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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
_x_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
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 Number)
One Plaza Road
Greenvale, New York 11548
------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 625-3500
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
On November 8, 1996, 2,880,751 shares of the Registrant's Common Stock, par
value $.001 a share, were outstanding.
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<PAGE>
INDEX
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements of Inmark Enterprises, Inc.
(Unaudited)
Consolidated Balance Sheets - September 30, 1996 and March 31, 1996 3
Consolidated Statements of Operations - Three month and six month
periods ended September 30,1996 and September 30, 1995 4
Consolidated Statement of Stockholders' Equity -
Six month period ended September 30, 1996 5
Consolidated Statements of Cash Flows - Six month periods ended
September 30, 1996 and September 30, 1995 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II - OTHER INFORMATION 11
Items 1-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Description of Exhibit
27 Financial Data Schedule
SIGNATURES 12
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
INMARK ENTERPRISES, INC.
Consolidated Balance Sheets
September 30, 1996 and March 31, 1996
<TABLE>
<CAPTION>
September 30,1996 March 31, 1996*
----------------- ---------------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,599,674 700,598
Restricted cash -- 250,000
Accounts receivable 2,461,055 --
Due from factor -- 578,725
Interest and other receivables -- 31,040
Deferred tax asset 640,000 640,000
Prepaid expenses and other current assets 62,493 57,940
----------- ----------
Total current assets 4,763,222 2,258,303
----------- ----------
Furniture, fixtures and equipment, net 139,795 121,159
Goodwill, net 2,379,787 2,524,927
Note receivable from officer 200,000 200,000
Other assets 14,230 14,180
----------- ----------
Total assets 7,497,034 5,118,569
=========== ==========
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable 748,036 851,898
Accrued job costs 1,932,418 1,287,904
Accrued compensation 110,811 32,144
Other accrued liabilities 548,773 182,846
Notes payable - SPAR 750,000 750,000
----------- ----------
Total current liabilities 4,090,038 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 2,880,751 shares at
September 30, 1996 and 2,604,251 shares at March 31, 1996 2,880 2,604
Additional paid-in capital 1,323,850 1,043,526
Retained earnings 2,080,266 967,647
----------- ----------
Total stockholders' equity 3,406,996 2,013,777
----------- ----------
Total liabilities and stockholders' equity 7,497,034 5,118,569
=========== ==========
</TABLE>
*The consolidated balance sheet as of March 31, 1996 has been summarized from
the Company's audited balance sheet as of that date
See accompanying notes to consolidated financial statements
-3-
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Month and six month periods ended September 30,
1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Six months Ended September 30,
-------------------------------- ------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $4,970,286 2,626,900 $9,802,039 7,467,572
Direct expenses 3,336,266 1,821,563 6,611,099 5,165,271
---------- --------- ---------- ---------
Gross Profit 1,634,020 805,337 3,190,940 2,302,301
---------- --------- ---------- ---------
Salaries 561,957 518,373 1,110,495 1,044,756
Selling, general and administrative expense 446,834 583,149 872,227 1,003,240
---------- --------- ---------- ---------
Total operating expenses 1,008,791 1,101,522 1,982,722 2,047,966
---------- --------- ---------- ---------
Operating income (loss) 625,229 (296,185) 1,208,218 254,305
Interest expense, net 7,177 38,628 13,305 70,103
---------- --------- ---------- ---------
Income (loss) before income taxes 618,052 (334,813) 1,194,913 184,202
Provision for income taxes (benefits) 40,480 (130,161) 82,294 71,839
---------- --------- ---------- ---------
Net income (loss) $ 577,572 (204,652) $1,112,619 112,363
========== ========= ========== =========
Net income (loss) per common and common equivalent share:
Primary $ 0.15 $ (.29) $ 0.32 $ 0.09
========== ========= ========== =========
Fully diluted $ 0.15 $ (.29) $ 0.31 $ 0.08
========== ========= ========== =========
Weighted average number of common and
common equivalent shares outstanding:
Primary 3,633,481 698,053 3,507,108 1,248,706
========== ========= ========== =========
Fully diluted 3,633,481 698,053 3,617,708 1,422,313
========== ========= ========== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<PAGE>
INMARK ENTERPRISES, INC.
