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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission File No. 0-17118
Mark Solutions, Inc.
(Exact name of registrant as specified in its charter)
Delaware 112864481
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
Parkway Technical Center
1515 Broad Street, Bloomfield, New Jersey 07003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 893-0500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $ .01 par value
Class A Common Stock Purchase Warrants
--------------------------------------
(Title of class)
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 other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ].
The aggregate market value of the 12,927,231 shares of Common Stock held by
non-affiliates of the Registrant on September 23, 1997 was $48,477,116 based on
the closing sales price of $3.75 on September 23, 1997.
The number of shares of Common Stock outstanding as of September 23, 1997
was 15,904,487.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
Item 1. Business
(a) General Development of Business.
Mark Solutions, Inc. ("Mark") is a Delaware corporation which operates its
various businesses through wholly-owned subsidiaries and a division.
Mark is engaged in the design, manufacture, and/or distribution of (i)
modular steel cells for housing of the general prison population as well as for
use as infectious disease isolation units for correctional institutions and
health care facilities, (ii) diagnostic support and archiving computer systems
marketed under the name "IntraScan" and (iii) a treatment booth for communicable
diseases.
In its marketing of modular steel products, Mark responds to public bids
and pursues joint ventures and affiliations with other companies to solicit
design, build and/or operate correctional facilities projects both domestically
and internationally.
Mark was incorporated under the laws of the State of Delaware on September
29, 1986 under the name "Showcase Cosmetics, Inc."
(b) Financial Information about Industry Segments
The following table sets forth information regarding Mark's industry
segments and classes of products. Information regarding discontinued cosmetics
operations, which were sold in October 1995, is excluded.
Fiscal Year Ended June 30,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
Sales to unaffiliated
customers:
Mark Correctional Systems:
Modular Cells .............. $ 6,114,195 $ 3,256,574 $ 5,949,490
----------- ----------- -----------
MarkCare Medical Systems:
IntraScan .................. 224,125 41,946 15,000
Treatment Booths ............ 111,424 156,095 161,083
----------- ----------- -----------
335,549 198,041 176,083
----------- ----------- -----------
$ 6,449,744 $ 3,454,615 $ 6,125,573
=========== =========== ===========
Operating Loss:
Mark Correctional Systems ...... $(2,706,272) $(4,508,406) $(3,055,631)
MarkCare Medical Systems ....... (1,035,934) (555,462) (671,099)
Identifiable Assets:
Mark Correctional Systems ...... $ 5,002,432 $ 1,317,620 $ 3,505,086
MarkCare Medical Systems ....... 429,845 1,766,143 268,795
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(c) Narrative Description of Business
Products and Services
Mark Correctional Systems Division
Mark operates its modular steel cell and infectious disease isolation unit
business through its division, Mark Correctional Systems.
Modular Cells. Since the initial sale of its prefabricated modular steel
cells for housing the general prison population in 1989, Mark has manufactured
and sold security prison cells in 14 states including Indiana, Illinois, New
York, New Jersey, Michigan, Missouri, Washington and Wisconsin. Revenues
generated by the sale of cells to correctional facilities aggregated $6,114,195
or 94.8% of Mark's total operating revenues for the fiscal year ended June 30,
1997.
These revenues are primarily attributable to nine projects including $
3,122,451 attributable to the New York State agreement described below.
Effective March 15, 1996, Mark received a three-year agreement from the
State of New York to be the exclusive supplier of modular steel prison cells and
shower facilities. Management anticipates that this contract will generate
revenues of approximately $50,000,000 over its term, which would represent
Mark's largest contract to date. Pursuant to the agreement, Mark will provide
complete, partially complete and/or components of modular units and support
services to Corcraft (Department of Corrections-Division of Industries) for sale
to State and local governments. The agreement has a stated estimate of 2,455
cells over the three years; however no minimum volume is guaranteed and purchase
orders are to be issued for specific projects. The State of New York reserves
the right to renegotiate the stated contract prices or solicit third party bids
for any single order of 700 or more cells. At its option, New York State may
license the manufacture of the entire cell and will not be obligated to pay
additional licensing fees after (i) Mark receives total payments of $15,000,000
under the agreement, (ii) the total number of cells manufactured under the
license exceeds 1,000 or (iii) the fifth anniversary date of the agreement. On
August 25, 1997, Mark received a purchase order of approximately $12,000,000
from New York State under this agreement which is scheduled to be completed by
December 31, 1997.
Mark's modular cell is a prefabricated, installation-ready, lightweight
steel structure which is manufactured according to the construction and security
specifications of each correctional institution project in sizes from 60 to 200
square feet. Each modular cell can be equipped with lavatory facilities;
wall-mounted sleeping accommodations; desk and stool; lighting and ventilation
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systems; and optional components such as fixed or operable windows and hinged or
sliding security doors. Each modular cell is constructed of durable low
maintenance, non-porous materials including a scratch resistant epoxy polymer
finish and is acoustically and thermally insulated.
The modular cell's lightweight construction requires less extensive and
costly foundation work than a traditional (e.g. concrete) cell, and is designed
with a self-contained exterior access panel which allows for simple ventilation,
plumbing and electrical connections. Each cell is load-bearing to allow for
multiple-story construction, and is manufactured to tolerances of 1/16 of an
inch, which results in more efficient and faster on-site installation.
Infectious Disease Isolation Units. Mark initially adapted its modular cell
design to the manufacturing of infectious disease isolation units in 1992 for a
court-ordered project at a New York City correctional institution on Rikers
Island. Mark focuses its infectious disease isolation unit marketing efforts on
correctional institutions and healthcare facilities.
In addition to the modular cell features, the infectious disease isolation
units are equipped with shower facilities and a protective anteroom for
healthcare providers and other individuals coming in contact with the occupant.
To prevent the escape of contaminated air, each unit is equipped with a negative
pressure ventilation system, which safely discharges the air externally. Mark's
epoxy polymer finish also allows for more effective bacteriological cleansing of
the unit.
Infectious disease isolation units are designed and manufactured according
to the specific requirements of the project, including security requirements of
correctional institutions. In addition, the units are subject to the guidelines
and regulations of OSHA, NIOSH, the Centers for Disease Control and Prevention
and applicable building codes including specific health guidelines which were
established to provide effective treatment of the patient and the safety of
medical providers including negative pressure requirements, filtration standards
and air flow systems.
MarkCare Medical Systems, Inc.
Mark operates its healthcare products business through MarkCare Medical
Systems, Inc., a wholly-owned Maryland subsidiary ("MarkCare-US") and MarkCare
Medical Systems, Ltd., a wholly-owned United Kingdom subsidiary (MarkCare-UK").
MarkCare-US and MarkCare UK are collectively referred to as "MarkCare".
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IntraScan II System. Since its acquisition of MarkCare-UK in May 1996,
MarkCare has primarily focused its marketing efforts on IntraScan II, a
"filmless" picture, archiving and communications system (PACS). IntraScan II is
marketed to radiology departments, large healthcare facilities, hospitals and
outpatient imaging group practices primarily through a marketing agreement with
Data General Corporation ("Data General") described below.
IntraScan II is a computer-based image, archival and retrieval system that
interfaces with medical imaging devices and can store and recall images from
imaging modalities including x-ray, computed tomography (CAT Scan), computed
radiography, nuclear medicine, ultra sound and magnetic resonance imaging (MRI).
While Mark is aware of similar systems in various stages of development,
management believes the IntraScan II is the only system which is designed to be
platform independent allowing the software to operate with most computer
hardware and operating systems.
IntraScan II has a high resolution display capability (512 X 512 to 2000 X
2500 pixels). The high resolution allows medical providers to make diagnoses
from computer digital images without the need for radiographic film. This
capability eliminates the processing time for film development allowing faster
diagnoses and significantly reduces the costs related to film development and
patient record storage.
The IntraScan II system allows image manipulation, including simulation of
the multi-image view box which allows side-by-side comparisons of images from
different modalities (e.g. x-ray and CAT Scan).
In addition, the IntraScan II system allows for networking between
departments within a healthcare facility or between institutions at different
locations by communication networks. This networking capability coupled with the
high resolution allows efficient and instant transfer of diagnostic quality
images for consultation and transportation of patient records.
The IntraScan II system consists of software programs protected by British
common law copyrights and standard hardware computer equipment as to which Mark
has no proprietary interests.
Effective March 18, 1996, Mark entered into a Master Supplier Agreement
with Data General pursuant to which Mark provides IntraScan II software and
related services to Data General to be incorporated into PACS sales proposals
and bids to healthcare facilities. The products and services to be provided by
Mark will be negotiated between Mark and Data General on a project by project
basis. Pursuant to this agreement, Mark is Data General's exclusive supplier of
PACS software products and Mark is permitted to market and sell the IntraScan II
software to other distributors or systems integrators.
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While no assurances can be given, Mark believes that the sales related to
the IntraScan II system, will generate material revenues in the fiscal year
ending June 30, 1998.
IntraScan I System. MarkCare continues to market its IntraScan I system on a
limited basis to radiologists, gynecologists, urologists and small independent
medical practices.
The IntraScan I system is a computer-based diagnostic support product for
ultrasound equipment. IntraScan I is an archiving and image enhancing system
which enables medical technicians to manipulate ultrasound images for improved
diagnostic capabilities. The information archiving applications of IntraScan I
can be networked similar to the IntraScan II system.
The IntraScan I system consists of software programs protected by U.S.
copyrights and standard hardware computer equipment as to which Mark has no
proprietary interests.
Treatment Booths. Mark has marketed its treatment booths since 1992 and focuses
its marketing efforts on healthcare facilities. Mark has obtained FDA approval
of the treatment booth as a "class III medical device". See "Regulation."
The treatment booth is a single occupancy 70 cubic foot chamber used in the
observation and treatment of patients with communicable diseases such as
tuberculosis. The booth is designed to isolate patients in order to protect
healthcare workers during sputum induction and to improve the efficacy of the
dispensing of aerosolized drugs. In addition to incorporating the structural
elements and low maintenance material of its modular cell technology, Mark
equips the treatment booth with an air filtration system designed to provide for
up to 450 air changes per hour through a laminar flow design which is monitored
by a meter and alarm. The filtering process circulates air through a HEPA filter
which collects 99.97% of all airborne particles including germs and medicines.
The filtered air is then exposed to ultra-violet light for additional
decontamination and is discharged externally. Mark also offers service
agreements for its treatment booths.
Mark has established safety and operational standards for its treatment
booths based on recommendations from board certified hygienists and other
medical professionals. Certification of booths is conducted by one of three
independent laboratories for compliance with Mark's internal standards and
manufacturers specifications.
Manufacturing and Assembly. Mark manufactures and assembles its modular
cells, infectious disease isolation units and treatment booths at its 74,000
square foot plant located in Jersey City, New Jersey, which is equipped with a
fully automated computer driven design and tooling system. This system allows
for more precise tolerances and faster production output. The raw materials for
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Mark's products, including sheet metal, hardware and other components are
supplied primarily by regional manufacturers. In addition to the manufacture of
the shell of its products, Mark purchases, assembles and installs the ancillary
components including lavatory facilities, shower facilities, desks, stools and
sleeping bunks. Management believes that there are a sufficient number of
national vendors to meet its raw material and component needs, and that Mark is
not dependent upon a limited number of suppliers. With respect to the IntraScan
systems, Mark's primary responsibility will be the development and loading of
software programs on to standard hardware equipment, minimal hardware
modifications and networking. Mark is able to conduct its IntraScan assembly and
modifications activities at the offices of MarkCare-UK and its executive
offices. In the event Mark determines that additional space is necessary based
on orders, management believes that adequate space will be available on
acceptable economic terms.
Delivery and On-Site Services. Mark contracts with several third-party
carriers to deliver the modular cells and infectious disease isolation units to
the construction site. In addition, Mark provides delivery and support services
for its products including installation assistance, operating instructions and
subsequent inspections and testing. Mark also offers certification and
maintenance services through long-term agreements, or on an as requested basis.
Marketing and Sales
Modular Cells and Infectious Disease Isolation Units. The market for Mark's
modular cell and infectious disease isolation units is primarily Federal, state
and local governmental agencies responsible for the construction and maintenance
of correctional institutions. While Mark believes its modular cell technology
has other applications such as temporary emergency housing, for the foreseeable
future the correctional institutions market will represent the substantial
majority of its modular products business. No assurances can be given that any
other markets will develop to any significant degree.
Mark designs prototypes of its modular cells and infectious disease
isolation units for marketing, sales and trade show demonstrations. Mark's
marketing and sales efforts are managed by its Vice President of Sales and
Marketing and include in-person solicitations, direct mail campaigns and
participation in industry trade shows. Mark presently markets and sells its
modular cells and infectious disease isolation units directly and through
independent manufacturers' representatives. Mark's network consists of 14
representatives servicing 25 states and 6 foreign countries including Canada,
Italy, South Africa, Russia and Latin America. Each representative generally
enters into an agreement with Mark which contains certain non-disclosure
restrictions and provides for payment on a commission basis.
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As a result of the New York State agreement, Mark has identified State
prison industries, which operate as job training and rehabilitative programs for
inmates, as a high potential market for its modular cells. Mark is soliciting
interest in the integration of its cells into other prison industries programs
based on the New York State model.
IntraScan Systems. The IntraScan II system is primarily marketed jointly
with Data General as the prime contractor to its existing healthcare client base
and to other healthcare institutions. Mark personnel participate in systems
demonstrations, site visits and assist in the solicitation of and response to
request for proposals. Mark is exploring other strategic alliances with
established medical equipment providers to gain access to exiting clients and to
benefit from such companies' marketing and sales forces. The IntraScan I system
is marketed on an independent limited basis by MarkCare's internal sales
personnel.
Treatment Booths. The marketing and sales efforts related to treatment
booths are conducted by Mark's internal sales personnel and is conducted
primarily through print advertisement.
