Registration Statement No. 333-62513
Rule 424 (b) (3) Prospectus
MARK SOLUTIONS, INC.
SUPPLEMENTAL PROSPECTUS
The following supplement prospectus dated February 8, 1999 amends, supplements
and restates the prospectus of Mark Solutions, Inc. (Registration Statement No.
333-62513) dated December 30, 1998.
<PAGE>
Registration Statement No. 333-62513
Rule 424 (b) (3) Prospectus
Prospectus
MARK SOLUTIONS, INC.
15,000,000 Shares of Common Stock
This Prospectus relates to the sale of up to 15,000,000 shares of common
stock, $.01 par value (the "Common Stock") of Mark Solutions, Inc. ("Mark")
consisting of (i) an indeterminate number of shares of Common Stock which are
issuable upon conversion of Mark's 122,000 shares of 7% Series A Preferred
Stock, $1.00 par value (the "A Preferred Stock"), (ii) an indeterminate number
of shares of Common Stock which are issuable upon conversion of Mark's 153,000
shares of 7% Series B Preferred Stock, $1.00 par value (the "B Preferred
Stock"), (iii) 1,375,000 shares of Common Stock which are issuable upon the
exercise of warrants at $1.50 per share (the "Warrants") and (iv) an
indeterminate number of shares of Common Stock issuable to pay the dividends on
the Preferred Stock (the "Interest Shares"). The A Preferred Stock and B
Preferred Stock (the "Preferred Stock"), and the Warrants and Interest Shares
are collectively referred to as the "Securities". The Securities were issued by
Mark in a private placement in June 1998 and a subsequent exchange placement in
January 1999. See "Mark's June 1998 Private Placement and January 1999 Exchange
Placement" for the terms of the Securities.
Mark is obligated to keep the registration statement (the "Registration
Statement"), of which this Prospectus forms a part, effective until June 29,
2000.
All of the shares of Common Stock offered hereby (the "Shares") are being
sold for the account of and by the person(s) named under the caption "Selling
Shareholders". Mark is bearing the cost related to the Registration Statement.
The Selling Shareholders have advised Mark that the Shares may be sold by the
Selling Shareholders or its pledgees, donees, transferees or other successors in
interest from time to time in the open market or in privately negotiated
transactions at prices satisfactory to the seller. See "Plan of Distribution".
Mark will receive no proceeds from the sale of the Shares.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. See "Risk Factors".
The Common Stock is traded on the Nasdaq SmallCap Market under the symbol
"MCSI". On February 5, 1999, the closing sales price of the Common Stock was $
1.00 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------------------------------
The date of this Prospectus is February 8, 1999.
<PAGE>
No person is authorized to give any information or to make any representations
other than those contained in this Prospectus, and, if given or made, such
information or representations should not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell, or
solicitation of an offer to purchase, the securities offered by this Prospectus,
in any jurisdiction to or from any person to whom or from whom it is unlawful to
make such offer or solicitation of an offer in such jurisdiction. Neither the
delivery of this Prospectus nor any distribution of the securities being offered
pursuant to this Prospectus shall, under any circumstances, create an
implication that there has been no change in the information set forth herein
since the date of this Prospectus.
TABLE OF CONTENTS
Page
Available Information . . . . . . . . . . . . . . . . . . 3
Summary . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Company . . . . . . . . . . . . . . . . . . . . 4
Risk Factors. . . . . . . . . . . . . . . . . . . . 5
Summary Selected Financial Data . . . . . . . . . . 5
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . 6
Price Range of Common Stock . . . . . . . . . . . . . . 11
Dividend Policy . . . . . . . . . . . . . . . . . . . . . 11
Selected Financial Data . . . . . . . . . . . . . . . . . 12
Management Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 13
Business . . . . . . . . . . . . . . . . . . . . . . . . 20
Mark Correctional Systems Division . . . . . . . . . . 21
MarkCare Medical Systems, Inc. . . . . . . . . . . . . 23
Management . . . . . . . . . . . . . . . . . . . . . . . 29
Executive Compensation . . . . . . . . . . . . . . . . . 31
Certain Transactions . . . . . . . . . . . . . . . . . . 33
Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . 35
Description of Capital Stock . . . . . . . . . . . . . . 38
Mark's June 1998 Private Placement . . . . . . . . . . . 38
Selling Shareholders . . . . . . . . . . . . . . . . . . 41
Plan of Distribution . . . . . . . . . . . . . . . . . . 42
Legal Matters . . . . . . . . . . . . . . . . . . . . . . 43
Experts . . . . . . . . . . . . . . . . . . . . . . . . . 43
Index to Financial Statements . . . . . . . . . . . . . . 44
2
<PAGE>
AVAILABLE INFORMATION
Mark has filed with the Commission a Registration Statement on Form S-1
(together with all amendments and exhibits thereto the "Registration Statement")
under the Securities Act with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus omits
certain information contained in the Registration Statement. For such
information, reference is made to the Registration Statement and the exhibits
thereto. Mark is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith Mark files reports and other information with the Commission.
The Registration Statement, reports and other information filed by Mark
with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices at 7 World
Trade Center, Suite 1300, New York, New York 10048, 1401 Brickell Avenue, Suite
200, Miami, Florida 33131, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, 1801 California Street, Suite 4800, Denver, Colorado 80202 and
5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036. Copies of
such material also can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549 at prescribed rates. In addition, the
Commission maintains an internet site (http:// www.sec.gov) that contains
reports, proxy statements and other information regarding Mark, which is an
electronic filer under Regulation S-T.
3
<PAGE>
SUMMARY
The following is a summary of certain information contained in this
Prospectus. This summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus and
the exhibits hereto. Certain capitalized items used and not otherwise defined in
this summary have the meanings ascribed to them elsewhere in this Prospectus.
THE COMPANY
Mark Solutions, Inc. ("Mark") is a Delaware corporation which operates
its businesses through wholly-owned subsidiaries and a division.
Mark is engaged in the design, manufacture and/or installation of (i)
modular steel cells for correctional institution construction and (ii)
diagnostic support, picture, archiving and communication computer systems (PACS)
marketed under the name "IntraScan".
Modular Steel Cells. Mark markets its modular steel products by responding
to public bids and by pursuing joint ventures and affiliations with other
companies to solicit design, build and/or operate correctional facilities
projects both domestically and internationally. Management believes that
nationwide emphasis on expedient easing of overcrowding conditions in
correctional institutions presents a significant growth opportunity; however,
there can be no assurance of sustained business.
Mark's modular cells can be manufactured and installed more efficiently
than traditional housing alternatives by virtue of lower labor and construction
costs and shorter installation time.
IntraScan PACS System. Mark markets its IntraScan PACS systems to radiology
departments, large healthcare facilities, hospitals and outpatient imaging group
practices, primarily through a marketing agreement with Data General
Corporation. Management believes that it can capitalize on the development of
the domestic and international PACS market; however, there can be no assurance
that significant business will develop.
The IntraScan PACS system interfaces with medical imaging devices to store
and recall images digitally from modalities including x-ray, CAT Scan, MRI,
ultrasound, computed radiography and nuclear medicine. The IntraScan PACS system
is "platform independent" allowing the software to operate with most computer
hardware and operating systems.
Mark was incorporated under the laws of the State of Delaware on September
29, 1986 under the name "Showcase Cosmetics, Inc.". Mark's principal executive
offices are located at 1515 Broad Street, Bloomfield, New Jersey 07003 and its
phone number is (973) 893-0500.
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<PAGE>
RISK FACTORS
The securities of Mark involve a high degree of risk. Mark has historically
had operating losses and related working capital deficiencies. To date, sales of
its modular steel cells has been sporadic and sales of its IntraScan PACS system
have been immaterial. See "Risk Factors".
SUMMARY SELECTED FINANCIAL DATA
The following summary selected financial data is based upon financial
information appearing elsewhere herein and such summary information should be
read in conjunction with such financial statements and notes thereto.
Income Statement Data:
<TABLE>
<CAPTION>
Three Months Ended
September 30 Fiscal Years Ended June 30
---------------------- --------------------------
1998 1997 1998 1997 1996
------------------------- ------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 688,861 $ 832,241 $12,921,810 $ 6,449,744 $ 3,454,615
Cost and Expenses 1,152,641 2,180,067 14,912,632 10,191,950 8,518,483
Operating Income (Loss) (463,780) (1,347,826) (1,990,822) (3,742,206) (5,063,868)
Net Other (Expenses) ( 38,035) ( 321,426) ( 397,277) (1,697,059) ( 46,691)
Net Income (Loss) From
Continuing Operations (501,815) (1,669,252) (2,388,099) (5,439,265) (5,110,559)
(Loss) From Discontinued
Operations - - - - - - - - - - - - ( 104,503)
Net Income (Loss) (501,815) (1,669,252) (2,388,099) (5,439,265) (5,215,062)
Earnings (Loss) per Share ($ .03) ($ .11) ($ .14) ( .38) ($ .41)
Weighted Average
Shares Outstanding 19,281,674 15,016,078 16,580,402 14,221,606 12,732,022
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data:
At September 30 At June 30
----------
1998 1998 1997 1996
--------------- --------------------------------------------
<S> <C> <C> <C> <C>
Working Capital (Deficit) $ 2,499,659 $ 3,078,217 $ 923,457 $ 675,864
Total Assets 5,309,193 5,174,101 5,432,277 3,083,763
Long-term Obligations 1,125,228 1,060,416 2,340,467 50,297
Total Liabilities 2,740,137 2,058,602 5,585,430 1,004,362
Temporary Stockholders Equity 1,220,000 1,220,000 - - - - - -
Stockholders' Equity
(Impairment) 1,349,056 1,895,499 (153,153) 2,079,401
</TABLE>
5
<PAGE>
RISK FACTORS
Prospective investors in the Common Stock should give careful consideration
to the following risks in making a decision concerning the securities offered
hereby.
1. Poor Financial Condition. Mark has experienced significant operating
losses and working capital and liquidity deficiencies over the past several
years. Mark had net losses of $2,388,099 and $5,439,265 for the fiscal years
ended June 30, 1998 and 1997. In addition, Mark had an accumulated deficit of
$30,144,024 at June 30, 1998. Mark has and will continue to experience such
financial difficulties in the foreseeable future absent significant increases in
the sale of modular cells and/or IntraScan PACS systems. Accordingly, based on
past operating results there can be no assurance that Mark will be able to
operate profitably. Mark's poor financial condition could adversely affect its
ability to raise additional working capital pursuant to private sales of its
securities.
2. Limited Market; Contracts for Modular Cells. Mark has derived
substantially all of its revenue from the sale of its modular cells to
correctional institutions and management believes that the sale of these
products will continue to represent the substantial majority of Mark's operating
revenues through June 30, 1999. The correctional institution market presents
substantial sales obstacles. Unless the project is very small, correctional
institutions, like other government agencies, must submit proposed projects to
public bidding by prospective suppliers. The purchasing agency is obligated to
select from among the bidders based on objective criteria. On the other hand,
private purchasers generally do not require bidding and a vendor such as Mark
would have the opportunity to convince the purchaser to deal with Mark to the
exclusion of competitors.
Mark continually bids on and solicits joint venture opportunities regarding
construction projects utilizing its modular steel cell products. At present,
Mark is not participating in any projects under a joint venture format. Mark
currently has contracts for it modular cells aggregating approximately
$10,800,000 in revenue for the period beginning July 1, 1998 to June 30, 1999.
3. Limited Sales of IntraScan PACS Systems. For the three fiscal years
ended June 30, 1998, Mark's revenues from the sale of IntraScan PACS systems and
related products totalled $474,373. While Mark believes the domestic and
international market for PACS systems is significant and expanding, there can be
no assurance that Mark will establish a material market share and run its
IntraScan operations profitably.
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<PAGE>
4. Working Capital Requirements. The ultimate success of Mark may depend
upon its ability to raise additional equity or obtain debt financing until it
can improve its operating results. To date Mark has primarily met its working
capital requirements by the private issuance of its securities, including the
Securities. Absent proceeds from the exercise of outstanding warrants and
improvement in the operations of Mark, management believes that its present
available working capital will be utilized by June 30, 1999. In the event Mark
must seek other sources of working capital, it will most likely have to rely on
additional private sales of its equity or debt securities. While Mark has been
successful in raising working capital through private sources in the past, no
assurance can be given that such sources will be available, or, if available, on
terms satisfactory to Mark. Mark will initially look to the exercise of
outstanding warrants to the extent that additional working capital is necessary.
5. Bonding Qualifications. 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. 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 have a material
adverse effect on the operations of Mark.
6. Significant Contract. For the fiscal year ended June 30, 1998,
$12,000,000 (93.0%) of Mark's revenue was attributable to its contract to
provide modular cells to the State of New York. The agreement has a stated
estimate of 2,455 cells over the three-year term ending December 31, 1999,
however, no minimum volume is guaranteed. In addition, 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. Accordingly, no assurances
can be given that Mark will receive additional significant orders under this
agreement.
7. Competition. Mark competes in two industries which are highly
competitive; government construction and computer software.
