insufficient to recover such goodwill.
(g) Earnings Per Share
The computation of 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 primary and the
period end market price for fully diluted earnings per share. The weighted
average number of common shares was computed assuming that only the 677,106
shares of the Company's common stock exchanged for the common stock of Inmark
Services, Inc. in the Merger were outstanding until September 29, 1995, after
which date the actual outstanding common stock of the Company was used in the
computation. Stock options and warrants have been excluded from the calculation
of the primary and fully diluted earnings per share in any period in which they
would be antidilutive.
- -24-
(h) 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.
(i) Fair Value of Financial Instruments
The carrying value of financial instruments including cash and cash
equivalents, restricted cash, due from factor, interest and other receivables,
and notes and accounts payable approximate estimated market values due to short
maturities and interest rates that approximate current rates.
(j) 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.
(3) Due From Factor
The Company's factoring agreement prior to April 24, 1996 provided for
assignment by the Company of all of its trade accounts receivable, against which
the Company drew advances from time to time. On April 24, 1996, the Company
entered into a new one year factoring agreement pursuant to which the Company,
at its sole discretion, could assign and draw advances from assigned trade
accounts receivable. Subsequent to April 24, 1996, the Company did not factor
any of its accounts receivable or otherwise require or receive any advances from
the factor. Balances due from factor at March 31, 1996 consisted of:
- -25-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997 and 1996
Trade receivables assigned to factor $1,215,724
Advances received 636,999
----------
$ 578,725
==========
Factoring fees for the years ended March 31, 1997 and 1996, which are
included in selling, general and administrative expenses, totaled $62,000 and
$430,000 respectively.
(4) Note Receivable From Officer
The note receivable from officer consists of a $200,000 Promissory Note
dated January 10, 1996 issued to the Company by one of its officers in exchange
for a loan from the Company. The Promissory Note provides for interest at an
annual rate of 10% with the principal and accrued interest on the note payable
on January 10, 1998. The Promissory Note is 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.
(5) Leases
The Company leases office space and equipment pursuant to the terms of
operating leases, all of which expire during the year ending March 31, 1998 and
are expected to be renewed. Rent expense for the years ended March 31, 1997 and
1996 were $105,598 and $95,213, respectively. Minimum rentals under these leases
for the year ending March 31, 1998 total $122,316.
(6) Notes Payable - Spar
Notes payable at March 31, 1996 consist of the following:
Fixed rate term note due on
October 2, 1996 with interest at 10%
per annum $ 250,000
Fixed rate term note due on
October 2, 1996 with interest at 7.5%
per annum 500,000
----------
Total $ 750,000
==========
- -26-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997 and 1996
(7) 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.
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
900,000 shares. Changes in options outstanding during each of the years
ended March 31, 1997 and 1996, and options exercisable and shares reserved
for issuance at March 31, 1997 are as follows:
Option price
Per share Outstanding Exercisable
--------- ----------- -----------
Balance at April 3, 1995 $2.25-6.51 83,000 83,000
Granted (A) $1.40-2.00 235,000 140,000
Canceled -- (500) (500)
---------- ------- -------
Balance at March 31, 1996 $1.40-6.51 317,500 222,500
Granted (B) $1.50-5.50 335,000 105,000
Exercised -- (1,500) (1,500)
Canceled -- (1,000) (1,000)
---------- ------- -------
Balance at March 31, 1997 $1.40-6.51 650,000 325,000
========== ======= =======
- ----------
(A) Represents 230,000 options granted on September 29, 1995, on completion of
the Merger, of which 180,000 were granted to the shareholders of Inmark
Services, Inc., who became executive officers of the Company, and 50,000
were granted to other employees of Inmark Services, Inc. at an exercise
price of $1.40, and
- -27-
5,000 options granted on November 27, 1995 to a new employee in connection
with his employment. Of the 180,000 options, 90,000 options were
immediately exercisable and the balance become exercisable on the second
anniversary of the grant date. Due to an employee termination, 500 of the
50,000 options granted onSeptember 29, 1995 were canceled and the remaining
49,500 options are immediately exercisable. The 5,000 options granted to
the new employee become exercisable on the second anniversary of the grant
date.
(B) Represents 300,000 options granted on May 7, 1996 to three executive
officers of the Company at an exercise price of $1.50 per share; 20,000
options granted on May 20, 1996 to other employees at an exercise price of
$1.50 and 5,000 options granted to each of three new employees in
connection with their employment on October 1, 1996, January 2, 1997 and
February 10, 1997 at an exercise price of $3.50, $4.50 and $5.50,
respectively. Of the 300,000 options, 100,000 options are immediately
exercisable and the balance become exercisable in two equal installments
commencing on the first and second anniversary of the grant date. Of the
20,000 options granted on May 20, 1996, options to purchase 5,000 shares of
common stock are immediately exercisable and the balance become exercisable
in three equal installments commencing on the first, second and third
anniversary of the grant date. The 5,000 options granted to each of the new
employees become exercisable on the first anniversary of each employee's
continued employment.
