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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998 (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
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 12, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $30,972,921.
As of June 12, 1998, 4,475,326 shares of Common Stock, $.001 par value,
were outstanding.
Documents Incorporated by Reference
Document Part of 10-K into which incorporated
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Proxy Statement relating to Registrant's Part III
1998 Annual Meeting of Stockholders
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PART I
This report contains certain "forward-looking statements" concerning the
Company's operations, economic performance and financial condition, which are
subject to inherent uncertainties and risks. Actual results could differ
materially from those anticipated in this report. When used in this report, the
words "estimate," "project," "anticipate," "expect," "intend," "believe" and
similar expressions are intended to identify forward-looking statements.
Item 1. Business.
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General Introduction
Inmark Enterprises, Inc. ("Inmark"), together with its wholly-owned
subsidiaries, Inmark Services, Inc., Optimum Group, Inc. and North American
Holding Corp. (collectively, the "Company"), is a full service marketing, sales
promotion and new age communications organization which designs, develops and
implements customized national, regional and local consumer and trade promotion
programs principally for Fortune 500 consumer product manufacturers. The
Company's promotional programs are designed to enhance the value of its clients'
budgeted expenditures and achieve, in an objectively measurable way, its
clients' specific marketing and promotional objectives. The Company's programs
in the industry are commonly referred to as "account specific", as they may
target the participation and cooperation of a specific retail chain or groups of
retailers or other sources of distribution to attain results in the form of
increased in-store product displays, related consumer purchases and enhanced
product brand name recognition. In addition to the traditional marketing and
sales promotional services, the Company's services and programs include new
media services consisting of Internet web site activities, interactive
computerization and animation and video production, thereby affording clients a
one-stop shop resource for strategic planning, creative development, production
and implementation.
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 a 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 which were discontinued in June 1993.
On March 31, 1998, Optimum Group, Inc. ("Optimum"), an indirect
wholly-owned subsidiary of the Company acquired all of the assets, assumed
certain liabilities and continued the business of OG Holding Corporation,
formerly known as Optimum Group, Inc. (the "Acquisition"). The purchase price
for the Acquisition consisted of $8,700,000 in cash, a subordinated note of the
Company in the principal amount of $2,500,000, 565,385 shares of newly and
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validly issued common stock of the Company and the payment or assumption of
approximately $1,900,000 of existing debt of the seller. Simultaneously with the
closing of the Acquisition, the Company entered into a loan agreement with a
bank pursuant to which the Company obtained a $5,000,000 five-year term loan and
a $5,000,000 revolving loan credit facility. A portion of the proceeds of the
loan was used to finance the Acquisition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations". The Optimum
business, founded in 1973, provides marketing, visual communications and graphic
design services which are totally complementary and value-added to those
services previously provided by the Company. Optimum assists clients in varied
industries in identifying the best and most complete solution for their business
communication needs. In its client relationships and related programs and
projects, Optimum provides leading edge visual communications technology and
internet development, interface and access and serves as an independent resource
for strategic planning, creative development, production and implementation.
Description of Business
General. The Company is a full service marketing, sales promotion and new
age communications organization which designs, develops and implements
customized, national, regional and local consumer and trade promotion programs
principally for Fortune 500 consumer product manufacturers and service
providers. The Company'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. The
Company's co-marketing "Account Specific" 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.
The Company's marketing, sales promotion, creative and new media services
generally include: (a) strategic planning, market research and analysis, product
positioning, selling strategy and process and direct marketing services which
assist its clients in identifying and defining specific objectives and advising
on the deployment of budgeted amounts to achieve their objective and maximize
value; (b) concept development, graphic design, conventional and computer
illustration, copy writing, 3-D graphics and animation, layout and production,
photography and video services which develop the concept and subsequently create
the consumer and trade promotional program; (c) implementing turnkey training
and incentive programs, including providing documentation, program manuals and
artwork, training a client's marketing and sales staffs, buying media and
merchandise, designing in-store displays, commercial editing, coordination and
trafficking of media and total program administration and (d) multimedia sales
presentations, interactive computer based training, Internet web site
development and access and animation and video production.
The Company combines the needs of its clients and those of their sales
forces and the needs of its clients' Trade outlets with the Company's
experience, techniques and proprietary systems to provide solutions and
measurable results. A typical program will integrate numerous promotional
techniques which take into consideration a number of factors, including: (a) the
channel of Trade on which the client is focused and a determination of the most
effective manner to obtain distribution support for the client's product;
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(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, point-of-purchase displays, couponing
and interactive video and Internet services.
Industry Background. Consumer 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 1997 Annual Report on the Promotion Industry,
the promotion industry continued to grow as consumer promotion expenditures
reached $71.5 billion in 1996, reflecting a $1.5 billion increase in such
expenditures over the prior year. According to the Annual Report, trends
indicate a continuing increase in in-store and local market account specific
directed promotions as well as new ways to use the Internet to involve
consumers. Additionally, packaged goods manufacturers continue to downsize their
in-house marketing and promotion personnel to reduce general and administrative
expenses, and correspondingly have increased their use of third party promotions
businesses, such as Inmark, to utilize cost effective, innovative and efficient
promotional programs maximizing budgeted expenditures.
The Company's Programs. The Company believes that it is well-positioned to
meet the increasing demands of consumer product manufacturers by offering a
range of customized, rather than "off the shelf", promotional programs,
providing turnkey implementation, and utilizing its creative development tools,
sales support, relationships with media outlets, the Internet and other forms of
visual communications, promotional products, and administrative services. The
Company's services are supported with an innovative management information
system, to gather, monitor, track and report the implementation status of each
program. The Company's ability to capture data regarding sales activity and
Trade acceptance of a particular program on a real time basis enables Inmark and
its clients to continually monitor and adjust the program to maximize its
effectiveness. A Company 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
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expenditure, to run simultaneously with individual and customized programs
nationwide.
The Company's promotional campaign strategies are typically implemented
with the use of one or more of the following promotional products:
o Promotional Radio - Broadcast time for traditional concept, image
and brand recognition advertising and as an incentive for Trade
participation. 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 the Company 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 (the Company 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.
o New Age Media - The Internet and other forms of interactive visual
communication designed to augment traditional media and reach audiences
that prefer a more active media over passive options. Includes Internet web
site design, development and providing reliable, high-speed access and
maintenance through the Company's own dedicated pipeline.
o Creative Services - A full range of services which include
concepting, graphic design, copywriting, 3-D graphics and animation,
illustration, photography and video.
Marketing Strategy. The Company's marketing strategy is to offer its
clients creative promotional programs intended to produce objectively measurable
results while removing from clients the significant burden of administrative and
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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,
the Company also has broadened its strategy and has offered and intends to
continue to offer its trade and consumer promotion products to clients in other
industries, such as financial services, entertainment, electronics, health care
and transportation to name a few, which also are expected to benefit from a
comprehensive customized program on a turnkey implementation basis.
The Company 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 the Company's 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.
The Company's services are marketed directly by the Company's sales force
consisting of twenty full-time and four part-time salespersons operating out of
a fully staffed and/or sales offices located in Greenvale, New York; Cincinnati,
Ohio; Barrington, Illinois; Birmingham, Alabama; Bloomington, Minnesota; Irvine
and San Francisco, California; Phoenix, Arizona; and Worcester, Pennsylvania.
Customers. The Company's principal clients are packaged goods and other
consumer products manufacturers, generally among the Fortune 500, which are
actively engaged in promoting their products to both the Trade and consumer. The
Company's clients include, among others, Colgate-Palmolive Company, The
Pillsbury Company, The Minute Maid Company, Bestfoods Specialty Products, CIBA
Consumer Pharmaceuticals, Bayer Corporation, Lamb Weston Inc., Menley & James
Laboratories, Inc., Hunt Foods Company, Perdue Farms, Inc., The Quaker Oats
Company, American Home Products Corporation, Fender Musical Instruments
Corporation and Duracell Corporation. For the fiscal year ended March 31, 1998,
before giving effect to the Acquisition and on a pro forma basis giving effect
to the Acquisition by including the revenues of the predecessor of Optimum for
the year ended December 31, 1997, the Company had one client, Colgate-Palmolive
Company, which accounted for approximately 34.4% and 24.5% of its revenues,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations". To the extent that the Company continues to have a
heavily weighted sales concentration with one or more clients, the loss of any
such client could have a material adverse affect on the earnings of the Company.
Unlike traditional general advertising firms, which are engaged as agents of
record on behalf of consumer products manufacturers, promotional companies,
including the Company, typically are engaged on a product-by-product, or
project-by-project basis. Although the Company's contracts with its clients are
executed on a project-by-project basis, the relationship of the Company 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, the Company's competition is derived from two basic groups
(which market their services to consumer products manufacturers): (a) other full
service promotion agencies and (b) companies which specialize in one specific
aspect or niche of a general promotional program. Other full service
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promotion agencies may be a part of or affiliated with larger general
advertising agencies such as the Cato Johnson relationship with Young & Rubicam
and J. Brown/LMC with Grey Advertising, 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 the Company. The Company competes on
the basis of the quality and the degree of comprehensive service which it
provides to its clients. There can be no assurance that the Company will be able
to continue to compete successfully with existing or future industry
competitors.