Consolidated Statement of Stockholders' Equity
Six months ended September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Total
par value $.001 Paid - in Retained Stockholders'
Shares Amount Capital Earnings Equity
------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1996 2,604,251 $ 2,604 $1,043,526 $ 967,647 $2,013,777
Exercise of warrants 276,500 276 280,324 -- 280,600
Net income -- -- -- 1,112,619 1,112,619
--------- ---------- ---------- ---------- ----------
Balance, September 30, 1996 2,880,751 $ 2,880 $1,323,850 $2,080,266 $3,406,996
========= ========== ========== ========== ==========
- 5 -
<PAGE>
INMARK ENTERPRISES, INC.
Consolidated Statements of Cash Flows
Six months ended September 30, 1996 and 1995
(Unaudited)
1996 1995
---- ----
Cash flows from operating activities:
Net income $1,112,619 112,363
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 169,216 273,315
Deferred income taxes -- 56,191
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (2,461,055) 946,555
Increase in prepaid expenses and other current assets (4,603) (76,735)
Decrease in interest and other receivables 31,040 --
(Decrease) increase in accounts payable (103,862) 555,359
Increase (decrease) in accrued job costs 644,514 (146,773)
Increase in other accrued liabilities 365,927 100,700
Increase (decrease) in accrued compensation 78,667 (509,250)
--------- ---------
Net cash (used in) provided by operating activities (167,537) 1,311,725
--------- ---------
Cash flows from investing activities:
Cash resulting from reverse purchase of Health Image
Media, Inc. -- 387,780
Acquisition costs related to management led buyout of SPAR -- (293,957)
Purchases of fixed assets (42,712) (42,468)
--------- ---------
Net cash (used in) provided by investing activities (42,712) (51,355)
--------- ---------
Cash flows from financing activities:
Repayments of loan payable to SPAR -- (125,000)
Release of restricted cash from factor 250,000 --
Decrease (increase) in due from factor, net 578,725 --
Proceeds from exercise of warrants 280,600 --
--------- ---------
Net cash provided by (used in) financing activities 1,109,325 (125,000)
--------- ---------
Net increase in cash 899,076 1,238,080
Cash at beginning of period 700,598 1,250
--------- ---------
Cash at end of period $1,599,674 1,239,330
========== =========
Supplemental disclosure:
Interest paid during the period $ 37,668 5,338
========== =========
Income tax paid during the period $ 38,283 --
========== =========
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
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Inmark Enterprises, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
September 30, 1996 and 1995
(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 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.
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 buy-out of that company's net assets and business on
April 3, 1995.
(2) 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. Operations for the three and six
month periods ended September 30, 1995 are solely those of Inmark Services,
Inc.
The interim financial statements of the Company for the three and six month
periods ended September 30, 1996 and 1995 have been prepared without audit.
In the opinion of management, such financial statements reflect all
adjustments, consisting of normal recurring accruals, necessary to present
fairly the Company's results for the interim periods presented. The results
of operations for the three and six month periods ended September 30, 1996
are not necessarily indicative of the results for a full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended March 31, 1996 included in
the Company's Annual Report on Form 10-K for the year ended March 31, 1996.
(3) 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
period, 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 the 677,106 shares of the Company's common stock exchanged for the
common stock of Inmark Services, Inc. in the Merger were outstanding for
the entire interim periods ended September 30, 1995; for the three and six
month periods ended September 30, 1996, 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.
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<PAGE>
(4) Income Taxes
Federal income taxes have not been provided for the three and six month
periods ended September 30, 1996, as any such taxes are expected to be
minimal as a result of net operating loss carryforwards. To the extent that
net operating loss carryforwards may not be available to offset state and
local income taxes, provision for such taxes has been established for the
three and six month periods ended September 30, 1996.
(5) Recent Accounting Developments
In December, 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
effective for years beginning after December 15, 1995. Under SFAS 123, the
Company may elect either a "fair value" based method or the current
"intrinsic value" based method of accounting prescribed by APB No. 25,
"Accounting for Stock Issued to Employees", for its stock-based
compensation arrangements. Under the "intrinsic value" based method, the
Company will be required to disclose in the footnotes to the consolidated
financial statements net income and earnings per share computed under the
"fair value" based method. The Company has elected to continue accounting
for stock-based compensation arrangements using the "intrinsic value" based
method; therefore, the adoption of SFAS 123 will not impact the Company's
results of operations or financial condition.