(ii) Warrants
Concurrent with the 1992 public offering of Health Image Media, Inc.'s
common stock, the Company issued a total of 1,265,000 Class A warrants and
1,265,000 Class B warrants. Each of the Class A warrants entitles the holder to
purchase one share of the Company's common stock and one Class B warrant for
$7.85 until October 20, 1997. Each Class B warrant entitles the holder to
purchase one share of the Company's common stock for $11.80 until October 20,
1997. The warrants are redeemable by the Company at a redemption price of $.05
per warrant if the average closing bid price for the Company's common stock
exceeds $11.00 for the Class A warrants and $16.60 for the Class B warrants for
20 consecutive business days ending within 15 days prior to the date notice of
redemption is given. Additionally, at March 31, 1996 and 1997, a total of 31,500
warrants previously granted with terms identical to those of the aforementioned
Class A warrants were outstanding and remain outstanding. Accordingly, 3,858,000
shares of the Company's common stock are reserved for exercise of these and the
aforementioned warrants as follows:
- -28-
Exercise
Warrant Shares Price per
Type Reserved Share Expiration
---- -------- ----- ----------
Class A 1,296,500 $ 7.85 October 20, 1997
Class B 2,561,500 (A) $11.80 October 20, 1997
---------
3,858,000
- ----------
(A) The issuance of 1,296,500 shares of common stock upon exercise of the Class
B warrants is dependent upon the prior exercise of the Class A warrants and
the aforementioned 31,500 warrants.
Other warrants to purchase shares of the Company's common stock are as
follows:
Warrant price
Per share Outstanding Exercisable
--------- ----------- -----------
Balance at April 3, 1995 $1.00 600,000 300,000
Became exercisable -- -- 150,000
Granted (A) $1.07 100,000 100,000
Granted (B) $1.40 81,891 81,891
---------- -------- --------
Balance at March 31, 1996 $1.00-1.40 781,891 631,891
Became exercisable -- -- 150,000
Exercised (C) -- (275,000) (275,000)
Canceled (D) -- (200,000) (200,000)
---------- -------- --------
Balance at March 31, 1997 $1.00-1.40 306,891 306,891
========== ======= =======
- ----------
(A) Granted on April 25, 1995, to two directors of the Company in connection
with their guarantee of the performance obligations of Inmark Services,
Inc. pursuant to the factoring agreement described in note 1, and are
immediately exercisable.
(B) Granted on September 29, 1995 to the shareholders of Inmark Services, Inc.
on completion of the Merger and are immediately exercisable.
(C) On April 10, 1996, a director of the Company exercised warrants to purchase
275,000 shares of common stock at a price of $1.00 per share for 225,000
shares and $1.07 per share for 50,000 shares.
(D) Concurrently with the resignations, on February 25, 1997 and March 3, 1997,
respectively of two directors of the Company, warrants to purchase 200,000
shares of the Company's common stock were returned to the Company and
50,000 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 50,000 warrants were initially
exercised.
- -29-
Prior to April 1, 1996, the Company accounted for its stock options and
warrants issued to employees in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On April 1, 1996, the Company adopted SFAS
No. 123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
and warrant grants made in Fiscal 1996 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion 25 in accounting
for its stock-based awards and, accordingly, no compensation cost has been
recognized for its stock options and warrants in the financial statements.
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, the Company's
net income and net income per share for fiscal 1997 and 1996 would have been
reduced by insignificant amounts for such years (substantially less than 1%).
However, such pro forma net income reflects only options and warrants granted in
fiscal 1997 and fiscal 1996. 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 1997 and fiscal 1996
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.
At March 31, 1997 and 1996, the per share weighted-average fair value of
stock options and warrants granted was $1.63 and $1.20, respectively on the date
of grant using the modified Black Scholes option-pricing model with the
following weighted-average assumptions: 1997 expected dividend yield 0%,
risk-free interest rate of 6.85%, expected volatility of 25%, and an expected
life of 6.91 years; 1996 - expected dividend yield 0%, risk-free interest rate
of 6.63%, expected volatility of 25%, and an expected life of 6.98 years.
- -30-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997 and 1996
(8) Income Taxes
The Company and its subsidiaries, which are wholly-owned, will file a
consolidated Federal income tax return for the year ended March 31, 1997. The
Company's subsidiary, Inmark Services, Inc., has filed separate Federal and
state income tax returns for the period from April 1, 1995 through September 29,
1995, the date of the Merger, and accordingly, has been included in the
consolidated Federal income tax return only for the post-Merger period.
The components of income tax expense (benefit) for the years ended March
31, 1997 and 1996 are as follows:
March 31, 1997 March 31, 1996
------------------------------ ----------------------------
Current:
State and local $ 242,209 $ 18,606
Federal 40,000 282,209 17,313 35,919
--------- ---------
Deferred:
Federal (442,133) (542,080)
--------- ---------
$(159,924) $(506,161)
========= =========
The difference 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, 1997 and 1996 are as
follows:
Rate
----------------------
1997 1996
---- ----
Statutory Federal income tax 34.0% 34.0%
State and local taxes net of
Federal benefit 6.6 2.7
Items not deductible, primarily
certain merger expenses in
1996 and amortization of goodwill .4 10.3
Valuation allowance adjustment (48.8) (156.3)
Other .3 (.4)
Effective tax rate (7.5)% (109.7)%
The Company has approximately $1,924,000 of net operating loss carryovers
at March 31, 1997 available to reduce future taxable income, which expire
principally in the years 2008 and 2009. Utilization of these carryforwards could
be limited under Internal Revenue Code Section 382 if there are future changes
in excess of allowable limitations in ownership of the common stock of the
Company within a specified time period.
