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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 December 31, 1997
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Plaza Road,
Greenvale, New York 11548
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(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 February 2, 1998, 3,014,876 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
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
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<S> <C> <C>
Item 1. Consolidated Financial Statements of Inmark Enterprises, Inc. (Unaudited)
Consolidated Balance Sheets - December 31, 1997 and March 31, 1997 3
Consolidated Statements of Operations - Three month and nine month periods
ended December 31, 1997 and December 31, 1996 4
Consolidated Statement of Stockholders' Equity - Nine month period ended
December 31, 1997
5
Consolidated Statements of Cash Flows - Nine month periods ended
December 31, 1997 and December 31, 1996
6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations
PART II - OTHER INFORMATION 10
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Items 1, 3 and 4. Not Applicable
Item 2. Changes in Securities
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
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27 Financial Data Schedule
SIGNATURES 11
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</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1997*
------------------ --------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 3,532,997 1,712,751
Accounts receivable 2,145,950 2,780,866
Unbilled contracts in progress 3,288,547 --
Interest and other receivables 12,013 6,725
Deferred tax asset 578,133 1,082,133
Prepaid expenses and other current assets 308,639 299,852
----------- -----------
Total current assets 9,866,279 5,882,327
----------- -----------
Furniture, fixtures and equipment, net 188,755 207,149
Goodwill, net 2,026,668 2,244,378
Note receivable from officer 225,000 200,000
Other assets 26,062 25,986
----------- -----------
Total assets 12,332,764 8,559,840
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
274,044 520,763
Accrued job costs 5,769,710 3,209,771
Accrued compensation 25,158 151,811
Other accrued liabilities 204,097 140,114
----------- -----------
Total current liabilities 6,273,009 4,022,459
----------- -----------
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 2,839,876 shares at
December 31, 1997 and 2,835,751 shares at March 31, 1997 2,840 2,835
Additional paid-in capital 1,283,428 1,277,396
Retained earnings 4,773,487 3,257,150
----------- -----------
Total stockholders' equity 6,059,755 4,537,381
----------- -----------
Total liabilities and stockholders' equity 12,332,764 8,559,840
=========== ===========
</TABLE>
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* The consolidated balance sheet as of March 31, 1997 has been summarized from
the Company's audited balance sheet as of that date.
See accompanying notes to unaudited consolidated financial statements.
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<PAGE>
INMARK ENTERPRISES, INC.
Consolidated Statements of Operations
Three month and nine month periods ended December 31, 1997 and December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended September 30,
------------------------------- ------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 7,210,047 3,665,711 $18,054,383 13,467,749
Direct expenses 4,967,101 2,407,384 12,260,535 9,018,482
----------- ---------- ----------- ----------
Gross Profit 2,242,946 1,258,327 5,793,848 4,449,267
----------- ---------- ----------- ----------
Salaries 800,472 670,587 2,182,369 1,779,824
Selling, general and administrative expense 487,297 331,342 1,404,149 1,204,828
----------- ---------- ----------- ----------
Total operating expenses 1,287,769 1,001,929 3,586,518 2,984,652
----------- ---------- ----------- ----------
Operating income 955,177 256,398 2,207,330 1,464,615
Interest income, net 44,480 15,208 109,007 1,903
----------- ---------- ----------- ----------
Income before income taxes 999,657 271,606 2,316,337 1,466,518
Provision for income taxes 468,744 (76,679) 800,000 5,615
----------- ---------- ----------- ----------
Net income 530,913 348,285 1,516,337 1,460,903
=========== ========== =========== ==========
Net income per common and common equivalent share:
Basic $.19 $.12 $.53 $.51
==== ==== ==== ====
Diluted $.14 $.09 $.42 $.40
==== ==== ==== ====
Weighted average number of common and
common equivalent shares outstanding:
Basic 2,839,251 2,880,751 2,836,918 2,870,249
========= ========= ========= =========
Diluted 3,738,668 3,701,810 3,593,174 3,646,312
========= ========= ========= =========
</TABLE>
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See accompanying notes to unaudited consolidated financial statements.
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<PAGE>
INMARK ENTERPRISES, INC.