Sales efforts, which are managed by its Vice President of Sales and
Marketing, include participation in trade shows, print advertising in medical
trade publications, direct mail advertising programs and the use of
demonstration videos.
Bid Process, Subcontracting and Bonding Requirements
Mark has derived the substantial majority of its revenues from state and
local government correctional projects and is consequently required to prepare
and submit bid proposals based on the design and specifications prepared by the
supervising architectural or engineering firm. Mark prepares and submits a
formal bid proposal, which includes price quotations and estimates, selected
material options and construction time estimates. Depending on the nature of the
project, Mark itself may bid, or provide bidding data regarding Mark's products
to a firm which is bidding to become the general contractor for the project. In
the latter case, the Mark data is incorporated in the bid made by the
prospective general contractor. After receipt and review of all accepted bids
the governmental agency awards the contract based on numerous factors including
costs, reputation, completion estimates and subcontracting arrangements. In
those instances where Mark is not the direct bidder but provides bid information
to a general contractor who is ultimately awarded the project, there is no
guarantee that Mark will receive the subcontract business.
The typical time period from submission of bids to awarding of the contract
to the direct bidder (whether Mark or a general contractor) is 60 to 120 days.
In those instances where Mark is not the direct bidder, subcontracts are
generally awarded within an additional 60 to 120 days.
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In connection with some government construction projects, Mark is required
to provide performance and completion bonds as a condition to submission or
participation in a bid. Due to Mark's financial condition, it has generally been
unable to obtain bonds without the assistance and guarantee of third parties
including Mark's President and/or another business entity owned by an outside
director. See "Item 13.-Certain Relationships and Related Transactions". To date
Mark has not limited its bidding activity nor lost any projects due to its
limited bonding capacity. However, as Mark is awarded multiple projects, the
inability to obtain bonds may limit the number of additional projects Mark can
pursue and would have a material adverse effect on operations.
Regulation
Mark modular cells and infectious disease isolation units are subject to
various state building codes including BOCA, UBC, the Southern Building Codes
and criteria established by the American National Standards Institute. In
addition, these products are subject to the guidelines and regulations of OSHA,
NIOSH and Centers for Disease Control and Prevention. The modular cells and
infectious disease isolation units comply with such codes and regulations in all
material respects.
Mark's treatment booth is a "class III medical device" and IntraScan I and
IntraScan II are "class II medical devices" as classified by the Federal Food
and Drug Administration ("FDA") and are subject to the premarket notification
and approval process. Accordingly, the products are regulated by The Federal
Food, Drug and Cosmetic Act and The Safe Medical Devices Act of 1990 regarding
the (i) effectiveness and safety of the product, (ii) condition of the
manufacturing facilities and procedures and (iii) labeling of devices. Mark has
received FDA approval for the treatment booth and the IntraScan systems
authorizing commercial distribution.
Certain aspects of Mark's manufacturing process are regulated by state and
Federal environmental laws. Mark has obtained all necessary licenses and permits
in this regard and is in compliance in all material respects with applicable
environmental laws.
Competition
Modular Cells and Infectious Disease Isolation Units. The construction
industry in general and the governmental construction industry in particular are
highly competitive. Due to the use of concrete and other traditional
construction methods in the substantial majority (approximately 90%) of
correctional facility construction, Mark competes for market share with a number
of major construction companies. Such competition is not with respect to any
particular project, but in persuading the purchasing agency to utilize steel
cell construction rather than traditional methods.
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With respect to those projects which incorporate modular cell
specifications in its design criteria, Mark competes with several other steel
product manufacturers, some of which have greater financial resources than Mark.
In addition, a number of manufacturers which have greater financial and
marketing resources than Mark, and which currently produce sheet metal products,
could ultimately manufacture modular cell and infectious disease isolation units
in competition with Mark.
Although competition in the construction industry is intense, Mark believes
it can compete for market share of correctional facility construction business
by promoting the viability and construction advantages of its technology to the
architectural, engineering and construction industries. In this regard
management emphasizes the uniqueness of its modular cell design which can be
manufactured and installed more efficiently than traditional construction
alternatives by virtue of lower labor and construction costs and shorter
installation time and the life cycle cost savings. Similarly, management
believes that the cost-effective design, operating costs and performance of its
infectious disease units and treatment booths will allow Mark to compete in the
healthcare market, but there can be no assurances in this regard.
IntraScan Systems. With regard to IntraScan II, other companies, which are
larger and better established than Mark, provide PACS systems for radiology
departments. In addition, large film and medical equipment manufacturers may
enter into the PACS business as the potential market is recognized. Mark
believes the effectiveness of the PACS system, features and post-installation
support are significant factors for its market and Mark believes it can compete
by focusing its product development on platform independent software
applications which broadens the market base, continually updating the features
of its software and forming strategic alliances with established healthcare
computer systems providers such as Data General.
Employees
At September 23, 1997 Mark had three management employees, four sales
employees, seven engineering employees and six office and clerical employees.
Mark also employs approximately 23 hourly employees in its manufacturing
facilities who are subject to a collective bargaining agreement with Mark
expiring on August 31, 1998. Management believes its employee relations to be
good.
At September 23, 1997, MarkCare-UK had one executive employee and eight
clerical/software development employees.
Trademarks, Patents and Trade Secrets
Mark owns a patent on certain aspects of its treatment booth expiring in
2014. Mark does not presently own any patents on its modular cells, infectious
disease isolation units or manufacturing
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assembly process. However, Mark attempts to protect its proprietary trade
secrets regarding the design and manufacture of its products through
non-disclosure agreements between Mark its employees and most third-party
suppliers and manufacturers' representatives.
Mark owns two United States copyrights on the software applications of the
IntraScan I system.
The IntraScan II software programs are protected by British common law
copyright. In addition, Mark owns a United States copyright regarding the
IntraScan II software. Mark has applied for patents on several aspects of the
IntraScan II system.
Item 2. Property
Mark leases its executive offices at 1515 Broad Street, Bloomfield, New
Jersey 07003, which consist of 6,500 square feet of space. Mark's lease expires
on December 31, 1998 and provides for monthly rent of $7,200. In addition, Mark
leases 74,000 square feet of manufacturing space in Jersey City, New Jersey
pursuant to a triple net lease expiring on November 15, 2004 at an annual rental
of $174,240 for the initial five years. The rent for the remaining three years
is subject to increases based on the consumer price index at that time.
MarkCare-UK leases its offices, which consist of 1,750 square feet of space
on a month to month basis at a monthly rent of $4,750.
Management believes its present manufacturing facilities and additional
available facilities are sufficient for Mark's current and anticipated needs.
Item 3. Legal Proceedings
Mark is not a party to any litigation other than ordinary routine litigation
incidental to its business.
Item 4. Submission of Matters to a Vote of Security-Holders
Not Applicable
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PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
(a) Market Information.
The following table sets forth for the calendar quarters indicated the high
and low bid prices of Mark's Common Stock and Class A Warrants. The Common Stock
trades on the NASDAQ system, Small Cap market under the symbol "MCSI". The Class
A Warrants trade in the over-the-counter market bulletin board and pink sheets.
Common Stock Class A Warrants
----------------- ------------------
High Low High Low
---- --- ---- ---
1995
1st Quarter 4-1/8 2 3/8 3/8
2nd Quarter 5-1/2 3-1/4 3/8 3/8
3rd Quarter 8-7/8 5-1/4 3-5/8 1-7/8
4th Quarter 8 5-1/4 4 2-1/2
1996
1st Quarter 8-1/4 5-1/2 3-1/2 3-1/4
2nd Quarter 8-3/8 5-1/4 3-5/8 1-7/8
3rd Quarter 6-5/8 5 3-1/4 1-5/8
4th Quarter 5-7/8 1-3/8 4 NA
1997
1st Quarter 2-3/4 15/16 NA NA
2nd Quarter 2-15/16 1 NA NA
3rd Quarter (thru September 23) 4-1/2 1-15/16 3/8 NA
- ----------
Over-the-counter quotations reflect inter-dealer prices without retail
mark-up, mark-down or commission and do not necessarily represent actual
transactions. Trading in Mark's Class A Warrants is sporadic and insignificant.
(b) Holders.
As of September 23, 1997, there were 184 holders of record of the Common
Stock and one holder of record of the Class A Warrants. Mark estimates the
number of beneficial holders of its Common Stock to be in excess of 450. There
are 22 market makers in the Common Stock.
(c) Dividends.
Mark has never paid and does not intend to pay in the foreseeable future,
cash dividends on its Common Stock.
(d) Sales of Unregistered Securities in Fiscal Year 1997.
The following sets forth information regarding private placement of equity
securities by Mark during the fiscal year ended June 30, 1997.
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Mark sold 992,194 shares of Common Stock pursuant to the conversion of
debentures issued in a private placement to Southbrook International
Investments, Ltd. The conversion was effected in reliance of the registration
exemption provided by Section 4(2) of the Securities Act of 1933 (the
"Securities Act") as not involving a public offering due to the limited nature
of the offering and the investor sophistication of the investor.
Mark issued the following warrants to five individuals for sales and/or
investor relations services. Each of the transactions was effected in reliance
of the registration exemption provided by Section 4(2) of the Securities Act as
not involving a public offering due to the limited nature of the offering and
the investor sophistication of the investor.
Number Per Share
of Shares Exercise Warrant Grant
Purchasable Price Term Date
----------- ----- ---- ----
50,000 $ 5.75 2 Years 09/19/96
50,000 5.125 2 Years 09/04/96
100,000 2.00 2 Years 04/01/97
50,000 1.25 3 Years 05/30/97
100,000 2.00 2 Years 06/18/97
Mark issued the following options to its outside directors as compensation
for serving as a Board member. Each of the transactions was effected in reliance
of the registration exemption provided by Section 4(2) of the Securities Act as
not involving a public offering due to the limited nature of the offering and
the individuals' relationship to Mark.
Number Per Share
of Shares Exercise Warrant Grant
Purchasable Price Term Date
----------- ----- ---- ----
120,000 $ 5.75 5 Years 09/19/96
120,000 2.00 5 Years 02/07/97
As partial consideration under a new employment agreement, on May 30, 1997
Carl Coppola was granted three-year warrants to purchase 250,000 shares of
Common Stock at an exercise price of $1.25; 250,000 shares of Common Stock at an
exercise price of $2.00 and 250,000 shares of Common Stock at an exercise price
of $2.75. This transaction was effected in reliance of the registration
exemption provided by Section 4(2) of the Securities Act as not involving a
public offering due to the limited nature of the offering and the individuals'
relationship to Mark.
In June 1997, Mark issued to three investors an aggregate of $1,550,000 in
two-year principal amount convertible debentures with a conversion rate of $ .80
per share. Each of the transactions was effected in reliance of the registration
exemption provided by Section 4(2) of the Securities Act as not involving a
public offering due to the limited nature of the offering and the investor
sophistication of the investors.
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Item 6. Selected Financial Data
The following Selected Financial Data are based upon financial statements
appearing elsewhere herein and such information should be read in conjunction
with such financial statements and notes thereto.
Income Statement Data:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 6,449,744 $ 3,454,615 $ 6,125,573 $ 3,183,073 $ 5,309,660
------------ ------------ ------------ ------------ ------------
Costs and Expenses:
Costs of Sales 6,091,773 4,022,102 5,975,973 2,370,971 3,742,371
Selling, general and administrative 4,100,177 3,718,886 3,876,330 3,592,081 2,334,159
Research and development -- -- -- 270,322 558,118
Reduction of carrying value of assets -- 777,495 -- -- --
------------ ------------ ------------ ------------ ------------
Total Costs and Expenses 10,191,950 8,518,483 9,852,303 6,233,374 6,634,648
------------ ------------ ------------ ------------ ------------
Operating Income (Loss) (3,742,206) (5,063,868) (3,726,730) (3,050,301) (1,324,988)
Net Other Income (Expense) (1,697,059) (46,691) (85,905) (64,749) (262,209)
Income Tax -- -- -- (29,460) --
------------ ------------ ------------ ------------ ------------
(Loss) From Continuing Operations (5,439,265) (5,110,559) (3,812,635) (3,144,510) (1,587,197)
(Loss) From Discontinued Operations -- (104,503) (1,377,438) (993,620) --
------------ ------------ ------------ ------------ ------------
Net Income (Loss) $ (5,439,265) $ (5,215,062) $ (5,190,073) $ (4,138,130) $ (1,587,197)
============ ============ ============ ============ ============
Earnings (Loss) per Share: $ (.38) $ (.41) $ (.48) $ (.47) $ (.18)
Weighted Average Shares Outstanding 14,221,606 12,732,022 10,726,204 8,802,543 8,710,975
<CAPTION>
Balance Sheet Data:
At June 30
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Working Capital (Deficit) $ 923,457 $ 675,864 $ (48,112) $ 216,635 $ 379,484
Net Property and Equipment 347,259 376,504 318,491 369,939 503,112
Total Assets 5,432,277 3,083,763 3,978,383 4,953,651 4,460,174
Current Liabilities 3,244,963 954,065 2,169,657 909,693 938,603
Other Liabilities 2,340,467 50,297 19,665 8,313 16,377
Stockholders' Equity (Impairment) (153,153) 2,079,401 1,789,061 4,035,645 3,505,194
</TABLE>
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
Mark's results of operations, liquidity, and working capital position have
been historically impacted by sporadic sales of its principal products, modular
steel cells. This sales pattern is primarily the result of the construction
industry's unfamiliarity with Mark's products and the emergence of competition.
Mark's modular steel represent an alternative to traditional construction
methods, and penetration into the construction market has met resistance
typically associated with a new, unfamiliar product. Accordingly, Mark has been,
and will continue to be, subject to significant sales fluctuations until its
modular cell technology receives greater acceptance in the construction market,
which management believes will occur as new projects are awarded and completed.