- -31-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997 and 1996
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, 1997 March 31, 1996
-------------- --------------
Deferred tax assets
Goodwill, principally due to excess of
book amortization over tax amortization $ 69,744 $ 29,641
Net operating loss carryforwards 654,133 1,279,010
Note receivable write-off 428,000 --
AMT credit 40,000 --
---------- ----------
Deferred tax assets 1,191,877 1,308,651
---------- ----------
Deferred tax liabilities
Furniture, fixtures and equipment,
principally due to differences in
depreciation -- 8,851
---------- ----------
Deferred tax liabilities -- 8,851
---------- ----------
Net deferred tax assets 1,191,877 1,229,800
Less valuation allowance 109,744 659,800
---------- ----------
Net deferred tax asset $1,082,133 $ 640,000
---------- ==========
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. Based upon the level of
historical taxable income and projections of future taxable income over the
period for which the deferred tax assets are deductible, management believes it
is more likely than not that the Company will realize the benefits of
approximately $1,082,000 of these deductible differences and thus a valuation
allowance is not deemed necessary for this amount of deferred tax assets at
March 31, 1997. The Company has provided a full valuation allowance for the
remainder of its deferred tax assets.
The Company's net operating loss carryovers were generated by operations of
Health Image Media, Inc. in tax periods prior to the September 29, 1995 Merger.
A full valuation allowance for related deferred tax assets had been established
by Health Image Media, Inc., which was not reduced at the time of the Merger.
The decrease of approximately $550,000 in the valuation allowance from
March 31, 1996 to March 31, 1997 was attributable principally to a change in
management's judgment about the realizability of deferred tax assets in future
years and to utilization of a portion of the net operating loss carryforward to
offset taxable income for the year ended March 31, 1997.
- -32-
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997 and 1996
(9) Significant Customers
During the year ended March 31, 1997, revenues from two customers
represented 48.9% (the same customer as represented 51.6% in the prior year) and
17.7%, respectively, of total revenues, and during the year ended March 31,
1996, revenues from two customers represented 51.6% and 21.1%, respectively, of
total revenues.
(10) Employee Benefit Plan
During the year ended March 31, 1997, the Company adopted a savings plan
available to substantially all salaried employees and 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 $9,500 and the Company at
its sole discretion may from time to time make a discretionary matching
contribution as it deems advisable. For the year ended March 31, 1997, the
Company has charged approximately $32,000 to expense as a 100% matching employer
contribution.
(11) Commitments
(i) Employment Agreements
The Company has entered into four year employment agreements with three of
its officers which at March 31, 1997 provide for base salaries in the aggregate
amount of $660,000 per year and a covenant not to compete.
(ii) Factoring Agreement
On March 20, 1996, the Company, gave notice of termination of the factoring
agreement as of its initial anniversary date, and as of April 24, 1996, the
Company entered into a new one year factoring agreement which expired on April
24, 1997. The new agreement provided for the Company to pay a closing fee of
$25,000 to the factor and for the factor to provide the Company with a $2
million factoring facility which the Company at its option may utilize during
the term of the agreement. Should the Company elect to sell any of its
receivables to the factor, the Company will incur an administrative fee cost and
a facility fee cost on the same terms as set forth in its previous factoring
agreement, the terms of which are described in note 1 above.
- -33-
(12) Contingent Asset
On December 18, 1995, the Court of Common Pleas of Berks County,
Pennsylvania signed an order approving the Company's settlement agreement with
Rx Returns, Inc., certain of its shareholders and certain shareholders of the
Company, under which Rx Returns, Inc. agreed to pay the Company $1,075,000 over
a period of time in satisfaction of the balance of a loan made in 1994 by Health
Image Media, Inc. and to discontinue, with prejudice, all claims filed against
the Company, including the shareholder derivative claims. As part of the
settlement, the Company also received as collateral 30% of the outstanding
capital stock of Rx Returns, Inc. which is redeemable by Rx Returns, Inc. only
after all amounts due the Company in the settlement are paid. As a result of the
settlement agreement, all pending litigation against the Company and certain of
its current and former directors, including the derivative shareholder claims,
and all pending litigation brought by the Company against Rx Returns, Inc. in
Federal District Court in the Eastern District of Pennsylvania has been
dismissed.
