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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to __________________
Commission File No. 0-17118
Mark Solutions, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 11-2864481
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(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
Parkway Technical Center
1515 Broad Street, Bloomfield, New Jersey 07003
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 893-0500
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------------- ------------------------------------------
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $ .01 par value
(Title of class)
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Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
The aggregate market value of the 7,129,938 shares of Common Stock
held by non-affiliates of the Registrant on September 30, 2000 was $3,564,969
based on the closing sales price of $0.50 on September 29, 2000.
The number of shares of Common Stock outstanding as of September 29,
2000 was 7,688,705.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
Item 1. Business
GENERAL DEVELOPMENT OF BUSINESS
Mark Solutions, Inc. ("Mark") is a Delaware corporation, which
operates its businesses through wholly owned subsidiaries and a division.
Mark markets its IntraScan II PACS software to radiology departments,
large healthcare facilities, hospitals, and outpatient imaging group practices
as part of comprehensive PACS proposals through marketing and strategic
partnering agreements with computer hardware manufacturers, systems integrators,
and radiology imaging equipment manufacturers. Mark's principal marketing
partner is Data General Corporation / EMC Corporation.
Mark designs, manufactures, and installs modular steel cells for
correctional institution construction and develops software applications under
the name "IntraScan II" for diagnostic support, picture, archiving and
communication computer systems (PACS).
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 correctional facilities.
Mark has decided it is in its best interest to separate the two
business segments. No definitive plan has been reached to effect such a
separation and there can be no assurances that one will occur.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The following table sets forth information regarding Mark's industry
segments and classes of products.
Fiscal Year Ended June 30,
(in thousands)
-----------------------------------------------------------------
2000 1999 1998
-------- -------- --------
Sales to external customers:
Mark Correction Systems:
Modular Cells $ 11,670 $ 8,497 $ 12,714
-------- -------- --------
MarkCare Medical Systems:
IntraScan 2,054 1,729 150
Other -- -- 58
-------- -------- --------
2,054 1,729 208
-------- -------- --------
$ 13,724 $ 10,226 $ 12,922
======== ======== ========
Operating Profit:
Mark Correctional Systems $ (794) $ (598) $ 73
MarkCare Medical Systems $ (3,613) $ (1,871) $ (2,064)
Identifiable Assets:
Mark Correctional Systems $ 5,076 $ 7,258 $ 4,258
MarkCare Medical Systems $ 1,253 $ 1,812 $ 916
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MARKCARE MEDICAL SYSTEMS
Mark operates its IntraScan II PACS software business through
MarkCare Medical Systems, Inc., a majority owned Delaware subsidiary
("MarkCare-US"), MarkCare Medical Systems, Ltd., a wholly owned subsidiary of
MarkCare-US ("MarkCare-UK") and MarkCare Medical Systems Korea
("MarkCare-Korea"), also a wholly owned subsidiary of MarkCare-US. MarkCare-US,
MarkCare-UK and MarkCare-Korea are collectively referred to as "MarkCare".
MarkCare conducts its IntraScan II PACS software activities at the offices of
MarkCare-UK and its executive offices.
IntraScan II PACS Software
IntraScan II is a software application for medical diagnostic,
picture, archiving and communication systems (PACS). The IntraScan II software
typically represents 25-30% of the total cost of a PACS system. PACS is a
"filmless" computer based system which allows transmission, storage and
integration of radiological images such as x-rays, computed tomography (CAT
Scan), ultra sound and magnetic resonance imaging (MRI) as well as patient
records by computer network. Through the network, diagnostic quality images and
patient records can be distributed efficiently and instantaneously.
Revenues generated by IntraScan II sales totaled $2,054,000 or 15.0%
of Mark's total operating revenues for the fiscal year ended June 30, 2000.
While no assurances can be given, Mark believes that IntraScan II sales will
represent a larger percentage of revenues in the fiscal year ending June 30,
2001 as compared to 2000.
As of September 30, 2000 MarkCare had a backlog of $940,000 in
IntraScan II orders as compared to a backlog of $937,000 as of September 1999.