In an attempt to achieve greater acceptance in the architectural, engineering
and construction communities, Mark's internal sales and engineering personnel
and its nationwide network of independent sales representatives conduct sales
presentations and participate in trade shows and other promotional activities.
Mark's has expanded its marketing efforts to more aggressively pursue
domestic and international joint venture and design/build development
opportunities to obtain projects and improve its results of operations in
efforts to achieve profitability. In addition, Mark is promoting the
incorporation of its modular cell products to State prison industries to
capitalize on the New York State agreement. See "Item 1. Business (c) Narrative
Description of Business-Marketing and Sales." Since January 1, 1996, Mark has
reduced office staff. From January 1996 to September 1996, Mark decided not to
occupy factory space, but outsourced the manufacturing of its small modular cell
projects to third party manufacturers. Mark occupied new factory facilities in
October 1996. Mark will continue to review its overhead and personnel expenses
based on operating results and prospects.
Mark is continually bidding on and soliciting joint venture opportunities
regarding construction projects. The anticipated revenues from any major
project, would substantially improve the Company's operating results and cash
flow, although no assurances can be given that any of these projects will be
awarded to the Company.
On July 17, 1996, the Company was awarded a contract from the State of New
York which management anticipates will generate revenues of approximately
$50,000,000 over three years ending December 31, 1999. Through June 30, 1997
Mark received orders aggregating approximately $3,000,000 under the New York
State agreement. On August 25, 1997, Mark received an additional order
of approximately $12,000,000 under the New York State agreement which is
scheduled to be completed by December 31, 1997.
Mark currently has bids pending on approximately $4,300,000 in projects. In
addition to the New York State agreement, for the fiscal year ended June 30,
1997, Mark submitted bids on approximately $36,000,000 in projects, of which
$3,125,200 was awarded to Mark.
14
<PAGE>
Through MarkCare, Mark continues to market its IntraScan II PACS and
teleradiology systems and is forming strategic alliances with other companies
with related medical products. Consistent with this marketing approach, Mark has
entered into a master supplier agreement with Data General Corporation, a large
computer hardware and systems integration provider with a client base of over
1,000 institutions, pursuant to which Data General will include the IntraScan II
PACS and teleradiology software applications in proposals to healthcare
institutions. Management anticipates that the sale of the IntraScan II systems
will begin to generate revenues in the calendar year ending December 31, 1998,
although no assurances can be given in this regard. If the IntraScan marketing
plan is successful, management believes that the revenues from resulting sales
will be more constant then those of the modular steel products presently and
will reduce fluctuations in Mark's results of operations and financial
condition.
The following table sets forth Mark's segmented results of operations of
continuing operations for the fiscal year ended June 30, 1997.
Mark
Correctional
Systems MarkCare Medical Total
------- ---------------- -----
Revenues $ 6,114,195 $ 335,549 $ 6,449,744
Cost of Sales 6,037,380 54,393 6,091,773
Selling, General and Administrative 2,810,587 1,289,590 4,100,177
Operating Loss (2,733,722) (1,008,434) (3,742,206)
15
<PAGE>
Results of Operations
Substantially all of Mark's operating revenues for the reported periods
were derived from the sale of its modular cells to correctional institutions.
Management believes that the sale of these modular steel products will continue
to represent substantially all of the Mark's operating revenues through June 30,
1998.
The following table sets forth for the periods indicated the percentages
which certain items bear to revenues and the percentage increases (decrease)
from period to period:
<TABLE>
<CAPTION>
Percentage of Revenues Period to Period
Year Ended June 30 Increase (Decrease)
----------------------------------------- ------------------------
1997 1996 1995 1997-1996 1996-1995
---------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 86.7% (43.6)%
Cost of sales 94.4 116.4 97.5 51.5 32.7
Selling, general and administrative 63.5 107.7 63.2 10.3 4.0
Reduction of carrying vale of assets -- 22.5 17.9 (100.0) 29.3
----- ----- -----
Operating income (loss) (58.0) (146.6) (78.8) 26.1 (4.9)
Net other income (expense) (26.3) (1.4) (1.4) 353.5 (45.6)
----- ----- -----
(Loss) from continuing operations (84.3) (147.9) (80.2) 3.2 4.0
(Loss) from discontinued operations -- (3.0) (4.5) (100.0) (62.3)
----- ----- -----
Net income (loss) (84.3) (151.0) (84.7) 5.2 (0.5)
===== ===== =====
</TABLE>
Fiscal Year Ended June 30, 1997 Compared to
Fiscal Year Ended June 30, 1996
Revenues from sales for the fiscal year ended June 30, 1997 increased 86.7%
to $6,449,744 from $3,454,615 for the comparable 1996 period. This increase is
primarily attributable to the awarding of nine projects, including $3,000,000
under the New York State agreement.
Cost of sales for the fiscal year ended June 30, 1997, consists primarily
of materials, labor and fixed factory overhead expense, increased 51.5% to
$6,091,773 from $4,022,102 for the comparable 1996. Cost of sales as a
percentage of revenues was 94.4% for the year ended June 30, 1997 as compared to
116.4% for the comparable 1996 period. Despite losses incurred in connection
with the outsourcing of projects for the three months ended September 30, 1996,
factory start up costs incurred in the quarter ended December 31, 1996 and cost
overruns on several projects, Mark reduced its cost of sales as a percentage of
revenues. Management expects continued gross profit improvement due to the
completed relocation of its factory and improved operating efficiencies. For the
year ended June 30, 1997 fixed factory overhead expenses were
16
<PAGE>
$221,066 as compared to $155,987 for the comparable 1996 period due to an
increase in repairs and maientenance. Additionally, MarkCare's product line has
lower costs of sales (6.6% as a percentage of revenues) as compared to the
modular cell product line. Management believes that the substantial majority of
the revenues of the MarkCare line will be attributable to software sales and
support services, which have minimal costs of sales.
Selling, general and administrative expenses for the fiscal year ended June
30, 1997 increased 10.3% to $4,100,177 from $3,718,886 for the comparable 1996
period. Stabilization of these expenses is attributable to reduction of office
staff expenses, trade show expenses and professional fees partially offset by
the inclusion of $877,269 of selling, general and administrative expenses of
MarkCare-UK which was acquired in May 1996.
Mark reduced its operating losses 26.1% to $3,742,206 in the fiscal year
ended June 30, 1997 from $5,063,868 in the comparable 1996 period. However, due
to a noncash imputed interest expense of $1,422,813 in connection with the
issuance of $4,500,000 in principal amount 7% convertible debentures for working
capital purposes, Mark's Net Loss for fiscal year 1997 increased 4.3% from
fiscal year 1996.
Fiscal Year Ended June 30, 1996 Compared to
Fiscal Year Ended June 30, 1995
Revenues from sales for the fiscal year ended June 30, 1996 decreased 43.6%
to $3,454,615 from $6,125,573 for the comparable 1995 period. This decrease is
attributed to the continued sporadic sales of its modular steel cell products as
discussed in "General". Mark's Jackson, Michigan project represented
approximately 89.5% of the 1996 fiscal year revenues.
Cost of sales for the fiscal year ended June 30, 1996 which consists
primarily of materials, labor, and fixed factory overhead expense, decreased
32.7% to $4,022,102 from $5,975,973 for the comparable 1995 period due to the
decrease in sales. Cost of sales as a percentage of revenues was 116.4% for the
year ended June 30, 1996 as compared to 97.5% for the comparable 1995 period.
This increase was the result of lower gross profit margins on construction
contracts, costs associated with maintaining factory operations absent
anticipated sales levels and losses incurred in connection with the outsourcing
of projects for the six months ended June 30, 1996. Fixed factory overhead
expenses for the fiscal year ended June 30, 1996 such as rent, real estate
taxes, depreciation and repairs and maintenance decreased 56.1% to $155,987 from
$355,109 for the comparable 1995 period. This decrease is primarily attributed
to the elimination of factory rent and related taxes and the suspension of
depreciation on idle factory equipment since January 1, 1996.
17
<PAGE>
Selling, general and administrative expenses for the fiscal year ended June
30, 1996 decreased 4.0% to $3,718,886 from $3,872,392 for the comparable 1995.
Mark incurred increased promotional and travel expenses during the six month
period ended December 31, 1995, which were offset by the reduction of office
staff since January 1, 1996.
Mark also wrote down the remaining $777,495 value of the assets related to
the IntraScan I acquisition of which $518,366, was originally schedule to be
amortized in fiscal 1997 and $259,129 in 1998. Net losses from discontinued
operations for fiscal 1996 was $104,503 or 2.3% of Mark's total net loss.
Liquidity and Capital Resources
Mark's working capital requirements result principally from staff and
management overhead, office expense and marketing efforts. Mark's working
capital requirements have historically exceeded its working capital from
operations due to the sporadic sales of its products. Accordingly, Mark has been
dependent and, absent significant improvements in operations, will continue to
be dependent on the infusion of new capital in the form of equity or debt
financing to meet its working capital deficiencies, although no assurance can be
given that such financing will be available. Mark believes its present available
working capital and anticipated cash from its existing contracts is sufficient
to meet its operating requirements through August 31, 1998. Mark obtained a
$400,000 revolving line of credit collateralized by substantially all of its
assets and has no outstanding borrowings at September 23, 1997. To the extent it
requires additional capital, Mark will continue to principally look to private
sources.
On August 23, 1996, Mark sold $2,200,000 principal amount 7% convertible
debentures due August 22, 1998. These debentures, as amended, were convertible
into shares of Common Stock at a conversion price which is the lesser of (i) $
1.38 or (ii) 80% of the average closing bid price on the five trading days
immediately preceding the date(s) of conversion. Interest on these debentures
was payable in cash or Common Stock at Mark's option. Mark redeemed $840,000 in
principal amount of these debentures in June and July 1997.
On January 21, 1997, Mark sold $750,000 principal amount 7% convertible
debentures due January 20, 1999. These debentures are convertible into shares of
Common Stock at a conversion price which is the lesser of (i) $ 2.125 or (ii)
80% of the average closing bid price on the five trading days immediately
preceding the date(s) of conversion. Interest on these debentures is payable in
cash or Common Stock at Mark's option.
In June 1997, Mark sold $1,550,000 principal amount 7% convertible
debentures due in June 1999. These debentures are convertible into shares of
Common Stock at a conversion price of $0.80. Interest on these debentures is
payable in cash or Common
18
<PAGE>
Stock at Mark's option.
In the fiscal year ended June 30, 1997, Mark sold 43,572 shares of Common
Stock pursuant to the exercise of warrants, resulting in gross proceeds of
$105,901. Since July 1, 1997 Mark sold 500,000 shares of Common Stock pursuant
to the exercise of warrants, resulting in gross proceeds of $1,318,750.
Mark presently has an effective registration statement relating to 843,425
shares of Common Stock issuable upon the exercise of warrants and options, the
majority of which are at exercise prices ranging from $2.00 to $5.00 per share.
Mark will initially look to the exercise of outstanding warrants and options to
meet working capital deficits, however, if sufficient securities are not
exercised, Mark will be required to seek additional private sales of its
securities, which, if available, would most likely be at discounts to the
current trading price of the Common Stock.
Mark's inventories increased to $336,287 at June 30, 1997 from $146,305 at
June 30, 1996 due to raw materials and components purchases for the increased
number of projects in production. While Mark presented does not have any
material commitments for capital expenditures, management believes that is
working capital requirements for inventory and other manufacturing related costs
will significantly increase with increases in product orders.
For the fiscal year ended June 30, 1997, Mark had negative cash flow from
operating activities of $4,235,209. For the fiscal year ended June 30, 1997,
Mark had negative cash flow from investing activities of $136,780 attributable
to the purchase of property and equipment. Mark has no present intention to make
any acquisition which would have a material negative or positive effect on cash
flow.
For the fiscal year ended June 30, 1997, financing activities provided
$4,530,524 in cash, principally from the sale of Common Stock and convertible
debentures.
Cash and cash equivalents increased from $263,922 at June 30, 1996 to
$422,457 at June 30, 1997 due to financing activities and accounts receivable
collections. Working capital increased to $1,286,030 at June 30, 1997 from
$675,864 at June 30, 1996 primarily due to proceeds from the debentures
issuances and increases in accounts receivable offset by operating expenses.
Other Matters
As of June 30, 1997, Mark had net operating loss carryforwards of
approximately $18,900,000. Such carryforwards begin to expire in the year 2009
if not previously used. The $18,900,000 carryforward is comprised of
approximately $17,200,000 which is available to offset taxable income in the tax
year ending June 30, 1998. The remaining carryforward is restricted as to
utilization under Section 382 of the Internal Revenue Code. Since realization
19
<PAGE>
of the tax benefits associated with these carryforwards is not assured, a full
valuation allowance was recorded against these tax benefits as required by SFAS
No. 109.
Impact of Inflation and Changing Prices
Mark has been affected by inflation through increased costs of materials
and supplies, increased salaries and benefits and increased general and
administrative expenses; however, unless limited by competitive or other
factors, Mark passes on increased costs by increasing its prices for products
and services.
Item 7A. Quantitative and Qualitative Disclosure About Market
Risk.
Not Applicable.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements and Supplementary Data to be provided pursuant to
this Item are included under Item 14 of this Report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
Not Applicable.
20
<PAGE>
PART III
Item 10. Directors And Executive Officers of the Registrant.
The following table sets forth the names and ages of the members of Mark's
Board of Directors and its executive officers.
