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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 June 30, 1998
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 August 6, 1998, 4,480,326 shares of the Registrant's Common Stock, par value
$.001 a share, were outstanding.
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<PAGE>
<TABLE>
INDEX
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INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Page
----
PART I - FINANCIAL INFORMATION
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<S> <C>
Item 1. Consolidated Financial Statements of Inmark Enterprises, Inc. (Unaudited)
Consolidated Balance Sheets - June 30, 1998 and March 31, 1998 4
Consolidated Statements of Operations - Three month periods ended
June 30, 1998 and June 30, 1997 5
Consolidated Statement of Stockholders' Equity - Three month period ended
June 30, 1998 6
Consolidated Statements of Cash Flows - Three month periods ended
June 30, 1998 and June 30, 1997 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
PART II - OTHER INFORMATION 13
- ---------------------------
Items 1-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Description of Exhibit
---------- ----------------------
10.1 Lease Agreement dated June 16, 1998 by and
between 415 Northern Blvd. Realty Corp. and
Inmark Services, Inc. (incorporated herein by
reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-3, File No.
333-60157, initially filed with the Securities and
Exchange Commission on July 30, 1998).
27 Financial Data Schedule
2
<PAGE>
(b) Reports on Form 8-K.
(i) On April 13, 1998, the Registrant filed a report on Form 8-K
announcing the March 31, 1998 completion of the Optimum Acquisition. Financial
statements for OG Holding Corporation (formerly known as Optimum Group, Inc.),
the seller of the Optimum business, for the years ended December 31, 1997 and
1996 were filed as part of the report on Form 8-K.
(ii) On June 8, 1998, the Registrant filed a report on Form 8K/A amending
the report on Form 8-K filed on April 13, 1998. A pro forma combined income
statement relating to the Optimum Acquisition was filed as part of the report on
Form 8-K/A.
SIGNATURES
- ---------- 14
</TABLE>
3
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
<TABLE>
INMARK ENTERPRISES, INC.
Consolidated Balance Sheets
June 30, 1998 and March 31, 1998
<S> <C> <C>
June 30, 1998 March 31, 1998*
--------------- ---------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,023,719 1,459,909
Contract receivables 15,550,065 10,933,241
Deferred tax asset 83,442 83,442
Prepaid taxes - 452,291
Prepaid expenses and other current assets 288,078 163,042
------------- --------------
Total current assets 16,945,304 13,091,925
------------- --------------
Furniture, fixtures and equipment, at cost 1,085,965 1,006,779
Less accumulated depreciation 231,732 191,522
------------- --------------
854,233 815,257
------------- --------------
Notes receivable from officer 225,000 225,000
Goodwill, net 16,334,637 16,534,950
Deferred financing costs 118,275 124,500
Other assets 75,410 26,757
------------- --------------
Total assets $ 34,552,859 30,818,389
============= ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,129,737 1,601,751
Accrued job costs 11,569,509 8,335,745
Accrued compensation 243,050 314,876
Other accrued liabilities 224,263 298,791
Accrued taxes payable 247,788 94,260
------------- --------------
Total current liabilities 13,414,347 10,645,423
------------- --------------
Notes payable bank - long term 7,000,000 7,000,000
Subordinated notes payable - long term 2,500,000 2,500,000
------------- --------------
Total liabilities 22,914,347 20,145,423
Stockholders' equity:
Class A convertible preferred stock, par value $.001;
authorized 650,000 shares; none issued and outstanding - -
Class B convertible preferred stock, par value $.001;
authorized 700,000 shares; none issued and outstanding - -
Preferred stock, undesignated; authorized 3,650,000
shares; none issued and outstanding - -
Common stock, par value $.001; authorized 25,000,000
shares; issued and outstanding 4,475,326 shares 4,475 4,475
Additional paid-in capital 5,131,896 5,131,896
Retained earnings 6,502,141 5,536,595
------------- --------------
Total stockholders' equity 11,638,512 10,672,966
------------- --------------
Total liabilities and stockholders' equity $ 34,552,859 30,818,389
============= ==============
* The consolidated balance sheet as of March 31, 1998 has been summarized from
the Company's audited balance sheet as of that date.
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
INMARK ENTERPRISES, INC.