Consolidated Statement of Stockholders' Equity
Nine months ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
par value $.001 Additional Total
------------------------ Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
--------- ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1997 2,835,751 $2,835 $1,277,396 $3,257,150 $4,537,381
Exercise of options 4,125 5 6,032 -- 6,037
Net income -- -- -- 1,516,337 1,516,337
--------- ------ ---------- ---------- ----------
Balance, December 31, 1997 2,839,876 $2,840 $1,283,428 $4,773,487 $6,059,755
========= ====== ========== ========== ==========
</TABLE>
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See accompanying notes to unaudited consolidated financial statements.
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<PAGE>
INMARK ENTERPRISES, INC.
Consolidated Statements of Cash Flows
Nine months ended December 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,516,337 1,460,903
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 270,608 255,947
Deferred income taxes 504,000 (200,000)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 634,916 (1,613,291)
Increase in unbilled contracts in progress (3,288,547) --
Increase in prepaid expenses and other assets (8,863) (84,451)
(Increase) decrease in interest and other receivables (30,288) 29,139
(Decrease) increase in accounts payable (246,719) 90,039
Increase (decrease) in accrued job costs 2,559,939 (52,470)
Increase in other accrued liabilities 63,983 32,991
(Decrease) increase in accrued compensation (126,653) 64,166
----------- -----------
Net cash provided by (used in) operating activities 1,848,713 (17,027)
----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (34,504) (85,063)
----------- -----------
Net cash used in investing activities (34,504) (85,063)
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Cash flows from financing activities:
Repayments of loan payable to SPAR -- (750,000)
Release of restricted cash from factor -- 250,000
Decrease in due from factor, net -- 578,725
Proceeds from exercise of stock options 6,037 280,600
----------- -----------
Net cash provided by financing activities 6,037 359,325
----------- -----------
Net increase in cash 1,820,246 257,235
Cash and cash equivalents at beginning of period 1,712,751 700,598
----------- -----------
Cash and cash equivalents at end of period $ 3,532,997 957,833
=========== ===========
Supplemental disclosure:
Interest paid during the period $ -- 38,294
=========== ===========
Income tax paid during the period $ 163,451 247,200
=========== ===========
</TABLE>
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See accompanying notes to unaudited consolidated financial statements.
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<PAGE>
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to the Unaudited Consolidated Financial Statements
December 31, 1997 and 1996
(1) BASIS OF PRESENTATION
The interim financial statements of Inmark Enterprises, Inc. (the
"Company") for the three and nine month periods ended December 31, 1997
and 1996 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 nine month periods ended December 31, 1997
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 included in the
Company's Annual Report on Form 10-K for the year ended March 31, 1997.
(2) EARNINGS PER SHARE
In February 1997, the FASB issued Statement 128, "Earnings Per Share".
Statement 128 supersedes APB Opinion No. 15, "Earnings Per Share" and
specifies the computation, presentation and disclosure requirements for
earnings per share ("EPS") for entities with publicly held common stock
or potential common stock. It replaces the presentation of primary EPS
with the presentation of basic EPS and replaces fully diluted EPS with
diluted EPS. It also requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Statement 128 is effective
for financial statements for both interim and annual periods ending
after December 15, 1997.
Earnings per share of common stock for the quarter and nine month
period ended December 31, 1997 have been calculated according to the
guidelines of Statement 128 and earnings per share of common stock for
the quarter and nine month period ended December 31, 1996 have been
restated to conform with Statement 128.
Basic earnings per share for the quarter and nine month period ended
December 31, 1997 has been computed by dividing net income for each
respective period by the weighted average number of shares of common
stock outstanding for the each respective period. Diluted earnings per
share for the quarter and nine month period ended December 31, 1997 has
been computed by dividing net income for each respective period by the
weighted average number of shares of common stock and common stock
equivalents outstanding for each respective 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 during
each respective period. Stock options and warrants have been excluded
from the calculation of diluted earnings per share in any period in
which they would be antidilutive.
(3) UNBILLED CONTRACTS IN PROGRESS
Unbilled contracts in progress represents revenue recognized in advance
of billings rendered based on work performed to date on certain
contracts. Accrued job costs are also recorded for such contracts to
match costs and revenue.
-7-
<PAGE>
(4) INCOME TAXES
The provision for income taxes for the three and nine month periods
ended December 31, 1997 include approximately $110,000 of deferred tax
benefits arising from the reduction of the valuation allowance for
deferred tax assets, as a result of management's belief that it is more
likely than not that such assets will be fully realized. Income taxes
for the period have otherwise been provided based upon the Company's
estimated effective tax rate for the year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion compares the Company's consolidated results of
operations for the three and nine month periods ended December 31, 1997 to the
Company's consolidated results of operations for the three and nine month
periods ended December 31, 1996. The information herein should be read together
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended March 31, 1997.
