SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-17118
MARK SOLUTIONS, INC.
Incorporated pursuant to the laws of the State of Delaware
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Internal Revenue Service -- Employer Identification No. 11-2864481
Parkway Technical Center, 1515 Broad Street, Bloomfield, New Jersey, 07003
(973) 893-0500
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check whether 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 registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
The total number of shares of the registrant's Common Stock, $ .01 par value,
16,972,212 shares outstanding as of November 12, 1997.
1
<PAGE>
MARK SOLUTIONS, INC.
Form 10-Q
for
Quarter Ended September 30, 1997
Index
Page
Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1997 and June 30, 1997 .................. 3
Consolidated Statements of Operations for the
Three Months Ended September 30, 1997 and
September 30, 1996 .................................... 5
Consolidated Statements of Cash Flows
for the Three Months Ended September 30,
1997 and September 30, 1996 ........................... 6
Notes to Consolidated Financial Statements............... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................... .............. 9
Part II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................ 12
Signatures .......................................................... 12
2
<PAGE>
Consolidated Balance Sheet
Assets
September 30 June 30
1997 1997
---- ----
Current Assets:
Cash and cash equivalents ..................... $ 767,910 $ 422,457
Restricted Cash ............................... 137,500 - - -
Accounts receivable, less
allowance of $5,500 at
September 30 and June 30,1997 ................ 1,805,788 3,178,928
Inventories ................................... 701,358 336,287
Other current assets .......................... 173,741 230,748
---------- ----------
Total Current Assets ....................... $3,586,297 $4,168,420
---------- ----------
Property and Equipment:
Machinery and equipment .... ................. 1,538,775 1,488,255
Demonstration equipment ....................... 395,419 395,419
Office furniture and equipment ................ 347,929 401,731
Leasehold improvements ........................ 55,662 41,568
Vehicles ...................................... 62,283 62,283
Property held under capital lease.............. 60,001 47,129
---------- ----------
Total .................................... 2,460,069 2,436,385
Less: Accumulated depreciation and
amortization ............................ 2,132,303 2,089,126
---------- ----------
Net Property and Equipment .................. 327,766 347,259
---------- ----------
Other Assets:
Cost in excess of net assets of
business acquired less accumulated
amortization of $279,918 and $227,433
at September 30,1997 and June 30, 1997,
respectively .................................. 769,773 822,258
Other assets ................................... 109,507 94,340
---------- ----------
Total Other Assets ........................... 879,280 916,598
---------- ----------
Total Assets ................................... $4,793,343 $5,432,277
=========== ===========
3
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Consolidated Balance Sheet
Liabilities and Stockholders' Equity (Impairment)
September 30, 1997 June 30, 1997
------------------ -------------
Current Liabilities:
Accounts payable .............................. $ 1,938,582 $ 1,638,288
Short-term borrowings ......................... 40,385 435,225
Current maturities of
long-term debt ............................... 7,611 448,729
Current portion of
obligations under
capital leases .............................. 11,237 8,276
Due to related
parties ..................................... 262,795 296,472
Notes payable to
officer ..................................... 140,113 160,000
Accrued liabilities ........................... 223,077 257,973
------------ ------------
Total Current Liabilities .................. $ 2,623,800 $ 3,244,963
------------ ------------
Other Liabilities:
Long-term debt excluding current
maturities ................................... 1,060,585 2,312,556
Long-term portion of obligations
under capital leases ........................ 34,323 27,911
------------ ------------
Total Other Liabilities .................... 1,094,908 2,340,467
------------ ------------
Commitments and Contingencies ................. - - - - - -
------------ ------------
Stockholders' Equity (Impairment):
Common stock, $.01 par value,
25,000,000 shares authorized, 16,936,204
and 14,779,085 shares issued and
outstanding at September 30 and June 30, 1997,
respectively ................................ 169,317 147,790