Item 2. 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 buy-out 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,
the following discussion includes the Company's results of operations for the
three and six month periods ended September 30, 1996 compared to the results of
operations of Inmark Services, Inc. for the three and six month periods ended
September 30, 1995. The following information should be read together with the
consolidated financial statements and notes thereto included elsewhere herein.
Results of Operations
Sales. Sales for the quarter ended September 30, 1996 were $4,970,000
compared to sales of $2,627,000 for the quarter ended June 30, 1995, an increase
of $2,343,000 or 89.2%. Sales for the six months ended September 30, 1996 were
$9,802,000 compared to sales of $7,468,000 for the six months ended September
30, 1995, an increase of $2,334,000 or 31.3%. The increases in sales for both
the quarter and six month periods ended September 30, 1996 were primarily the
result of an overall increase in scheduled billings related to contracts in
place during the periods.
-8-
<PAGE>
Direct Expenses. Direct expenses for the quarter ended September 30, 1996
were $3,336,000, or 67.1% of sales, compared to $1,822,000, or 69.4% of sales,
for the comparable prior year quarter. Direct expenses for the six months ended
September 30, 1996 were $6,611,000, or 67.4% of sales, compared to $5,165,000,
or 69.2% of sales, for the comparable prior year period. The increase in the
amount of direct expenses for the quarter and six month periods ended September
30, 1996 principally relates to the comparative increase in contracted sales
invoiced in the respective periods, whereas the decrease in direct expenses as a
percentage of sales for both the quarter and six month periods ended September
30, 1996 are primarily the result of current client programs which in the
aggregate have a higher gross profit margin than the mix of programs in place
during the comparable prior year quarter and six month periods.
As a result of these changes in sales and direct expenses, gross profit for
both the quarter and six month periods ended September 30, 1996 increased by
$829,000 and $889,000 compared to the prior year respective periods, thereby
amounting to $1,634,000 and $3,191,000 for the quarter and six month periods
ended September 30, 1996, respectively.
Operating Expenses. Operating expenses for the quarter ended September 30,
1996 decreased by $93,000 to $1,009,000 compared to $1,102,000 for the quarter
ended September 30, 1995. Operating expenses for the six months ended September
30, 1996 decreased by $65,000 to $1,983,000 compared to $2,048,000 for the
comparable prior year six month period. Operating expenses as a percentage of
sales were 20.3% and 41.9%, respectively, for the quarters ended September 30,
1996 and September 30, 1995 and 20.2% and 27.4% respectively, for the six month
periods ended September 30, 1996 and 1995.
The decrease in operating expenses for both the quarter and six month
period ended September 30, 1996 compared to the comparative quarter and six
month period of 1995 resulted primarily from the net effect of (i) the
elimination of approximately $277,000 of non-recurring acquisition, factoring
agreement and merger expenses incurred in the prior year quarter and six month
periods, and (ii) a decrease in factoring administrative and facility fees of
approximately $63,000 and $175,000, respectively during the quarter and six
month periods ended September 30, 1996; offset for the quarter and six month
period ended September 30, 1996 by an increase in (i) the total of salaries,
related taxes and employee benefits of approximately $58,000 and $81,000,
respectively, (ii) selling and related expenses, inclusive of sales commissions,
of $90,000 and $177,000, respectively; (iii) legal and accounting expenses,
public company and related shareholder reporting expenses and fees to directors,
of approximately $18,000 and $73,000, respectively and (iv) other expenses
related to the overall increase in level of operations.
The increase in the total of salaries, related taxes and employee benefits
is primarily attributable to added personnel, a general increase in
non-executive salaries and the increased cost of medical insurance coverage
provided by the Company to its employees whereas the increase in selling and
related expenses are attributable to the increase in sales and in the amounted
budgeted for marketing, advertising and promoting the Company's identity and
services.
Interest Expense. Net interest expense decreased $31,000 and $57,000,
respectively, during the quarter and six month periods ended September 30, 1996.