To date, Rx Returns, Inc. has repaid approximately $200,000 of its loan but
has otherwise failed to make the installment payments of its loan to the Company
as required by the settlement agreement and, therefore, is in default of the
settlement agreement thereby causing the total settlement amount to increase to
$1,325,000 . On January 30, 1996, the Company notified Rx Returns, Inc. of the
default and the Company currently is considering its available remedies,
including, but not limited to exercising its rights as a secured creditor of the
assets of Rx Returns, Inc. and exercising its rights against Rx Returns, Inc.'s
guarantors and taking possession of the shares of Rx Returns, Inc. capital stock
pledged by them as collateral security of their guarantee obligations. There can
be no assurance, however, that any of these remedies will result in the Company
being repaid. Accordingly, the entire balance due from Rx Returns, Inc. has been
fully reserved. Other income reflected in the statement of operations for the
year ended March 31, 1996 consists principally of amounts received from Rx
Returns, Inc. during the year.
(13) Recent Accounting Developments
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS No. 128), was issued. SFAS No. 128 simplifies the
standards for computing earnings per share as it replaces primary earnings per
share and fully diluted earnings per share with basic earnings per share and
diluted earnings per share, respectively. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997 and
requires restatement of all prior period earnings per share presented. The
Company believes that adoption of SFAS No. 128 in fiscal 1998 will increase the
Company's reported earnings per share since the computation of basic earnings
per share will exclude outstanding stock options which were previously included
in the computation of primary earnings per share, while diluted earnings per
share will be approximately the same.
Effective April 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". Statement 121 requires the
Company to estimate the future cash flows expected to result from the use and
eventual disposition of its furniture, fixtures and equipment and other long
lived assets, and if the sum of such cash flows is less than the carrying amount
of these assets, to recognize an impairment loss to the extent, if any, that the
carrying amount of the assets exceeds their fair values. The Company believes
that expected future cash flows derived from these assets will be at least equal
to their carrying values, and that no impairment loss was indicated.
- -34-
(14) Subsequent Events
(i) Extension of Employment Agreements
On May 2, 1997, the Company extended the term of the existing
employment agreements with three of its officers until September 29, 2001.
(ii) Grant of Stock Options and Warrants
On May 1, 1997, the Company elected two new directors and granted
director stock options to purchase 5,500 shares of common stock at an
exercise price of $5.00 to each director. On issue, fifty percent of the
options were immediately exercisable with the balance exercisable on the
first anniversary of the date of grant.
On May 1, 1997, concurrent with the Company entering into a financial
advisory services agreement with an investment banking firm with which a
new director is associated, the Company issued immediately exercisable
warrants to purchase 30,000 shares of the Company's common stock at an
exercise price of $5.00 to each of the new director and another associate
of the investment banking firm.
On May 2, 1997, the Company, pursuant to its 1992 Stock Option Plan,
granted to three of its officers incentive stock options to purchase up to
a total of 300,000 shares of common stock at an exercise price of $5.00 per
share. The options to purchase the 300,000 shares of common stock are
exercisable in three equal installments commencing on the first, second and
third anniversary of the grant date.
On May 2, 1997, the Company, pursuant to its 1992 Stock Option Plan,
granted to its employees incentive stock options to purchase up to a total
of 10,800 shares of common stock at an exercise price of $5.00 per share.
The options become exercisable on the first anniversary of the grant date.
(iii) Officer Loan
On April 7, 1997, the Company, in exchange for a promissory note,
loaned $25,000 to an officer of the Company. The loan bears interest at an
annual rate of 10% and is payable in full, together with accrued interest
on April 7, 1999. An existing pledge agreement wherein 112,851 shares of
the Company's common stock owned by the officer have been pledged to secure
the officer's loan obligation has been amended to include such pledged
shares as security for the additional $25,000 loan.
- -35-
Independent Auditors' Report
The Board of Directors and Stockholders
Inmark Services, Inc.:
We have audited the accompanying balance sheets of SPAR Promotion &
Marketing Services, Inc. as of March 31, 1995 and 1994, and the related
statements of operations and retained earnings (deficit) and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly,
in all material respects, the financial position of SPAR Promotion & Marketing
Services, Inc. as of March 31, 1995 and 1994, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
June 23, 1995
- -36-
SPAR PROMOTION & MARKETING SERVICES, INC.
Balance Sheets
March 31, 1995 and 1994
Assets 1995 1994
---- ----
Current assets:
Cash $ 1,100 21,520
Accounts receivable, less allowance for doubtful
accounts of $4,000 4,466,647 860,344
Advances to employees 1,800 65,000
Prepaid expenses and other current assets 42,845 40,708
----------- -----------
Total current assets 4,512,392 987,572
----------- -----------
Furniture, fixtures and equipment 114,490 62,590
Less accumulated depreciation (33,043) (11,009)
----------- -----------
81,447 51,581
----------- -----------
Goodwill, net of accumulated amortization of
$230,562 and $115,279 as of March 31, 1995 and
1994, respectively 115,279 230,562
Other assets 13,803 13,043
----------- -----------
Total assets $ 4,722,921 1,282,758
=========== ===========
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Accounts payable 1,592,626 940,028
Accrued job costs 967,608 367,123
Accrued bonuses 823,033 --
Other accrued liabilities 20,675 35,030
Income taxes payable 20,000 --
Current portion of capital lease obligation 5,744 4,894
Loan payable to affiliate 172,002 388,881
Advance from affiliate 350,000 --
----------- -----------
Total current liabilities 3,951,688 1,735,956
----------- -----------
Capital lease obligation, net of current portion -- 4,960
----------- -----------
Commitments and contingencies
Stockholders' equity (deficiency):
Capital stock, no par value, authorized 2,500 shares;
issued and outstanding 72 shares 72 72
Retained earnings (deficit) 771,161 (458,230)
----------- -----------
Total stockholders' equity (deficiency) 771,233 (458,158)
----------- -----------
Total liabilities and stockholders'
equity (deficiency) $ 4,722,921 1,282,758
=========== ===========
See accompanying notes to financial statements.