Additional paid-in capital .................... 30,330,446 27,454,982
Retained earnings (deficit)................... (29,425,128) (27,755,925)
------------ ------------
Total Stockholders' Equity
(Impairment) ........................... 1,074,635 (153,153)
------------ ------------
Total Liabilities and
Stockholders' Equity (Impairment) $ 4,793,343 $ 5,432,277
============ ============
4
<PAGE>
Consolidated Statement of Operations
Three Months Three Months
Ended September Ended September
30,1997 30,1996
------- -------
Revenues:
Sales .......................................... $ 832,241 $ 309,358
Costs and Expenses:
Cost of Sales ............................... 1,057,174 241,552
Selling, general, and administrative expenses .. 1,122,893 886,043
------------ ------------
Total Costs and Expenses ..................... 2,180,067 1,127,595
------------ ------------
Operating (loss) ............................... (1,347,826) ($ 818,237)
------------ ------------
Other Income (Expenses):
Interest income ................................ 49 9,682
Interest expense ............................... (196,577) (23,997)
Imputed Interest on Convertible Debenture ...... (96,093) - - -
Bad Debt Expense ............................... (28,756) - - -
Loss on disposal of Property and Equipment ..... - - - (1,620)
------------ ------------
(321,377) (15,935)
------------ ------------
Net (Loss) ..................................... $(1,669,203) $ (834,172)
============ =============
(Loss) per Share ............................... $ (0.11) $ (0.06)
============ =============
Weighted Average Number of Shares Outstanding .. 15,016,078 13,584,604
============ =============
Dividends Paid ................................. $ -- $ --
============ =============
5
<PAGE>
Consolidated Statements of Cash Flows
Three Months Three Months
Ended September Ended September
30,1997 30,1996
------- -------
Cash Flows From Operating Activities:
Net (loss) ..................................... $ (1,669,203) $(834,172)
Adjustments to reconcile net (loss) to
net cash (used for) operating activities:
Depreciation and amortization ................ 84,075 89,927
Loss on disposal of asset ................... -- 1,620
(Increase) decrease in assets
Restricted cash ............................ (137,500) (1,907)
Accounts Receivables ....................... 1,373,140 42,496
Inventory .................................. (365,071) (188,567)
Other current assets ...................... 57,007 (28,480)
Other assets .............................. (15,167) (34,415)
Increase (decrease) in liabilities:
Accounts payable .......................... 300,294 54,881
Due to related parties .................... (33,677) 104,929
Accrued liabilities ....................... (34,896) 2,365
Net adjustments to reconcile net (loss)
to net cash (used for) operating activities 1,228,205 42,849
------------ ------------
Net Cash (Used for) Operating Activities $ (440,998) $ (791,323)
------------ ------------
Cash Flows From Investing Activities:
Acquisition of property and equipment ....... (12,097) (16,973)
Proceeds from sale of property and equipment -- 1,500
Net Cash Provided by (Used for)
------------ ------------
Investing Activities ....................... (12,097) (15,473)
------------ ------------
Cash Flows From Financing Activities:
Proceeds from issuance of convertible debt .. -- 2,200,000
Repayment of convertible debt ............... (441,296) --
Decrease of short term borrowings .............. (394,840) 38,017
Proceeds of equipment loans less repayments .... 7,580 (4,035)
Repayment of notes payable officer ............. (19,887) --
Proceeds from issuance of common stock ......... 1,648,908 48,750
Payment of debt issue costs .................... (1,917) (162,700)
Payment of offering costs and commissions ...... -- (21,279)
------------ ------------
Net Cash Provided by Financing Activities 798,548 2,098,753
------------ ------------
Net Increase in Cash ........................... $ 345,453 $ 1,291,957
============ ============
Cash and Cash Equivalent at beginning of Year .. 422,457 263,922
------------ ------------
Cash and Cash Equivalents at End of Period ..... $ 767,910 $ 1,555,879
============ ============
6
<PAGE>
Notes to Consolidated Financial Statements
Note 1 - Financial Statement Presentation:
In the opinion of management, the accompanying consolidated financial statements
contain all normal and recurring adjustments necessary to present fairly the
financial position of Mark Solutions, Inc. and Subsidiaries (the "Company") as
of September 30, 1997 and June 30, 1997 and the results of operations and cash
flows for the three months ended September 30, 1997 and 1996.