Employees
The Company currently has 98 full-time and 10 part-time employees,
including 20 full-time and 4 part-time employees involved in sales, 51 full-time
and 3 part-time employees in marketing support and program management, 9
full-time employees in new media and information technology and 18 full-time and
3 part-time employees in finance and administration. None of the Company's
employees is represented by a labor organization and the Company considers the
relationships with its employees to be good.
Risk Factors
Dependence on Key Personnel. The Company's business is managed by a
relatively small number of key management and operating personnel, the loss of
certain of whom could have a material adverse impact on the Company's business.
The Company believes that its future success will depend in large part on its
continued ability to attract and retain highly skilled and qualified personnel.
Each of the Company's key executives is a party to an employment agreement that
expires in either 2001 or 2002 and thereafter automatically renews for an
additional term of one year unless either party elects to terminate the
agreement upon at least 60 days notice prior to the expiration of the then
current term. Customers. The Company's principal clients are consumer product
manufacturers, generally among the Fortune 500, which are actively engaged in
promoting their products both to specific retail chains, groups of retailers or
other sources of distribution and to consumers. As a substantial portion of the
Company's sales have been dependent on one client or a limited concentration of
clients, to the extent such dependency 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. See "Description of Business - Customers".
Competition. The market for promotional services is highly competitive,
with hundreds of companies claiming to provide various services in the promotion
industry. Certain of these companies may have greater financial and marketing
resources than those available to the Company. The Company competes on the basis
of the quality and the degree of comprehensive service which it provides to its
clients. There can be no assurance that the Company will be able to continue to
compete successfully with existing or future industry competitors. See
"Description of Business - Competition".
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Risks Associated with Acquisitions. Consistent with its strategy, the
Company is currently evaluating, has made offers with respect to, and is engaged
in discussions regarding various acquisition and strategic relationship
opportunities. No assurance can be given that any potential acquisition or
strategic relationship will be consummated. These acquisitions or strategic
relationships could be funded by cash on hand, Inmark's securities and/or
additional borrowings. It is possible that one or more of such possible future
acquisitions or strategic relationships, if completed, could adversely affect
the Company's funds from operations or cash available for distribution, in the
short term or the long term or both, or increase the Company's debt, or such an
acquisition or strategic relationship could be followed by a decline in the
market value of Inmark's securities.
Expansion Risk. The Company is experiencing a period of rapid expansion
which management expects will increase in the near future. This growth has
increased the operating complexity of the Company as well as the level of
responsibility for both existing and new management personnel. The Company's
ability to manage its expansion effectively will require it to continue to
implement and improve its operational and financial systems and to expand, train
and manage its employee base. The Company's inability to effectively manage its
expansion could have a material adverse effect on its business.
A portion of the Company's expansion may occur through acquisitions as an
alternative to direct investments in the assets required to implement the
expansion. No assurance can be given that suitable acquisitions can be
identified, financed and completed on acceptable terms, or that the Company's
future acquisitions, if any, will be successful or will not impair the Company's
ability to service its outstanding obligations.
Control by Executive Officers and Directors. The executive officers of the
Company collectively beneficially own a significant percentage of the voting
stock of Inmark and, in effect, have the power to influence strongly the outcome
of all matters requiring stockholder approval, including the election or removal
of directors and the approval of significant corporate transactions. Such voting
could also delay or prevent a change in the control of Inmark in which the
holders of the Inmark common stock could receive a substantial premium. In
addition, the Company's loan agreement with its bank requires that, during the
term of the loan agreement, the executive officers of Inmark maintain a minimum
percentage of beneficial ownership of Inmark's Common Stock.
Outstanding Indebtedness; Security Interest. In connection with the
Acquisition, Inmark, Services, and Optimum entered into a loan agreement
providing for a $5,000,000 five-year term loan and a $5,000,000 revolving loan
credit facility. The prompt and full payment and other performance of all of the
obligations of Services and Optimum under the loan agreement or otherwise to the
lender or any affiliate of the lender are guaranteed by Inmark. As security for
all of its obligations under the loan agreement, (a) Inmark, Services and
Optimum granted the lender a first priority lien on and security interest in all
of the assets of Inmark, Services and Optimum, including the stock of Services
and Optimum and the right, title and interest of Inmark, Services and Optimum in
and to the Purchase Agreement, and (b) Inmark and Services pledged their shares
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of Services and Optimum, respectively, to the lender. In the event that an event
of default under the loan agreement occurs, at the lender's option, (i) the
revolving line of credit shall terminate, (ii) the principal and interest of all
loans and all other obligations under the loan agreement shall be immediately
due and payable, and (iii) the lender shall be entitled to exercise any and all
rights and remedies provided for in the loan agreement and in any document
delivered to the lender in connection with the loan agreement, all rights and
remedies of a secured party under the Uniform Commercial Code, and all other
rights and remedies that may otherwise be available to the lender by agreement
or at law or in equity.
Shares Eligible for Future Sale. Future sales of shares by existing
stockholders under Rule 144 of the Securities Act, or through the exercise of
outstanding registration rights or the issuance of shares of Common Stock upon
the exercise of options or warrants or conversion of convertible securities
could materially adversely affect the market price of share of Common Stock and
could materially impair Inmark's future ability to raise capital through an
offering of equity securities. Substantially all of Inmark's outstanding shares,
other than those held by affiliates, are transferable without restriction under
the Securities Act. No predictions can be made as to the effect, if any, that
market sales of such shares or the availability of such shares for future sale
will have on the market price of shares of Common Stock prevailing from time to
time.
Lack of Dividend History. Inmark has never declared or paid any cash
dividends on its Common Stock and does not expect to declare any such dividends
in the foreseeable future. Payment of any future dividends will depend upon the
earnings and capital requirements of the Company, the Company's debt facilities
and other factors the Board of Directors consider appropriate. The Company
intends to retain earnings, if any, to finance the development and expansion of
its business, and therefore does not anticipate paying any dividends in the
foreseeable future. In addition, the terms of the Company's loan agreement
restrict the payment of dividends on the common stock.
Forward Looking Statements.
The statements contained in this report that are not historical facts are
"forward- looking-statements" (as such term is defined in the Private Securities
Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as "estimates," "projects," "anticipates,"
"expects," "intends," "believes" or the negative thereof or other variations
thereon or comparable terminology or by discussions of strategy that involve
risks and uncertainties. Management wishes to caution the reader that these
forward-looking statements, such as statements regarding development of the
Company's business, the Company's anticipated capital expenditures and other
statements contained in this report regarding matters that are not historical
facts, are only estimates or predictions. No assurance can be given that future
results will be achieved. Actual events or results may differ materially as a
result of risks facing the Company (including those described in "Risk Factors"
above) or actual events differing from the assumptions underlying such
statements.
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Item 2. Properties.
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The Company has the following leased office facilities:
Square
Facility Location Feet
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Principal offices of Inmark
Enterprises, Inc. and principal
and sales offices of Inmark
Services, Inc. Greenvale, New York 5,500
Principal and sales offices of
Optimum Group, Inc. Cincinnati, Ohio 17,000
Other sales offices Barrington, Illinois 800
San Francisco, California 900
Irvine, California 200
Phoenix, Arizona 100
Birmingham, Alabama 100
Bloomington, Minnesota 100
Worcester, Pennsylvania 100
With the exception of the Cincinnati, Ohio office lease which at March 31, 1998
has a remaining term of twelve years, each of the Company's office leases is
short term and annually renewable.
Item 3. Legal Proceedings.
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Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
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Not Applicable.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
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Market Information
Effective December 17, 1996, Inmark's Common Stock began trading on the
Nasdaq SmallCap Market under the symbol IMKE. Prior to that date, the Company's
Common Stock was traded over-the-counter on the OTC Electronic Bulletin Board
under the same symbol. Prior to October 20, 1997, in addition to its Common
Stock, traded securities of the Company included Units, Class A Warrants and
Class B Warrants. On that date the Units, Class A Warrants and Class B Warrants
ceased to trade as the term of both the Class A Warrants and Class B Warrants
expired. The following table sets forth for the periods indicated, through
December 16, 1996, the high and low bid prices and as of December 17, 1996 the
high and low trade prices for the Common Stock as reported by NASDAQ. The
quotations listed below reflect inter-dealer prices, without retail mark-ups,
mark- downs or commissions and may not necessarily represent actual
transactions.
Common Stock
------------
High Low
---- ---
Fiscal Year 1997
- ----------------
First Quarter 3 1 1/2
Second Quarter 3 5/8 2
Third Quarter 4 1/8 3 1/4
Fourth Quarter 6 3/4 3 5/8
Fiscal Year 1998
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First Quarter 5 1/8 4
Second Quarter 6 1/2 4 1/2
Third Quarter 7 15/16 5 3/8
Fourth Quarter 7 3/16 4 3/4
On May 4, 1998, Inmark's Board of Directors declared a five-for-four stock
split of Inmark's Common Stock in the form of a twenty-five percent stock
dividend payable on June 14, 1998 to stockholders of record as of May 14, 1998.
On June 13, 1998, giving effect to the stock dividend, there were 4,475,326
shares of Common Stock outstanding, approximately 42 shareholders of record and
approximately 900 beneficial owners whose shares are held by a number of
financial institutions. Inmark 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
Inmark's Common Stock in the foreseeable future.
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Item 6. Selected Financial Data.
