-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R7YvrNq3Yvev9nM9gh85vp8rmlfrgA7/zDj+R2r95+PEXMsVnapk04yUyERDz4nx cCp81ATh+272mCppxSlFxQ== 0000886475-99-000012.txt : 19990707 0000886475-99-000012.hdr.sgml : 19990707 ACCESSION NUMBER: 0000886475-99-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990706 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INMARK ENTERPRISES INC CENTRAL INDEX KEY: 0000886475 STANDARD INDUSTRIAL CLASSIFICATION: [9995] IRS NUMBER: 061340408 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20394 FILM NUMBER: 99659248 BUSINESS ADDRESS: STREET 1: 415 NORTHERN BLVD CITY: GREAT NECK STATE: NY ZIP: 11021-4812 BUSINESS PHONE: 5166222800 MAIL ADDRESS: STREET 1: 415 NORTHERN BLVD CITY: GREAT NECK STATE: NY ZIP: 11021-4812 FORMER COMPANY: FORMER CONFORMED NAME: HEALTH IMAGE MEDIA INC DATE OF NAME CHANGE: 19930328 10-K 1 INMARK ENTERPRISES, INC. FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1999 (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.) 415 Northern Boulevard, Great Neck, New York 11021 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (516) 622-2800 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 29, 1999, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $6,612,961. As of June 29, 1999, 4,513,481 shares of Common Stock, $.001 par value, were outstanding. Documents Incorporated by Reference Document Part of 10-K into which incorporated ------- ------------------------------------ Definitive Proxy Statement relating to Part III Registrant's 1999 Annual Meeting of Stockholders - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. - ------ --------- General Introduction Inmark Enterprises, Inc. ("Inmark"), together with its wholly-owned subsidiaries, Inmark Services, Inc. ("Services"), Optimum Group, Inc. ("Optimum"), U.S. Concepts, Inc. ("U.S. Concepts" and, together with Inmark, Services and Optimum, the "Company"), is a full service marketing, sales promotion and interactive new media services and E-commerce provider organization which designs, develops and implements customized national, regional and local consumer and trade promotion programs. The Company's clients are principally Fortune 500 consumer product companies. 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. In the industry, the Company's programs are commonly referred to as "account specific" and or "co-marketing", 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 traditional marketing and sales promotional services, the Company's services and programs include interactive new media services consisting of Internet web site development, E-commerce, electronic sales presentations and computer based training. By providing a wide range of programs and services, the Company affords clients a total solutions resource for strategic planning, creative development, production and implementation, including in-store and special event activities. Inmark 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 415 Northern Boulevard, Great Neck, New York 11021, and its telephone number is 516-622-2800. 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 Inmark and the management of Inmark Services, Inc. became the executive management of the Company. Previously, Inmark had been engaged in unrelated activities which were discontinued in June 1993. On March 31, 1998, Optimum, an indirect wholly-owned subsidiary of Inmark acquired all of the assets and assumed certain liabilities of OG Holding Corporation, formerly known -2- as Optimum Group, Inc. (the "Optimum Acquisition"). The purchase price for the Optimum Acquisition consisted of $9,298,000 in cash (including expenses), a subordinated note of Inmark in the principal amount of $2,500,000, 565,385 shares of newly and validly issued common stock of Inmark ("Inmark Common Stock") and the payment or assumption of approximately $1,900,000 of existing debt of the seller. Simultaneously with the closing of the Optimum Acquisition, the Company entered into a loan agreement with a bank (the "Loan Agreement") pursuant to which the Company obtained a $5,000,000 five-year term loan (the "Term Loan") and a $5,000,000 revolving loan credit facility (the "Revolving Loan Facility", and together with the Term Loan, the "Loan"). A portion of the proceeds of the Loan was used to finance the Optimum 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 complement and add value to those services provided by other subsidiaries of the Company. Optimum assists clients in varied industries in identifying the best and most complete solution for their business communication needs. Optimum offers clients leading edge visual communications technology and Internet development, interface and access, interactive sales training and support solutions, and serves as an independent resource for strategic planning, creative development, production and implementation. On December 29, 1998, U.S. Concepts, a Delaware corporation and wholly-owned subsidiary of the Company acquired the business conducted by U.S. Concepts, Inc., a New York corporation now known as Murphy Liquidating Corporation (the "U.S. Concepts Acquisition"). The purchase price for the U.S. Concepts Acquisition was $1,660,000, consisting of $1,410,000 in cash (including expenses) and 30,000 newly issued shares of Inmark Common Stock valued at $250,000. In the event that U.S. Concepts achieves specified pre-tax earnings during the four-year period commencing on January 1, 1999, additional installments of purchase price totaling up to $2,500,000 may be payable. At the option of the recipient, 50% of such installments may be paid in shares of Inmark Common Stock. In connection with the U.S. Concepts Acquisition, U.S. Concepts assumed liabilities in the amount of $2,500,000. The cash portion of the U.S. Concepts Acquisition was financed with proceeds from the Company's remaining unused Revolving Loan Facility. The U.S. Concepts business founded in 1983, provides event marketing and in-store promotion services, including brand creating and execution of special event campaigns, tours and festivals, sales driven sampling, demonstration programs and events. These services complement and add value to the services provided by the other subsidiaries of the Company. U.S. Concepts assists clients with the expertise and manpower to reach target customers where they live, shop, play and study in a manner that integrates client brands directly with customer lifestyles. On January 14, 1999, the Loan Agreement was amended to increase the principal amount available under the Revolving Loan Facility for the period from January 14, 1999 to and including December 31, 1999 from $5,000,000 to $7,000,000. The Loan Agreement was further amended on June 30, 1999 to reduce the principal amount available under the Revolving Loan Credit Facility from $7,000,000 to $5,000,000 and to amend certain financial covenants. In connection with the June 30, 1999 amendment, the bank granted waivers of the Company's non-compliance with respect to such financial covenants with respect to the quarter ended March 31, 1999. See "Risk Factors-Outstanding Indebtedness; Security Interest" and "Management's Discussion and Analysis of -3- Financial Condition and Results of Operations". Description of Business General. The Company is a full service marketing, sales promotion and interactive new media services and E-commerce provider organization which designs, develops and implements customized, national, regional and local consumer and trade promotion programs. The Company's clients are principally Fortune 500 consumer product companies. The Company's promotional programs are designed to enhance the value of its clients' budgeted expenditures and to achieve, in an objective and measurable way, its clients' specific marketing and promotional objectives. The Company's co-marketing "Account Specific" programs often 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 clients in identifying and defining specific objectives; (b) advising clients on the deployment of budgeted amounts to achieve their objectives and maximize value; (c) 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; (d) 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; (e) multimedia sales presentations, interactive computer based sales training, and Internet web site development and access; and (f) provision of on-site and in-store personnel to conduct and coordinate the implementation of specifically created promotional special events, sampling and demonstration activities and programs. The Company combines the needs of its clients and it clients' sales forces and 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; (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 profile of the retail consumer of the client's products. Distinct from many promotion and marketing companies which may adopt specific promotional programs or techniques 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, special events, specialty printing, licensing, point-of-purchase displays, couponing and interactive video and Internet services. Industry Background. Consumer goods manufacturers typically employ two separate -4- but related marketing programs to sell their products. First, they 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. A general advertising campaign typically employs television, radio, print media and other forms of communication designed to generate brand recognition and product awareness among consumers. Second, they undertake a promotional advertising program, often on a local or regional rather than national level, which may aim to induce the Trade to display and carry their products, and which may target the consumer to promote purchases and further increase brand name recognition. Promotion advertising may include broadcast media and may employ or integrate portions of the image created through the general advertising campaign, but it is typically more "directed" to the point of purchase, employing techniques such as couponing, sampling, incentives to the Trade, events, merchandising and licensing and similar efforts. Promo Magazine's 1998 Annual Report on the Promotion Industry reported that the promotion industry continued to grow as consumer promotion expenditures increased $7.9 billion to $79.4 billion in 1997, reflecting an 11% 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 and a continuing increase in the use of 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. These programs provide turnkey implementation, and utilize creative development tools, sales support, relationships with media outlets, the Internet and other forms of visual communications, promotional products and activities, 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 the Company and its clients to continually monitor and adjust the program to maximize its effectiveness. A Company promotional program may promote a client's products on a uniform basis nationwide or may be otherwise tailored for a particular regional or local market for a specific product. A program, localized for specific markets or products, can be coordinated with respect to both timing and expenditure, to run simultaneously with individual and customized programs nationwide. 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. 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, -5- a Trade's coupon circular or solo-mailers referencing and promoting the client's product. The Trade may also permit product sampling within one or more stores in the chain. 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 because it provides to the Trade media which the Trade would otherwise have to purchase. o Promotional Television - Broadcast time, to achieve objectives similar to those of promotional radio, and to create an incentive for Trade participation. The advertising value added through the Company's editing of a client's television commercial to include a specific Trade customer's name, logo and feature activity 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, offered to the Trade in return for providing specific in-store merchandising on behalf of a client's product. o Special Events - Custom designed event marketing programs in support of client brand needs. These programs consist of creating, organizing, implementing and/or participating in tours, comedy and music events, competitions, fairs, festivals and college marketing events. o In-Store Sampling and Demonstrations - Trained personnel providing sampling or demonstration of a client's product at various retail outlets including grocery, mass merchandise, beverage and drug stores. 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. These promotions include (a) merchandise giveaways in conjunction with product purchases; (b) vacation and product sweepstakes (for which the Company designs display materials, writes the rules, qualifies the winners and arranges travel plans or product ordering); (c) product sampling in one or more stores; and (d) traditional couponing. o New Media - Use of the Internet and other forms of interactive visual communication designed to augment traditional media and reach audiences that prefer a more active media. The Company's new media services include Internet web site design, support, and development and provision of reliable, high-speed access and maintenance through the Company's own dedicated pipeline, computer based training, E-commerce and electronic sales presentations. o Creative Services - A full range of services which include concept development, 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 logistical details associated with such programs. This -6- strategy has focused, and in the future will continue to focus, on clients in the packaged goods industry, where ample opportunities continue to exist. However, the Company also has broadened its strategy by offering its trade and consumer promotion products to clients in other industries which the Company believes can benefit from a comprehensive customized program on a turnkey implementation basis, such as financial services, entertainment, electronics, health care and transportation. The Company believes that its strategy of attempting to provide comprehensive solutions to its clients' promotional advertising programs distinguishes it from certain of its competitors, which provide only specific promotional programs without office and field support (an integral part of the Company's business). The Company also believes that its strategy is more attuned to clients' 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 forty-two salespersons operating out of fully staffed and/or sales offices located in Great Neck and New York, New York; Cincinnati and Cleveland, Ohio; Chicago and Barrington, Illinois; Birmingham, Alabama; Bloomington, Minnesota; Los Angeles, Laguna Hills and San Francisco, California; New Brunswick, New Jersey; Boston, Massachusetts; 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 both to the Trade and to consumers. The Company's clients include, among others, Colgate-Palmolive Company, General Mills, Inc., The Procter & Gamble Company, The Minute Maid Company, Bestfoods Specialty Products, Bayer Corporation, Lamb Weston Inc., Hillshire Farm & Kahn's, Inc., Starkist Seafood Company, Hewlett-Packard Company, 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, 1999, before giving effect to the U.S. Concepts Acquisition and on a pro forma basis giving effect to the U.S. Concepts Acquisition by including the revenues of the predecessor of U.S. Concepts for its year ended December 31, 1998, the Company had one client, The Procter & Gamble Company, which accounted for approximately 11.6% and 21.2% 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. However, the relationship of the Company and its predecessors with certain of its 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 promotion -7- agencies may be a part of or affiliated with larger general advertising agencies which have greater financial and marketing resources available than Inmark. These competitors include Cato Johnson (which is affiliated with Young & Rubicam), J. Brown/LMC (which is affiliated with Grey Advertising), and Market Growth Resources (which is a division of True North Communications). 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. See "Risk Factors Competition". Employees The Company currently has 210 full-time and 722 part-time employees, including 42 full-time and 3 part-time employees involved in sales, 134 full-time and 719 part-time employees in marketing support, program management and in-store sampling and demonstration, 12 full-time employees in new media and information technology and 22 full-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, 2002 or 2003 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 continues, 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". Unpredictable Revenue Patterns. A significant portion of the Company's revenues are derived from large promotional programs which originate on a project by project basis. Since these projects are susceptible to change, delay or cancellation as a result of specific client financial or other circumstantial issues as well as changes in the overall economy, the Company's revenue is unpredictable and may vary significantly from period to period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". -8- 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". Risks Associated with Acquisitions. An integral part of the Company's growth strategy is evaluating and, from time to time, engaging in discussions regarding acquisitions and strategic relationships. No assurance can be given that suitable acquisitions or strategic relationships can be identified, financed and completed on acceptable terms, or that the Company's future acquisitions, if any, will be successful. Expansion Risk. The Company is experiencing a period of rapid expansion. 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. 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 Loan Agreement requires the executive officers of Inmark maintain a minimum percentage of beneficial ownership of Inmark Common Stock during the term of the Loan Agreement. Outstanding Indebtedness; Security Interest. Inmark, Services, Optimum and U.S. Concepts are parties to the $5,000,000 Revolving Credit Facility and to the $5,000,000 five-year Term Loan. The prompt and full payment and other performance of all of the obligations of Services, Optimum and U.S. Concepts 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, Optimum and U.S. Concepts granted the lender a first priority lien on and security interest in all of the assets of Inmark, Services, Optimum and U.S. Concepts, including the stock of Services, Optimum and U.S. Concepts and the right, title and interest of Inmark, Services, Optimum and U.S. Concepts in and to the Optimum Agreement and the U.S. Concepts Agreement, and (b) Inmark pledged its shares of Services and U.S. Concepts, and Services pledged its shares of Optimum to the lender. If an event of default occurs under the Loan Agreement, at the lender's option, (i) the Revolving Credit Facility shall terminate, (ii) the principal and interest of the Loan 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 -9- 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. At March 31, 1999, the principal amount of the Company's notes payable to the lender under the Loan Agreement was $10,000,000 and, at that date, the Company was not in compliance with three of the financial covenants contained in the Loan Agreement; namely, the defined maximum senior debt leverage ratio, the minimum EBITDA and the maximum permitted capital expenditures. On June 30, 1999, the Company and the lender executed an amendment to the Loan Agreement pursuant to which the lender waived the Company's non-compliance with respect to such financial covenants with respect to the quarter ended March 31, 1999 and modifying such financial covenants in a manner that is consistent with the Company's business plan. There can be no assurance that the Company will be able to satisfy, on an ongoing basis, the amended financial covenants contained in the Loan Agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". Shares Eligible for Future Sale. Future sales of shares of Inmark Common Stock by existing stockholders under Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"), or through the exercise of outstanding registration rights or the issuance of shares of Inmark Common Stock upon the exercise of options or warrants or conversion of convertible securities could materially adversely affect the market price of shares of Inmark Common Stock and could materially impair Inmark's future ability to raise capital through an offering of equity securities. Substantially all outstanding shares of Inmark Common Stock, 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 Inmark Common Stock prevailing from time to time. Forward Looking Statements. This report contains or incorporates by reference forward-looking statements which the Company believes to be within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on beliefs of the Company's management as well as assumptions made by and information currently available to the Company's management. When used in this report, the words "estimate," "project," "believe," "anticipate," "intend," "expect," "plan," "predict," "may," 'should," "will," the negative thereof or other variations thereon or comparable terminology are intended to identify, forward-looking statements. Such statements reflect the current views of the Company with respect to future events based on currently available information and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in those forward-looking statements. Factors that could cause actual results to differ materially from the Company's expectations, include but are not limited to those described above in "Risk Factors". Other factors may be described from time to time in the Company's public filings with the Securities and Exchange Commission, news releases and other communications. The forward-looking statements contained in this report speak only as of the date hereof. The Company does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof -10- or to reflect the occurrence of unanticipated events. Item 2. Properties. - ------ ---------- The Company has the following leased facilities: Square Annual Facility Location Feet Base Rent -------- -------- ------ --------- Principal office of Inmark and principal and sales office of Services Great Neck, New York 16,500 $292,000 Principal and sales office of Optimum Cincinnati, Ohio 17,000 $144,000 Principal and sales office of U.S. Concepts New York, New York 11,500 $167,000 Other sales offices of Barrington, Illinois 800 Services, Optimum, Chicago, Illinois 1,400 and U.S. Concepts Cleveland, Ohio 100 Los Angeles, California 800 San Francisco, California 2,650 Laguna Hills, California 300 Boston, Massachusetts 350 New Brunswick, New Jersey 300 Birmingham, Alabama 100 Minneapolis, Minnesota 300 Worcester, Pennsylvania 100 ------- Total 7,200 $149,000 Warehouses of Optimum, Cincinnati, Ohio 3,500 and U.S. Concepts used Los Angeles, California 1,000 for storage of promotional items New York, New York 400 Miami Beach, Florida 600 Boston, Massachusetts 200 San Diego, California 200 Chicago, Illinois 800 San Francisco, California 1,000 ------ 7,700 $107,000
With the exception of the principal office leases for Great Neck, New York, Cincinnati, Ohio and New York, New York, which at March 31, 1999 have remaining terms of ten years, eleven years and seventeen months respectively, each of the Company's other facility leases is short term and annually renewable. For a summary of the Company's minimal rental commitments under all noncancelable operating leases as of March 31, 1999, see note 4 to the Notes to Consolidated Financial Statements. -11- Item 3. Legal Proceedings. - ------ ----------------- On April 30, 1999, U.S. Concepts was sued in the Superior Court of the State of California, County of San Francisco, by Ms. Star Norman for damages in excess of $25,000 plus unspecified punitive and other damages. The complaint arises out of plaintiff's claim of sex discrimination in violation of California Fair Employment and Housing Act and the California constitution and wrongful discharge in violation of public policy. All of the acts complained of took place prior to the date of incorporation of U.S. Concepts in Delaware and at a time when the subject business was being conducted by a New York corporation, then named U.S. Concepts, Inc. and now named Murphy Liquidating Corporation ("Murphy Liquidating"). The subject business was acquired by U.S. Concepts from Murphy Liquidating on December 29, 1998. The Company intends to defend this case vigorously on the grounds that U.S. Concepts has no liability for the acts complained of because they all took place before the incorporation of U.S. Concepts in Delaware. The Company will also vigorously assert that U.S. Concepts never assumed the obligation of Murphy Liquidating, if there be one, in connection with the acquisition of the subject business. Further, the Company has notified Murphy Liquidating and its shareholder that it claims indemnification from them for any loss arising from this matter pursuant to indemnification agreements entered into in connection with the U.S. Concepts Acquisition. Item 4. Submission of Matters to a Vote of Security Holders. - ------ --------------------------------------------------- Not Applicable. -12- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. - ------ --------------------------------------------------------------------- Market Information Effective December 17, 1996, Inmark Common Stock began trading on the Nasdaq SmallCap Market under the symbol IMKE. Prior to that date, Inmark 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 Inmark Common Stock, traded securities of Inmark included Units, Class A Warrants and Class B Warrants. 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 the high and low trade prices for Inmark 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 1998 - ---------------- 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 Fiscal Year 1999 - ---------------- First Quarter 12 1/2 5 1/32 Second Quarter 10 4 7/8 Third Quarter 8 15/16 5 10/32 Fourth Quarter 9 10/32 3 15/16 On May 4, 1998, Inmark's Board of Directors declared a five-for-four stock split of Inmark 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 29, 1999, giving effect to the stock dividend, there were 4,513,481 shares of Inmark Common Stock outstanding, approximately 47 shareholders of record and approximately 700 beneficial owners whose shares are held by a number of financial institutions. Inmark has never declared or paid cash dividends on Inmark 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 Common Stock in the foreseeable future. In addition, pursuant to the terms of the Loan Agreement, the Company may only pay a cash dividend one time in each fiscal year subsequent to the fiscal year ended March 31, 1999 and may only pay such dividend -13- (a) in an amount not in excess of 25% of the Company's net income for the immediately preceding fiscal year, (b) if no event of default shall have occurred and be continuing or will occur as a result of making such dividend, and (c) if the Company has made the mandatory prepayments of outstanding principal required by the Loan Agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". Recent Sales of Nonregistered Securities On December 29, 1998, 30,000 unregistered shares of Inmark Common Stock were issued to Murphy Liquidating in partial payment of the purchase price for the U.S. Concepts Acquisition. The shares were issued in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act as the U.S. Concepts Acquisition was a transaction not involving a public offering within the meaning of the Securities Act. Item 6. Selected Financial Data. - ------ ----------------------- The Merger on September 29, 1995 of Inmark Services, Inc. into a newly-formed wholly-owned subsidiary of Inmark was accounted for as a reverse purchase of Inmark 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 its predecessors due to the application of purchase accounting adjustments as a result of the Inmark Services, Inc. management-led buyout of Spar, one of those predecessors. Year Ended Year Ended Year Ended Year Ended Year Ended March 31, March 31, March 31, March 31, March 31, 1995 (1) 1996 (2) 1997 1998 (3) 1999 (4) ------------ ------------ ----------- ------------ ----------- Statement of Operations Data: Sales $13,670,938 $14,645,990 $18,901,730 $25,965,780 $38,781,136 Gross Profit 4,453,233 4,497,192 6,291,821 8,403,363 12,469,901 Income before Income Taxes 1,248,886 461,486 2,129,579 3,579,445 2,230,900 Provision (Benefit) for Income Taxes 19,495 (506,161) (159,924) 1,300,000 892,361 Net Income 1,229,391 967,647 2,289,503 2,279,445 1,338,539 Net Income per Common and Common Equivalent Share*: Basic ** $.46 $.64 $.63 $.30 Diluted ** $.38 $.51 $.50 $.24 * Adjusted for the five-for-four stock split effective May 14, 1998 ** Not applicable as companies were privately owned
-14- March 31, March 31, March 31, March 31, March 31, 1995 1996 1997 1998 (5) 1999 --------- --------- --------- --------- --------- Balance Sheet Data: Working Capital (deficiency) $(2,204,473) $ (846,489) $1,859,868 $ 2,446,502 $ 3,146,441 Total Assets 5,242,136 5,118,569 8,559,840 30,818,389 42,452,443 Long-Term Debt - - - 9,500,000 11,875,000 Total Liabilities 5,241,986 3,104,792 4,022,459 20,145,423 29,875,338 Stockholders Equity 150 2,013,777 4,537,381 10,672,966 12,577,105
(1) Represents operations of Spar which was acquired by Inmark Services, Inc. on April 3, 1995 in a transaction accounted for as a purchase. (2) Includes operations of Inmark Services, Inc. for the entire year and the Company from the September 29, 1995 Merger date. (3) Represents operations of the Company excluding the operations of Optimum Group, Inc. acquired on March 31, 1998. (4) Represents operations of the Company and the operations of U.S. Concepts, Inc., which was acquired on December 29, 1998, for the three months ended March 31, 1999. (5) Includes assets and liabilities of Optimum Group, Inc. acquired on March 31, 1998. See consolidated financial statements of the Company appearing elsewhere herein. Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------ ----------------------------------------------------------------------- of Operations. ------------- On March 31, 1998, Optimum, an indirect wholly-owned subsidiary of the Company, acquired the Optimum business for a purchase price of $15,743,000 consisting of $9,298,000 in cash (including expenses), a subordinated note of the Company in the principal amount of $2,500,000 and 565,385 shares of newly issued Inmark Common Stock valued at $3,675,000. In connection with the Optimum Acquisition, Optimum assumed liabilities in the amount of $1,884,000. The Optimum 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. However, the consolidated balance sheet of the Company at March 31, 1998 includes the Optimum balance sheet at that date. On December 29, 1998, U.S. Concepts, a Delaware corporation and a wholly-owned subsidiary of Inmark, acquired the business conducted by U.S. Concepts, Inc., a New York corporation, for a purchase price of $1,660,000 consisting of $1,410,000 in cash (including expenses) and 30,000 shares of newly issued Inmark Common Stock valued at $250,000. In the event that U.S. Concepts achieves specified pre-tax earnings during the four-year period commencing on January 1, 1999, additional installments of purchase price totaling up to $2,500,000 may be payable. At the option of the recipient 50% of such installments may be paid in shares of the Inmark Common Stock. In connection with the U.S. Concepts Acquisition, U.S. Concepts assumed liabilities in the amount of $2,500,000. Accordingly, as discussed below, results of operations for the year ended March 31, 1999 represent the operations of the Company including the operations of U.S. Concepts for the three months ended March 31, 1999. The following information should be read together with the consolidated financial statements and notes thereto included elsewhere herein. -15- General The Company's sales are generated from projects subject to contracts which require the Company to provide its services within specified time periods of generally ranging up to twelve months. As a result, the Company has projects in process at various stages of completion. With respect to each project, sales are recognized based upon the estimated percentage-of-completion of the project. On any given date, the estimated percentage-of-completion of a project is measured by the cost of the Company's services expended to such date on such project compared to the total cost of such required to be incurred in connection with such project. The Company's business is such that sales may vary considerably from quarter to quarter. The Company's direct expenses consist primarily of direct labor costs; costs to purchase media and program merchandise; cost of production, merchandise warehousing and distribution, and third-party contract fulfillment; and other directly related program expenses. Direct expenses do not include the salaries and benefits of the employees of Services servicing or otherwise involved in the administration of promotional programs or overhead expenses which could otherwise be allocated to such programs. For Fiscal 1999, before giving effect to the U.S. Concepts Acquisition, and on a pro forma basis giving effect to the U.S. Concepts Acquisition by including the revenues of the predecessor of U.S. Concepts for the year ended December 31, 1998, the Company had one client, The Procter & Gamble Company, which accounted for approximately 11.6% and 21.2%, respectively, of its revenues. In comparison, in Fiscal 1998, the Company had one client, Colgate-Palmolive Company, which accounted for approximately 34.4% of the Company's sales. To the extent the Company's sales are dependent on one client or a limited concentration of clients, and such dependency continues, 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. -16- Results of Operations The following table presents operating data of the Company, expressed as a percentage of sales for each of the fiscal years ended March 31, 1999, 1998 and 1997: Year Ended March 31, ------------------------------------------------------------ 1999 1998 1997 ---------------- ------------------ ---------------- Statement of Operations Data: Sales 100.0% 100.0% 100.0% Direct expenses 67.8% 67.6% 66.7% Gross profit 32.2% 32.4% 33.3% Salaries 13.1% 12.1% 13.2% Selling, general and administrative expense 11.4% 7.0% 8.9% Total operating expense 24.6% 19.2% 22.1% Operating income 7.6% 13.2% 11.2% Interest expense (income), net 1.9% (0.6%) (0.1%) Income before provision for taxes 5.8% 13.8% 11.3% Provision (benefit) for income taxes 2.3% 5.0% (0.8%) Net income 3.5% 8.8% 12.1% Other Data: EBITDA 10.6% 14.6% 13.0%
The following table presents operating data of the Company, expressed as a comparative percentage of change from the immediately preceding fiscal year for each of the fiscal years ended March 31, 1999, 1998 and 1997: Year Ended March 31, ------------------------------------------------------------ 1999 1998 1997 ---------------- ------------------ ---------------- Statement of Operations Data: Sales 49.4% 37.4% 29.1% Direct expenses 49.8% 39.3% 24.3% Gross profit 48.4% 33.6% 39.9% Salaries 61.4% 26.2% 17.8% Selling, general and administrative expense 142.9% 8.8% (16.4%) Total operating expense 91.3% 19.2% 1.2% Operating income (13.9%) 61.9% 472.1% Interest expense (income), net 568.9% (1,058.0%) (85.6%) Income before provision for income taxes (37.7%) 68.1% 361.5% Provision (benefit) for income taxes (31.4%) 912.9% (68.4%) Net income (41.3%) (0.4%) 136.6% Other Data: EBITDA 9.0% 54.5% 169.0%