The accounting policies followed by the Company are set forth in the
Notes to Financial Statements included in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1997 and such notes are incorporated
herein by reference.
The results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year.
Convertible Debenture Conversion Discount- The conversion discount rate to
market value of convertible debentures to common stock is recorded as interest
expense over the period from the sale of the debentures to the first conversion
date.
Certain reclassifications have been made to the current and prior year amounts
to conform to the current period presentation.
Note 2 - Inventories:
Inventories consist of the following:
September 30, 1997 June 30, 1997
------------------ ---------------
Raw materials $701,358 $300,888
Finished goods -0- 35,399
--------- --------
Total $701,358 $336,287
========= ========
7
<PAGE>
Note 3 - Convertible Debentures
On August 23, 1996, the Company sold $2,200,000 principle amount 7%
convertible debentures due August 22, 1998. At June 30, 1997 the balance
remaining on this debenture was $441,296, which was all repaid on July 21, 1997.
On January 21,1997, the Company sold $750,000 principle amount 7% convertible
debentures due January 20, 1999. The outstanding balance of $750,000 as of
September 30, 1997 is included in long-term debt excluding current maturities on
the accompanying balance sheet. In addition, during September 1997, the Company
issued 11,382 shares of common stock as payment of accrued interest through June
30, 1997 on the debenture.
In June 1997, the Company sold $1,550,000 principle amount 7% convertible
debentures due June 1999. The debentures are convertible into shares of common
stock at a conversion price of $0.80 per share. In September 1997, $1,250,000
was converted into 1,562,500 ahares of common stock. In addition, the Company
issued 33,237 shares of common stock as payment of accrued interest on the
debentures up to the date of conversion.
Note 4 - Common Stock and Additional Paid-In Capital:
During the three months ended September 30, 1997, the Company issued 550,000
shares of common stock as a result of the exercise of warrants, receiving gross
proceeds of $1,456,250.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Mark Solutions, Inc.'s (the "Company") 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 the Company's
products and the emergence of competition.
The Company's modular steel products represent an alternative to
traditional concrete construction methods, and penetration into the construction
market has met resistance typically associated with an unfamiliar product.
Accordingly, the Company has been, and will continue to be, subject to
significant sales fluctuations until its modular steel 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, the Company's internal sales and engineering personnel and its
network of independent sales representatives conduct sales presentations and
participate in trade shows and other promotional activities.
The Company 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 become profitable. In addition, the Company is promoting the
incorporation of its modular cell products to State prison industries to
capitalize on its New York State agreement. Since January 1, 1996, the Company
has reduced office staff. From January 1996 to September 1996, the Company
decided not to occupy factory space, but outsourced the manufacturing of its
small modular cell projects to third party manufacturers. The Company occupied
new factory facilities in October 1996. The Company will continue to review its
overhead and personnel expenses based on operating results and prospects.
The Company 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,
revenues from this contract were approximately $3,000,000. On August 25, 1997,
the Company received an additional order of approximately $12,000,000 under the
New York State agreement, which is scheduled to be completed and billed by
December 31, 1997.
The Company currently had bids pending on approximately $4,500,000 in
projects. For the three months ended September 30, 1997, the Company submitted
bids on approximately $12,500,000 in projects and remains under consideration
for $3,400,000 of these projects.
9
<PAGE>
Through its subsidiaries, MarkCare Medical Systems, Inc. and MarkCare
Medical Systems, Ltd. (collectively "MarkCare"), the Company continues to market
its IntraScan II PACS and teleradiology systems and is forming strategic
alliances with other companies with related medical products. Effective March
1996, the Company 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 the Company's results
of operations and financial condition.
Results of Operations
The substantial majority of the Company's operating revenues for the
reported periods were derived from the sale of modular cells for correctional
institutions. Management believes that the sale of these modular steel products
will continue to represent the substantial majority of the Company's operating
revenues through June 30, 1998. For the three months ended September 30, 1997
sales of the modular steel products represented 78.2% of total revenues.