In the three-month period ended September 30, 2000, MarkCare generated revenues
of $906,000 as compared to $959,000 for the comparable prior period.
IntraScan II interfaces with most medical imaging devices based on
the healthcare industry communication standard DICOM 3.0, and can store and
recall images from commonly used modalities including x-ray, CAT Scan, computed
radiography, nuclear medicine, ultra sound and MRI.
The IntraScan II PACS software is both platform and database
independent using popular client/server architecture, multiple hardware
platforms (Data General, DEC, IBM and Hewlett Packard) and operating systems
(UNIX based versions, Windows 98 and Windows 2000). IntraScan II operates across
Sybase and Oracle data base management systems, which together represent
approximately 70% of the worldwide healthcare database market. This open
platform independence allows IntraScan II to operate with most computer hardware
and operating systems and broadens the potential customer base and possible
marketing partners. While Mark is aware of similar PACS systems in various
stages of development, management believes the IntraScan II PACS system is the
only system which is designed to be platform and database independent.
IntraScan II is designed using Internet/Intranet web technology that
allows authorized users to access the PACS system from remote locations as well
as at the healthcare facility.
IntraScan II is comprised of several principal modules that permit a
phasing in of the different functions over time and, with minimal
reconfiguration, can be scaled to the size and need of the healthcare facility.
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Image Management System. The IMS module controls the primary
functions of a PACS system which includes the management, distribution, recall
and validation of images to various departments and clinicians and the
integration of the images to patient records through the facility's information
systems commonly referred to as HIS/RIS. This module can interface with most
installed and available HIS/RIS systems based on the healthcare industry
communication standard HL-7. The IMS is the "server" of a client/server PACS
environment. Based on the customer's requirements, the IMS is easily configured
to manage which healthcare personnel receive the patient information, where and
when such information is needed, when the information is archived for long term
storage, and subsequent retrieval from the archive (pre-fetching). In addition,
the IMS module is designed so that the healthcare facility personnel can
customize screen layouts, icon choices, rules, actions, tables and GUI
(graphical user interface) based items with minimal technical knowledge and
without changes to the underlying source code. These changes can be effected at
the facility or remotely, using the IntraScan II Web technology.
Viewer Software/Module. The viewer module controls the viewing and
manipulation of images at computer terminal locations and the printing of these
images when required. The viewer module is the "client" of a client/server PACS
environment. This module is based on a Windows 98/Windows NT operating systems
for easy point and click use and is fully iconized. IntraScan II allows for
image manipulation such as rotation of images, enlarging images or portions of
images, changes in contrast, changes in color, brightness and clarity. The user
can also add text, arrows, regions of interest and measurements. Additionally,
images from different modalities (e.g. x-ray and CAT Scan) can be viewed
side-by-side for efficient and easy comparison. This module controls the degree
of image resolution required for the nature of the viewing activity. Diagnoses
can be made at diagnostic workstations from digital images on high-resolution
display capability monitors (512 X 512 to 2000 X 2500 pixels), 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. In addition, this module can be configured to limit
resolution and image manipulation capabilities at additional viewing terminals,
such as clinical workstations and quality assurance stations, based on their
intended use.
Archiving Module. This storage module controls the permanent and
long-term storage of patient images and records after quick access to the
information is no longer critical. The information can be stored on several
alternative mediums such as CD-ROM, DLT Tapes, and DVD disks. Because this
storage method eliminates the costs associated with space and handling
requirements of film images, patient record storage costs are significantly
reduced.
Web Based Module and Teleradiology. Most PACS systems are designed to
be closed or "local area networks" which are accessible only within the
healthcare facility sites.
IntraScan II is designed for local area networks and, by virtue of
the Web Server module, uses Internet communication capabilities such as modems,
ISDN, Satellite link and high speed T1 lines to provide off site access to a
PACS system at remote computer workstations or terminals often referred to as
teleradiology. These terminals can be networked with a healthcare facilities
PACS system and be equipped with all or some of the on site workstation image
and communication features and functions described above. The development of
this technology gives remote, isolated locations global access to top quality
medical providers previously unavailable due to geographic/travel limitations.