-17- Fiscal Year 1999 Compared to Fiscal Year 1998 Sales. Sales for the fiscal year ended March 31, 1999 ("Fiscal 1999") were $38,781,000, compared to sales of $25,966,000 for the fiscal year ended March 31, 1998 ("Fiscal 1998"), an increase of $12,815,000. The increase was primarily attributable to the inclusion of the sales of Optimum for the full fiscal year and the sales of U.S. Concepts for the three month period ended March 31, 1999 which combined totaled $14,300,000. Such increase was partially offset by a decrease in sales for the fourth quarter primarily resulting from the reduction and cancellation of certain sales contracts and a deferral by customers of anticipated sales to the fiscal year ending March 31, 2000 ("Fiscal 2000"). At March 31, 1999, the Company's sales backlog, inclusive of approximately $8,700,000 attributable to U.S. Concepts, amounted to approximately $16,600,000, compared to a sales backlog of approximately $6,200,000 at March 31, 1998. Direct Expenses. Direct expenses for Fiscal 1999 were $26,311,000, compared to direct expenses of $17,562,000 for Fiscal 1998, an increase of $8,749,000. The increase was primarily attributable to the inclusion of the direct expenses of Optimum for the full fiscal year and of the direct expenses of U.S. Concepts for the three months ended March 31, 1999, which combined totaled $9,356,000. Such increase was partially offset by the reduction of direct expenses of Services related to its fourth quarter decrease in sales. The increase in direct expenses as a percentage of sales for Fiscal 1999 was primarily the result of client programs in the aggregate having a slightly lower gross profit margin than the mix of client programs in Fiscal 1998. As a result of the changes in sales and direct expenses, the Company's gross profit for Fiscal 1999 increased to $12,470,000 from $8,403,000 for Fiscal 1998. Operating Expenses. Operating expenses for Fiscal 1999 increased by $4,544,000 and amounted to $9,521,000, compared to operating expenses of $4,977,000 for Fiscal 1998. The increase in operating expenses for Fiscal 1999 was primarily the result of (A) the inclusion of the operating expenses of Optimum and U.S. Concepts totaling $3,433,000, and (B) an increase of approximately $1,111,000 primarily related to the overall expansion and increase in the level of operations. The $3,433,000 of operating expenses of Optimum and U.S. Concepts included in Fiscal 1999 consisted of approximately (i) $1,443,000 in salaries, bonuses and related employee payroll expenses and (ii) $1,990,000 of selling, general and administrative expenses (which included approximately $647,000 of amortization of goodwill and deferred financing costs associated with the Optimum Acquisition and the U.S. Concepts Acquisition). Interest Income/Expense. For Fiscal 1999, the Company incurred net interest expense of $718,000, as a result of bank borrowings for the Optimum Acquisition and the U.S. Concepts Acquisition and notes issued in connection with the Optimum Acquisition. For Fiscal 1998, the Company had interest income of $153,000 and was debt free. The Company's note obligation and bank borrowings have principal payments scheduled to commence on March 31, 2000 and June 30, 2000 respectively. The Company anticipates that it will continue to incur significant interest expense for the Fiscal 2000 and thereafter. -18- Income Before Provision for Income Taxes. For Fiscal 1999, the Company had income before provision for income taxes equal to $2,231,000. In comparison, for Fiscal 1998, the Company's income before provision for income taxes was $3,579,000. Provision For Income Taxes. For Fiscal 1999, the Company made a provision for federal, state and local income taxes in the amount of $892,000, based upon the Company's effective tax rate for Fiscal 1999. However, such provision does not give effect to exercise of stock options and warrants during Fiscal 1998 by two former officers and directors of the Company which resulted in a tax benefit of approximately $310,000 which was recorded as additional paid-in capital in Fiscal 1999. 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. Net Income. As a result of the items discussed above, the Company's net income for Fiscal 1999 was $1,339,000 compared to $2,279,000 for Fiscal 1998. Fiscal Year 1998 Compared to Fiscal Year 1997 Sales. Sales for 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. The increase was the result of an overall increase in sales contracts primarily from new clients. At both March 31, 1998 and 1997, the Company's sales backlog amounted to approximately $6,200,000. Direct Expenses. Direct expenses for Fiscal 1998 were $17,562,000 compared to direct expenses of $12,610,000 for Fiscal 1997. The increase in the amount of direct expenses for Fiscal 1998 principally relates to the increase in sales for Fiscal 1998, 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 client programs 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. Operating Expenses. Operating expenses for Fiscal 1998 increased by $802,000 and amounted to $4,977,000 compared to operating expenses of $4,175,000 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 additional personnel and an overall increase in base salaries, management bonuses and employee benefits such as 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. Interest Income. For Fiscal 1998, the Company had interest income from short term investments of $153,000 without incurring any interest expense, whereas for Fiscal 1997, the Company had net interest income of $13,000. -19- Income Before Provision for Income Taxes. For Fiscal 1998, the Company had income before provision for income taxes equal to $3,579,000. In comparison, for Fiscal 1997, the Company's income before provision for income taxes was $2,130,000. 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. For Fiscal 1997, the Company's provision for income taxes reflected a tax benefit of $160,000. 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. Liquidity and Capital Resources Effective March 31, 1998, the Company entered into the Loan Agreement pursuant to which the Company obtained the $5,000,000 five-year Term Loan and the $5,000,000 Revolving Loan Facility. On March 31, 1998, the Company borrowed $5,000,000 under the Term Loan and $2,000,000 under the Revolving Loan Facility to finance the Optimum Acquisition. In connection with the Loan, 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 Loan 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 loan rate 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 quarterly payments commencing on June 30, 2000 and to end on March 31, 2003. The Loan is 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. On December 29, 1998, to finance the U.S. Concepts Acquisition, the Company utilized the Revolving Credit Facility, increasing its outstanding borrowings to the maximum amount then available. On January 14, 1999, in order to provide for short term financing needs, the Loan Agreement was amended to increase the principal amount available under the Revolving Credit Facility from $5,000,000 to $7,000,000 for the period from January 14, 1999 through December 31, 1999. At March 31, 1999, the Company's notes payable to the bank amounted to $10,000,000 and, at that date, the Company was not in compliance with three of the financial covenants of the Loan Agreement; namely, the defined maximum senior debt leverage ratio, the minimum EBITDA and the maximum permitted capital expenditures. -20- On June 30, 1999, the Loan Agreement was further amended to reduce the principal amount available under the Revolving Loan Facility from $7,000,000 to $5,000,000 and to modify certain financial covenants. In connection with the June 30, 1999 amendment, the bank granted waivers of the Company's non-compliance with respect to such financial covenants with respect to the quarter ended March 31, 1999. There can be no assurance that the Company will be able to satisfy, on an ongoing basis, the modified financial covenants of the Loan Agreement. See note 5 to "Notes to Consolidated Financial Statements-Long-Term Debt." For the period from April 24, 1996 until March 31, 1998, the Company's activities were funded with internally generated cash flow primarily from operations. At March 31, 1999, the Company had cash and cash equivalents of $2,688,000, working capital of $3,146,000, bank loans of $10,000,000, subordinated debt of $2,500,000 and stockholders' equity of $12,577,000 compared to cash and cash equivalents of $1,460,000, working capital of $2,447,000, bank loans of $7,000,000, subordinated debt of $2,500,000 and stockholders' equity of $10,673,000 at March 31, 1998. Management believes that the Company's existing cash position and credit facility combined with internally generated cash flow will satisfy its cash requirements for Fiscal 2000, subject to the Company obtaining satisfactory modifications of the Loan Agreement as discussed above. To the extent that the Company is required to seek additional external financing in the form of a revised or replacement credit facility, equity or debt, there can be no assurance that the Company will be able to obtain such additional funding. The $1,228,000 increase in the Company's cash and cash equivalents at March 31, 1999 resulted primarily from the Company's net cash provided by operating activities and the proceeds from bank borrowings reduced by funds used to finance the U.S. Concepts Acquisition and to purchase fixed assets. Net cash provided by operating activities during Fiscal 1999 was $127,000, due principally to $1,339,000 of net income, $1,179,000 of depreciation and amortization expense, $542,000 of deferred income taxes, an increase of $1,525,000 in deferred revenue and an increase of $1,682,000 in accounts payable and accrued liabilities which amounts were offset by an increase of $667,000 in accounts receivable, an increase of $4,253,000 in unbilled contracts in progress, an increase of $1,050,000 in prepaid taxes and a net change of $30,000 in other operating assets and liabilities. In comparison, net cash provided by operating activities in Fiscal 1998 was $1,933,000 which was principally derived from net income of $2,279,000 and the addition of non-cash charges of $1,361,000, offset by net changes in operating assets and liabilities of $1,708,000 primarily attributable to increases in accounts receivable, unbilled contracts in progress and prepaid taxes and offsetting increases in accrued costs and expenses. For Fiscal 1999, net cash used in investing activities amounted to $1,904,000 of which $1,277,000 was used in connection with the U.S. Concepts Acquisition and $627,000 was used for the purchase of fixed assets. In comparison, for Fiscal 1998 net cash used in investing activities amounted to $9,242,000 of which $9,192,000 was used in connection with the Optimum Acquisition and $51,000 was used for the purchase of fixed assets. -21- For Fiscal 1999, financing activities, consisting of bank borrowings of $3,000,000 and proceeds of $6,000 from the exercise of stock options, provided net cash of $3,006,000 which was primarily used for the cash requirements of the U.S. Concepts Acquisition and to supplement short term working capital. For Fiscal 1998, financing activities provided cash of $7,057,000 principally from (i) bank borrowings of $7,000,000 used for a portion of the Optimum Acquisition purchase price and (ii) proceeds of $181,000 from the exercise of stock options and warrants of which $125,000 was used for financing costs related to the Optimum Acquisition. At March 31, 1998, the Company had cash and cash equivalents of $1,460,000, working capital of $2,447,000, 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 during Fiscal 1998 and the increase in shareholders' equity to the extent in excess of the Company's net income for Fiscal 1998 were related solely to the Optimum Agreement. Primarily as a result of the use of funds for the Optimum Acquisition which offset the net cash provided by operating activities during Fiscal 1998, the Company's cash and cash equivalents balances decreased by $253,000 and amounted to $1,460,000 at March 31, 1998. Operating activities during Fiscal 1998 provided $1,933,000 in cash, principally from net income of $2,279,000 and the addition of non-cash adjustments of $1,361,000. Such amounts were offset by net changes in operating assets and liabilities of $1,708,000 primarily attributable to increases in accounts receivable, unbilled contracts in progress and prepaid taxes and offsetting increases in accrued costs and expenses. In comparison, operating activities in Fiscal 1997 provided $841,000 in cash, principally from net income of $2,290,000. Such net income was 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 $9,242,000 of which $9,192,000 was used in connection with the Optimum Acquisition $51,000 was used for the purchase of fixed assets. This compares to the net cash provided from investing activities of $109,000 for Fiscal 1997 which resulted from the release to the Company of $250,000 of restricted cash held by a factor pursuant to its then expiring factoring agreement and the use of $141,000 for the purchase of fixed assets. For Fiscal 1998, financing activities provided cash of $7,057,000 compared to cash of $63,000 for Fiscal 1997. In Fiscal 1998, the 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. In comparison, 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 Inmark Common Stock for $54,000. -22- Quantitative and Qualitative Disclosures About Market Risk The Company's earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in money market funds with portfolios of investment grade corporate and U.S. government securities and, secondarily, from its Long-Term debt arrangements. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. See note 5 to "Notes to Consolidated Financial Statements-Long Term Debt." Recent Accounting Developments Effective April 1, 1998, the Company adopted SFAS 130 "Reporting Comprehensive Income" which requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in the financial statements. The adoption of SFAS 130 did not have an impact on the Company's financial position or results of operations. On April 1, 1998, the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information", which established standards to report information about operating segments and related disclosures about products and services, geographic areas and major customers. The adoption of SFAS 131 did not have an impact on the Company's reporting of its results of operations and financial position since the Company operates in one segment. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which is effective for all quarters of fiscal years beginning after June 15, 1999. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In accordance with SFAS 133, an entity is required to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 requires that changes in the derivatives' fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company does not believe that the implementation of SFAS 133 will have a material effect on its financial position or results of operations. Other Matters Year 2000 issues relate to the potential for system and processing failures of date related data as a result of computer controlled systems using two digits rather than four to define the applicable year. The result could be system failure or miscalculations which could cause disruptions to operations. State of Readiness - The Company has evaluated its computer systems and has determined that its systems require software upgrades to make them Year 2000 compliant. The Company has -23- purchased vendor software which is Year 2000 compliant and is currently in the installation process. The Company does not have any significant in-house developed software. The Company's computer systems are not interdependent with the computer systems of its vendors and others with which the Company transacts business. Costs - Based on its assessment to date, the Company's incremental costs to modify or upgrade it P.C. based systems should not be material. Risks - The most reasonably likely worst case Year 2000 scenario would be failures beyond the control of the Company such as telecommunications or electrical failures. In addition, Year 2000 problems may effect its customers and others with which the Company transacts business. The Company believes its primary business risks would include, but not be limited to, delays in implementing customer marketing programs, lost customers and increased operating costs. Company Plan - The Company is discussing year 2000 issues with its customers and vendors but has not yet formalized any contingency plans. -24- Item 8. Financial Statements. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Consolidated Financial Statements of Inmark Enterprises, Inc. Independent Auditors' Report .........................................................26 Consolidated Balance Sheets as of March 31, 1999 and 1998.............................27 Consolidated Statements of Operations for the years ended March 31, 1999, 1998 and 1997.................................................... 28 Consolidated Statements of Stockholders' Equity for the years ended March 31, 1999, 1998 and 1997.................................................... 29 Consolidated Statements of Cash Flows for the years ended March 31, 1999, 1998 and 1997 ....................................................30 Notes to Consolidated Financial Statements............................................31
-25- 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1999, in conformity with generally accepted accounting principles. KPMG LLP Melville, New York June 10, 1999, except as to note 5, which is as of June 30, 1999 -26- INMARK ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 1999 AND 1998 1999 1998 ------------ ----------- Assets Current assets: Cash and cash equivalents $ 2,687,575 1,459,909 Accounts receivable 7,042,640 5,648,555 Unbilled contracts in progress 9,537,540 5,284,686 Deferred tax asset - 83,442 Prepaid taxes 1,502,431 452,291 Prepaid expenses and other current assets 376,593 163,042 ------------ ----------- Total current assets 21,146,779 13,091,925 ------------ ----------- Furniture, fixtures and equipment, at cost 1,820,479 1,006,779 Less accumulated depreciation 453,341 191,522 ------------ ----------- 1,367,138 815,257 ------------ ----------- Notes receivable from officer 225,000 225,000 Goodwill, net of amortization of $1,744,155 and $851,377 19,548,929 16,534,950 Deferred financing costs, net of amortization of $24,900 and $0 99,600 124,500 Other assets 64,997 26,757 ------------ ----------- Total assets $ 42,452,443 30,818,389 ============ =========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 3,499,388 1,601,751 Deferred revenue 3,096,698 642,223 Accrued job costs 8,841,958 7,693,522 Accrued compensation 320,273 314,876 Other accrued liabilities 991,137 298,791 Deferred taxes payable 625,884 - Subordinated notes payable - current 625,000 - Accrued taxes payable - 94,260 ------------ ---------- Total current liabilities 18,000,338 10,645,423 Notes payable bank - long term 10,000,000 7,000,000 Subordinated notes payable - long term 1,875,000 2,500,000 ------------ ----------- Total liabilities 29,875,338 20,145,423 ------------ ----------- Stockholders' equity: Class A convertible preferred stock, par value $.001; authorized 650,000 shares; none issued and outstanding - - Class B convertible preferred stock, par value $.001; authorized 700,000 shares; none issued and outstanding - - Preferred stock, undesignated; authorized 3,650,000 shares; none issued and outstanding - - Common stock, par value $.001; authorized 25,000,000 shares; issued and outstanding 4,513,481 shares at March 31, 1999 and 4,475,326 shares at March 31, 1998 4,513 4,475 Additional paid-in capital 5,697,458 5,131,896 Retained earnings 6,875,134 5,536,595 ------------ ----------- Total stockholders' equity 12,577,105 10,672,966 ------------ ----------- Total liabilities and stockholders' equity $ 42,452,443 30,818,389 ============ =========== See accompanying notes to consolidated financial statements.
-27- INMARK ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 1999, 1998, 1997 1999 1998 1997 --------------- -------------- --------------- Sales $ 38,781,136 25,965,780 18,901,730 Direct expenses 26,311,235 17,562,417 12,609,909 --------------- -------------- --------------- Gross profit 12,469,901 8,403,363 6,291,821 --------------- -------------- --------------- Salaries 5,084,098 3,150,751 2,497,325 Selling, general and administrative expense 4,436,934 1,826,278 1,678,139 --------------- -------------- --------------- Total operating expenses 9,521,032 4,977,029 4,175,464 --------------- -------------- --------------- Operating income 2,948,869 3,426,334 2,116,357 Interest income (expense), net (717,969) 153,111 13,222 --------------- -------------- --------------- Income before income taxes 2,230,900 3,579,445 2,129,579 Provision for income taxes (benefit) 892,361 1,300,000 (159,924) --------------- -------------- --------------- Net income $ 1,338,539 2,279,445 2,289,503 =============== ============== =============== Net income per share: Basic $ .30 $ .63 $ .64 =============== ============== =============== Diluted $ .24 $ .50 $ .51 =============== ============== =============== Weighted average number of shares outstanding: Basic 4,487,763 3,590,935 3,584,375 =============== ============== ============== Diluted 5,671,702 4,587,106 4,494,267 =============== ============== ============== Reconciliation of weighted average shares used for basic and diluted computation is as follows: Weighted average shares - Basic 4,487,763 3,590,935 3,584,375 Dilutive effect of options and warrants 1,183,939 996,171 909,892 ---------------- -------------- -------------- Weighted average shares - Diluted 5,671,702 4,587,106 4,494,267 ================ ============== ============== See accompanying notes to consolidated financial statements.
-28- INMARK ENTERPRISES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997 Additional Total Common Stock Paid-in Retained Stockholders' par value $.001 Capital Earnings Equity --------------------------------- -------------- ------------- --------------- Shares Amount --------------- -------------- 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 Exercise of warrants and options 8,155 8 5,592 - 5,600 Acquisition of U.S. Concepts, Inc. 30,000 30 249,970 - 250,000 Tax benefit from exercised options - - 310,000 - 310,000 Net income - - - 1,338,539 1,338,539 --------------- -------------- -------------- ------------- --------------- Balance, March 31, 1999 4,513,481 $ 4,513 $ 5,697,458 $ 6,875,134 $ 12,577,105 =============== ============== ============== ============= =============== See accompanying notes to consolidated financial statements.
-29- INMARK ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 1999, 1998 AND 1997 1999 1998 1997 --------------- ---------------- ----------------- Cash flows from operating activities: Net income $ 1,338,539 2,279,445 2,289,503 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,179,497 362,658 335,985 Deferred income taxes 542,442 998,691 (442,133) Changes in operating assets and liabilities, net of effects of acquisitions: Increase in accounts receivable (667,014) (846,606) (2,780,866) Increase in unbilled contracts in progress (4,252,854) (5,284,686) - Increase in notes receivable - officer - (25,000) - (Increase) decrease in prepaid expenses and other assets (171,337) 144,592 (229,403) Increase in prepaid taxes (1,050,140) (452,291) - Increase (decrease) in accounts payable 226,486 221,451 (331,135) Increase in accrued job costs 1,148,436 3,841,528 1,921,867 Increase (decrease) in other accrued liabilities 396,435 (18,113) (42,732) Increase in deferred revenue 1,524,909 642,223 Increase (decrease) in accrued compensation 5,397 69,347 119,667 Decrease in accrued taxes payable (94,260) (133) - --------------- ---------------- ----------------- Net cash provided by operating activities 126,536 1,933,106 840,753 --------------- ---------------- ----------------- Cash flows from investing activities: Purchases of fixed assets (627,284) (50,554) (141,426) Release of restricted cash from factor - - 250,000 Acquisitions, net of cash acquired* (1,277,186) (9,191,932) - --------------- ---------------- ----------------- Net cash (used in) provided by investing activities (1,904,470) (9,242,486) 108,574 --------------- ---------------- ----------------- Cash flows from financing activities: Decrease in due from factor, net - - 578,725 Repayment of notes payable to Spar - - (750,000) Proceeds from exercise of stock options and warrants 5,600 181,038 287,601 Repurchase of common stock - - (53,500) Proceeds from borrowings 3,000,000 7,000,000 - Financing costs related to purchase of Optimum Group, Inc. - (124,500) - --------------- ---------------- ----------------- Net cash provided by financing activities 3,005,600 7,056,538 62,826 --------------- ---------------- ----------------- Net increase (decrease) in cash 1,227,666 (252,842) 1,012,153 Cash and cash equivalents at beginning of period 1,459,909 1,712,751 700,598 --------------- ---------------- ----------------- Cash and cash equivalents at end of period $ 2,687,575 1,459,909 1,712,751 =============== ================ ================= Supplemental disclosures of cash flow information: Interest paid during the period $ 783,669 - 38,294 =============== ================ ================= Income taxes paid during the period $ 989,387 768,457 298,936 =============== ================ ================= Supplemental schedule of noncash investing activities: *Details of acquisitions Fair value of assets acquired $ 1,127,051 2,775,467 - Cost in excess of net assets of companies acquired 3,881,214 14,580,852 - Liabilities assumed (3,347,969) (1,883,775) - Stock and note issued (250,000) (6,175,003) - --------------- ---------------- ----------------- Cash paid 1,410,296 9,297,541 - Less: cash acquired (133,110) (105,609) - --------------- ---------------- ----------------- Net cash paid for acquisitions $ 1,277,186 9,191,932 - =============== ================ ================= Supplemental disclosures of noncash financing 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.
-30- INMARK ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 and 1998 (1) Organization and Nature of Business ----------------------------------- 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 U.S. Concepts, Inc. ---------------------------------- On December 29, 1998, a wholly-owned subsidiary of the Company, U.S. Concepts, Inc., a Delaware corporation, ("U.S. Concepts") purchased substantially all of the assets and business from and assumed certain of the liabilities of Murphy Liquidating Corporation formerly known as U.S. Concepts, Inc., a New York corporation (the "U.S. Concepts Acquisition") in a transaction accounted for as a purchase. The purchase price was $1,660,000 and consisted of cash of $1,410,000, including expenses, and 30,000 shares of common stock of the Company valued at $250,000. The purchase price could increase with payments of up to an additional $2,500,000 (50% of which, at the option of the recipient, may be paid in shares of the Company's common stock) to the extent that U.S. Concepts achieves specified pre-tax earnings during the four year period subsequent to December 31, 1998. The cash portion of the purchase price was financed with proceeds from the Company's remaining unused bank revolving loan credit facility. The U.S. Concepts Acquisition has been accounted for as a purchase whereby the excess of the purchase price, including costs of the acquisition, of $3,881,000 over the fair value of assets acquired less liabilities assumed has been classified as goodwill and will be amortized on a straight-line basis over a twenty-five year period. Acquisition of Optimum Group, Inc. ---------------------------------- On March 31, 1998, an indirect wholly-owned subsidiary of the Company, Optimum Group, Inc ("Optimum") purchased all of the assets and business from and assumed substantially all of the liabilities of OG Holding Corporation (the "Optimum Acquisition") in a transaction accounted for as a purchase. The purchase price was $15,743,000 and consisted of cash of $9,298,000, including expenses, 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 have been put in escrow as collateral for the Company should the Company be entitled to indemnification pursuant to the purchase agreement. The Optimum Acquisition has been accounted for as a purchase whereby the excess of the purchase price, including the costs of the acquisition, of $14,581,000 over the fair value of assets acquired less liabilities assumed has been classified as goodwill and will be amortized 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 on a straight-line basis over a five-year period. -31- INMARK ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 and 1998 Pro forma results of operations of the Company had the acquisition of U.S. Concepts and OG Holding occurred on April 1, 1997 would be as follows: 1999 1998 ---- ---- Sales $51,931,686 $55,983,276 Net income 1,473,745 752,358 Basic earnings per share .33 .17 Diluted earnings per share .26 .14 (2) Summary of Significant Accounting Policies ------------------------------------------ (a) 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. (b) 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 project. Costs associated with the fulfillment of projects 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 projects are made in the period in which such losses are determined. (c) Cash Equivalents ---------------- Investments with original maturities of three months or less at the time of purchase are considered cash equivalents. (d) 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 ten years. Goodwill 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. (e) 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 -32- INMARK ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 and 1998 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, 1999, the computation of weighted average number of common shares outstanding for the year included a ninety-three day inclusion of the shares of common stock issued for the U.S. Concepts Acquisition and 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 and share information have been adjusted for the five-for-four stock dividend paid June 15, 1998. (f) Income Taxes ------------ The Company uses the asset and liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) 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 or interest rates that approximate current rates. (h) 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. (i) Reclassifications ----------------- Certain reclassifications have been made to amounts reported in the prior year to conform to the 1999 presentation. (3) Notes Receivable From Officer ----------------------------- The notes receivable from officer totaling $225,000 at March 31, 1999 and 1998 consist 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 -33- INMARK ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 and 1998 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 accrued interest on the notes to April 7, 2001. 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. (4) Leases ------ The Company has several noncancellable operating leases, primarily for property, that expire within eleven years. Rent expense for the years ended March 31, 1999, 1998 and 1997 amounted to $456,312, $118,092 and $105,598, respectively. Future noncancellable minimum lease payments under all of the leases as of March 31, 1999 are as follows: Year ending March 31, 2000 $ 771,181 2001 547,892 2002 487,084 2003 472,846 2004 482,736 Thereafter 3,046,518 ------------ $ 5,808,257 ============ (5) Long-Term Debt -------------- 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, which expires on March 31, 2003, and a term loan in the amount of $5,000,000, which expires on 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 (6.97% and 7.50% at March 31, 1999 and 1998, respectively). 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. At March 31, 1999, the Company was not in compliance with certain covenants in the loan agreement. On June 30, 1999, the Company and the bank executed an amendment to the loan agreement pursuant to which the bank waived the Company's non-compliance with respect to such financial covenant as of March 31, 1999 and the financial covenants were modified to be consistent with the Company's business plan. -34- INMARK ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 and 1998 Long-Term debt as of March 31, 1999 and 1998 is summarized as follows: 1999 1998 ----------- ---------- 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. $ 5,000,000 $ 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. 5,000,000 5,000,000 9% subordinated note payable to OG Holding Corporation with interest payable in quarterly installments and principal payments in annual installments of $625,000 commencing March 31, 2001 through March 31, 2003 1,875,000 - ----------- ---------- Total Long-Term debt $ 11,875,000 $ 7,000,000 =========== ==========
Maturities and payment requirements on Long-Term debt are as follows: Notes Payable Subordinated Bank Note ---------- ---------- 2001 $ 1,250,000 $ 625,000 2002 1,875,000 625,000 2003 6,875,000 625,000 ---------- ---------- $ 10,000,000 $ 1,875,000 ========== ========== (6) 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. -35- INMARK ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 and 1998 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 1,125,000 shares. Changes in options outstanding, inclusive of options not issued under the Plan, during each of the years ended March 31, 1999, 1998 and 1997, and options exercisable and shares reserved for issuance at March 31, 1999 are as follows: Weighted average price Outstanding Exercisable per share --------------- --------------- ---------------- Balance at March 31, 1996 $1.73 451,875 333,125 Granted (A) $1.31 418,750 131,250 Exercised $1.12 (8,125) (8,125) Canceled $1.40 (1,250) (1,250) --------------- --------------- ---------------- Balance at March 31, 1997 $1.51 861,250 455,000 Became exercisable $1.68 - 268,749 Granted (B) $5.91 627,250 90,208 Exercised $1.43 (5,156) (5,156) Canceled $2.84 (107,594) (104,531) --------------- --------------- ---------------- Balance at March 31, 1998 $2.88 1,375,750 704,270 Became exercisable $3.27 - 344,948 Granted (C) $8.88 171,850 50,508 Exercised $1.12 (8,155) (8,155) Canceled $8.52 (6,595) (3,137) --------------- --------------- ---------------- Balance at March 31, 1999 $3.54 1,532,850 1,088,434 =============== ================ ================
(A) Represents 400,000 options granted at an exercise price of $1.20 per share and 6,250 options granted to each of three new employees at an exercise price of $2.80, $3.60 and $4.40, respectively. Of the options granted, 131,250 were immediately exercisable and the balance exercisable either in one, two or three annual installments. (B) Represents 402,250 options granted at an exercise price of $4.00, 12,500 options granted at an exercise price of $4.30 and 212,500 options granted at an exercise price of $5.60 per share. Of the options granted, 90,208 were immediately exercisable and the balance exercisable in either one, two or three year annual installments. (C) Represents options granted to purchase 13,750 shares at an exercise price of $10.00, 62,500 options granted at an exercise price of $9.60 per share, and an aggregate of 95,600 options granted to employees of U.S. Concepts at an exercise price of $8.25. Of the options granted, 50,508 were immediately exercisable and the balance exercisable in one or two annual installments. -36- INMARK ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 and 1998 (ii) Warrants -------- At March 31, 1999, warrants to purchase shares of the Company's common stock are as follows: Weighted average price Outstanding Exercisable per share ----------------- --------------- ---------------- Balance at March 31, 1996 $0.81 1,129,864 942,364 Became exercisable $0.80 - 187,500 Exercised $0.80 (343,750) (343,750) Canceled (A) $0.80 (250,000) (250,000) ----------------- --------------- ---------------- Balance at March 31, 1997 $0.82 536,114 536,114 Granted (B) $4.00 75,000 75,000 Exercised $1.00 (218,750) (218,750) ----------------- --------------- ----------------- Balance at March 31, 1998 and 1999 $1.43 392,364 392,364 ================= =============== ================
(A) Concurrently with the resignations in fiscal 1997 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. (B) In fiscal 1998, concurrent with the Company entering into a financial advisory services agreement with an investment banking firm with which a 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. At March 31, 1999, outstanding warrants in the amount of 392,364 are exercisable over the next eight years. -37- INMARK ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 and 1998 The Company applies APB 25 and related interpretations in accounting for its stock option plan. 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, Accounting for Stock-Based Compensation, the Company's net income and net income per share for fiscal 1999, 1998 and 1997 would have been as follows: Fiscal 1999 Fiscal 1998 Fiscal 1997 --------------- ---------------- ---------------- Net income: As reported $ 1,338,539 $ 2,279,000 $ 2,290,000 Pro forma 887,298 2,023,000 2,277,000 Basic income per share: As reported $ 0.30 $ 0.63 $ 0.64 Pro forma 0.20 0.56 0.64 Diluted income per share: As reported $ 0.24 $ 0.50 $ 0.51 Pro forma 0.15 0.44 0.51
However, such pro forma net income reflects only options and warrants granted since April 1, 1995. 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 1999, fiscal 1998 and fiscal 1997 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 options outstanding as of March 31, 1999 are summarized in ranges as follows: Range of Weighted Number of Weighted average exercise price average options remaining life exercise outstanding price - --------------------- ------------- ------------------ ----------------- $1.12-4.00 $2.24 1,080,750 9.79 $4.01-7.00 $5.35 284,625 5.97 $7.01-10.00 $8.86 167,475 5.41 -38- INMARK ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 and 1998 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: Fiscal 1999 Fiscal 1998 Fiscal 1997 --------------- -------------- -------------- Risk-free interest rate 5.07% 6.41% 6.85% Expected life - years 5.16 6.07 6.91 Expected volatility 82% 35% 25% Expected dividend yield 0% 0% 0% Fair value $6.15 $2.04 $1.30 (7) 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, 1999, 1998 and 1997 are as follows: March 31, 1999 March 31, 1998 March 31, 1997 ----------------------------- --------------------------- ---------------------------------- Current: State and local $ 83,785 $ 129,954 $ 242,209 Federal 17,445 101,230 256,139 386,093 40,000 282,209 ---------- --------- ----------- Deferred: Federal and State 791,131 913,907 (442,133) ------------ -------------- --------------- $ 892,361 $ 1,300,000 $ (159,924) ============ ============== ===============
The differences 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, 1999, 1998 and 1997 are as follows: Rate -------------- 1999 1998 1997 -------------- -------------- -------------- Statutory Federal income tax 34.0% 34.0% 34.0% State and local taxes, net of Federal benefit 5.9 5.1 6.6 Items not deductible, primarily amortization of goodwill 0.8 0.5 0.4 Valuation allowance adjustment - - 48.8) Other (0.7) (3.3) 0.3 -------------- -------------- -------------- Effective tax rate 40.0% 36.3% (7.5)%
-39- INMARK ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 and 1998 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, 1999 March 31, 1998 --------------- --------------- Deferred tax assets (liabilities): Goodwill, principally due to differences in amortization $ (23,486) 104,616 Net operating loss carryforwards 235,495 - Unbilled revenue (1,124,037) - Other (28,943) (21,174) --------------- --------------- Net deferred tax asset (liability) $ (940,971) 83,442 =============== ===============
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. Current taxes payable at March 31, 1999 were reduced by approximately $310,000 to reflect the Federal tax benefit relating to compensation expense for non-qualified stock options and, accordingly, additional paid-in capital was increased by this amount. (8) Significant Customers --------------------- During the year ended March 31, 1999, the Company had one client which, before and after giving effect to the U.S. Concepts Acquisition, accounted for approximately 11.6% and 21.2%, respectively of its revenues. During the year ended March 31, 1998, the Company had another client which, before and after giving effect to the Optimum Acquisition, accounted for approximately 34.4% and 24.5%, respectively, of its revenues and such client during the year ended March 31, 1997 represented 48.9% of revenues. (9) Employee Benefit Plan --------------------- The Company has a savings plan available to substantially all salaried employees which is 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, 1999, 1998 and 1997, the Company has charged approximately $246,000, $66,000 and $32,000 to expense as a matching employer contribution. -40- INMARK ENTERPRISES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 and 1998 (10) Commitments ----------- Employment Agreements --------------------- The Company has entered into four year employment agreements with three of its officers which at March 31, 1999 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 Optimum Acquisition, Optimum has entered into four year employment contracts with seven of its management personnel which at March 31, 1999 provide for annual base salaries in the aggregate amount of $1,042,000 and a covenant not to compete. In connection with the U.S. Concepts Acquisition, U.S. Concepts has entered into four year employment contracts with two of its management personnel which at March 31, 1999 provide for annual base salaries in the aggregate amount of $375,000 and a covenant not to compete. -41- Item 9. Changes in and Disagreements with Accountants on Accounting and - ------ --------------------------------------------------------------- Financial Disclosure. -------------------- Not Applicable. PART III Item 10. Directors and Executive Officers of the Company. - ------- ----------------------------------------------- Pursuant to the Company's by-laws, Directors are elected to a one-year term of office by the stockholders of the Company at its annual meeting. Information regarding the Directors and Executive Officers of the Company is listed in the following table: Positions with the Company and Principal Occupation or Employment during the past Age Five Years Director Since Paul A. Amershadian 51 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 48 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 66 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 59 Director of the Company since May 1, 1997; 1997 Senior Vice President of Janney Montgomery Scott Inc., an investment banking firm, since 1978; Presently serves as Chairman of Board of Directors of Supreme Industries, Inc. and as a director of Nu Horizons Electronics Corp.; Transmedia Network, Inc.; TGC Industries, Inc.; and Hirsch International Corp. -42- Joseph S. Hellman 68 Director of the Company since May 1, 1997; 1997 Partner in the law firm of Kronish Lieb Weiner & Hellman LLP during the past five years. Thomas E. Lachenman 48 President of Optimum Group, Inc., a wholly- 1998 owned subsidiary of the Company, from March 31, 1998 until May 31, 1999, and of such company's predecessor from 1963 through March 31, 1998; Director of the Company since March 31, 1998. Brian Murphy 42 President of U.S. Concepts, Inc., a wholly-owned 1998 subsidiary of the Company, since December 28, 1998, and of such company's predecessor from 1992 through December 29, 1998. Director of the Company since December 29, 1998.