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The Merger on September 29, 1995 of Inmark Services, Inc. into a then
newly-formed wholly-owned subsidiary of the Company was 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. 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 Promotion & Marketing Services, Inc. ("Spar"), one
of those predecessors, due to the application of purchase accounting adjustments
as a result of the Inmark Services, Inc. management-led buyout of Spar.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
March 31, March 31, March 31, March 31, March 31,
1994 (2) 1995 (2) 1996 (1) 1997 1998 (3)
----------- ------------ ------------ ------------ ------------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Sales $6,676,355 $13,670,938 $14,645,990 $18,901,730 $25,965,780
Gross Profit 1,699,725 4,453,233 4,497,192 6,291,821 8,403,363
Income (Loss) before Income Taxes (457,105) 1,248,886 461,486 2,129,579 3,579,445
Provision (Benefit) for Income Taxes 1,125 19,495 (506,161) (159,924) 1,300,000
Net Income (Loss) (458,230) 1,229,391 967,647 2,289,503 2,279,445
Net Income (Loss) per
Common and Common
Equivalent Share*
Basic ** ** $.46 $.64 $.63
Diluted ** ** $.38 $.51 $.50
* Adjusted for the five-for-four stock split effective May 14, 1998
** Not applicable as companies were privately owned
</TABLE>
<TABLE>
<CAPTION>
March 31, March 31, March 31, March 31, March 31,
1994 1995 1996 1997 1998 (4)
----------- ----------- ----------- ----------- ------------
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working Capital (deficiency) $ (784,384) $(2,204,473) $ (846,489) $1,859,868 $ 2,446,502
Total Assets 1,282,758 5,242,136 5,118,569 8,559,840 30,818,389
Long-term Debt - - - - 9,500,000
Total Liabilities 1,735,956 5,241,986 3,104,792 4,022,459 20,145,423
Stockholders Equity (deficiency) (458,158) 150 2,013,777 4,537,381 10,672,966
(1) Includes operations of Inmark Services, Inc. for the entire year and the
Company from the September 29, 1995 Merger date.
(2) Represents operations of Spar which was acquired by Inmark Services, Inc.
on April 3, 1995 in a transaction accounted for as a purchase.
(3) Represents operations of the Company excluding the operations of Optimum
Group, Inc. which was acquired on March 31, 1998.
(4) Includes assets and liabilities of Optimum acquired on March 31, 1998. See
consolidated financial statements of the Company appearing elsewhere
herein.
</TABLE>
-12-
<PAGE>
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.
On March 31, 1998, Optimum Group, Inc. ("Optimum"), an indirect
wholly-owned subsidiary of the Company, acquired the Optimum business for a
purchase price of $14,875,000 consisting of $8,700,000 in cash, a subordinated
note of the Company in the principal amount of $2,500,000 and 565,385 shares of
newly issued common stock of the Company valued at $3,675,000. In connection
with the Acquisition, Optimum assumed liabilities in the amount of $1,883,775.
The Acquisition has been accounted for as a purchase by the Company as at March
31, 1998. Accordingly, as discussed below, results of operations for the year
ended March 31, 1998 represent the operations of the Company excluding Optimum
and the consolidated balance sheet of the Company at March 31, 1998 includes the
consolidation of the Optimum balance sheet at that date. The following
information should be read together with the consolidated financial statements
and notes thereto included elsewhere herein.
Results of Operations
Sales. The Company's sales for the fiscal year ended March 31, 1998
("Fiscal 1998") were $25,966,000, compared to sales of $18,902,000 for the
fiscal year ended March 31, 1997 ("Fiscal 1997"), an increase of $7,064,000 or
37.4%. The increase in sales in Fiscal 1998 resulted from an overall increase in
contracted sales primarily from additional contracts from new clients.
The Company's sales for 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
-13-
<PAGE>
primarily from an overall increase in sales contract volume generated from
larger contract amounts from continued client relationships and contracts with
new clients.
For Fiscal 1998, Fiscal 1997 and Fiscal 1996, the Company had one client,
Colgate-Palmolive Company, which accounted for approximately 34.4%, 48.9% and
51.6%, respectively, of the Company's sales. As a substantial portion of the
Company's sales have been dependent on one client, to the extent such
concentration continues at a rate of 10% or more with one or more clients and
such dependency is not otherwise overcome, the loss of any such client could
have a material adverse affect on the Company's revenues, results of operations
and liquidity.
Direct Expenses. Direct expenses consist primarily of costs to purchase
media, program merchandise, production, merchandise warehousing and
distribution, third-party contract fulfillment and 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 1998 were $17,562,000 or 67.6% of
sales, compared to direct expenses for Fiscal 1997 which were $12,610,000 or
66.7% of sales. The increase in the amount of direct expenses for Fiscal 1998
principally relates to the increase in sales for the fiscal year, whereas the
increase in direct expenses as a percentage of sales for Fiscal 1998 primarily
resulted from client programs which in the aggregate had a lower gross profit
margin than the mix of programs contracted for in Fiscal 1997.
As a result of the changes in sales and direct expenses, the Company's
gross profit for Fiscal 1998 increased to $8,403,000 from $6,292,000 for Fiscal
1997 and, as a percentage of sales, gross profit decreased to 32.4% in Fiscal
1998 compared to 33.3% in Fiscal 1997.
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 had 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.
Operating Expenses. Operating expenses for Fiscal 1998 increased by
$802,000 or 19.2% to $4,977,000 compared to $4,175,000 for Fiscal 1997. As a
percentage of sales, operating expenses for Fiscal 1998 were 19.2% compared to
22.1% for Fiscal 1997.
The increase in operating expenses for Fiscal 1998 resulted primarily from
(I) the aggregate increase of approximately $691,000 attributable to increases
in salaries and related payroll taxes principally related to the employment of
-14-
<PAGE>
additional personnel and an overall increase in base salaries, management
bonuses and employee benefits such as provided medical insurance and 401K
Retirement Plan contributions; and (ii) the increase in selling, general and
administrative expenses related to the overall increase in the level of
operations.
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.
Other Income. For Fiscal 1998 and Fiscal 1997, the Company did not have any
other income whereas for Fiscal 1996 the Company had $177,000 of other income
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.
Interest Income/Expense. For Fiscal 1998, the Company had interest income
from short term investments of approximately $153,000 without incurring any
interest expense, whereas for Fiscal 1997, the Company had net interest income
of $13,000 after incurring interest on the Spar notes before their final payment
during the fiscal year.
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.
Provision For Income Taxes. For Fiscal 1998, the Company made a provision
for federal, state and local income taxes in the amount of $1,300,000 based upon
the Company's estimated effective tax rate for the fiscal year. The provision
takes into account approximately $110,000 of deferred tax benefits expected to
be realized from the reduction in the valuation allowance for deferred tax
assets.
-15-
<PAGE>
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. As of March 31, 1997, the Company had 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 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 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.
Net Income. As a result of the items discussed above, the Company's net
income for Fiscal 1998 was $2,279,000 compared to $2,290,000 for Fiscal 1997 and
$968,000 for Fiscal 1996.
Liquidity and Capital Resources
Effective March 31, 1998, the Company entered into a loan agreement with a
bank pursuant to which the Company obtained a $5,000,000 five-year term loan and
a $5,000,000 revolving loan credit facility. On March 31, 1998, the Company
borrowed $5,000,000 under its term loan facility and $2,000,000 under its
revolving credit facility to finance the acquisition of the Optimum business. In
connection with the loan facilities, the Company paid a one-time closing fee of
$100,000 and pays quarterly in arrears (i) a commitment fee at the rate of
one-quarter of one percent per annum on the unused portion of the revolving
credit facility and (ii) interest on the unpaid principal amount of each loan
outstanding during the quarter at a rate per annum which, conditioned upon the
Company's satisfying certain defined debt to equity ratios is, at the option of
the Company, equal to either the rate applicable to an equivalent term
Eurodollar rate loan plus between one and one-half percent and two percent or
the bank's prime rate plus up to an additional two percent. The term loan
requires scheduled quarterly repayments commencing on June 30, 2000 and ending
on March 31, 2003. Unpaid loans made to the Company pursuant to the loan
agreement are secured by a first priority lien and security interest in all the
assets of the Company. In addition, the loan agreement provides for a number of
negative and affirmative covenants, restrictions and limitations and other
conditions including among others, (i) limitations regarding the payment of cash
dividends, (ii) use of proceeds, (iii) maintenance of minimum quarterly
earnings, (iv) compliance with a defined maximum senior debt leverage ratio and
fixed charge coverage ratio, and (v) maintenance of a minimum percentage of
beneficially owned shares of the Company held by the Company's management.
For the period from April 24, 1996 until March 31, 1998, the Company's
-16-
<PAGE>
operating activities and other commitments were funded with then existing
working capital and internally generated cash flow primarily from operations.
Prior to April 24, 1996, the Company's operating activities and other
commitments 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, 1995, the Company entered into a one year 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.
At March 31, 1998, the Company had cash of $1,460,000, working capital of
$2,446,502, bank loans of $7,000,000, subordinated debt of $2,500,000 and
stockholders' equity of $10,673,000 compared to cash and cash equivalents of
$1,713,000, working capital of $1,860,000, no bank loans or subordinated debt
and stockholders' equity of $4,537,000 at March 31, 1997. The incurrence of bank
loans and subordinated debt is solely related to the Optimum acquisition as is
the increase in shareholders' equity to the extent it exceeds the Company's net
income for the year. The Company's cash at March 31, 1998, as well as additional
borrowing, to support working capital needs if required, available to the
Company from its revolving credit bank line and anticipated cash flows from
operations are expected to be sufficient to fund planned future operating
requirements. Otherwise, the Company will be required to seek additional
external financing in the form of equity or debt. There can be no assurance that
the Company will be able to obtain such additional funding, if required.