Name Age Position
- ---- --- --------
Carl C. Coppola(1) 57 Chairman of the Board,
President, Chief Executive
Officer; Chief Financial Officer
Michael J. Rosenberg 53 Vice President-Sales and Marketing
Richard Branca(2) 49 Director
Ronald E. Olszowy 51 Director
William Westerhoff(1) 59 Director
Michael Nafash(2) 36 Director
- ----------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
All directors hold office until the next annual meeting of shareholders of
Mark (currently expected to be held during December 1997) and until their
successors are elected and qualified. Officers hold office until the first
meeting of directors following the annual meeting of shareholders and until
their successors are elected and qualified, subject to earlier removal by the
Board of Directors.
Carl C. Coppola has been a Director, President and Chief Executive Officer of
Mark since 1984. For more than 30 years, Mr. Coppola has been President and
Chief Executive Officer of Mark Lighting Fixture Co., Inc., an unaffiliated
entity.
Michael J. Rosenberg has been Vice President- Sales and Marketing of Mark since
1990.
Richard Branca has been a Director of Mark since November 18, 1992.
Since 1970 Mr. Branca has been President and Chief Executive Officer
of Bergen Engineering Co., a construction company.
Ronald E. Olszowy has been a Director of Mark since November 18,
1992. Since 1966, Mr. Olszowy has been President and Chief
Executive Officer of Nationwide Bail Bonds, which provides bail,
performance and fidelity bonds. Mr. Olszowy has also been President
of Interstate Insurance Agency since 1980.
21
<PAGE>
William Westerhoff has been a Director of Mark since November 18, 1992. Mr.
Westerhoff has been retired since June 1992. Prior thereto and for more than
five years Mr. Westerhoff was, a partner of Sax, Macy, Fromm & Co., certified
public accountants.
Michael Nafash has been a Director of Mark since December 18, 1995. Mr. Nafash
is Chairman of the Board, President and Chief Executive Officer of Evolutions,
Inc. (OTC), an environmental oriented apparel company since February 1994. On
June 6, 1997, three of Evolutions, Inc.'s subsidiaries filed a Chapter 11
bankruptcy petition (Case No. 97B-43791-2-3) in the U.S. Bankruptcy Court in the
Southern District of New York. From June 1992 to June 1996, Mr. Nafash was
employed by Pure Tech International, Inc. (NASDAQ/NMS:PURT), a plastics and
metal recycling company, including as Chief Financial Officer from October 1993
to March 1995. Prior thereto, Mr. Nafash was a certified public accountant with
Michaels, Nafash & Georgallas and Weidenbaum Ryder & Co.
Directors' Compensation
Directors have not received any cash compensation for serving as directors
or on committees but have and will continue to be reimbursed for travel expenses
incurred in attending meetings. In lieu of the cash compensation customarily
paid to nonemployee directors, Mark has established a policy of granting stock
options to directors exercisable at the bid price of the Common Stock on the
date of grant. On September 19, 1996, each of the nonemployee directors was
granted five-year options to purchase 30,000 shares of Common Stock at $ 5.75
per share, the closing sales price on the date of grant. On February 7, 1997,
each of the nonemployee directors was granted five-year options to purchase
30,000 shares of Common Stock at $ 2.00 per share, the closing sales price on
the date of grant. Effective September 17, 1997, each nonemployee director will
receive $ 1,000 for each meeting attended. These fees will be accrued but remain
unpaid until Mark's financial condition sufficiently improves as determined by
Mr. Coppola. Future compensation policies will be reviewed annually based upon
Mark's financial condition and results of operations.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16 (a) of the Securities Exchange Act of 1934, as amended, requires
Mark's directors, executive officers and 10% shareholders to file with the
Securities and Exchange Commission reports of ownership and changes in ownership
of Mark's equity securities including its Common Stock. Such persons are also
required to furnish Mark with such reports.
To Mark's knowledge during the fiscal year ended June 30, 1997, all Section
16(a) filing requirements were satisfied.
22
<PAGE>
Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth the amount of all compensation paid to
Mark's Chief Executive Officer for the last three fiscal years ended June 30. No
other executive officer received annual compensation in excess of $ 100,000.
<TABLE>
<CAPTION>
====================================================================================================================================
Annual Compensation Long Term Compensation
Awards/Payouts
====================================================================================================================================
====================================================================================================================================
Name and Year Salary ($) Bonus Other Annual Restricted Optio- LTIP All other
Principal ($) Compensation Stock ns/SARs Payouts Compen-
Position Awards $ # $ sation
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carl Coppola,
President & CEO 1997 $ 300,000 -0- -0- -0- 750,000 -0- -0-
1996 $ 275,000 -0- -0- -0- -0- -0- -0-
1995 $ 250,000 -0- -0- -0- 200,000 -0- -0-
====================================================================================================================================
</TABLE>
Option/SAR Grants in Fiscal Year 1997
The following table sets forth individual grants of stock options to the
named executive officers in the Summary Compensation Table above for the fiscal
year ended June 30, 1997.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed
Annual Rates of
Stock Price
Appreciation for
Option Term (1)
% of Total ---------------------------
Options
Options Granted to Exercise
Granted Employees in Price Expiration
Name (#)(2) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ------- --------- ------------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Carl Coppola 250,000 24.2% $ 1.25 05/29/00 $ 41,000 $ 88,000
250,000 24.2% $ 2.00 05/29/00 0 0
250,000 24.2% $ 2.75 05/29/00 0 0
</TABLE>
- ----------
(1) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately prior
to the expiration of their term, assuming the specified compounded rates of
appreciation on the Common Stock over the term of the options. These
numbers do not take into account provisions of certain options providing
for termination of the option following termination of employment,
nontransferability or differences in vesting periods.
(2) Closing sales price on date of option grants was $ 1.25 per share.
23
<PAGE>
1997 Fiscal Year End Option Values
The following table sets forth the value of options granted to the named
Executive Officers in the Summary Compensation Table above for the fiscal year
ended June 30, 1997.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised in-the Money Options
Options at Fiscal Year (#) at Fiscal Year End ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
<S> <C> <C>
Carl Coppola 950,000 / 0 $ 1,562,500 (1)
</TABLE>
(1) Based upon a closing sales price of $ 3-3/4 per share of Common Stock on
September 23, 1997.
Employment Agreements
Pursuant to a three-year employment agreement expiring on June 30, 2000,
Mr. Coppola receives an annual base salary of $200,000 and was granted
three-year options to purchase 250,000 shares of Common Stock at an exercise
price of $ 1.25; 250,000 shares of Common Stock at an exercise price of $ 2.00
and 250,000 shares of Common Stock at an exercise price of $ 2.75. In addition,
Mr. Coppola is entitled to reimbursement of expenses not to exceed $15,000
annually and is provided with an automobile and maintenance and use
reimbursement by Mark. Mr. Coppola's employment is terminable by Mark upon 90
days written notice and provides for a two-year non-compete period to take
effect upon the termination of Mr. Coppola's employment.
Stock Option Plan
Under Mark's 1993 Stock Option Plan (the "Option Plan"), options to
purchase up to 1,000,000 shares of Common Stock may be granted to key employees
and officers of Mark or any of its subsidiaries. The Option Plan is designed to
qualify under Section 422 of the Internal Revenue Code as an "incentive stock
option" plan.
As of September 23, 1997 options to purchase 381,000 shares of Common Stock
have been awarded and remain outstanding under the Option Plan. To date options
to purchase 80,000 shares of Common Stock have been exercised.
24
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The following table sets forth certain information with respect to each
beneficial owner of 5% or more of the Common Stock, each Director of Mark, each
Executive Officer of Mark who is named in the Summary Compensation Table and all
Executive Officers and Directors as a group as of September 23, 1997. The
persons named in the table have sole voting and investment power with respect to
all shares of Common Stock owned by them, unless otherwise noted.
Number of % of Shares
Shares Owned Outstanding
------------ -----------
Carl C. Coppola
c/o Mark Solutions, Inc.
1515 Broad Street
Bloomfield, NJ 07003 2,706,400(1) 16.0%
Marquise LLC
411 West Putnam Avenue
Greenwich, CT 06830 1,412,500(2) 8.9%
Joseph Salvani
1 Duran Avenue
Ridgewood, NJ 07450 1,159,956(3) 7.2%
Walter Grossman
277 North Avenue
Westport, CT 06880 862,713(4) 5.4%
William Westerhoff 65,000(5) (6)
Richard Branca 130,000(5) (6)
Ronald E. Olszowy 115,000(5) (6)
Michael Nafash 86,000(7) (6)
All Executive Officers
and Directors as
a group (6 persons) 3,277,300(8) 19.0%
25
<PAGE>
(1) Includes 63,200 shares held in trust for the benefit of three children of
Mr. Coppola. Mr. Coppola disclaims beneficial ownership of these shares.
Also includes 950,000 shares of Common Stock issuable upon exercise of
warrants which are presently exercisable.
(2) Includes 150,000 shares of Common stock owned by affiliates. Marquise LLC
has shared dispositive and voting power with respect to these shares.
(3) Includes 100,000 shares of Common Stock issuable upon exercise of warrants
which are presently exercisable.
(4) Includes 112,000 shares held in trust for the benefit of two children of
Mr. Grossman. Mr. Grossman disclaims beneficial ownership of these shares.
(5) Represents or includes 65,000 shares of Common Stock issuable pursuant to
options which are presently exercisable.
(6) Less than 1%
(7) Includes 85,000 shares of Common Stock issuable upon exercise of warrants
which are presently exercisable.
(8) Includes 1,360,000 shares of Common Stock issuable upon exercise of
warrants or options, which are presently exercisable.
26
<PAGE>
Item 13. Certain Relationships and Related Transactions.
Mark purchases lighting fixtures, fabricating services and other related
services from Mark Lighting Fixture Co., Inc. ("Mark Lighting"), a company
wholly owned by Carl Coppola, President and Chief Executive Officer of Mark. For
the fiscal year ended June 30, 1997, Mark paid Mark Lighting $240,739 for such
goods and services.
Mark purchased goods and fabricating services from Metalite, Inc.
("Metalite"), a company wholly owned by Carl Coppola's brother. For the fiscal
year ended June 30, 1997, Mark paid Metalite $13,510 for such goods and
services. For the fiscal year ended June 30, 1997, Mark sold Metalite goods and
services for $1,856.
In connection with several modular cell projects, Carl Coppola provided
third party guarantees to assist Mark in obtaining required performance and
completion bonds. As compensation for providing these guarantees, Mr. Coppola
will receive $95,785 representing five percent of the gross proceeds from these
projects. Such fees will be accrued but not paid until Mark's financial
condition sufficiently improves as determined by the Board of Directors.
On January 10, 1997, Mark extended the expiration date of the warrants to
purchase 200,000 at $ 2.50 per share issued to Mr. Coppola from January 15, 1997
to December 31, 1997.
In May 1997 Mr. Coppola made loans aggregating $160,000 to Mark for working
capital purposes. The loans are represented by demand notes with an annual
interest rate of 10% payable semiannually. These notes remain outstanding.
Effective July 1, 1997, Mark and Mr. Coppola entered into an employment
agreement. See "Item 11. Executive Compensation. Employment Agreements" for the
terms of such agreement.
On September 19, 1996, Mark extended the expiration date of the warrants to
purchase 150,000 at $ 2.625 per share issued to Bergen Engineering Co. Inc. for
one year to November 3, 1997.
Mark grants each nonemployee director options as compensation for serving
on the Board of Directors. On September 19, 1996, each of the nonemployee
directors was granted five-year options to purchase 30,000 shares of Common
Stock at $ 5.75 per share, the closing sales price on the date of grant. On
February 7, 1997,
27
<PAGE>
each of the nonemployee directors was granted five-year options to purchase
30,000 shares of Common Stock at $ 2.00 per share, the closing sales price on
the date of grant.
On June 18, 1997, Mark granted to Joseph Salvani, a principal shareholder,
two-year warrants to purchase 100,000 shares of Common Stock at $ 2.00 per share
as compensation for consulting services rendered and to be rendered.
On December 23, 1996 Mark extended the expiration date of the warrants to
purchase 150,000 at $ 5.00 per share issued to Joseph Salvani for one year to
December 31, 1997.
Management believes that each of the foregoing transactions are on terms no
less favorable to Mark than could be obtained from unaffiliated third parties.
28
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a)(1) Consolidated Financial Statements
- Report of Independent Accountants F-1
- Consolidated Balance Sheets for
June 30, 1997 and 1996 F-2
- Consolidated Statements of Operations
for fiscal years ended June 30, 1997,
1996 and 1995 F-4
- Consolidated Statements of Stockholders
Equity for fiscal years ended June 30,
1997, 1996 and 1995 F-5
- Consolidated Statement of Cash Flows
for fiscal years ended June 30,
1997, 1996 and 1995 F-6
- Notes to Consolidated Financial Statements F-7
- Baker Tilly Report F-22
(3) Exhibits.
Sequential
Exhibit Page No.if
Number Description applicable
------ ----------- ----------
2. Agreement and Plan of Reorganization
dated December 23, 1992, as amended,
between Mark, Showcase Cosmetics,
Inc. and Mark Acquisition Corp.
(Incorporated by reference to Exhibit
I to Mark's Proxy Statement/Prospectus,
under its former name "Showcase
Cosmetics, Inc., dated October 8, 1993
to Form S-4 Registration Statement
[File No. 33-61176], referred to
herein as "Mark's Form S-4").