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 1999 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 1999 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. -43- 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 1999 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is hereby incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. - ------- --------------------------------------------------------------- (a) The following documents are filed as part of this Report. 1. Financial Statements: Page Index to Financial Statements. 25 Consolidated Financial Statements of Inmark Enterprises, Inc. Independent Auditors' Report 26 Consolidated Balance Sheets as of March 31, 1999 and 1998 27 Consolidated Statements of Operations for the years ended March 31, 1999, 1998 and 1997 28 Consolidated Statement of Stockholders' Equity for the three years ended March 31, 1999 29 Consolidated Statements of Cash Flows for the years ended March 31, 1999, 1998 and 1997 30 Notes to Consolidated Financial Statements 31
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). -44- 2.3 Asset Purchase Agreement, dated as of December 29, 1998, by and among U.S. Concepts, Inc., a New York corporation, Brian Murphy, U.S. Concepts, Inc., a Delaware corporation, and Inmark Enterprises, Inc. 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 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). -45- 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). 10.16 First Amendment to Loan Agreement, Security Agreement and Pledge Agreement, dated as of December 29, 1998, by and among PNC Bank National Association, Inmark Enterprises, Inc., U.S. Concepts, Inc., Inmark Services, Inc. and Optimum Group, Inc. 10.17 Second Amendment to Loan Agreement, Security Agreement and Pledge Agreement, dated as of January 14, 1999, by and among PNC Bank National Association, Inmark Enterprises, Inc., -46- U.S. Concepts, Inc., Inmark Services, Inc. and Optimum Group, Inc. 10.18 Third Amendment to Loan Agreement, Security Agreement and Pledge Agreement, dated as of June 30, 1999, by and among PNC Bank National Association, Inmark Enterprises, Inc., U.S. Concepts, Inc., Inmark Services, Inc. and Optimum Group, Inc. 21 Subsidiaries of the Registrant 23 Consent of Independent Auditors 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. -47- 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 30, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated: Signature and Title Signature and Title By:/s/ John P. Benfield By:/s/ Donald A. Bernard -------------------- --------------------- John P. Benfield Donald A. Bernard President and Executive Vice President and Chief Executive Officer and Director Chief Financial Officer and (Principal Executive Officer) Director (Principal Financial and Accounting Officer) Dated: June 30, 1999 Dated: June 30, 1999 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 30, 1999 Dated: June 30, 1999 By:/s/ Joseph S. Hellman By:/s/ Brian Murphy --------------------- ---------------- Joseph S. Hellman Brian Murphy Director Director Dated: June 30, 1999 Dated: June 30, 1999 -48- 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). 2.3 Asset Purchase Agreement dated as of December 29, 1998, by and among U.S. Concepts, Inc., a New York corporation, Brian Murphy, U.S. Concepts, Inc., a Delaware corporation, and Inmark Enterprises, Inc. 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. -49- 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 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 March 31, 1998, File No. 000-20394, initially filed with the Securities and Exchange Commission on April 13, 1998). -50- 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). 10.16 First Amendment to Loan Agreement, Security Agreement and Pledge Agreement, dated as of December 29, 1998, by and among PNC Bank National Association, Inmark Enterprises, Inc., U.S. Concepts, Inc., Inmark Services, Inc. and Optimum Group, Inc. 10.17 Second Amendment to Loan Agreement, Security Agreement and Pledge Agreement, dated as of January 14, 1999, by and among PNC Bank National Association, Inmark Enterprises, Inc., U.S. Concepts, Inc., Inmark Services, Inc. and Optimum Group, Inc. 10.18 Third Amendment to Loan Agreement, Security Agreement and Pledge Agreement, dated as of June 30, 1999, by and among PNC Bank National Association, Inmark Enterprises, Inc., U.S. Concepts, Inc., Inmark Services, Inc. and Optimum Group, Inc. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 27 Financial Data Schedule EX-2.3 2 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT -------------------------------------------------------------- Among U.S. CONCEPTS, INC., a New York corporation, BRIAN MURPHY, an individual, U.S. CONCEPTS, INC., a Delaware corporation, and INMARK ENTERPRISES, INC., a Delaware corporation Dated as of December 29, 1998 ================================================================================ Page TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS ......................................2 1.1 Certain Defined Terms.......................................2 ARTICLE 2 PURCHASE AND SALE OF ASSETS.......................16 2.1 Purchase and Sale of Assets................................16 (a) Cash..............................................16 (b) Accounts Receivable...............................16 (c) Assigned Contracts................................16 (d) Intellectual Property.............................17 (e) Name and Goodwill.................................17 (f) Records...........................................17 (g) Proceeds of Insurance Policies....................17 (h) Tangible Personal Property and Fixtures...........17 (i) Safe Deposit Boxes and Off-Site Storage Facilities........................................18 (j) Real Property.....................................18 (k) Inventories and Supplies..........................18 2.2 Excluded Assets............................................18 (a) CFM Partners Receivable...........................18 (b) Corporate Documents...............................18 (c) This Agreement........................................18 (d) Certain Assets .......................................19 2.3 Assumption of Liabilities..................................19 2.4 Purchase Price.............................................20 2.5 Allocation of Purchase Price...............................23 2.6 Failure to Obtain Consents and Approvals...................24 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER AND THE SHAREHOLDER.....................25 3.1 Organization and Qualification of Seller...................25 3.2 Authority; Due Execution; Binding Obligation...............26 3.3 Capital Stock of Seller....................................26 3.4 Subsidiaries and Affiliates................................27 3.5 Corporate Books and Records................................27 3.6 No Conflict................................................27 3.7 Governmental Consents and Approvals........................28 3.8 Financial Information, Books and Records and Operating Data.............................................28 3.9 Title......................................................30 3.10 Solvency and Payment of Liabilities........................30 3.11 Inventories................................................30 3.12 Acquired Assets............................................30 3.13 Unrecorded Contract Billings and Related Costs.............31 3.14 Conduct in the Ordinary Course; Absence of Certain Changes, Events and Conditions.............................32 ii Page 3.15 Litigation.................................................35 3.16 Certain Interests..........................................36 3.17 Compliance with Laws.......................................37 3.18 Permits and Licenses; Related Matters......................37 3.19 Material Contracts.........................................38 3.20 Intellectual Property......................................39 3.21 Real Property..............................................41 3.22 Tangible Personal Property.................................43 3.23 Purchased Assets...........................................44 3.24 Customers..................................................45 3.25 Suppliers..................................................46 3.26 Employee Benefit Matters...................................46 (a) Plans and Material Documents...........................46 (b) Americans With Disability Act..........................49 3.27 Labor Matters..............................................49 3.28 Employees..................................................50 3.29 Taxes......................................................51 3.30 Insurance..................................................52 3.31 Brokers....................................................53 3.32 Full Disclosure............................................53 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PURCHASER AND INMARK...........................54 4.1 Organization of Purchaser and Inmark.......................54 4.2 Authority; Due Execution; Binding Obligation. .............54 4.3 No Conflict................................................55 4.4 Capital Stock of Inmark....................................56 4.5 SEC Reports................................................57 4.6 Governmental Consents and Approvals........................58 4.7 Litigation.................................................58 4.8 Brokers....................................................58 4.9 Full Disclosure............................................58 4.10 Financing..................................................59 4.11 Conduct in the Ordinary Course; Absence of Certain Changes, Events and Conditions.....................59 4.12 Compliance with Laws.......................................59 4.13 Taxes......................................................59 ARTICLE 5 DELIVERIES........................................60 5.1 Seller's and Shareholder's Deliveries..........................60 (a) Bill of Sale......................................60 (b) Assignments.......................................60 (c) Assignment of Trademark...........................61 (d) Organizational Documents..........................61 (e) Corporate and Stockholder Authorization...........61 (f) Good Standing; Qualification to Do Business.......62 (g) Consents and Approvals............................62 iii Page (h) Encumbrance Release...............................62 (i) Legal Opinion.....................................62 (j) Change of Name....................................62 (k) Employment Agreements.............................62 (l) Investment Representation Letter..................63 (m) Stock Option Agreements ..........................63 (n) S&S Contract......................................63 (o) MCI Liability.....................................63 (p) Business Documents................................63 (q) Evidence of Insurance.............................63 (r) Miscellaneous.....................................64 5.2 Purchaser's Deliveries.....................................64 (a) Cash Payment......................................64 (b) Inmark Common Stock...............................64 (c) Assignment and Assumption Agreement...............64 (d) Organizational Documents..........................64 (e) Corporate Authorization...........................65 (f) Good Standing Certificate.........................65 (g) Consents and Approvals............................65 (h) Legal Opinion.....................................65 (i) Employment Agreements.............................65 (j) Miscellaneous.....................................66 5.3 Inmark's Deliveries........................................66 (a) Organizational Documents..........................66 (b) Corporate Authorization...........................66 (c) Good Standing Certificate.........................67 (d) Consents and Approvals............................67 (e) Legal Opinion.....................................64 (f) Stock Option Agreements ..........................67 (g) Miscellaneous.....................................67 ARTICLE 6 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION...........................................68 6.1 Survival of Representations and Warranties.....................68 6.2 Indemnification................................................68 6.3 Procedure for Certain Indemnification..........................69 6.4 Limitation on Liability........................................70 6.5 Right to Withhold Additional Purchase Price....................71 6.6 Certain Limitations ...........................................71 6.7 Exclusive Remedy...............................................71 ARTICLE 7 COVENANTS SUBSEQUENT TO CLOSING............................71 7.1 Further Assurances.........................................71 7.2 Change of Name.............................................72 7.3 Records....................................................72 7.4 Tax Reporting..............................................73 7.5 Employee Benefit Plans.....................................73 iv Page (a) Continuation of Plans.............................73 (b) Continuation of Coverage..........................75 (c) Assumption of Employee Benefit Plans..............75 7.6 Incentive Stock Options....................................75 7.7 Non-Competition; Trade Secrets.............................76 7.8 Gains, Transfer and Sales Taxes............................79 7.9 Board Representation.......................................79 7.10 Working Capital............................................80 ARTICLE 8 INMARK COMMON STOCK........................................80 8.1 Representations and Warranties of Seller and the Shareholder................................................80 8.2 Registration Under the Securities Act of 1933..............81 (a) Registration Rights..................................81 (b) Inmark's Obligations in Registration.................83 (c) Information From Seller and the Shareholder..........85 (d) Indemnification by Purchaser and Inmark..............85 (e) Indemnification by Seller and the Shareholder......................................86 (f) Rule 144.............................................87 8.3 Inmark Shares Lock-Up Agreement............................87 ARTICLE 9 GENERAL PROVISIONS.........................................88 9.1 Notices....................................................88 9.2 Public Announcements.......................................90 9.3 Headings...................................................90 9.4 Severability...............................................90 9.5 Entire Agreement...........................................91 9.6 Assignment.................................................91 9.7 No Third Party Beneficiaries...............................91 9.8 Amendment or Termination...................................91 9.9 Remedies and Venue.........................................92 9.10 Governing Law..............................................93 9.11 Counterparts...............................................94 9.12 Expenses...................................................94 9.13 Schedules..................................................94 9.14 Director and Officer Indemnification.......................94 v EXHIBITS A - Form of Bill of Sale B - Form of Assignment and Assumption Agreement C - Form of Assignment of Trademark D - Form of Legal Opinion of Cohen & Silverman E-1 - Form of Employment Agreement for Brian Murphy E-2 - Form of Employment Agreement for Bradford Bryen F - Form of Legal Opinion of Kronish Lieb Weiner & Hellman LLP G - Form of Investment Representation Letter H - Form of Stock Option Agreement vi ASSET PURCHASE AGREEMENT, dated as of December 29, 1998, by and among U.S. CONCEPTS, INC., a New York corporation ("Seller"), BRIAN MURPHY, an individual (the "Shareholder"), U.S. CONCEPTS, INC., a Delaware corporation ("Purchaser"), and INMARK ENTERPRISES, INC., a Delaware corporation ("Inmark"). W I T N E S S E T H : WHEREAS, Seller owns and operates the sales promotion and marketing services business described in Section 1.1 hereof (the "Business); and WHEREAS, Seller desires to sell and transfer to Purchaser, and Purchaser desires to purchase and acquire from Seller, all of Seller's right, title and interest in and to substantially all of the tangible and intangible assets of Seller relating to the Business, or used or held for use in connection with the Business, all as set forth more fully below; and WHEREAS, the Shareholder is entering into this Agreement to induce Purchaser to acquire the Business; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements and covenants hereinafter set forth, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Action" means any claim, action, suit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority. "Affiliate" means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person. "Agreement" or "this Agreement" means this Asset Purchase Agreement, dated as of December 29, 1998, among Seller, the Shareholder, Purchaser and Inmark (including the Exhibits and Schedules hereto) and all amendments hereto made in accordance with the provisions of Section 9.8. "Assigned Contracts" has the meaning set forth in Section 2.1(c). "Assumed Liabilities" has the meaning specified in Section 2.3. "Audited Financial Statements" means historical balance sheets and related statements of income, shareholders' equity and cash flows for the Business certified by KPMG Peat Marwick LLP in accordance with U.S. GAAP for the nine-month period ended September 30, 1998 and the year ended December 31, 1998. 2 "Bryen" means Bradford Bryen, an individual. "Business" means the business of providing sales promotion and marketing services and all other business which at any time prior to the date hereof has been conducted by Seller. "Business Day" means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by law to be closed in the City of New York. "CERCLA" means the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended through the date hereof. "Closing" means the consummation of the transactions contemplated by this Agreement, which is occurring simultaneously with the execution and delivery of this Agreement by Seller, the Shareholder, Purchaser and Inmark at the offices of Kronish Lieb Weiner & Hellman LLP, 1114 Avenue of the Americas, New York, New York 10036-7798, to be effective as of 12:01 A.M. local time on the Closing Date. "Closing Date" means the date of this Agreement. "Code" means the Internal Revenue Code of 1986, as amended through the date hereof. "Confidentiality Agreement" means that certain Joint Confidentiality Agreement, dated as of October 20, 1998, by and between Seller and Inmark. "control" (including the terms "controlled by" and "under common control with"), with respect to the relationship between or among two or more Persons, means the possession, directly or indirectly or as trustee or executor, of the power to 3 direct or cause the direction of the affairs or management of a Person, whether through the ownership of voting securities, as trustee or executor, by contract or otherwise, including, without limitation, the ownership, directly or indirectly, of securities having the power to elect a majority of the board of directors or similar body governing the affairs of such Person. "Damages" has the meaning specified in Section 6.2. "Earnout Commencement Date" means the Closing Date if the Closing Date is the first of a month or the first day of the month immediately following the Closing Date if the Closing Date is not the first of a month. "Encumbrance" means any security interest, pledge, mortgage, lien (including, without limitation, environmental and tax liens), charge, encumbrance, adverse claim, preferential arrangement or restriction of any kind, including, without limitation, any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership. "Environment" means surface waters, groundwaters, soil, subsurface strata and ambient air. "Environmental Law" means any Law, now or hereinafter in effect and as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to the Environment, health, safety or Hazardous Materials, including without limitation, CERCLA; the Resource Conservation and Recovery Act, 42 U.S.C. ss.ss. 6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. ss.ss. 6901 et seq.; the Clean Water Act, 33 U.S.C. ss.ss. 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. ss.ss. 2601 et seq.; the Clean Air Act, 42 U.S.C. ss.ss. 7401 et seq; the Safe Drinking Water Act, 42 U.S.C. ss.ss. 300f et seq.; the Atomic Energy 4 Act, 42 U.S.C. ss.ss. 2011 et seq.; the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. ss.ss. 136 et seq.; and the Federal Food, Drug and Cosmetic Act, 21 U.S.C. ss.ss. 301 et seq. "Environmental Permits" means all permits, approvals, identification numbers, licenses and other authorizations required under any applicable Environmental Law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means an organization which is a member of a controlled group of organizations within the meaning of Sections 414(b), (c), (m) or (o) of the Code which includes the Seller. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Excluded Assets" has the meaning specified in Section 2.2. "Financial Statements" has the meaning specified in Section 3.8(a). "Governmental Authority" means any United States federal, state or local or any foreign government, governmental, regulatory or administrative authority, agency or commission or any court, tribunal or judicial or arbitral body. "Governmental Order" means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority. 5 "Group Plans" has the meaning specified in Section 3.26. "Hazardous Materials" means (a) petroleum and petroleum products, radioactive materials, asbestos in any form that is or could become friable, transformers or other equipment that contains polychlorinated biphenyls, and radon gas, (b) any other chemicals, materials or substances defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous wastes", "restricted hazardous wastes", "toxic substances", "toxic pollutants", "contaminants" or "pollutants" or words of similar import, under any applicable Environmental Law, and (c) any other chemical, material or substance exposure to which is regulated by any Governmental Authority. "Indebtedness" means, with respect to any Person, (a) all indebtedness of such Person, whether or not contingent, for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services (other than accounts payable incurred in the ordinary course of business), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all obligations of such Person as lessee under leases that have been or should be, in accordance with U.S. GAAP, recorded as capital leases, (f) all obligations, contingent or otherwise, of such Person under acceptance, letter of credit or similar facilities, (g) all obligations of such Person to purchase, redeem, retire, defease or otherwise acquire for value any capital stock of such Person or any warrants, rights or options to acquire such capital stock, 6 valued, in the case of redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (h) all Indebtedness of others referred to in clauses (a) through (g) above guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (i) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, (ii) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether such property is received or such services are rendered) or (iv) otherwise to assure a creditor against loss, and (i) all Indebtedness referred to in clauses (a) through (h) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Encumbrance on property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness. "Inmark" has the meaning specified in the preamble to this Agreement. "Inmark Common Stock" means the common stock of Inmark, par value $.001 per share. "Inmark Shares" means the shares of Inmark Common Stock issued and delivered at Closing to Seller. "Intellectual Property" means (a) inventions, whether or not patentable, whether or not reduced to practice, and 7 whether or not yet made the subject of a pending patent application or applications, (b) ideas and conceptions of potentially patentable subject matter, including, without limitation, any patent disclosures, whether or not reduced to practice and whether or not yet made the subject of a pending patent application or applications, (c) national (including the United States) and multinational statutory invention registrations, patents, patent registrations and patent applications (including all reissues, divisions, continuations, continuations-in-part, extensions and reexaminations) and all rights therein provided by international treaties or conventions and all improvements to the inventions disclosed in each such registration, patent or application, (d) trademarks, service marks, trade dress, logos, trade names and corporate names, whether or not registered, including all common law rights, and registrations and applications for registration thereof, including, but not limited to, all marks registered in the United States Patent and Trademark Office, the trademark offices of the states and territories of the United States of America, and the trademark offices of other nations throughout the world, and all rights therein provided by international treaties or conventions, (e) copyrights (registered or otherwise) and registrations and applications for registration thereof, and all rights therein provided by international treaties or conventions, (f) computer software including, without limitation, source code, operating systems and specifications, data, data bases, files, documentation and other materials related thereto, data and documentation, (g) trade secrets and confidential, technical and business information (including ideas, formulas, compositions, inventions, and conceptions of inventions whether patentable or unpatentable and whether or not reduced to practice), (h) whether or not confidential, technology (including know-how and show- how), manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data, copyrightable works, 8 financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information, (i) copies and tangible embodiments of all the foregoing, in whatever form or medium, (j) all rights to obtain and rights to apply for patents, and to register trademarks and copyrights, and (k) all rights to sue or recover and retain damages and costs and attorneys fees for present and past infringement of any of the foregoing. "Interim Financial Statements" has the meaning specified in Section 3.8(a). "Inventories" means all inventory, merchandise, finished goods, and raw materials, packaging, supplies and other personal property related to the Business maintained, held or stored by or for Seller as of the Closing Date and any prepaid deposits for any of the same. "Investment Representation Letter" means that certain investment representation letter in the form attached as Exhibit G which Bryen is executing and delivering to Inmark simultaneously with the execution and delivery of this Agreement. "IRS" means the Internal Revenue Service of the United States. "Law" means any federal, state or local statute, law, ordinance, regulation, rule, code, order, other requirement or rule of law. "Liabilities" means any and all Indebtedness, debts, liabilities, obligations, claims, expenses, Taxes, contracts, accounts payable or commitments of any kind, character or description, whether accrued or fixed, absolute or contingent, matured or unmatured or determined or determinable, including, 9 without limitation, those arising under any Law (including, without limitation, any Environmental Law), Action or Governmental Order and those arising under any contract, agreement, arrangement, commitment or undertaking. "Licensed Intellectual Property" means all Intellectual Property licensed or sublicensed to Seller from a third party and used in connection with the Business. "Material Adverse Effect" means any circumstance, change in, or effect on the Business or the Purchased Assets that, individually or in the aggregate with any other circumstances, changes or effects on the Business or the Purchased Assets (a) is, or is reasonably likely to be, materially adverse to Seller, the Business or the Purchased Assets or the prospects, results of operations or the condition (financial or otherwise) of Seller, the Business or the Purchased Assets or (b) is reasonably likely to adversely affect the ability of Purchaser to operate or conduct the Business in the manner in which it is currently operated or conducted by Seller; provided, however, that the effects of general economic conditions or the loss of customers or decline of customers' orders shall not be deemed a Material Adverse Effect except to the extent that the representations and warranties contained in Section 3.24 are breached. "Material Contracts" has the meaning specified in Section 3.19(a). "MCI" means MCI Worldcom, Inc. "MCI Liability" means any and all amounts payable or contingently payable by Seller to MCI and/or any entitled awardee in connection with MCI's 1997 promotional program. 10 "Owned Intellectual Property" means all Intellectual Property in and to which Seller holds, or has a right to hold, right, title and interest and used, or held for use, in connection with the Business. "Permits" has the meaning specified in Section 3.18(a). "Permitted Encumbrances" means such of the following as to which no enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced: (a) liens for taxes, assessments and governmental charges or levies not yet due and payable which are not in excess of the amount accrued therefor on the balance sheet included in the Interim Financial Statements; (b) Encumbrances imposed by law, such as materialmen's, mechanics', carriers', workmen's and repairmen's liens and other similar liens arising in the ordinary course of business securing obligations that (i) are not overdue for a period of more than 30 days and (ii) are not in excess of $5,000 in the case of a single property or $50,000 in the aggregate at any time; (c) pledges or deposits to secure obligations under workers' compensation laws or similar legislation or to secure public or statutory obligations; and (d) minor survey exceptions, reciprocal easement agreements and other customary encumbrances on title to real property that (i) were not incurred in connection with any Indebtedness, (ii) do not render title to the property encumbered thereby unmarketable and (iii) do not, individually or in the aggregate, materially adversely affect the value or use of such property for its current and anticipated purposes. "Person" means any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity. 11 "Pre-Tax Earnings" means the net income of Seller and, after the Closing, Purchaser, calculated on the same basis as net income is reflected in Seller's Audited Financial Statements referred to in Section 3.8 but calculated before deduction of any amounts payable on account of federal, state or local Taxes based on or measured by income. In determining Pre-Tax Earnings, there shall not be deducted as an expense (a) any amounts payable under this Agreement (including, but not limited to, the Purchase Price and any other amounts payable pursuant to Section 2.4) and any legal, accounting or other fees or expenses and any deferred financing costs incurred in connection with the negotiation and consummation of the transactions contemplated by this Agreement or the Related Documents (but excluding any such expenses incurred in the normal course of business following the Closing), (b) any charges for corporate or administrative overhead or management, consulting or other services of Inmark or any Affiliate or any of their employees or consultants (other than for management, consulting or other services provided specifically to Purchaser, which may be deducted as an expense), or (c) any interest charges in excess of the actual interest cost to Inmark or any Affiliate of any money actually loaned to Purchaser or advanced to or on behalf of Purchaser as working capital. Purchaser shall compute the amount of Pre-Tax Earnings as promptly as practicable after the end of the applicable period. Purchaser shall deliver to Seller and the Shareholder a notice (the "Payment Notice") showing (in reasonable detail) the computation of Pre-Tax Earnings and including a copy of the financial information used in making such computation. Purchaser's computation of Pre-Tax Earnings for each period shall be binding on the parties to this Agreement unless, within 30 days following receipt of the Payment Notice, Seller or the Shareholder gives to Purchaser notice (a "Dispute Notice") that it disagrees with the Payment Notice. Seller and the Shareholder shall be given full access (including the right to make copies) to Purchaser's books and records during business hours to review 12 or audit Purchaser's computation. If the parties shall fail to resolve their dispute within 15 days thereafter, Purchaser and Seller or the Shareholder shall request a firm of independent certified public accountants mutually agreeable to the parties to compute the amount of Pre-Tax Earnings for such period as promptly as possible (and no later than 30 days thereafter), which computation shall be binding on the parties to this Agreement. If the parties cannot agree on such an accounting firm, then a "Big Five" national accounting firm (other than any firm that is rendering or has rendered services to Inmark, Purchaser, Seller, the Shareholder or any of their Affiliates during the five prior years) shall be selected by lottery until one such firm is willing to compute the Pre-Tax Earnings for such period for purposes of this Agreement. The expense of any such accounting firm shall be borne equally by Purchaser, on the one hand, and Seller and or/the Shareholder, on the other hand. "Purchase Price" has the meaning specified in Section 2.4. "Purchased Assets" has the meaning specified in Section 2.1. "Purchaser" has the meaning specified in the preamble to this Agreement. "Purchaser Indemnitee" has the meaning specified in Section 6.2(a). "Real Property" means the real property leased by Seller as tenant, and used in connection with the Business, together with, to the extent leased by Seller all buildings and other structures, facilities or improvements currently or hereafter located thereon and all fixtures of Seller attached or appurtenant thereto and used in connection with the Business. 13 "Regulations" means the Treasury Regulations (including proposed or Temporary Regulations) promulgated by the United States Department of Treasury with respect to the Code or other federal tax statutes. "Related Documents" means the agreements and other instruments and documents to be executed by Seller, the Shareholder, Purchaser and/or Inmark in connection with or pursuant to this Agreement. "S&S" means Schieffelin & Somerset Co. "S&S Contract" means that certain agreement, dated as of January 1, 1996, by and between S&S and Seller. "Securities Act" means the Securities Act of 1933, as amended. "Seller" has the meaning specified in the preamble to this Agreement. "Seller Indemnitee" has the meaning specified in Section 6.2(b). "Seller Plans" has the meaning specified in Section 3.26. "Shareholder" has the meaning specified in the preamble to this Agreement. "Subsidiary" means a corporation, limited liability company, partnership, joint venture, association or other entity in which the Company owns, of record or beneficially, any direct or indirect equity or other interest or any right (contingent or otherwise) to acquire the same. 14 "Tangible Personal Property" means machinery, equipment, tools, supplies, furniture, fixtures, personalty, vehicles, rolling stock and other tangible personal property owned or leased by Seller for use in the Business. "Tax" or "Taxes" means any and all taxes, fees, levies, duties, tariffs, imposts, and other charges of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any government or taxing authority, including, without limitation: taxes or other charges on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, social security, workers' compensation, unemployment compensation, or net worth; taxes or other charges in the nature of excise, withholding, ad valorem, stamp, transfer, value added, or gains taxes; license, registration and documentation fees; and customs duties, tariffs, and similar charges. "U.S. GAAP" means United States generally accepted accounting principles and practices as in effect during the relevant period and applied consistently throughout the periods involved. 