<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1996
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- -----------------
Commission File Number: 0-17118
--------------------------------
Mark Solutions, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-2864481
- ----------------------------------- --------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification No.)
Parkway Technical Center
1515 Broad Street
Bloomfield, New Jersey 07003
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (201) 893-0500
----------------------
- --------------------------------------------------------------------------------
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
Common Stock, $ .01 par value: 14,616,282 shares outstanding as of February 13,
1997.
<PAGE>
MARK SOLUTIONS, INC.
Form 10-Q
for
Quarter Ended December 31, 1996
Index
Part I. Financial Information Page No.
Item 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 1996 and June 30, 1996 ........ 3
Consolidated Statements of Operations
for the Six Months Ended
December 31, 1996 and December 31, 1995 .... 5
Consolidated Statements of Cash Flows
for the Six Months Ended December 31,
1996 and December 31, 1995 ................. 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 4. Submission of Matters to a Vote of
Security-Holders ........................ 12
Item 6. Exhibits and Reports on Form 8-K ............. 12
Signatures 13
2
<PAGE>
Mark Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Assets
December 31, 1996 June 30, 1996
-------------------------- ---------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 107,394 $ 263,922
Restricted cash 183,688 181,781
Accounts receivable 1,778,769 904,596
Inventories 683,980 146,305
Other current assets 201,645 133,325
---------- ----------
Total Current Assets $ 2,955,476 $ 1,629,929
Property and Equipment:
Machinery and equipment 1,486,087 1,472,528
Demonstration equipment 436,348 395,419
Office furniture and equipment 368,763 324,006
Leasehold improvements 40,084 14,254
Vehicles 62,283 68,783
Property held under capital lease - - - 40,929
---------- ----------
Total 2,393,565 2,315,919
Less: Accumulated depreciation
and amortization 2,002,794 1,939,415
---------- ----------
Net Property and Equipment 390,771 376,504
Other Assets:
Costs in excess of net assets
of businesses acquired, less accumulated
amortization of $122,465 and $17,495 at
December 31, 1996 and June 30, 1996,
respectively 927,226 1,032,196
Debt issue costs, less accumulated amortization
of $27,117 as of December 31, 1996 135,583 - - -
Other assets 79,548 45,134
---------- ----------
Total Other Assets 1,142,357 1,077,330
---------- ----------
Total Assets $ 4,488,604 $ 3,083,763
=========== ===========
</TABLE>
3
<PAGE>
Mark Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1996
--------------------------- -----------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 1,132,535 $ 499,254
Current maturities of long-term debt 96,496 80,558
Current portion of obligations under capital leases - - - 5,921
Due to related parties 132,441 45,194
Accrued liabilities 265,939 323,138
----------- ----------
Total Current Liabilities $ 1,627,411 $ 954,065
Other Liabilities:
Long-term debt excluding current maturities 994,979 19,989
Long-term portion of obligations under
capital leases - - - 30,308
----------- ----------
Total Other Liabilities 994,979 50,297
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.01 par value,
25,000,000 shares authorized,
14,616,282 shares issued and
outstanding at December 31, 1996
and 13,576,315 shares issued and
outstanding at June 30, 1996 144,645 135,762
Additional paid-in capital 25,595,596 24,260,299
Retained earnings (deficit) (23,874,027) (22,316,660)
------------ ------------
Total Stockholders' Equity 1,866,214 2,079,401
----------- -----------
Total Liabilities and Stockholders' Equity $ 4,488,604 $ 3,083,763
=========== ===========
</TABLE>
4
<PAGE>
Mark Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
December 31 December 31
1996 1995 1996 1995
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 1,684,030 $ 2,550,492 $ 1,374,672 $ 583,435
Other income 11,177 - - - 11,177 - - -
------------- ------------- ----------- -------------
Total Revenues 1,695,207 2,550,492 1,385,849 583,435
------------- ------------- ----------- -------------
Cost and Expenses:
Cost of sales 1,358,375 2,929,219 1,116,549 820,327
Selling, general and administrative 1,822,640 1,977,745 936,872 975,098
------------- ------------- ----------- -------------
Total Costs and Expenses 3,181,015 4,906,964 2,053,421 1,795,425
------------- ------------- ----------- -------------
Operating (Loss) (1,485,808) (2,356,472) (667,572) (1,211,990)
------------- ------------- ----------- -------------
Other Income (Expenses):
Interest earned 17,146 12,044 7,464 5,724
Interest expense (85,583) (4,979) (61,589) (2,098)
Loss on asset disposal (3,120) - - - (1,500) - - -
------------- ------------- ----------- -------------
Net Other Income (Expenses) (71,557) 7,065 (55,625) 3,626
------------- ------------- ----------- -------------
(Loss) From Continuing Operations (1,557,365) (2,349,407) (723,197) (1,208,364)
------------- ------------- ----------- -------------
Discontinued Operations:
Loss on cosmetics segment - - - (35,078) - - - - - -
Loss on disposal of cosmetics segment - - - (69,425) - - - - - -
------------- ------------- ----------- -------------
Loss From Discontinued Operations - - - (104,503) - - - - - -
------------- ------------- ----------- -------------
Net (Loss) $ (1,557,365) $ (2,453,910) $ (723,197) $ (1,208,364)