Due to the use of concrete and other traditional construction methods in
the substantial majority (approximately 90%) of correctional facilities
construction, Mark competes for market share with a number of major national and
regional construction companies in its efforts to convince the purchasing agency
to utilize steel cell construction rather than traditional methods. With respect
to those projects which incorporate modular steel cell in its design criteria,
7
<PAGE>
Mark competes against other regional metal fabricators, some of which have
greater financial resources than Mark. In addition, other sheet metal
manufacturers which have greater financial and marketing resources than Mark
could enter the modular cell business. Accordingly, there can be no assurance
that Mark will be able to successfully compete in the market for modular steel
cells.
With regard to the IntraScan PACS system, other companies, including
several established film and medical equipment manufacturers, which are larger
and better financed than Mark, offer PACS systems. As the PACS market develops,
other large medical equipment, computer hardware or software companies could
enter the PACS business. Accordingly, there can be no assurance that Mark will
be able to successfully compete in the PACS market.
8. Dependence on Key Person. Mark is dependent upon the continued services
of Carl Coppola, its Chairman of the Board, President and Chief Executive
Officer. The loss of Mr. Coppola could have a material adverse effect on Mark.
Mark is the beneficiary of a term life insurance policy of $1,000,000 on the
life of Mr. Coppola.
9. Recent Trading Prices; Nasdaq Listing Maintenance Requirements; Potential
Application of Exchange Act "Penny Stock" Rules. Since August 4, 1998, Mark's
Common Stock has traded at or below $1.00 per share. Mark's Common Stock trades
on the Nasdaq SmallCap Market. To be eligible for continued listing of its
Common Stock, Mark is required to maintain, among other things, (i) a minimum
bid price of $1.00 per share and (ii) minimum net tangible assets of $2,000,000
or a market capitalization of $35 million. If Mark fails to maintain its Nasdaq
SmallCap Market listing, the liquidity of the Common Stock would be adversely
affected. In addition, Mark's ability to raise additional working capital
through sales of its equity securities would also be adversely affected.
In the event Mark fails to maintain its Nasdaq SmallCap Market listing,
Mark's Common Stock would most likely be a "penny stock" as that term is defined
in the Exchange Act. Brokers effecting transactions in a penny stock are subject
to additional customer disclosure and record keeping obligations including
providing (i) a standardized risk disclosure document about the penny stock
market prior to the transaction, (ii) current bid and offer quotations for the
penny stock, (iii) the compensation of the broker and its salesperson for
transactions in penny stocks, (iv) monthly account statements showing the market
value of each penny stock owned by the customer. In addition, brokers effecting
8
<PAGE>
transactions in a penny stock are also subject to addition sales practice
requirements under Rule 15g-9 of the Exchange Act including making an
individualized written suitability determination of penny stock investments for
each customer and obtaining a prior written agreement for the specific penny
stock purchase. Because of these additional obligations, certain brokers will
not effect transactions in penny stocks, which could have an adverse effect on
the liquidity of the security and make selling it more difficult.
10. Impact of Conversion Price of Preferred Stock and Debentures on the
Trading Price of Common Stock. Due to the right of the holders to convert the
Preferred Stock into shares of Common Stock at the discounted rate of 75% of the
market price, rises in the trading price of the Common Stock may meet resistance
due to the potential sale of the underlying Common Stock which would be acquired
at below the then current trading price. In June 1998 a holder converted other
debentures in the principal amount of $750,000 provided Mark agree to issue
additional shares of Common Stock to the extent the trading price fell below
$1.25 per share during the period through June 30, 1999. This adjustment
provision may similarly affect the trading price of the Common Stock. Because of
the discount to the current market price of the Common Stock, sales of the
shares of Common Stock underlying the Preferred Stock may cause a downward trend
in the trading price of the Common Stock until such shares are sold if the
interest to buy the Common Stock by investors is weak. Based on the closing bid
price of Mark's Common Stock on February 5, 1999 of $1.00, shares of Common
Stock issuable under the Private Placement would equal 10,083,332. Because the
conversion of the Preferred Stock is dependent on the price of the Common Stock
at future dates, the actual number of shares of Common Stock which will be
issued in undeterminable, and may exceed the assumed number given above.
11. Subcontractor Credit Risk. Mark's manufacturing operations are limited
to the steel modular cell for use as one component of correctional institution
projects. Therefore, Mark may not be the prime contractor on a project, but a
subcontractor. Under these circumstances, Mark usually will not have the direct
financial obligation of the government agency or other purchaser, but will be
primarily relying on the prime contractor regarding payment for its products.
This presents a greater credit risk to Mark.
12. Related Party Transactions; Potential Conflicts of Interests. Mark has
been a party to business transactions with certain officers, Directors or their
affiliates. Mark intends to purchase goods and services in the ordinary course
of business from related parties and may determine based upon circumstances at
that time to engage in additional transactions with officers, Directors,
9
<PAGE>
principal shareholders or affiliates. While Mark believes these transactions
have been on terms no less favorable than could be obtained from unaffiliated
parties, such situations present potential conflicts of interest.
13. No Dividends. Mark has never paid a cash dividend on its Common Stock.
Mark does not intend to pay in the foreseeable future, cash dividends on the
Common Stock but intends to retain its earnings to finance growth.
14. Antitakeover Effects of Authorized and Unissued Preferred Stock. Mark's
Board of Directors have the authority to issue up to 4,725,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions including voting rights, of those shares without any further vote
or action by Mark's shareholders. The rights of the holders of Common Stock will
be subject to, and may be adversely affected by the rights of the holders of any
preferred stock that may be issued. The issuance of preferred stock, while
providing flexibility for possible acquisitions and other corporate purposes,
could have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of Mark. Mark has no present plans to
issue shares of Preferred Stock. See "Description of Capital Stock- Authorized
and Unissued Preferred Stock".
10
<PAGE>
PRICE RANGE OF COMMON STOCK
The following table sets forth for the calendar quarters indicated the high
and low bid prices of Mark's Common Stock. The Common Stock trades on the Nasdaq
SmallCap Market under the symbol "MCSI".
Common Stock
High Low
1996
1st Quarter 8-1/4 5-1/2
2nd Quarter 8-3/8 5-1/4
3rd Quarter 6-5/8 5
4th Quarter 5-7/8 1-3/8
1997
1st Quarter 2-3/4 15/16
2nd Quarter 4-1/2 1-31/32
3rd Quarter 4-1/2 1-15/16
4th Quarter 4-3/8 2-3/16
1998
1st Quarter 2-7/16 1-21/32
2nd Quarter 2 1
3rd Quarter 1-15/16 7/16
4th Quarter 1 3/8
-----------------------------------------------------------------------
On February 5, 1999, the closing bid and ask price of the Common Stock
were $1.00 and $1.03125 respectively.
Over-the-counter quotations reflect inter-dealer prices without retail
mark-up, mark-down or commission and do not necessarily represent actual
transactions.
As of February 5, 1999, there were 187 holders of record of the Common
Stock. Mark estimates the number of beneficial holders of its Common Stock to be
in excess of 600. There are 22 market makers in the Common Stock.
DIVIDEND POLICY
Mark anticipates that for the foreseeable future it will pay any cash
dividends on its Common Stock and will continue to retain earnings, if any, for
use it its business. Future dividend policies will be determined by the Board of
Directors based upon conditions then existing, including Mark's earnings and
financial condition, capital requirements and other relevant factors.
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<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data is based upon financial information
included herein and such information should be read in conjunction with such
financial statements and notes thereto.
Income Statement Data:
<TABLE>
<CAPTION>
Three Months Ended
September 30 Fiscal Years Ended June 30
-------------------------
1998 1997 1998 1997 1996 1995 1994
-------------------------- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 688,861 $ 832,241 $12,921,810 $ 6,449,744 $ 3,454,615 $ 6,125,573 $ 3,183,073
---------- ---------- ----------- ----------- ----------- ----------- -----------
Costs and Expenses:
Costs of Sales 414,851 1,227,587 10,972,291 6,091,773 4,022,102 5,975,973 2,370,971
Selling, general and
administrative 737,790 952,480 3,940,341 4,100,177 3,718,886 3,876,330 3,592,081
Research and
development - - - - - - - - - - - - - - - - - - 270,322
Reduction of carrying
value of assets - - - - - - - - - - - - 777,495 - - - - - -
----------- ----------- ------------ ------------ ----------- ----------- -----------
Total Costs and
Expenses 1,152,641 2,180,067 14,912,632 10,191,950 8,518,483 9,852,303 6,233,374
----------- ----------- ----------- ------------ ----------- ----------- -----------
Operating (Loss) ( 463,780) (1,347,825) (1,990,822) (3,742,206) (5,063,868) (3,726,730) (3,050,301)
Net Other Income
(Expense) ( 38,035) ( 321,426) (397,277) (1,697,059) (46,691) (85,905) (64,749)
Income Tax - - - - - - - - - - - - - - - - - - (29,460)
----------- ----------- ------------ ------------ ------------ ----------- -----------
(Loss) From Continuing
Operations ( 501,815) (1,669,252) (2,388,099) (5,439,265) (5,110,559) (3,812,635) (3,144,510)
(Loss) From
Discontinued Operations - - - - - - - - - - - - (104,503) (1,377,438) (993,620)
----------- ----------- ------------ ------------ ------------ ----------- -----------
Net (Loss) $( 501,815) $(1,669,252) $(2,388,099) $(5,439,265) $(5,215,062) $(5,190,073) $(4,138,130)
=========== =========== ============ ============ ============ ============ ============
(Loss) per Share: ($ .03) ($ .11) ($ .14) ($ .38) ($ .41) ($ .48) ($ .47)
=========== =========== ============ ============ ============ ============ ============
Weighted Average
Shares Outstanding 19,281,674 15,016,078 16,580,402 14,221,606 12,732,022 10,726,204 8,802,543
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data:
At At June 30
September 30 ----------
1998 1998 1997 1996 1995 1994
------------ ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital (Deficit) $ 2,499,659 $ 3,078,217 $ 923,457 $ 675,864 $ (48,112) $ 216,635
Net Property and Equipment 587,673 438,612 347,259 376,504 318,491 369,939
Total Assets 5,309,193 5,174,101 5,432,277 3,083,763 3,978,383 4,953,651
Current Liabilities 1,614,909 998,186 3,244,963 954,065 2,169,657 909,693
Other Liabilities 1,125,228 1,060,416 2,340,467 50,297 19,665 8,313
Temporary Stockholder's Equity 1,220,000 1,220,000 - - - - - - - - - - - -
Stockholders' Equity
(Deficiency) 1,349,056 1,895,499 (153,153) 2,079,401 1,789,061 4,035,645
</TABLE>
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<PAGE>
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 product, modular
steel cells.
Mark's modular steel cell is an alternative to traditional construction
methods, and penetration into the construction market has met resistance
typically associated with an 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 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 programs
to capitalize on the New York State agreement. See " Business-Mark Correctional
Systems Division". 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 Mark's operating results and cash flow, although no
assurances can be given that any of these projects will be awarded to Mark.
Under a three-year contract expiring in December 1999 with the State of New
York, Mark provides modular steel cells and components to the State's prison
industry program for the final assembly. In fiscal year ended June 30, 1998,
revenues from this contract were approximately $12,000,000.
Mark currently has bids pending on approximately $5,182,000 in modular cell
projects. In addition to the New York State orders of $12,000,000, Mark bid on
$51,000,000 in correctional cell projects in the fiscal year ended June 30,
1998, was awarded $3,000,000 of the projects. For the fiscal year ended June 30,
1998 modular steel cells represented $22,000,000 or 43% of all domestic
correctional cell projects awarded and Mark received 68% of these modular steel
cell awards.
13
<PAGE>
Through its subsidiaries, MarkCare Medical Systems, Inc. and MarkCare
Medical Systems, Ltd., (collectively "MarkCare"), Mark continues to market its
IntraScan II PACS and teleradiology systems and is forming strategic alliance
with other companies with related medical products. Mark 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 applications to which Data
General will include the IntraScan II PACS system and teleradiology software
applications in proposals to healthcare institutions. Mark has recently signed
licensing/marketing agreements with six (6) companies including SANTAX A/S,
WorldCare UK, Ltd. and Konica U.K., Ltd. Management anticipates that sales of
the IntraScan II PACS system will begin to generate material revenues in the
fiscal year ending June 30, 1999 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, 1998.
<TABLE>
<CAPTION>
Mark
Correctional MarkCare
Systems (% of Total) Medical (% of Total) Total
<S> <C> <C> <C> <C> <C>
Revenues $12,713,508 (98.4) $ 208,302 (1.6) $12,921,810
Cost of Sales 10,272,206 (93.6) 700,085 (6.4) 10,972,291
Selling, General
and Administrative 2,287,832 (58.1) 1,652,509 (41.9) 3,940,341
Operating Income (Loss) 73,434 (-3.7) (2,064,256) (103.7) (1,990,822)
</TABLE>
Results of Operations
The substantial majority 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 a majority of Mark's operating revenues through June
30, 1999.