Consolidated Statements of Operations
Three Months Ended June 30, 1998 and 1997
(Unaudited)
<S> <C> <C>
1998 1997
----------------- ---------------
Sales $ 12,251,770 5,918,887
Direct expenses 8,293,204 4,034,636
--------------- ---------------
Gross profit 3,958,566 1,884,251
--------------- ---------------
Salaries 1,073,422 686,707
Selling, general and administrative expense 1,105,962 475,011
--------------- ---------------
Total operating expenses 2,179,384 1,161,718
--------------- ---------------
Operating income 1,779,182 722,533
Interest expense (income), net 170,636 (39,794)
--------------- ---------------
Income before income taxes 1,608,546 762,327
Provision for income taxes 643,000 200,256
--------------- ---------------
Net income $ 965,546 562,071
=============== ===============
Net income per common and common equivalent share:
Basic $ .22 $ .16
=============== ===============
Diluted $ .17 $ .13
=============== ===============
Weighted average number of common and common equivalent shares outstanding:
Basic 4,475,326 3,544,688
=============== ===============
Diluted 5,709,198 4,449,888
=============== ===============
Reconciliation of the net income available to common shareholders for the
computation of diluted income per share is as follows:
Net income available to common shareholders on both a
basic and diluted basis 965,546 562,071
Reconciliation of weighted average shares used for basic and diluted computation
is as follows:
Weighted average shares - basic 4,475,326 3,544,688
Dilutive effect of options and warrants 1,233,872 905,200
--------------- --------------
Weighted average shares - diluted 5,709,198 4,449,888
=============== ==============
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
INMARK ENTERPRISES, INC.
Consolidated Statement of Stockholders' Equity
Three Months Ended June 30, 1998
(Unaudited)
<S> <C> <C> <C> <C> <C>
Total
Common Stock Additional Retained Stockholders'
par value $.001 Paid-in Earnings Equity
Capital
-------------------------------------------- ------------- ------------- --------------
Shares Amount
--------------------- ------------------
Balance, March 31, 1998 4,475,326 $ 4,475 $ 5,131,896 $ 5,536,595 $ 10,672,966
Net income - - - 965,546 965,546
--------------------- ------------------ ------------- ------------- --------------
Balance, June 30, 1998 4,475,326 $ 4,475 $ 5,131,896 $ 6,502,141 $ 11,638,512
===================== ================== ============= ============= ==============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
<TABLE>
INMARK ENTERPRISES, INC.
Consolidated Statements of Cash Flows
Three Months Ended June 30, 1998 and 1997
(Unaudited)
<S> <C> <C>
1998 1997
------------------- -------------------
Cash flows from operating activities:
Net income $ 965,546 562,071
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 264,874 82,445
Deferred income taxes - 44,256
Changes in operating assets and liabilities:
Increase in contracts receivable (4,616,824) (1,073,469)
(Increase) decrease in prepaid expenses and other assets (173,689) 171,745
Decrease in prepaid taxes 452,291 -
Decrease in accounts payable (472,014) (203,336)
Increase in accrued job costs 3,233,764 667,261
(Decrease) increase in other accrued liabilities (74,528) 52,248
Increase in accrued taxes payable 153,528 -
Decrease in accrued compensation (71,826) (132,653)
--------------- ---------------
Net cash provided by (used in) operating activities (338,878) 170,568
--------------- ---------------
Cash flows from investing activities:
Purchases of fixed assets (79,186) (6,018)
Costs related to purchase of Optimum Group, Inc. (18,126) -
--------------- ---------------
Net cash used in investing activities (97,312) (6,018)
--------------- ---------------
Net (decrease) increase in cash (436,190) 164,550
Cash and cash equivalents at beginning of period 1,459,909 1,712,751
--------------- ---------------
Cash and cash equivalents at end of period $ 1,023,719 1,877,301
=============== ===============
Supplemental disclosure:
Interest paid during the period $ 136,940 -
=============== ===============
Income tax paid during the period $ 1,536 53,888
=============== ===============
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
7
<PAGE>
Inmark Enterprises, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
June 30, 1998 and 1997
(1) Basis of Presentation
---------------------
The interim financial statements of Inmark Enterprises, Inc. (the
"Company") for the three month periods ended June 30, 1998 and 1997
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 month period ended June 30, 1998 is not necessarily indicative of
the results for a full year.
On March 31, 1998, Optimum Group, Inc. ("Optimum"), an indirect
wholly-owned subsidiary of the Company, acquired all of the assets and
the business and assumed certain of the liabilities of OG Holding
Corporation, formerly known as Optimum Group, Inc. (the "Optimum
Acquisition"). The Optimum Acquisition has been accounted for as a
purchase by the Company as at March 31, 1998. Accordingly, the results
of operations discussed below for the three month period ended June 30,
1998 reflect the consolidated operations of the Company including
Optimum whereas the operations for the three month period ended June
30, 1997 are that of the Company excluding Optimum.
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, 1998.
(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.
8
<PAGE>
Earnings per share of common stock for the three month period ended
June 30, 1998 has been calculated according to the quidelines of
Statement 128 and earnings per share of common stock for the three
month period ended June 30, 1997 has been restated to conform with
Statement 128. All earnings per share calculations have been adjusted
for the five-for-four stock split paid in the form of a stock dividend
June 15, 1998 to shareholders of record May 14, 1998.