For Fiscal 1998, primarily as a result of the use of funds for the Optimum
acquisition which offset the net cash provided by operating activities, the
Company's cash and cash equivalents balances decreased by $253,000 and amounted
to $1,460,000 at March 31, 1998.
Operating activities in Fiscal 1998 provided $2,092,000 in cash,
principally from net income of $2,279,000 and the addition of non-cash
adjustments of $1,361,000 which amounts are offset by net changes in operating
assets and liabilities of $1,548,000 primarily attributable to increases in
accounts receivable, unbilled contracts in progress and prepaid taxes and
offsetting increases in accrued costs and expenses. This compares to cash of
$841,000 provided by operating activities in Fiscal 1997, principally from net
income of $2,290,000, offset by non-cash adjustments of $106,000 and net changes
in operating assets and liabilities of $1,343,000 primarily attributable to an
increase in accounts receivable and an offsetting increase in accrued costs and
expenses.
For Fiscal 1998, cash used in investing activities amounted to $9,401,000
of which (i) $9,350,000 is comprised of the $8,700,000 cash portion of the
Optimum acquisition purchase price and $756,000 of investment banking,
financing, legal and accounting costs and fees incurred in the Acquisition less
the cash of $106,000 acquired in the Acquisition and (ii) $51,000 for the
purchase of fixed assets. This compares to the net cash provided from investing
activities of $109,000 for Fiscal 1997 as described more fully below.
-17-
<PAGE>
For Fiscal 1998, financing activities provided cash of $7,057,088 compared
to cash of $63,000 for Fiscal 1997. The increase in cash provided was
principally the result of bank borrowings of $7,000,000, pursuant to the
Company's loan agreement, used for a portion of the Optimum acquisition purchase
price and to a lesser extent proceeds of $181,000 from the exercise of stock
options and warrants, whereas for Fiscal 1997, the net cash provided by
financing activities included a decrease of $579,000 in the amount due from
factor, receipt of $288,000 of proceeds from the exercise of stock options, the
repayment of notes payable to Spar of $750,000 and the repurchase of Company
stock for $54,000.
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 an offsetting increase in
accrued costs and expenses. 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.
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 (iv) 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.
-18-
<PAGE>
Other Matters
The Company is currently disputing whether ten year options to purchase an
aggregate of 55,000 shares of the Company's common stock at a price of $4.73 per
share, after giving effect to the 5-for-4 stock dividend payable on June 15,
1998 to shareholders of record on May 14, 1998, which were granted in the amount
of 27,500 each to two former officers and directors of the Company in the fiscal
year ended March 31, 1993, are currently outstanding. In previous reports and
Securities and Exchange Report filings, the Company reported these options to
have expired as a result of the resignations of each of these former officers
and directors. The Company has since been advised by these former officers and
directors that they continue to hold valid the terms and conditions of the
aforementioned options and accordingly that the options are readily exercisable
for the remainder of their term. The Company has taken exception to the
continued validity of these options and is currently investigating its courses
of action.
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.
-19-
<PAGE>
Item 8. Financial Statements.
- ------ --------------------
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements of Inmark Enterprises, Inc.
<S> <C>
Independent Auditors' Report .........................................................21
Consolidated Balance Sheets as of March 31, 1998 and 1997.............................22
Consolidated Statements of Operations for the years ended
March 31, 1998, 1997 and 1996.................................................... 23
Consolidated Statement of Stockholders' Equity for the three years ended
March 31, 1998................................................................... 24
Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1997 and 1996 ....................................................25
Notes to Consolidated Financial Statements............................................26
</TABLE>
-20-
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Inmark Enterprises, Inc.
We have audited the consolidated financial statements of Inmark Enterprises,
Inc. and subsidiaries, as listed in the accompanying index. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Inmark Enterprises,
Inc. and subsidiaries as of March 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1998, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
New York, New York
June 10, 1998
-21-
<PAGE>
INMARK ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -----------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,459,909 1,712,751
Contract receivables 10,933,241 2,780,866
Deferred tax asset 83,442 1,082,133
Prepaid taxes 452,291 -
Prepaid expenses and other current assets 163,042 306,577
----------- ----------
Total current assets 13,091,925 5,882,327
----------- ----------
Furniture, fixtures and equipment, at cost 1,006,779 326,293
Less accumulated depreciation 191,522 119,144
----------- ----------
815,257 207,149
----------- ----------
Notes receivable from officer 225,000 200,000
Goodwill, net of amortization of $851,377 and $561,097 16,534,950 2,244,378
Deferred financing costs 124,500 -
Other assets 26,757 25,986
----------- ----------
Total assets $ 30,818,389 8,559,840
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,601,751 520,763
Accrued job costs 8,335,745 3,209,771
Accrued compensation 314,876 151,811
Other accrued liabilities 298,791 140,114
Accrued taxes payable 94,260 -
----------- ---------
Total current liabilities 10,645,423 4,022,459
Notes payable bank - long term 7,000,000 -
Subordinated notes payable - long term 2,500,000 -
----------- ----------
Total liabilities 20,145,423 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 4,475,326 shares at March 31,
1998 and 3,544,689 shares at March 31, 1997 4,475 3,545
Additional paid-in capital 5,131,896 1,276,686
Retained earnings 5,536,595 3,257,150
----------- ----------
Total stockholders' equity 10,672,966 4,537,381
----------- ----------
Total liabilities and stockholders' equity $ 30,818,389 8,559,840
=========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
-22-
<PAGE>
INMARK ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1998, 1997, 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Sales $ 25,965,780 18,901,730 14,645,990
Direct expenses 17,562,417 12,609,909 10,148,798
----------- ----------- -----------
Gross profit 8,403,363 6,291,821 4,497,192
----------- ----------- -----------
Salaries 3,150,751 2,497,325 2,119,425
Selling, general and administrative expense 1,826,278 1,678,139 2,007,845
----------- ----------- -----------
Total operating expenses 4,977,029 4,175,464 4,127,270
----------- ----------- -----------
Operating income 3,426,334 2,116,357 369,922
Other income 200 - 177,277
Interest income (expense), net 152,911 13,222 (85,713)
----------- ----------- -----------
Income before income taxes 3,579,445 2,129,579 461,486
Provision for income taxes (benefit) 1,300,000 (159,924) (506,161)
----------- ----------- -----------
Net income $ 2,279,445 2,289,503 967,647
=========== =========== ===========
Net income per common and common equivalent share:
Basic $ .63 $ .64 $ .47
=========== =========== ===========
Diluted $ .50 $ .51 $ .38
=========== =========== ===========
Weighted average number of common and common equivalent
shares outstanding:
Basic 3,590,935 3,584,375 2,073,150
=========== =========== ===========
Diluted 4,587,106 4,494,267 2,576,321
=========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE>
INMARK ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Additional Total
Capital Stock Common Stock Paid-in Retained Stockholders'
no par value Par value $.001 Capital Earnings Equity
---------------- ----------------- ----------- ------------ ------------
Shares Amount Shares Amount
------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 3, 1995 150 $ 150 - - $ - $ - $ -
Recapitalization by issuance
of common stock in exchange
for capital stock of Inmark Services, Inc. (150) (150) 846,383 846 (696) - 150
Acquisition of monetary assets of
Health Image Media, Inc. by
issuance of common stock - - 2,408,931 2,409 879,788 - 882,197
Debt payable to stockholders
converted to warrants - - - - 163,783 - 163,783
Net income - - - - - 967,647 967,647
---- ------- --------- ----- --------- --------- ----------
Balance, March 31, 1996 - - 3,255,314 3,255 1,042,875 967,647 2,013,777
Exercise of warrants and options - - 351,875 352 287,249 - 287,601
Repurchase of common stock - - (62,500) (63) (53,437) - (53,500)
Net income - - - - - 2,289,503 2,289,503
---- ------- --------- ----- --------- --------- ----------
Balance, March 31, 1997 - - 3,544,689 3,544 1,276,687 3,257,150 4,537,381
---- ------- --------- ----- --------- --------- ----------
Exercise of warrants and options - - 223,906 224 180,814 - 181,038
Acquisition of Optimum Group, Inc. - - 706,731 707 3,674,395 - 3,675,102
Net income - - - - - 2,279,445 2,279,445
---- ------- --------- ----- --------- --------- ----------
Balance, March 31, 1998 - $ - 4,475,326 $4,475 $5,131,896 $5,536,595 $10,672,966
==== ======= ========= ===== ========= ========= ==========
See accompanying notes to consolidated financial statements.