============= ============= ============ =============
(Loss) Per Share $ (.11) $ (.20) $ (.05) $ (.10)
============= ============= ============ =============
Weighted Average Shares Outstanding 14,061,378 12,290,665 14,232,470 12,700,914
============= ============= ============ =============
Dividends Paid $ - 0 - $ - 0 - $ - 0 - $ - 0 -
============= ============= ============ =============
</TABLE>
5
<PAGE>
Mark Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
December 31, 1996 December 31, 1995
------------------------------- -----------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net (loss) $ (1,557,365) $ (2,453,910)
Adjustments to reconcile net (loss) to
net cash (used for) operating activities:
Depreciation and amortization $ 198,846 $ 312,600
Accrued interest on debt conversion 9,477 - - -
Loss on sale of equipment 3,120 - - -
Loss from discontinued operations - - - 104,503
(Increase) decrease in assets:
Restricted cash (1,907) 16,075
Accounts receivable (874,173) 395,968
Costs and estimated earnings in excess
of billings on contract in progress - - - (293,742)
Inventories (537,675) (177,211)
Other current assets (68,320) (29,170)
Other assets (34,414) (74,354)
Increase (decrease) in liabilities:
Accounts payable 633,281 (494,548)
Due to related parties 87,247 (154,864)
Accrued liabilities (57,202) (5,016)
------------- -----------
Net adjustments to reconcile net (loss)
to net cash (used for) operating activities (641,720) (399,759)
------------- -------------
Net Cash (Used for) Operating Activities (2,199,085) (2,853,669)
Cash Flows From Investing Activities:
Additions to property and equipment (84,146) (28,334)
Proceeds from disposition of segment - - - 85,000
------------- -----------
Net Cash Provided by (Used for)
Investing Activities (84,146) 56,666
Cash Flows From Financing Activities:
Proceeds from short-term borrowings 2,200,000 - - -
Increase of short-term borrowings 13,086 - - -
Repayment of notes payable for equipment (8,386) (14,605)
Proceeds from issuance of common stock 105,982 2,907,088
Debt issue costs (162,700) - - -
Payment of issuance costs (21,279) - - -
------------- -----------
Net Cash Provided by Financing Activities 2,126,703 2,892,483
------------- -------------
Net Increase (Decrease) in Cash
and Cash Equivalents (156,528) 95,480
Cash at Beginning of Year 263,922 116,704
------------- -------------
Cash at End of Period $ 107,394 $ 212,184
============= =============
</TABLE>
6
<PAGE>
Mark Solutions, Inc. and Subsidiaries
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 December 31, 1996 and June 30, 1996 and the results of
operations and cash flows for the six months ended December 31, 1996 and 1995.
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, 1996 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.
Certain reclassifications have been made to the current and prior year
amounts to conform to the current period presentation.
Note 2 - Inventories:
Inventories at December 31, 1996 and June 30, 1996 consist of the following:
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1996
----------------- -------------
<S> <C> <C>
Raw materials $ 518,030 $ 127,477
Finished goods 165,950 18,828
----------- ----------
$ 683,980 $ 146,305
=========== ==========
</TABLE>
Note 3 - Convertible Debentures:
On August 23, 1996, the Company sold $ 2,200,000 principal amount 7%
convertible debentures due August 22, 1998 (the "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 $ 950,000 as of December 31,
1996 is included in long-term debt excluding current maturities on the
accompanying balance sheet.
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 term of the 1996 Debentures.
7
<PAGE>
Note 4 - Common Stock and Additional Paid-In Capital:
During the six months ended December 31, 1996, the Company issued 43,572
shares of common stock as a result of exercise of warrants, receiving gross
proceeds of $ 105,894.
Note 5 - Subsequent Events:
On January 21, 1996, 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 Debentures is payable in cash or
common stock at the Company's option.
8
<PAGE>
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 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
nationwide 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 return to profitability. 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. As of October 1996 the
Company has occupied new factory facilities. 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. Through February 14,
1997 the Company has received orders aggregating approximately $ 3,000,000
under the New York State agreement.
The Company currently has bids pending on approximately $ 10,700,000 in
projects. For the six months ended December 31, 1996, the Company submitted
bids on approximately $ 23,800,000 in projects and continues to be under
consideration for approximately $ 10,600,000 of these projects.
9
<PAGE>
Through its subsidiary, MarkCare Medical Systems, Inc. ("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. Consistent with this marketing approach, the Company 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, 1997,
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 its 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 September 30, 1997. For the six months
ended December 31, 1996, sales of the modular steel products represented 90.4%
of total revenues.
Revenues from sales for the six months ended December 31, 1996 decreased
34.0% to $ 1,684,030 from $ 2,550,492 for the comparable 1995 period. This
decrease is attributed to the continued sporadic sales of its modular steel
cell products as discussed in "General".