29
<PAGE>
Sequential
Exhibit Page No.if
Number Description applicable
------ ----------- ----------
3. a) -- Certificate of Incorporation, as amended
(Incorporated by reference to
Exhibit 3.a) to Mark's Form 10-K for the
fiscal year ended June 30, 1994)
b) -- By-laws (Incorporated by
reference to Showcase Exhibit
3 b) to Mark's Form S-4)
4. a) -- Specimen Stock Certificate
(Incorporated by reference to Mark
Exhibit 4 a) to Mark's Form S-4)
b) -- Form of Warrant Certificate
(Incorporated by reference to Mark
Exhibit 4 b) to Mark's Form S-4)
10. Material Contracts
a) -- Employment Agreement between Mark
and Carl Coppola ----------
b) -- Incentive Stock Option Plan
(Incorporated by reference to
Exhibit IV to Mark's Form S-4)
c) -- Agreement between New York State and
Mark dated July 17, 1996. (Incorporated
by reference to Exhibit 10 d) to Mark's
Form 10-K for the fiscal year ended
June 30, 1996)
d) -- Agreement between Data General Corporation
and Mark dated March 18, 1996 as amended
on January 20, 1997. (Incorporated
by reference to Exhibit 10 e) to
Mark's Form 10-K for the
fiscal year ended June 30, 1996)
Sequential
30
<PAGE>
Exhibit Page No.if
Number Description applicable
------ ----------- ----------
21. Subsidiaries of Mark (Incorporated by
reference to Exhibit 21 to Mark's Form 10-K
for the fiscal year ended June 30, 1996)
24. Power of Attorney (included on page 35)
27. Financial Data Schedule
(b) Reports on Form 8-K.
The following reports on Form 8-K have been filed by Mark during the
quarter ended June 30, 1997:
Date of Report Items Reported, Financial Statements Filed
-------------- ------------------------------------------
None
31
<PAGE>
POWER OF ATTORNEY
Mark Solutions, Inc., and each of the undersigned do hereby appoint Carl
Coppola, its or his true and lawful attorney to execute on behalf of Mark
Solutions, Inc. and the undersigned any and all amendments to this Report and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission.
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.
MARK SOLUTIONS, INC.
September 26, 1997 By: /s/ Carl Coppola
-----------------
(Carl Coppola, Chief
Executive Officer and
President)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the persons on behalf of the Registrant and in
the capacities and on the date indicated:
Signature Title Date
- --------- ----- ----
/s/ Carl Coppola Chief Executive Officer September 26, 1997
- ----------------------- President and Director
(Carl Coppola) (Principal Executive
Officer and Principal
Financial and
Accounting Officer)
/s/ Richard Branca Director September 26, 1997
(Richard Branca)
/s/ Ronald Olszowy Director September 26, 1997
- -----------------------
(Ronald E. Olszowy)
/s/William Westerhoff Director September 26, 1997
- -----------------------
(William Westerhoff)
/s/Michael Nafash Director September 26, 1997
- -----------------------
(Michael Nafash)
32
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
Mark Solutions, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Mark
Solutions, Inc. and Subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (impairment), and
cash flows for each of the years in the three year period ended June 30, 1997.
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 did not audit the financial
statements of Markcare Medical Systems Limited, a wholly owned subsidiary, which
statements reflect total assets of $192,095 and $438,520 as of June 30, 1997 and
1996, respectively, and total revenues of $224,125 and $41,946, respectively,
for the years then ended. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Markcare Medical Systems Limited, is based solely on the
report of the other auditors.
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 consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 Mark
Solutions, Inc. and Subsidiaries as of June 30, 1997 and 1996, and the results
of its operations and cash flows for each of the years in the three year period
ended June 30, 1997 in conformity with generally accepted accounting principles.
Sax Macy Fromm & Co., PC
Certified Public Accountants
Clifton, New Jersey
August 22, 1997
Except for Note 1 as
to which the date is
September 23, 1997
- F-1 -
<PAGE>
Mark Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
Assets
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
----------------------- -----------------------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 422,457 $ 263,922
Restricted cash -- 181,781
Accounts receivable, less allowance of
$5,500 in 1997 and 1996 3,178,928 904,596
Inventories 336,287 146,305
Other current assets 230,748 133,325
---------- ----------
Total Current Assets $4,168,420 $1,629,929
Property and Equipment:
Machinery and equipment 1,488,255 1,472,528
Demonstration equipment 395,419 395,419
Office furniture and equipment 401,731 324,006
Leasehold improvements 41,568 14,254
Vehicles 62,283 68,783
Property held under capital lease 47,129 40,929
---------- ----------
Total 2,436,385 2,315,919
Less: Accumulated depreciation
and amortization 2,089,126 1,939,415
---------- ----------
Net Property and Equipment 347,259 376,504
Other Assets:
Costs in excess of net assets
of businesses acquired, less accumulated
amortization of $227,433 in 1997 and
$17,495 in 1996 822,258 1,032,196
Other assets 94,340 45,134
---------- ----------
Total Other Assets 916,598 1,077,330
---------- ----------
Total Assets $5,432,277 $3,083,763
========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
- F-2 -
<PAGE>
Mark Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
Liabilities and Stockholders' Equity (Impairment)
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------------------- --------------------------
<S> <C> <C> <C> <C>
Current Liabilities:
Accounts payable $ 1,638,288 $ 499,254
Short-term borrowings 435,225 69,414
Current maturities of long-term debt 448,729 11,144
Current portion of obligations
under capital leases 8,276 5,921
Due to related parties 296,472 45,194
Notes payable to officer 160,000 --
Accrued liabilities 257,973 323,138
------------ ------------
Total Current Liabilities $ 3,244,963 $ 954,065
Other Liabilities:
Long-term debt excluding current maturities 2,312,556 19,989
Long-term portion of obligations under
capital leases 27,911 30,308
------------ ------------
Total Other Liabilities 2,340,467 50,297
Commitments and Contingencies -- --
Stockholders' Equity (Impairment):
Common stock, $.01 par value,
25,000,000 shares authorized,
14,779,085 and 13,576,315 shares
issued and outstanding in 1997
and 1996, respectively 147,790 135,762
Additional paid-in capital 27,454,982 24,260,299
Retained earnings (deficit) (27,755,925) (22,316,660)
------------ ------------
Total Stockholders' Equity (Impairment) (153,153) 2,079,401
------------ ------------
Total Liabilities and Stockholders' Equity (Impairment) $ 5,432,277 $ 3,083,763
============ ============
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
- F-3 -
<PAGE>
Mark Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended June 30
------------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 6,449,744 $ 3,454,615 $ 6,125,573
------------ ------------ ------------
Costs and Expenses:
Cost of sales 6,091,773 4,022,102 5,975,973
Selling, general, and administrative expenses 4,100,177 3,718,886 3,876,330
Reduction in carrying value of assets -- 777,495 --
------------ ------------ ------------
Total Costs and Expenses 10,191,950 8,518,483 9,852,303
------------ ------------ ------------
Operating (Loss) (3,742,206) (5,063,868) (3,726,730)
------------ ------------ ------------
Other Income (Expenses):
Interest income 21,291 23,800 17,430
Interest expense (290,651) (10,490) (103,335)
Imputed interest expense on convertible debentures (1,422,813) - - - --
Loss on disposal of property and equipment (4,886) (60,001) --
------------ ------------ ------------
Net Other (Expenses) (1,697,059) (46,691) (85,905)
------------ ------------ ------------
(Loss) From Continuing Operations (5,439,265) (5,110,559) (3,812,635)
------------ ------------ ------------
Discontinued Operations:
Loss of Bar-Lor Subsidiaries -- (35,078) (277,438)
Reduction in carrying value -- -- (1,100,000)
Loss on disposal of Bar-Lor Subsidiaries -- (69,425) --
------------ ------------ ------------
Total Discontinued Operations -- (104,503) (1,377,438)
------------ ------------ ------------
Net (Loss) $ (5,439,265) $ (5,215,062) $ (5,190,073)
============ ============ ============
(Loss) per Share $ (.38) $ (.41) $ (.48)
============ ============ ============
Weighted Average Number of Shares Outstanding 14,221,606 12,732,022 10,726,204
============ ============ ============
Dividends Paid $ - 0 - $ - 0 - $ - 0 -
============ ============ ============
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
- F-4 -
<PAGE>
Mark Solutions, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Impairment)
<TABLE>
<CAPTION>
Total
Common Stock Additional Retained Stockholders'
----------------------------- Paid-In Earnings Equity
Shares Amount Capital (Deficit) [Impairment]
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances June 30, 1994 9,749,777 $ 97,497 $ 15,849,673 $(11,911,525) $ 4,035,645
Issuance of stock through
private placements 1,985,024 19,850 3,252,672 -- 3,272,522
Commissions and related fees -- -- (329,033) -- (329,033)
Net loss for the year ended
June 30, 1995 -- -- -- (5,190,073) (5,190,073)
------------ ------------ ------------ ------------ ------------
Balances June 30, 1995 11,734,801 117,347 18,773,312 (17,101,598) 1,789,061
Acquisition of Simis Medical
Imaging, Limited on May 28, 1996 204,850 2,048 1,247,952 -- 1,250,000
Issuance of stock through
private placements 1,636,664 16,367 4,247,210 -- 4,263,577
Commissions and related fees -- -- (8,175) -- (8,175)
Net loss for the year ended
June 30, 1996 -- -- -- (5,215,062) (5,215,062)
------------ ------------ ------------ ------------ ------------
Balances June 30, 1996 13,576,315 135,762 24,260,299 (22,316,660) 2,079,401
Issuance of stock through
private placements 210,576 2,106 103,795 -- 105,901
Conversion of convertible
debentures 992,194 9,922 1,399,548 -- 1,409,470
Imputed interest expense on
convertible debentures -- -- 1,422,813 -- 1,422,813
Deferred imputed interest on
convertible debt, net of
amortization of $32,031 -- -- 160,157 -- 160,157
Warrants issued for services -- -- 130,861 -- 130,861
Commissions and related fees -- -- (22,491) -- (22,491)
Net loss for the year ended
June 30, 1997 -- -- -- (5,439,265) (5,439,265)
------------ ------------ ------------ ------------ ------------
Balances June 30, 1997 14,779,085 $ 147,790 $ 27,454,982 $(27,755,925) $ (153,153)
============ ============ ============ ============ ============
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
F-5
<PAGE>
Mark Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended June 30
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net (loss) $(5,439,265) $(5,215,062) $(5,190,073)
Adjustments to reconcile net (loss) to net cash (used for) operating
activities:
Depreciation and amortization 377,280 637,169 654,155
Amortization of debt issue costs 147,909 -- --
Imputed interest expense on convertible debentures 1,422,813 -- --
Deferred imputed interest on convertible debentures 160,157 -- --
Warrants issued for services 130,861 -- --
Common stock issued for interest expense 49,471 -- --
Loss from discontinued operations -- 104,503 --
Reduction in carrying value of assets -- 777,495 --
Net assets of discontinued segment -- -- 1,377,438
Loss on disposition of property and equipment 4,886 60,001 --
(Increase) decrease in assets:
Restricted cash 181,781 177,469 (359,250)
Accounts receivable (2,274,332) 666,445 (895,127)
Costs and estimated earnings in excess of
billings on contract in progress -- 66,485 (66,485)
Inventories (189,982) 3,334 402,174
Other current assets (97,423) (16,032) 418
Other assets (34,415) (7,153) 1,718
Increase (decrease) in liabilities:
Accounts payable 1,139,038 (1,336,488) 976,164
Due to related parties 251,277 (161,763) 30,408
Accrued liabilities (65,265) 56,558 237,501
----------- ----------- -----------
Net adjustments to reconcile net (loss)
to net cash (used for) operating activities 1,204,056 1,028,023 2,359,114
----------- ----------- -----------
Net Cash (Used for) Operating Activities (4,235,209) (4,187,039) (2,830,959)
----------- ----------- -----------
Cash Flows From Investing Activities:
Additions to property and equipment (139,280) (51,451) (6,500)
Proceeds from disposition of segment -- 100,000 --
Proceeds from sale of assets 2,500 12,500 --
----------- ----------- -----------
Net Cash Provided by (Used for) Investing Activities (136,780) 61,049 (6,500)
----------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from convertible debt 4,500,000 -- --
Repayment of convertible debt (398,704) -- --
Proceeds from short-term borrowings 1,185,912 38,668 --
Repayment of short-term borrowings (820,000) -- --
Repayment of notes payable for equipment and vehicles (17,387) (29,283) (29,085)
Advances from officer 160,000 -- 400,000
Repayment of advances from officer -- -- (400,000)
Payment of offering costs and commissions (22,491) (8,175) (329,033)
Proceeds from issuance of common stock 105,894 4,263,577 3,272,524
Payment of debt issue costs (162,700) -- --
Cash acquired in business combination -- 8,421 --
----------- ----------- -----------
Net Cash Provided by Financing Activities 4,530,524 4,273,208 2,914,406
----------- ----------- -----------
Net Increase in Cash and Cash Equivalents 158,535 147,218 76,947
Cash and Cash Equivalents at Beginning of Year 263,922 116,704 39,757
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 422,457 $ 263,922 $ 116,704
=========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
- F-5 -
<PAGE>
Mark Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Management Plans and Subsequent Events:
Mark Solutions, Inc.'s (the Company) modular cell products represent an
alternative to traditional construction methods, and penetration into the
construction market has met resistance typically associated with a new,
unfamiliar product. Accordingly, the Company has been and will continue to be
subject to significant sales fluctuations until its modular cell technology
receives greater acceptance in the construction market, which management
believes will occur as new projects are awarded and completed.
In May 1996, the Company acquired MarkCare Medical Systems Limited
(formerly Simis Medical Imaging Limited), the entity which developed the
IntraScan II software, to more effectively control the development and marketing
strategy. In addition, the Company has entered into a software supplier
agreement with Data General Corporation, a large computer hardware and
integration provider, pursuant to which Data General will include the IntraScan
II PACS software program in proposals to health care institutions. Although no
assurances can be given, management believes that these actions will improve the
effectiveness of its marketing plan and will enable the Company to generate
revenues from IntraScan II in fiscal 1998.
The Company's working capital requirements have historically exceeded its
working capital from operations. Accordingly, the Company has been dependent,
and absent significant improvements in operations, will continue to be dependent
on the infusion of new capital in the form of equity or debt financing. From
July 1, 1997 through September 23, 1997, the Company sold 500,000 shares of
common stock pursuant to the exercise of warrants, resulting in gross proceeds
of $1,318,750.