</TABLE>
-24-
<PAGE>
INMARK ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,279,445 2,289,503 967,647
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 362,658 335,985 541,708
Deferred income taxes 998,691 (442,133) (640,000)
Changes in operating assets and liabilities:
Increase in contracts receivable (6,131,292) (2,780,866) -
Increase in notes receivable - officer (25,000) - (200,000)
Decrease (Increase) in prepaid expenses and other assets 144,592 (229,403) (74,335)
Increase in prepaid taxes (452,291) - -
Increase (decrease) in accounts payable 379,865 (331,135) (881,028)
Increase in accrued job costs 4,483,751 1,921,867 320,296
(Decease) increase in other accrued liabilities (18,113) (42,732) 168,571
Increase (decrease) in accrued compensation 69,347 119,667 (659,250)
Decrease in accrued taxes payable (133) - -
----------- ----------- ----------
Net cash provided by (used in) operating activities 2,091,520 840,753 (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 (50,554) (141,426) (69,701)
Release of restricted cash from factor - 250,000 250,000
Payment for purchase of Optimum Group, Inc., net of cash
acquired (9,350,346) - -
----------- ------------ ----------
Net cash (used in) provided by investing activities (9,400,900) 108,574 366,017
----------- ----------- ----------
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 181,038 287,601 -
Repurchase of common stock - (53,500) -
Proceeds from borrowings 7,000,000 - -
Financing costs related to purchase of Optimum Group, Inc. (124,500) - -
----------- ----------- ----------
Net cash provided by financing activities 7,056,538 62,826 789,722
----------- ----------- ----------
Net (decrease) increase in cash (252,842) 1,012,153 699,348
Cash and cash equivalents at beginning of period 1,712,751 700,598 1,250
----------- ----------- ----------
Cash and cash equivalents at end of period $ 1,459,909 1,712,751 700,598
=========== =========== ==========
Supplemental disclosure:
Interest paid during the period $ - 38,294 42,090
=========== =========== ==========
Income tax paid during the period $ 768,457 298,936 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.
</TABLE>
-25-
<PAGE>
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(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 full service marketing, sales promotion and new age
communications company which designs, develops and implements sales,
marketing and promotional programs primarily for consumer product
client companies. The Company assists its clients in realizing product
recognition and sales by providing promotional programs at both
national and local levels, which are created to address identified
trade, sales and consumer needs.
Acquisition of Optimum Group, Inc. - March 31, 1998
-----------------------------------------------------
On March 31, 1998, an indirect wholly-owned subsidiary of the Company,
Optimum Group, Inc, formerly known as OG Acquisition Corp. ("Optimum")
purchased all of the assets and business from and assumed substantially
all of the liabilities of OG Holding Corporation formerly known as
Optimum Group, Inc. (the "Acquisition") in a transaction accounted for
as a purchase. The purchase price was $14,875,000 and consisted of cash
of $8,700,000, a subordinated note in the principal amount of
$2,500,000 with interest at the rate of 9% per annum and 565,385 shares
of common stock of the Company valued at $3,675,000. The cash portion
of the purchase price included $7,000,000 provided pursuant to a loan
agreement between the Company and a bank and $1,700,000 provided from
the Company's cash balances. Pursuant to the purchase agreement between
Optimum and OG Holding Corporation, both the 565,385 shares of the
Company's common stock and the $2,500,000 subordinated note portions of
the purchase price have been put in escrow as collateral for the
Company should the Company be entitled to indemnification pursuant to
the purchase agreement. The Acquisition has been accounted for as a
purchase whereby the $14,580,852 excess of the purchase price plus the
costs of the Acquisition over the fair value of assets acquired less
liabilities assumed has been classified as goodwill and the Company
anticipates amortizing such amount over a twenty-five year period.
Deferred financing costs incurred in connection with the loan agreement
in the amount of $124,500 are being amortized over a five year period.
Pro forma results of operations of the Company had the acquisition
occurred on April 1, 1997 would consist of the operations of OG Holding
Corporation for the year ended December 31, 1997 combined with the
operations of the Company for the year ended March 31, 1998 as follows:
-26-
<PAGE>
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
Sales $36,474,000
Net income 2,388,784
Earnings per share*:
Basic $ .56
Diluted $ .45
* Adjusted for 5-for-4 stock split payable in the form of a stock
dividend June 15, 1998 to shareholders of record May 14, 1998.
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. Prior to March 31, 1997, on
their respective due dates, all the notes due Spar had been paid.
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.
Merger with Health Image Media, Inc. - September, 1995
------------------------------------------------------
On September 29, 1995, 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 a reverse purchase of the Company
by Inmark Services, Inc. Accordingly, the net assets of Health Image
-27-
<PAGE>
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
Media, Inc. totaling $882,197 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 described in Note 1 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.
(c) Revenue Recognition
-------------------
The Company recognizes revenue on the percentage-of-completion
method, measured by the cost for services expended to date compared
to the total services required to be performed on the respective
contract. 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. Provision for anticipated losses on uncompleted contracts
are made in the period in which such losses are determined.
(d) Cash Equivalents
----------------
Investments with original maturities of three months or less at the
time of purchase are considered cash equivalents.
(e) Long-Lived Assets
-----------------
Furniture, fixtures and equipment are stated at cost. Depreciation
is computed by the straight- line method over the estimated useful
lives of the assets, which are three to five years. Goodwill
-28-
<PAGE>
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
represents the excess of cost over the fair value of net assets of
businesses acquired and is amortized over periods ranging from ten
years to twenty-five years on a straight-line basis. The period of
amortization of long-lived assets is evaluated at least annually to
determine whether events and circumstances warrant revised
estimates of useful lives or adjustment to the carrying value. This
evaluation considers, among other factors, expected cash flows and
profits of the business to which the asset relates. Based upon the
periodic analysis, long-lived assets are written down if it appears
that future profits or cash flows will be insufficient to recover
such asset.
(f) Earnings Per Share
------------------
Effective April 1, 1997, the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 128, "Earnings Per Share".
Statement 128 replaces the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. The
computation of basic earnings per common share is based upon the
weighted average number of common shares outstanding during the
year and the computation of diluted earnings per common and common
equivalent share is based upon the weighted average number of
common shares outstanding during the year, plus the assumed
exercise of stock options and warrants, less the number of treasury
shares assumed to be purchased from the proceeds of such exercises
using the average market price of the Company's common stock. For
the fiscal year ended March 31, 1998, the computation of weighted
average number of common shares outstanding for the year included a
one day inclusion of the shares of common stock issued for the
Optimum Acquisition. All earnings per share calculations have been
adjusted for the five- for-four stock dividend payable June 15,
1998.
For the fiscal year ended March 31, 1996, 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.
(g) 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
-29-
<PAGE>
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
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.
(h) Fair Value of Financial Instruments
-----------------------------------
The carrying value of financial instruments including cash and cash
equivalents, restricted cash, contracts and other receivables, and
notes and accounts payable approximate estimated market values due
to short maturities and interest rates that approximate current
rates.
(i) 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) Contract Receivables
--------------------
March 31, March 31,
1998 1997
--------------- --------------
Contract receivables
Billed
Completed contracts $ 2,416,021 $ 675,374
Contracts in progress 3,232,534 2,104,892
Unbilled 5,284,686 -
---------- ----------
$ 10,933,241 $ 2,780,866
========== ==========
(4) Notes Receivable From Officer
-----------------------------
The notes receivable from officer totaling $225,000 and $200,000 at
March 31, 1998 and 1997, consists of a $200,000 Promissory Note dated
January 10, 1996 and a $25,000 Promissory Note dated April 7, 1997
issued to the Company by one of its officers in exchange for loans from
the Company. The Promissory Notes provide for interest at an annual
rate of 10% with the principal and accrued interest on the notes
originally payable on January 10, 1998 and April 7, 1999, respectively.
The Company has agreed to extend the payment date of principal and
-30-
<PAGE>
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
accrued interest on the note previously due on January 10, 1998 to
co-inside with the payment date of the Promissory Note of April 7,
1997. The Promissory Notes are secured by a Pledge Agreement which
provides the Company with collateral security consisting of a first
lien and security interest in 112,851 shares of the Company's common
stock owned by the officer.
(5) Leases
------
The Company has several noncancellable operating leases, primarily for
property, that expire within twelve years. Rent expense for the years
ended March 31, 1998, 1997 and 1996 were $118,092, $105,598 and
$95,213, respectively. Future noncancellable minimum lease payments
under all of the leases as of March 31, 1998 are as follows:
Year ending March 31,
1999 $ 251,082
2000 154,981
2001 150,761
2002 146,780
2003 141,000
Thereafter 1,092,750
-----------
$ 1,937,354
===========
(6) Long-Term Debt
--------------
Long-term debt as of March 31, 1998 is summarized as follows:
Notes Payable, Bank
-------------------
The Company has a loan agreement with its principal bank which provides
for a five year revolving line of credit in the amount of $5,000,000
and term loan in the amount of $5,000,000 expiring March 31, 2003.
Borrowings under the revolving line of credit and the term loan are
evidenced by promissory notes and are secured by all of the Company's
assets. In addition, the Company, on a quarterly basis, pays a
commitment fee of one-quarter of one percent per annum on the unused
revolving line of credit and interest on outstanding amounts, at the
option of the Company, based on various formulas which relate to the
prime rate or other prescribed rates. The loan agreement contains
certain covenants, in addition to the calculation of the Company's
total leverage ratio, which among other things, limits the distribution
of dividends and other payments.
