UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1998
--------------------------
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
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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
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (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
----- ----
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: 17,036,674 shares outstanding as of May 4, 1998.
1
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MARK SOLUTIONS, INC.
Form 10-Q
for
Quarter Ended March 31, 1998
Index
Part I. Financial Information Page No.
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1998 and June 30, 1997 ....................... 3-4
Consolidated Statements of Operations
for the Nine Months and Three Months
Ended March 31, 1998 and March 31, 1997 .............. 5
Consolidated Statements of Cash Flows
for the Nine Months Ended March 31,
1998 and March 31, 1997................................. 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
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<TABLE>
<CAPTION>
Mark Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 1998 June 30, 1997
---------------- ---------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 948,319 $ 422,457
Accounts receivable, less allowance of
$5,500 at March 31, 1998 and June 30,1997 3,256,072 3,178,928
Inventories 396,762 336,287
Other current assets 106,186 230,748
----------- -----------
Total Current Assets $4,707,339 $4,168,420
Property and Equipment, net 509,878 347,259
Other Assets:
Cost in excess of net assets
of business acquired less accumulated
amortization of $384,887 and $227,433 at
March 31,1998 and June 30, 1997,
respectively 664,804 822,258
Other assets 74,549 94,340
----------- -----------
Total Other Assets 739,353 916,598
----------- -----------
Total Assets $5,956,570 $5,432,277
========== ==========
</TABLE>
<TABLE>
<CAPTION>
3
<PAGE>
Mark Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 1998 June 30, 1997
---------------- ---------------
<S> <C> <C> <C> <C> <C>
Current Liabilities:
Accounts payable $ 1,516,991 $ 1,638,288
Short-term borrowings - 435,225
Current maturities of long-term debt 19,167 448,729
Current portion of obligations
under capital leases 4,465 8,276
Due to related parties 103,050 296,472
Notes payable to officer 50,000 160,000
Accrued liabilities 278,439 257,973
----------- -----------
Total Current Liabilities $1,972,112 $3,244,963
Other Liabilities:
Long-term debt excluding current maturities 1,073,758 2,312,556
Long-term portion of obligations under
capital leases 11,266 27,911
----------- -----------
Total Other Liabilities 1,085,024 2,340,467
Commitments and Contingencies - - - - - -
Stockholders' Equity (Impairment):
Common stock, $.01 par value,
50,000,000 shares authorized,
16,972,212 and 14,779,085 shares
issued and outstanding at March
31, 1998 and June 30, 1997, respectively 169,722 147,790
Additional paid-in capital 30,377,778 27,454,982
Deficit (27,648,066) (27,755,925)
----------- -----------
Total Stockholders' Equity (Impairment) 2,899,434 (153,153)
----------- -----------
Total Liabilities and Stockholders' Equity (Impairment) $5,956,570 $5,432,277
========== ==========
</TABLE>
4
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<TABLE>
<CAPTION>
Mark Solutions, Inc. and Subsidiaries
Consolidated Statement of Operations
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
March 31, 1998 March 31, 1997 March 31, 1998 March 31, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 12,719,161 $ 3,276,578 $ 5,075,930 $ 1,581,371
Costs and Expenses:
Cost of sales 9,256,183 2,665,643 3,376,283 1,307,268
Selling, general, and
administrative expenses 2,950,210 2,899,160 842,217 1,076,520
------------- ------------- ------------- -------------
Total Costs and Expenses 12,206,393 5,564,803 4,218,500 2,383,788
-------------- ------------- ------------- -------------
Operating Income(Loss) 512,768 (2,288,225) 857,430 (802,417)
Other Income (Expenses):
Interest income 5,960 21,272 5,114 4,126
Interest expense (250,712) (728,728) (21,519) (643,145)
Imputed Int. on convertible debenture (160,157) -- -- 439,997
Loss on disposal of assets -- (3,120) -- --
------------ ------------ ------------- -------------
(404,909) (710,576) (16,405) (199,022)
------------- ------------- ------------- -------------
Net Income(Loss) $ 107,859 $ (2,998,801) $ 841,025 $ (1,001,439)
============= ============= ============= =============
BASIC EARNINGS PER SHARE
Income(Loss) per Share $ 0.01 $ (0.21) $ 0.05 $ (0.07)
============= ============= ============= =============
Weighted Average Number of
Shares Outstanding 16,310,982 13,974,665 16,972,212 14,475,378
============= ============= ============= =============
DILUTED EARNINGS PER SHARE
Income(Loss) per Share $ 0.01 $ (0.21) $ 0.05 $ (0.07)
============= ============= ============= =============
Weighted Average Number of
Shares Outstanding 17,471,547 13,974,665 18,132,777 14,475,378
============= ============= ============= ============
</TABLE>
5
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<TABLE>
<CAPTION>
Mark Solutions, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
Nine Months Nine Months
Ended Ended
March 31, 1998 March 31, 1997
------------------- -------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income(loss) $ 107,859 $ (2,998,801)
------------------- -------------------
Adjustments to reconcile net income(loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 257,950 316,453
Loss on disposal of assets - 3,120
Imputed interest expense on convertible debt 188,199 637,810