The Company has an effective registration statement relating to
843,425 shares of common stock issuable upon the exercise of warrants and
options and intends to register approximately 1,415,000 additional shares of
common stock issuable upon the exercise of other outstanding warrants and
options. The Company will initially look to the exercise of presently
outstanding warrants and options to meet working capital deficits, however if
sufficient securities are not exercised, the Company will consider additional
private sales of its securities.
On July 17, 1996, the Company was awarded a contract from the State of
New York which management anticipates will generate revenues of approximately
$50,000,000 over the three year period ending December 31, 1999, although there
is no minimum or maximum contract amount. On August 25, 1997, the Company
received an order of approximately $12,000,000 scheduled to be completed by
December 31, 1997 under this agreement. Management believes that the cash flow
from this order will significantly improve the Company's working capital
position. Management also believes that the exposure resulting from the New York
State contract will be beneficial in the Company's market penetration efforts,
particularly to other prison industry programs.
In addition to the New York State agreement, as of September 23, 1997 the
Company has outstanding bids for five modular cell projects aggregating
approximately $4,300,000, and is scheduled to bid on 21 modular cell projects
aggregating approximately $46,000,000 through December 31, 1997, although no
assurances can be given that any of these projects will be awarded to the
Company.
The Company believes the existing modular cell contracts, (particularly the
New York State purchase orders), presently available working capital, projected
modular cell contracts and other financial developments will result in improved
operating results and generate sufficient working capital through fiscal 1998.
- F-6 -
<PAGE>
Note 2 - Summary of Significant Accounting Policies:
A. Nature of Business - The Company is a Delaware corporation which
operates its various businesses through wholly-owned subsidiaries and
a division.
The Company is engaged in the design, manufacture, assembly and/or
distribution of (i) modular steel cells for housing of the general
prison population as well as for use as infectious disease isolation
units for correctional institutions and health care facilities, (ii) a
self-contained treatment booth for communicable diseases, and (iii)
diagnostic support and archiving computer systems marketed under the
name "IntraScan".
B. Basis of Consolidation - The consolidated financial statements include
the accounts of Mark Solutions, Inc. (Mark) and all of its wholly
owned Subsidiaries, MarkCare Medical Systems, Inc. (MarkCare), and
MarkCare Medical Systems Limited (LTD). During the year ended June 30,
1997, MarkCare Medical Systems Limited changed its name from Simis
Medical Imaging Limited. The operations of MarkCare Medical Systems
Limited are included in the accompanying consolidated financial
statements from the date it was acquired, May 28, 1996.
C. Revenue Recognition - Revenues are recorded at the time services are
performed or when products are shipped except for manufacturing
contracts which are recorded on the percentage-of-completion method
which measures the percentage of costs incurred over the estimated
total costs for each contract. This method is used because management
considers incurred costs to be the best available measure of progress
on these contracts. Contract costs include all direct material and
labor costs and those indirect costs related to contract performance.
Selling, general and administrative costs are charged to expense as
incurred. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined. The Company
provides an allowance for bad debts and returns based upon its
historical experience. The allowance for bad debts is charged as a
general and administrative expense.
D. Cash Equivalents - For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
E. Inventories - Inventories are valued at the lower of cost or market on
a first-in, first-out basis. The Company evaluates the levels of
inventory based on historical movement and current projections of
usage of the inventory. If this evaluation indicates obsolescence and
or slow movement, the Company would record a reduction in the carrying
value by the amount the cost basis exceeded the estimated net
realizable value of the inventory.
- F-7 -
<PAGE>
Note 2 - Summary of Significant Accounting Policies (Continued):
F. Property and Depreciation - All property and equipment items are
stated at cost. Leasehold improvements are amortized under the
straight-line method. Substantially all other items are depreciated
under straight line and accelerated methods. Depreciation and
amortization is provided in amounts sufficient to write-off the cost
of depreciable assets, less salvage value, over the following
estimated useful lives:
Machinery and equipment 7 years
Demonstration equipment 5 - 7 years
Office furniture and equipment 5 - 7 years
Leasehold improvements 31 - 39 years
Vehicles 5 years
Property held under capital lease 5 years
From January 1, 1996 to September 30, 1996 the Company did not
maintain a manufacturing facility and outsourced its manufacturing to
third party manufacturers. As a result, the Company's manufacturing
equipment, with a cost of $1,261,637, was not utilized. The
accompanying financial statements do not include a charge for the
depreciation of the manufacturing equipment from January 1, 1996 to
September 30, 1996. The Company obtained a manufacturing facility on
October 1, 1996 and subsequently placed the manufacturing equipment in
service.
G. Costs in Excess of Net Assets of Businesses Acquired - In connection
with the acquisition of MarkCare and LTD, the excess acquisition cost
over the fair value of net assets of businesses acquired is being
amortized using the straight-line method over five years.
The Company periodically reviews the carrying amounts of costs in
excess of net assets of businesses acquired. If events or changes in
circumstances indicate that the amount of the net assets may not be
recoverable, based on information available to the Company at that
time, including current and projected cash flows, an appropriate
adjustment is charged to operations.
H. Impairment of Long-Lived and Intangible Assets - In 1995, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS
No. 121 prescribes the accounting treatments for long-lived assets,
identifiable intangibles and goodwill related to those assets when
there are indications that the carrying values of those assets may not
be recoverable.
I. Income Taxes - Deferred income taxes are recognized for tax
consequences of "temporary differences" by applying enacted statutory
tax rates, applicable to future years, to differences between the
financial reporting and the tax basis of existing assets and
liability. Deferred taxes are also recognized for operating losses
that are available to offset future taxable income.
- F-8 -
<PAGE>
Note 2 - Summary of Significant Accounting Policies (Continued):
J. Loss Per Common Share - Loss per share is based on the weighted
average number of shares of common stock outstanding during each year.
Outstanding stock options and warrants are not included in the
computation since such items are anti-dilutive. A single presentation
of loss per share is shown on the accompanying financial statements
since there is no difference between the primary and fully diluted
computations.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS 128). This statement simplifies the current standards for
computing earnings per share (EPS), as specified in Accounting
Principles Board Opinion No. 15, "Earnings per Share" (APB 15). Under
SFAS 128, the presentation of primary EPS will be replaced by the
presentation of basic EPS. For companies with complex capital
structures, the presentation of fully diluted EPS will be replaced by
diluted EPS. Diluted EPS is computed similarly to fully diluted EPS,
pursuant to APB 15. The Company will adopt this standard in fiscal
1998 beginning with the fiscal quarter ending December 31, 1997, and
its adoption is not expected to have a material impact on reported
earnings per share for future or restated prior periods.
K. Stock-Based Compensation - The Company grants stock options to
employees with an exercise price equal to or above the fair value of
the shares at the date of the grant. The Company accounts for stock
option grants in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and, accordingly, recognizes no
compensation expense for the stock option grants.
L. Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of expenses during the report period. The estimates
involve judgments with respect to, among other things, various future
factors which are difficult to predict and are beyond the control of
the Company. Therefore, actual amounts could differ from these
estimates.
M. Reclassifications - Certain prior year amounts have been reclassified
to conform with the current year presentation.
Note 3 - Acquisition:
On May 28, 1996, the Company acquired all of the capital stock of MarkCare
Medical Systems Limited, a privately held British company (LTD) for $1,250,000
payable in the Company's common stock. This acquisition has been accounted for
using the purchase method of accounting. LTD is the developer of the IntraScan
II system. The common stock will be issued pursuant to Regulation S promulgated
under the Securities Act of 1933. The consideration paid by the Company was
established through negotiations between the Company and the LTD shareholders
and was based on the potential revenues management believes LTD and the related
IntraScan II system sales will generate.
- F-9 -
<PAGE>
Note 3 - Acquisition (Continued):
At the initial closing, the Company issued an aggregate of 108,696 shares
of common stock representing $625,000 of the purchase price. The balance of the
purchase price was paid by the Company issuing 263,158 shares on November 28,
1996 and the number of shares issued was calculated by dividing $625,000 by the
closing sales price of the common stock on November 25, 1996.
The following unaudited proforma information presents a summary of
consolidated results of operations of the Company and the acquired business as
if the acquisition had occurred July 1, 1994:
June 30
---------------------------------
1996 1995
------------ -----------
Net Sales $ 4,034,791 $ 6,931,367
============ ===========
Net (Loss) $ (5,366,966) $(5,465,884)
============ ===========
Earnings Per Share $ (.42) $ (.50)
============ ===========
These unaudited proforma results have been prepared for comparative
purposes only. They do not purport to be indicative of the results of operations
which actually would have resulted had the combination been in effect on July 1,
1994, or of future results of operations of the consolidated entities. The
operations of LTD, are included in the accompanying consolidated financial
statements from the date it was acquired, May 28, 1996.
Note 4 - Inventories:
Inventories consist of the following:
June 30
-------------------------
1997 1996
-------- --------
Raw materials $300,888 $127,477
Finished goods 35,399 18,828
-------- --------
Total Inventories $336,287 $146,305
======== ========
Note 5 - Other Current Assets:
Other current assets consist of:
June 30
--------------------
1997 1996
-------- --------
Prepaid expenses $ 60,860 $ 97,755
Loans and exchanges 9,731 35,570
Deferred imputed interest on convertible debentures 160,157 --
-------- --------
Total $230,748 $133,325
======== ========
- F-10 -
<PAGE>
Note 6 - Costs in Excess of Net Assets of Business Acquired:
The components of costs in excess of net assets of businesses acquired
as of June 30, 1997 and 1996 are as follows:
Year Ended June 30
--------------------------
1997 1996
----------- -----------
Beginning balances $ 1,032,196 $ 1,295,864
Acquisition of MarkCare Medical Systems Limited -- 1,049,691
Amortization expense for the year (209,938) (535,864)
Reduction in carrying value:
Intrascan I Technology -- (777,495)
----------- -----------
Ending Balances $ 822,258 $ 1,032,196
=========== ===========
Note 7 - Short-Term Borrowings:
In March 1997 the Company acquired a bank line of credit based on 60% of
eligible accounts receivable and 32% of the appraised value of eligible
machinery and equipment, not to exceed the line of credit amount of $400,000.
This revolving credit agreement, which expires in March 1998, is collateralized
by substantially all of the Company's assets plus the personal guarantee of the
Company's chief executive officer. Interest is payable monthly at 1-1/2% above
the bank's prime rate. The outstanding balance as of June 30, 1997 was $352,000.
LTD has available a U.K. Pound 25,000 line of credit agreement for working
capital requirements. The line is collateralized by the personal residence of
LTD's managing director. Outstanding borrowings accrue interest at 10.5%. In
connection with the acquisition of LTD, the Company agreed to negotiate with the
lender to remove the managing director's personal liability under this credit
facility. Outstanding borrowings as of June 30, 1997 and 1996 were $83,225 and
$69,414, respectively. The exchange rate for U.K. Pounds into U.S. dollars as of
June 30, 1997 and 1996, was 1.6645 and 1.5520, respectively.
The total credit line balance outstanding as of June 30, 1997 and 1996, was
$435,225 and $69,414, respectively and is included in short-term borrowings in
the accompanying balance sheet.
Note 8 - Accrued Liabilities:
The accrued liabilities consist of:
June 30
---------------------------
1997 1996
-------- --------
Salaries $ 77,488 $166,190
Professional fees 48,665 45,795
Interest 35,422 --
Other 96,398 111,153
-------- --------
Total $257,973 $323,138
======== ========
- F-11 -
<PAGE>
Note 9 - Related Party Transactions:
The Company purchases materials and is reimbursed for various expenses from
Mark Lighting Fixture Co., Inc. (Mark Lighting), an entity owned by the
Company's Chief Executive Officer and Metalite, Inc. (Metalite), an entity owned
by the brother of the Company's Chief Executive Officer. In addition, the
Company has engaged Laborstat, Inc. (Laborstat), an entity owned by the
Company's Chief Executive Officer.
The following related party transactions are included in the accompanying
financial statements:
Year Ended June 30
--------------------------------------
1997 1996 1995
-------- -------- --------
Purchases $231,051 $105,512 $162,291
Expense reimbursement $135,319 $ 93,125 $ 48,734
Consulting services $ 33,540 $ -- $ 6,615
Bonding fees $ 95,785 $ -- $ --
As a result of current and prior years' transactions, the Company has net
balances due to (from) the following related parties which will be settled in
the ordinary course of business:
June 30
--------------------------
1997 1996
--------- ---------
Mark Lighting Fixture Co., Inc. $ 134,327 $ (16,225)
Metalite, Inc. 8,869 (27,078)
Laborstat, Inc. (988) (1,505)
Carl Coppola 95,785 --
Other shareholders 58,479 90,002
--------- ---------
Due to Related Parties $ 296,472 $ 45,194
========= =========
In connection with several modular cell projects, the Company's Chief
Executive Officer, Carl Coppola, provided third party guarantees to assist the
Company in obtaining performance and completion bonds. As compensation for
providing these guarantees, the Company recorded $95,785, representing five
percent of the gross proceeds from these projects.
On May 22, 1997 and May 30, 1997, the Company received $75,000 and $85,000,
respectively and issued 10% promissory notes payable to its Chief Executive
Officer with principal and interest due August 20, 1997 and September 30, 1997,
respectively, and interest due semi-annually.
On January 16, 1995 the Company received $400,000 and issued 10% promissory
notes payable to its Chief Executive Officer with principal and interest due on
March 31, 1995. These notes were secured by a first priority security interest
in the Company's assets. As further consideration for the promissory notes, the
Company issued warrants to purchase 200,000 shares of the Company's common stock
at $2.50 (the closing sales price on the date of grant) per share with the
warrants expiring on January 20, 1997. On February 23, 1995, these promissory
notes were repaid with interest. On January 10, 1997 the expiration date for the
above warrants was extended to December 31, 1997.