-31-
<PAGE>
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
Revolving line of credit note payable in
quarterly installments of interest only with a
final payment of interest and principal
outstanding on March 31, 2003 at 7.75% payable
on principal outstanding through June 30, 1998
and interest thereafter payable quarterly at
variable rates $2,000,000
Term loan note payable in quarterly
installments of interest only through March 31,
2000 and interest and principal payments
increasing from $312,500 from June 30, 2000
through March 31, 2001 to $468,750 from June
30, 2001 through March 31, 2003. Interest at
7.75% is payable on principal outstanding
through June 30, 1998 and thereafter quarterly
interest payments are at variable rates 5,000,000
9% subordinated note payable to OG Holding
Corporation with interest payable in quarterly
installments and principal payments in annual
installments of $625,0000 commencing March 31,
2000 through March 31, 2003 2,500,000
---------
Total long-term debt $9,500,000
=========
(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 (1,125,000 shares adjusted for the 5-for-4 stock
dividend payable June 15, 1998). Changes in options outstanding
during each of the years ended March 31, 1998, 1997 and 1996, and
options exercisable and shares reserved for issuance at March 31,
1998 (adjusted for the 5-for-4 stock dividend payable June 15,
1998) are as follows:
Option price
Per share Outstanding Exercisable
------------ ----------- -----------
Balance at April 3, 1995 $1.80-5.21 103,750 103,750
Granted (A) $1.12-1.60 293,750 175,000
Canceled - (625) (625)
---------- --------- ---------
Balance at March 31, 1996 $1.12-5.21 396,875 278,125
Granted (B) $1.20-4.40 418,750 131,250
Exercised - (1,875) (1,875)
Canceled - (1,250) (1,250)
---------- --------- --------
Balance at March 31, 1997 $1.12-5.21 812,500 406,250
Became Exercisable - - 268,749
Granted (C) $4.00-5.60 627,250 90,208
Exercised - (11,406) (11,406)
Canceled - (107,594) (104,531)
---------- --------- --------
Balance at March 31, 1998 $1.12-5.60 1,320,750 649,270
========== ========= ========
(A) Represents 287,500 options granted on September 29, 1995, on
completion of the Merger, of which 225,000 were granted to the
shareholders of Inmark Services, Inc., who became executive
officers of the Company, and 62,500 were granted to other
employees of Inmark Services, Inc. at an exercise price of
$1.12, and 6,250 options granted on November 27, 1995 to a new
employee in connection with his employment. Of the 225,000
-32-
<PAGE>
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
options, 112,500 options were immediately exercisable and the
balance become exercisable on the second anniversary of the
grant date. Due to an employee termination, 625 of the 62,500
options granted on September 29, 1995 were canceled and the
remaining 61,875 options are immediately exercisable. The
6,250 options granted to the new employee become exercisable
on the second anniversary of the grant date.
(B) Represents 375,000 options granted on May 7, 1996 to three
executive officers of the Company at an exercise price of
$1.20 per share; 25,000 options granted on May 20, 1996 to
other employees at an exercise price of $1.20 and 6,250
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 $2.80, $3.60 and
$4.40, respectively. Of the 375,000 options, 125,000 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 25,000 options granted
on May 20, 1996, options to purchase 6,250 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
6,250 options granted to each of the new employees become
exercisable on the first anniversary of each employee's
continued employment.
(C) Represents options granted on May 1, 1997 to purchase 13,750
shares at an exercise price of $4.00 to the Company's two
outside directors; 375,000 options granted on May 2, 1997 to
three executive officers of the Company at an exercise price
of $4.00 per share; 13,500 options granted on May 2, 1997 to
other employees at an exercise price of $4.00 per share;
12,500 options granted on September 16, 1997 to two new
employees in connection with their employment at an exercise
price of $4.30; 187,500 options granted on March 24, 1998 to
three executive officers of the Company and 25,000 options to
other employees at an exercise price of $5.60 per share. Of
the 13,750 options, options to purchase 6,875 shares of common
stock are immediately exercisable with the balance exercisable
on the first anniversary of the date of grant. The 375,000
options become exercisable in three equal installments
commencing on the first, second and third anniversary of the
grant date. The 13,500 options become exercisable on the first
anniversary of the grant date. The 12,500 options became
exercisable immediately. Of the 187,500 options and the 25,000
options, one-third are immediately exercisable and the balance
become exercisable in two equal installments on the first and
second anniversary of the date of grant.
-33-
<PAGE>
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(ii) Warrants
--------
Concurrent with the 1992 public offering of the Company'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 entitled
the holder to purchase one share of the Company's common stock and
one Class B warrant for $7.85 until October 20, 1997. In addition,
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 as at October 20, 1997, these
warrants and all of the Class A and Class B warrants remained
unexercised as to their underlying right to purchase share of the
Company's common stock. Accordingly, on October 20, 1997 all of the
aforementioned warrants expired and the Company is no longer
reserving the previously reserved 3,858,000 shares for their
exercise.
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 $0.80 750,000 375,000
Became exercisable - - 187,500
Granted (A) $0.87 125,000 125,000
Granted (B) $1.12 102,364 102,364
Granted (C) $0.60 152,500 152,500
---------- --------- ---------
Balance at March 31, 1996 $0.60-1.12 1,129,864 942,364
Became exercisable - - 187,500
Exercised - (343,750) (343,750)
Canceled (D) - (250,000) (250,000)
---------- --------- ---------
Balance at March 31, 1997 $0.60-1.12 536,114 536,114
Granted (E) $4.00 75,000 75,000
Exercised - (218,750) (218,750)
---------- --------- ----------
Balance March 31, 1998 $0.60-4.00 392,364 392,364
========== ========= =========
-34-
<PAGE>
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(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 its then effective
factoring agreement, 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) Granted on April 25, 1995 to Factor pursuant to the then
effective Inmark Services, Inc factoring agreement, and are
immediately exercisable.
(D) Concurrently with the resignations, on February 25, 1997 and
March 3, 1997, respectively of two directors of the Company,
warrants to purchase 250,000 shares of the Company's common
stock were returned to the Company and 62,500 shares of the
Company's common stock which previously had been issued on
exercise of warrants at prices of $1.00 and $1.07 per share
were repurchased by the Company for $53,500, the aggregate
amount of the proceeds received by the Company when the 62,500
warrants were initially exercised.
(E) 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
37,500 shares of the Company's common stock at an exercise
price of $4.00 to each of the new director and another
associate of the investment banking firm.
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
-35-
<PAGE>
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
stock option and warrant grants made in Fiscal1996 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 1998, 1997 and 1996 would have been as follows:
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997 Fiscal 1996
------------ ------------- ------------
<S> <C> <C> <C>
Net income:
As reported $ 2,279,000 $ 2,290,000 $ 968,000
Pro forma 2,023,000 2,277,000 961,000
Basic income per share:
As reported $ 0.63 $ 0.64 $ 0.47
Pro forma 0.56 0.64 0.46
Diluted income per share:
As reported $ 0.50 $ 0.51 $ 0.38
Pro forma 0.44 0.51 0.37
</TABLE>
However, such pro forma net income reflects only options and
warrants granted in fiscal 1998, 1997 and 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.
The per share weighted-average fair value of stock options and
warrants granted on their respective date of grant using the
modified Black Scholes option-pricing model and their related
weighted-average assumptions are as follows:
-36-
<PAGE>
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997 Fiscal 1996
-------------- --------------- ---------------
<S> <C> <C> <C>
Risk-free interest rate 6.41 % 6.85 % 6.63 %
Expected life - years 6.07 6.91 6.98
Expected volatility 35 % 25 % 25 %
Expected dividend yield 0 % 0 % 0 %
Fair value $2.04 $1.30 $0.96
</TABLE>
(8) Income Taxes
------------
The Company and its subsidiaries, which are wholly-owned, file
consolidated Federal income tax returns.
The components of income tax expense (benefit) for the years ended
March 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997 March 31, 1996
------------------------ ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Current:
State and local $ 129,954 $ 242,209 $ 18,606
Federal 256,139 386,093 40,000 282,209 17,313 35,919
---------- ---------- ---------
Deferred:
Federal 913,907 (442,133) (542,080)
--------- -------- ---------
$1,300,000 $(159,924) $(506,161)
========= ======== =========
</TABLE>
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,
1998, 1997 and 1996 are as follows:
Rate
---------------------------
1998 1997 1996
------ ------ ------
Statutory Federal income tax 34.0% 34.0% 34.0%
State and local taxes net of
Federal benefit 5.1 6.6 2.7
Items not deductible, primarily
certain merger expenses in
1996 and amortization of goodwill 0.5 0.4 10.3
Valuation allowance adjustment (48.8) (156.3)
Other - 0.3 (0.4)
---- ---- ------
Effective tax rate 36.3% (7.5)% (109.7)%
-37-
<PAGE>
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
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, March 31,
1998 1997
------------- -----------
Deferred tax assets
Goodwill, principally due to excess of
book amortization $ 104,616 69,744
Net operating loss carryforwards - 654,133
Note receivable write-off - 428,000
AMT credit - 40,000
----------- ----------
Deferred tax assets 104,616 1,191,877
----------- ----------
Deferred tax liabilities
Furniture, fixtures and equipment,
principally due to differences in
depreciation 21,174 -
----------- ----------
Deferred tax liabilities 21,174 -
----------- ----------
Net deferred tax assets 83,442 1,191,877
Less valuation allowance - 109,744
----------- ----------
Net deferred tax asset $ 83,442 1,082,133
=========== ==========
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 83,442 of these
deductible differences and thus a valuation allowance is not deemed
necessary for this amount of deferred tax assets at March 31, 1998.