The net interest expense decreases from comparative prior year periods is the
result of a reduced balance of notes payable outstanding during the quarter and
six month periods ended September 30, 1996 and the respective $11,000 and
$23,000 increases in interest earned during such periods.
Provision For Income Taxes. For the three and six month periods ended
September 30, 1996, no provisions for federal income taxes were made, as net
operating loss carryovers from prior years are available to offset taxable
income; however, for the respective periods, provision for state and local
income taxes have been made, at a rate of approximately 7%, as net operating
loss carryforwards may not be allowable as an offset against such taxes. For the
three and six month periods ended September 30, 1995, provisions for income
taxes (benefits) had been made at the then estimated annual effective tax rate
of 39% for Inmark Services, Inc.
-9-
<PAGE>
Net Income. As a result of the items discussed above, net income for the
quarter ended September 30, 1996 was $578,000 compared to a net loss of $205,000
for the comparable prior year quarter, and net income for the six months ended
September 30, 1996 was $1,113,000 compared to net income of $112,000 for the six
months ended September 30, 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 and with 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 may receive advances of up to
75% of those of its accounts receivable which the Company, at its discretion,
elects to sell to the factor. Total advances may not exceed $2,000.000 at any
given time during the term of the factoring agreement. In connection with the
factoring agreement, the Company paid a one time closing fee of $25,000 and pays
an administration fee and facility fee based upon the same terms upon which such
fees were paid under its earlier factoring agreement. In connection with the
termination of its earlier factoring agreement, the $250,000 cash collateral
deposit balance pledged to the factor was released together with the accrued
interest thereon.
For the six months ended September 30, 1996, cash used in operations
amounted to $168,000 and purchases of fixed assets totaled $43,000. Cash
provided by the collection of receivable amounts due from the factor and by the
release of restricted cash by the factor totaled $829,000, and proceeds from the
exercise of warrants amounted to $281,000. As a result, cash increased by
$899,000. At September 30, 1996, the Company had cash of $1,600,000 and working
capital of $673,000 compared to cash of $701,000 and a negative working capital
of $846,000 at March 31, 1996. Stockholders' equity increased by $1,393,000
during the six months ended September 30, 1996 as a result of the Company's net
income and the proceeds received from the exercise of outstanding warrants.
At September 30, 1996, the outstanding principal balance of the notes
issued to Spar in the Spar acquisition was $750,000 and on October 1, 1996, the
payment due date of the notes, the Company paid Spar the remaining note balances
and related accrued interest as required. The Company believes its working
capital position will continue to improve as the Company continues to maintain
profitable operations thereby negating the need of external financing.
Otherwise, the Company will require the continued availability of funding under
the factoring agreement or alternatively, 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 financing, if
required.
-10-
<PAGE>
PART II - OTHER INFORMATION
Items 1-5. Not Applicable
Items 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Description of Exhibit
----------- ----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K. None
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Dated: November 8, 1996 By: /s/ John P. Benfield
-------------------------------------
John P. Benfield, President
(Principal Executive Officer)
and Director
Dated: November 8, 1996 By: /s/ Donald A. Bernard
-------------------------------------
Donald A. Bernard, Executive Vice
President and Chief Financial Officer
(Principal Accounting and Financial
Officer) and Director
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Mar-31-1997
<PERIOD-START> Apr-01-1996
<PERIOD-END> Sep-30-1996
<CASH> 1,599,674
<SECURITIES> 0
<RECEIVABLES> 2,461,055
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,763,222
<PP&E> 227,579
<DEPRECIATION> 87,784
<TOTAL-ASSETS> 7,497,034
<CURRENT-LIABILITIES> 4,090,038
<BONDS> 0
0
0
<COMMON> 2,880
<OTHER-SE> 3,404,116
<TOTAL-LIABILITY-AND-EQUITY> 7,497,034
<SALES> 9,802,039
<TOTAL-REVENUES> 9,802,039
<CGS> 6,611,099
<TOTAL-COSTS> 6,611,099
<OTHER-EXPENSES> 1,982,722
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,305
<INCOME-PRETAX> 1,194,913
<INCOME-TAX> 82,294
<INCOME-CONTINUING> 1,112,619
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,112,619
<EPS-PRIMARY> .32
<EPS-DILUTED> .31
</TABLE>