IntraScan II's web based application can be used to create a
centralized archiving depository for multiple facilities at different locations
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and allows the system administrator to manage a PACS system and resolve user
problems from any off-site computer terminal with Internet/Intranet
communication capability, subject to strict security authorization.
Application Service Provider (ASP) Compatible. The IntraScan II is
fully compatible with ASP technology. Mark believes that ASP technology will
allow greater penetration into the overall teleradiology market.
Current Installations
MarkCare's IntraScan II software has been installed or is scheduled
for installation in the following facilities:
Patient Installation Contract Strategic
Name and Location Beds Date Value(1) Partner.
----------------- -------- ------------ ------------ -----------
Leichester General
Hospital, England 700 July 1997 $ 860,000 Data General
Organ Transplant
Center, Turkey 100 October 1998 $ 200,000 Data General
Hospital de la
Ribera, Spain 350 January 1999 $ 700,000 Data General
Princeton Community
Hospital, West Virginia 200 January 1999 $ 720,000 Data General
Gill Hospital,
South Korea 2,000 August 1999 $1,250,000 Data General
Central Middlesex
Hospital, England 100 August 1999 $ 420,000 Data General
Ankara Rehabilitation
Hospital, Turkey 100 September 1999 $ 200,000 Data General
Ulleval Hospital,
Norway 1,700 September 1999 $1,500,000 Santax A/S
Houston Health Center,
Georgia 186 October 2000 $ 425,000 Data General
Childrens Mercy
Hospital, Missouri 177 November 2000 $ 500,000 Data General
Royal Victoria Hospital,
North Ireland N/A November 2000 $ 175,000 Data General
Boundary Trails Medical,
Canada 150 December 2000 $ 240,000 MediSolutions
1) This represents gross revenues to Mark and includes licensing, installation
and long-term maintenance and support fees.
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Product Development
The application software industry is subject to rapid technological
changes. MarkCare's IntraScan II development strategy is to continually improve
its web based, user friendly modules and add additional features and functions
based on the requirements of the PACS market in general and the feedback from
existing customers and sales efforts. MarkCare will continue to develop platform
and database independent applications using popular client/server environments,
multiple hardware platforms and operating systems. As of September 30, 2000
MarkCare's product development staff consisted of 18 employees. MarkCare
anticipates that it will continue to spend substantial resources on an ongoing
basis to develop competitive products.
Sales and Marketing; Strategic Partners
The IntraScan II PACS software is marketed to radiology departments,
large healthcare facilities, hospitals, and outpatient imaging group practices
as part of comprehensive PACS proposals through marketing and strategic
partnering agreements with established computer hardware manufacturers, systems
integrators, and radiology imaging equipment manufacturers. MarkCare has an
internal sales force consisting of six employees that participates and supports
the marketing and sales efforts of these companies. MarkCare personnel
participate in systems demonstrations, site visits, and assist in the
solicitation of and response to requests for proposals.
MarkCare's marketing strategy is to establish as many distribution
channels as possible to compensate for its limited financial resources,
personnel resources and lack of industry recognition. MarkCare believes this
partnering strategy also gives it access to the partners installed healthcare
client base and other established relationships not otherwise available to
MarkCare.
MarkCare's principal marketing partner is Data General, a large
computer hardware and systems integrator company, which is a division of EMC
Corporation, and has a client base of over 1,200 healthcare institutions in the
United States.
Under a Master Supplier Agreement with Data General, MarkCare
provides IntraScan II PACS software and related services to be incorporated into
PACS sale proposals. The products and services to be provided by MarkCare are
negotiated on a project-by-project basis. Pursuant to this agreement, MarkCare
is Data General's exclusive supplier of PACS software products; however,
MarkCare is permitted to market and sell the IntraScan II PACS software to other
distributors or systems integrators.
In addition to the Data General agreement, MarkCare has strategic
partnerships with the following companies:
Santax A/S, a Norwegian company;
Konica, a multi-national diversified film and digital imaging
company;
Worldcare, a United Kingdom company;
Avantec, an Indian company;
AIS, a Swiss company;
Medilink, an Australian company;
Chrome Global, an Australian company
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Product Pricing and Payment Terms
MarkCare generally submits a scope of work and pricing proposal as
part of a comprehensive PACS system proposal prepared by one of its marketing
partners. MarkCare's proposal addresses the healthcare facility's requirements
as to functionality, image modalities and number and type of viewing stations.