-38-
<PAGE>
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
The decreases of approximately $110,000 and $550,000 in the valuation
allowance from March 31, 1997 to March 31, 1998, and March 31, 1996 to
March 31, 1997, respectively, were 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,
1998.
(9) Significant Customers
---------------------
During the year ended March 31, 1998, the Company had one client which,
before and after giving effect to the Acquisition, accounted for
approximately 34.4% and 24.5%, respectively, of its revenues. During
the year ended March 31, 1997 and 1996, the same client represented
48.9% and 51.6%, respectively, of revenues and in those same years
another client represented 17.7% and 21.1%, respectively, of 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 $10,000 and the Company at its sole discretion may from
time to time make a discretionary matching contribution as it deems
advisable. For the years ended March 31, 1998 and 1997, the Company has
charged approximately $66,000 and $32,000 to expense as a matching
employer contribution.
(11) Commitments
-----------
Employment Agreements
---------------------
The Company has entered into four year employment agreements with three
of its officers which at March 31, 1998 provide for base salaries in
the aggregate amount of $750,000 per year through September 29, 2001
and a covenant not to compete. In connection with the Acquisition,
Optimum has entered into four year employment contracts with seven of
its management personnel which at March 31, 1998 provide for base
salaries in the aggregate amount of $1,042,000 and a covenant not to
compete.
-39-
<PAGE>
INMARK ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(12) Recent Accounting Developments
------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS 130 establishes standards
for the reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general purpose financial statements. SFAS 131 establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments
in interim financial reports. It also establishes standards of related
disclosures about products and services, geographic areas and major
customers. Both standards will be adopted by the Company during the
first quarter of fiscal 1999 and are not expected to have material
effects on its financial position and results of operations.
(13) Subsequent Events
-----------------
(i) Stock Dividend
--------------
On May 4, 1998, the Company declared a five-for-four stock split of
its outstanding common stock effected in the form of a twenty-five
percent stock dividend. Stockholders of record as of May 14, 1998
receive one additional share of stock for each four shares owned on
that date, payable on June 14, 1998.
-40-
<PAGE>
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:
<TABLE>
<CAPTION>
Positions with the Company and Principal
Occupation or Employment during the past
Age Five Years Director Since
<S> <C> <C> <C>
Paul A. Amershadian 50 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 47 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 65 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 58 Director of the Company since May 1, 1997; 1997
Senior Vice President of Janney Montgomery
Scott Inc., an investment banking firm, since
-41-
<PAGE>
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 67 Director of the Company since May 1, 1997; 1997
Partner in the law firm of Kronish, Lieb, Weiner
& Hellman LLP since 1963.
Thomas E. Lachenman 47 Director of the Company since March 31, 1998; 1998
President and Chief Executive Officer of
Optimum Group, Inc., formerly known as
OG Acquisition Corp, since March 31, 1998;
President and Chief Executive Officer of the predecessor
Optimum Group, Inc. from 1972 to March 31, 1998.
</TABLE>
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
1998 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under
the Securities Exchange Act of 1934 and is hereby incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------- --------------------------------------------------------------
Information required by this item is contained in the sections entitled
"Election of Directors" and "Security Ownership and Certain Beneficial Owners
and Management" in the Company's definitive Proxy Statement for its 1998 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 1998 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.
-42-
<PAGE>
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:
--------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Index to Financial Statements. 20
Consolidated Financial Statements of Inmark Enterprises, Inc.
Independent Auditors' Report 21
Consolidated Balance Sheets as of March 31, 1998 and 1997 22
Consolidated Statements of Operations for the years ended
March 31, 1998, 1997 and 1996 23
Consolidated Statement of Stockholders' Equity
for the three years ended March 31, 1998 24
Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1997 and 1996 25
Notes to Consolidated Financial Statements 26
</TABLE>
2. Financial Statement Schedules:
-----------------------------
No financial statement schedules are provided herein because
they are not required or not applicable or the required information is shown in
the consolidated financial statements or in the notes thereto.
3. Exhibits:
--------
Exhibit
Number Description of Exhibits.
------- -----------------------
2.1 Asset Purchase Agreement, dated as of December 8,
1998, by and among OG Holding Corporation
(formerly known as Optimum Group, Inc.), James H.
Ferguson, Michael J. Halloran, Christina M. Heile,
David E. Huddleston, Thomas E. Lachenman, Thomas
L. Wessling, Optimum Group, Inc. (formerly known
as OG Acquisition Corp.) and Inmark Enterprises,
Inc. (incorporated by reference to Exhibit 2.1 to
the Registrant's Report on Form 8-K dated March
31, 1998, File No. 000-20394, initially filed with
the Securities and Exchange Commission on April
13, 1998).
2.2 Amendment No. 1 to the Asset Purchase Agreement,
dated as of March 31, 1998 (incorporated by
reference to Exhibit 2.2 to the Registrant's
Report on Form 8-K dated March 31, 1998, File No.
000-20394, initially filed with the Securities and
Exchange Commission on April 13, 1998).
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).
-43-
<PAGE>
3.2 Bylaws of the Registrant (incorporated by
reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1, File No.
33-47932, initially filed with the Securities and
Exchange Commission on May 14, 1992).
10.1 Health Image Media, Inc. 1992 Stock Option Plan
(incorporated by reference to Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1,
File No. 33-47932, initially filed with the
Securities and Exchange Commission on May 14,
1992).
10.2 Employment Agreement dated September 29, 1995
between Registrant and John P. Benfield
(incorporated by reference to Exhibit 10.3 to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1996, initially filed
with the Securities and Exchange Commission on
July 1, 1996).
10.3 Employment Agreement dated September 29, 1995
between the Registrant and Donald A. Bernard
(incorporated by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1996, initially filed
with the Securities and Exchange Commission on
July 1, 1996).
10.4 Employment Agreement dated September 29, 1995
between Registrant and Paul A. Amershadian
(incorporated by reference to Exhibit 10.5 to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1996, initially filed
with the Securities and Exchange Commission on
July 1, 1996).
10.5 Promissory Note and Pledge Agreement dated January
10, 1996 between Inmark Services, Inc. and Paul A.
Amershadian (incorporated by reference to Exhibit
10.6 to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1996,
initially filed with the Securities and Exchange
Commission on July 1, 1996).
10.6 First Amendment to Employment Agreement dated May
2, 1997 between the Registrant and John P.
Benfield (incorporated by reference to Exhibit
10.7 to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1997,
initially filed with the Securities and Exchange
Commission on June 27, 1997).
10.7 First Amendment to Employment Agreement dated May
2, 1997 between the Registrant and Donald A.
Bernard (incorporated by reference to Exhibit 10.8
to the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1997, initially
filed with the Securities and Exchange Commission
on June 27, 1997).
10.8 First Amendment to Employment Agreement dated May
2, 1997 between the Registrant and Paul A.
Amershadian (incorporated by reference to Exhibit
10.9 to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1997,
initially filed with the Securities and Exchange
Commission on June 27, 1997).
10.9 Promissory Note, dated April 7, 1997, in the
principal amount of $25,000, by Paul A.
Amershadian in favor of Inmark Services, Inc.
(incorporated by reference to Exhibit 10.10 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1997, initially filed
with the Securities and Exchange Commission on
June 27, 1997).
10.10 Amendment to Pledge Agreement, dated as of April
7, 1997, between Paul A. Amershadian and Inmark
Services, Inc. (incorporated by reference to
Exhibit 10.11 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended March 31,
1997, initially filed with the Securities and
Exchange Commission on June 27, 1997).
10.11 Escrow Agreement, dated as of March 31, 1998 by
and among OG Holding Corporation, formerly known
as Optimum Group, Inc., Electing Small Business
Trust f/b/o James H. Ferguson, Electing Small
Business Trust f/b/o Michael J. Halloran, Electing
Small Business Trust f/b/o Christina M. Heile,
Electing Small Business Trust f/b/o David E.
Huddleston, Electing Small Business Trust f/b/o
Thomas E. Lachenman, Electing Small Business Trust
f/b/o Roderick S. Taylor, Electing Small Business
Trust f/b/o Thomas L. Wessling, Steven Clements,
Kimberly Longshore, Terry Steding, Optimum Group,
Inc., formerly known as OG Acquisition Corp.,
Inmark Enterprises, Inc., and Kronish, Lieb,
Weiner & Hellman LLP (incorporated by reference to
Exhibit 2.3 to the Registrant's Report on Form 8-K
dated March 31, 1998, File No. 000-20394,
initially filed with the Securities and Exchange
Commission on April 13, 1998).
10.12 Loan Agreement, dated as of March 31, 1998, by and
among PNC Bank, National Association, Inmark
Enterprises, Inc., Inmark Services, Inc., and
Optimum Group, Inc. (formerly OG Acquisition
Corp.) (incorporated by reference to Exhibit 99.2
to the Registrant's Report on Form 8-K dated March
31, 1998, File No. 000-20394, initially filed with
the Securities and Exchange Commission on April
13, 1998).
10.13 Guaranty, dated as of March 31, 1998, by Inmark
Enterprises, Inc. in favor of PNC Bank, National
Association (incorporated by reference to Exhibit
99.3 to the Registrant's Report on Form 8-K dated
March 31, 1998, File No. 000- 20394, initially
filed with the Securities and Exchange Commission
on April 13, 1998).