14
<PAGE>
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 Period to Period
Revenues Increase (Decrease)
Three Months Ended
September 30 Year ended June 30
------------------- ------------------ September 30, 1998- 1998- 1997-
1998 1997 1998 1997 1996 September 30, 1997 1997 1996
---- ---- ---- ---- ---- ------------------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0% 100.0% (17.0)% 100.3% 86.7%
Cost of sales 60.0 148.0 84.9 94.4 116.4 (66.0) 80.1 51.5
Selling, general
and administra-
tive Expenses 107.1 114.4 30.5 63.5 107.7 (23.0) 3.9 10.3
Reduction of carry-
ing value of assets -- -- -- -- 22.5 - - -- (100.0)
----- ----- ----- ----- -----
Operating income (loss) (67.3) (161.9) (15.4) (58.0) (146.6) (65.6) (46.8) 26.1
Net other
income (expense) (5.5) (38.6) (3.1) (26.3) (1.4) (88.2) (76.6) 353.5
----- ----- ----- ----- -----
(Loss) from continuing
operations (72.8) (200.0) (18.5) (84.3) (147.9) (69.9) (56.1) 3.2
(Loss) from discontinued
operations -- -- -- -- (3.0) -- -- (100.0)
------- ------- ------- ------- --------
Net income (loss) (72.8%) (200.0%) (18.5%) (84.3%) (151.0%) (69.9) (56.1) 5.2
======= ======= ======= ======= ========
</TABLE>
Three Months Ended September 30, 1998 Compared to
Three Months Ended September 30, 1997
Revenues for the three months ended September 30, 1998 decreased 17% to
$688,861 from $832,241 for the comparable 1997 period. For the three months
ended September 30, 1998 sales of the modular steel products represented 83% of
total revenues.
Cost of sales for the three months ended September 30, 1998, which consists
primarily of materials, labor, supplies, and fixed factory overhead expense,
decreased 66% to $414,851 from $1,227,587 for the comparable 1997 period. Cost
of sales as a percentage of revenues was 60% for the three months ended
September 30, 1998 as compared to 148% for the comparable 1997 period. This
decrease is attributable to operating efficiencies implemented at Mark's
manufacturing facility over the past year and better plant management during
slowdowns in projects.
Selling, general and administrative expenses for the three months ended
September 30, 1998 decreased 23% to $737,790 from $952,480 for the comparable
1997. Reduction of these costs are attributable to management's continued focus
on cost controls.
15
<PAGE>
Fiscal Year Ended June 30, 1998 Compared to
Fiscal Year Ended June 30, 1997
Revenues from sales for the fiscal year ended June 30, 1998, increased
100.3% to $12,921,810 from $6,449,744 for the comparable period. This increase
is primarily attributable to the awarding of a $12,000,000 project under the New
York State agreement.
Cost of sales for the fiscal year ended June 30, 1998, consists of
materials, labor and fixed factory overhead expense and increased by 80.1% to
$10,972,291 from $6,091,773 for the comparable period. Cost of sales as a
percentage of revenues was 84.9% for the year ended June 30, 1998 as compared to
94.4% for the comparable period. Management expects continued gross profit
improvement as sales become less sporadic and as the plant achieves additional
operating efficiencies. For the year ended June 30, 1998 fixed factory overhead
expenses were $264,381 as compared to $272,936 for the comparable 1997 period.
Management believes that the substantial majority of the revenues of the
MarkCare line will be attributable to software sales and support services, which
have higher gross profits.
Selling, general and administrative expenses for the fiscal year ended June
30, 1998, decreased 3.9% to $3,940,341 from $4,100,177 for the comparable 1997
period. Stabilization of these expenses is attributable to management's focus on
cost controls.
Mark reduced its operating losses 46.8% to $1,990,822 in the fiscal year
ended June 30, 1998 from $3,742,206 in the comparable period. For the same
period, Mark's net loss decreased by 56.1%.
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 and 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
16
<PAGE>
year ended June 30, 1997 fixed factory overhead expenses were $272,066 as
compared to $155,987 for the comparable 1996 period due to an increase in
repairs and maintenance. Management believes that the substantial majority of
the revenues of the MarkCare line will be attributable to software sales and
support services, which have higher gross profit.
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 non-cash 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 5.2% from
fiscal year 1996.
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 sporadic sales. Accordingly, Mark has been dependent and,
absent continued 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 June 30, 1999. Mark has a $400,000 revolving line
of credit collateralized by substantially all of its assets and has $275,000 in
outstanding borrowings at December 28, 1998. To the extent it requires
additional capital, Mark will continue to principally look to private sources.
On June 29, 1998, Mark completed a $2,750,000 private placement of debt and
equity units (the "Private Placement") pursuant to which Mark sold (i) 1,220,000
in Common Stock, (ii) $1,530,000 in convertible debentures due December 28,
1999, (iii) warrants to purchase 1,375,000 shares of Common Stock and (iv) an
option to purchase an additional $2,550,000 principal amount debentures with
warrants to purchase 1,275,000 shares of Common Stock. On January 29, 1999, Mark
completed an exchange placement pursuant to which the investors in the Private
17
<PAGE>
Placement effectively exchanged the Common Stock and debentures into shares of
convertible Preferred Stock. See "Mark's June 1998 Private Placement and January
1999 Exchange Placement".
In the fiscal year ended June 30, 1998, Mark sold 580,000 shares of Common
Stock pursuant to the exercise of warrants for gross proceeds of $1,510,450.
Mark presently has an effective registration statement relating to 569,500
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, if any. If Mark is required to seek additional
private sales of its securities, if available, the sales would most likely be at
discounts to the current trading price of the Common Stock.
Mark's inventories increased from $112,474 at June 30, 1998 to $856,314 at
September 30, 1998 due to the start of additional projects. 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, 1998, Mark had negative cash flow from
operating activities of $1,437,949. For the fiscal year ended June 30, 1998,
Mark had negative cash flow from investing activities of $216,338 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.
Cash and cash equivalents increased from $564,577 at June 30, 1998 to
$1,620,680 at September 30, 1998 due to financing activities. Working capital
decreased to $ 2,499,659 at September 30, 1998 from $3,078,217 at June 30, 1998
primarily as a result of operating losses for the period.
Other Matters
As of June 30, 1998, Mark had net operating loss carry-forwards of
approximately $19,550,000. Such carry-forwards begin to expire in the year 2009
if not previously used. The $19,550,000 carry-forward is comprised of
approximately $17,850,000 which is available to offset taxable income in the tax
year ending June 30, 1999. The remaining $1,700,000 carry-forward is restricted
as to utilization under Section 382 of the Internal Revenue Code. Since
realization of the tax benefits associated with these carry-forwards is not
assured, a full valuation allowance was recorded against these tax benefits as
required by SFAS No. 109.
18
<PAGE>
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.
Forward Looking Statements
Except for the historical information contained herein, the matters
discussed in this report are forward looking statements under the federal
securities law. These statements are based on Mark's current plan and
expectations and involve risks and uncertainties that could cause actual future
activities and results to differ materially from those projected. Such risks and
uncertainty include, among other things, collection risks, meeting financial
requirements and the uncertainty of material sales of the IntraScan II PACS
system.
Year 2000 Disclosure
After an evaluation and analysis of its operations, including its financial
and operational computer systems applications, Mark has concluded no material
adverse effect on its operations will occur due to Year 2000 software failures.
To the extent modifications to such systems are required, management believes
the related costs will not materially affect Mark's financial position.
19
<PAGE>
BUSINESS
General
Mark Solutions, Inc. ("Mark") is a Delaware corporation which operates
its businesses through wholly-owned subsidiaries and a division.
Mark is engaged in the design, manufacture and/or installation of (i)
modular steel cells for correctional institution construction and (ii)
diagnostic support, picture, archiving and communication computer systems (PACS)
marketed under the name "IntraScan".
Modular Steel Cells. Mark markets its modular steel products by responding
to public bids and by pursuing joint ventures and affiliations with other
companies to solicit design, build and/or operate correctional facilities
projects both domestically and internationally. Management believes that
nationwide emphasis on expedient easing of overcrowding conditions in
correctional institutions presents a significant growth opportunity; however,
there can be no assurance of sustained business.
Mark's modular cells can be manufactured and installed more efficiently
than traditional housing alternatives by virtue of lower labor and construction
costs and shorter installation time.
IntraScan PACS System. Mark markets its IntraScan PACS systems to radiology
departments, large healthcare facilities, hospitals and outpatient imaging group
practices, primarily through a marketing agreement with Data General
Corporation. Management believes that it can capitalize on the development of
the domestic and international PACS market; however, there can be no assurance
that significant business will develop.
The IntraScan PACS system interfaces with medical imaging devices to store
and recall images digitally from modalities including x-ray, CAT Scan, MRI,
ultrasound, computed radiography and nuclear medicine. The IntraScan PACs system
is "platform independent" allowing the software to operate with most computer
hardware and operating systems.
Mark was incorporated under the laws of the State of Delaware on September
29, 1986 under the name "Showcase Cosmetics, Inc.". Mark's principal executive
offices are located at 1515 Broad Street, Bloomfield, New Jersey 07003 and its
phone number is (973) 893-0500.
20
<PAGE>
Industry Segment Financial Information
The following table sets forth information regarding Mark's industry
segments and classes of products.
Fiscal Year Ended June 30,
--------------------------
1998 1997 1996
---- ---- ----
Sales to unaffiliated
customers:
Mark Correctional Systems:
Modular Cells ........... $ 12,713,508 $ 6,114,195 $ 3,256,574
------------ ----------- -----------
MarkCare Medical Systems:
IntraScan ............... 150,482 224,125 41,946
Other ......... 57,820 111,424 156,095
----------- ----------- ----------
208,302 335,549 198,041
----------- ----------- ----------
$12,921,810 $6,449,744 $3,454,615
=========== =========== ==========
Operating Profit (Loss):
Mark Correctional Systems ... $73,434 $(2,706,272) $(4,508,406)
MarkCare Medical Systems ... (2,064,256) (1,035,934) (555,462)
Identifiable Assets:
Mark Correctional Systems ... $4,258,021 $5,002,432 $1,317,620
MarkCare Medical Systems ...... 916,080 429,845 1,766,143
MARK CORRECTIONAL SYSTEMS DIVISION
Mark operates its modular steel cell business through its division, Mark
Correctional Systems.
Modular Cells. Since the initial sale of its prefabricated modular steel
cells for correctional facilities 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 $12,713,508 or 98.4% of
Mark's total operating revenues for the fiscal year ended June 30, 1998. These
revenues are primarily 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. 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 estimated 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
21
<PAGE>
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. To date, Mark has
received three (3) purchase orders for approximately $15,000,000 pursuant to
this agreement.
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
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.
The modular cells can also be adapted for use as infectious disease
isolation units, which have a negative pressure ventilation system, and safely
discharges contaminated air. While Mark continues to have the capability to
manufacture the infectious disease isolation units, it discontinued actively
marketing such units in Fiscal 1998.
Manufacturing and Assembly. Mark manufactures and assembles its modular
cells 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 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.
22
<PAGE>
Delivery and On-Site Services. Mark contracts with several third-party
carriers to deliver the modular cells 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.
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 into 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.
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. 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.
MARKCARE MEDICAL SYSTEMS
Mark operates its PACS 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".
23
<PAGE>
IntraScan II PACS System. The IntraScan II PACS system, is a "filmless"
picture, archiving and communications system 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.
The IntraScan II PACS system 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 PACS system is the
only system which is designed to be platform independent allowing the software
to operate with most computer hardware and operating systems.
The IntraScan II PACS system 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 PACS 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 PACS 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 PACS system includes software programs, protected by
British common law copyrights and U.S. 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 PACS system
software and related services to Data General to be incorporated into PACS sale
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 PACS system software to other distributors or systems integrators.
24
<PAGE>
While no assurances can be given, Mark believes that the sales related to
the IntraScan II PACS system, will generate material revenues in the fiscal year
ending June 30, 1999. Mark received its first purchase order for its **
IntraScan II PACS software on August 10, 1998 from Data General.
Development and Programming. Mark's primary responsibility with respect to
the IntraScan II PACS system is the development and loading of software programs
on to standard hardware equipment, minimal hardware modifications and
networking. Mark is able to conduct its IntraScan II PACS system 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.
Marketing and Sales
Modular Cells. The market for Mark's modular cell 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 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 directly and through independent manufacturers'
representatives. Mark's network consists of 10 outside sales representatives
servicing eighteen (18) states and eleven (11) foreign countries including
Canada, Italy, France 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. Mark has also signed a licensing
agreement covering the continent of Africa and several surrounding islands.
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 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 II PACS System. The IntraScan II PACS 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
25
<PAGE>
participate in systems demonstrations, site visits, and assist in the
solicitation of and response to request for proposals. Mark has entered into
other strategic alliances with established medical equipment providers to gain
access to existing clients and to benefit from such companies' marketing and
sales forces. Mark has signed licensing/marketing agreements with: Santax A/S, a
Norwegian company; Konica, a multi-national company; Worldcare, a United Kingdom
company; Avantec, an Indian company; AIS, a Swiss company, and Medilink, an
Australian company.
Regulation
Mark modular cells 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 comply with such codes and regulations in all
material respects.
The IntraScan II PACS system is a "class II medical device", classified by
the Federal Food and Drug Administration ("FDA") subject to the pre-market
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 a letter from the FDA for the IntraScan II PACS system, 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. 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.
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
<PAGE>
26
marketing resources than Mark, and which currently produce sheet metal products,
could ultimately manufacture modular cells 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 concrete
construction by virtue of lower labor and construction costs and shorter
installation time and the life cycle cost savings. Mark also believes its
modular cell design has advantages over other manufacturers' steel cells.