RESULTS OF OPERATIONS
SALES. Sales for the quarter ended December 31, 1997 were $7,210,000
compared to sales of $3,666,000 for the prior year quarter ended December 31,
1996, an increase of $3,544,000 or 96.7%. Sales for the nine months ended
December 31, 1997 were $18,054,000 compared to sales of $13,468,000 for the nine
months ended December 31, 1996, an increase of $4,586,000 or 34.1%. The increase
in sales for both the quarter and nine month periods ended December 31, 1997
were primarily the result of the overall increase in the level of percentage of
completion of contract projects in progress during the periods compared to the
contract projects in progress in the like prior year quarter and nine month
period.
DIRECT EXPENSES. Direct expenses for the quarter ended December 31, 1997
were $4,967,000, or 68.9% of sales, compared to $2,407,000, or 65.7% of sales,
for the comparable prior year quarter. Direct expenses for the nine months ended
December 31, 1997 were $12,261,000, or 67.9% of sales, compared to $9,018,000,
or 67.0% of sales, for the comparable prior year period. The increase in the
amount of direct expenses and the increase in direct expenses as a percentage of
sales in both the quarter and nine month period ended December 31, 1997 were
primarily the result of the increased amount of sales for the respective periods
at, on average, lower gross profit margins related to the contracts in progress
during the periods compared to the sales and gross profit margins of contracts
in progress in the comparable prior year quarter and nine month period.
As a result of these changes in sales and direct expenses, gross profit for
both the quarter and nine month periods ended December 31, 1997 increased by
$985,000 and $1,345,000 compared to the prior year respective periods, thereby
amounting to $2,243,000 and $5,794,000 for the quarter and nine month periods
ended December 31, 1997, respectively.
OPERATING EXPENSES. Operating expenses for the quarter ended December 31,
1997 increased by $286,000 to $1,288,000 and amounted to 17.9% of sales compared
to operating expenses of $1,002,000 representing 27.3% of sales for the quarter
ended December 31, 1996. Operating expenses for the nine months ended December
31, 1997 increased by $602,000 to $3,587,000 and amounted to 19.9% of sales
compared to operating expenses of $2,985,000 representing 22.2% of sales for the
comparable prior year nine month period.
Respectively, the increase in operating expenses for both the quarter and
nine month period ended December 31, 1997 over the like operating expenses of
prior year quarter and nine month period ended December 31, 1996 were primarily
the result of (i) the respective increases of $130,000 and $403,000 related to
an increase in both personnel and overall salaries and (ii) the respective
increases of $156,000 and $199,000 in selling, general and administrative
expenses reflecting with the increase in the level of operations during the
respective periods.
-8-
<PAGE>
INTEREST INCOME/EXPENSE. For the quarter and nine month period ended
December 31, 1997, interest income of $44,000 and $109,000 respectively, was
earned from short term cash equivalent investments. During each period, as there
was no interest bearing debt outstanding, no interest expense was incurred. For
the comparable quarter and nine month period of 1996, interest income net of
interest expense in the amount of $15,000 and $2,000, respectively, was earned.
PROVISION FOR INCOME TAXES. Provision for federal, state and local income
taxes in the amounts of $469,000 and $800,000 respectively, for the three and
nine month period ended December 31, 1997 were based upon the Company's
estimated effective tax rate for the fiscal year and include $110,000 of
deferred tax benefits expected to be realized arising from the reduction of the
valuation allowance for deferred tax assets. In comparison, for the three and
nine month period ended December 31, 1996, the provision for income taxes
include deferred tax benefits arising from the reduction of the valuation
allowance for deferred tax assets anticipated to be realized in utilization of
prior years' net operating loss carryforwards which are offset by a provision
for state and local income taxes which have been provided at estimated effective
annual rates, as net operating loss carryforwards may not be allowable as an
offset against such state and local taxes. Accordingly, for the quarter ended
December 31, 1996, the provision for income taxes reflected a net tax benefit
provision in the amount of $77,000 and for the nine month period ended December
31, 1996 a net anticipated tax provision of $6,000.
NET INCOME. As a result of the items discussed above, net income for the
quarter ended December 31, 1997 was $531,000 compared to net income of $348,000
for the comparable prior year quarter and net income for the nine months ended
December 31, 1997 was $1,516,000 compared to $1,461,000 for the nine months
ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES.