- F-12 -
<PAGE>
Note 9 - Related Party Transactions (Continued):
The Company utilized the underwriting and financial consulting services of
Brookehill Equities (Brookehill), a company affiliated with a shareholder of the
Company. For the years ended June 30, 1997, 1996 and 1995 fees paid to
Brookehill were $-0-, $-0-, and $321,683, respectively. In February 1995 this
shareholder, participated in a private placement by the Company and purchased
91,071 units for $3.50 per unit. Each unit consists of two shares of common
stock and one two-year warrant to purchase an additional share of common stock
for $2.00.
A member of the Company's Board of Directors provided bonding services for
the Company's Michigan contract which concluded June 1996. As consideration for
these services, the Director's company, Bergen Engineering, Co. received a 5%
commission on the gross revenue of the contract and warrants to purchase 150,000
shares of the Company's common stock at $2.625 per share (the closing sales
price on the date of grant) with the warrants expiring on November 3, 1996. For
the years ended June 30, 1997, 1996, and 1995 fees paid to Bergen Engineering
Co., were $-0-, $120,061 and $213,076, respectively. On September 19, 1996, the
expiration date for the above warrants was extended to November 3, 1997.
In October 1994, a director participated in a private placement by the
Company and purchased 50,000 shares of common stock for an aggregate of
$131,250, subject to adjustment based upon subsequent private placements. Based
on sale of units in January and February 1995 the director received an
additional 15,000 shares of common stock.
The Company grants nonemployee directors options for serving on the Board
of Directors. On September 19, 1996, each of the Company's four nonemployee
directors were granted five-year options to purchase 30,000 shares of common
stock at $5.75 per share, the closing sales price on the date of grant. On
February 7, 1997, each of the Company's four nonemployee directors were granted
five-year options to purchase 30,000 shares of common stock at $2.00 per share,
the closing sales price on the date of grant.
On June 18, 1997, the Company granted to Joseph Salvani, a principal
shareholder, two-year warrants to purchase 100,000 shares of common stock at
$2.00 per share as compensation for consulting services rendered and to be
rendered.
- F-13 -
<PAGE>
Note 10 - Long-Term Debt:
A. Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Note payable, due in monthly installments of $387, including
interest at 10.9%; due June 1997; collateralized by a vehicle $ -- $ 4,383
Note payable, due in monthly installments of $751, including interest
at 9.9%; due December 1999; collateralized by a vehicle
19,989 26,750
7% convertible debentures due August 20, 1998 441,296 --
7% convertible debentures due January 20, 1999 750,000 --
7% convertible debentures due June 2, 1999 1,250,000 --
7% convertible debenture due June 29, 1999 300,000 --
---------- ----------
Total Long-Term Debt 2,761,285 31,133
Less: Current Portion 448,729 11,144
---------- ----------
Long-Term Debt, Excluding Current Portion $2,312,556 $ 19,989
========== ==========
</TABLE>
Maturities of total long-term debt are as follows:
Year Ended June 30
1998 $ 448,729
1999 2,308,171
2000 4,385
-----------
$ 2,761,285
===========
B. Convertible Debentures:
On August 23, 1996, the Company sold $2,200,000 principal amount 7%
convertible debentures due August 22, 1998 ("1996 Debentures"). On December
26, 1996, the terms of the 1996 Debentures were amended to (i) prohibit
additional conversions until March 31, 1997 unless the trading price of the
common stock reaches levels in excess of $3.00 per share and (ii) modify
the conversion price to the lesser of (a) $1.38 or (b) 80% of the average
closing bid price on the five trading days immediately preceding the
date(s) of conversion. The outstanding balance of $441,296 as of June 30,
1997 is included in current maturities of long-term debt on the
accompanying balance sheet since the Company, on July 21, 1997, repaid the
outstanding balance.
In connection with the issuance of the 1996 Debentures, the Company
incurred $162,700 of debt issue costs. These costs have been capitalized
and are amortized over the remaining term of the 1996 Debentures. The
unamortized portion is included in other assets as of June 30, 1997.
- F-14 -
<PAGE>
Note 10 - Long-Term Debt (Continued):
On January 21, 1997, the Company sold $750,000 principal amount 7%
convertible debentures due January 20, 1999 (the "1997 Debentures"). The
1997 debentures are convertible, on or after July 15, 1997, into shares of
common stock at a conversion price which is the lesser of (i) $2.125 or
(ii) 80% of the average closing bid price on the five trading days
immediately preceding the date(s) of conversion. Interest on the 1997
Debentures is payable in cash or common stock at the Company's option. The
outstanding balance of $750,000 as of June 30, 1997 is included in
long-term debt excluding current maturities on the accompanying balance
sheet.
On June 2, 1997, the Company sold $1,250,000 principal amount 7%
Convertible Debentures due June 2, 1999. The debentures are immediately
convertible into shares of common stock at a conversion price of $0.80 per
share. The sale of these shares is restricted until December 2, 1997. The
outstanding balance of $1,250,000 as of June 30, 1997 is included in
long-term debt excluding current maturities on the accompanying balance
sheet.
On June 27, 1997, the Company sold $300,000 principal amount 7% convertible
debentures due June 29, 1999. The debentures are convertible, on or after
December 30, 1997, into shares of common stock at a conversion price of
$0.80 per share. Since the holders of these debentures are restricted from
conversions until December 30, 1997, included in current assets is $160,157
which represents the unamortized portion of the beneficial conversion
feature as of June 30, 1997. The outstanding balance of $300,000 as of June
30, 1997 is included in long-term debt excluding current maturities on the
accompanying balance sheet.
The Company has charged operations for the year ending June 30, 1997, with
$1,422,813 of imputed interest expense on convertible debentures, which
represents the discount on conversion of each of the above convertible
debentures.
The estimated fair value of the Company's convertible debt as of June 30,
1997 is as follows:
Carrying Fair
Amount Value
----------- ------------
Convertible debt $ 2,741,296 $ 2,928,796
The estimated fair value amount has been determined using available market
information or other appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop
estimates of fair value, so the estimates are not necessarily indicative of
the amount that could be realized or would be paid in a current market
exchange. The effect of using different market assumptions and/or
estimation methodologies may be material to the estimated fair value
amounts.
- F-15 -
<PAGE>
Note 11 - Stockholders' Equity:
A. Stock Option Plan:
On November 10, 1993 the Company adopted a Stock Option Plan. The Plan is
administered and terms of option grants are established by the Board of
Directors. Under the terms of the plan, options to purchase 1,000,000
shares of common stock may be granted to key employees. Options become
exercisable as determined by the Board of Directors and expire over terms
not exceeding ten years from the date of grant, three months after
termination of employment, six months after death or one year in the case
of permanent disability of the optionee. The option price for all shares
granted under the Plan is equal to the fair market value of the common
stock at the date of grant, as determined by the Board of Directors, except
in the case of a ten percent shareholder where the option price shall not
be less than 110% of the fair market value at the date of grant.
The following information relates to shares under option and shares
available for grant under the Plan:
<TABLE>
<CAPTION>
June 30
--------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 367,000 $ 3.70 523,000 $ 3.71 367,500 $ 4.00
Granted 282,500 1.60 -- -- 200,500 3.25
Cancelled (268,500) 3.81 (76,000) 3.79 (45,000) 4.00
Exercised -- -- (80,000) 3.67 -- --
------- ----------- ------- ----------- ------- -----------
Outstanding at end of year 381,000 $ 2.04 367,000 $ 3.70 523,000 $ 3.71
======= =========== ======= =========== ======= ===========
Available for issuance under the Plan 539,000 553,000 477,000
Weighted average contractual life (years) 2.24 1.22 1.84
Shares subject to exercisable option 381,000 367,000 523,000
</TABLE>
B. Stock Warrants:
Outstanding warrants are as follows:
<TABLE>
<CAPTION>
June 30
--------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Warrants outstanding at
beginning of year 3,933,880 $ 4.10 4,848,859 $ 4.45 3,147,838 $ 5.58
Granted 1,395,000 2.91 615,000 5.08 1,702,021 2.38
Exercised (43,572) 2.43 (1,456,979) 2.54 (1,000) 3.25
Expired (2,043,550) 4.02 (73,000) 7.16 -- --
--------- ------ --------- ------ --------- ------
Warrants Outstanding at
End of Year 3,241,758 $ 3.64 3,933,880 $ 4.10 4,848,859 $ 4.45
========= ====== ========= ====== ========= ======
Weighted average contractual life (years) 1.51 .79 1.02
</TABLE>
- F-16 -
<PAGE>
Note 11 - Stockholders' Equity (Continued):
The above warrants are currently exercisable into 3,411,758 shares of the
Company's common stock.
C. Proforma Information:
Pro forma information regarding net earnings and earnings per share, as
required by SFAS No. 123, has been determined as if the Company had
accounted for its employee stock options under the fair-value method. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for fiscal 1997 and 1996: risk-free interest rate of 6.40% and
5.57%; dividend yield -0-; volatility fact related to the expected market
price of the Company's common stock of .35; and weighted-average expected
option life of 3.3 and 2.0 years. The weighted-average fair value of
options granted during fiscal 1997 and 1996 were $1.84 and $5.63,
respectively. The Company's pro forma information follows:
June 30,
--------------------------------
1997 1996
----------- -------------
Pro forma net earnings $(5,701,590) $ (5,224,781)
Proforma loss per common share (.40) (.41)
Note 12 - Leases:
A. Facility Leases:
The Company occupies its offices pursuant to an operating lease expiring in
December 1998. The Company conducts its manufacturing operations pursuant
to an operating lease expiring November 15, 2004. Under the terms of these
leases, the Company is obligated to pay maintenance, insurance, and its
allocable share of real estate taxes.
Future minimum rental payments under these operating leases are as follows:
Year Ended June 30
1998 $ 260,364
1999 217,302
2000 174,240
2001 174,240
2002 and thereafter 580,800
-----------
$ 1,406,946
===========
Rent expense for the years ending June 30, 1997, 1996, and 1995, was
$254,522, $205,586, and $179,976, respectively.
- F-17 -
<PAGE>
Note 12 - Leases (Continued):
B. Capital Leases:
The Company leases certain equipment under capital leases with expiration
dates ranging from April 2000 through April 2002.
Future minimum lease payments are as follows:
Year Ended June 30
- ------------------
1998 $ 15,790
1999 15,790
2000 14,757
2001 4,485
2002 1,612
---------
Total future minimum lease payments 52,434
Less: Amount representing interest 16,247
---------
Present value of net future minimum lease payments 36,187
Less: Current portion of obligations under capital leases 8,276
---------
Long-term portion of obligations under capital leases $ 27,911
=========
Note 13 - Commitments and Contingencies:
The Company entered into an employment agreement with its Chief Executive
Officer. The agreement expires on June 30, 2000 and is payable at an annual base
salary of $200,000. In addition, the agreement includes three year nonqualified
options to purchase 750,000 shares of common stock at various prices exercise
prices ranging from $1.25 to $2.75.
In connection with the acquisition of LTD, a former shareholder of LTD
entered into a three-year employment agreement with LTD which provides (i) an
annual salary of U.K. Pounds 60,000 in the initial year with U.K. Pounds 5,000
increases in the succeeding two years and (ii) bonus equal to 10% of the post
tax profits of LTD. The remaining aggregate commitment for future salaries as of
June 30, 1997, excluding bonuses, is approximately $198,000. The exchange rate
for U.K. Pounds into U.S. dollars was 1.6645 as of June 30, 1997.
The Company maintains cash balances at several financial institutions
located in New Jersey. Accounts at each institution are insured by the Federal
Deposit Insurance Corporation up to $100,000. As of June 30, 1997 and 1996, the
Company's uninsured cash balances totalled $598,555 and $417,000, respectively.
Note 14 - Income Taxes:
As of June 30, 1997, the Company has Federal net operating loss
carryforwards of approximately $18,900,000. Such carryforwards begin to expire
in 2009 if not previously used. The $18,900,000 carryforward is comprised of
approximately $17,200,000 which is available for utilization in the tax year
ending June 30, 1998. The remaining $1,700,000 carryforward is restricted as to
utilization subject to the provisions of Internal Revenue Code Section 382.
Since realization of the tax benefits associated with these carryforwards is not
assured, a full valuation allowance was recorded against these tax benefits as
required by SFAS No. 109.
- F-18 -
<PAGE>
Note 15 - Discontinued Operations:
On November 10, 1993, Showcase Cosmetics, Inc. (Showcase), the parent
company of the Bar-Lor Subsidiaries, and the Company consummated a
Reorganization (the "Reorganization") pursuant to a Plan of Reorganization dated
December 23, 1992, as amended.
Pursuant to the Reorganization, Showcase acquired all of the assets,
subject to substantially all of the liabilities of the Company for 8,363,836
shares of common stock which represented 96% of the outstanding shares of common
stock of Showcase. The Reorganization was, in substance, an acquisition of
Showcase by the Company, as the control of Showcase transferred from the
management of Showcase to the management of the Company.
The Reorganization was accounted for using the purchase method of
accounting. The purchase price of $2,613,292 plus expenses associated with the
transaction exceeded the net assets acquired, resulting in $1,336,604 which was
assigned to costs in excess of net assets of businesses acquired. The Company
charged operations with $1,100,000 as a reduction in the segments carrying value
of its assets in the quarter ended June 30, 1995.
On October 13, 1995, the Company disposed of the Bar-Lor Subsidiaries,
whose principal services were the packaging and distribution of cosmetics
products. The assets of the segment sold consist primarily of cash, accounts
receivable, inventories, and machinery and equipment.
Operating results of the segment for the period July 1, 1994 through
October 13, 1995 are shown separately in the accompanying consolidated
statements of operations. The consolidated statement of operations for June 30,
1995 was restated and the operating results of the segment are shown separately.