IntraScan II PACS System. 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 a PACS system features and post-installation support, are significant factors
for its market. 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
As of February 5, 1999, Mark had four (4) management employees, four (4)
sales employees, nine (9) engineering employees and seven (7) office and
clerical employees. Mark also employs hourly employees in its manufacturing
facilities who are subject to a collective bargaining agreement which expires on
August 31, 2001. Management believes its employee relations to be good.
As of February 5, 1999, MarkCare had twenty (20) clerical/software
programming employees and two (2) sales employees.
Copyrights, Patents and Trade Secrets
Mark does not presently own any patents on its modular cells or
manufacturing 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.
27
<PAGE>
The IntraScan II PACS system software programs are protected by British
common law copyright and United States copyright. Mark has applied for patents
on several aspects of the IntraScan II PACS system. Mark believes the protection
afforded by the copyrights and the granting of any patents for the IntraScan II
PACS System will allow Mark to maintain its competitiveness in the PACS market.
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 $2,063.
Management believes its present manufacturing facilities and additional
available facilities are sufficient for Mark's current and anticipated needs.
Legal Proceedings
On August 28, 1998, Evergreen Mobile Company filed a demand for arbitration
against Mark in San Francisco, California with the American Arbitration
Association alleging delay and warranty claims of $1,333,000 related to a
contract under which Mark provided modular steel cells for $432,000. Mark
believes the alleged damages are excessive and intends to vigorously defend this
action.
In September 1997, the Pulaski County Board of Indiana filed a lawsuit
against Mark and Calumet Construction Corporation, the general contractor
("Calumet"), related to a project where Mark provided modular steel cells for
$913,731. The County alleges delay claims, and other damages caused by, among
other things, delays in delivery of the cells and requests a declaratory
judgment for the allocation of the remaining balance of $313,700 the County
believes it owes Mark and Calumet under the project. The parties attempted to
resolve the dispute through mediation, during which Calumet asserted backcharges
against Mark of $399,000. Mark believes the delay claims and backcharges are
excessive and is vigorously defending this action.
In August 1997, Mark filed a demand for arbitration against Demien
Construction Company ("Demien") in Missouri with the American Arbitration
Association alleging nonpayment of approximately $200,000 related to a contract
under which Mark provided modular steel cells for $407,000. Demien has asserted
delay claims and backcharges for remedial work of approximately $244,000 against
Mark. Mark believes the alleged damages are excessive and intends to vigorously
pursue this action.
28
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth the names and ages if the members of Mark's
Board of Directors and its executive officers.
Name Age Position
- ---- --- --------
Carl C Coppola (1) 58 Chairman of the Board,
President, Chief Executive Officer
Michael Nafash 37 Chief Financial Officer, Director
Michael J. Rosenberg 53 Vice President - Sales and Marketing
Richard Branca (2) 50 Director
Yitz Grossman 43 Director
Ronald E. Olszowy 52 Director
William Westerhoff (1)(2) 60 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 1998) 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., and unaffiliated
entity.
Michael Nafash has been the Chief Financial Officer of Mark since January 1998
and has been a Director since December 18, 1995. From February 1994 to January
1998, Mr. Nafash was employed by Evolutions, Inc. (OTC), an environmental
oriented apparel company as Chairman of the Board, President and Chief Executive
Officer. On January 5, 1998, Evolutions, Inc. filed a Chapter 7 bankruptcy
petition (Case no. 98-20010) in the U.S. Bankruptcy Court in Newark, New Jersey.
From 1992 to June 1996, Mr. Nafash was employed by Pure Tech International,
Inc., a plastics and metal recycling company, including as Chief Financial
Officer from October 1993 to March 1995.
29
<PAGE>
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.
Yitz Grossman has been a Director of Mark since December 4, 1997. Since 1983 Mr.
Grossman has been President and Chairman of Target Capital Corporation, a
financial consulting 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.
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.
Directors' Compensation
Each outside director receives a $1,000 fee and is reimbursed for travel
expenses for each meeting attended. The fees will be accrued but remain unpaid
until Mark's financial condition sufficiently improves as determined by Mr.
Coppola. Mark has established a policy of granting stock options to directors
exercisable at the closing sales price of the Common Stock on the date of grant.
On December 4, 1997, each of the outside directors received five-year options to
purchase 100,000 shares of Common Stock at between $2.875 and $3.375 per share.
On June 25, 1998, the foregoing options were cancelled and each outside director
received five-year options to purchase 100,000 shares of Common Stock at $1.125
per share, the closing sales price on the date of grant.
30
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the amount of all compensation paid to each
of the Mark's executive officers whose compensation exceeded $100,000, including
its Chief Executive Officer, for the Mark's last three fiscal years ended June
30.
<TABLE>
<CAPTION>
================================================================================================================================
| | | Annual Compensation | Long Term Compensation | |
| | | | Awards/Payouts | |
================================================================================================================================
|Name and | Year | Salary ($) | Bonus | Other Annual | Restricted | Options/ | LTIP | All other|
|Principal | | | ($) | Compensation | Stock | SARs# | Payouts| Compen- |
|Position | | | | | Awards $ | | $ | sation |
- -------------------------------------------------------------------------------------------------------------------------------|
|<S> <C> <C> <C> <C> <C> <C> <C> <C>
||Carl Coppola, | | | | | | | |
|President & CEO | 1998 | 200,000 | -0- | -0- | -0- | 200,000 | -0- | -0- |
| | 1997 | 300,000 | -0- | -0- | -0- | 750,000 | -0- | -0- |
| | 1996 | 275,000 | -0- | -0- | -0- | -0- | -0- | -0- |
|----------------------------------------------------------------------------------------------------------------------------- |
|Michael Nafash, | 1998 | 50,000 | -0- | -0- | -0- | 150,000 | -0- | -0- |
|VP- Finance & | | | | | | | | |
|CFO(1) | | | | | | | | |
===============================================================================================================================
<FN>
(1) Mr. Nafash became an employee of the Company on January 1, 1998 and receives an annual salary of
$100,000.
</FN>
</TABLE>
Options/SAR Grants in Fiscal Year 1998
The following table sets forth individual grants of stock options to the
named executive officers in the Summary Compensation Table for the fiscal year
ended June 30, 1998.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed
Annual Rates of
Stock Price
Appreciation for
Option Term (1)
-------------------
% of Total
Options
Options Granted to Exercise
Granted Employees in Price Expiration
Name (#)(2) Fiscal Year ($/Sh) Date 5%($) 10% ($)
- -------------- -------- ----------- --------- ----------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Carl Coppola 250,000 52.1% $ 1.125 06/24/03 43,750 93,750
Michael Nafash 150,000 31.1% $ 1.125 06/24/03 26,250 56,250
<FN>
(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) The closing sales price on date of option grants was $ 1.125 per share.
</FN>
</TABLE>
31
<PAGE>
1998 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 for the fiscal year ended
June 30, 1998.
Number of Securities Value of Unexercised
Underlying Unexercised in-the Money Options
Options at Fiscal Year (#) at Fiscal Year End ($)
Name Exercisable/Unexercisable Exercisable
- ---- ------------------------- -----------
Carl Coppola 1,000,000 / 0 0 (1)
Michael Nafash 210,000 / 0 0 (1)
- -----------------------------------
(1) Based upon a closing sales price of $1.00 per share of Common Stock on
February 5, 1999.
1998 Fiscal Year End Repricing of Options
The following table sets forth all repricings of stock options held by the
named executive officers in the Summary Compensation Table in the last ten
years.
On June 25, 1998, the Board of Directors of Mark determined to effectively
lower the exercise price of options granted on December 4, 1997 to employees of
Mark, including Messrs. Coppola and Nafash, by canceling such options and
granting new options. The terms of the new options were identical in all
respects to the cancelled options except for the exercise price and new
expiration date. The purpose and intention of the repricing was to maintain
equity incentives for key employees to foster loyalty and economic motivation.
The Board of Directors believes that stock options which are significantly out
of the money provide no particular compensatory incentive to employees regarding
performance or to forego alternate employment opportunities.
<TABLE>
<CAPTION>
========================================================================================================================
| | | | | | | Length of |
| | | Number of | Market Price | Exercise | | Original Term |
| | | Securities | of Stock at | Price at Time | | Remaining at |
| | | Underlying | Time of | of Repricing | New | Date of |
| | | Options/SARs | Repricing or | or Exercise | Exercise | Repricing or |
|Name and | | Repriced or | Amendment | Amendment | Price | Amendment |
|Title | Date | Amended(#) | ($) | ($) | | (Years/Days) |
|----------------|---------------|---------------|-------------------|------------------|-------------|-----------------|
|<S> <C> <C> <C> <C> <C> <C>
| | | | | | | |
|Carl Coppola, | 06/25/98 | 250,000 | 1.125 | 2.875 | 1.125 | 2/156 |
|CEO | | | | | | |
|----------------|---------------|---------------|-------------------|------------------|-------------|-----------------|
| | | | | | | |
|Michael Nafash, | 06/25/98 | 150,000 | 1.125 | 2.875 | 1.125 | 2/156 |
|CFO | | | | | | |
=========================================================================================================================
</TABLE>
32
<PAGE>
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.
CERTAIN 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, 1998, Mark paid Mark Lighting $416,497 for such
goods and services.
On December 4, 1997, Mr. Coppola was granted three-year options to purchase
250,000 shares of Common Stock at $2.875 per share. On June 25, 1998, the
foregoing options were cancelled and Mr. Coppola was granted three-year options
to purchase 250,000 shares of Common Stock at $1.125 per share the closing sales
price on the date of grant.
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 were repaid on
April 16, 1998.
33
<PAGE>
In May 1998, Mark loaned Mr. Coppola $100,000 at 10% interest per annum.
The loan was payable on demand and was repaid in full in September 1998.
On December 4, 1997, Mr. Nafash was granted three-year options to purchase
150,000 shares of Common Stock at $2.875 per share. On June 25, 1998, the
foregoing options were cancelled and Mr. Nafash granted three-year options to
purchase 150,000 shares of Common Stock at $1.125 per share the closing sales
price on the date of grant.
In order to induce their exercise, on September 9, 1997, Mark reduced the
exercise price of warrants to purchase 100,000 shares of Common Stock issued to
Joseph Salvani from $5.00 to $2.50 per share.
Mark grants each nonemployee director options as compensation for serving
on the Board of Directors. On December 4, 1997, each of the outside directors
received five-year options to purchase 100,000 shares of Common Stock at between
$2.875 and $3.375 per share. On June 25, 1998, the foregoing options were
cancelled and each outside director received five-year options to purchase
100,000 shares of Common Stock at $1.125 per share the closing sale price on the
date of grant.
Management believes that each of the foregoing transactions are on terms no
less favorable to Mark than could be obtained from unaffiliated third parties.
34
<PAGE>
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 below
and all executive officers and Directors as a group as of February 5, 1999. 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 Shares % of Shares
Beneficial Owner Owned Outstanding
- ---------------- ---------------- ------------
Carl C. Coppola
c/o Mark Solutions, Inc.
1515 Broad Street
Bloomfield, NJ 07003 2,797,100 (1) 14.6%
Joseph Salvani
1 Duran Avenue
Ridgewood, NJ 07450 1,159,956 (2) 6.4%
William Westerhoff 160,000 (3) (4)
Richard Branca 225,000 (3) (4)
Ronald E. Olszowy 210,000 (3) (4)
Michael Nafash 211,000 (5) (4)
Yitz Grossman 119,333 (6) (4)
All executive officers and Directors
as a group (7 persons) 4,036,333 (7) 20.0%
__________________________________
(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 1,000,000 shares of Common Stock issuable pursuant to
options which are presently exercisable.
(2) Includes 100,000 shares of Common Stock issuable pursuant to warrants which
are presently exercisable.
(3) Represents or includes 160,000 shares of Common Stock issuable pursuant to
options which are presently exercisable.
(4) Less than 1%
(5) Includes 210,000 shares of Common Stock issuable pursuant to options which
are presently exercisable.
(6) Includes 19,333 shares held in a charitable trust of which Mr. Grossman
serves as one of the trustees. Mr. Grossman disclaims beneficial ownership
of these shares. Also includes 100,000 shares of Common Stock issuable
pursuant to options which are presently exercisable.
(7) Includes 2,115,000 shares of Common Stock issuable pursuant to warrants or
options which are presently exercisable.
35
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Mark consists of 50,000,000 shares of
Common Stock, $.01 par value per share and 5,000,000 shares of Preferred Stock,
$1.00 par value per share. As of February 5, 1999 there were 18,076,674 shares
of Common Stock outstanding, 122,000 shares of A Preferred Stock outstanding and
153,000 shares of B Preferred Stock outstanding.
Common Stock
The holders of Common Stock have one vote per share on all matters to be
voted upon by the holders of the Common Stock. The holders of the Common Stock
do not have cumulative voting rights. The Common Stock is not redeemable and has
no conversion or preemptive rights. Subject to preferences that may apply to any
outstanding preferred stock, the holders of the Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors. In the event of liquidation, the holders of Common Stock will share
equally in any balance of Mark's assets available for distribution to them after
satisfaction of creditors and the holders of Mark's senior securities, if any.