15 ARTICLE 2 PURCHASE AND SALE OF ASSETS 2.1 Purchase and Sale of Assets. Simultaneously with the execution and delivery of this Agreement, Seller is assigning, transferring, selling, conveying and delivering to Purchaser, and Purchaser is purchasing and acquiring from Seller, free and clear of all Encumbrances (except for Permitted Encumbrances), all of Seller's right, title and interest in and to the properties, assets and rights comprising or used in the Business, other than the Excluded Assets (collectively, the "Purchased Assets"), including, without limitation: (a) Cash. All investment securities, cash on hand or in transit and in bank accounts, and cash equivalents of Seller. (b) Accounts Receivable. All billed or unbilled costs and accounts, notes, fees, commissions and all other billed or unbilled receivables payable or to be payable to Seller, whether prior, on or after the Closing Date. (c) Assigned Contracts. All leases for real and personal property, employee contracts, customer contracts, franchise agreements, technology, license and know-how agreements, and to the extent permitted by applicable law, all rights under any written or oral contract, agreement, lease, plan, instrument, registration, license, certificate of occupancy, other permit or approval of any nature, or other document, commitment, arrangement, practice or authorization relating to the Business including, without limitation, those listed on Schedule 2.1(c) hereto (all of which contracts, orders, 16 agreements, permits and leases are hereinafter collectively referred to as the "Assigned Contracts"). (d) Intellectual Property. All Owned Intellectual Property and all Licensed Intellectual Property, including, without limitation, that listed on Schedule 2.1(d) hereto. (e) Name and Goodwill. The name "U.S. Concepts, Inc." and all goodwill associated therewith or with the Business. (f) Records. All books, records and files or other documentation relating to the Purchased Assets or the Business (other than as set forth in Section 2.2(b)), including without limitation, all (i) sales promotion materials, (ii) client lists and telephone numbers with respect to past, present or prospective clients and customers of the Business and related sales and credit records, (iii) inventory, maintenance and asset history records, and (iv) employee lists and telephone numbers used in the Business. (g) Proceeds of Insurance Policies. All proceeds of insurance policies relating to the Purchased Assets and the Business. (h) Tangible Personal Property and Fixtures. All Tangible Personal Property (including Seller's telephone system), leasehold improvements and other fixed assets used in the Business, including, without limitation, the assets listed and described on Schedule 2.1(h) hereto, and all of Seller's rights to its telephone number. (i) Safe Deposit Boxes and Off-Site Storage Facilities. All safe deposit boxes and off-site storage 17 facilities used in the Business, including, without limitation, those listed on Schedule 2.1(i) hereto. (j) Real Property. All Real Property including, without limitation, that listed on Schedule 2.1(j) hereto. (k) Inventories and Supplies. All Inventories and office and other supplies used in the Business, wherever located. 2.2 Excluded Assets. The Purchased Assets exclude, and Seller is retaining all of its right, title and interest in and to all of, and is not transferring to Purchaser, only the following (the "Excluded Assets"): (a) CFM Partners Receivable. Amounts receivable from CFM Partners to the extent not in excess of $323,240. (b) Corporate Documents. Any interest in and to the capital stock of Seller and all minute books, stock books, income tax records, and similar corporate records of Seller. (c) This Agreement. All rights of Seller under this Agreement or any Related Documents to which Seller is a party. (d) Certain Assets. The assets listed on Schedule 2.2. 2.3 Assumption of Liabilities. Upon and subject to the terms, conditions, representations and warranties contained herein, Purchaser is assuming and agreeing to pay, perform and discharge when due only (a) all trade accounts payable and accrued expenses of Seller that arose in the ordinary course of business of Seller and are set forth in the Interim Financial 18 Statements, (b) all trade accounts payable and accrued expenses of Seller that have arisen or arise after the date of the Interim Financial Statements in the ordinary course of business of Seller, (c) all obligations of Seller under the agreements, contracts, leases, licenses, and other arrangements referred to in the definition of Assigned Contracts either (i) to furnish goods and services to another Person on and after the Closing Date or (ii) to pay for goods and services that another Person will furnish to it after the Closing Date, (d) all Indebtedness of Seller to The Chase Manhattan Bank, N.A. reflected in the Interim Financial Statements or arising in the ordinary course of business of Seller after the date of the Interim Financial Statements, (e) all obligations to and on behalf of former employees of Seller who become employees of Purchaser that arise in the ordinary course of business on and after the Closing Date, (f) Indebtedness of Seller to the Shareholder as of the Closing in a principal amount not in excess of $189,609, (g) the obligations contemplated by Section 7.5(c), and (h) those Liabilities of Seller relating to the Business which are reflected in the Interim Financial Statements (the "Assumed Liabilities") and no other Liabilities of Seller. Without limiting the generality of the foregoing, Purchaser is not assuming the MCI Liability or any liability of Seller or the Shareholder, now existing or hereafter arising, for Taxes except to the extent set forth on Schedule 2.3, and the term "Assumed Liabilities" shall not include any of the same. 2.4 Purchase Price. (a) The purchase price for the Purchased Assets (the "Purchase Price") is (i) $1,410,000 in cash, (ii) 30,000 newly and validly issued, fully paid and nonassessable Inmark Shares, and (iii) Purchaser's assumption of the Assumed Liabilities. The Purchase Price shall be paid to Seller. Seller hereby acknowledges the receipt and delivery of the Purchase Price. 19 (b) (i) In addition to the Purchase Price which Purchaser is paying to Seller at the Closing, Purchaser shall pay to Seller the following amounts (the "Additional Purchase Price"): (A) with respect to the twenty-four month period commencing on the Earnout Commencement Date and ending on the day prior to the second anniversary of the Earnout Commencement Date, if Pre-Tax Earnings equal or exceed $1,892,000, Purchaser shall pay to Seller, on a prorated basis, $33,333 for each $23,650 of Pre-Tax Earnings in excess of $1,892,000; provided, however, that the payment pursuant to this clause (A) shall not exceed $500,000 ; (B) with respect to the twelve-month period commencing on the second anniversary of the Earnout Commencement Date and ending on the day prior to the third anniversary of the Earnout Commencement Date, if Pre-Tax Earnings equal or exceed $1,164,000, Purchaser shall pay to Seller, on a prorated basis, $33,333 for each $14,550 of Pre-Tax Earnings in excess of $1,164,000; provided, however, that the payment pursuant to this clause (B) shall not exceed $500,000; (C) with respect to the twelve-month period commencing on the third anniversary of the Earnout Commencement Date and ending on the day prior to the fourth anniversary of the Earnout Commencement Date, if Pre-Tax Earnings equal or exceed $1,338,400, Purchaser shall pay to Seller, on a prorated basis, $66,667 for each $16,730 of Pre-Tax Earnings in excess of $1,338,400; provided, however, that the payment pursuant to this clause (C) shall not exceed $1,000,000 (as such amount may be adjusted pursuant to Section 2.4(b)(ii)); (D) with respect to the four-year period commencing on the Earnout Commencement Date and ending on the day 20 prior to the fourth anniversary of the Earnout Commencement Date, Purchaser shall pay to Seller, on a prorated basis, $33,333 for each $57,670 of Pre-Tax Earnings in excess of $5,767,000; provided, however, that the payment pursuant to this clause (D) shall not exceed $500,000 (as such amount may be adjusted pursuant to Section 2.4(b)(ii)). (ii) Notwithstanding the provisions of Section 2.4(b)(i), the total maximum amount payable by Seller to Purchaser pursuant to clauses (C) and (D) of Section 2.4(b)(i) shall be reduced by an amount equal to 50,000 multiplied by 50 percent of the exercise price of the options to purchase an aggregate of 50,000 shares of Inmark Common Stock granted to the Shareholder and Bryen at the Closing. (iii) In the event that Seller has not earned the maximum payment of Additional Purchase Price pursuant to clauses (A), (B) or (C) (as such amount may be reduced pursuant to Section 2.4(b)(ii)), Seller shall be entitled to earn the difference between $2,000,000 (reduced pursuant to Section 2.4(b)(ii)) and the amount paid to Seller pursuant to clauses (A), (B) and (C) if Pre-Tax Earnings for the four-year period commencing on the Earnout Commencement Date and ending on the day prior to the fourth anniversary of the Earnout Commencement Date equal or exceed $5,493,000. (iv) Purchaser shall pay to Seller each installment of Additional Purchase Price payable pursuant to Section 2.4(b)(i) no later than 90 days after the conclusion of the period to which such installment relates and payable pursuant to Section 2.4(b)(iii) no later than 90 days after the fourth anniversary of the Earnout Commencement Date. If any amount of the Additional Purchase Price is not paid when due under this Section 2.4, Purchaser shall be liable for (A) interest on the amount unpaid from its due date until paid at the rate of eight 21 percent per annum, and (B) all reasonable expenses of collection, including, but not limited to reasonable attorneys' fees and disbursements and court costs. (v) Seller may elect to receive up to 50% of any installment of Additional Purchase Price payable pursuant to Section 2.4(b) in newly and validly issued, fully paid and nonassessable shares of Inmark Common Stock, the number of which shall be determined by dividing the value of the payment to be received in Inmark Common Shares by 85% of the average, for the five business days immediately preceding the date of payment by Purchaser, of the quoted market closing price of Inmark Common Stock on the NASDAQ System or such other principal securities exchange on which the Inmark Common Stock is listed or admitted to trading, or if the Common Shares are not quoted on the NASDAQ System or listed or admitted to trading on any such securities exchange, of the closing bid price as furnished by the National Quotation Bureau or a similar organization if NASDAQ is no longer reporting such information, or if such information is no longer being provided with respect to the Inmark Common Stock, then as determined in good faith by written resolution of the Board of Directors of Inmark based on the best information available to it. Seller shall exercise its election by delivering notice to Purchaser within five days after final determination of the amount of such installment of Additional Purchase Price. (c) Within 45 days after the Closing Date, Seller and the Shareholder shall deliver to Purchaser and Inmark a balance sheet of Seller as at December 31, 1998 and the related statements of income and changes in financial position from the date of the Interim Financial Statements to December 31, 1998, together with all related notes and schedules thereto, certified by KPMG Peat Marwick LLP in accordance with U.S. GAAP (collectively, the "Closing Date Financial Statements"). In the event that Seller's and Purchaser's aggregate Pre-Tax Earnings 22 for calendar year 1998 as shown on the Closing Date Financial Statements and as adjusted for the MCI Liability, results in a loss for the period from September 30, 1998 through December 31, 1998 in excess of $25,000, Seller shall pay to Purchaser, within 10 Business Days after delivery of the Closing Date Financial Statements to Seller and the Shareholder, as a reduction of the Purchase Price, an amount equal to $7.50 for each $1.00 of loss in excess of $25,000; provided, however, that any amounts owed by Seller to Purchaser pursuant to this Section 2.4(c) may be satisfied, to the extent Purchaser is indebted to the Shareholder, by cancellation of Indebtedness of Purchaser to the Shareholder. 2.5 Allocation of Purchase Price. Purchaser and Seller agree (i) the Purchase Price shall be allocated among the Purchased Assets in the manner required by Treasury Regulation Section 1.1060-1T(d) on IRS Form 8594 (Asset Acquisition Statement Under Section 1060) based on the respective fair market values as of the Closing Date of the assets set forth therein to be included as Class I, II, III and IV assets; (ii) the fair market value of the Purchased Assets set forth on IRS Form 8594, unless otherwise subjected to an independent appraisal, (x) with respect to the Purchased Assets that are reflected on the books of Seller (the "Book Assets"), shall be the net book value of such assets as of the Closing Date as determined on application of U.S. GAAP for presentation on Seller's balance sheet, (y) with respect to the Purchased Assets that are not Book Assets (the "Non-Book Assets") shall, in the aggregate, be the excess of the Purchase Price of all the Purchased Assets less the portion of the Purchase Price allocated to the Book Assets, and (z) with respect to the individual Non-Book Assets, shall be based on a reasonable allocation of the portion of the Purchase Price that is allocated to Non-Book Assets; (iii) the allocation set forth on IRS Form 8594 shall be binding on Purchaser and Seller for all federal, state and local tax purposes and Purchaser and Seller 23 shall file consistent IRS Forms 8594 with their respective federal income tax returns; (iv) Purchaser shall prepare its IRS Form 8594 and provide Seller with a copy so as to enable Seller to prepare its IRS Form 8594 on a timely basis consistent with that of Purchaser; and (v) Seller will assist Purchaser and provide Purchaser with any information reasonably necessary for the completion of IRS Form 8594. 2.6 Failure to Obtain Consents and Approvals. In the ---------------------------------------- event that any consent required with respect to any contract or agreement to be assigned to Purchaser cannot be obtained prior to the Closing Date, Seller shall subcontract all of its obligations to perform under such contract to Purchaser. The cost of performing each such subcontract shall be borne by Purchaser and Seller shall deliver to Purchaser all revenues earned under each such contract. Upon the receipt of the necessary third party consent, Seller shall assign the relevant contract to Purchaser. No additional consideration shall be paid for such assignment. Nothing in this Agreement shall be deemed to constitute an assignment of or an attempt to assign any contract or other agreement to which Seller is a party if the attempted assignment thereof without the consent of the other party to such contract or agreement would constitute a breach thereof or affect in any way the rights of Seller (or Purchaser) thereunder. 24 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER AND THE SHAREHOLDER Seller and the Shareholder jointly and severally represent and warrant to Purchaser and Inmark as follows: 3.1 Organization and Qualification of Seller. Seller is a corporation duly organized, validly existing and in good standing under the Laws of the State of New York. Seller has all necessary power and authority to own, operate or lease the properties and assets now owned, operated or leased by it and to carry on the Business as it has been and is currently conducted. Seller is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the properties owned or leased by it or the operation of the Business makes such licensing or qualification necessary, except jurisdictions where such failure to qualify will either result in a penalty of less than $1,000, can be cured at a cost of less than $1,000 or will result in no liability to Purchaser. Each jurisdiction in which Seller is qualified to do business as a foreign corporation is listed on Schedule 3.1. True and correct copies of the Certificate of Incorporation and By-laws of Seller, each as in effect on the date hereof, have been delivered by Seller to Purchaser. 3.2 Authority; Due Execution; Binding Obligation. (a) Seller has all necessary power and authority to execute and deliver this Agreement and the Related Documents to which it is a party, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Related Documents by Seller, the performance by Seller of its obligations hereunder and thereunder and the consummation by Seller of the 25 transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of Seller. (b) The Shareholder has full legal capacity to execute and deliver this Agreement and the Related Documents to which he is a party, to carry out his obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. (c) This Agreement has been duly executed and delivered by Seller and the Shareholder. Assuming due authorization, execution and delivery by Purchaser and Inmark of this Agreement, this Agreement constitutes a legal, valid and binding obligation of Seller and the Shareholder enforceable against Seller and the Shareholder in accordance with its terms, except as such enforcement may be subject to (a) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (b) general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). 3.3 Capital Stock of Seller. All of the issued and outstanding shares of capital stock of Seller are owned of record and beneficially by the Shareholder as set forth on Schedule 3.3. No Person other than the Shareholder has any interest in the issued or unissued capital stock of Seller. None of the issued and outstanding shares of capital stock of Seller was issued in violation of any preemptive rights. 3.4 Subsidiaries and Affiliates. There are no corporations, limited liability companies, partnerships, joint ventures, associations or other entities in which Seller owns, of record or beneficially, any direct or indirect equity or other interest or any right (contingent or otherwise) to acquire the same. Neither Seller nor the Shareholder is a member or 26 participant in or Affiliate of any corporation, limited liability company, partnership, joint venture or similar arrangement which is involved in the conduct of the Business. 3.5 Corporate Books and Records. The minute books of Seller contain accurate records of all meetings and accurately reflect all proceedings of the stockholders, Boards of Directors and all committees of the Boards of Directors of Seller. Complete and accurate copies of all such minute books and of the stock certificate book of Seller have been provided by Seller to the Purchaser. 3.6 No Conflict. Assuming that all consents, approvals, authorizations and other actions described in Section 3.7 have been obtained and all filings and notifications listed on Schedule 3.7 have been made, except as may result from any facts or circumstances relating solely to Purchaser or Inmark, the execution, delivery and performance of this Agreement and the Related Documents by Seller and the Shareholder do not and will not (a) violate, conflict with or result in the breach of any provision of the certificate of incorporation or by-laws of Seller, (b) conflict with or violate (or cause an event which may reasonably be expected to have a Material Adverse Effect as a result thereof) any Law or Governmental Order applicable to Seller or the Shareholder or any of their respective assets, properties or businesses, including, without limitation, the Business or (c) except as set forth on Schedule 3.6 conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, or result in the creation of any Encumbrance on any of the Purchased Assets pursuant to, (i) any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other 27 instrument or arrangement to which Seller or the Shareholder is a party or by which any of the Purchased Assets is bound or affected or (ii) any law or statute or any judgment, decree, order, regulation or rule of any court or governmental or regulatory authority relating to Seller, the Shareholder or the Business. 3.7 Governmental Consents and Approvals. The execution, delivery and performance of this Agreement and the Related Documents by Seller and the Shareholder do not and will not require any consent, approval, authorization or other order of, action by, filing with or notification to any Governmental Authority, except as described on Schedule 3.7. 3.8 Financial Information, Books and Records and Operating Data. (a) Seller has delivered to Purchaser true and complete copies of (i) the unaudited balance sheet of the Business for each of the four fiscal years ended as of December 31, 1994, December 31, 1995, December 31, 1996 and December 31, 1997, and the related unaudited statements of income and cash flows of the Business, together with all related notes and schedules thereto (collectively referred to herein as the "Financial Statements"), and (ii) the audited balance sheet of the Business as of September 30, 1998, and the related audited statements of income and cash flows of the Business, together with all related notes and schedules thereto (collectively referred to herein as the "Interim Financial Statements"). The Financial Statements and the Interim Financial Statements (i) were prepared in accordance with the books of account and other financial records of the Business, (ii) present in all material respects the results of operation of the Business as of the date thereof for the periods covered thereby, (iii) have been prepared in accordance with U.S. GAAP applied on a basis consistent with the past practices of the Business and (iv) include all adjustments (consisting only of normal recurring accruals) that 28 are necessary for a fair presentation in all material respects of the financial condition of the Business and the results of the operations of the Business as of the dates thereof or for the periods covered thereby. (b) The books of account and other financial records of the Business: (i) reflect all items of income and expense and all assets and Liabilities required to be reflected therein in accordance with U.S. GAAP applied on a basis consistent with the past practices of the Business, and (ii) are in all material respects complete and correct, and do not contain or reflect any material inaccuracies or discrepancies. (c) There are no Liabilities of Seller, or existing conditions which could reasonably be expected to result in Liabilities of Seller, other than as (i) reflected or reserved against on the Interim Financial Statements or (ii) disclosed on Schedule 3.8, or (iii) incurred in the ordinary course of Seller's business since the date of the Interim Financial Statements. 3.9 Title. Except as otherwise identified on Schedule 3.9, Seller has, and pursuant to this Agreement will convey, sell, transfer, assign and deliver to Purchaser, good, valid, marketable, legal and beneficial title to all of the Purchased Assets, free and clear of all Encumbrances except for Permitted Encumbrances. There are no outstanding options, warrants, commitments, agreements or any other rights of any character, entitling any person or entity other than Purchaser to acquire any interest in all, or any part of, the Purchased Assets. All Seller's leasehold or other executory interests in and to the Purchased Assets are fully and freely assignable to Purchaser, except as set forth on Schedule 3.9. 29 3.10 Solvency and Payment of Liabilities. Seller is not on the date hereof, nor will it be on the Closing Date, either as a result of the transactions contemplated by this Agreement or otherwise, insolvent, as such term is defined in the Title 11 Bankruptcy of the United States Code or any state statute relating to insolvency; the sum of its debts is not greater than all of its property on the date hereof nor will it be on the Closing Date either as a result of the transactions contemplated hereby or otherwise; and it is on the date hereof, and will be after the Closing Date, able to pay its debts as they mature. 3.11 Inventories. (a) Subject to amounts reserved therefor on the balance sheet included in the Interim Financial Statements, the values at which all Inventories owned by Seller are carried on the balance sheet included in the Interim Financial Statements reflect the historical inventory valuation policy of the Business of stating such Inventories at the lower of cost (determined on the last-in, first-out method) or market value. Except as set forth on Schedule 3.11, Seller has good and marketable title to the Inventories free and clear of all Encumbrances. The Inventories do not consist of, in any material amount, items that are obsolete or damaged. (b) The Inventories are in good and merchantable condition in all material respects and are suitable and usable for the purposes for which they are intended. 3.12 Acquired Assets. Except as disclosed on Schedule 3.12, each asset of the Business (including, without limitation, the benefit of any licenses, leases or other agreements or arrangements) acquired since the date of the Interim Financial Statements has been acquired for consideration not less than the fair market value of such asset at the date of such acquisition. 30 3.13 Unrecorded Contract Billings and Related Costs. (a) As of the date of the Interim Financial Statements, there were no unbilled amounts owing to Seller pursuant to Assigned Contracts in progress, and, as of the date immediately preceding the date hereof, unbilled amounts owing to Seller pursuant to Assigned Contracts in progress totalled approximately $35,000. (b) As of the date of the Interim Financial Statements, there were no accounts payable and liabilities accrued with respect to the unbilled Assigned Contracts in progress, and, as of the date immediately preceding the date hereof, liabilities for costs and expenses to be incurred and recorded as either accounts payable or accrued liabilities related to unbilled contracts totalled approximately $30,000. 3.14 Conduct in the Ordinary Course; Absence of Certain Changes, Events and Conditions. Except as disclosed on the Financial Statements, the Interim Financial Statements or Schedule 3.14, the Business has been conducted in the ordinary course and consistent with past practice since the date of such Financial Statements and Interim Financial Statements. As amplification and not limitation of the foregoing, except as disclosed on the Financial Statements, the Interim Financial Statements or Schedule 3.14, since the date of the Interim Financial Statements Seller has not, except in the ordinary course of business, in connection with the Business: (i) permitted or allowed any of the Purchased Assets (whether tangible or intangible) to be subjected to any Encumbrance, which has not been released prior to the date hereof, other than Permitted Encumbrances; (ii) discharged or otherwise obtained the release of any Encumbrance or paid or otherwise discharged any Liability other than current liabilities reflected on 31 the balance sheet included in the Interim Financial Statements and current liabilities incurred in the ordinary course of the Business consistent with past practice since the date of the Interim Financial Statements; (iii) failed to pay any creditor any amount owed to such creditor when due; (iv) made any material changes in the customary methods of operations of the Business, including, without limitation, practices and policies relating to marketing, selling, pricing, purchasing, Inventories or performance of any obligations Seller may have to clients or customers; (v) merged with, entered into a consolidation with or acquired any interest in any Person or acquired any operating assets or business of any Person or any division or line of business thereof, or otherwise acquired any material assets other than in the ordinary course of the Business consistent with past practice; (vi) made, in connection with the Business, any capital expenditure or commitment for any capital expenditure in excess of $25,000 individually or $50,000 in the aggregate; (vii) issued, in connection with the Business, any sales orders or otherwise agreed to make any purchases involving exchanges in value in excess of $25,000 individually or $50,000 in the aggregate; (viii) sold, transferred, leased, subleased, licensed or otherwise disposed of any properties or 32 assets, real, personal or mixed (including, without limitation, leasehold interests and intangible assets); (ix) except for the transactions contemplated hereby, entered into any agreement, arrangement or transaction with any of its directors, officers, employees or shareholders (or with any relative, beneficiary, spouse or Affiliate of such Person) in connection with or relating to the Business; (x) (A) granted any increase, or announced any increase, in the wages, salaries, compensation, bonuses, incentives, pension or other benefits payable by Seller to any of its employees in connection with or relating to the Business, including, without limitation, any increase or change pursuant to any Plan or (B) established or increased or promised to increase any benefits under any Plan; (xi) amended, terminated, cancelled or compromised any material claims of Seller relating to the Business; (xii) made any change in any method of accounting or accounting practice or policy used by Seller relating to the Business, other than such changes required by U.S. GAAP; (xiii) failed to maintain the Purchased Assets in good operating condition and repair, ordinary wear and tear excepted; (xiv) allowed any Permit or Environmental Permit that was issued or relates to the Business to lapse or terminate or failed to renew any such Permit or 33 Environmental Permit or any insurance policy issued or relating to the Business that is scheduled to terminate or expire within 45 calendar days of the Closing Date except for expiring insurance policies that are replaced with similar policies; (xv) amended, modified or consented to the termination of any Material Contract or Seller's rights thereunder; (xvi) disclosed any secret or confidential Intellectual Property relating to the Business (except by way of issuance of a patent) or permitted to lapse or go abandoned any Intellectual Property relating to the Business (or any registration or grant thereof or any application relating thereto) to which, or under which, Seller has any right, title, interest or license; (xvii) suffered any casualty loss or damage with respect to any of the Purchased Assets which in the aggregate have a replacement cost of more than $100,000, whether or not such loss or damage shall have been covered by insurance; (xviii) suffered any Material Adverse Effect relating to the Business; or (xix) agreed, whether in writing or otherwise, to take any of the actions specified in this Section 3.14 or granted any options to purchase, rights of first refusal, rights of first offer or any other similar rights or commitments with respect to any of the actions specified in this Section 3.14, except as expressly contemplated by this Agreement. 34 3.15 Litigation. Except as set forth on Schedule 3.15 (which, with respect to each Action disclosed therein, sets forth the parties, nature of the proceeding, date and method commenced, amount of damages or other relief sought and, if applicable, paid or granted), there are no Actions by or against Seller, or affecting any of the Purchased Assets or the Business, pending or, to the best knowledge of Seller and the Shareholder, threatened. Except as set forth on Schedule 3.15, there are no Actions against the Shareholder relating to the Purchased Assets or the Business pending, or to the best knowledge of Seller and the Shareholder, threatened. To the best knowledge of Seller and the Shareholder there are no facts or circumstances that may give rise to any of the foregoing. None of the matters disclosed on Schedule 3.15 has had or is reasonably expected to have a Material Adverse Effect or could affect the legality, validity or enforceability of this Agreement or the Related Documents or the consummation of the transactions contemplated hereby or thereby. Except as set forth on Schedule 3.15, none of Seller, the Shareholder, the Business or any of the Purchased Assets is subject to any Governmental Order (nor, to the best knowledge of Seller and the Shareholder, are there any such Governmental Orders threatened to be imposed by any Governmental Authority) which has had or is reasonably expected to have a Material Adverse Effect. 3.16 Certain Interests. (a) Except as disclosed on Schedule 3.16(a), no Shareholder or officer or director of Seller, no relative or spouse (or relative of such spouse) who resides with, or is a dependent of, any such Shareholder or officer or director, and no Affiliate of any such person: (i) has any direct or indirect financial interest in any competitor, supplier or customer of the Business; provided, however, that the ownership of securities representing no more than one percent of the 35 outstanding voting power of any competitor, supplier or customer and which are listed on any national securities exchange or traded actively in the over-the-counter market, shall not be deemed to be a "financial interest" so long as the Person owning such securities has no other connection or relationship with such competitor, supplier or customer; (ii) owns, directly or indirectly, in whole or in part, or has any other interest in any tangible or intangible property which Seller uses or has used in the conduct of the Business or otherwise; or (iii) has outstanding any Indebtedness to Seller relating to the Business. (b) Except as disclosed on Schedule 3.16(b) and except for obligations to make current salary and expense reimbursement payments, Seller has no Liability or other obligation of any nature whatsoever relating to the Business to the Shareholder or to any officer, director or employee of Seller or to any relative or spouse (or relative of such spouse) who resides with, or is a dependent of, the Shareholder or any such officer, director or employee. 3.17 Compliance with Laws. Except as set forth on Schedule 3.17, Seller and the Shareholder have conducted and continue to conduct the Business in accordance with Seller's certificate of incorporation and by-laws and with all Laws and Governmental Orders applicable to Seller, the Shareholder, any of the Purchased Assets or the Business, and neither Seller nor any of the Shareholder is in violation of any such Law or Governmental Order. 36 3.18 Permits and Licenses; Related Matters. Schedule 3.18(a) sets forth a true, complete and correct list of all the health and safety and other permits, licenses, authorizations, certificates, exemptions and approvals of Governmental Authorities (collectively, "Permits"), including, without limitation, Environmental Permits, necessary for the current use, occupancy and operation of each Purchased Asset and the conduct of the Business. All such Permits are in full force and effect. To the best knowledge of Seller and the Shareholder, the Permits constitute all permits, licenses, franchises, orders, certificates and approvals required for the lawful operation of the Purchased Assets and the Business. To the best knowledge of Seller and the Shareholder, there is no existing practice, action or activity of Seller and no existing condition of the Purchased Assets or the Business which will give rise to any civil or criminal Liability under, or violate or prevent compliance with, any health or occupational safety or other applicable Law. Seller has not received any notice from any Governmental Authority revoking, cancelling, rescinding, materially modifying or refusing to renew any Permit or providing written notice of violations under any Law. To the best knowledge of Seller and the Shareholder, Seller is in all respects in compliance with the Permits and the requirements of the Permits. Schedule 3.18(b) identifies all Permits that are nontransferable or which will require the consent of any Governmental Authority in the event of the consummation of the transactions contemplated by this Agreement. 