Revenues for the three months ended September 30, 1997 increased 169.0% to
$832,241 from $309,358 for the comparable 1996 period. This increase is
attributed to the progress on five of the previously awarded projects, including
$198,400 under the New York State agreement.
Cost of sales for the three months ended September 30, 1997, which consists
primarily of materials, labor, supplies, and fixed factory overhead expense,
increased 337% to $1,122,893 from $241,552 for the comparable 1996 period
reflecting the increase in sales. Cost of sales as a percentage of revenues was
127.0% for the three months ended September 30, 1997 as compared to 78.1% for
the comparable 1996 period. This increase is attributable to cost overruns on
several previously awarded projects due to, among other things, delays caused by
the relocation of its factory in fiscal 1997. Management expects its gross
profit margin to improve due to operating efficiencies implemented over the last
six months. For the three months ended September 30, 1997 fixed factory overhead
expenses were $61,332. For the comparable 1996 period the Company did not occupy
factory space. Additionally, MarkCare's product line (primarily software sales
and support services) has a significantly lower cost of sales.
Selling, general and administrative expenses for the three months ended
September 30, 1997 increased 26.7% to $1,122,893 from $886,043 for the
comparable 1996. This increase is primarily attributable to an increase in
selling expenses related to the MarkCare products, including staff expenses,
travel and promotional activities and the administrative expenses associated
with the operation of its factory facilities for the modular cells.
11
<PAGE>
Liquidity and Capital Resources
The Company's working capital requirements result principally from staff
and management overhead, office expense and marketing efforts. The Company's
working capital requirements have historically exceed its working capital from
operations due to the sporadic sales of its products. 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 to meet its working capital deficiencies, although no assurance
can be given that such financing will be available. The Company believes its
present available working capital and anticipated cash from its existing
contracts is sufficient to meet its operating requirements through August 31,
1998. The Company obtained a $400,000 revolving line of credit collateralized by
substantially all of its assets and has no outstanding borrowings at November 3,
1997. To the extent it requires additional capital, the Company will continue to
principally look to private sources.
For the three months ended September 30, 1997, the Company sold 550,000
shares of Common Stock pursuant to the exercise of warrants raising gross
proceeds of $1,456,250. Since October 1, 1997, the Company sold 30,000 shares of
Common Stock pursuant to the exercise of warrants raising gross proceeds of
$60,000.
The Company presently has an effective registration statement relating to
813,425 shares of Common Stock issuable upon the exercise of warrants and
options, the majority of which are exercise prices ranging from $ 2.00 to $ 5.00
per share. 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 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 Company's Common
Stock.
The Company's inventory increased to $701,358 at September 30, 1997 from
$336,287 at June 30, 1997 due to raw material purchases and component purchases
for the increased production volume.
Cash and cash equivalents increased from $422,457 at June 30, 1997 to
$787,910 at September 30, 1997 primarily due to proceeds from exercise of
warrants and options. Working capital increased to $962,497 at September 30,
1997 from $923,457 at June 30, 1997 primarily due to the warrant and option
proceeds offset by operating expenses.
11
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Exhibit Description
27.1 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
Date: November 12, 1997
MARK SOLUTIONS, INC.
By:/s/ Carl Coppola
-------------------
Carl Coppola- President,
Chief Executive Officer
and Chief Financial Officer
12
<PAGE>
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 767,910
<SECURITIES> 0
<RECEIVABLES> 1,811,288
<ALLOWANCES> 5,500
<INVENTORY> 701,358
<CURRENT-ASSETS> 3,586,297
<PP&E> 2,460,069
<DEPRECIATION> 2,132,303
<TOTAL-ASSETS> 4,793,343
<CURRENT-LIABILITIES> 2,623,800
<BONDS> 0
0
0
<COMMON> 169,317
<OTHER-SE> 905,318
<TOTAL-LIABILITY-AND-EQUITY> 4,793,343
<SALES> 832,241
<TOTAL-REVENUES> 832,290
<CGS> 1,057,174
<TOTAL-COSTS> 2,180,067
<OTHER-EXPENSES> 124,849
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 196,577
<INCOME-PRETAX> (1,669,203)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,669,203)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,669,203)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