Revenues of the segment for the period July 1, 1995 through October 13,
1995 and for the year ended June 30, 1995 were $166,989 and $917,934,
respectively. These amounts are not included in the accompanying consolidated
statements of operations.
Assets and liabilities of the segment disposed of consisted of the
following:
October 13, June 30,
1995 1995
--------- ---------
Cash $ 16,513 $ 50,580
Accounts receivable, net 6,291 (10,485)
Inventories 346,104 363,093
Other current assets 11,434 5,251
Machinery and equipment, net 29,335 33,499
Other 17,880 17,880
--------- ---------
427,557 459,818
--------- ---------
Accounts payable 234,145 239,199
Accrued expenses 8,987 16,116
Notes payable 15,000 --
--------- ---------
258,132 255,315
--------- ---------
Net Assets of Discontinued Segment 169,425 $ 204,503
=========
Less: Loss on disposition of segment 69,425
---------
Net Proceeds From Disposition of Segment $ 100,000
=========
- F-19 -
<PAGE>
Note 16 - Supplemental Cash Flow Information:
A. Cash paid for interest during the years ended June 30, 1997, 1996 and
1995 amounted to $40,832, $9,581 and $12,615, respectively.
B. The Company acquired certain equipment with an aggregate cost of
$6,200 and $56,325 under capital lease obligations for the years ended
June 30, 1997 and 1995, respectively.
C. During 1997, $360,000 of convertible debentures were liquidated
through the issuance of common stock.
Note 17 - Segment Information:
The Company's two industry segments are the design and manufacture of
modular steel prison cells for the corrections industry and the distribution of
treatment booths and IntraScan Systems to the medical industry. The following is
a summary of selected consolidated financial information for the Company's
industry segments:
June 30
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
Revenues:
Modular steel products $ 6,114,195 $ 3,256,574 $ 5,949,490
Medical products 335,549 198,041 176,083
----------- ----------- -----------
Total $ 6,449,744 $ 3,454,615 $ 6,125,573
=========== =========== ===========
Operating Loss:
Modular steel products $(2,706,272) $(4,508,406) $(3,055,631)
Medical products (1,035,934) (555,462) (671,099)
----------- ----------- -----------
Total $(3,742,206) $(5,063,868) $(3,726,730)
=========== =========== ===========
Identifiable Assets:
Modular steel products $ 5,002,432 $ 1,317,620 $ 3,505,085
Medical products 429,845 1,766,143 268,795
Discontinued operation -- -- 204,503
----------- ----------- -----------
Total $ 5,432,277 $ 3,083,763 $ 3,978,383
=========== =========== ===========
For the year ended June 30, 1997, one customer accounted for 48% of total
revenues. Revenues from one customer accounted for 70% of total revenues during
the year ended June 30, 1996. For the year ended June 30, 1995, one customer
accounted for 60% of total revenues. As of June 30, 1997, one customer accounted
for 60% of receivables.
Note 18 - Reduction in Carrying Value of Assets:
The Company acquired the stock of LTD, the developer of the Intrascan II
system. In connection with this acquisition, the Company has determined to focus
its marketing efforts on the Intrascan II technology. In November 1992, the
Company acquired Diversified Imaging Technology, a company which developed the
Intrascan I technology which subsequently was integrated with the Intrascan II
product. As a result, during the fourth quarter of fiscal 1996 the Company
charged operations with approximately $777,000 to write off the excess net
assets of businesses acquired as resulting from its acquisition of the Intrascan
I technology.
- F-20 -
<PAGE>
BAKER TILLY
AUDITORS REPORT TO THE MEMBERS OF MARKCARE MEDICAL SYSTEMS, LTD.
We have audited the financial statements [for the year ended June 30, 1997].
Respective responsibilities of directors and auditors
As described [ ] the company's directors are responsible for the preparation of
the financial statements. It is our responsibility to form an independent
opinion, based on our audit, on those statements and to report our opinion to
you.
Basis of opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practice Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgments made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Fundamental Uncertainty
These accounts have been prepared under the going concern accounting policy [ ].
This is on the basis that the holding company and the directors will continue to
provide sufficient finance to enable the company to meet its liabilities. The
balance sheet position is currently insolvent by L 340,319. As stated [ ] in the
financial statements amounts owing to the holding company and a company owned by
a director total L 324,476. The company is therefore reliant on the holding
company and directors support in order to continue trading. Our opinion is not
qualified in this respect.
Opinion
In our option the financial statements give a true and fair view of the state of
the company's affairs at 30 June 1997 and of its loss for the period then ended
and have been properly prepared in accordance with the provisions of the
Companies Act 1985.
/s/ Baker Tilly
Registered Auditor
Chartered Accountants
Old Sarum House
49 Princes Street
Yeovil, Somerset
BA20 1EG
- F-21 -
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made and dated as of May 30, 1997, by and between Mark
Solutions, Inc., a Delaware corporation, ("Mark") and Carl Coppola ("Employee").
W I T N E S S E T H
WHEREAS, Mark has agreed to employ the services of Employee to act as President
and Chief Executive Officer and Employee has agreed to accept such employment,
each upon the terms contained herein.
NOW THEREFORE, and in consideration of the promises and covenants herein
contained and intending to be legally bound hereby, the parties agree as
follows:
1. Initial Term. Mark agrees to employ Employee for a three (3) year term
commencing as of July 1, 1997 and ending June 30, 2000, subject to earlier
termination as provided herein.
2. Duties. Throughout the term of this Agreement, Employee shall serve Mark as
President and Chief Executive Officer. Employee shall faithfully and diligently
devote his best efforts, energies and abilities to the duties and
responsibilities reasonably required of him in his capacity of his positions,
such responsibilities being similar to those performed by other executives in
the same capacity in similar size companies in the same industry as Mark.
Employee shall discharge his duties in accordance with the policies, goals and
objectives established by the Board of Directors and management of Mark. Upon
the effectiveness of this Agreement, the business affairs of Mark shall occupy
substantially all of the business time of Employee not to be less than 40
hours per week, provided, however, Employee shall not be precluded from engaging
in other business activities, including serving as President of Mark Lighting
Fixture Co., Inc. and on the board of directors of Mark and other companies, as
long as such activity does not interfere with the duties of Employee as outlined
in this Agreement.
3. Compensation. The compensation of Employee for the services provided for
herein shall be as follows:
(a) Employee shall receive a base salary of TWO HUNDRED THOUSAND ($ 200,000)
DOLLARS annually, and such higher amount as Mark's Board of Directors may,
in its sole discretion, from time to time fix, payable in weekly
installments.
(b) In addition to the base salary provided for herein, Employee shall be
eligible for performance bonuses as determined by the Board of Directors.
<PAGE>
(c) Employee shall be entitled to participate in any retirement plans or
benefit programs for the payment or reimbursement of medical, disability or
life insurance, stock option plans and other compensation plans generally
available to employees of Mark, provided, however, the initiation and exact
terms of the foregoing plans and programs shall be established in the sole
discretion of the Board of Directors.
(d) During the term hereof, Mark shall provide Employee with an automobile of
substantially similar kind and class now provided to Employee. Mark shall
pay all expenses in connection with the automobile including, but not
limited to insurance, repairs, maintenance and gasoline.
(e) Employee shall receive three-year nonqualified options to purchase 750,000
shares of Common Stock of Mark, 250,000 of which are exercisable at $ 1.25,
250,000 of which are exercisable at $ 2.00 and 250,000 of which are
exercisable at $ 2.75, in cash or Common Stock.
(f) Mark shall pay reasonable business expenses incurred by Employee in
connection with the promotion of Mark and in connection with the business
of Mark, including but not limited to travel and entertainment expenses,
subject to the presentment of appropriate receipts and documentation of
such expenses. Mark shall reimburse Employee not less than monthly for such
approved business expenses.
4. Renewal of Employment. Not less than sixty (60) days prior to the expiration
of the then current term of this Agreement, each party agrees to give written
notice to the other of its desire to renew or terminate this Agreement. If both
parties agree to renew this Agreement the employment of Employee shall be
automatically extended for successive one (1) year periods on the same terms
and conditions as contained herein.
5. Termination of Employment. Employee's employment with Mark shall be
terminated if any of the following occurs:
(a) The expiration of the term of this Agreement without notice and agreement
to renew as set forth in Section 4;
(b) Mark and Employee shall mutually agree in writing;
(c) Death of Employee;
(d) Ninety (90) days written notice from Mark through its Board of Directors
for any reason or no reason, including, but not limited to, (i) Employee
becoming "disabled", which shall be the inability, through mental or
physical illness, to perform his duties under this Agreement, (ii) Employee
shall have been convicted of a felony, as determined by a court of
competent jurisdiction and such decision shall have become final, (ii)
Employee's material failure, refusal or willful neglect to carry out the
duties following written notice of such failure from Mark.
<PAGE>
In the event of the termination of the employment, Employee shall only be
entitled to receive any base salary, performance compensation and other benefits
accruing prior to such termination and shall not be entitled to any other
payments or compensation.
6. Confidential Information; Noncompete. Employee acknowledges that while
providing services under this Agreement, he will be privy to financial and other
information relating to the business and industry of Mark. Accordingly, Employee
acknowledge that he is acting in a fiduciary capacity with respect to Mark and
agrees as follows:
(a) During the term of this Agreement and at any time thereafter, Employee
shall not divulge, furnish or make accessible to anyone (other than in the
regular course of business) any knowledge or information with respect to
any confidential or secret aspect of the business of Mark, including, but
not limited to, trade secrets and proprietary technology, or any customer
lists or other information relating to the customers of Mark;
(b) During the term of this Agreement and for a period of two (2) year(s)
following the termination thereof, Employee shall not engage, as a
shareholder, partner, sole proprietor, employee, consultant or independent
contractor of any corporation, partnership or other business entity, in any
business activities which are in direct or indirect competition with Mark;
(c) During the term of this Agreement and for a period of two (2) years
following the termination hereof, he shall not, directly or indirectly
solicit or negotiate with any person who has been a material supplier to,
or client of, Mark during Employee's employment or one (1) year prior to
the termination thereof; and
(d) During the term of this Agreement and for a period of two (2) years
following the termination hereof, he shall not solicit, encourage or
otherwise participate in any effort or attempt to influence any of the then
employees or agents to terminate their affiliation or other relationship
with Mark.
The Employee acknowledges that the scope of the restrictions set forth in this
Section 6 is reasonably required to protect Mark's business interests for which
the Employee is being compensated under this Agreement, and if any such
restriction is nevertheless determined to be too broad for enforcement in
accordance with its terms, the Employee agrees that such restriction shall be
enforced to the maximum extent permitted by law.
7. Vacation/Sick Days. During each year of the term of this Agreement, Employee
shall be entitled to four (4) weeks vacation and the customary sick leave.
<PAGE>
8. Indemnification. In the event Employee is, or was a party, or is threatened
to be made a party to any threatened, pending or completed action, suit, or
proceeding by reason of the fact he is or was an officer, director, agent or
employee of Mark he shall be indemnified by Mark to the maximum extent permitted
by law not inconsistent with the provisions of the Certificate of Incorporation
and By-laws of Mark. The right of indemnification herein provided for shall not
be deemed exclusive of any other rights to which Employee may be entitled to as
a matter of law or otherwise, but shall be deemed to be in addition thereof.
9. Notices. Any notice to be given under this Agreement shall be deemed received
upon the date of actual receipt. Such notice shall be sent to the last know
business or residential address of the recipient by means which evidence such
receipt including (i) certified mail return receipt requested, (ii) facsimile or
(iii) overnight delivery.
10. Transferability. This Agreement is a contract for Employee's personal
services and shall not be assigned, delegated or transferred in whole or in part
by Employee.
11. Successors and Assigns. This Agreement binds, inures to the benefit of, and
is enforceable by the successors and assigns of the parties, and does not confer
any rights on any other persons or entities.
12. Entire Agreement; Amendments. This Agreement contains the entire agreement
between the parties. No amendment or modification of this Agreement shall be
effective unless it is in writing and signed by both parties. Any amendments
shall be attached hereto and become a part of this Agreement.
13. Severability. The provisions of this Agreement shall be severable and if any
provision shall be prohibited by law, invalid or unenforceable in whole or in
part for any reason, the remaining provisions shall remain in full force and
effect.
14. Governing Law. The validity, construction and performance of this Agreement
shall be governed by the substantive laws of the State of New Jersey as applied
to agreements entered into and performed entirely within New Jersey.
<PAGE>
15. Counterparts. This Agreement may be executed in counterparts and by
facsimile, each of which shall be an original and all of which taken together
will constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement, in a manner legally binding upon them as of the first date first
above written.
Mark Solutions, Inc.
By:/s/ Carl Coppola
----------------------------
(Print Name and Title)
and
Carl Coppola
-----------------------------
Carl Coppola
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Jun-30-1997
<PERIOD-END> Jun-30-1997
<CASH> 422,457
<SECURITIES> 0
<RECEIVABLES> 3,184,428
<ALLOWANCES> 5,500
<INVENTORY> 336,287
<CURRENT-ASSETS> 4,168,420
<PP&E> 2,436,385
<DEPRECIATION> 2,089,126
<TOTAL-ASSETS> 5,432,277
<CURRENT-LIABILITIES> 3,244,963
<BONDS> 2,340,467
147,790
0
<COMMON> 0
<OTHER-SE> (300,943)
<TOTAL-LIABILITY-AND-EQUITY> 5,432,277
<SALES> 6,449,744
<TOTAL-REVENUES> 6,471,035
<CGS> 6,091,773
<TOTAL-COSTS> 10,191,950
<OTHER-EXPENSES> 1,427,699
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 290,651
<INCOME-PRETAX> (5,439,265)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,439,265)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,439,265)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