- -37-
SPAR PROMOTION & MARKETING SERVICES, INC.
Statements of Operations and Retained Earnings (Deficit)
Years ended March 31, 1995 and 1994
1995 1994
---- ----
Sales $13,670,938 6,676,355
Direct expenses 9,217,705 4,976,630
----------- ---------
Gross profit 4,453,233 1,699,725
----------- ---------
Salaries 1,667,725 1,465,279
Bonuses and incentive compensation 848,033 --
Selling, general and administrative expense 660,782 666,559
----------- ---------
Total operating expenses 3,176,540 2,131,838
----------- ---------
Operating income (loss) 1,276,693 (432,113)
Interest expense, net 27,807 24,992
----------- ---------
Income (loss) before income taxes 1,248,886 (457,105)
Income tax expense 19,425 1,125
----------- ---------
Net income (loss) 1,229,391 (458,230)
Retained earnings (deficit) at
beginning of year (458,230) --
----------- ---------
Retained earnings (deficit) at end of year $ 771,161 (458,230)
=========== =========
See accompanying notes to financial statements.
- -38-
SPAR PROMOTION & MARKETING SERVICES, INC.
Statements of Cash Flows
Years ended March 31, 1995 and 1994
1995 1994
---- ----
Cash flows from operating activities:
Net income (loss) $ 1,229,391 (458,230)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 137,317 126,288
Provision for uncollectible accounts receivable -- 4,000
Changes in operating assets and liabilities:
Increase in accounts receivable (3,606,303) (504,539)
Decrease (increase) in advances to employees 63,200 (65,000)
Increase in prepaid expenses and other current assets (2,137) (40,708)
Increase in other assets (760) (13,043)
Increase in accounts payable 652,598 940,028
Increase in accrued job costs 600,485 7,318
(Decrease) increase in other accrued liabilities (14,355) 35,030
Increase in accrued bonuses 823,033 --
Increase in income taxes payable 20,000 --
---------- ---------
Net cash (used in) provided by
operating activities (97,531) 31,144
----------- ---------
Cash flows from investing activities:
Costs of acquisition of the business of R.G. Meadows, Inc. -- (370,841)
Purchases of fixed assets (51,900) (23,951)
----------- ---------
Net cash used in investing activities (51,900) (394,792)
Cash flows from financing activities:
Proceeds from loan payable to affiliate -- 388,953
Repayments of loan payable to affiliate (216,879) --
Advances from affiliate 350,000 --
Repayments under capital lease obligations (4,110) (3,785)
----------- ---------
Net cash provided by financing activities 129,011 385,168
----------- ---------
Net (decrease) increase in cash (20,420) 21,520
Cash at beginning of year 21,520 --
----------- ---------
Cash at end of year $ 1,100 21,520
=========== =========
Supplemental disclosures:
Interest paid during the year $ 28,467 24,992
=========== =========
Income taxes paid during the year $ 325 --
=========== =========
See accompanying notes to financial statements.
- -39-
SPAR PROMOTION & MARKETING SERVICES, INC.
Notes to Financial Statements
March 31, 1995 and 1994
(1) Organization and Nature of Business
SPAR Promotion & Marketing Services, Inc. (the Company) is a marketing and
sales promotional organization which designs, develops and coordinates 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.
In April 1993, the Company, which was previously inactive, purchased the
assets and business and assumed certain liabilities of R.G. Meadows, Inc., a
company engaged in providing marketing and promotional services primarily to
consumer product client companies. The aggregate cash purchase price of
$370,841, including legal and other acquisition costs of $55,714, was allocated
to the net assets acquired which included office furniture and accounts
receivable. The excess of the purchase price over the aggregate fair value of
the assets purchased has been recorded as goodwill.
(2) Summary of Significant Accounting Policies
(a) Revenue Recognition
The Company recognizes revenue upon billing in accordance with contract
terms, which in general provide for billing as services are rendered and
accepted. Costs associated with the fulfillment of the contracts are accrued and
recognized proportionately to the related revenue in order to ensure a matching
of revenue and expenses in the proper period.
(b) Furniture, Fixtures and Equipment
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 five years.
Equipment under capital lease is stated at the present value of minimum
lease payments at the inception of the lease and is amortized by the
straight-line method over the terms of the lease.
(c) Goodwill
Goodwill represents the excess of the purchase price over the aggregate
fair value of the assets purchased and is being amortized over three years on a
straight-line basis.
- -40-
SPAR PROMOTION & MARKETING SERVICES, INC.
Notes to Financial Statements
March 31, 1995 and 1994
(d) Income Taxes
The Company is an S corporation for Federal and state income tax purposes.