3.19 Material Contracts. (a) Except for contracts listed on Schedule 3.19(a), Seller is not a party to any contract or other arrangement (written or oral) which (i) is not terminable upon not more than 30 days notice by Seller without payment of any penalty or premium or (ii) imposes or may impose on Seller a duty, liability or obligation involving more than $25,000. Seller and the Shareholder have caused to be delivered 37 to Purchaser and Inmark correct and complete copies (or in the case of oral contracts or informal arrangements, summaries thereof) of all of the contracts, and all amendments thereto, listed on Schedule 3.19(a) (such contracts and amendments, "Material Contracts"). (b) Except as disclosed on Schedule 3.19(b), (i) each Material Contract is valid and binding on the respective parties, is in full force and effect and represents the entire agreement between the parties thereto with respect to the subject matter of the Material Contract and (ii) upon consummation of the transactions contemplated by this Agreement, except to the extent that any consents set forth on Schedule 3.7 are not obtained, each Material Contract shall continue in full force and effect for the benefit of Purchaser without penalty or other adverse consequence. (c) Except as disclosed on Schedule 3.19(c), no party to any Material Contract is in breach of, or in default under, any Material Contract, nor will the consummation of the transactions contemplated by this Agreement constitute a breach of or default under any Material Contract or otherwise give any party a right to terminate such Material Contract. Seller has not received any notice of termination or cancellation under any Material Contract and no party to any Material Contract has any right of termination or cancellation under such Material Contract except in connection with the default of Seller thereunder. (d) To the best knowledge of Seller and the Shareholder, no event has occurred that, with notice or lapse of time would constitute a breach or default or permit termination, modification or acceleration under any Material Contract. (e) Except as disclosed on Schedule 3.19(e), there is no contract, agreement or other arrangement granting any 38 Person any rights, adverse or otherwise, under any Material Contract or any preferential right to purchase any of the properties or assets of Seller. 3.20 Intellectual Property. (a) Schedule 3.20(a)(i) sets forth a true and complete list and a brief description, including complete identification of each patent and patent application and each registration or application for registration thereof, of all Owned Intellectual Property and Schedule 3.20(a)(ii) sets forth a true and complete list and a brief description, including a description of any license or sublicense, of all Licensed Intellectual Property. The Owned Intellectual Property and the Licensed Intellectual Property constitute all the Intellectual Property necessary for the conduct of the Business as currently conducted by Seller. In each case where a registration or patent or application for registration or patent is held by Seller by assignment, the assignment has been duly recorded with the State or national Trademark Office from which the original registration issued or before which the application for registration is pending. To the best knowledge of Seller and the Shareholder, the rights of Seller in or to the Owned Intellectual Property and the Licensed Intellectual Property do not conflict with or infringe on the rights of any other Person, and Seller has not received any claim or written notice from any Person, to such effect. The consummation of the transactions contemplated by this Agreement will not result in the termination or impairment of any of the Owned Intellectual Property or the Licensed Intellectual Property. After the consummation of the transactions contemplated hereby, Purchaser shall own or possess adequate licenses or other valid rights to use all the Owned Intellectual Property and the Licensed Intellectual Property to the same extent, and in the same manner, as Seller. 39 (b) Except as disclosed on Schedule 3.20(b): (i) all the Owned Intellectual Property is owned by Seller free and clear of any Encumbrance and (ii) no Actions have been made or asserted or are pending (nor, to the best knowledge of Seller and the Shareholder, has any such Action been threatened) against Seller either (A) based upon or challenging or seeking to deny or restrict the use by Seller of any of the Owned Intellectual Property or (B) alleging that any services provided by Seller are being provided in violation of any patents or trademarks, or any other rights of any Person. To the best knowledge of Seller and the Shareholder, no Person is using any patents, copyrights, trademarks, service marks, trade names, trade secrets or similar property that are confusingly similar to the Owned Intellectual Property or that infringe upon the Owned Intellectual Property or upon the rights of Seller therein. Except as disclosed in Schedule 3.20(b), Seller has not granted any license or other right to any other Person with respect to the Owned Intellectual Property. (c) With respect to each of such licenses and sublicenses listed Schedule 3.20(a)(ii): (i) Seller has not granted to any other Person any rights, adverse or otherwise, under such license or sublicense; (ii) no Actions have been made or asserted or are pending (nor, to the best knowledge of Seller and the Shareholder, has any such Action been threatened) against Seller either (A) based upon or challenging or seeking to deny or restrict the use by Seller of any of the Licensed Intellectual Property or (B) alleging that any Licensed Intellectual Property is being licensed, sublicensed or used in violation of any patents or trademarks, or any other rights of any Person; and 40 (iii) to the best knowledge of Seller and the Shareholder, no Person is using any patents, copyrights, trademarks, service marks, trade names, trade secrets or similar property that are confusingly similar to the Licensed Intellectual Property or that infringe upon the Licensed Intellectual Property or upon the rights of Seller therein. 3.21 Real Property. (a) Seller does not own any real property. Except as is set forth on Schedule 3.21(a)(i), Seller does not lease any Real Property. The Real Property constitutes all the real property, buildings, structures, facilities, improvements, fixtures, systems, easements, licenses, rights and appurtenances necessary for the conduct of the Business as currently conducted by Seller. For purposes of this Section 3.21 and Sections 3.22 and 3.23, the term "lease" shall include any leases, subleases, sale/leaseback arrangements or similar arrangements. (b) Except as described on Schedule 3.21(b) or Schedule 3.17, to the best knowledge of Seller and the Shareholder, there is no violation of any Law relating to any of the Real Property for which Seller is responsible. Seller is in peaceful and undisturbed possession of each parcel of Real Property and, to the best knowledge of Seller and the Shareholder, there are no contractual or legal restrictions that preclude or restrict the ability of Seller to use the premises in the manner in which they are currently being used by Seller. The Real Property is currently maintained in good operating condition and repair. To the best knowledge of Seller and the Shareholder, there are no material latent defects or material adverse physical conditions affecting the Real Property or any of the improvements, fixtures, fixed assets and personalty of a permanent nature annexed, affixed or attached to, located on or forming part of the Real Property. Seller is not leasing or 41 subleasing any parcel or any portion of any parcel of Real Property to any other Person, nor has Seller assigned its interest under any lease or sublease for any Real Property to any third party. (c) To the best knowledge of Seller and the Shareholder, there are no condemnation proceedings or eminent domain proceedings of any kind pending or threatened against the Real Property. (d) To the best knowledge of Seller and the Shareholder and assuming all required consents and approvals are obtained, there are no facts that would prevent the Real Property from being occupied by Purchaser after the Closing Date in the same manner as occupied by Seller immediately prior to the Closing Date. (e) To the best knowledge of Seller and the Shareholder, no improvements made on the Real Property by or on behalf of Seller (by the landlord of the Real Property or otherwise) and none of the current uses and conditions thereof violate any covenants, restrictions, agreements applicable to the Real Property, and no permits, licenses or certificates pertaining to the ownership or operation of all improvements on the Real Property, other than those which are transferable with the Real Property, are required by any Governmental Authority having jurisdiction over the Real Property. (f) The rental set forth in each lease or sublease of the Real Property is the actual rental being paid, and there are no separate agreements or understandings with respect to the same. (g) Seller has the full right to exercise any renewal options contained in the leases and subleases pertaining 42 to the Real Property on the terms and conditions contained therein and upon due exercise would be entitled to enjoy the use of each Real Property for the full term of such renewal options. 3.22 Tangible Personal Property. (a) Except as is set forth on Schedule 3.22(a)(i), Seller does not own or lease any Tangible Personal Property. The Tangible Personal Property listed on Schedule 3.22(a)(i) constitutes all the material machinery, equipment, tools, supplies, furniture, fixtures, personalty, vehicles, rolling stock and other personal property necessary for the conduct of the Business as currently conducted by Seller. (b) Seller has, and after the Closing the Purchaser shall have, the full right to exercise any renewal options contained in the leases and subleases pertaining to the Tangible Personal Property on the terms and conditions contained therein and upon due exercise Seller or Purchaser, as the case may be, would be entitled to enjoy the use of each item of leased Tangible Personal Property for the full term of such renewal options. 3.23 Purchased Assets. (a) Except as disclosed on Schedule 3.23, Seller owns, leases or has the legal right to use all the Purchased Assets, including, without limitation, the Owned Intellectual Property, the Licensed Intellectual Property, the Real Property and the Tangible Personal Property, and, with respect to contract rights, is a party to and enjoys the right to the benefits of all contracts, agreements and other arrangements used by Seller or in or relating to the conduct of the Business as currently conducted by Seller. Seller has good title to, or, in the case of leased or subleased Purchased Assets, subsisting leasehold interests in, all the Purchased Assets, free and clear of all Encumbrances, except (i) as disclosed on Schedule 3.23 and (ii) for Permitted Encumbrances. 43 (b) The Purchased Assets, together with the Inventory owned by S&S, constitute all the properties, assets and rights forming a part of, used or held in, and all such properties, assets and rights as are necessary for use in the conduct of, the Business. At all times since the date of the Interim Financial Statements, all the Purchased Assets material to the Business are in good operating condition and repair, ordinary wear and tear excepted, and are suitable for the purposes for which they are used and intended. (c) Following the consummation of the transactions contemplated by this Agreement, Purchaser will own, pursuant to good and marketable title, or lease, under valid and subsisting leases, its respective interest in the Purchased Assets without incurring any penalty or other adverse consequence, including, without limitation, any increase in rentals, royalties, or licenses or other fees imposed as a result of, or arising from, the consummation of the transactions contemplated by this Agreement. 3.24 Customers. Schedule 3.24 lists each of the customers to whom Seller rendered services since January 1, 1995 and the amounts invoiced during the years ended December 31, 1995, 1996 and 1997 and the period from January 1, 1998 through September 30, 1998 to each such customer. The notes contained in the column entitled "status of relationship" on Schedule 3.24 indicate, in the best judgment of Seller and the Shareholder, the status of Seller's relationships with its customers for the remainder of the year ending December 31, 1998 and Seller and the Shareholder have no actual knowledge of the intention of any customer to terminate its relationship with Seller except as set forth in such Schedule. Notwithstanding any provision of this Agreement to the contrary, neither Seller nor the Shareholder shall have any liability, nor shall Inmark or Purchaser have any rights to indemnification hereunder, if any customer terminates 44 or reduces its relationship with Seller after the Closing except to the extent that such termination or reduction reflects a breach of any representation or warranty contained in the preceding sentence of this Section 3.24. 3.25 Suppliers. Seller and the Shareholder have provided Purchaser and Inmark with (a) a computer listing of all payments Seller has made from January 1, 1998 through September 30, 1998 to suppliers of goods or services to Seller ("Suppliers"), (b) a computer listing of all of Seller's unpaid trade payables to Suppliers as of September 30, 1998, and (c) a computer listing as of September 30, 1998 of all goods and services ordered by Seller for which invoices had not been received as of September 30, 1998. Such computer lists are complete and accurate. Except as disclosed on Schedule 3.25, Seller has not received any notice, that any supplier will not sell raw materials, supplies, merchandise or other goods or services to Seller at any time after the Closing Date on terms and conditions substantially similar to those used in its current sales to Seller, subject only to general and customary price increases. 3.26 Employee Benefit Matters. (a) Plans and Material Documents. (i) Schedule 3.26(a) contains a true and complete list of all bonus, deferred compensation, pension, profit-sharing, retirement, insurance, stock purchase, stock option, welfare, severance, hospitalization, insurance and other employee benefit plans (as defined in section 3(3) of ERISA), whether formal or informal, presently maintained by the Seller or maintained by it since 1996, or under which the Seller has, or has had since 1996, any obligation to contribute (collectively, the "Seller Plans"). (ii) For each of the Seller Plans, Seller has delivered or made available to Purchaser true and 45 complete copies of (a) the plan document, (b) any related trust agreements, insurance contracts and other funding agreements, (c) the summary plan descriptions, (d) the most recent Internal Revenue Service determination letter, if any, (e) the most recently filed annual report (Form 5500 Series) and accompanying schedules filed with the Department of Labor or Internal Revenue Service, (f) the most recent financial statements, if any, and (g) the most recent actuarial reports, if any. (iii) Each such Seller Plan which is intended to be a "qualified plan" under section 401(a) of the Code, has received, a favorable determination letter from the Internal Revenue Service. With respect to any Seller Plan which has received such a determination letter, nothing has occurred since the date of such determination letter that would adversely affect the qualification of the Seller Plan under section 401(a) of the Code. (iv) To the best knowledge of Seller and the Shareholder, Seller has performed and complied with all of its material obligations under or with respect to the Seller Plans, and the Seller Plans have operated in all material respects in accordance with their respective terms. To the best knowledge of Seller and the Shareholder, all Seller Plans have operated in all material respects in accordance with the applicable requirements of ERISA and the Code and other applicable laws, rules and regulations, and all material reports required by any governmental agency with respect to a Seller Plan have been timely filed. 46 (v) With respect to each Seller Plan that is covered by Title IV of ERISA, the present value of benefit liabilities (within the meaning of section 4001(a)(16) of ERISA) valued on a termination basis as of the Closing Date under regulations issued by the Pension Benefit Guaranty Corporation does not exceed the value of the assets of such Seller Plan. (vi) To the best knowledge of Seller and the Shareholder, no reportable event (as defined in section 4043(e) of ERISA), prohibited transaction (as defined in section 406 of ERISA or section 4975 of the Code), accumulated funding deficiency (as defined in section 302 of ERISA) or plan termination (as defined in Title IV of ERISA or section 411(d) of the Code) has occurred with respect to any of the Seller Plans or with respect to any employee benefit plan (as defined in section 3(3) of ERISA) of an ERISA Affiliate (the Seller Plans and the employee benefit plans of ERISA Affiliates are collectively referred to as the "Group Plans"). (vii) None of the Group Plans is a multiemployer plan (as defined in section 3(37) of ERISA) and the Seller does not have any actual or potential liability with respect to any multiemployer plan or a past or present withdrawal therefrom. (viii) Each Seller Plan which constitutes a welfare benefit plan within the meaning of section 3(1) of ERISA has complied and continues to comply in all material respects with the health care continuation coverage requirements of section 4980B of the Code and Part 6 of Subtitle B of Title I of ERISA. Other than the coverage referred to in the immediately preceding 47 sentence, there are no benefits to be provided to current retirees under any of the Seller Plans which constitutes a welfare benefit plan. (ix) No action, suit or proceeding, hearing, or investigation with respect to the administration or investment of the assets of any Group Plan is pending or, to the best knowledge of Seller and the Shareholder, threatened. None of the Shareholder or directors or officers of Seller has any knowledge of any basis for any such action, suit, proceeding, hearing or investigation. (b) Americans With Disability Act. To the best knowledge of Seller and the Shareholder, Seller is in compliance in all material respects with the requirements of the Americans With Disabilities Act. 3.27 Labor Matters. Except as set forth on Schedule 3.27, (a) Seller is not a party to any collective bargaining agreement or other labor union contract applicable to persons employed by Seller in connection with the Business and, to the best knowledge of Seller and the Shareholder, currently there are no organizational campaigns, petitions or other unionization activities seeking recognition of a collective bargaining unit for Seller which could affect the Business; (b) there are no controversies, strikes, slowdowns or work stoppages pending or, to the best knowledge of Seller and the Shareholder, threatened between Seller and any of its employees related to the Business, and Seller has not experienced any such controversy, strike, slowdown or work stoppage within the past three years in connection with the Business; (c) Seller is currently in compliance in all material respects with all applicable Laws relating to the employment of labor in connection with the Business, including those related to wages, hours, collective 48 bargaining and the payment and withholding of taxes and other sums as required by the appropriate Governmental Authority and has withheld and paid to the appropriate Governmental Authority or is holding for payment not yet due to such Governmental Authority all amounts required to be withheld from employees of Seller in connection with the Business and is not liable for any arrears of wages, taxes, penalties or other sums for failure to comply with any of the foregoing; (d) in connection with the Business, Seller has paid in full to all its employees or adequately accrued for in accordance with U.S. GAAP all wages, salaries, commissions, bonuses, benefits and other compensation currently due to or on behalf of such employees; (e) there is no claim with respect to payment of wages, salary or overtime pay that has been asserted or is now pending or, to the best knowledge of Seller and the Shareholder, threatened before any Governmental Authority with respect to any Persons currently or formerly employed by Seller in connection with the Business; (f) Seller is not a party to, or otherwise bound by any consent decree with, or citation by any Governmental Authority relating to employees or employment practices in connection with the Business; (g) there is no charge or proceeding with respect to a violation of any occupational safety or health standards that has been asserted or is now pending or, to the best knowledge of Seller and the Shareholder, threatened with respect to Seller in connection with the Business; and (h) there is no charge of discrimination in employment or employment practices, for any reason, including, without limitation, age, gender, race, religion or other legally protected category, which has been asserted or is now pending or, to the best knowledge of Seller and the Shareholder, threatened before the United States Equal Employment Opportunity Commission, or any other Governmental Authority in any jurisdiction in which Seller has employed or currently employs any Person in connection with the Business. 49 3.28 Employees. (a) Schedule 3.28(a) lists the name, place of employment, the current annual salary rates, bonuses, deferred or contingent compensation, pension, "golden parachute" and other like benefits paid or payable (in cash or otherwise) in 1997 and 1998, the date of employment and a description of position and job function of each current permanent salaried employee, officer or director of Seller employed in connection with the Business. On and after January 1, 1999, neither Purchaser nor Seller shall have any liability for vacation accrued with respect to any of Seller's employees or officers for periods prior to January 1, 1999. (b) Schedule 3.28(b) lists all employment agreements and severance agreements relating to Seller or the Business. Except as set forth on Schedule 3.28(b), Seller is not a party to, and has no obligation or responsibility under or with respect to, any oral or written agreement with any employee of the Business. Seller has delivered to Purchaser true and correct copies of all documents listed on Schedule 3.28(b) and of all written personnel policies, employee and/or supervisor handbooks, procedures and forms of employment applications relating to employees of the Business. (c) No amount paid or payable (or which may become payable) pursuant to any plan, arrangement or agreement including, without limitation, any of those listed on Schedule 3.28(a) or Schedule 3.28(b) and any Seller Plan to or for the benefit of any employee, officer, director, consultant or agent of Seller, was or will constitute any excess parachute payment (within the meaning of Section 280G of the Code) as a consequence, direct or indirect, in whole or in part, of the consummation of the transaction contemplated under this Agreement. 50 3.29 Taxes. All returns, reports, estimates, information returns and statements of any nature regarding Taxes required to be filed by Seller have been filed when due. All of the information provided on such returns, reports, estimates, information returns and statements was true and correct as of the date filed, and all of the Taxes shown to be due on such returns, reports, estimates, information returns and statements have been paid in full. Except as otherwise set forth on Schedule 3.29, there is no tax deficiency outstanding, proposed or assessed against Seller. There are no Taxes that are or could constitute an Encumbrance (other than Permitted Encumbrances) on the Purchased Assets or the Business or that could have a Material Adverse Effect or, individually or in the aggregate, a material adverse effect on Purchaser. 3.30 Insurance. (a) Schedule 3.30(a) sets forth a list of all insurance policies maintained by Seller with respect to the Business together with a description of each policy (including the numbers, the term, the name of the insurer, the coverage amounts, the nature of the coverage and the amount of annual premiums). To the knowledge of Seller and the Shareholder, all material assets, properties and risks of the Business are, and for the past five years have been, covered by valid and, except for policies that have expired under their terms in the ordinary course, currently effective insurance policies or binders of insurance (including, without limitation, general liability insurance, property insurance and workers compensation insurance) issued in favor of Seller, in each case with responsible insurance companies, in such types and amounts and covering such risks as are consistent with customary practices and standards of companies engaged in businesses and operations similar to those of the Business. (b) To the knowledge of Seller and the Shareholder, with respect to each insurance policy held by Seller 51 in connection with the Business: (i) the policy is legal, valid, binding and enforceable in accordance with its terms and, except for policies that have expired under their terms in the ordinary course, is in full force and effect; (ii) Seller is not in breach or default (including any breach or default with respect to the payment of premiums or the giving of notice), and no event has occurred which, with notice or the lapse of time, would constitute such a breach or default or permit termination or modification, under the policy; (iii) no party to the policy has repudiated, or given notice of a intent to repudiate, any provision thereof; and (iv) there is no claim pending under any policy as to which coverage has been questioned, denied or disputed by the insurer. (c) Since January 1, 1997, no insurance carrier has cancelled, failed to renew or materially reduced any insurance coverage for Seller in connection with the Business or given any notice or other indication of its intention to cancel, not renew or reduce any such coverage. (d) All insurance policies listed on Schedule 3.30(a) are outstanding and duly in force as of the date hereof. 3.31 Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Seller or the Shareholder. 3.32 Full Disclosure. No representation or warranty of Seller or the Shareholder in this Agreement, nor any statement or certificate furnished or to be furnished to the Purchaser or Inmark pursuant to this Agreement, or in connection with the transactions contemplated by this Agreement, contains or will contain any untrue statement of a material fact, or omits or will 52 omit to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances under which made, not misleading. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PURCHASER AND INMARK Purchaser and Inmark jointly and severally represent and warrant to Seller and the Shareholder as follows: 4.1 Organization of Purchaser and Inmark. Each of Purchaser and Inmark is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. True and correct copies of the certificate of incorporation and by-laws of Purchaser and Inmark, each as currently in effect, have been delivered by Purchaser to Seller. 4.2 Authority; Due Execution; Binding Obligation. (a) Purchaser has all necessary power and authority to execute and deliver this Agreement and the Related Documents to which it is a party, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Related Documents by Purchaser, the performance by Purchaser of its obligations hereunder and thereunder and the consummation by Purchaser of the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of Purchaser. (b) Inmark has all necessary power and authority to execute and deliver this Agreement, to carry out its obligations hereunder and to consummate the transactions 53 contemplated hereby. The execution and delivery of this Agreement by Inmark, the performance by Inmark of its obligations hereunder and the consummation by Inmark of the transactions contemplated hereby have been duly authorized by all requisite action on the part of Inmark. (c) This Agreement has been duly executed and delivered by Purchaser and Inmark. Assuming due authorization, execution and delivery by Seller and the Shareholder, this Agreement constitutes a legal, valid and binding obligation of Purchaser and Inmark enforceable against Purchaser and Inmark in accordance with its terms except as such enforcement may be subject to (a) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (b) general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). 4.3 No Conflict. Assuming the making and obtaining of all filings, notifications, consents, approvals, authorizations and other actions referred to in Section 4.6 and of the consent of PNC Bank, National Association pursuant to the Loan Agreement, dated as of March 31, 1998, by and among Inmark, Inmark Services, Inc., Optimum Group, Inc. and PNC Bank, National Association, except as may result from any facts or circumstances relating solely to Seller or the Shareholder, the execution, delivery and performance of this Agreement and the Related Documents by Purchaser and Inmark does not and will not (a) violate, conflict with or result in the breach of any provision of the certificate of incorporation or by-laws of Purchaser or Inmark, (b) conflict with or violate any Law or Governmental Order applicable to Purchaser or Inmark, or (c) conflict with, or result in any breach of, constitute a default (or event which with the giving of notice or lapse or time, or both, would become a default) under, require any consent under, or give to others any rights of 54 termination, amendment, acceleration, suspension, revocation, or cancellation of, or result in the creation of any Encumbrance on any of the assets or properties of Purchaser or Inmark pursuant to, (i) any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which Purchaser or Inmark is a party or by which any of such assets or properties are bound or affected which would have a material adverse effect on the ability of Purchaser or Inmark to consummate the transactions contemplated by this Agreement or (ii) any law or statute or any judgment, decree, order, regulation or rule of any court or governmental or regulatory authority relating to Purchaser or Inmark. 4.4 Capital Stock of Inmark. (a) The authorized capital stock of Inmark consists of 25,000,000 shares of common stock, par value $.001 per share, 650,000 shares of Class A convertible preferred stock, par value $.001 per share ("Class A Preferred Stock"), 700,000 shares of Class B convertible preferred stock, par value $.001 per share ("Class B Preferred Stock"), and 3,650,000 shares of preferred stock, undesignated ("Undesignated Preferred Stock"). As of the date hereof, 4,483,481 shares of Inmark Common Stock are issued and outstanding, all of which are validly issued, fully paid and nonassessable, and no shares of Class A Preferred Stock, Class B Preferred Stock or Undesignated Preferred Stock are issued and outstanding. None of the issued and outstanding shares of Inmark Common Stock was issued in violation of any preemptive rights. To Inmark's knowledge, there is no claim by the Securities and Exchange Commission or any other Governmental Authority that any issued and outstanding shares of Inmark Common Stock were issued in violation of the Securities Act or any other applicable securities laws. Except for options and other warrants to purchase an aggregate of 1,778,989 shares of Inmark Common Stock, Inmark does not have outstanding any stock or securities 55 convertible into or exchangeable for any shares of its capital stock and is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock. (b) Upon consummation of the transactions contemplated by this Agreement, the Inmark Shares will be duly authorized, validly issued, fully paid and non-assessable, and, assuming the accuracy of the representations made by Seller in Section 8.1 hereof, will be issued in compliance with the Securities Act and other applicable securities laws. 4.5 SEC Reports. Purchaser and Inmark have delivered to Seller copies of Inmark's Annual Reports on Form 10-K for the years ended March 31, 1996, 1997 and 1998, Purchaser's Quarterly Reports on Form 10-Q for the quarters ended June 30, 1998 and September 30, 1998, any and all Current Reports on Form 8-K filed since March 31, 1998, and Inmark's most recent proxy statement, in each case as filed with the Securities and Exchange Commission. Such reports and proxy statement substantially comply with the applicable requirements of the Securities Act and the Exchange Act, and the rules and regulations thereunder, and do not, as of their respective dates, contain a misstatement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The balance sheets and related statements of income and cash flows, together with all related notes and schedules thereto, appearing in such Reports (collectively the "Inmark Financial Statements") (i) were prepared in accordance with the books of account and other financial records of Inmark, (ii) have been prepared in accordance with U.S. GAAP consistently applied on a basis consistent with the past practices of Inmark, and (iii), in the case of unaudited statements, include all adjustments (consisting of normal recurring accruals) that are necessary for a fair presentation of the consolidated financial 56 condition of Inmark and the consolidated results of the operations of Inmark as of the dates thereof or for the periods covered thereby. 4.6 Governmental Consents and Approvals. The execution, delivery and performance of this Agreement by Purchaser and Inmark do not and will not require any consent, approval, authorization or other order of, action by, filing with, or notification to, any Governmental Authority except for the filing of a Current Report on Form 8-K with the Securities and Exchange Commission. 4.7 Litigation. Except as set forth on Schedule 4.7, there is no Action pending or, to the knowledge of Purchaser or Inmark, threatened, which (a) seeks to delay or prevent the consummation of, or which would be reasonably likely to materially adversely affect Purchaser's or Inmark's ability to consummate, the transactions contemplated by this Agreement, or (b) may reasonably be expected to have a material adverse effect on the condition (financial or otherwise), assets or business of Inmark or Purchaser. 4.8 Brokers. Except for Janney Montgomery Scott Inc. (whose fee shall be paid by Inmark), no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Purchaser or Inmark. 4.9 Full Disclosure. No representation or warranty of Purchaser or Inmark in this Agreement, nor any statement or certificate furnished or to be furnished to Seller or the Shareholder pursuant to this Agreement, or in connection with the transactions contemplated by this Agreement, contains or will contain any untrue statement of a material fact, or omits or will 57 omit to state a material fact necessary to make the statements contained herein or therein not misleading. 4.10 Financing. Inmark and Purchaser have no reason to believe that the cash required to pay the Purchase Price and the Additional Purchase Price will not be available to Purchaser when and if due in accordance with the terms of this Agreement. 4.11 Conduct in the Ordinary Course; Absence of Certain Changes, Events and Conditions. Except as disclosed on the Inmark Financial Statements or Schedule 4.11, the businesses of Inmark and its Subsidiaries have been conducted in the ordinary course and consistent with past practice since the periods covered by the Inmark Financial Statements. Since the date of the Inmark Financial Statements, there has been no material adverse change in the condition (financial or other), assets or business of Inmark or its subsidiaries. 4.12 Compliance with Laws. Except as set forth on Schedule 4.12, Inmark and its Subsidiaries, to the best of Inmark's knowledge, have conducted and continue to conduct their businesses in accordance with their respective charters and by-laws and with all Laws and Governmental Orders applicable to them or any of their assets of their businesses, and neither Inmark nor any of its Subsidiaries is in violation of any such Law or Governmental Order. 