Cost of sales for the six months ended December 31, 1996 which consists
primarily of materials, labor, supplies, and fixed factory overhead expense,
decreased 53.6% to $ 1,358,375 from $ 2,929,219 for the comparable 1995 period
due to the decrease in sales. Cost of sales as a percentage of revenues was
80.6% for the six months ended December 31, 1996 as compared to 114.8% for the
comparable 1995 period. This decrease is attributable to lower costs of sales
of the Company's MarkCare product line (46.8% as a percentage of revenues) as
compared to the modular cell product line (84.2% as a percentage of revenues).
Management believes that the substantial majority of the revenues of the
MarkCare line will be attributable to software sales and support services
which have virtually no costs of sales. Despite losses incurred in connection
with the outsourcing of projects for the three months ended September 30, 1996
and factory start up costs incurred in the quarter ended December 31, 1996,
the Company reduced its cost of sales for the modular cell product from 114.8%
as a percentage of revenues for the period ended December 31, 1995 through
improved gross profit margins and operating efficiencies. For the six months
ended December 31, 1996 fixed factory overhead expenses were $ 55,627 as
compared to $ 158,889 for the comparable 1995 period due to savings associated
with the decision not to maintain a factory for the three months ended
September 30, 1996.
Selling, general and administrative expenses for the six months ended
December 30, 1996 decreased 7.8% to $ 1,822,640 from $ 1,977,745 for the
comparable 1995. This decrease is attributable to a decrease of 32.5% in such
expenses for the six months ended December 31, 1996 from the comparable 1995
period due to reductions in office staff, trade show expenses, professional
fees and the elimination of amortization expenses related to the IntraScan I
acquisition, partially offset by the inclusion of $ 382,574 of selling,
general and administrative expenses of Simis Medical Imaging, Ltd. which was
acquired in May 1996.
10
<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 is sufficient to meet its
operating requirements through July 31, 1997. The Company has been unable to
secure bank financing and, to the extent it requires additional capital, will
continue to principally look to private sources.
On August 23, 1996, the Company sold $ 2,200,000 principal amount 7%
convertible debentures due August 22, 1998 (the "1996 Debentures"). The 1996
Debentures, as amended, are 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 the 1996 Debentures is payable in cash or Common
Stock at the Company's option.
The Company presently has an effective registration statement relating to
3,368,880 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. 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 $ 683,980 at December 31, 1996 from
$ 146,305 at June 30, 1996 as the Company increased purchases of raw materials
and components for projects in production.
Cash and cash equivalents decreased from $ 263,922 at June 30, 1996 to
$ 107,394 at December 31, 1996 as certain accounts payable were satisfied.
During the three months ended December 31, 1996, cash and cash equivalents
decreased $ 1,448,485 as the accounts receivable associated with the purchase
of raw materials and cell components remain outstanding. Working capital
increased to $ 1,328,065 at December 31, 1996 from $ 675,864 at June 30, 1996
primarily due to proceeds from the 1996 Debenture placement offset by
operating expenses.
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.
11
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders.
On December 10, 1996, the Company held its Annual Meeting of Shareholders
at which directors were elected and the Company's selection of its independent
public accountants, Sax, Macy, Fromm & Co., P.C. for the year ending June 30,
1997 was ratified. The vote for the foregoing matters was as follows:
1. Election of Directors
Each of the directors was re-elected.
Name Votes For Votes Against
- ---------------------- ----------- -------------
Carl Coppola 11,782,316 59,515
Richard Branca 11,785,993 59,838
Ronald E. Olszowy 11,785,993 59,838
William Westerhoff 11,785,853 55,978
Michael Nafash 11,785,053 56,778
2. Ratification of Selection of Independent Public Accountants
Votes For Votes Against Abstentions
--------- ------------- -----------
11,746,225 50,356 45,250
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Exhibit Description
27.1 Financial Data Schedule
12
<PAGE>
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: February 13, 1997
MARK SOLUTIONS, INC.
By: /s/ Carl Coppola
--------------------------------
Carl Coppola- President,
Chief Executive Officer
and Chief Financial Officer
13
<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>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 107,394
<SECURITIES> 0
<RECEIVABLES> 1,778,769
<ALLOWANCES> 0
<INVENTORY> 683,980
<CURRENT-ASSETS> 2,955,476
<PP&E> 2,393,565
<DEPRECIATION> 2,002,794
<TOTAL-ASSETS> 4,488,604
<CURRENT-LIABILITIES> 1,627,411
<BONDS> 0
<COMMON> 144,645
0
0
<OTHER-SE> 1,721,569
<TOTAL-LIABILITY-AND-EQUITY> 4,488,604
<SALES> 1,684,030
<TOTAL-REVENUES> 1,712,353
<CGS> 1,358,375
<TOTAL-COSTS> 3,181,015
<OTHER-EXPENSES> 3,120
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85,583
<INCOME-PRETAX> (1,557,365)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,557,365)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,557,365)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