(Increase) decrease in assets:
Restricted cash - 162,920
Accounts Receivables (77,144) (1,394,543)
Inventory (60,475) (797,660)
Other current assets 124,562 23,200
Other assets 19,791 (34,415)
Increase (decrease) in liabilities:
Accounts payable (121,297) 831,646
Due to related parties (193,422) 158,882
Accrued liabilities 20,466 (157,765)
------------------- -------------------
Net adjustments to reconcile net (loss) to net cash
provided by (used for) operating activities 158,630 (250,352)
------------------- -------------------
Net Cash Provided by
(Used for) Operating Activities 266,489 (3,249,153)
------------------- -------------------
Cash Flows From Investing Activities:
Acquisition of property and equipment (263,202) (97,629)
------------------- -------------------
Net Cash (Used for)
Investing Activities (263,202) (97,629)
------------------- -------------------
Cash Flows From Financing Activities:
Proceeds from issuance of convertible debt - 2,950,000
Repayment of long term debt (420,277) -
Increase(decrease) of short term borrowings (435,225) 250,088
Proceeds of equipment loans less repayments (20,456) -
Repayment of notes payable officer (110,000) -
Proceeds from issuance of common stock 1,510,450 105,894
Debt issue costs (1,917) (162,700)
Payment of issuance costs - (22,498)
------------------- -------------------
Net Cash Provided by Financing Activities 522,575 3,120,784
------------------- -------------------
Net Increase (Decrease) in Cash 525,862 (225,998)
Cash and Cash Equivalents at Beginning of Period 422,457 263,922
------------------- ------------------
Cash and Cash Equivalents at End of Period $ 948,319 $ 37,924
=================== ===================
</TABLE>
6
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Mark Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 INTERIM FINANCIAL INFORMATION
The consolidated balance sheet of the Company as of March 31, 1998, the
consolidated statements of operations for the nine months and three months ended
March 31, 1998 and 1997 and the consolidated statements of cash flows for the
nine months ended March 31, 1998 and 1997 are unaudited and have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. In the opinion of management all adjustments (which include only
normal recurring accruals) necessary to present fairly the financial position,
results of operations and cash flows have been included.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The June 30, 1997 balance sheet data is derived
from the audited consolidated financial statements. The attached financial
statements should be read in connection with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended June 30, 1997.
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:
March 31, 1998 June 30, 1997
-------------- -------------
Raw Materials $ 396,762 $ 300,888
Finished Goods - 35,399
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Total 396,762 $ 336,287
========== ==========
7
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Note 3 Common Stock and Additional Paid-In Capital
a. Warrant Exercise
--------------------
During the nine months ended March 31, 1998, the Company issued
580,000 shares of common stock as a result of the exercise of
warrants, receiving gross proceeds of $1,516,250.
b. Debt Conversion
--------------------
During the nine months ended March 31, 1998, Convertible Debentures in
the amount of $1,250,000 were converted into 1,562,500 shares 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.
c. Earnings Per Share
----------------------
During the quarter ended March 31, 1998 the Company adopted Financial
Accounting Standards Board ("FASB") Statement No. 128, "Earnings Per
Share." Basic earnings per common share is computed by dividing the
net earnings by the weighted average number of shares of common stock
outstanding during the period. Dilutive earnings per share gives
effect to stock options and warrants which are considered to be
dilutive common stock equivalents. Earnings per share have been
retroactively restated to reflect FASB No. 128 for all prior periods
presented.
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. 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.
Under a three-year contract expiring in December 1999 with the State
of New York, the Company provides modular steel cells and components to the
State's prison industry program for the final assembly. Through March 31, 1998,
revenues from this contract were approximately $11,900,000. The Company believes
it will be awarded additional projects under its New York State contract and
anticipates additional prison projects will be awarded in New York State by July
1998.
The Company currently has bids pending on approximately $10,000,000 in
projects. In addition to the $12 million in New York State orders, of the
approximately $23,000,000 in bids submitted by the Company for the nine months
ended March 31, 1998, the Company was awarded $430,000 in projects and remains
under consideration for approximately $10,000,000 in projects.
9
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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. The Company has 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.
The Company has recently signed additional IntraScan distributor agreements with
SANTAX A/S, a leading supplier of medical equipment in Scandinavia and WorldCare
UK, Ltd., a worldwide telemedicine network provider. 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 was 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 March 31, 1998 sales
of the modular steel products represented 98.5% of total revenues.