4.13 Taxes. All returns, reports, estimates, information returns and statements of any nature regarding Taxes required to be filed by Inmark or any of its Subsidiaries have been filed when due. All of the information provided on such returns, reports, estimates, information returns and statements was true and correct as of the date filed, and all of the Taxes show to be due on such returns, reports, estimates, information returns and statements have been paid in full. Except as 58 otherwise set forth on Schedule 4.13, there is no tax deficiency outstanding, proposed or assessed against Inmark or any of its subsidiaries. ARTICLE 5 DELIVERIES 5.1 Seller's and Shareholder's Deliveries. Simultaneously with the execution and delivery of this Agreement, Seller and the Shareholder are delivering or causing to be delivered to Purchaser and Inmark the following: (a) Bill of Sale. A bill of sale, substantially in the form attached as Exhibit A, conveying to Purchaser all of the Purchased Assets to be acquired hereunder, free and clear of any and all Encumbrances, except Permitted Encumbrances. (b) Assignments. Written instruments of the assignment by Seller to Purchaser of (i) the Assigned Contracts (other than assigned leases and subleases of real property) pursuant to an Assignment and Assumption Agreement, substantially in the form attached as Exhibit B, together with (A) the original S&S Contract, (B) originals of all Assigned Contracts other than the S&S Contract, to the extent available, and (C) conformed copies of all other Assigned Contracts, and (ii) the assigned leases and subleases of real property constituting Assigned Contracts pursuant to assignments of leases and subleases in forms reasonably satisfactory to Purchaser and Inmark together with (A) the original sublease and consents to assignment for Seller's headquarters located at 16 West 22nd Street, New York, New York, (B) originals of all other leases and subleases of real estate being assigned by Seller to Purchaser, to the extent 59 available, and (C) conformed copies of all other leases and subleases of real estate being assigned by Seller to Purchaser. (c) Assignment of Trademark. A written instrument of assignment by Seller to Purchaser of the registered trademarks listed on Schedule 3.20(a)(i) hereto, substantially in the form attached as Exhibit C. (d) Organizational Documents. A copy of (i) the Certificate of Incorporation, as amended, of Seller certified by the secretary of state of the State of New York as of a date not earlier than 30 Business Days prior to the Closing Date and accompanied by a certificate of the Secretary or Assistant Secretary of Seller, dated as of the Closing Date, stating that no amendments have been made to such Certificate of Incorporation since such date, and (ii) the By-laws of Seller certified by the Secretary or Assistant Secretary of Seller. (e) Corporate and Stockholder Authorization. A certificate, dated the Closing Date, executed by the Secretary or Assistant Secretary of Seller, certifying resolutions of the Board of Directors and of the Shareholder, approving and authorizing the execution, delivery and performance by Seller of this Agreement and each of the Related Documents to which Seller is a party and the consummation of the transactions contemplated hereby and thereby (together with an incumbency and signature certificate regarding the officer(s) signing any document or instrument on behalf of Seller). (f) Good Standing; Qualification to Do Business. Good standing certificates for Seller from the secretary of state of the jurisdictions listed on Schedule 5.1(f) in each case dated as of a date not earlier than 30 Business Days prior to the Closing Date. 60 (g) Consents and Approvals. Copies of all consents and approvals obtained pursuant to Section 3.7 hereof, and all registrations, qualifications, declarations, filings and notices made by Seller pursuant to Section 5.1 hereof. (h) Encumbrance Release. Evidence reasonably satisfactory to Purchaser that any Encumbrances on or affecting the Purchased Assets of record on the date hereof, except for Permitted Encumbrances, have been removed or released. (i) Legal Opinion. The legal opinion of Cohen & Silverman, Seller's general counsel, addressed to Purchaser and Inmark and dated the Closing Date, substantially in the form attached as Exhibit D. (j) Change of Name. The documents contemplated by Section 7.2 hereof, in form and substance sufficient to change Seller's name as therein required and in the appropriate form for filing with the Governmental Authority with whom such documents must be filed to become effective. (k) Employment Agreements. An employment agreement executed by each of the Shareholder and Bryen in the form for each of the Shareholder and Bryen attached as Exhibit E- 1 and Exhibit E-2 respectively. (l) Investment Representation Letter. The Investment Representation Letter executed by Bryen in the form attached as Exhibit G. (m) Stock Option Agreements. Counterparts of the stock option agreements, substantially in the form attached as Exhibit H, executed by each of the Shareholder and Bryen and granting to the Stockholder options to purchase 42,500 shares of 61 Inmark Common Stock and to Bryen options to purchase 7,500 shares of Inmark Common Stock. (n) S&S Contract. Documentation in form and substance satisfactory to Purchaser regarding the renewal or extension of the S&S Contract, or a new contract between Seller and S&S, for the period from January 1, 1999 through December 31, 2001. (o) MCI Liability. Documentation in form and substance satisfactory to Purchaser regarding the satisfaction, or current status, of the MCI Liability. (p) Business Documents. All manuals, including employee manuals, customer lists, books and other records and files, computer programs, computer software and master disk of source codes (if any) relating to, or associated with, the Business, the Purchased Assets or Seller. (q) Evidence of Insurance. Evidence reasonably satisfactory to Purchaser that Purchaser has been listed as an additional insured on all insurance policies relating to the Purchased Assets and the Business for the remainder of the terms of such policies. (r) Miscellaneous. Such other documents and certificates of officers as reasonably may be required by Purchaser or Inmark to consummate this Agreement and the transactions contemplated hereby. 5.2 Purchaser's Deliveries. Simultaneously with the execution and delivery of this Agreement, Purchaser is delivering the following to Seller and, to the extent herein provided, to the Shareholder: 62 (a) Cash Payment. A cash payment in the amount of $1,410,000, made $1,022,00 by wire transfer to an account designated by Seller as set forth on Schedule 5.2(a) subject to a holdback of $388,000 to be used to satisfy the MCI Liability. (b) Inmark Common Stock. Stock certificates evidencing an aggregate of 30,000 Inmark Shares registered in the name of Seller. (c) Assignment and Assumption Agreement. An assumption agreement executed by Purchaser, substantially in the form attached as Exhibit B. (d) Organizational Documents. A copy of (i) the Certificate of Incorporation, as amended, of Purchaser certified by the secretary of state of Delaware as of a date not earlier than 30 Business Days prior to the Closing Date and accompanied by a certificate of the Secretary or Assistant Secretary of Purchaser, dated as of the Closing Date, stating that no amendments have been made to such Certificate of Incorporation (or similar organizational documents) since such date, and (ii) the By-laws (or similar organizational documents) of Purchaser certified by the Secretary or Assistant Secretary of Purchaser. (e) Corporate Authorization. A certificate, dated the Closing Date, executed by the Secretary or Assistant Secretary of Purchaser, certifying resolutions of the Board of Directors of Purchaser approving and authorizing the execution, delivery and performance by Purchaser of this Agreement and each of the Related Documents to which Purchaser is a party and the consummation of the transactions contemplated hereby and thereby (together with an incumbency and signature certificate regarding the officer(s) signing any document or instrument on behalf of Purchaser). 63 (f) Good Standing Certificate. A Certificate of Good Standing for Purchaser from the State of Delaware, dated as of a date not earlier than 30 Business Days prior to the Closing Date. (g) Consents and Approvals. All necessary consents and approvals of third parties or Governmental Authorities required to be obtained by Purchaser to permit Purchaser to perform this Agreement or any Related Document to which Purchaser is a party. (h) Legal Opinion. The legal opinion of Kronish Lieb Weiner & Hellman LLP, Purchaser's counsel, addressed to Seller and the Shareholder and dated the Closing Date, substantially in the form attached as Exhibit F. (i) Employment Agreements. An employment agreement executed by Purchaser for each of the Shareholder and Bryen substantially in the form for each of the Shareholder and Bryen attached as Exhibit E-1 and Exhibit E-2 respectively. (j) Miscellaneous. Such other documents, assignments, instruments of conveyance, and certificates of officers as reasonably may be required by Seller and the Shareholder to consummate this Agreement and the transactions contemplated hereby. 5.3 Inmark's Deliveries. Simultaneously with the execution and delivery of this Agreement, Inmark is delivering to Seller and the Shareholder the following: (a) Organizational Documents. A copy of (i) the Certificate of Incorporation, as amended (or similar organizational documents), of Inmark certified by the secretary of state of Delaware as of a date not earlier than 30 Business 64 Days prior to the Closing Date and accompanied by a certificate of the Secretary or Assistant Secretary of Inmark, dated as of the Closing Date, stating that no amendments have been made to such Certificate of Incorporation (or similar organizational documents) since such date, and (ii) the By-laws (or similar organizational documents) of Inmark certified by the Secretary or Assistant Secretary of Inmark. (b) Corporate Authorization. A certificate, dated the Closing Date, executed by the Secretary or Assistant Secretary of Inmark, certifying resolutions of the Board of Directors of Inmark approving and authorizing the execution, delivery and performance by Inmark of this Agreement and each of the Related Documents to which Inmark is a party and the consummation of the transactions contemplated hereby and thereby (together with an incumbency and signature certificate regarding the officer(s) signing any document or instrument on behalf of Inmark). (c) Good Standing Certificate. A Certificate of Good Standing for Inmark from the State of Delaware, dated as of a date not earlier than 30 Business Days prior to the Closing Date. (d) Consents and Approvals. All necessary consents and approvals of third parties or Governmental Authorities required to be obtained by Inmark to permit Inmark to perform this Agreement. (e) Legal Opinion. The legal opinion of Kronish, Lieb, Weiner & Hellman LLP, Inmark's counsel, addressed to Seller and the Shareholder and dated the Closing Date, substantially in the form attached as Exhibit F. 65 (f) Stock Option Agreements. Counterparts of the stock option agreements, substantially in the form attached as Exhibit H, executed by Inmark and granting to the Stockholder options to purchase 42,500 shares of Inmark Common Stock and to Bryen options to purchase 7,500 shares of Inmark Common Stock. (g) Miscellaneous. Such other documents, assignments, instruments of conveyance, and certificates of officers as reasonably may be required by Seller and the Shareholder to consummate this Agreement and the transactions contemplated hereby. ARTICLE 6 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION 6.1 Survival of Representations and Warranties. The ------------------------------------------ representations and warranties in this Agreement shall survive the Closing and any investigation at any time made by or on behalf of Seller, the Shareholder, Purchaser or Inmark and shall expire on the second anniversary of the Closing Date except as to claims made in writing pursuant to Section 6.3 before such second anniversary. No claim for misrepresentation or breach of warranty shall be made by any party against any other party after such second anniversary. The covenants and agreements of the parties in this Agreement shall survive the execution and delivery of this Agreement and the Closing. 6.2 Indemnification. (a) Seller and the Shareholder, jointly and severally, shall defend, indemnify and hold harmless Purchaser and Inmark, and their respective Subsidiaries, officers, 66 directors, shareholders, employees, agents, successors and assigns (each, a "Purchaser Indemnitee"), for any loss, liability, claim, damage or expense (including, without limitation, the reasonable costs of investigation and defense and reasonable attorneys' fees and disbursements) (collectively, "Damages") suffered or incurred by any Purchaser Indemnitee arising from or in connection with (a) any breach of any of the representations and warranties of Seller and the Shareholder contained in Article 3 of this Agreement or in any certificate delivered by any of them pursuant to this Agreement or (b) any failure by Seller or the Shareholder to perform or comply with any of its respective obligations contained in this Agreement; provided, however, that for purposes of this Section 6.2, the Shareholder shall not be a Purchaser Indemnitee. (b) Inmark and Purchaser, jointly and severally, shall defend, indemnify and hold harmless Seller and the Shareholder, and their respective officers, directors, shareholders, employees, agents, successors and assigns (each, a "Seller Indemnitee"), for any Damages suffered or incurred by any Seller Indemnitee arising from or in connection with (a) any breach of any of the representations and warranties of Purchaser or Inmark contained in Article 4 of this Agreement or in any certificate delivered by any of them pursuant to this Agreement, (b) any failure by Purchaser or Inmark to perform or comply with any of its respective obligations contained in this Agreement, or (c) any failure by Inmark to pay the fees referred to in Section 4.8. 6.3 Procedure for Certain Indemnification. (a) Promptly after receipt by a Purchaser Indemnitee or a Seller Indemnitee (an "Indemnitee") under Section 6.2 of notice of a claim or the commencement of any action by a third party as to which indemnification is or will be sought, such Indemnitee shall, if a claim in respect thereof is to be made against an 67 indemnifying party under such Section, give prompt notice to the indemnifying party of such claim or the commencement of such action, but the failure to so notify the indemnifying party shall not relieve it of any liability that it may have to any Indemnitee except to the extent the indemnifying party demonstrates that the defense of such action is materially prejudiced thereby. If any such claim or action shall be asserted or brought against an Indemnitee, it shall give notice to the indemnifying party of the commencement thereof within five days of the receipt of such notice and the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, to assume, at its expense, the defense thereof (utilizing counsel reasonably satisfactory to the Indemnitee), in which case the indemnifying party shall not be liable to such Indemnitee under such Section for any fees of other counsel or any other expenses, in each case subsequently incurred by such Indemnitee in connection with the defense thereof. If notice is given to an indemnifying party of the assertion of a claim or commencement of any action and it does not, within five days after the Indemnitee's notice is given, give notice to the Indemnitee of its election to assume the defense thereof, the Indemnitee shall be entitled to select counsel of its own choice and the indemnifying party shall pay the reasonable fees and expenses of one counsel in each relevant jurisdiction. An indemnifying party shall not be responsible for any settlement or compromise of any action, claim or proceeding effected without its consent (which consent shall not be unreasonably withheld). 6.4 Limitation on Liability. The Purchaser Indemnitees, on the one hand, and the Seller Indemnitees, on the other hand, shall not be entitled to indemnification pursuant to this Article 6 for Damages suffered or incurred by such Indemnitees unless their Damages aggregate at least $35,000 (the "Basket Amount"). In the event that Damages exceed the Basket Amount, the indemnifying party or parties shall be precluded from 68 asserting that any such Damages are immaterial or not adverse to such Indemnitees. If Damages aggregate more than the Basket Amount, the indemnifying party or parties shall be liable only for the amount of such Damages that exceed the Basket Amount up to the aggregate amount, in the case of Seller and the Shareholder or Purchaser and Inmark (as the case may be), of $1,660,000 plus any amounts payable as Additional Purchase Price; provided, however, that to the extent such amounts payable as Additional Purchase Price have not previously been paid, the liability of Seller and the Shareholder shall be satisfied first pursuant to Section 6.5. 6.5 Right to Withhold Additional Purchase Price. So long as liability for a claim made by a Purchaser Indemnitee pursuant to Section 6.2 shall be in dispute, Purchaser shall be entitled to withhold payments due under Section 2.4(b). Upon the rendering of an arbitrators' award pursuant to Section 9.9 hereof, the amount so withheld by Purchaser shall be applied towards the satisfaction of the liability of Seller and the Shareholder to such Purchaser Indemnitee for Damages, if any. If the amount withheld by Purchaser pursuant to this Section 6.5 exceeds the Damages awarded to a Purchaser Indemnitee, Purchaser shall pay to the Seller the difference between the amount withheld pursuant to this Section 6.5 and the Damages awarded to the Purchaser Indemnitee together with interest on such difference, at the rate of eight percent per annum, from the date payment was originally due pursuant to Section 2.4(b) until the date the difference is paid to Seller. 6.6 Certain Limitations. If indemnification is due from any indemnifying party hereunder, any amounts recovered by the Indemnitee through insurance (net of any costs incurred in connection with the collection thereof), to the extent actually received by the Indemnitee, shall be credited to the indemnifying party. Each Indemnitee agrees to use reasonable efforts to seek all reasonable remedies against applicable insurers. 69 6.7 Exclusive Remedy. Except for the remedies provided in the Confidentiality Agreement, the parties acknowledge and agree that the sole and exclusive remedy with respect to any and all claims relating to, or arising out of this Agreement or the transactions contemplated hereby, shall be pursuant to the indemnification provisions contained in this Agreement. ARTICLE 7 COVENANTS SUBSEQUENT TO CLOSING 7.1 Further Assurances. Seller and the Shareholder jointly and severally agree, without further consideration, to execute and deliver following the Closing such other instruments of transfer and take such other action as Purchaser may reasonably request in order to put Purchaser in possession of, and to vest in Purchaser, good and valid title to the Purchased Assets free and clear of any Encumbrances (other than Permitted Encumbrances) in accordance with this Agreement and to consummate the transactions contemplated by this Agreement. 7.2 Change of Name. Simultaneously with the Closing, Seller will take all actions necessary to change its name to a name unrelated and not confusing with "U.S. Concepts, Inc." and shall provide to Purchaser copies of duly executed documents effecting the change in such name for filing by Purchaser. From and after the Closing Date, and other than in connection with the preparation and filing of tax returns and amendments, Seller shall discontinue all further use, directly or indirectly, of the name "U.S. Concepts, Inc." or any variation thereof, and of any trademark, trade name, service mark or name, or logo used by Seller or any word or logo that is similar in sound or appearance. 70 7.3 Records. In order to facilitate the resolution of any claims made by or against or incurred by Seller or for any other purpose, for a period of six (6) years after the Closing, Purchaser (i) shall retain the books and records of Seller for periods prior to the Closing and which have been delivered to Purchaser, unless specifically authorized by Seller or the Shareholder to the contrary in writing, and (ii) upon reasonable notice, shall afford the officers, employees and authorized agents and representatives of Seller reasonable access (including the right to make, at Seller's expense, photocopies), during normal business hours, to such books and records. 7.4 Tax Reporting. The parties hereby agree to adopt the alternative procedure provided in Section 5 of Revenue Procedure 96-60 for preparing and filing all payroll and employment tax returns for the employees of Seller that are engaged by Purchaser, pursuant to which Purchaser will assume Seller's obligation to furnish Forms W-2 to the employees of Seller who will continue their employment in the Business with Purchaser. Seller and Purchaser will each perform the duties imposed on them as predecessor and successor, respectively, in such Section 5, and Seller will furnish all relevant information with respect to such employees. The failure or refusal of Seller to timely furnish complete and accurate information with respect to any such employee shall be deemed an assumption by Seller to comply with the standard procedure provided in Section 4 of Revenue Procedure 96-60 for preparing and filing all payroll and employment tax returns for the employees of Seller. 7.5 Employee Benefit Plans. (a) Continuation of Plans. On and after the Closing Date, Seller shall continue to process (or cause to be processed) in an expeditious manner and with respect to all eligible current and former employees of Seller performing, or having performed, services related to the Business (the 71 "Employees") (and, to the extent applicable, their spouses, dependents and beneficiaries) the following obligations: (i) all claims under such "employee benefit plans" (as defined under Section 3(3) of ERISA) maintained by Seller that provide health and medical, or other welfare benefits submitted for covered expenses with respect to occurrences commencing on or prior to the Closing Date, including, but not limited to, (A) covered hospital benefits for any confinements that commenced on or before the Closing Date, including any covered charges of health care professionals' relating to such confinements, and (B) any other covered medical or health expenses incurred on or before the Closing Date; (ii) short-term and long-term disability benefits, if any, for disabilities that commenced on or before the Closing Date for the period that each of such affected individuals remain disabled; (iii) life and survivor income benefits, if any, for deaths which occur on or prior to the Closing Date; (iv) workers' compensation benefits for disabilities resulting from a work-related accident which occurred on or prior to the Closing Date; (v) all benefits that are being, or that may be, paid to, or with respect to, any Employees who are on short or long-term disability, or medical, personal or other leaves of absence as of the Closing Date (or who go on short or long-term disability, or medical, personal or other leave of absence after the Closing Date as a result of any injury, illness or other factor occurring on or prior to the Closing Date) pursuant to 72 the terms of such employee benefit plans as in effect immediately prior to such date (including any subsequent benefit increases); (vi) benefits under any "spending account," or similar arrangement, under any "cafeteria plan" (as defined under Section 125 of the Code), regardless of whether such benefits accrue before, on or after the Closing Date; and (vii) benefits under all other such employee benefit plans which accrue on or before the Closing Date. (b) Continuation of Coverage. Seller (or any plan maintained by Seller) shall, to the extent required by Law, provide continued health and medical coverage as required under Section 4980B of the Code, Part 6 of Title I of ERISA or any other applicable federal, state or local law or ordinance to all eligible employees of Seller (and their eligible spouses, dependents and beneficiaries) with respect to whom a "qualifying event" (as such term is defined under Sections 4980B(f)(3) of the Code or 603 of ERISA) or other triggering event described under the applicable federal, state or local laws or ordinances occurred on or before the Closing Date. (c) Assumption of Employee Benefit Plans. From and after the Closing, the employee benefit plans of Seller shall be assumed by Purchaser. Seller agrees that Purchaser may terminate such employee benefit plans at any time following the Closing if Purchaser shall, in lieu thereof, provide employees of Purchaser with the same or substantially similar or better employee benefit plans (including, but not limited to, employee benefit plans within the meaning of Section 3(3) of ERISA), as those provided to employees of Inmark with comparable status and seniority. Years of service with Seller shall be credited to 73 employees of Seller for vesting and participation purposes under the employee benefit plans of Purchaser. 7.6 Incentive Stock Options. Simultaneously with the Closing, Inmark shall grant to employees of Seller (other than the Stockholder and Bryen) who, as of the Closing Date, are becoming employees of Purchaser, incentive stock options to purchase a total of 50,000 shares of Inmark Common Stock pursuant to Inmark's 1992 Stock Option Plan. The exercise price of such options shall be the quoted market closing price of Inmark Common Stock on the NASDAQ System on the Closing Date. 7.7 Non-Competition; Trade Secrets. Seller and the Shareholder jointly and severally agree as follows effective on and after the Closing Date: (a) All confidential research, advertising, sales, manufacturers and other materials or articles or information, including, without limitation, data processing reports, customer sales analyses, invoices, price lists or information, samples, or any other materials or data of any kind furnished to Seller or the Shareholder by Purchaser or Inmark or any of their Affiliates are and shall remain the sole and confidential property of Purchaser, Inmark and their Affiliates; provided, however, that the foregoing shall not apply to (a) any material in the public domain other than by reason of a breach of this Section 7.7, or (b) any material required to be disclosed by law or judicial process. If Purchaser or Inmark or any of their Affiliates requests the return of such materials at any time, Seller and the Shareholder shall promptly deliver the same to Purchaser or Inmark or their Affiliate, as the case may be. (b) For a period of five years after the Closing Date, neither Seller nor the Shareholder shall, directly or indirectly, through its respective agents, employees or otherwise, or as a principal, partner, stockholder, agent, director, officer, employee, consultant or in any other capacity, 74 shall engage in (as a principal, partner, stockholder, agent, director, officer, employee, consultant or otherwise) or be financially interested in any business activities which are the same as, similar to or in competition with, the business activities carried on by Purchaser or Inmark, or any of their Subsidiaries, or being definitely planned by Purchaser or Inmark, or any of their Subsidiaries, but in each case only to the extent that such business activities are similar to, or competitive with, the Business, or at any time during such period induce or attempt to influence any employee of Purchaser or Inmark, or any of their Affiliates, to terminate his employment with Purchaser or Inmark, or any of their Affiliates. (c) Neither Seller nor the Shareholder shall use for its or his personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any Person other than Purchaser, Inmark or their Affiliates, any material referred to in Section 7.6(a) or any confidential information regarding the business methods, business policies, procedures, techniques, research or development projects or results, trade secrets, or other confidential knowledge or processes of or developed by Purchaser, Inmark or any of their Affiliates, or any confidential names and addresses of customers or clients or any confidential data on or relating to past, present or prospective customers or clients or any other confidential information relating to or dealing with the business operations or activities of Purchaser, Inmark or any of their Affiliates, made known to Seller or the Shareholder or learned or acquired by the Shareholder while in the employ of Purchaser, Inmark or any of their Affiliates. The foregoing restrictions shall not apply to (i) any material in the public domain other than by reason of breach of this Section 7.7, or (ii) any material required to be disclosed by law or judicial process. This Section 7.7 shall not prevent Seller or the Shareholder from serving as a producer, director, actor or writer in any entertainment-related business activity that is not competitive with the Business. 75 (d) Any and all writings, improvements, processes, procedures and/or techniques which the Shareholder may make, conceive, discover or develop, either solely or jointly with any other person or persons, at any time during the term of his employment by Seller, Purchaser or Inmark, or any of their Affiliates, whether during working hours or at any other time and whether at the request or upon the suggestion of Seller, Purchaser or Inmark, or any of their Affiliates, or otherwise, which relate to or are useful in connection with any business now or hereafter carried on or contemplated by Purchaser or Inmark, or any Affiliate, including developments or expansions of its present fields of operations, shall be the sole and exclusive property of Purchaser. The Shareholder shall make full disclosure to Purchaser of all such writings, improvements, processes, procedures and techniques, and, at the request and expense of Inmark, shall do everything necessary to vest the absolute title thereto in Purchaser. No Shareholder shall be entitled to any additional or special compensation or reimbursement regarding any and all such writings, improvements, processes, procedures and techniques. (e) Seller and the Shareholder acknowledge that the restrictions contained in this Section 7.7, in view of the nature of the business in which Purchaser and Inmark are engaged, are reasonable and necessary in order to protect the legitimate interests of Purchaser, Inmark and their Affiliates, and that any violation thereof would result in irreparable injuries to Purchaser and Inmark, and Seller and the Shareholder therefore acknowledge that, in the event of their violation of any of these restrictions, Purchaser and/or Inmark shall be entitled to obtain from any court of competent jurisdiction preliminary and permanent injunctive relief (without establishing the likelihood of irreparable injury or posting bond or other security). In the event of such violation, Purchaser and/or Inmark shall also be entitled to receive damages, which right shall be cumulative and in addition to any other rights or remedies to which Purchaser or Inmark may be entitled. 76 (f) If the period of time or the scope of activity restricted in Section 7.7(b) above should be adjudged unreasonable in any proceeding, then the period of time shall be reduced by such number of months and/or the scope of restricted activity shall be modified so that such restrictions may be enforced as is adjudged to be reasonable. If Seller or the Shareholder is determined to have violated any of the restrictions contained in Section 7.7(b), the restrictive period shall not run in favor of Seller or the Shareholder from the time of the commencement of any such violation until such time as such violation shall be cured by Seller and the Shareholder. 7.8 Gains, Transfer and Sales Taxes. Seller and the Shareholder shall pay all transfer, gains and similar taxes and fees payable in connection with the transactions contemplated by this Agreement, and shall indemnify and hold harmless Purchaser and Inmark from and against any liability with respect to such taxes (including any penalties, interest and professional fees). Purchaser shall pay all sales and use taxes payable in connection with the transactions contemplated by this Agreement, and shall indemnify and hold harmless Seller and the Shareholder from and against any liability with respect to such taxes (including any penalties, interest and professional fees). Such taxes shall not be deducted in determining Pre-Tax Earnings. Seller, the Shareholder, Purchaser and Inmark shall cooperate in the preparation and filing of any required returns with respect to such taxes. 7.9 Board Representation. Immediately following the Closing, Inmark's by-laws shall be amended to increase the size of the board of directors by one board member and the Inmark's existing board of directors shall adopt a resolution filling such vacancy with Brian Murphy. So long as Brian Murphy remains an employee of Purchaser or any Affiliate, Inmark shall use its reasonable best efforts to nominate and elect him as a director of Inmark. 77 7.10 Working Capital. During the term of the employment agreement between Purchaser and the Shareholder, provided that Purchaser maintains positive Pre-Tax Earnings, Inmark shall provide to Purchaser such working capital as is reasonably necessary to enable Purchaser to continue to operate the Business in its normal course. ARTICLE 8 INMARK COMMON STOCK 8.1 Representations and Warranties of Seller and the Shareholder. (a) Seller and the Shareholder represent and warrant to Purchaser and Inmark that Seller and the Shareholder understand that the Inmark Shares have not been registered for sale under any federal or state securities laws and that Inmark Common Stock is being or will be offered and sold to Seller pursuant to the exemption from registration provided for under Section 4(2) of the Securities Act, and Seller is acquiring the Inmark Shares for Seller's own account for investment and without any view to any distribution thereof, except that Seller shall be permitted to distribute and transfer the Inmark Shares to the Shareholder and to Bryen, subject to the further restrictions of this Agreement and of the Investment Representation Letter (and, at the request of Seller, Inmark shall promptly take all actions necessary to effect any such distribution and transfer); that the representations and warranties set forth in this Section 8.1(a) are given with the intention that Purchaser and Inmark rely on them for purposes of claiming such exemption; and that Seller and the Shareholder understand that Seller must bear the economic risk of Seller's investment in the Inmark Shares for an indefinite period of time as the Inmark Shares cannot be sold unless subsequently registered under such laws or unless an exemption from such registration is available. 78 (b) Seller and the Shareholder agree that the Inmark Shares will not be sold or otherwise transferred for value unless (i) a registration statement with respect thereto has become effective under the Securities Act, or (ii) there is presented to Inmark an opinion of counsel satisfactory to Inmark that such registration is not required, and Seller and the Shareholder consent that any transfer agent of Inmark may be instructed not to transfer any Inmark Shares unless it receives satisfactory evidence of compliance with the foregoing provisions, and that there may be endorsed upon any certificate or instrument representing the Inmark Shares an appropriate legend calling attention to the foregoing restrictions on transferability of such shares. (c) Seller and the Shareholder represent and warrant to Purchaser and Inmark that Seller and the Shareholder are aware of Inmark's business affairs and financial condition and have acquired sufficient information about Inmark to reach an informed and knowledgeable decision to acquire the Inmark Shares hereunder. Seller and the Shareholder further represent and warrant that Seller and the Shareholder have discussed Inmark and its plans, operations and financial condition with Inmark's officers, have received all such information as they deem necessary and appropriate to enable them to evaluate the financial risk inherent in making an investment in the Inmark Shares and have received satisfactory and complete information concerning the business and financial condition of Inmark in response to all inquiries in respect thereof. 