Basic earnings per share for the three month period ended June 30, 1998
has been computed by dividing net income for the period by the weighted
average number of shares of common stock outstanding for the period.
Diluted earnings per share for the three month period ended June 30,
1998 has been computed by dividing net income for the period by the
weighted average number of shares of common stock and common stock
equivalents outstanding for 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 during the 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
properly match costs and revenue.
(4) Income Taxes
------------
The provision for income taxes for the three month period ended June
30, 1998 is based upon the Company's estimated effective tax rate for
the year, whereas for the three month period ended June 30, 1997, the
provision for income taxes included approximately $110,000 of deferred
tax benefits arising from the reduction of the valuation allowance for
deferred tax assets.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
---------------------
The following discussion compares the Company's consolidated
(including Optimum) results of operations for the three month period ended June
30, 1998 to the Company's then consolidated (excluding Optimum) results of
operations for the three month period ended June 30, 1997. 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, 1998.
Results of Operations
Sales. The Company's sales for the quarter ended June 30, 1998
were $12,252,000, inclusive of $3,246,000 of sales of Optimum, compared to the
Company's sales of $5,919,000 for the prior year quarter ended June 30, 1997, an
increase of $6,333,000 or 107%. Other than the increase in sales attributable to
Optimum, the additional increase in sales resulted from the overall increase in
contract
9
<PAGE>
projects in progress during the period compared to the contract projects in
progress in the like prior year quarter.
Direct Expenses. Direct expenses for the quarter ended June
30, 1998 were $8,293,000, or 67.7% of sales, inclusive of $1,986,000 of direct
expenses of Optimum, compared to $4,035,000, or 68.2% of sales, for the
comparable prior year quarter, an increase of $4,258,000 or 105.6%. Other than
the increase in direct expenses attributable to Optimum, the additional increase
in the amount of direct expenses for the quarter ended June 30, 1998 principally
relates to the comparative increase in sales for the period, whereas the
decrease in direct expenses as a percentage of sales for the quarter ended June
30, 1998 was primarily the result of current Optimum client projects in the
aggregate contributing a greater gross profit margin than the mix of the
Company's projects during the comparable prior year quarter.
As a result of these changes in sales and direct expenses,
gross profit for the quarter ended June 30, 1998 increased by $2,075,000 to
$3,959,000 compared to the quarter ended June 30, 1997.
Operating Expenses. Operating expenses for the quarter ended
June 30, 1998 increased by $1,018,000 to $2,179,000 compared to $1,162,000 for
the quarter ended June 30, 1997. The increase in operating expenses for the
quarter ended June 30, 1998 was primarily the result of (A) the inclusion of
$741,000 of operating expenses of Optimum consisting of approximately (I)
$338,000 in salaries, bonuses and related employee payroll expenses and (ii)
$403,000 of selling, general and administrative expenses which included
approximately $150,000 of amortization of goodwill and deferred financing costs
associated with the Optimum Acquisition and (B) with respect to the Company, an
increase of approximately $277,000 related primarily to the overall increase in
the level of operations in the quarter ended June 30, 1998. With the inclusion
of the operating expenses of Optimum and the related amortization of the costs
related to the Optimum Acquisition, operating expenses as a percentage of sales,
decreased to 17.8% compared to 19.6% for the prior year quarter ended June 30,
1997.
Interest Expense/Income. For the quarter ended June 30, 1998,
the Company incurred net interest expense of approximately $171,000 on its bank
borrowings and notes issued in conjunction with the Optimum Acquisition. For the
comparable quarter of the prior fiscal year, the Company had earned interest
income of approximately $40,000 from short term cash equivalent investments.
Provision For Income Taxes. Provisions for federal, state and
local income taxes for the quarter ended June 30, 1998 were based upon the
Company's estimated effective tax rate for the fiscal year. In comparison, for
the prior year quarter ended June 30, 1997, provisions for federal, state and
local income taxes were based upon the Company's effective tax rate for the
fiscal year and included $110,000 of deferred tax benefits expected to be
realized arising from the reduction of the valuation allowance for deferred tax
assets.
Net Income. As a result of the items discussed above, net
income for the quarter ended June 30, 1998 was $966,000 compared to net income
of $562,000 for the comparable prior year quarter.
10
<PAGE>
Liquidity and Capital Resources.
For the quarter ended June 30, 1998, all of the Company's
activities were funded with existing working capital without the need to further
utilize amounts available under its revolving credit bank line. At June 30,
1998, the Company had cash and cash equivalents totaling $1,024,000 and working
capital of $3,531,000 compared to cash and cash equivalents of $1,460,000 and
working capital of $2,447,000 at March 31, 1998. Stockholders' equity increased
to $11,639,000 as a result of the Company's net income for the quarter ended
June 30, 1998.