The Common Stock currently outstanding is, and the Common Stock to be issued
pursuant to the conversion of the Preferred Stock or the exercise of Warrants
will be, validly issued, fully paid and non-assessable.
Series A and Series B Preferred Stock
Except for the conversion price, the terms, conditions and preferences of the A
and B Preferred Stock are identical. Each share of A Preferred Stock is
convertible, at the option of the holder, into shares of Common Stock equal to
$10.00 per share divided by the lesser of (a) $1.00 or (b) 75% of the average
per share closing bid price of the Common Stock for the five trading days
immediately preceding the conversion date(s). Each share of B Preferred Stock is
convertible, at the option of the holder, into shares of Common Stock equal to
$10.00 per share divided by the lesser of (a) $1.50 or (b) 75% of the average
per share closing bid price of the Common Stock for the five trading days
immediately preceding the conversion date(s). The Preferred Stock will
automatically convert into Common Stock on June 30, 2000 at the then applicable
conversion price.
Except as otherwise required by law, the holders of shares of Preferred Stock
have four votes per share voting as a single class with the Common Stock. Each
share of Preferred Stock receives a quarterly dividend with an annual rate of
$0.70 per share. In the event of any liquidation, the holders of the Preferred
Stock will share equally in any balance of Mark's assets available for
36
<PAGE>
distribution to them up to $10.00 per share plus unpaid dividends, after
satisfaction of creditors and the holders of Mark's senior securities, if any.
The holder's of the Preferred Stock may require Mark to redeem the Preferred
Stock at a redemption price equal to $10.00 per share plus accrued dividends in
the event of a breach of the provision of the Preferred Stock, bankruptcy,
dissolution, insolvency, liquidation or similar events.
Authorized And Unissued Preferred Stock
Additional Preferred Stock is available for issuance from time to time at
the discretion of the Board of Directors without action or vote by the
shareholders. The Preferred Stock may be issued in one or more classes or series
and the Board of Directors have the authority to fix the rights and preferences
of each such class or series, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any class or
series, or the designations of such class or series.
The voting and other rights of the holders of the Common Stock may be
subject to and adversely effected by, the rights of any Preferred Stock that may
be issued in the future, including dilution of the ownership of current
shareholders. In addition, the issuance of Preferred Stock could have potential
anti-takeover effects in that the shares could be used to issue control blocks
to persons or entities considered favorable by management shareholders rendering
an unfriendly tender-offer, proxy contest or merger more difficult. The
existence of the authorized but unissued Preferred Stock, and the Board of
Directors' ability to issue such shares and set its terms without shareholder
approval, may deter persons from seeking to acquire Mark on a hostile basis and
could make any attempt at gaining control of Mark or changing management of Mark
more difficult or time consuming.
Options and Warrants
At February 5, 1999, options and warrants to purchase a total of 4,968,500
shares of Common Stock were outstanding. Except for the 1,375,000 Warrants
issued to the Selling Shareholders, all such warrants and options are presently
exercisable. See Note 12 of Notes to Consolidated Financial Statements for a
schedule of options and warrants outstanding as of June 30, 1998.
Transfer Agent
The Transfer Agent for the Common Stock is Continental Stock Transfer &
Trust Company, New York, New York.
37
<PAGE>
MARK'S JUNE 1998 PRIVATE PLACEMENT AND
JANUARY 1999 EXCHANGE PLACEMENT
Mark effected a June 1998 private placement which raised gross proceeds of
$2,750,000 (the "Private Placement"). The Private Placement consisted of equity
and debt units pursuant to which Mark issued 1,220,000 shares of Common Stock,
(ii) $1,530,000 principal amount convertible debentures due December 28, 1999,
(iii) warrants to purchase 1,375,000 shares of Common Stock and (iv) an option
to purchase an additional $2,550,000 principal amount convertible debentures
with warrants to purchase 1,275,000 shares of Common Stock. The Private
Placement was effected to comply with the continued listing requirements of The
Nasdaq SmallCap Market related to "net tangible assets" and to provide for
adequate working capital to fund operations.
The Common Stock being offered under this Prospectus were acquired by the
Selling Shareholders in a January 1999 exchange placement (the "Exchange
Placement") pursuant to which the investors agreed to exchange the securities
received in the Private Placement for (i) 122,000 shares of A Preferred Stock,
(ii) 153,000 shares of B Preferred Stock, (iii) warrants to purchase 1,375,000
shares of Common Stock (the "Warrants") and (iv) an option exercisable by the
investors to purchase an additional 275,000 shares of Preferred Stock with
warrants to purchase 1,375,000 shares of Common Stock (the "Preferred Stock Unit
Option").
As of February 5, 1999, all of the Preferred Stock and Warrants remained
issued and outstanding.
Preferred Stock. Except for the conversion price, the terms, conditions and
preferences of the A and B Preferred Stock are identical.
Conversion Rights. Each share of A Preferred Stock is convertible, at the
option of the holder, into shares of Common Stock equal to $10.00 per share
divided by the lesser of (a) $1.00 or (b) 75% of the average per share closing
bid price of the Common Stock for the five trading days immediately preceding
the conversion date(s). Each share of B Preferred Stock is convertible, at the
option of the holder, into shares of Common Stock equal to $10.00 per share
divided by the lesser of (a) $1.50 or (b) 75% of the average per share closing
bid price of the Common Stock for the five trading days immediately preceding
the conversion date(s). The Preferred Stock will automatically convert into
Common Stock on June 30, 2000 at the then applicable conversion price.
38
<PAGE>
Voting Rights. Except as otherwise required by law, the holders of shares
of Preferred Stock have four votes per share voting as a single class with the
Common Stock.
Dividends. Each share of Preferred Stock receives a quarterly dividend with
an annual rate of $0.70 per share. The dividends of the Preferred Stock are
payable in cash or Common Stock, at the option of Mark.
Liquidation and Redemption Rights. In the event of any liquidation, the
holders of the Preferred Stock will share equally in any balance of Mark's
assets available for distribution to them up to $10.00 per share plus unpaid
dividends, after satisfaction of creditors and the holders of Mark's senior
securities, if any. The holder's of the Preferred Stock may require Mark to
redeem the Preferred Stock at a redemption price equal to $10.00 per share plus
accrued dividends in the event of a breach of the provision of the Preferred
Stock, bankruptcy, dissolution, insolvency, liquidation or similar events.
Warrants. The Warrants consist of 1,375,000 warrants each to purchase one share
of Common Stock for $1.50 per share expiring on June 28, 2002.
Preferred Stock Unit Option. The investors also received an option to purchase
additional preferred stock units, which in the aggregate would consist of (i)
275,000 shares of Preferred Stock with terms identical to the Series B Preferred
Stock and (ii) 1,375,000 four-year warrants, each to purchase one share of
Common Stock at $1.50 per share. The Preferred Stock Unit Option is exercisable
until January 28, 2000. The Common Stock underlying the Preferred Stock Unit
Option is not being offered by this Prospectus.
Anti-dilution Provisions. The Securities contain anti-dilution provisions in the
event of stock dividends, stock splits, reverse stock splits and similar
transactions.
Issuances over Twenty (20%) Percent of the Outstanding Common Stock Pursuant to
Private Placement. In order to satisfy applicable Nasdaq corporate governance
requirements, Mark was prohibited from issuing in excess of 3,615,334 shares of
Common Stock under the Private Placement until it obtained shareholder approval.
Mark received shareholder approval at its annual meeting of shareholders on
December 28, 1998.
Based on the closing bid price of Mark's Common Stock on February 5, 1999
of $1.00, shares of Common Stock issuable under the Private Placement would
equal 10,083,332. Because the conversion of Preferred Stock is dependent on the
price of the Common Stock at future dates, the actual number of shares of Common
39
<PAGE>
Stock which will be issued is undeterminable, and may exceed the assumed number
given above.
Restriction on Acquiring in Excess of Five (5%) of the Outstanding Common Stock.
Each of the Securities includes a provision prohibiting any holder from
acquiring the beneficial ownership of over five (5%) percent of Mark's Common
Stock through the (i) conversion of Preferred Stock, (ii) exercise of the
Warrants or (iii) exercise of the Preferred Stock Unit Option.
Impact of Conversion Price of the Preferred Stock. The conversion price of the
Preferred Stock is variable based on the current price of Mark's Common Stock at
the time of conversion. Because of the discount to the current market price of
the Common Stock, sales of the shares of Common Stock underlying the Preferred
Stock may cause a downward trend in the trading price of the Common Stock until
such shares are sold if the interest to buy the Common Stock by investors is
weak. The Selling Shareholders are not prohibited from taking or maintaining a
short position in the Common Stock. While each Selling Shareholder has
represented that as of February 4, 1999 they do not maintain a short position in
the Common Stock, they reserve there right to do so in the future.
Registration. Mark is obligated to register under the Securities Act the Common
Stock underlying the Securities and to keep such registration effective until
June 29, 2000.
Option to Purchase Units and Lock Up Agreement. Investors owning 74,000 shares
of A Preferred Stock, 148,000 Warrants and the Preferred Stock Unit Option to
purchase 74,000 units have granted Mark an option until March 26, 1999 to
repurchase such securities for $740,000. Mark has paid a nonrefundable deposit
of $222,000 which will be applied toward the exercise price.
In addition, these investors have agreed that until July 29, 1999 they will not
(i) convert any Preferred A Stock, (ii) convert the 111,000 shares of Preferred
B Stock at less than $1.50 per share, (iii) effect or maintain, directly or
indirectly, a short position in Mark's Common Stock or (iv) exercise all or a
portion of the Preferred Stock Unit Option.
40
<PAGE>
SELLING SHAREHOLDERS
The up to 15,000,000 shares of Common Stock offered hereby are being
offered for the account of the following person(s). The information regarding
such person(s) and beneficial ownership of Common Stock has been provided by the
Selling Shareholders.
Shares of Shares of Total Shares Shares of
Common Common of Common Common
Stock Stock Stock Stock
Issuable Issuable Beneficially Owned
Under Under Owned and After
Name Preferred Stock(1) Warrants Offered(1) Offering(1)
- ---- ------------------ -------- ---------- -----------
Jules Nordlicht 1,066,666 400,000 1,466,667 0
Huberfeld Bodner
Family Foundation 1,000,000 375,000 1,375,000 0
Mark Nordlicht 266,667 100,000 366,667 0
John Georgallas 266,667 100,000 366,667 0
Harry Adler 133,333 50,000 183,333 0
Rita Folger 133,333 50,000 183,333 0
Mechon L'Hoyroa 75,000 28,125 103,125 0
Joseph Antine 66,667 25,000 91,667 0
Philip Huberfeld 66,667 25,000 91,667 0
Issac Levy 66,667 25,000 91,667 0
Beth Medrash Gevoa
of Israel 66,667 25,000 91,667 0
Abraham Elias 66,667 25,000 91,667 0
Congregation of Ahavas
Tzdodak V'Chesed 66,667 25,000 91,667 0
Abraham Ziskind 66,667 25,000 91,667 0
Jerusalem Fund 66,667 25,000 91,667 0
Shor Yoshuv Institute 66,667 25,000 91,667 0
Josh Berkowitz 66,667 12,500 45,833 0
Yeshiva of Telshe Alumni 33,333 12,500 45,833 0
Shekel HaKodesh 16,666 6,250 22,916 0
Judah Perstein 16,666 6,250 22,916 0
Ahron Schiller 8,333 3,125 11,458 0
Rebecca Adika 8,333 3,125 11,458 0
Elissa Eisner Gottlieb 8,333 3,125 11,458 0
(1) Assumes dividends paid in cash. Based on a conversion rate of 75% of the
closing sale price of $1.00 on February 5, 1999.
41
<PAGE>
PLAN OF DISTRIBUTION
The sale of shares of Common Stock by the Selling Shareholders may be
effected from time to time in transactions on one or more exchanges or in the
over-the-counter market, or otherwise in negotiated transactions, through the
timing of options on the shares or through a combination of such methods of
sale, at fixed prices, which may be charged at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. The Selling Shareholders may effect such transactions by
selling the shares of Common Stock in an exchange distribution in accordance
with the rules of such exchange to or through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Shareholders and/or the purchasers of the shares of
Common Stock for which such broker-dealer may act as agent or to whom they sell
as principal, or both (which compensation as to a particular broker-dealer may
be in excess of customary compensation). The Selling Shareholders and any
broker-dealers who act in connection with the sale of the shares of Common Stock
hereunder may be deemed to be "underwriters" within the meaning of Section 2(11)
of the Securities Act, and any commissions received by them and profit on any
sale of the shares of Common Stock as principal might be deemed to be
underwriting discounts and commissions under the Securities Act.
In addition any securities covered by the Prospectus which qualify for sale
pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to the
Prospectus, as supplemented. From time to time the Selling Shareholders may
engage in short sales, short sales against the box, puts and calls and other
transactions in securities of Mark or derivatives thereof, and may sell and
deliver the shares in connection therewith.
From time to time Selling Shareholders may pledge their shares pursuant to
the margin provisions of their respective customer agreements with their
respective brokers. Upon a default by a Selling Shareholder, the broker may
offer and sell the pledged shares of the Common Stock from time to time.