S corporation income tax status requires the stockholders to include their pro
rata share of the Company's income or loss in their individual tax returns. The
Company has provided for state and local income taxes for those taxing
jurisdictions which do not recognize the S corporation election.
(3) Lease
The Company leases office space and equipment pursuant to the terms of
operating leases. Rent expense for the years ended March 31, 1995 and 1994 was
$89,809 and $106,716, respectively. In addition, the Company leases office
equipment pursuant to the terms of a capital lease. The following is an analysis
of the leased office equipment:
Years ended March 31
--------------------
1995 1994
---- ----
Office equipment $13,633 13,633
Accumulated depreciation (9,093) (4,546)
------- ------
$ 4,540 9,087
======= ======
Depreciation of assets held under capital lease is included in selling,
general, and administrative expense in the accompanying statements of operations
and retained earnings (accumulated deficit).
The Company's lease for office space in Chicago expired in December of
1994. The Company continues to occupy this space on a month to month basis and
is currently negotiating with the landlord to enter into a new lease.
The following is a summary of future minimum lease payments under capital
and operating leases as of March 31, 1995:
Capital Operating
Year ending March 31 lease leases
-------------------- ----- ------
1996 $6,072 55,382
1997 -- 938
------ ------
6,072 56,320
Less amount representing interest 328 --
------ ------
Present value of net minimum
lease obligations $5,744 56,320
====== ======
- -41-
SPAR PROMOTION & MARKETING SERVICES, INC.
Notes to Financial Statements
March 31, 1995 and 1994
(4) Loan Payable to Affiliate
The loan payable to an affiliate is due on demand, and calls for monthly
payments of $25,000 at an interest rate of 1-1/2% over Citibank's quoted prime
rate per annum. Interest expense for the years ended March 31, 1995 and 1994
amounted to $27,181 and $23,901, respectively.
Anadvance from this affiliate in the amount of $350,000 received in March
1995 was repaid in April 1995 without interest.
(5) Income Taxes
As indicated in note 2, the Company is an S corporation and is not subject
to Federal income tax. Income tax expense applies to state and local taxing
jurisdictions which do not recognize S corporation status and amounted to
$19,495 and $1,125 for the years ended March 31, 1995 and 1994, respectively.
(6) Significant Customers
During the year ended March 31, 1995, revenues from one customer
represented 52.4% of total revenues. Revenue from three customers during the
year ended March 31, 1994 represented 23.6%, 21.0% and 13%, respectively, of
total revenues.
(7) Commitments
Employment Agreements
In May 1993, the Company entered into employment agreements with four of
its officers, which provide for base salaries over the agreement period of
$540,000 per year in the aggregate. The agreements, which terminate on March 31,
1997, also provide for these officers to participate in a management bonus pool,
based on a percentage of net earnings as defined in the respective agreements,
as well as a covenant not-to-compete, as defined by a separate non-compete
agreement. No bonuses were earned or paid as of March 31, 1994. The Company has
accrued for bonuses of $463,783 for the year ended March 31, 1995.
In March 1995, one of the executives of the Company refereed to above
terminated his employment agreement and was retained by the Company as a
consultant pursuant to a contract through March of 1997 at a fixed amount of
$160,000 per annum, with no participation in future profits.
- -42-
SPAR PROMOTION & MARKETING SERVICES, INC.
Notes to Financial Statements
March 31, 1995 and 1994
The Company also assumed an employment agreement with an executive dated
January 1, 1990 in conjunction with the acquisition discussed in note 1. This
agreement, which has an indefinite term, provides for a minimum base salary of
$115,000 per year. The agreement also provides to the executive as incentive
compensation a percentage of pre-tax profit of the Midwest office's operations,
based on a formula as set forth in the employment agreement and provides for a
covenant not-to-compete for the term of employment and for a period of one year
thereafter. No incentive compensation had been earned or paid as of March 31,
1994. The Company has paid $25,000 and accrued incentive compensation of
$359,250 for the year ended March 31, 1995.
(8) Subsequent Events
(a) Management Buyout
SPMS Acquisition Corp. (SPMS), a company newly formed by the Company's
management, purchased from the Company, as of April 3, 1995, all of its assets
and assumed substantially all of its liabilities for $1,828,000 in cash and
$1,672,000 in subordinated notes consisting of (i) a note in the principal
amount of $1,000,000 payable on October 1, 1995 together with interest at the
rate of 7.5% per annum, (ii) a note in the principal amount of $500,000 payable
on October 1, 1996 together with interest at the rate of 7.5% per annum and
(iii) a note in the principal amount of $172,000 payable in monthly installments
of principal of $25,000 together with interest at the rate of 1.5% above the
Citibank quoted prime rate commencing May 1, 1995. At the option of SPMS,
payment of $250,000 of the principal amount of the $1,000,000 note may be
deferred until the maturity date of the $500,000 note, provided that there is an
increase in the interest rate to 10% per annum. On May 2, 1995, SPMS Acquisition
Corp. legally changed its name to Inmark Services, Inc. (Inmark).