MarkCare includes in its proposal the cost of licenses, installation and initial
training, which is based on the number of users and/or computer terminals. In
addition, MarkCare will typically submit a proposal to provide technical
support, product updates and new releases after the initial warranty period,
usually ninety days. Annual fees for this technical support are a fixed
percentage of the licensing fees of an installation.
Regulation
IntraScan II PACS software is a "Class II medical device", as
classified by the Federal Food and Drug Administration subject to the pre-market
notification and approval process. Accordingly, the IntraScan II PACS is
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. MarkCare has received a letter from the FDA for the
IntraScan II PACS system, authorizing commercial distribution.
Competition
Other companies, which are larger, more established and better known than
MarkCare, develop and sell PACS system software, including Agfa, Seimens,
General Electric and Kodak. In addition, other film and medical equipment
manufacturers may enter into the PACS business as the potential market is
recognized by acquiring or developing its own PACS software capabilities.
In addition to resources and brand recognition, MarkCare believes
significant competitive factors in the PACS market are a system's adaptability,
operating features and post-installation support. MarkCare believes it can be
competitive by:
o Pursuing its strategic partnering strategy with larger PACS
related companies.
o Developing software applications which are platform and data
base independent, which broadens MarkCare's market base.
o Emphasizing its current software operation features and performance
including its image management system.
o Continually updating its software and adding additional features.
o Focusing and promoting its development efforts on web based
technology.
o ASP (Application Service Provider) compatibility.
Employees
As of September 30, 2000, MarkCare-US had two management employees,
one sales employee, six engineering employees, four technical support staff and
two office and clerical employees.
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As of September 30, 2000, MarkCare-UK had fifteen software engineers,
four management employees, five sales employees, nine support staff, and two
office staff employees.
As of September 30, 2000, MarkCare-Korea had two sales personnel and
four technical support staff employees.
Copyrights, Patents and Trade Secrets
The IntraScan II PACS system software programs are protected by
British common law copyright and United States copyright. MarkCare also requires
employees and third party nondisclosure agreements in an effort to protect
proprietary information and prevent reverse engineering of its products. Because
the software industry is subject to rapid technological change and accelerated
obsolescence, MarkCare believes the programming and creative skills of its
personnel, product development and frequent product enhancements, name
recognition and post installation support and maintenance are more important to
maintaining its competitiveness. MarkCare believes its existing copyrights and
commitment to the continuous development of superior products will allow it to
maintain its competitiveness in the PACS market.
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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 16 states including Indiana, Illinois, New York, New Jersey, Michigan,
Missouri, Washington, Wisconsin, South Carolina and Minnesota as well as the
Commonwealth of Puerto Rico. Revenues generated by the sale of cells to
correctional facilities totaled $11,670,000 or 85.0% of Mark's total operating
revenues for the fiscal year ended June 30, 2000. For the year ended June 30,
2000 the following projects accounted for 77.5% of Mark's total operating
revenue:
Percentage of Fiscal 2000
Project Operating Revenues
---------------- ---------------------------
Renovation of Cellhouse "H" 31.8%
Pendleton Correctional Facility
Pendleton, Indiana
269 cells
Lake County Jail Addition 24.8%
Crown Point, Indiana
256 cells
Administration of Corrections 20.9%
Puerto Rico
438 cells
As of September 30, 2000 Mark had a backlog of $5,958,000 in modular cell
orders as compared to a backlog of $9,756,000 as of September 30, 1999.
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
that can vary from 60 to 200 square feet. Each modular cell can be equipped with
lavatory facilities, wall-mounted sleeping bunks, desk and stool, storage bins,
lighting and ventilation systems; and optional components such as fixed or
operable windows and hinged or sliding security doors.