Revenues for the three months ended March 31, 1998 increased 221.0% to
$5,075,930 from $1,581,371 for the comparable 1997 period. This increase is
solely attributed to the previously awarded New York State project.
Cost of sales for the three months ended March 31, 1998, which
consists primarily of materials, labor, supplies, and fixed factory overhead
expense, increased 158% to $3,376,283 from $1,307,268 for the comparable 1997
period, reflecting the increase in sales. Cost of sales as a percentage of
revenues was 66.5% for the three months ended March 31, 1998 as compared to
82.7% for the comparable 1997 period. This decrease is attributable to
efficiencies of running such a large project. Management expects to achieve
increased gross margins in its steel business due to additional operating
efficiencies implemented over the last nine months in the Company's new
manufacturing facility.
Selling, general and administrative expenses for the three months
ended March 31, 1998 decreased 22% to $842,396 from $1,076,520 for the
comparable 1997. This decrease is primarily attributable to the successful
implementation by management of cost controls, including reductions in office
expense, consulting and professional fees.
Revenues for the nine months ended March 31, 1998 increased 288% to
$12,719,161 from $3,276,578 for the comparable 1997 period. This increase is
attributed to the progress on five previously awarded projects, including
$11,931,000 on the most recent New York State purchase order.
10
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Cost of sales for the nine months ended March 31, 1998, increased 247%
to $9,256,183 from $2,665,643 for the comparable 1997 period reflecting the
increase in sales. Cost of sales as a percentage of revenues was 72.8% for the
nine months ended March 31, 1998 as compared to 81.3% for the comparable 1997
period. This decrease is attributable to efficiencies associated with the New
York State Project.
Selling, general and administrative expenses for the nine months ended
March 31, 1998 increased less than1% to $2,921,017 from $2,899,160 for the
comparable 1997.
Liquidity and Capital Resources
The Company's working capital requirements result principally from
staff and management overhead, office expense and marketing efforts.
Cash and cash equivalents increased from $422,457 at June 30, 1997 to
$948,319 at March 31, 1998 primarily due to proceeds from the exercise of
warrants and options. Working capital increased to $2,735,227 at March 31, 1998
from $923,457 at June 30, 1997 primarily due to profits generated and warrant
and option proceeds during the nine months ended March 31, 1998. The Company
believes its present available working capital and anticipated cash from its
existing contracts is sufficient to meet its operating requirements through
December 31, 1998. In addition, the Company has renewed a $400,000 revolving
line of credit collateralized by substantially all of its assets and has no
outstanding borrowings at May 5, 1998.
The Company's inventory increased to $396,762 at March 31, 1998 from
$336,287 at June 30, 1997 due to raw material purchases and component purchases
for the increased production volume.
The Company presently has an effective registration statement relating
to 763,425 shares of Common Stock issuable upon the exercise of warrants and
options, the majority of which have exercise prices ranging from $ 2.00 to $
5.00 per share. In the event working capital from operations is insufficient to
finance growth in the Company's business or to meet cyclical working capital
shortfalls, the Company will initially look to the exercise of presently
outstanding warrants and options to meet working capital needs, however, if
sufficient securities are not exercised, the Company will 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.
Forward Looking Statements
Except for the historical information contained herein, the matters
discussed in this report are forward looking statements under the Federal
securities laws that involve risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
include, among other things, collection risks, meeting financial requirements,
ability to obtain materials and the uncertainty of sales of the IntraScan II
product line.
11
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Exhibit Description
- --------------- --------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K for the Quarter Ending March 31, 1998
Date of Report Item(s) Reported
- --------------- --------------------
April 15, 1998 Item 4. Change in Registrant's
Certifying Accountant
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: May 4, 1998
MARK SOLUTIONS, INC.
By:/s/ Michael Nafash
--------------------------
Chief Financial Officer
12
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 948,319
<SECURITIES> 0
<RECEIVABLES> 3,261,572
<ALLOWANCES> 5,500
<INVENTORY> 396,762
<CURRENT-ASSETS> 4,707,339
<PP&E> 2,411,737
<DEPRECIATION> 1,901,859
<TOTAL-ASSETS> 5,956,570
<CURRENT-LIABILITIES> 1,972,112
<BONDS> 1,085,024
0
0
<COMMON> 169,722
<OTHER-SE> 2,729,712
<TOTAL-LIABILITY-AND-EQUITY> 5,956,570
<SALES> 12,719,161
<TOTAL-REVENUES> 12,719,161
<CGS> 9,256,183
<TOTAL-COSTS> 12,206,393
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 250,712
<INCOME-PRETAX> 107,859
<INCOME-TAX> 0
<INCOME-CONTINUING> 107,859
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107,859
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