(b) Factoring Agreement
Of the $3,500,000 purchase price paid by SPMS to the Company, the cash
payment of $1,828,000 was provided pursuant to a $2,000,000 Factoring Agreement
dated April 24, 1995 by and between SPMS and Access Trade Funding, Inc. The
factoring agreement provides for Access to purchase, without recourse,
substantially all of SPMS accounts receivable and amounts invoiced by SPMS for
services provided by SPMS to its customers and for Access to advance to SPMS 75%
of the face amount of such purchased accounts receivable. Upon collection of the
amounts due with respect to purchased accounts receivable, and after application
of such collected amounts to reimburse Access for amounts advanced to SPMS and
for the payment of fees due Access under the factoring agreement, the balance
collected will be tendered to SPMS in satisfaction of the purchase price for the
accounts receivable. The factoring agreement is for a fixed term of one year and
may be renewed for consecutive one-year terms although SPMS has the right to
terminate the agreement
- -43-
SPAR PROMOTION & MARKETING SERVICES, INC.
Notes to Financial Statements
March 31, 1995 and 1994
prior to the end of the initial one-year term upon payment of all outstanding
obligations then due Access under the agreement plus additional fees based on
the revenues of the Company for the remainder of the then current term of the
agreement, less any amounts paid with respect to the facility fee during the
current term of the agreement, but in no event less than $225,000. The factoring
agreement provides for Access to receive (i) an origination fee of $50,000 upon
execution of the factoring agreement, (ii) a facility fee payable monthly in the
amount of 1.5% of the accounts receivable purchased, subject to a minimum fee of
$225,000 for the year, and (iii) an administrative fee payable monthly in the
amount of 1% of the outstanding facility balance for each month or portion
thereof. The performance obligations of SPMS to Access under the factoring
agreement are personally guaranteed by SPMS management and further secured by
the guarantees of Health Image Media, Inc. and two of the directors of Health
Image Media, Inc. which are further supported with collateral in the amounts of
$500,000 provided by Health Image Media, Inc. and $250,000 by each director. The
guarantees provided by HIMI and its two directors are limited to the amount of
collateral pledged.
(c) Proposed Public Merger
On April 25, 1995, SPMS entered into an Agreement and Plan of Merger and
Plan of Reorganization with Health Image Media, Inc. (HIMI), whereby SPMS will
be merged into a wholly owned subsidiary of HIMI which will then be the
surviving corporation, subject to the approval of the HIMI stockholders. Upon
consummation of the merger, each share of common stock of SPMS will be exchanged
for 4,514.04 shares of HIMI's common stock, $.001 par value, or an aggregate of
677,106 shares, representing 26% of the outstanding shares of HIMI assuming no
exercise of options or warrants.
In addition to the shares to be issued in conjunction with the merger, HIMI
will grant to SPMS shareholders options to purchase an aggregate of 180,000
shares, and will reserve an additional 50,000 shares for issuance upon exercise
of options to be granted to other key employees following the effective time of
the merger. Further, the SPMS shareholders will be granted warrants to purchase
additional shares in lieu of being paid cash in connection with the obligation
assumed by HIMI to pay a management bonus already earned by the SPMS
shareholders.
- -44-
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 49 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 46 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 64 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 57 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 Shelter Components Corporation;
Nu Horizons Electronics Corp.; Transmedia
Network, Inc.; TGC Industries, Inc.; The
Western Systems Corp.; Hirsch International
Corp. and Chase Packaging, Inc.
Joseph S. Hellman 66 Director of the Company since May 1, 1997; 1997
Partner in the law firm of Kronish, Lieb, Weiner
& Hellman LLP since 1963.
- -45-
The following two persons were also directors and executive officers during
the year ended March 31, 1997 until their resignations, the dates of which are
set forth below:
Robert F. Hussey 47 Director of the Company from May 1992 until 1992
March 3, 1997; Chairman of the Board of the
Company from May 1994 until October 16, 1996;
President and Chief Executive Officer of the Company
from June 1993 until September 29, 1995; Director
and President of Metrovision of North America, Inc.,
a niche cable television network, since 1991.
Courtlandt G. Miller 45 Director of the Company from March 1992 until 1992
February 25, 1997; Secretary from March 1992
and Treasurer from June 1993 until October 16, 1996;
Director of Diagnostek, Inc., a mail service pharmacy
contractor, from 1985 until July 1995, General Counsel
and Secretary of that company from 1987 until July 1995,
and Executive Vice President from 1988 until July 1995.
Section 16(a). Beneficial Ownership Reporting Compliance
The following officers, directors and holders of more than 10% of the
outstanding Common Shares failed to file the following Form 4 reports under
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") during the period April 1, 1996 through March 31, 1997: (i) Robert F.
Hussey, a director and Chairman of the Board of the Company until his
resignation during Fiscal 1997, failed to file a Form 4 due April 10, 1997,
reporting the surrender to the Company of warrants to purchase 125,000 Common
Shares, and (ii) Courtland G. Miller, a director, secretary and treasurer of the
Company until his resignation during Fiscal 1997, failed to file a Form 4 due
March 10, 1997, reporting the sale to the Company of 50,000 Common Shares and
the surrender to the Company of warrants to purchase 75,000 shares. There are no
known failures to file a required Form 3 or 5, no other known failures to file a
required Form 4 and no known late filings of a required Form 3, 4 or 5 during
Fiscal 1997 by any person required to file such forms with respect to the
Company pursuant to Section 16 of the Exchange Act.