The cells are constructed of durable low maintenance, non-porous
materials including a scratch resistant epoxy polymer finish, which results in
lower ongoing maintenance and life cycle costs. The cells are acoustically and
thermally insulated and are designed to provide easy connection and maintenance
access to all utilities, such as ventilation systems, plumbing and electric,
through a secure exterior access panel.
Each cell is load bearing to allow for multiple-story construction,
and is manufactured to tolerances of 1/16 of an inch, resulting in efficient and
faster on-site installation compared to traditional construction.
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Because the modular steel cells overall dimensions and weight are
less than traditional concrete cells, the project square footage requirements
can be reduced and the load bearing and foundation requirements (e.g. support
beams, footings and pilings) can be less extensive. These design modifications
can reduce construction time, labor costs and material costs for the project.
The insulated galvaneeled steel cell life cycle savings in energy cost
reductions and maintenance savings are dramatically superior to concrete
construction.
Bid Process, Subcontracting and Bonding Requirements
The substantial majority of Mark's revenues have been from state and
local government correctional projects. Consequently, Mark is 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 may bid directly to the owner, or provide bidding information for
incorporation into the general contractor. After receipt and review of all
accepted bids the governmental agency awards the contract based on a number of
factors including costs, reputation, completion estimates and subcontracting
arrangements. In those instances where Mark 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 30 to 60 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. See "Item 13. Certain Relationships and Related
Transactions". To date, Mark has not limited its bidding activity nor lost any
projects due to its limited bonding capacity. However, as Mark is awarded
multiple projects, the inability to obtain bonds may limit the number of
additional projects Mark can pursue and would have a material adverse effect on
operations.
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
modular cells, including sheet metal, hardware, and other components are
supplied primarily by regional manufacturers. In addition to the manufacture of
the shell of its modular cells, 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. In the event Mark
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determines that additional space is necessary, management believes that adequate
space will be available on acceptable economic terms.
Marketing and Sales
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's 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 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
Executive Vice President 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 sales network consists of twelve (12) outside sales
representatives that service all of the United States and foreign countries
including Canada 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.
Similar to its contract with The State of New York's prison industries
program, Mark has identified and is soliciting interest for the integration of
its modular cells into other comparable State programs, which provide job
training and rehabilitative opportunities for inmates.
Delivery and On-Site Services
Mark contracts with several third-party carriers to deliver its
modular cells to the project's construction site. In addition, Mark provides
delivery and support services for its products including installation, operating
instructions and subsequent inspections and testing.
Regulation
The 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, the modular cells are
subject to the guidelines and regulations of OSHA, NIOSH and Centers for Disease
Control and Prevention. Mark's modular cells comply with these codes and
regulations in all material respects.
State and Federal environmental laws regulate certain aspects of
Mark's manufacturing process. Mark has obtained all necessary licenses and
permits and is in compliance in all material respects with applicable
environmental laws.
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Competition
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 that incorporate modular cell
specifications in its design criteria, Mark competes with several other steel
product manufacturers who manufacture a comparable product, some of which have
greater financial resources than Mark. In addition, a number of manufacturers,
which have greater financial and marketing resources than Mark and which
currently produce sheet metal products, could ultimately manufacture modular
steel 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 construction advantages of its technology to the
architectural, engineering and construction industries. In this regard,
management emphasizes the potential for reduced construction time, labor costs
and material costs associated with the modular steel cell as well as the life
cycle cost savings. Mark also believes its modular cell design has advantages
over other manufacturers' steel cells, which give it a competitive advantage
when an architect selects the steel cell design specification.
Employees
As of September 30, 2000, Mark had two executive management
employees, two plant management employees, two sales employees, three
engineering employees and five office and clerical employees. Mark also employs
hourly employees in its manufacturing facilities who are subject to a three-year
collective bargaining agreement, which expires on August 31, 2001. Management
believes its employee relations to be good.
Copyrights, Patents and Trade Secrets
Mark does not 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. Since most correctional facility
projects are public bids, proprietary technology is not typically a competitive
advantage.
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Item 2. Property
Mark leases its executive offices at 1515 Broad Street, Bloomfield,
New Jersey 07003, which consists of 6,500 square feet of space. Mark's lease
expires on December 31, 2001 and provides for monthly rent of $8,667.