8.2 Registration under the Securities Act of 1933. (a) Registration Rights. Seller and the Shareholder shall have the following demand and piggyback registration rights (other than in connection with a merger or acquisition registered on Form S-4, or similar special purpose form, or with an employee benefit plan or similar plan registered on Form S-8, or similar special purpose form, or any dividend reinvestment plan): 79 (i) Seller and the Shareholder shall have the right on two occasions to demand that Inmark file expeditiously a registration statement under the Securities Act covering not less than 100% of the Inmark Shares then beneficially owned by Seller and the Shareholder which are permitted to be sold pursuant to Section 8.3. Such demand may be made at any time after the first anniversary of the Closing Date but in no event later than (a) the third anniversary of the Closing Date, or (b) if, on such third anniversary, the Inmark Shares are not eligible for sale under the Securities and Exchange Commission Rule 144(k), then the date that such shares become eligible for sale under Rule 144(k) (such later date being referred to as the "Registration Date"). If the registration is delayed or withdrawn by Inmark, the period when such demand may be made shall be extended for a period of time equal to the length of the delay in registering such securities. Inmark shall bear all expenses attendant to registering such securities (other than the cost of counsel to selling stockholders and underwriting discounts and commissions, if any). (ii) If Inmark shall intend to file a registration statement, then Inmark shall give prompt notice of such intent to Seller and the Shareholder, and Seller and the Shareholder shall have the right on no more than two occasions during the period from the first anniversary of the Closing Date through the Registration Date, to piggyback in such registration statement the Inmark Shares then beneficially owned by Seller and the Shareholder which are permitted to be sold pursuant to Section 8.3, provided that after Inmark delivers written notice by registered mail of its intention to file a registration statement under the Securities Act, Seller and the Shareholder must respond affirmatively within twenty (20) business days after delivery of such notice. In connection with this piggyback registration right, Inmark shall bear all expenses attendant to registering such securities (other than the cost of counsel to selling stockholders and underwriting discounts and commissions, if any). If, in the sole judgment of the managing underwriter of 80 any public offering by Inmark, the amount of securities to be registered pursuant to the aforementioned piggyback rights shall be determined to be, in the aggregate, an amount which would adversely affect the success of Inmark's registration of its securities for its own account, then Inmark shall be required to include in the registration only that number of securities, including the Inmark Shares, that the underwriters believe will not adversely affect the success of the offering (the securities so included to be apportioned pro rata among the selling stockholders according to the total amount of securities owned by each selling stockholder or in such other proportions as shall mutually be agreed to in writing by such selling stockholders). (b) Inmark's Obligations in Registration. If and whenever Inmark is required by the provisions of this Section 8.2 to effect the registration of the Inmark Shares under the Securities Act, Inmark shall: (i) Prepare and file with the Commission a registration statement with respect to all outstanding Inmark Shares to be included in the registration statement and cause such registration statement to become effective and file such amendments necessary to maintain the effectiveness of the registration statement for a period of not less than one (1) year, except that Inmark shall not be required to keep such registration statement effective, or to prepare or file any amendments or supplements thereto, after the period of distribution of the registered securities has been completed; (ii) Furnish to Seller and the Shareholder such numbers of copies of the preliminary prospectus included in such registration statement and the prospectus included in such registration statement at the time it is ordered effective by the Commission as such holders may reasonably request in order to facilitate the disposition of the registered securities; 81 (iii) Use reasonable efforts to register or qualify the Inmark Shares covered by such registration statement under such other state securities laws of such jurisdictions as Seller and the Shareholder shall reasonably request, provided, however, that Inmark will not be required to: (A) qualify generally to do business in any jurisdiction where it would not be required to do so but for this clause (iii); (B) subject itself to taxation in such jurisdiction; (C) consent to general service of process; (D) register in any state requiring, as a condition to registration, the escrow or surrender of any Company securities held by any security holder; and (E) incur expenses exceeding $10,000 in the aggregate, in connection with such registration or qualification; and (iv) Notify Seller and the Shareholder, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the request of any such holder, prepare and furnish to Seller and the Shareholder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statement therein not misleading in the light of the circumstances then existing, provided that no such supplement or amendment need be filed after distribution of the registered securities has been completed. (c) Information From Seller and the Shareholder. Notices and requests delivered by Seller and the Shareholder to Purchaser pursuant to this Section 8.2 shall contain such information regarding the Inmark Shares and the intended method 82 of disposition of the Inmark Shares and such other information regarding Seller and the Shareholder as shall reasonably be required by counsel to Inmark in order to appropriately disclose matters pertaining to Seller and the Shareholder in the registration statement. (d) Indemnification by Purchaser and Inmark. In the --------------------------------------- event of any registration under the Securities Act of any Inmark Shares pursuant to this Section 8.2, Purchaser and Inmark hereby jointly and severally agree to indemnify and hold harmless Seller and the Shareholder and each other person, if any, who controls Seller within the meaning of the Securities Act and each other person (including underwriters) who participates in the offering of the Inmark Shares, against any losses, claims, damages or liabilities, joint or several, to which Seller, the Shareholder or such controlling person or participating person may become subject under the Securities Act or otherwise, in so far as such losses, claims, damages or liabilities (or proceedings in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained, on the effective date thereof, in any registration statement under which such Inmark Shares were registered under the Securities Act, in any preliminary prospectus or final prospectus contained therein, or in any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse Seller, the Shareholder and each such controlling person or participating person for any legal or any other expenses reasonably incurred by Seller, the Shareholder or such controlling person or participating person in connection with investigating or defending any such loss, damage, liability or proceeding; provided, however, that neither Purchaser nor Inmark will be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, said preliminary or 83 final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished to Purchaser or Inmark by Seller, the Shareholder or such controlling or participating person, as the case may be, specifically for use in the preparation thereof. (e) Indemnification by Seller and the Shareholder. It shall be a condition of Purchaser's obligation under this Section 11.2 to cause Inmark to effect any registration under the Securities Act that, if requested by Inmark, there shall have been delivered to Purchaser and Inmark an agreement or agreements duly executed by Seller and the Shareholder and reasonably satisfactory to Inmark and Purchaser, whereby Seller and the Shareholder agree to indemnify and hold harmless Purchaser, Inmark, each other person referred to in subparts (1), (2), (3) and (5) of Section 11(a) of the Securities Act in respect of such registration statement and each other person, if any, which controls Inmark within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which Purchaser or Inmark may become subject under the Securities Act or otherwise, but only to the extent that such losses, claims, damages or liabilities (or proceedings in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained, on the effective date thereof, in any registration statement under which such Inmark Shares were registered under the Securities Act, in any preliminary prospectus or final prospectus contained therein or in any amendment or supplement thereto or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, which, in each such statement, said preliminary or final prospectus or said amendment or supplement is made or omitted in reliance upon, and in conformity with, written information furnished to Purchaser or Inmark by Seller or the Shareholder for use in the preparation thereof. 84 (f) Rule 144. With a view to making available to Seller and the Shareholder the benefit of Rule 144 promulgated under the Securities Act, and any other similar rules and regulations of the Securities and Exchange Commission that may at any time permit Seller and the Shareholder to sell or distribute without registration the Inmark Shares, Inmark agrees to file with the Securities and Exchange Commission in a timely manner all reports and other documents required to be filed by it under the Exchange Act and, upon reasonable request, to take any other actions necessary or appropriate to permit the Inmark Shares to be sold under Rule 144, including, but not limited to, furnishing any reasonably requested opinions of counsel to Inmark's transfer agent and the removal of any restrictive legends from stock certificates. 8.3 Inmark Shares Lock-Up Agreement. Notwithstanding anything to the contrary contained herein, (a) neither Seller nor the Shareholder shall transfer or sell any Inmark Shares until the first anniversary of the Closing Date, (b) neither Seller nor the Shareholder shall transfer or sell more than one-third of its Inmark Shares during the period from the first anniversary of the Closing Date through the second anniversary of the Closing Date or more than a total of two-thirds of its Inmark Shares (including the Inmark Shares sold prior to the second anniversary of the Closing Date) prior to the third anniversary of the Closing Date, except that the foregoing restrictions on sale of Inmark Shares (a) shall not apply to transfers of Seller's Inmark Shares to the Shareholder or to Bryen and (b) shall be void and of no further effect with respect to the Shareholder if his employment with Purchaser is terminated (i) by Purchaser without "cause" (as defined in the Shareholder's employment agreement with Purchaser) or (ii) by the Shareholder for "good reason" (as defined in the Shareholder's employment agreement with Purchaser). This Section shall not restrict the transfer of Inmark Shares by will or the laws of intestacy. For purposes of this Section 8.3, the term "Inmark Shares" shall be deemed to 85 include any shares of Inmark issued in stock splits of, or as stock dividends on, the Inmark Shares. ARTICLE 9 GENERAL PROVISIONS 9.1 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by courier service, by telecopy or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 9.1): (a) if to Seller: U.S. Concepts, Inc. 16 West 22nd Street, 2nd Floor New York, New York 10010 Telecopy: (212) 206-0597 Attention: Brian Murphy with a copy to: Corbin Silverman & Sanseverino LLP 805 Third Avenue New York, New York 10022 Telecopy: (212) 308-7189 Attention: James T. Sandnes, Esq. (b) if to the Shareholder: 225 Central Park West, Apt. 1420 New York, New York 10024 86 with a copy to: Corbin Silverman & Sanseverino LLP 805 Third Avenue New York, New York 10022 Telecopy: (212) 308-7189 Attention: James T. Sandnes, Esq. (c) if to Inmark: Inmark Enterprises, Inc. 415 Northern Boulevard Great Neck, New York 11021 Telecopy: (516) 622-2888 Attention: Donald A. Bernard with a copy to: Kronish, Lieb, Weiner & Hellman LLP 1114 Avenue of the Americas New York, New York 10036 Telecopy: (212) 479-6275 Attention: Joseph S. Hellman, Esq. (d) if to Purchaser: U.S. Concepts, Inc. c/o Inmark Enterprises, Inc. 415 Northern Boulevard Great Neck, New York 11021 Telecopy: (516) 622-2888 Attention: Donald A. Bernard 87 with a copy to: Kronish, Lieb, Weiner & Hellman LLP 1114 Avenue of the Americas New York, New York 10036 Telecopy: (212) 479-6275 Attention: Joseph S. Hellman, Esq. 9.2 Public Announcements. Except as required by law, no party to this Agreement shall make, or cause to be made, any press release or public announcement in respect of this Agreement or the transactions contemplated hereby or otherwise communicate with any news media without the prior written consent of the other party. The parties shall cooperate as to the timing and contents of any such press release or public announcement. 9.3 Headings. The descriptive headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. 9.4 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any Law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible. 9.5 Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto with respect to the 88 subject matter hereof and thereof and supersedes all prior agreements and undertakings, both written and oral, among Seller, the Shareholder, Purchaser and Inmark with respect to the subject matter hereof and thereof except for the Confidentiality Agreement, which shall continue in full force and effect in accordance with its terms after the Closing under this Agreement. 9.6 Assignment. Seller may assign all or any part of its rights under this Agreement to the Shareholder and/or to Bryen. The Shareholder may assign all or any part of his rights under this Agreement to Bryen. Seller shall not otherwise assign this Agreement by operation of law or otherwise without the express written consent of Purchaser and Inmark. The Shareholder shall not assign this Agreement without the express written consent of Purchaser and Inmark except by operation of law. Any consent required by this Section 12.6 may be granted or withheld in the sole discretion of Purchaser or Inmark. 9.7 No Third Party Beneficiaries. This Agreement shall be binding upon and inure solely to the benefit of the parties hereto and their permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. 9.8 Amendment or Termination. No agreement shall be effective to change, modify, waive, release, amend, terminate, discharge or effect an abandonment of this Agreement, in whole or in part, unless such agreement is in writing, refers expressly to this Agreement and is signed by the party against whom enforcement of the change, modification, waiver, release, amendment, termination, discharge or effectuation of the abandonment is sought. 9.9 Remedies and Venue. (a) Except as otherwise specifically provided in this Agreement or in any Related Document, any controversy, claim or dispute arising out of or 89 relating to this Agreement or any Related Document, or the breach, termination, enforceability or validity hereof or thereof, including without limitation the determination of the scope or applicability of this agreement to arbitrate, shall be determined by arbitration in New York City before three arbitrators and administered by the American Arbitration Association (the "AAA") under its Commercial Arbitration Rules (and, if applicable, its Supplementary Procedures for Large, Complex Disputes), provided that persons eligible to be selected as arbitrators shall be limited to attorneys-at-law who (i) are on the AAA's Large, Complex Case Panel or the CPR Foundation Panel of Distinguished Neutrals, or who have professional credentials similar to the attorneys listed on such AAA and CPR panels, and (ii) who have practiced law for at least 15 years as an attorney in New York specializing in either general commercial litigation or general corporate and commercial matters. Judgment upon the award rendered may be entered in any court having jurisdiction. (b) Notwithstanding the foregoing, the parties agree that due to the unique subject matter of this transaction, monetary damages will be insufficient to compensate the non- breaching party in the event of a breach of any non-monetary obligation under this Agreement. Accordingly, the parties agree that the non-breaching party shall be entitled (without prejudice to any other right or remedy to which it may be entitled) to an appropriate decree of specific performance, or an injunction restraining any violation of this Agreement or other equitable remedies to enforce this Agreement (without establishing the likelihood of irreparable injury or posting bond or other security), and the breaching party waives in any action or proceeding brought to enforce this Agreement the defense that there exists an adequate remedy at law. Any action or proceeding with respect to this agreement or the related documents shall be brought exclusively in the courts of the state of New York residing in the borough of Manhattan or of the United States of America for the Southern District of New York, and, by execution 90 and delivery of this Agreement, each party hereto hereby accepts for itself and in respect of its property, generally and unconditionally, the exclusive jurisdiction of the aforesaid courts. Each party hereto hereby waives, and agrees not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement of this Agreement or any related document, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that this Agreement or any related document may not be enforced in or by said courts or that its property is exempt or immune from execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or (provided that process shall be served in any manner referred to in the following sentence) that service of process upon such party is ineffective. Each party hereto agrees that service of process in any such action, suit or proceeding against it with respect to this agreement may be made upon it in any manner permitted by the laws of the state of New York or the federal laws of the United States. 9.10 Governing Law. The validity and construction of this Agreement and the Related Documents referred to herein shall be governed by the internal laws (and not the principles of conflict of laws) of the state of New York. 9.11 Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 9.12 Expenses. Except as otherwise provided in this Agreement (including, without limitation, Section 7.8), all expenses, including, but not limited to, fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the Related Documents and the 91 transactions contemplated hereby shall be paid by Inmark or Purchaser with respect to all of the foregoing expenses incurred by Seller, the Shareholder, Purchaser and Inmark. 9.13 Schedules. Notwithstanding anything to the contrary contained in this Agreement, information disclosed in one Schedule of this Agreement shall be deemed to be disclosed for purposes of each other Schedule of this Agreement. 9.14 Director and Officer Indemnification. At all times, from and after the Closing, Inmark and the Purchaser agree to indemnify and hold harmless the Shareholder in respect of acts or omissions or alleged acts or omissions occurring on and after the Closing Date in their capacities as employees, officers or directors of Inmark and/or Purchaser to the fullest extent permitted under applicable law and on terms and conditions no less favorable than those made available to the members of the Board of Directors of Inmark. [Signature Pages Follow] 92 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. U.S. CONCEPTS, INC., a New York corporation By: /s/ Brian Murphy ---------------- Brian Murphy President ----------------------------- Brian Murphy U.S. CONCEPTS, INC., a Delaware corporation By: /s/ Donald A. Bernard --------------------- Donald A. Bernard Executive Vice President, Chief Financial Officer and Secretary INMARK ENTERPRISES, INC., a Delaware corporation By: /s/ John P. Benfield -------------------- John P. Benfield President and Chief Executive Officer 93 EX-10.16 3 FIRST AMENDMENT TO LOAN DOCUMENTS FIRST AMENDMENT TO LOAN DOCUMENTS THIS FIRST AMENDMENT TO LOAN AGREEMENT; SECURITY AGREEMENT; and PLEDGE AGREEMENT (this "Amendment") is made as of December 29, 1998 among PNC Bank National Association ("Lender") having offices at One Garret Mountain Plaza, West Paterson, New Jersey 07424, Inmark Enterprises, Inc., a Delaware corporation ("Enterprises"), U.S. Concepts, Inc., a Delaware corporation, ("USC"), Inmark Services, Inc. a Delaware corporation ("Services"), and Optimum Group, Inc., an Ohio corporation (formerly, OG Acquisition Corp.) ("New OGI" and together with Services and USC, the "Borrower"). Enterprises, USC, Services, and New OGI are collectively referred to herein as the "Inmark Group". PRELIMINARY STATEMENT: A. Lender, Enterprises, Services and New OGI entered into a Loan Agreement dated as of March 31, 1998 (as amended hereby and as further amended, supplemented or otherwise modified from time to time, the "Agreement"), pursuant to which, among other things, Lender agreed to make (i) Revolving Loans to Services and New OGI in the aggregate principal amount at any one time outstanding not to exceed $5,000,000 and (ii) a term loan to Services and New OGI in the principal amount of $5,000,000, all upon the terms and subject to the conditions set forth therein. B. Enterprises, Services and New OGI entered into a Security Agreement in favor of Lender dated as of March 31, 1998 (as amended hereby and as further amended, supplemented or otherwise modified from time to time, the "Security Agreement"). C. Enterprises, Services and New OGI entered into a Pledge Agreement in favor of Lender dated as of March 31, 1998 (as amended hereby and as further amended, supplemented or otherwise modified from time to time, the "Pledge Agreement"). D. Enterprises entered into a Guaranty in favor of Lender dated as of March 31, 1998 (as amended hereby and as further amended, supplemented or otherwise modified from time to time, the "Guaranty"). E. Enterprises, Services and New OGI have each requested that Lender consent to the transaction (the "Proposed Transaction") contemplated by the Asset Purchase Agreement among U.S. Concepts, Inc., a New York corporation, Brian Murphy, an individual, ("Murphy"), USC and Enterprises (the "USC Acquisition Agreement"), including, the purchase and acquisition of the Purchased Assets and the assumption of the Assumed Liabilities (as such terms are defined in the USC Acquisition Agreement), and waive any breach by the Inmark Group of Section 5.1 of the Agreement by reason of the Proposed Transaction (the "Waiver"). F. Lender has agreed to the Waiver upon the condition, among others, that each member of the Inmark Group executes and delivers this Amendment. AGREEMENT: 1. Definitions. Capitalized terms used in this Amendment shall have the same meanings given them in the Agreement, unless otherwise defined herein. 2. Addition of USC as Borrower and Grantor. USC hereby becomes and now is for all purposes a "Borrower" or "Grantor," as the case may be, under (and a party to) the Agreement, the Security Agreement, the Pledge Agreement and all other Loan Documents (with all the obligations of a Borrower and Grantor in and under the Loan Documents), as fully as if USC executed and delivered the Agreement and the other Loan Documents as a Borrower on March 31, 1998 and the term "Borrower" and "Grantor" in the Agreement and the other Loan Documents shall now include USC as well as Services and New OGI. Without limiting the generality of the preceding sentences, (a) USC understands and agrees that all of the representations and warranties in the Agreement, the Security Agreement, the Pledge Agreement and the other Loan Documents will be deemed repeated for USC at the date hereof and at the time that each Revolving Loan is made; and (b) USC is bound by (including without limitation that it fully adopts and agrees to perform) all of the covenants, other agreements and other provisions binding on the Borrower contained in the Loan Documents, including, without limitation, to repay money borrowed by the Borrower. 3. Grant of Collateral under Security Agreement. As security for the full and punctual payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of all of the Obligations, whether pursuant to any Loan Document or otherwise, USC hereby pledges, transfers and assigns to Lender (and its successors and assigns), and grants to Lender (and its successors and assigns) security interests in (a) all of the Collateral now or hereafter owned by USC (or to which it has any right, title or interest), wherever located and whether now existing or hereafter created, and (b) all accessions and additions thereto, replacements and substitutions therefor, and proceeds and products thereof. (The security interests granted hereby, and all remedies and other rights stated or referred to in the Security Agreement or any other Loan Document, shall continue in full force and effect until the later of (i) the termination of the Revolving Line of Credit, or (ii) the full, final and indefeasible payment and performance of the Obligations. 4. Grant of Security Collateral under Pledge Agreement. As security for the full and punctual payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of all of the Obligations, whether pursuant to any Loan Document or otherwise, USC hereby pledges, transfers and assigns to Lender (and its successors and assigns), and grants to Lender (and its successors and assigns) security interests in all of its Security Collateral. The security interests granted hereby, and all remedies and other rights stated or referred to in the Pledge Agreement or any other Loan Document, shall continue in full force and effect until the later of (i) the termination of the Revolving Line of Credit, or (ii) the full, final and indefeasible payment and performance of the Obligations. 5. Revised Schedules. To take into account the addition of USC as a Borrower and Grantor, the purchase of the Purchased Assets, the assumption of the Assumed Liabilities and the other s transactions contemplated by the USC Acquisition Agreement, the parties hereby amend the Agreement, the Security Agreement and Pledge Agreement by replacing each of the Schedules thereto with the revised Schedules set forth in Appendix A-1, Appendix A-2 and Appendix A-3 to this Amendment (collectively, the "Revised Schedules"). 2 6. Consent of Other Member of Inmark Group. Each of Enterprises, Services and New OGI hereby consents to the addition of USC as a Borrower under the Agreement and the other Loan Document and acknowledges and agrees that such addition shall not impair, reduce or otherwise affect the obligations of any of them under the Agreement or any other Loan Document. 7. Waivers and Consents. a. The Lender hereby grants a waiver of the Inmark Group's non-compliance with Section 5.1 of the Agreement and of the Event of Default that would otherwise result from a violation of that Section, solely by reason of the Proposed Transaction. Subject to the accuracy, non-violation and satisfaction of each of the representations, warranties, covenants, and conditions set forth herein, Lender hereby consents to the Proposed Transaction. Each member of the Inmark Group agrees that it will hereafter comply fully with this and all other provisions of the Agreement and all other Loan Documents which remain in full force and effect. b. The Lender hereby consents to the change of the location of the chief executive office/chief place of business of Enterprises and Services from One Plaza Road, Greenvale, New York to 415 Northern Boulevard, Great Neck, New York and waives any prior breaches of section 4.2 of the Security Agreement directly related to such change without 30 calendar days prior written notice to Lender; provided, that, without limiting the generality of the Security Agreement, at the sole expense of the Inmark Group, the Inmark Group agrees to execute and deliver to Lender amendments to financing statements and other similar public filings to reflect such change of location. c. The Lender hereby consents to the guarantee by Enterprises of the obligations of USC under that certain Agreement of Sublease dated November 8, 1995 between Ketchum Communications, Inc. and UCS (as assignee of U.S. Concepts, Inc., a New York corporation). d. Except as expressly described above, the foregoing waivers and consents shall not constitute (i) a modification or an alteration of the terms, conditions or covenants of the Agreement or any other Loan Document or (ii) a waiver, release or limitation upon the Lender's exercise of any of its rights and remedies thereunder, which are hereby expressly reserved. This waiver shall not relieve or release any member of the Inmark Group or any guarantor in any way from any of its respective duties, obligations, covenants or agreements under the Agreement or the other Loan Documents or from the consequence of any Event of Default thereunder, except as expressly described above. These waivers and consents shall not obligate the Lender, or be construed to require the Lender, to waive any other Events of Default or defaults, whether now existing or which may occur after the date of this Amendment. 8. Certain Representations and Warranties. In order to induce the Lender to enter into this Amendment, each member of the Inmark Group hereby represents and warrants to the Lender that after giving effect to the transactions contemplated by the Proposed Transaction: a. no Event of Default, or any event which, with the giving of notice, the lapse of time, or both, or the occurrence of any other condition, would constitute an Event of Default, has occurred and is continuing; b. the Agreement, the Security Agreement, the Pledge Agreement and each of the 3 other Loan Documents (as amended by this Amendment), after giving effect to this Amendment, continue to be in full force and effect and to constitute the legal, valid and binding obligations of each member of the Inmark Group that is a party thereto, enforceable against each member of the Inmark Group in accordance with their respective terms; and c. the representations and warranties made by each member of the Inmark Group in or pursuant to the Agreement, the Security Agreement, the Pledge Agreement or any other Loan Document (in each case as amended by this Amendment), or which are contained in any certificate, document or financial or other statement furnished at any time under or in connection herewith or therewith, are each true and correct in on and as of the date hereof, as though made on and as of such date. d. Appendix B to this Amendment contains a true, complete and correct copy of the unaudited pro forma balance sheets of the Inmark Group as at September 30, 1998; (b) such pro forma balance sheets fairly presents on a pro forma basis the financial condition of the Inmark Group as of that date after giving effect to the Proposed Transaction; and (c) such pro forma balance sheets were prepared in accordance with GAAP. 9. Certain Acknowledgments. The parties acknowledge and agree that the term "Loan Documents" includes any Documents relating to any derivative, swap or other similar transactions entered into by any member of the Inmark Group in relation to or in connection with the other Loan Documents, and correspondingly, the term "Obligations" as used in the Loan Documents, includes all the liabilities and obligations under such Documents relating to such derivative, swap or other similar transactions. 10. Conditions to Effectiveness of this Amendment. This Amendment shall become effective upon the satisfaction of the following conditions: a. Notes. In exchange for the Revolving Note and the Term Note, Lender shall have received an Amended and Restated Revolving Note and an Amended and Restated Term Note, each payable to the order of Lender, conforming to the requirements hereof and executed by (a) duly authorized officer(s) of Borrower (including USC). b. Certain Other Loan Documents. Lender shall have received each of the following, duly executed and delivered by the parties thereto (other than Lender) and each of which shall be in full force and effect: i. the letter notifying the account debtors of each member of the Inmark Group of the assignment of the Accounts to Lender, substantially in the form of Exhibit K to the Agreement (with the addition of USC as a signatory) that may be delivered by Lender after an Event of Default. c. Legal Opinion of Counsel to the Inmark Group - Loan Agreement. Lender shall have received a favorable opinion, dated the Closing Date, of Kronish, Lieb, Weiner & Hellman LLP, counsel to the Inmark Group, substantially in the form of Appendix C to this Amendment. 4 d. Legal Opinion of Counsel to the Inmark Group - Acquisition Agreement. Lender shall have received a favorable opinion, dated the Closing Date, of Kronish, Lieb, Weiner & Hellman LLP, counsel to the Inmark Group, substantially in the form of Exhibit F to the USC Acquisition Agreement. e. Legal Opinion of Seller Counsel - Acquisition Agreement. Lender shall have received a favorable opinion, dated the date of this Agreement, of Corbin Silverman & Sanseverino LLP, counsel to Seller under the USC Acquisition Agreement, substantially in the form of Exhibit D to the USC Acquisition Agreement or a letter from such counsel stating that Lender may rely on such opinion in form reasonably satisfactory to Lender. f. Acquisition Agreement Closing; etc. (i) The Proposed Transaction shall have been consummated without any amendment, modification or waiver of any of the provisions of the USC Acquisition Agreement (other than those made to comply with the Loan Documents), (ii) the Inmark Group shall have delivered to Lender a true, complete and correct copy of the USC Acquisition Agreement and each of the Documents executed and delivered by the parties thereto in connection therewith, (iii) each of the parties to the USC Acquisition Agreement shall have executed and delivered to Lender a consent to the collateral assignment of the USC Acquisition Agreement for the benefit of Lender substantially in the form of Exhibit N to the Agreement (but taking into account the conforming changes arising from this Amendment), and (iv) the Inmark Group shall have delivered to Lender evidence that the indebtedness to Chase Manhattan Bank referenced in section 2.3 of the USC Acquisition Agreement has been paid-off and terminated and the security interests granted to the lender parties to the Seller's Loans have been terminated and released. g. Fees and Expenses. The Inmark Group shall have paid all expenses of Lender, including, without limitation, reasonable counsel fees, in connection with the preparation, execution and delivery of this Amendment and all other documents and instruments to be executed and delivered pursuant hereto or in connection herewith, and the transactions contemplated hereby. h. Certificate of Secretary of Assistant Secretary. Lender shall have received a certificate from the Secretary or an Assistant Secretary of each member of the Inmark Group, dated the Closing Date, certifying (as applicable) that or as to (i) attached to each such certificate is a (A) true, complete and correct copy of (I) the resolutions of the Board of Directors of such member of the Inmark Group authorizing among other things (x) the execution, delivery and performance of this Amendment (y) in the case of USC, the granting by it of the Liens provided for in the Loan Documents, and (z) in the case of Parent and USC authorizing the Acquisition Agreement and the transactions contemplated thereby and (B) the By-Laws of USC and (ii) such resolutions and By-Laws have not been amended, modified, revoked or rescinded since the dates on which they were adopted and (iii) the incumbency and signature of each officer signing this Amendment and any other certificate or other document to be delivered pursuant hereto (and another officer of such member of the Inmark Group shall certify as to the incumbency of such Secretary or Assistant Secretary). i. Organizational Documents; Good Standing Certificates. Lender shall have received from USC (i) a certificate of the Secretary of State of the jurisdiction of its incorporation, with an attached copy of the Certificate of Incorporation (or Articles of Incorporation) of USC and (ii) good standing certificates (or comparable certificates) from each Secretary of State (or a similar official) of each jurisdiction where it is qualified to do business. 