42
<PAGE>
LEGAL MATTERS
Timothy J. McCartney, Esq. has acted as counsel for Mark and has rendered
an opinion on the validity of the shares of Common Stock to be issued pursuant
to the Securities.
EXPERTS
Mark's consolidated balance sheet as of June 30, 1998 and the consolidated
statements of operations, stockholders' equity (deficiency) and cash flows for
the year ended June 30, 1998 appearing in this Prospectus, have been included in
reliance on the report of Holtz Rubenstein & Co., LLP, independent certified
public accountants, given on the authority of that firm as experts in accounting
and auditing.
Mark's consolidated balance sheets as of June 30, 1997 and 1996 and the
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended June 30, 1997 appearing in this
Prospectus, have been included in reliance on the report of Sax Macy Fromm &
Co., P.C., independent certified public accountants, given on the authority of
that firm as experts in accounting and auditing.
43
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Audited Consolidated Financial Statements for the Fiscal Years Ended June 30,
1998, 1997 and 1996:
Reports of Independent Accountants F-1
Consolidated Balance Sheets for June 30, 1998
and 1997 F-3
Consolidated Statements of Operations for
fiscal years ended June 30, 1998, 1997
and 1996 F-5
Consolidated Statements of Stockholders
Equity (Impairment) for fiscal years ended
June 30, 1998, 1997 and 1996 F-6
Consolidated Statement of Cash Flows for
fiscal years ended June 30, 1998, 1997
and 1996 F-7
Notes to Consolidated Financial Statements F-8
Chantrey Vellacott Report F-26
Baker Tilly Report F-28
Unaudited Consolidated Financial Statements for the Three Months Ended September
30, 1998 and 1997:
Consolidated Balance Sheets for
September 30, 1998 and June 30, 1998 F-30
Consolidated Statements of Operations for
the three months ended September 30, 1998
and September 30, 1997 F-32
Consolidated Statement of Cash Flows for
the three months ended September 30, 1998
and September 30, 1997 F-33
Notes to Interim Consolidated Financial Statements F-34
44
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
Mark Solutions, Inc. and Subsidiaries
Bloomfield, New Jersey
We have audited the consolidated balance sheet of Mark Solutions, Inc. and
Subsidiaries as of June 30, 1998, and the related consolidation statements of
operations, stockholders' equity (deficiency), and cash flows for the year
ended. 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 audit. We did not audit the
financial statements of MarkCare Medical Systems Limited, a wholly owned
subsidiary, which statements reflect total assets of $155,015 as of June 30,1998
and a net loss of $1,301,640 for the year 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 audit 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 misstatement. 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 audit provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, 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, 1998, and the results of its operations and cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
August 25,1998
(except for Note 10c.,
as to which the date
is November 8, 1998.)
-F-1-
<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 the related
consolidated statements of operations, stockholders' equity (impairment), and
cash flows for each of the years in the two-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 as of June 30, 1997 and total
revenues of $224,125, for the year 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 the results of its
operations and cash flows for each of the years in the two 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-2-
<PAGE>
<TABLE>
<CAPTION>
Mark Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
Assets
June 30, 1998 June 30, 1997
----------------- -----------------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 564,577 $ 422,457
Restricted cash 1,234,005 - - -
Subscriptions receivable 1,231,000 - - -
Accounts receivable, less allowance
of $5,500 in 1998 and 1997 623,912 3,178,928
Due from officer 102,058 - - -
Inventories (Note 4) 112,474 336,287
Other current assets (Note 5) 208,377 230,748
----------------- -----------------
Total Current Assets $ 4,076,403 $ 4,168,420
Property and Equipment:
Machinery and equipment 1,545,728 1,488,255
Demonstration equipment 436,348 395,419
Office furniture and equipment 397,607 401,731
Leasehold improvements 188,973 41,568
Vehicles 62,283 62,283
Property held under capital lease 47,129 47,129
----------------- -----------------
Total 2,678,068 2,436,385
Less: Accumulated depreciation and
amortization 2,239,456 2,089,126
----------------- -----------------
Net Property and Equipment 438,612 347,259
Other Assets:
Costs in excess of net assets of
businesses acquired, less accumulated
amortization of $437,373 in 1998 and
$227,433 in 1997 (Note 6) 612,318 822,258
Other Assets: 46,768 94,340
----------------- -----------------
Total Other assets 659,086 916,598
------------ -----------
Total Assets $ 5,174,101 $ 5,432,277
============ ===========
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
-F-3-
<PAGE>
<TABLE>
<CAPTION>
Mark Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
Liabilities and Stockholder's Equity (Deficiency)
June 30, 1998 June 30, 1997
----------------- -----------------
<S> <C> <C> <C> <C>
Current Liabilities:
Accounts payable $ 715,642 $ 1,638,288
Short-term borrowings - - - 435,225
Current maturities of long-term debt 108,171 448,729
Current portion of obligations
under capital leases 19,418 8,276
Due to related parties 14,693 296,472
Notes payable to officer - - - 160,000
Accrued liabilities (Note 8) 140,262 257,973
----------------- -----------------
Total Current Liabilities $ 998,186 $ 3,244,963
Other Liabilities:
Long-term debt excluding current maturities 1,029,385 2,312,556
Long-term portion of obligations under
capital leases 31,031 27,911
----------------- -----------------
Total Other Liabilities 1,060,416 2,340,467
Commitments and Contingencies - - - - - -
Temporary Stockholder's Equity (Note 10C.) 1,220,000 - - -
Stockholder's Equity (Deficiency):
Common Stock, $.01 par value,
50,000,000 shares authorized;
19,296,674and 14,779,085 shares
issued and outstanding at June 30,
1998 and 1997 respectively 192,967 147,790
Additional paid-in capital 31,846,556 27,454,982
Deficit (30,144,024) (27,755,925)
----------------- ------------------
Total Stockholder's Equity (Deficiency) 1,895,499 (153,153)
------------ ------------
Total Liabilities and Stockholders' Equity
(Deficiency) $5,174,101 $5,432,277
============ =============
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
-F-4-
<PAGE>
<TABLE>
<CAPTION>
Mark Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended June 30
-------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $ 12,921,810 $ 6,449,744 $ 3,454,615
Costs and Expenses:
Cost of sales 10,972,291 6,091,773 4,022,102
Selling, general and administrative
expenses 3,940,341 4,100,177 3,718,886
Reduction in carrying value of assets - - - - - - 777,495
---------- ---------- ---------
Total Costs and Expenses 14,912,632 10,191,950 8,518,483
---------- ---------- ---------
Operating (Loss) (1,990,822) (3,742,206) (5,063,868)
Other Income (Expenses):
Interest income 12,503 21,291 23,800
Interest expense (249,623) (290,651) (10,490)
Imputed interest expense on
convertible debentures (160,157) (1,422,813) - - -
Loss of disposal of property and
equipment - - - (4,886) (60,001)
---------- ---------- ----------
Net Other (Expenses) (397,277) (1,697,059) (46,691)
---------- ---------- ----------
(Loss) From Continuing Operations (2,388,099) (5,439,265) (5,110,559)
Discontinued Operations:
Loss of Bar-Lor Subsidiaries - - - - - - (35,078)
Loss of disposal of Bar-Lor
Subsidiaries - - - - - - (69,425
---------- ---------- ---------
Total Discontinued Operations - - - - - - (104,503)
Net (Loss) $(2,388,099) $(5,439,265) $(5,215,062)
=========== ============ ============
Basic (Loss) per share $ (0.14) $ (0.38) $ (0.41)
=========== ============ ============
Weighted Average Number of Shares
Outstanding 16,580,402 14,221,606 12,732,022
=========== ============ ===========
Dividends Paid $ -0- $ -0- $ -0-
=========== ============ ===========
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
</TABLE>
-F-5-
<PAGE>
Mark Solutions, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION>
Total
Additional Retained Stockholders'
Common Stock Paid-In Earnings Equity
Shares Amount Capital (Deficit) [Deficiency]
------ ------ ------- --------- ------------
<S> <C> <C> <C> <C> <C>
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
Commission and related fees - - - - - - (8,175) - - - (8,175)
Net loss for the year ended
June 30, 1996 - - - - - - - - - (5,215,062) (5,215,062)
---------- ------- ---------- ----------- ---------
Balance 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)
Conversion of convertible
debentures 2,602,500 26,025 2,173,975 - - - 2,200,000
Deferred imputed interest on
convertible debentures - - - - - - 321,000 - - - 321,000
Stock issued in lieu of interest 44,619 447 192,258 - - - 192,705
Stock issued for services 64,462 645 113,957 - - - 114,602
Warrants issued for services - - - - - - 92,000 - - - 92,000
Conversion of warrants 580,000 5,800 1,510,450 - - - 1,516,250
Commissions and related fees - - - - - - (188,006) - - - (188,006)
Issuance of stock through private
placement 1,220,000 12,200 - - - - - - 12,200
Issuance of warrants through
private placement - - - - - - 176,000 - - - 176,000
Miscellaneous adjustment 6,008 60 (60) - - - - - -
Net loss for the year ended
June 30, 1998 - - - - - - - - - (2,388,099) (2,388,099)
---------- ------- ---------- ----------- ---------
Balances June 30, 1998 19,296,674 $192,967 $31,846,556 $(30,144,024) $1,895,499
========== ======== =========== ============ ==========
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
-F-6-
<PAGE>
<TABLE>
<CAPTION>
Mark Solutions Inc. and Subsidiaries
Consolidated Statements and Cash Flow
Years Ended June 30
-------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net (loss) $ (2,388,099) $ (5,439,265) $ (5,215,062)
Adjustments to reconcile net (loss) to net cash (used for)
provided by operating activities:
Depreciation and amortization 360,270 377,280 637,169
Amortization of debt issue costs - - - 147,909 - - -
Deferred imputed interest on convertible debentures - - - 160,157 - - -
Securities issued for services 206,602 130,861 - - -
Stock issued for interest expense 192,705 1,472,284 - - -
Loss from discontinued operations - - - - - - 104,503
Reduction in carrying value of assets - - - - - - 777,495
Loss on disposition of property and equipment - - - 4,886 60,001
(Increase) decrease in assets:
Restricted cash (1,234,005) 181,781 177,469
Accounts receivable 2,555,016 (2,274,332) 666,445
Costs and estimated earnings in excess of billings on
contract in progress - - - - - - 66,485
Inventories 223,813 (189,982) 3,334
Other current assets 22,371 (97,423) (16,032)
Due from officer (102,058) - - - - - -
Other assets 47,572 (34,415) (7,153)
Increase (decrease) in liabilities:
Accounts payable (922,646) 1,139,038 (1,336,488)
Due to related parties (281,779) 251,277 (161,763)
Accrued liabilities (117,711) (65,265) 56,558
------------ ------------ ------------
Net adjustments to reconcile net (loss)
to net cash (used for) provided by operating activities 950,150 1,204,056 1,028,023
------------ ------------ ------------
Net Cash (Used for) Operating Activities (1,437,949) (4,235,209) (4,187,039)
------------ ------------ ------------
Cash Flows From Investing Activities:
Additions to property and equipment (216,338) (139,280) (51,451)
Proceeds from disposition of segment - - - - - - 100,000
Proceeds from sale of assets - - - 2,500 12,500
------------ ------------ ------------
Net Cash Provided by (Used for) Investing Activities (216,338) (136,780) 61,049
------------ ------------ ------------
Cash Flows From Financing Activities:
Proceeds from long-term debt 1,033,000 4,500,000 - - -
Repayment of long-term debt (456,729) (398,704) - - -
Proceeds from short-term borrowings 1,080,000 1,185,912 38,668
Repayment of short-term borrowings (1,515,225) (820,000) - - -
Repayment of notes payable for equipment and vehicles (11,083) (17,387) (29,283)
Advances from officer - - - 160,000 - - -
Repayment of advances from officer (160,000) - - - - - -
Payment of offering costs and commissions (45,456) (22,491) (8,175)
Proceeds from issuance of securities 1,871,900 105,894 4,263,577
Payment of debt issue costs - - - (162,700) - - -
Cash acquired in business combination - - - - - - 8,421
------------ ------------ ------------
Net Cash Provided by Financing Activities 1,796,407 4,530,524 4,273,208
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 142,120 158,535 147,218
Cash and Cash Equivalent at Beginning of Year 422,457 263,922 116,704
------------ ------------ ------------
Cash and Cash Equivalents at End of Year $ 564,577 $ $ 422,457 $ 263,922
============ =========== ===========
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
</TABLE>
-F-7-
<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 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 May 1996, the Company acquired MarkCare Medical Systems Limited
(formerly Simis Medical Imaging Limited), the entity, which developed the
IntraScan II PACS 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
significant revenues from the IntraScan II PACS system in fiscal 1999. Mark
received its first purchase order for its IntraScan II PACS software on August
10, 1998 from Data General.
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.
The Company has effective registration statements relating to 569,500
shares of common stock issuable upon the exercise of warrants and options and
intends to register approximately 3,760,000 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.
The Company believes the existing modular cell contracts, 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 1999.
-F-8-
<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, and/or
installation of (i) modular steel cells for correctional institution
construction and (ii) diagnostic support, picture archiving and
communication computer systems (PACS) marketed under the name
"IntraScan".