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 $174,000 through October 31, 2000. Annual rent for
the remaining years of the lease increase yearly from $215,045 for the year
beginning November 1, 2000 to $292,901 for the year beginning November 1, 2003,
subject to additional increases based on the consumer price index at that time.
MarkCare-UK leases 8,000 square feet pursuant to a 25-year lease
expiring June 30, 2024 at an annual rental cost of $147,000. MarkCare-UK
received six months free rent as an inducement to enter into the long-term
lease.
MarkCare-Korea leases approximately 1,200 square feet of office space
at an annul rental fee of $43,000.
Management believes its present manufacturing facilities and
additional available facilities are sufficient for Mark's current and
anticipated needs.
Item 3. 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. By
agreement dated September 8, 1999, Mark reached a settlement with Evergreen
whereby Mark paid to Evergreen the sum of $300,000 in installments of $50,000
due by December 31, 1999 and $250,000 by May 31, 2000. All payments were made in
a timely manner and this matter is resolved.
There are no other material legal proceedings pending.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information.
The following table sets forth for the calendar quarters indicated
the high and low bid prices of Mark's Common Stock, after giving effect to the
1-for-4 reverse split effected on June 15, 1999. The Common Stock trades on the
Nasdaq SmallCap Market under the symbol "MSOL".
Common Stock
--------------------------------------
High Low
---- ---
1998
1st Quarter 9 3/4 6 5/8
2nd Quarter 8 4
3rd Quarter 7 3/4 1 3/4
4th Quarter 3 5/8 2
1999
1st Quarter 6 2
2nd Quarter 5 5/8 2 7/16
3rd Quarter 5 5/8 1 3/4
4th Quarter 4 13/16 1 1/8
2000
1st Quarter 6 5/8 3 1/4
2nd Quarter 3 1/4 1 3/32
3rd Quarter 1 9/32 1/2
Over-the-counter quotations reflect inter-dealer prices without
retail mark-up, mark-down or commission and do not necessarily represent actual
transactions.
Mark's Common Stock has recently traded at prices below the NASDAQ
minimum requirement for continued listing on the NASDAQ SmallCap Market. Absent
an increase in trading prices to satisfy the minimum listing requirement, there
can be no assurances that Mark's Common Stock will continue to be listed on the
SmallCap market.
(b) Holders.
As of September 29, 2000, there were 185 holders of record of the
Common Stock. Mark estimates the number of beneficial holders of its Common
Stock to be in excess of 575. There are 16 market makers in the Common Stock.
(c) Dividends.
Mark has never paid and does not intend to pay in the foreseeable
future, cash dividends on its Common Stock.
(d) Sales of Unregistered Securities in Fiscal Year 2000.
The following sets forth information regarding private placements of
equity securities by Mark during the fiscal year ended June 30, 2000 which were
not included in previously filed Mark reports.
During the fiscal year 2000 Mark awarded Carl Coppola, President and
Chief Executive Officer options to purchase 109,300 shares of the Company's
Common Stock. See "Executive Compensation."
-15-
<PAGE>
Item 6. Selected Financial Data
The following Selected Financial Data are based upon financial
statements appearing elsewhere herein and such information should be read in
conjunction with such financial statements and notes thereto.