For the quarter ended June 30, 1998, cash used in operating
activities amounted to $339,000, cash used to purchase fixed assets totaled
$79,000 and additional cash used related to the Optimum Acquisition amounted to
$18,000, thereby resulting in a decrease in cash of $436,000.
The Company believes that its current working capital
position, together with the current unused amount available under its revolving
credit bank line, 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 additional external financing. To the extent that the Company should be
required to seek external equity or additional debt financing, there can be no
assurance that the Company will be able to obtain any such additional funding.
Other Matters.
The Company plans to modify or replace portions of its
software prior to March 31, 1999, so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. As the Company's
computer systems are PC based, the modifications or replacements necessary to
overcome the year 2000 issue are not anticipated to result in any material
incremental costs. With conversions to new software and modifications to
existing software, the year 2000 issue should not pose significant operational
problems for the Company.
11
<PAGE>
Forward-Looking Statements.
This report contains or incorporates by reference
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that are based on beliefs of the Company's management as well as
assumptions made by and information currently available to the Company's
management. When used in this report, the words "estimate," "project,"
"believe," "anticipate," "intend," "expect," "plan," "predict," "may," "should,"
"will," the negative thereof or other variations thereon or comparable
terminology are intended to identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events based on
currently available information and are subject to risks and uncertainties that
could cause actual results to differ materially from those contemplated in those
forward- looking statements. Factors that could cause actual results to differ
materially from the Company's expectations are set forth in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1998 under "Risk
Factors", including but not limited to "Dependence on Key Personnel,"
"Customers," "Competition," "Risk Associated with Acquisitions," "Expansion
Risk," "Control by Executive Officers and Directors," "Outstanding Indebtedness;
Security Interest," "Shares Eligible for Future Sale," and "Lack of Dividend
History." Other factors may be described from time to time in the Company's
public filings with the Commission, news releases and other communications. The
forward- looking statements contained in this report speak only as of the date
hereof. The Company does not undertake any obligation to release publicly any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
12
<PAGE>
PART II - OTHER INFORMATION
---------------------------
<TABLE>
<S> <C>
Items 1-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
Exhibit No. Description of Exhibit
---------- ----------------------
10.1 Lease Agreement dated June 16, 1998 by and
between 415 Northern Blvd. Realty Corp. and
Inmark Services, Inc. (incorporated herein by
reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-3, File No.
333-60157, initially filed with the Securities and
Exchange Commission on July 30, 1998).
27 Financial Data Schedule
(b) Reports on Form 8-K.
(i) On April 13, 1998, the Registrant filed a report on Form 8-K
announcing the March 31, 1998 completion of the Optimum
Acquisition. Financial statements for OG Holding Corporation
(formerly known as Optimum Group, Inc.), the seller of the
Optimum business, for the years ended December 31, 1997 and
1996 were filed as part of the report on Form 8-K.
(ii) On June 8, 1998, the Registrant filed a report on Form 8-K/A
amending the report on Form8-K filed on April 13, 1998. A pro
forma combined income statement relating to the Optimum
Acquisition was filed as part of the report on Form 8-K/A.
</TABLE>
13
<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: August 6, 1998 By: /s/ John P. Benfield
------------------------------
John P. Benfield, President
(Principal Executive Officer)
and Director
Dated: August 6, 1998 By: /s/ Donald A. Bernard
-------------------------------
Donald A.Bernard, Executive Vice
President and Chief Financial Officer
(Principal Accounting and Financial
Officer) and Director
14
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000886475
<NAME> Inmark Enterprises, Inc.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Mar-31-1999
<PERIOD-START> Apr-01-1998
<PERIOD-END> Jun-30-1998
<CASH> 1,023,719
<SECURITIES> 0
<RECEIVABLES> 15,550,065
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,945,304
<PP&E> 1,085,965
<DEPRECIATION> 231,732
<TOTAL-ASSETS> 34,552,859
<CURRENT-LIABILITIES> 13,414,347
<BONDS> 9,500,000
0
0
<COMMON> 4,475
<OTHER-SE> 11,634,037
<TOTAL-LIABILITY-AND-EQUITY> 34,552,859
<SALES> 12,251,770
<TOTAL-REVENUES> 12,251,770
<CGS> 8,293,204
<TOTAL-COSTS> 8,293,204
<OTHER-EXPENSES> 2,179,384
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 170,636
<INCOME-PRETAX> 1,608,546
<INCOME-TAX> 643,000
<INCOME-CONTINUING> 965,546
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 965,546
<EPS-PRIMARY> .22
<EPS-DILUTED> .17
</TABLE>