B. Basis of Consolidation - The consolidated financial statements
include the accounts of Mark Solutions, Inc. (Mark) and its wholly
owned Subsidiaries, MarkCare Medical Systems, Inc. (MarkCare), and
MarkCare Medical Systems Limited (LTD). The operations of MarkCare
Medical Systems Limited are included in the accompanying
consolidated financial statements from the date it was acquired, May
28, 1996.Prior to consolidation, the financial statements of LTD are
reconciled to U.S. Generally Accepted Accounting Principles.
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-9-
<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 5 - 7 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 out-sourced 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. 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-10-
<PAGE>
Note 2 - Summary of Significant Accounting Policies (Continued):
I. Loss Per Common Share - In 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128). This Statement establishes standards for computing and
presenting earnings (loss) per share (EPS).
SFAS No. 128 requires dual presentation of basic and diluted EPS.
Basic EPS excludes dilution and is computed by dividing net income
available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if stock options or convertible
securities were exercised or converted into common stock. The
Company's adoption of SFAS No. 128 did not materially change current
and prior years' EPS.
Basic and diluted loss per share amounts were equivalent for the
years ended June 30, 1998, 1997 and 1996.
J. 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.
K. 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.
L. Research and Development Costs - Research and development costs,
consisting of salaries and materials, relating to software
development are expensed as incurred. Prior to technological
feasibility the costs were charged to Selling, General and
Administrative expense, amounting to $0, $481,987 and $326,158 for
the years ended June 30, 1998, 1997 and 1996, respectively.
M. Reclassifications - Certain prior year amounts have been
reclassified to conform with the current year presentation.
-F-11-
<PAGE>
Note 2 - Summary of Significant Accounting Policies (Continued):
N. New Standards - In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distribution
to owners. Among other disclosures, SFAS No. 130 requires that all
items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as
other financial statements.
In addition, in June 1997, the FASB issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related
Information," which establishes standards for reporting information
about operating segments. It also establishes standards for
disclosures regarding products and services, geographic areas and
major customers.
Both of these new standards are effective for periods beginning
after December 15, 1997 and require comparative information for
earlier years to be restated. The implementation of these new
standards will not affect the Company's results of operations and
financial position, but may have an impact on future financial
statement disclosures.
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. The Company recorded costs in excess of
net assets approximating $1,050,000 in connection with this acquisition.
Note 4 - Inventories:
Inventories consist of the following:
June 30
--------------------------------------
1998 1997
----------------- -----------------
Raw materials $ 84,974 $ 300,888
Finished goods 27,500 35,399
----------------- -----------------
Total Inventories $ 112,474 $ 336,287
================= =================
-F-12-
<PAGE>
Note 5 - Other Current Assets:
Other current assets consist of:
June 30
------------------------------------
1998 1997
---------------- -----------------
Prepaid expenses $ 208,377 $ 60,860
Loans and exchanges - - - 9,731
Deferred imputed interest
on convertible debentures - - - 160,157
---------------- -----------------
Total $ 208,377 $ 230,748
================ =================
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, 1998 and 1997 are as follows:
Year Ended June 30
-------------------------------------------
1998 1997
-------------------- -------------------
Beginning balances $ 822,258 $1,032,196
Amortization expense
for the year (209,940) (209,938)
-------------------- -------------------
Ending Balances $ 612,318 $ 822,258
==================== ===================
Note 7 - Short-Term Borrowings:
In March 1997 the Company entered into 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 October 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 Company did not have any outstanding
borrowing at June 30, 1998.
-F-13-
<PAGE>
Note 8 - Accrued Liabilities:
The accrued liabilities consist of:
June 30
-----------------------------------------
1998 1997
------------------- ------------------
Salaries $ 34,282 $ 77,488
Professional fees 90,900 48,665
Interest - - - 35,422
Other 15,080 96,398
------------------- ------------------
Total $ 140,262 $ 257,973
=================== ==================
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.
The following related party transactions are included in the accompanying
financial statements:
Year Ended June 30
--------------------------------------
1998 1997 1996
---------- ---------- ---------
Purchases $ 421,497 $ 231,051 $ 105,512
Expense reimbursement 58,104 135,319 93,125
Consulting services 1,120 33,540 - - -
Bonding fees (5,029) 95,785 - - -
-F-14-
<PAGE>
Note 9 - Related Party Transactions (Continued):
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
-----------------------------------------
1998 1997
------------------- ------------------
Mark Lighting Fixture Co., Inc. $ 3,360 $ 134,327
Metalite, Inc. 8,869 8,869
Laborstat, Inc. (800) (988)
Carl Coppola (102,058) 95,785
Other shareholders 3,265 58,479
------------------- ------------------
Due to (from) Related Parties $ (87,364) 296,472
=================== ==================
In connection with several modular cell project, 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 for the year ended June 30,
1997.
During May 1997 the Company received an aggregate of $160,000 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. The entire balance was paid during fiscal 1998.
The Company grants non-employee directors, options for serving on
the Board of Directors. On December 3, 1997, each of the Company's directors
were granted five-year options to purchase 100,000 shares of Common Stock at
between $2.875 and $3.375 per share, the closing share price on the date of
grant. On June 25, 1998, the Company cancelled the options and issued new
five-year options purchase 100,000 shares of Common Stock at $1.125 per share,
the closing price on the date of the grant.
The loan to Carl Coppola of $102,058 was repaid subsequent to year
end.
-F-15-
<PAGE>
Note 10 - Long-Term Debt:
A. Long-term debt consists of the following:
June 30
-------------------------------------
1998 1997
------------- ---------------
Note payable, due December 1999;
collateralized by small equipment $ 12,556 $ 19,989
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 debentures due
June 29, 1999 100,000 300,000
7% convertible debentures due
December 31, 1999 1,025,000 - - -
------------- --------------
Total Long-Term Debt 1,137,556 2,761,285
Less: Current Portion 108,171 448,729
------------ --------------
Long-Term Debt, Excluding
Current Portion $ 1,029,385 $ 2,312,556
=========== ============
Maturities of total long-term debt are as follows:
Year Ended June 30
------------------
1999 108,171
2000 1,029,385
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
entire Debenture had been converted at June 30, 1998.
In connection with the issuance of the 1996 Debentures, the Company
incurred $162,700 of debt issue costs. These costs were charged to
operations over the remaining term of the 1996 Debentures.
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. On May 1, 1998 the Debenture
was converted into 750,000 shares of Common Stock.
-F-16-
<PAGE>
Note 10 - Long Term Debt (Continued)
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.
During 1998 the Company issued 44,619 shares of Common Stock (valued
at $192,258) in connection with the conversion of accrued interest
on convertible debentures.
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. Included in current
assets is $160,157, which represents the unamortized portion of the
beneficial conversion feature as of June 30, 1997. On June 19, 1998,
$200,000 of the Debenture was converted into 250,000 shares of
Common Stock. The Company issued 75,000 warrants with an exercise
price of $1.50 as part of the conversion. At June 30 1998, $100,000
of the debenture remains outstanding.
In June 1998, the Company completed a $2,750,000 private placement of
equity and debt units (the "Private Placement") pursuant to which the
Company issued (i) 1,220,000 shares of Common Stock (the "Private
Placement Common Stock"), (ii) convertible debentures (face amount
$1,530,000) due December 28, 1999, (the "Convertible Debentures"),
(iii) warrants to purchase 1,375,000 shares of Common Stock, (iv) and
an option exercisable by the investors to purchase an additional
convertible debentures (face amount $2,550,000) with warrants to
purchase 1,275,000 shares of Common Stock (the "Debt Unit Option").
Of the $1,530,000 proceeds received in connection with the
convertible debentures and its related options, $505,000 was
attributed to the debenture conversion features and options and has
been classified as additional paid-in capital, and the remaining
$1,025,000 has been classified as a long-term obligation.
At June 30, 1998 approximately $1,234,000 of the proceeds were held
in escrow and $1,231,000 were outstanding. These funds were
collected and deposited into the Company's operating accounts in
July 1998.
-F-17-
<PAGE>
The holders of the Private Placement Common Stock are entitled to
additional shares of Common Stock to the extent the net proceeds from
the sale of the Private Placement Common Stock is less than $1.30 per
share (the "Adjustment Shares"). The Convertible Debentures are
convertible into shares of Common Stock at the lesser of (i) $1.50
per share or (ii) 75% of the average closing bid price of the Common
Stock for the five trading days immediately preceding the conversion.
The Warrants are exercisable for a four-year period at $1.50 per
share. The Debt Unit Option entitles the investors to purchase up to
an additional $2,550,000 in 18 month principal amount convertible
debentures with terms identical to the Convertible Debentures with
four-year warrants to purchase an aggregate of 1,250,000 shares of
Common Stock at $1.50 per share.
Issuance of Common Stock in excess of 3,615,334 shares pursuant to
the Private Placement including the (i) Adjustment Shares, (ii)
conversion of the Convertible Debentures, (iii) exercise of Warrants
and (iv) exercise of the Debt Unit Option is subject to the approval
of the Company's shareholders. In the absence of shareholder approval
of issuance's in excess of 3,615,334 shares the holders of the
Private Placement Common Stock and Convertible debentures will have
the right to demand cash payment equal to the value of the Share
Adjustment and the redemption of the Convertible Debentures at 125%
of the principal amount plus accrued interest.
As of September 1, 1998, all of the Convertible Debentures and
Warrants remained, issued and outstanding.
The Company has charged to operations for the years ending June 30,
1998 and 1997, $160,157 and $1,422,813 of imputed interest expense
on convertible debentures, which represents the discount on
conversion of each of the above convertible debentures.
C. Temporary Stockholders Equity:
Due to issues regarding certain terms of the Private Placement,
each of the investors is an "underwriter" of the Private Placement
Shares in connection with any resale and has rescission rights
through November 4, 1999. If all of the investors assert rescission
rights, the investors would be entitled to (i) return the Private
Placement Shares, related Warrants and the rights to the Adjustment
Shares, if any, and receive a refund of their purchase price of
$1,220,000 plus interest or (ii) if the Private Placement Shares,
related Warrants and the rights to the Adjustment Shares, if any,
are sold, sue for the difference between the purchase price of
$1,220,000 and the sales price of these securities. Accordingly,
$1,220,000 of the proceeds from the Private Placement has been
classified in the Consolidated Balance Sheet at June 30, 1998 as
"Temporary Stockholders Equity" and such classification will
continue until the expiration of the rescission rights.
-F-18-
<PAGE>
Note 11 - Fair Value of Financial Instruments
The estimated fair value of the Company's convertible debt as of June
30, 1998 is as follows:
Carrying Fair
Amount Value
---------------- ----------------
Convertible debt $ 1,125,000 $ 1,125,000
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.
The fair value of the Company's other financial instruments approximates
their carrying amounts.
-F-19-
<PAGE>
Note 12 - 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 employment, six months after death or one year in
the case of permanent disability of the option holder. 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>
1998 June 30, 1997 1996
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 381,000 $2.04 367,000 $3.70 523,000 $3.71
Granted 524,000 2.67 282,500 1.60 -- --
Cancelled (505,500) 2.95 (268,500) 3.81 (76,000) 3.79
Exercised ------- ---- ------- 2.04 (80,000) 3.67
Outstanding at
end of year 399,500 $1.45 381,000 $2.04 367,000 $3.70
======= ===== ======= ===== ======= =====
Available for
issuance under Plan 520,000 539,000 533,000
Weighted average
contractual life
(years) 1.95 2.24 1.22
Shares subject to
exercisable option 399,000 381,000 367,000
</TABLE>
<TABLE>
-F-20-
<PAGE>
<CAPTION>
Note 12- Stockholders' Equity (Continued):
B. Stock Warrants
Outstanding warrants are as follows:
1998 June 30, 1997 1996
Weighted Average Weighted Average Weighted Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Warrants outstanding
at beginning
of year 3,241,758 $3.67 3,933,880 $4.10 4,848,859 $4.45
Granted 2,565,000 1.58 1,395,000 2.91 615,000 5.08
Exercised (580,000) (2.61) (43,572) 2.43 (1,456,979) 2.54
Expired (980,091) (4.20) (2,043,550) 4.02 (73,000) 7.16
---------- ------ ----------- ----- ----------- -----
Warrants outstanding
at end of year 4,246,667 $2.43 3,241,758 $3.64 3,933,880 $4.10
========= ===== ========= ====== ========= =====
Weighted average
contractual life
(years) 2.56 1.51 .79
</TABLE>
C. Pro forma 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 1998 and 1997:
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 1998 and 1997 were $1.76 and $1.84,
respectively. The Company's pro forma information follows:
June 30
--------------------------------------
1998 1997 1996
---- ---- ----
Pro forma net (loss) $(3,017,300) $(5,701,590) $(5,224,781)
Pro forma loss per common share (.41) (.40) (.41)
-F-21-
<PAGE>
Note 13 - 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.
The Company also leases various automobiles and small office
equipment.
Future minimum rental payments under these operating leases are as
follows:
Year Ended June 30
1999 276,254
2000 193,820
2001 186,149
2002 174,236
2003 and thereafter 413,811
---------
Total future minimum rental payments 1,070,034
=========
Rent expense for the years ending June 30, 1998, 1997, and 1996,
was $330,991, $254,522, and $205,586, respectively.