For the nine months ended December 31, 1997, all of the Company's
activities were funded with existing working capital and internally generated
cash flow. At December 31, 1997, the Company had cash and cash equivalents
totaling $3,533,000 and working capital of $3,593,000 compared to cash and cash
equivalents of $1,713,000 and working capital of $1,860,000 at March 31, 1997.
Stockholders' equity increased to $6,060,000 as a result of the Company's net
income for the nine months ended December 31, 1997.
For the nine months ended December 31, 1997, cash provided by operations
amounted to $1,849,000, cash received from the exercise of stock options
amounted to $6,000 and cash used to purchase fixed assets totaled $35,000,
thereby resulting in an increase in cash of $1,820,000.
The Company believes that its current working capital position is
sufficient to support its existing and anticipated levels of operation and that
its working capital will continue to increase as the Company continues to
maintain profitable operations, thereby negating the need for external financing
to support operations. To the extent that the Company should be required to seek
external equity or debt financing, there can be no assurance that the Company
will be able to obtain any such additional financing.
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<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEMS 1, 3 AND 4. NOT APPLICABLE.
ITEM 2. CHANGES IN SECURITIES.
On October 30, 1997 and November 20, 1997, respective stock options granted
to Company employees in 1995 and 1996 pursuant to the Company's Stock Option
Plan, were exercised by two former employees to purchase an aggregate of 4,125
shares of the Company's common stock at exercise prices of $1.40 and $1.50 per
share as follows:
Shares Exercise Price Aggregate
Purchased Per Share Amount
--------- -------------- ---------
October 30, 1997 1,500 $1.40 $2,100
750 $1.50 $1,125
November 20, 1997 1,500 $1.40 $2,100
375 $1.50 $ 562
With respect to the above shares, there were no underwriting discounts or
commissions and all of the proceeds were used for general working capital. The
registrant claimed exemption from registration under Section 4 (2) of the
Securities Act of 1933 as a transaction by an issuer not involving any public
offering. The former employees each gave a written investment representation and
the share certificates were appropriately legended and stop transfer
instructions lodged with the transfer agent.
ITEM 5. OTHER INFORMATION.
On December 9, 1997, the Company announced that it had entered into an
agreement to acquire Optimum Group, Inc. ("Optimum") for approximately $15
million in a combination of cash, notes and common stock in addition to the
assumption of certain liabilities. The transaction which is subject to the
completion of financing, due diligence and Optimum audited financial statements
is expected to close during the Company's fourth quarter ending March 31, 1998.
On closing, pursuant to the purchase agreement, the Company will pay $8,825,000
in cash, issue $2,500,000 in subordinated notes and issue 565,835 shares of its
common stock in addition to assuming approximately $2,000,000 in liabilities and
debt.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
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27 Financial Data Schedule
(b) Reports on Form 8-K.
On December 12, 1997, the Company filed on Form 8-K its press
release of December 9, 1997 wherein the Company announced that
it had entered into an agreement to acquire Optimum Group,
Inc.
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<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: February 2, 1998 By: /s/ John P. Benfield
------------------------------
John P. Benfield, President
(Principal Executive Officer)
and Director
Dated: February 2, 1998 By: /s/ Donald A. Bernard
------------------------------
Donald A. Bernard, Executive Vice
President and Chief Financial Officer
(Principal Accounting and Financial
Officer) and Director
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Mar-31-1998
<PERIOD-START> Apr-01-1997
<PERIOD-END> Dec-31-1997
<CASH> 3,532,997
<SECURITIES> 0
<RECEIVABLES> 2,145,950
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,866,279
<PP&E> 360,797
<DEPRECIATION> 172,042
<TOTAL-ASSETS> 12,332,764
<CURRENT-LIABILITIES> 6,273,009
<BONDS> 0
0
0
<COMMON> 2,840
<OTHER-SE> 6,056,915
<TOTAL-LIABILITY-AND-EQUITY> 12,332,764
<SALES> 18,054,383
<TOTAL-REVENUES> 18,054,383
<CGS> 12,260,535
<TOTAL-COSTS> 12,260,535
<OTHER-EXPENSES> 3,586,518
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,316,337
<INCOME-TAX> 800,000
<INCOME-CONTINUING> 1,516,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,516,337
<EPS-PRIMARY> .53
<EPS-DILUTED> .42
</TABLE>