10.14 Pledge Agreement, dated as of March 31, 1998, by
Inmark Enterprises, Inc., Inmark Services, Inc.
and Optimum Group, Inc. (formerly OG Acquisition
Corp.) in favor of PNC Bank, National Association
(incorporated by reference to Exhibit 99.4 to the
Registrant's Report on Form 8-K dated March 31,
1998, File No. 000-20394, initially filed with the
Securities and Exchange Commission on April 13,
1998).
10.15 Security Agreement, dated as of March 31, 1998, by
Inmark Enterprises, Inc., Inmark Services, Inc.
and Optimum Group, Inc. (formerly OG Acquisition
Corp.) in favor of PNC Bank, National Association
(incorporated by reference to Exhibit 99.5 to the
Registrant's Report on Form 8-K dated March 31,
1998, File No. 000-20394, initially filed with the
Securities and Exchange Commission on April 13,
1998).
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
-44-
<PAGE>
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the last quarter of the fiscal
year covered by this report.
-45-
<PAGE>
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 12, 1998
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 Chief Executive Officer Executive Vice President
and Director and Chief Financial Officer
(Principal Executive Officer) and Director
(Principal Financial and
Accounting Officer)
Dated: June 12, 1998 Dated: June 12, 1998
By:/s/ Paul A. Amershadian By:/s/ Herbert M. Gardner
----------------------- ----------------------
Paul A. Amershadian Herbert M. Gardner
Executive Vice President - Marketing Director
and Sales and Director
Dated: June 12, 1998 Dated: June 12, 1998
By:/s/ Joseph S. Hellman By:/s/ Thomas E. Lachenman
--------------------- -----------------------
Joseph S. Hellman Thomas E. Lachenman
Director Director
Dated: June 12, 1998 Dated: June 12, 1998
-46-
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibits.
------- -----------------------
2.1 Asset Purchase Agreement dated as of December 8,
1998, by and among OG Holding Corporation
(formerly known as Optimum Group, Inc.), James H.
Ferguson, Michael J. Halloran, Christina, M.
Heile, David E. Huddleston, Thomas E. Lachenman,
Thomas L. Wessling, Optimum Group, Inc. (formerly
known as OG Acquisition Corp.) and Inmark
Enterprises, Inc. (incorporated by reference to
Exhibit 2.1 to the Registrant's Report on Form 8-K
dated March 31, 1998, File No. 000-20394,
initially filed with the Securities and Exchange
Commission on April 13, 1998).
2.2 Amendment No. 1 to the Asset Purchase Agreement,
dated as of March 31, 1998 (incorporated by
reference to Exhibit 2.2 to the Registrant's
Report on Form 8-K dated March 31, 1998, File No.
000-20394, initially filed with the Securities and
Exchange Commission on April 13, 1998).
3.1 Certificate of Incorporation, as amended, of the
Registrant (incorporated by reference to Exhibit
3.1 to the Registrant's Registration Statement on
Form S-1, File No. 33-47932, initially filed with
the Securities and Exchange Commission on May 14,
1992).
3.2 Bylaws of the Registrant (incorporated by
reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1, File No.
33-47932, initially filed with the Securities and
Exchange Commission on May 14, 1992).
10.1 Health Image Media, Inc. 1992 Stock Option Plan
(incorporated by reference to Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1,
File No. 33-47932, initially filed with the
Securities and Exchange Commission on May 14,
1992).
10.2 Employment Agreement dated September 29, 1995
between Registrant and John P. Benfield
(incorporated by reference to Exhibit 10.3 to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1996, initially filed
with the Securities and Exchange Commission on
July 1, 1996).
10.3 Employment Agreement dated September 29, 1995
between the Registrant and Donald A. Bernard
(incorporated by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1996, initially filed
with the Securities and Exchange Commission on
July 1, 1996).
10.4 Employment Agreement dated September 29, 1995
between the Registrant and Paul A. Amershadian
(incorporated by reference to Exhibit 10.5 to the
Registrant's Annual Report on Form 10- K for the
fiscal year ended March 31, 1996, initially filed
with the Securities and Exchange Commission on
July 1, 1996).
10.5 Promissory Note and Pledge Agreement dated January
10, 1996 between Inmark Services, Inc. and Paul A.
Amershadian (incorporated by reference to Exhibit
10.6 to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1996,
initially filed with the Securities and Exchange
Commission on July 1, 1996).
10.6 First Amendment to Employment Agreement dated May
2, 1997 between the Registrant and John P.
Benfield (incorporated by reference to Exhibit
10.7 to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1997,
initially filed with the Securities and Exchange
Commission on June 27, 1997).
10.7 First Amendment to Employment Agreement dated May
2, 1997 between the Registrant and Donald A.
Bernard (incorporated by reference to Exhibit 10.8
to the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1997, initially
filed with the Securities and Exchange Commission
on June 27, 1997).
10.8 First Amendment to Employment Agreement dated May
2, 1997 between the Registrant and Paul A.
Amershadian (incorporated by reference to Exhibit
10.9 to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1997,
initially filed with the Securities and Exchange
Commission on June 27, 1997).
-47-
<PAGE>
10.9 Promissory Note, dated April 7, 1997, in the
principal amount of $25,000, by Paul A.
Amershadian in favor of Inmark Services, Inc.
(incorporated by reference to Exhibit 10.10 to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1997, initially filed
with the Securities and Exchange Commission on
June 27, 1997).
10.10 Amendment to Pledge Agreement, dated as of April
7, 1997, between Paul A. Amershadian and Inmark
Services, Inc. (incorporated by reference to
Exhibit 10.11 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended March 31,
1997, initially filed with the Securities and
Exchange Commission on June 27, 1997).
10.11 Escrow Agreement, dated as of March 31, 1998 by
and among OG Holding Corporation, formerly known
as Optimum Group, Inc., Electing Small Business
Trust f/b/o James H. Ferguson, Electing Small
Business Trust f/b/o Michael J. Halloran, Electing
Small Business Trust f/b/o Christina M. Heile,
Electing Small Business Trust f/b/o David E.
Huddleston, Electing Small Business Trust f/b/o
Thomas E. Lachenman, Electing Small Business Trust
f/b/o Roderick S. Taylor, Electing Small Business
Trust f/b/o Thomas L. Wessling, Steven Clements,
Kimberly Longshore, Terry Steding, Optimum Group,
Inc., formerly known as OG Acquisition Corp.,
Inmark Enterprises, Inc., and Kronish, Lieb,
Weiner & Hellman LLP (incorporated by reference to
Exhibit 2.3 to the Registrant's Report on Form 8-K
dated March 31, 1998, File No. 000-20394,
initially filed with the Securities and Exchange
Commission on April 13, 1998).
10.12 Loan Agreement, dated as of March 31, 1998, by and
among PNC Bank, National Association, Inmark
Enterprises, Inc., Inmark Services, Inc., and
Optimum Group, Inc. (formerly OG Acquisition
Corp.) (incorporated by reference to Exhibit 99.2
to the Registrant's Report on Form 8-K dated March
31, 1998, File No. 000-20394, initially filed with
the Securities and Exchange Commission on April
13, 1998).
10.13 Guaranty, dated as of March 32, 1998, by Inmark
Enterprises, Inc. in favor of PNC Bank, National
Association (incorporated by reference to Exhibit
99.3 to the Registrant's Report on Form 8-K dated
-48-
<PAGE>
March 31, 1998, File No. 000-20394, initially
filed with the Securities and Exchange Commission
on April 13, 1998).
10.14 Pledge Agreement, dated as of March 31, 1998, by
Inmark Enterprises, Inc., Inmark Services, Inc.
and Optimum Group, Inc. (formerly OG Acquisition
Corp.) in favor of PNC Bank, National Association
(incorporated by reference to Exhibit 99.4 to the
Registrant's Report on Form 8-K dated March 31,
1998, File No. 000-20394, initially filed with the
Securities and Exchange Commission on April 13,
1998).
10.15 Security Agreement, dated March 31, 1998, by
Inmark Enterprises, Inc., Inmark Services, Inc.
and Optimum Group, Inc. (formerly OG Acquisition
Corp.) in favor of PNC Bank, National Association
(incorporated by reference to Exhibit 99.5 to the
Registrant's Report on Form 8-K dated March 31,
1998, File No. 000-20394, initially filed with the
Securities and Exchange Commission on April 13,
1998).
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule
-49-
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Wholly-Owned Subsidiaries of Inmark Enterprises, Inc. (Registrant):
State of Incorporation
----------------------
Inmark Services, Inc. New York
North American Holding Corp. Delaware
Wholly-Owned Subsidiary of Registrant's Wholly-
Owned Subsidiary, Inmark Services, Inc.:
Optimum Group, Inc. Ohio
-50-
<PAGE>
Exhibit 23
Consent of Independent Auditors
The Board of Directors
Inmark Enterprises, Inc.
We consent to incorporation by reference in the registration statement (No.
333-02392) on Form S-8 of Inmark Enterprises, Inc. of our report dated June 10,
1998 relating to the consolidated balance sheets of Inmark Enterprises, Inc. and
subsidiaries as of March 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended March 31, 1998, which report appears in the
March 31, 1998 annual report on Form 10-K of Inmark Enterprises, Inc.
KPMG Peat Marwick LLP
Jericho, New York
June 12, 1998
-51-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27
Financial Data Schedule
<ARTICLE> 5
<MULTIPLIER> 1
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