5 j. Consents, Licenses, Approvals, etc. Lender shall have received copies of all consents, licenses and approvals, if any, required in connection with the execution, delivery and performance by each member of the Inmark Group, and the validity and enforceability against each member of the Inmark Group of this Amendment, and such consents, licenses and approvals shall be in full force and effect. k. Financial Information; Solvency. Lender shall have received (i) a copy of each of the financial statements referred to in section 8.d of this Amendment, and (ii) a certification by the Chief Financial Officer of Parent substantially in the form of Exhibit O to the Agreement (but taking into account the Proposed Transactions) regarding such financial statements and the Solvency of the Inmark Group l. Recordings and Filings; Other Actions. Any documents (including, without limitation, financing statements and an assignment of registered intellectual property) required to be filed, registered or recorded (and that have not already been so filed, registered or recorded) in order to create, in favor of Lender a perfected Lien against the Collateral thereunder with respect to which a Lien may be perfected by a filing under the Uniform Commercial Code or any other applicable law shall have been delivered to Lender duly executed by the appropriate member of the Inmark Group and shall be in proper form to be filed, registered or recorded in each office in each jurisdiction required in order to create in favor of Lender a perfected Lien on the respective Collateral described therein having the priority purported to be granted thereby. Lender shall have also received evidence that all necessary filing fees and all taxes or other expenses related to such filings, registrations or recordings will be paid in full. Lender shall have received evidence that all other actions necessary or, in the opinion of Lender, desirable to perfect the Liens created by the Loan Documents have been taken. m. Searches. Lender shall have received the results of recent searches, in form and substance satisfactory to Lender and by a Person satisfactory to Lender, of (i) Uniform Commercial Code filings which may have been filed with respect to personal property of Seller and USC (including under any tradenames used by it) in each jurisdiction in which it has or, within the last six months, had personal property, (ii) upper and lower court judgment filings which may have been filed against Seller or USC in each jurisdiction referred to in clause (i) above, and (iii) tax lien filings which may have been filed against Seller or USC in each jurisdiction referred to in clause (i) above. n. Evidence of Insurance. Lender shall have received evidence satisfactory to it that USC has obtained policies of insurance required pursuant to section 4.7. o. No Legal Restraints. There shall be no (i) litigation, investigation or other proceeding of or before any Governmental Authority pending or, to the best of knowledge of each member of the Inmark Group, threatened against any member of the Inmark Group or any of its properties or revenues that could have a Material Adverse Effect or (ii) injunction, writ, restraining order or any order of any nature issued by any Governmental Authority directing that the transactions provided for in this Amendment not be consummated as therein provided. p. Additional Matters. Lender shall have received such other certificates, opinions, documents and instruments relating to the transactions contemplated by this Amendment as it may have reasonably requested, and all corporate and other proceedings and all other documents (including, all documents referred to herein and not appearing as exhibits hereto) and legal matters in 6 connection with the transactions contemplated by this Amendment shall be satisfactory in form and substance to Lender and its counsel. 11. North American Holding Corp. The Inmark Group acknowledges, represents, warrants and covenants with respect to its affiliate North American Holding Corp. ("NAHC"): (i) 100 percent of the issued and outstanding equity interests of NAHC is owned by a member of the Inmark Group; (ii) NAHC has no right, title or interest of any kind in or to any asset or property of any kind (tangible, intangible or otherwise); (iii) no member of the Inmark Group has at any time or will at any time permit the conduct of any business of any kind (including, without limitation, the purchase or acquisition (by transfer, conveyance or otherwise) of any asset or property of any kind or the assumption of any liability or obligation of any kind); and (iv) as soon as practicable, Inmark Group will cause the dissolution of NAHC. 12. Counterparts. This Amendment may be executed in several counterparts, each of which, when executed and delivered, shall be deemed an original, and all of which together shall constitute one agreement. 13. Governing Law. This Amendment shall be governed by and construed and interpreted in accordance with the laws of the State of New York, without giving effect to principles of conflicts of law. 14. Effect of Amendment. From and after the effectiveness hereof, all references to the Agreement, the Security Agreement and the Pledge Agreement in the other Loan Documents shall mean the Agreement, the Security Agreement and the Pledge Agreement, respectively, as amended and modified by this Amendment. 15. Ratification. Except as amended and otherwise modified by this Amendment, the Agreement, the Security Agreement, the Pledge Agreement and the other Loan Documents shall remain in full force and effect in accordance with their respective terms. [signature page follows] 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. PNC BANK NATIONAL ASSOCIATION By: /s/ Charles W. Jones --------------------- Name/Title: Charles W. Jones INMARK ENTERPRISES, INC. By: /s/ Donald A. Bernard --------------------- Name/Title: Donald A. Bernard Executive Vice President, Chief Financial Officer and Secretary U.S. CONCEPTS, INC. (a Delaware corporation) By: /s/ Donald A. Bernard --------------------- Name/Title: Donald A. Bernard Executive Vice President, Chief Financial Officer and Secretary INMARK SERVICES, INC. By: /s/ Donald A. Bernard --------------------- Name/Title: Donald A. Bernard Executive Vice President, Chief Financial Officer and Secretary 8 OPTIMUM GROUP, INC. By: Donald A. Bernard --------------------- Name/Title: Donald A. Bernard Executive Vice President, Chief Financial Officer and Secretary 9 EX-10.17 4 SECOND AMENDMENT TO LOAN DOCUMENTS SECOND AMENDMENT TO LOAN DOCUMENTS THIS SECOND AMENDMENT TO LOAN AGREEMENT; SECURITY AGREEMENT; and PLEDGE AGREEMENT (this "Amendment") is made as of January 14, 1999 among PNC Bank National Association ("Lender") having offices at One Garret Mountain Plaza, West Paterson, New Jersey 07424, Inmark Enterprises, Inc., a Delaware corporation ("Enterprises"), U.S. Concepts, Inc., a Delaware corporation, ("USC"), Inmark Services, Inc. a Delaware corporation ("Services"), and Optimum Group, Inc., an Ohio corporation (formerly, OG Acquisition Corp.) ("New OGI" and together with Services and USC, the "Borrower"). Enterprises, USC, Services, and New OGI are collectively referred to herein as the "Inmark Group". PRELIMINARY STATEMENT: A. Lender, Enterprises, Services and New OGI entered into a Loan Agreement dated as of March 31, 1998 (as amended by a First Amendment to Loan Documents dated as of December 29, 1998, to which USC became a party, and as amended hereby and as further amended, supplemented or otherwise modified from time to time, the "Agreement"), pursuant to which, among other things, Lender agreed to make (i) Revolving Loans to Services and New OGI in the aggregate principal amount at any one time outstanding not to exceed $5,000,000 and (ii) a term loan to Services and New OGI in the principal amount of $5,000,000, all upon the terms and subject to the conditions set forth therein. B. Enterprises, Services and New OGI entered into a Security Agreement in favor of Lender dated as of March 31, 1998 (as amended hereby and as further amended, supplemented or otherwise modified from time to time, the "Security Agreement"). C. Enterprises, Services and New OGI entered into a Pledge Agreement in favor of Lender dated as of March 31, 1998 (as amended hereby and as further amended, supplemented or otherwise modified from time to time, the "Pledge Agreement"). D. Enterprises entered into a Guaranty in favor of Lender dated as of March 31, 1998 (as amended hereby and as further amended, supplemented or otherwise modified from time to time, the "Guaranty"). E. Enterprises, Services, New OGI and USC have each requested that Lender increase the aggregate principal amount of the Revolving Loans to Services, USC and New OGI by $2,000,000 so that the aggregate principal amount at any one time outstanding is not to exceed $7,000,000 until December 31, 1999, at which time the amount of the Revolving Loans shall be reduced to $5,000,000. E. Lender has agreed to the increase of the Revolving Loans upon the condition, among others, that each member of the Inmark Group executes and delivers this Amendment. AGREEMENT: 1. Definitions. Capitalized terms used in this Amendment shall have the same meanings given them in the Agreement, unless otherwise defined herein. 2. Section 1.1 (a) of the Loan Agreement is hereby amended to delete "$5,000,00" in the sixth line and substitute "$7,000,000" therefor 3. Certain Representations and Warranties. In order to induce the Lender to enter into this Amendment, each member of the Inmark Group hereby represents and warrants to the Lender that after giving effect to the transactions contemplated by the Proposed Transaction: a. no Event of Default, or any event which, with the giving of notice, the lapse of time, or both, or the occurrence of any other condition, would constitute an Event of Default, has occurred and is continuing; b. the Agreement, the Security Agreement, the Pledge Agreement and each of the other Loan Documents (as amended by this Amendment), after giving effect to this Amendment, continue to be in full force and effect and to constitute the legal, valid and binding obligations of each member of the Inmark Group that is a party thereto, enforceable against each member of the Inmark Group in accordance with their respective terms; and c. the representations and warranties made by each member of the Inmark Group in or pursuant to the Agreement, the Security Agreement, the Pledge Agreement or any other Loan Document (in each case as amended by this Amendment), or which are contained in any certificate, document or financial or other statement furnished at any time under or in connection herewith or therewith, are each true and correct in on and as of the date hereof, as though made on and as of such date. 4. Certain Acknowledgments. The parties acknowledge and agree that the term "Loan Documents" includes any Documents relating to any derivative, swap or other similar transactions entered into by any member of the Inmark Group in relation to or in connection with the other Loan Documents, and correspondingly, the term "Obligations" as used in the Loan Documents, includes all the liabilities and obligations under such Documents relating to such derivative, swap or other similar transactions. 5. Conditions to Effectiveness of this Amendment. This Amendment shall become effective upon the satisfaction of the following conditions: 2 a. Note. In exchange for the Amended and Restated Revolving Note dated December 29, 1998 as of March 31, 1998, Lender shall have received a Second Amended and Restated Revolving Note payable to the order of Lender, conforming to the requirements hereof and executed by (a) duly authorized officer(s) of Borrower. b. Certain Other Loan Documents. Lender shall have received each of the following, duly executed and delivered by the parties thereto (other than Lender) and each of which shall be in full force and effect. c. Fees and Expenses. The Inmark Group shall have paid all expenses of Lender, including, without limitation, an amendment fee in the amount of $10,000, reasonable counsel fees, in connection with the preparation, execution and delivery of this Amendment and all other documents and instruments to be executed and delivered pursuant hereto or in connection herewith, and the transactions contemplated hereby. d. Certificate of Secretary of Assistant Secretary. Lender shall have received a certificate from the Secretary or an Assistant Secretary of each member of the Inmark Group, dated the Closing Date, certifying (as applicable) that or as to (i) attached to each such certificate is a true, complete and correct copy of the resolutions of the Board of Directors of such member of the Inmark Group authorizing among other things the execution, delivery and performance of this Amendment and (ii) such resolutions have not been amended, modified, revoked or rescinded since the dates on which they were adopted and (iii) the incumbency and signature of each officer signing this Amendment and any other certificate or other document to be delivered pursuant hereto (and another officer of such member of the Inmark Group shall certify as to the incumbency of such Secretary or Assistant Secretary). e. Recordings and Filings; Other Actions. Any documents (including, without limitation, financing statements and an assignment of registered intellectual property) required to be filed, registered or recorded (and that have not already been so filed, registered or recorded) in order to create, in favor of Lender a perfected Lien against the Collateral thereunder with respect to which a Lien may be perfected by a filing under the Uniform Commercial Code or any other applicable law shall have been delivered to Lender duly executed by the appropriate member of the Inmark Group and shall be in proper form to be filed, registered or recorded in each office in each jurisdiction required in order to create in favor of Lender a perfected Lien on the respective Collateral described therein having the priority purported to be granted thereby. Lender shall have also received evidence that all necessary filing fees and all taxes or other expenses related to such filings, registrations or recordings will be paid in full. Lender shall have received evidence that all other actions necessary or, in the opinion of Lender, desirable to perfect the Liens created by the Loan Documents have been taken. f. No Legal Restraints. There shall be no (i) litigation, investigation or other proceeding of or before any Governmental Authority pending or, to the best of knowledge of each member of the Inmark Group, threatened against any member of the Inmark Group or any of its properties or revenues that could have a Material Adverse Effect or (ii) injunction, writ, restraining order or any order of any nature issued by any Governmental Authority directing that the transactions provided for in this Amendment not be consummated as therein provided. 3 g. Additional Matters. Lender shall have received such other certificates, opinions, documents and instruments relating to the transactions contemplated by this Amendment as it may have reasonably requested, and all corporate and other proceedings and all other documents (including, all documents referred to herein and not appearing as exhibits hereto) and legal matters in connection with the transactions contemplated by this Amendment shall be satisfactory in form and substance to Lender and its counsel. 6. Counterparts. This Amendment may be executed in several counterparts, each of which, when executed and delivered, shall be deemed an original, and all of which together shall constitute one agreement. 7. Governing Law. This Amendment shall be governed by and construed and interpreted in accordance with the laws of the State of New York, without giving effect to principles of conflicts of law. 8. Effect of Amendment. From and after the effectiveness hereof, all references to the Agreement, the Security Agreement and the Pledge Agreement in the other Loan Documents shall mean the Agreement, the Security Agreement and the Pledge Agreement, respectively, as amended and modified by this Amendment. 9. Ratification. Except as amended and otherwise modified by this Amendment, the Agreement, the Security Agreement, the Pledge Agreement and the other Loan Documents shall remain in full force and effect in accordance with their respective terms. [signature page follows] 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. PNC BANK NATIONAL ASSOCIATION By: /s/ Charles W. Jones ----------------------- Name/Title: Charles W. Jones, VP INMARK ENTERPRISES, INC. By: /s/ John P. Benfield ----------------------- Name/Title: John P. Benfield, CEO U.S. CONCEPTS, INC. (a Delaware corporation) By: /s/ Brian Murphy ----------------------- Name/Title: Brian Murphy, President INMARK SERVICES, INC. By: /s/ John P. Benfield ----------------------- Name/Title: John P. Benfield, CEO OPTIMUM GROUP, INC. By: /s/ Thomas E. Lachenman ----------------------- Name/Title: Thomas E. Lachenman, CEO 5 EX-10.18 5 THIRD AMENDMENT TO LOAN DOCUMENTS THIRD AMENDMENT TO LOAN DOCUMENTS THIS THIRD AMENDMENT TO LOAN AGREEMENT; SECURITY AGREEMENT; and PLEDGE AGREEMENT (this "Amendment") is made as of June 30, 1999 among PNC Bank National Association ("Lender") having offices at One Garret Mountain Plaza, West Paterson, New Jersey 07424, Inmark Enterprises, Inc., a Delaware corporation ("Enterprises"), U.S. Concepts, Inc., a Delaware corporation, ("USC"), Inmark Services, Inc. a Delaware corporation ("Services"), and Optimum Group, Inc., an Ohio corporation (formerly, OG Acquisition Corp.) ("New OGI" and together with Services and USC, the "Borrower"). Enterprises, USC, Services, and New OGI are collectively referred to herein as the "Inmark Group". PRELIMINARY STATEMENT: A. Lender, Enterprises, Services and New OGI entered into a Loan Agreement dated as of March 31, 1998 ((i) as amended by a First Amendment to Loan Documents dated as of December 29, 1998, to which USC became a party, (ii) as amended by a Second Amendment to Loan Documents dated as of January 14, 1999, and (iii) as amended hereby and as further amended, supplemented or otherwise modified from time to time, the "Agreement"), pursuant to which, among other things, Lender agreed to make (i) Revolving Loans to Borrower in the aggregate principal amount at any one time outstanding not to exceed $7,000,000 and (ii) a term loan to Borrower in the principal amount of $5,000,000, all upon the terms and subject to the conditions set forth therein. B. The Inmark Group has requested that Lender waive the non-compliance by Borrower of certain of its covenants under Sections 4.5(c), 6.1, 6.2 and 6.4 of the Agreement (such waivers as expressly described and limited herein shall be referred to collectively as "Waivers"). C. Lender has agreed to the Waivers upon the condition, among others, that each member of the Inmark Group agrees to the amendments set forth herein and executes and delivers this Amendment. AGREEMENT: 1. Definitions. Capitalized terms used in this Amendment shall have the same meanings given them in the Agreement, unless otherwise defined herein. 2. Section 1.1(a). Section 1.1(a) of the Agreement is hereby amended to delete "$7,000,000" in the sixth line and substitute "$5,000,000" therefor. 3. Section 3.8. The Lender hereby acknowledges that the events described in the letter dated June 30, 1999 from counsel to the Inmark Group to counsel to the Lender and attached hereto as Exhibit A relative to Agreement of Sublease dated November 8, 1995 between Ketchum Communications, Inc., and USC, as assignee of U.S Concepts, Inc., a New York corporation (the "Sublease") solely for the purposes of Section 3.8 of the Agreement do not constitute a default under the Sublease which individually or in the aggregate has a Material Adverse Effect on USC. 4. Section 4.5(c). The Lender hereby grants a waiver of Borrower's non-compliance with Section 4.5(c) of the Agreement, solely in respect of Borrower's failure to deliver the required monthly financial statements and Accounts aging report and account payable aging reports in respect of the months ended April 30,1999 (the "April 1999 Report") and May 31,1999 (the "May 1999 Report"), and of the Event of Default that would otherwise result from a violation of that Section, solely by reason of such non-compliance. The Inmark Group agrees that failure to submit the April 1999 Report and May 1999 Report to Lender on or before July 15,1999 and July 31, 1999 respectively shall constitute a breach of the Agreement, retroactive to the date of Borrower's initial non-compliance with Section 4.5(c). 5. Section 6.1. a. Waiver. The Lender hereby grants a waiver of Borrower's non-compliance with Section 6.1 of the Agreement, solely in respect of the quarter ended March 31, 1999, and of the Event of Default that would otherwise result from a violation of that Section, solely by reason of such non-compliance. b. Amendment. Section 6.1 of the Loan Agreement is hereby amended to replace the Minimum EBITDA amounts corresponding to the following dates with the respective adjusted amounts set forth below: Quarter Ended Minimum EBITDA June 30, 1999 $2,050,000 September 30, 1999 $3,210,000 December 31, 1999 $3,450,000 6. Section 6.2. a. Waiver. The Lender hereby grants a waiver of Borrower's non-compliance with Section 6.2 of the Agreement, solely in respect of the quarter ended March 31, 1999, and of the Event of Default that would otherwise result from a violation of that Section, solely by reason of such non-compliance. b. Amendment. Section 6.2 of the Loan Agreement is hereby amended to replace the Maximum Senior Debt Leverage Ratio corresponding to the following dates with the respective adjusted ratios set forth below: Quarter Ended Maximum Senior Debt Leverage Ratio June 30, 1999 4.15:1 September 30, 1999 2.75:1 December 31, 1999 2.50:1 7. Section 6.4 The Lender hereby grants a waiver of Borrower's non-compliance with Section 6.4 of the Agreement, solely in respect of the quarter ended March 31, 1999, and of the Event of Default that would otherwise result from a violation of that Section, solely by reason of such non-compliance. 2 8. Applicable Margin. The "Applicable Margin," as defined in Section 1.1 of Exhibit A, is hereby amended to replace the rates applicable for the corresponding Total Leverage Ratio with the following adjusted rates set forth below: Applicable Margin for Applicable Margin Senior Debt Leverage Ratio Eurodollar Rate Loans for Base Rate Loans less than 1.5:1 1.50% 0.00% less than 2.0:1 but greater 2.00% 0.50% than or equal to 1.5:1 less than 3.0:1 but greater 2.50% 1.00% than or equal to 2.0:1 greater than or equal to 3.0:1 3.00% 1.50% 9. Interest Period. The portion of the second sentence of the definition of "Interest Period," in Section 1.1 of Exhibit A, up to the colon, is hereby amended and restated as follows: "The duration of each such Interest Period shall be three months, provided that:" The portion of such second sentence following the colon shall remain unchanged. 10. Other Covenants. Each member of the Inmark Group, jointly and severally, covenants and agrees that it shall furnish to the Lender in form and substance satisfactory to Lender: a. As soon as available, but in no event later than 45 calendar days after the end of the quarters ending June 30, 1999, September 30, 1999 and December 31, 1999, at the Inmark Group's sole cost and expense, a report in form and substance reasonably acceptable to Lender that includes (i) a cover letter from KPMG LLP pertaining to its review of the financial statements of the Inmark Group and (ii) a special report from KPMG LLP pertaining to its testing of not less than 75 percent of the revenue recognized in the applicable quarter by Services -- it being agreed that such report shall include KPMG LLP's review and analysis of, among other things, Services' following of its corporate policies for revenue recognition, Services' matching of expenses and accruals in accordance with GAAP and such other matters customarily found in reports of this type from accounting firms; and b. No later than July 31, 1999, a written plan, prepared and approved by the management of the Inmark Group, that sets forth in reasonable detail (together with estimated time frames) to address (and cure) the issues raised in the management letter, dated June 10, 1999, from KPMG LLP to the Inmark Group. 11. Additional Fees. The Inmark Group acknowledges and agree that if the Maximum Senior Debt Leverage Ratio is not reduced below 2.0:1 in respect of the quarter ended December 31, 1999, Borrower shall pay to Lender an additional fee of $25,000, as soon as practicable, but in no case later than January 15, 2000. 12. Collection of Receivables. If requested by Lender, Borrower shall establish and maintain at an office of Lender a lockbox (the "Lockbox"), pursuant to Lender's form of Lockbox Agreement (the "Lockbox Agreement"), for the collection of payments in respect of Accounts. When such Lockbox is 3 established, Borrower will direct each Account debtor to remit all payments in respect of Accounts directly into the Lockbox. If, notwithstanding such instructions, the borrower receives the proceeds of any Accounts, it shall receive them as the Lender's trustee, shall not commingle them with Borrower's other funds and shall immediately deliver such payments to the Lender in their original form, duly endorsed in blank or shall deposit them into a payment account, as the Lender may direct. Each deposit of any such proceeds of Accounts shall be accompanied by information describing the source of the funds. Lender may, at any time, notify Account debtors that the Accounts have been assigned to the Lender and may collect them directly and charge Borrower for the costs and expenses of collection. Borrower, at Lender's request, shall execute and deliver to the Lender the Lockbox Agreement, any documents contemplated by the Lockbox Agreement and such other documents as Lender shall require in connection with the foregoing. For the avoidance of doubt, the Lockbox Agreement, if executed, shall be considered a "Loan Document." 13. Certain Representations and Warranties. a. In order to induce the Lender to enter into this Amendment, each member of the Inmark Group hereby represents and warrants to the Lender that after giving effect to the Waivers and the amendments contemplated by this Amendment that: (1) no Event of Default, or any event which, with the giving of notice, the lapse of time, or both, or the occurrence of any other condition, would constitute an Event of Default, has occurred and is continuing; (2) the Agreement, the Security Agreement, the Pledge Agreement and each of the other Loan Documents (as amended by this Amendment), after giving effect to this Amendment, continue to be in full force and effect and to constitute the legal, valid and binding obligations of each member of the Inmark Group that is a party thereto, enforceable against each member of the Inmark Group in accordance with their respective terms; (3) the representations and warranties made by each member of the Inmark Group in or pursuant to the Agreement, the Security Agreement, the Pledge Agreement or any other Loan Document (in each case as amended by this Amendment), or which are contained in any certificate, document or financial or other statement furnished at any time under or in connection herewith or therewith, are each true and correct in on and as of the date hereof, as though made on and as of such date; (4) the "draft" quarterly financial statements for the Inmark Group for the quarter ended March 31, 1999 and delivered to Lender were prepared in accordance with GAAP and fairly present the financial condition and operating results of the Inmark Group as of that date; (5) the "draft" financial statements for year ended March 31, 1999 for the Inmark Group delivered to Lender were prepared in accordance with GAAP and fairly present the financial condition and operating results of the Inmark Group as of that date; and the KPMG LLP audited financial statements for the Inmark Group for the same period will not reflect any modification from such draft (other than non-material modifications). 14. Conditions to Effectiveness of this Amendment. This Amendment shall become effective upon the satisfaction of the following conditions: 4 a. Mandatory Prepayment. Borrower shall have prepaid the outstanding principal amount of the Term Loan in an amount equal to $1,340,000. b. Note. In exchange for the Second Amended and Restated Revolving Note, Lender shall have received a Third Amended and Restated Revolving Note, payable to the order of Lender, conforming to the requirements hereof and executed by (a) duly authorized officer(s) of Borrower. c. Fees and Expenses. The Inmark Group shall have paid all expenses of Lender, including, without limitation, (i) an amendment fee in the amount of $25,000 and (ii) reasonable fees and expenses of counsel, in connection with the preparation, execution and delivery of this Amendment and all other documents and instruments to be executed and delivered pursuant hereto or in connection herewith, and the transactions contemplated hereby. d. Recordings and Filings; Other Actions. Any documents (including, without limitation, financing statements and an assignment of registered intellectual property) required to be filed, registered or recorded (and that have not already been so filed, registered or recorded) in order to create, in favor of Lender a perfected Lien against the Collateral thereunder with respect to which a Lien may be perfected by a filing under the Uniform Commercial Code or any other applicable law shall have been delivered to Lender duly executed by the appropriate member of the Inmark Group and shall be in proper form to be filed, registered or recorded in each office in each jurisdiction required in order to create in favor of Lender a perfected Lien on the respective Collateral described therein having the priority purported to be granted thereby. Lender shall have also received evidence that all necessary filing fees and all taxes or other expenses related to such filings, registrations or recordings will be paid in full. Lender shall have received evidence that all other actions necessary or, in the opinion of Lender, desirable to perfect the Liens created by the Loan Documents have been taken. e. No Legal Restraints. There shall be no (i) litigation, investigation or other proceeding of or before any Governmental Authority pending or, to the best of knowledge of each member of the Inmark Group, threatened against any member of the Inmark Group or any of its properties or revenues that could have a Material Adverse Effect or (ii) injunction, writ, restraining order or any order of any nature issued by any Governmental Authority directing that the transactions provided for in this Amendment not be consummated as therein provided. f. Additional Matters. Lender shall have received such other certificates, opinions, documents and instruments relating to the transactions contemplated by this Amendment as it may have reasonably requested, and all corporate and other proceedings and all other documents (including, all documents referred to herein and not appearing as exhibits hereto) and legal matters in connection with the transactions contemplated by this Amendment shall be satisfactory in form and substance to Lender and its counsel. 15. Condition Subsequent. This Amendment shall become automatically void and of no force and effect if on or prior to July 1, 1999 Lender shall not have received a certificate from the Secretary or an Assistant Secretary of each member of the Inmark Group, dated the Closing Date, certifying (as applicable) that or as to (i) attached to each such certificate is a true, complete and correct copy of the resolutions of the Board of Directors of such member of the Inmark Group authorizing among other things the execution, delivery and performance of this Amendment and (ii) such resolutions have not been amended, modified, 5 revoked or rescinded since the dates on which they were adopted and (iii) the incumbency and signature of each officer signing this Amendment and any other certificate or other document to be delivered pursuant hereto (and another officer of such member of the Inmark Group shall certify as to the incumbency of such Secretary or Assistant Secretary). 16. Counterparts. This Amendment may be executed in several counterparts, each of which, when executed and delivered, shall be deemed an original, and all of which together shall constitute one agreement. 17. Governing Law. This Amendment shall be governed by and construed and interpreted in accordance with the laws of the State of New York, without giving effect to principles of conflicts of law. 18. Effect of Amendment. From and after the effectiveness hereof, all references to the Agreement, the Security Agreement, the Pledge Agreement in the other Loan Documents shall mean the Agreement, the Security Agreement, the Pledge Agreement, respectively, as amended and modified by this Amendment. 19. Ratification; Effect of Waivers. Except as amended and otherwise modified by this Amendment, the Agreement, the Security Agreement, the Pledge Agreement and the other Loan Documents shall remain in full force and effect in accordance with their respective terms. Except as expressly described above, the Waivers shall not constitute (i) a modification or an alteration of the terms, conditions or covenants of the Agreement, the Security Agreement, the Pledge Agreement or any other Loan Document or (ii) a waiver, release or limitation upon the Lender's exercise of any of its rights and remedies thereunder, which are hereby expressly reserved. The Waivers shall not relieve or release any member of the Inmark Group or any guarantor in any way from any of its respective duties, obligations, covenants or agreements under the Agreement, the Security Agreement, the Pledge Agreement or the other Loan Documents or from the consequence of any Event of Default thereunder, except as expressly described above. The Waivers shall not obligate the Lender, or be construed to require the Lender, to waive any other Events of Default or defaults, whether now existing or which may occur after the date of this Amendment. [signature page follows] 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. PNC BANK NATIONAL ASSOCIATION By: /s/ Charles W. Jones -------------------- Name/Title: Charles W. Jones Vice President INMARK ENTERPRISES, INC. By: /s/ Donald A. Bernard --------------------- Name/Title: Donald A. Bernard Executive Vice President U.S. CONCEPTS, INC. (a Delaware corporation) By: /s/ Donald A. Bernard --------------------- Name/Title: Donald A. Bernard Executive Vice President INMARK SERVICES, INC. By: /s/ Donald A. Bernard --------------------- Name/Title: Donald A. Bernard Executive Vice President OPTIMUM GROUP, INC. By: /s/ Donald A. Bernard --------------------- Name/Title: Donald A. Bernard Executive Vice President 7 EX-21 6 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Subsidiaries of the Registrant Wholly-Owned Subsidiaries of Inmark Enterprises, Inc. (Registrant): State of Incorporation Inmark Services, Inc. New York U.S. Concepts, Inc. Delaware Wholly-Owned Subsidiary of the Registrant's Wholly- Owned Subsidiary, Inmark Services, Inc.: Optimum Group, Inc. Ohio North American Holding Corp., a wholly-owned subsidiary of the Registrant incorporated in Delaware, was dissolved on May 17, 1999 EX-23 7 CONSENT OF INDEPENDENT AUDITORS Exhibit 23 Consent of Independent Auditors The Board of Directors Inmark Enterprises, Inc. We consent to incorporation by reference in the registration statements (No. 333-02392) on Form S-8 and No. 333-60157 on Form S-3) of Inmark Enterprises, Inc. of our report dated June 10, 1999, except as to note 5, which is as of June 30, 1999, relating to the consolidated balance sheets of Inmark Enterprises, Inc. and subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for the three years then ended, which report appears in the March 31, 1999 annual report on Form 10-K of Inmark Enterprises, Inc. KPMG LLP Melville, New York June 30, 1999 EX-27 8 FINANCIAL DATA SCHEDULE
5 1 12-MOS Mar-31-1999 Apr-01-1998 Mar-31-1999 2,687,575 0 16,580,180 0 0 21,146,779 1,820,479 453,341 42,452,443 18,000,338 0 0 0 4,513 12,572,592 42,452,443 38,781,136 38,781,136 26,311,235 26,311,235 9,521,032 0 717,969 2,230,900 892,361 1,338,539 0 0 0 1,338,539 .30 .24
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