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 1997 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.
- -46-
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 1997 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 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 1997 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. 15
Consolidated Financial Statements of Inmark Enterprises, Inc.
Independent Auditors' Report 16
Consolidated Balance Sheets as of March 31, 1997 and 1996 17
Consolidated Statements of Operations for the years ended
March 31, 1997 and 1996 18
Consolidated Statement of Stockholders' Equity
for two the years ended March 31, 1997 19
Consolidated Statements of Cash Flows for the years ended
March 31, 1997 and 1996 20
Notes to Consolidated Financial Statements 21
SPAR Promotion & Marketing Services, Inc. (a predecessor company)
Independent Auditors' Report 36
Balance Sheets as of March 31, 1995 and 1994 37
Statements of Operations and Retained Earnings (Deficit)
for the years ended March 31, 1995 and 1994 38
Statements of Cash Flows for the years ended March 31,
1995 and 1994. 39
Notes to Financial Statements 40
- -47-
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.
- ------ ------------------------
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).
4.1 Form of Warrant Agreement (incorporated by reference to Exhibit 4.2 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).
4.2 Form of Unit Purchase Option (incorporated by reference to Exhibit 4.5
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).
10.1 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 Merger and Acquisitions Agreement between the Registrant and D.H.
Blair Investment Banking Corp. (incorporated by reference to Exhibit
10.8 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).*
10.3 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).
10.4 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).
- -48-
10.5 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).
10.6 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).
10.7 First Amendment to Employment Agreement dated May 2, 1997
between the Registrant and John P. Benfield.
10.8 First Amendment to Employment Agreement dated May 2, 1997
between the Registrant and Donald A. Bernard.
10.9 First Amendment to Employment Agreement dated May 2, 1997
between the Registrant and Paul A. Amershadian.
10.10 Promissory Note, dated April 7, 1997, in the principal amount of
$25,000, by Paul A. Amershadian in favor of Inmark Services,
Inc.
10.11 Amendment to Pledge Agreement, dated as of April 7, 1997,
between Paul A. Amershadian and Inmark Services, Inc.
21 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21 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).
23 Consent of Independent Auditors.
27 Financial Data Schedule
* Compensatory plan, contract or arrangement required to be
filed under Item 601(b)(10) of Regulation S-K.
(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.
- -49-
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 24, 1997
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 Director
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
Dated: June 24, 1997 Dated: June 24, 1997
By: /s/ Paul A. Amershadian By: /s/ Herbert M. Gardner
------------------------------------ ------------------------------------
Paul A. Amershadian Herbert M. Gardner
Executive Vice President - Director
Marketing and Sales and Director
Dated: June 24, 1997 Dated: June 24, 1997
By: /s/ Joseph S. Hellman
------------------------------------
Joseph S. Hellman
Director
Dated: June 24, 1997
- -50-
EXHIBIT INDEX
Exhibit
Number Description of Exhibits.
------ ------------------------
3.1 Certificate of Incorporation, as amended, of the
Registrant (incorporated by reference to Exhibit
3.1 to the Registrant's Registration Statement on
Form S-1, File No. 33-47932, initially filed with
the Securities and Exhange 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).
4.1 Form of Warrant Agreement (incorporated by
reference to Exhibit 4.2 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).
4.2 Form of Unit Purchase Option (incorporated by
reference to Exhibit 4.5 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).
10.1 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 Mergers and Acquisitions Agreement between the
Registrant and D.H. Blair Investment Banking
Corp. (incorporated by reference to Exhibit 10.8
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).*
10.3 Employment Agreement dated September 29,
1995 between Registrant and John P. Benfield
(incorporated by reference to Exhibit 10.3 to the
Exhibit
Number Description of Exhibits (continued)
------ -----------------------------------
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 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).
10.5 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).
10.6 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).
10.7 First Amendment to Employment Agreement
dated May 2, 1997 between the Registrant and
John P. Benfield.
10.8 First Amendment to Employment Agreement
dated May 2, 1997 between the Registrant and
Donald A. Bernard.
10.9 First Amendment to Employment Agreement
dated May 2, 1997 between the Registrant and
Paul A. Amershadian.
10.10 Promissory Note, dated April 7, 1997, in the
principal amount of $25,000, by Paul A.
Amershadian in favor of Inmark Services, Inc.
Exhibit
Number Description of Exhibits (Continued)
------ -----------------------------------
10.11 Amendment to Pledge Agreement, dated as of
April 7, 1997, between Paul A. Amershadian and
Inmark Services, Inc.
21 Subsidiaries of the Registrant (incorporated by
reference to Exhibit 21 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
March 31, 1996, initially filed with the Securities
and Exhange Commission on July 1, 1996).
23 Consent of Independent Auditors.
27 Financial Data Schedule
* Compensatory plan, contract or arrangement
required to be filed under Item 601(b)(10) of
Regulation S-K.