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
1999 $29,723
2000 26,587
2001 8,936
2002 1,611
-------------
Total future minimum lease payments 66,857
Less: Amount representing interest 16,408
-------------
Present value of net future minimum lease payments 50,449
Less: Current portion of obligations under capital leases 19,418
------------
Long-term portion of obligations under capital leases $31,031
============
-F-22-
<PAGE>
Note 14 - 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 (3) 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 (3) 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. On January 28, 1998 the Company bought out the
remainder of the contract in exchange for 64,462 shares of Common Stock. The
value of the shares at the issue date was $114,602.
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, 1998 and 1997, the
Company's uninsured cash balances approximated $1,576,000 and $599,000,
respectively.
The Company is involved in various lawsuits and claims incidental to its
business. In the opinion of management, the ultimate liabilities, if any,
resulting from such lawsuits and claims, will not materially affect the
financial position of the Company.
Note 15 - Income Taxes:
As of June 30, 1998, the Company has Federal net operating loss carry
forwards of approximately $19,550,000. Such carry forwards begin to expire in
2009 if not previously used. The $19,550,000 carry forward is comprised of
approximately $17,850,000 which is available for utilization in the tax year
ending June 30, 1999. The remaining $1,700,000 carry forward is restricted as to
utilization subject to the provisions of Internal Revenue Code Section 382.
Since realization of the tax benefits associated with these carry forwards is
not assured, a full valuation allowance was recorded against these tax benefits
as required by SFAS No. 109.
-F-23-
<PAGE>
Note 16 - Discontinued Operations:
On November 10, 1993, Showcase Cosmetics, Inc. (Showcase), the parent
company of the Bar-Lor Subsidiaries, and the Company consummated Reorganization
(the "Reorganization") pursuant to a Plan of Reorganization dated December 23,
1992, as amended. The reorganization was accounted for using the purchase method
of accounting. On October 13, 1995, the Company disposed of the Bar-Lor
Subsidiaries, whose principal services were the packaging and distribution of
cosmetic products.
Note 17 - Supplemental Cash Flow Information:
A. Cash paid for interest during the years ended June 30, 1998, 1997
and 1996 amounted to $64,919, $40,832 and $9,581.
B. The Company acquired certain equipment with an aggregate cost of
$25,345 and $6,200 under capital leases obligations for the years
ended June 30, 1998 and 1997 respectively.
C. During 1998, $2,200,000 of Debentures were converted into 2,602,500
shares of common stock. During 1997, $360,000 of Converted
Debentures were liquidated through the issuance of Common Stock.
D. During 1998, the Company granted outside consultants options to
acquire 360,000 shares of common stock at exercise prices ranging
from $1.16 to $4.00. In addition, the Company modified the terms of
640,000 options held by outside consultants. The fair value of these
options ($92,000) has been charged to operations in accordance with
SFAS No. 123.
-F-24-
<PAGE>
Note 18 - 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
-------
1998 1997 1996
---- ---- ----
Revenues:
Modular steel products $12,713,508 $ 6,114,195 $ 3,256,574
Medical products 208,302 335,549 198,041
----------- ----------- -----------
Total $12,921,810 $ 6,449,744 $ 3,454,615
=========== ============ ===========
Operating Profit (Loss):
Modular steel products 73,434 (2,706,272) (4,508,406)
Medical products (2,067,256) (1,035,934) (555,462)
----------- ----------- ----------
Total $(1,990,822) $(3,742,206) $(5,063,868)
============ ============ ===========
Identifiable Assets:
Modular steel products $ 4,258,021 $ 5,002,432 $ 1,317,620
Medical products 916,080 429,845 1,766,143
----------- ----------- ----------
Total $ 5,174,101 $ 5,432,277 3,083,763
=========== ============ ===========
For the year ended June 30, 1998, 1997 and 1996, one customer accounted for
93%, 48% and 70% of the total revenues. As of June 30, 1998, one customer
accounted for 42% of receivables.
Note 19 - Reduction in Carrying Value of Assets:
The Company acquired the stock of LTD, the developer of the IntraScan II
PACS system. In connection with this acquisition, the Company has determined to
focus its marketing efforts on the IntraScan II PACS technology. In November
1992, the Company acquired Diversified Imaging Technology, a company that
developed the IntraScan I technology, which was subsequently 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-25-
<PAGE>
CHANTREY VELLACOTT
MARKCARE MEDICAL SYSTEMS LIMITED
Auditors' Report To The Members of MarkCare Medical Systems Limited
We have audited the financial statements, [for the year ended June 30, 1998].
Which have been prepared under the historical cost convention [ ].
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 financial statements and to report our
opinion to you.
Basis Of Opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices 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 judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting polices are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so 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.
Going concern
In forming our opinion we have considered the adequacy of the disclosures made
in the financial statements [ ] concerning the basis on which the financial
statements have been prepared. The financial statements have been prepared on a
going concern basis. We considered that this matter should be drawn to your
attention but our opinion is not qualified in this respect.
US GAAP and US GAAS
With respect to the information disclosed in the financial statements, we are
not aware of any material differences between UK Generally Accepted Accounting
Principles and US Generally Accepted Accounting Principles or between UK
Auditing Standards and US Generally Accepted Auditing Standards.
-F-26-
<PAGE>
Opinion
In our opinion the financial statements give a true and fair view of the state
of the company's affairs at 30 June 1998 and of its loss for the year then ended
and have been properly prepared in accordance with the Companies Act of 1985.
/s/ Chantrey Vellacott
Chartered Accountants
Registered Auditors
LONDON
30 September 1998
-F-27-
<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 and 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 judgements 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 misstatements, 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 at June 30, 1997, is insolvent by L 340,319. As stated in
the financial statements amounts owned 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.
US GAAP and US GAAS
With respect to the information disclosed in the financial statements, we are
not aware of any material differences between UK Generally Accepted Accounting
Principles and US Generally Accepted Accounting Principles or between UK
Auditing Standards and US Generally Accepted Auditing Standards.
-F-28-
<PAGE>
Opinion
In our opinion 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
ending and have been properly prepared in accordance with the provisions of the
Companies Act 1985.
/s/ Baker Tilly
Registered Auditors
Chartered Accountants
Old Sarum House
49 Princes Street
Yeovil, Somerset
BA20 1EG
25 September 1997
-F-29-
<PAGE>
Mark Solutions, Inc. and Subsidiaries
Consolidated Balance Sheet
ASSETS
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------ -------------
Current Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,620,680 $ 564,577
Restricted cash - 1,234,005
Subscriptions receivable - 1,231,000
Accounts receivable, less allowance of
$5,500 at September 30, and June 30,1998 1,207,310 623,912
Due from officer - 102,058
Inventories 856,314 112,474
Other current assets 430,264 208,377
----------- -----------
Total Current Assets 4,114,568 4,076,403
Property and equipment, net 587,673 438,612
Other Assets:
Cost in excess of net assets
of business acquired less accumulated
amortization of $489,858 and $437,373 at
September 30 and June 30, 1998,
respectively 559,833 612,318
Other assets 47,119 46,768
----------- -----------
Total Other Assets 606,952 659,086
----------- -----------
Total Assets $ 5,309,193 $ 5,174,101
=========== ===========
</TABLE>
-F-30-
<PAGE>
Mark Solutions, Inc. and Subsidiaries
Consolidated Balance Sheet
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------ -------------
Current Liabilities:
<S> <C> <C> <C> <C>
Accounts payable 1,078,848 $ 715,642
Current maturities of long-term debt 108,367 108,171
Current portion of obligations
under capital leases 27,810 19,418
Due to related parties 79,909 14,693
Deferred revenues 206,082 -
Accrued liabilities 113,893 140,262
---------- ----------
Total Current Liabilities 1,614,909 998,186
Other Liabilities:
Long-term debt excluding current maturities 1,084,218 1,029,385
Long-term portion of obligations under
capital leases 41,010 31,031
---------- ----------
Total Other Liabilities 1,125,228 1,060,416
Commitments and Contingencies - -
Temporary Equity 1,220,000 1,220,000
Stockholders' Equity:
Common stock, $.01 par value,
50,000,000 shares authorized,
19,296,674 shares issued and
outstanding at September 30 and
June 30, 1998, respectively 192,967 192,967
Additional paid-in capital 31,812,146 31,846,556
Deficit (30,645,839) (30,144,024)
Treasury Stock (10,218) -
---------- ----------
Total Stockholders' Equity 1,349,056 1,895,499
---------- ----------
Total Liabilities and Stockholders' Equity $5,309,193 $5,174,101
========== ==========
</TABLE>
-F-31-
<PAGE>
Mark Solutions, Inc. and Subsidiaries
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Revenues:
Sales $ 688,861 $ 832,241
-------------- --------------
Costs and Expenses:
Cost of sales 414,851 1,227,587
Selling, general, and
administrative expenses 737,790 952,480
-------------- --------------
Total Costs and Expenses 1,152,641 2,180,067
-------------- --------------
Operating (Loss) (463,780) (1,347,826)
-------------- --------------
Other Income (Expenses):
Interest income 28,224 -
Interest expense (11,426) (196,577)
Imputed Interest expense on
convertible debentures (54,833) (96,093)
Bad debt expense - (28,756)
-------------- --------------
(38,035) (321,426)
-------------- --------------
Net (Loss) $ (501,815) $ (1,669,252)
============== ==============
Basic (Loss) per Share $ (0.03) $ (0.11)
============== ==============
Weighted Average Number of
Shares Outstanding 19,281,674 15,016,078
============== ==============
</TABLE>
-F-32-
<PAGE>
Mark Solutions, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, 1998 September 30, 1997
------------------ --------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net (loss) $ (501,815) $(1,669,203)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 74,827 84,075
Deferred Imputed interest on convertible debentures 54,833 -
(Increase) decrease in assets:
Restricted cash 1,234,005 (137,500)
Accounts Receivable (583,398) 1,373,140
Inventory (743,840) (365,071)
Other current assets (119,829) 57,007
Other assets (351) (15,167)
Increase (decrease) in liabilities:
Accounts payable 363,206 300,294
Due to related parties 65,216 (33,677)
Increase in deferred revenue 206,082 -
Accrued liabilities (26,369) (34,896)
Net adjustments to reconcile net (loss) to net cash
--------------- -------------
provided by operating activities 524,382 1,228,205
Net Cash Provided by
--------------- -------------
(Used for) Operating Activities 22,567 (440,998)
--------------- -------------
Cash Flows From Investing Activities:
Acquisition of property and equipment (171,403) (12,097)
Net Cash (Used for)
--------------- -------------
Investing Activities (171,403) (12,097)
--------------- -------------
Cash Flows From Financing Activities:
Collection of subscriptions receivable 1,231,000 -
Repayment of convertible debt - (441,296)
Increase in short term borrowings - (394,840)
Proceeds of equipment loans less repayments 18,567 7,580
Repayment of notes payable officer - (19,887)
Proceeds from issuance of common stock - 1,648,908
Debt issue costs - (1,917)
Payment of stock related costs (34,410) -
Purchase of treasury stock (10,218) -
--------------- -------------
Net Cash Provided by Financing Activities 1,204,939 798,548
--------------- -------------
Net Increase in Cash 1,056,103 345,453
Cash and Cash Equivalents at Beginning of Period 564,577 422,457
--------------- -------------
Cash and Cash Equivalents at End of Period $ 1,620,680 $ 767,910
=============== =============
</TABLE>
-F-33-
<PAGE>
Note 1 INTERIM FINANCIAL INFORMATION
The consolidated balance sheet of the Company as of September 30, 1998, the
consolidated statements of operations for the three months ended September 30,
1998 and 1997 and the consolidated statements of cash flows for the three months
ended September 30, 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 accurals) 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, 1998 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 hereto included in the Company's Annual Report on Form 10-K
for the year ended June 30, 1998.
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, 1998 June 30, 1998
------------------ -------------
Raw Materials $ - $ 84,974
Work-in-progress $ 828,814 $ -
Finished Goods $ 27,500 $ 27,500
--------- --------
Total $ 856,314 $112,474
========= ========
-F-34-
<PAGE>
Note 3 COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
Basic earnings (loss) 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. Basic and dilutive
loss per share were equivalent for all periods presented. Earnings per share
have been retroactively restated to reflect FASB No. 128 for all prior periods
presented.
Note 4 TEMPORARY EQUITY
Due to issues regarding certain terms of the June 1998 Private Placement, each
of the investors is an "underwriter" of the 1,220,000 Private Placement Shares
in connection with any resale and has rescission rights through November 4,
1999. If any of the investors assert rescission rights and ultimately prevail,
the investors would be entitled to (i) return the Private Placement Shares,
related Warrants and the rights to the Adjustment Shares, if any, and receive a
refund of their purchase price of $1,220,00 plus interest or (ii) if the Private
Placement Shares, related Warrants and the rights to the Adjustment Shares, if
any, are sold, sue for the difference between the purchase price of $1,220,00
and the sales price of these securities. Accordingly, $1,220,000 of the proceeds
from the Private Placement has been classified in the Consolidated Balance Sheet
at September 30, 1998 as "Temporary Stockholders Equity" and such classification
will continue to the expiration of the potential rights.
-F-35-
<PAGE>