Income Statement Data:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
(in thousands, except share and per share data)
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 13,724 $ 10,226 $ 12,922 $ 6,450 $ 3,454
Costs and Expenses:
Cost of Sales 11,698 7,113 10,628 6,201 4,022
General and administrative 3,454 2,085 2,405 2,312 3,152
Software Costs 778 1,225 409 256 13
Marketing Costs 1,454 1,264 679 604 554
Amortization Expense 210 210 210 210 ---
Other Costs 537 798 582 609 ---
Reduction of carrying value of assets --- --- --- --- 777
----------- ----------- ----------- ----------- -----------
Total Costs and Expenses 18,131 12,695 14,913 10,192 8,518
Operating (Loss) (4,407) (2,469) (1,991) (3,742) (5,064)
Net Other (Expense) (154) (241) (397) (1,697) (47)
Income Tax Benefit 173 1,000 --- --- ---
----------- ----------- ----------- ----------- -----------
(Loss) From Continuing Operations (4,388) (1,710) (2,388) (5,439) (5,111)
(Loss) From Discontinued Operations --- --- --- --- (104)
----------- ----------- ----------- ----------- -----------
Net (Loss) $ (4,388) $ (1,710) $ (2,388) $ (5,439) $ (5,215)
=========== =========== =========== =========== ===========
(Loss) per Share $ (.72) $ (.36) $ (.58) $ (1.53) $ (1.64)
Weighted Average Shares Outstanding 6,112,534 4,945,257 4,145,101 3,555,402 3,183,006
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
(in thousands, except share and per share data)
--------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Working Capital (Deficit) $ 1,372 $ 1,032 $ 3,077 $ 923 $ 676
Net Property and Equipment 1,254 1,224 439 347 377
Total Assets 6,329 9,070 5,174 5,432 3,084
Current Liabilities 3,379 5,832 999 3,245 954
Other Liabilities 2,094 505 1,060 2,340 50
Temporary Stockholders' Equity --- --- 1,220 --- ---
Stockholders' Equity (Deficiency) 856 2,733 1,895 (153) 2,079
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General
Mark's results of operations, liquidity, and working capital position
have been historically impacted by sporadic sales of its principal products,
modular steel cells and IntraScan II PACS software.
Mark's modular steel cell is an alternative to traditional
construction methods, and penetration into the construction market has met
-16-
<PAGE>
resistance typically associated with an unfamiliar product. Accordingly, Mark
has been, and will continue to be, subject to sales fluctuations until its
modular cell technology obtains broader acceptance in the construction market.
Based on the increase in the number of projects being designed for steel cells,
management believes its cells are receiving greater market acceptance as a
viable alternative to concrete. Mark continues to promote it steel cells to the
architectural, engineering, and construction communities by making sales
presentations, participating in trade shows, conducting selected direct mail
campaigns and engaging in other marketing activities.
Mark has increased its cell marketing spending to more aggressively
pursue projects and persuade the construction industry to increase the use of
steel cells. Mark believes this investment has been successful to date and is
necessary to achieve profitability. 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. Mark currently has bids pending
on approximately $14,935,000 in modular cell projects. Mark also expects to bid
on approximately $78,450,000 in additional cell projects during the fiscal year
ended June 30, 2001, however there can be no assurances that Mark's current or
planned bids will be successful. 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.
For the year ended June 30, 2000, Mark was awarded $10,360,000 of the
$31,625,000 in correctional cell projects it bid on.
MarkCare markets the IntraScan II PACS software as part of
comprehensive PACS proposals made by MarkCare's strategic partners. See "Item 1.
Business - MarkCare Medical Systems Sales and Marketing, Strategic Partners".
MarkCare's principal marketing partner is Data General Corporation. In response
to increased interest from its strategic partners and prospective customers,
MarkCare accelerated its development and marketing efforts. Sales of the
IntraScan II PACS software began to generate material revenues in the fiscal
year ended June 30, 1999 and management expects these revenues to increase
during fiscal 2001 although no assurances can be given in this regard.
Management believes that MarkCare will be soliciting approximately $100 million
in new business over the next two fiscal years. If the IntraScan marketing plan
is successful, management believes that the revenues will be more constant then
those presently generated by modular steel cell sales, and will reduce
fluctuations in Mark's consolidated 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, 2000.
(in thousands)
Mark Correctional MarkCare
Systems Medical Total
---------------- ------------ --------
Revenues $ 11,670 $ 2,054 $ 13,724
Cost of Sales 9,728 1,970 11,698
Selling, general and administrative 2,841 3,382 6,223
Operating (loss) $ (794) $ (3,613) $ (4,407)
-17-
<PAGE>
Results of Operations
The substantial majority of Mark's operating revenues for the
reported periods were derived from the sale of its modular steel cells.
Management believes that the sale of cells will continue to represent a majority
of Mark's operating revenues through June 30, 2001.
The following table sets forth, for the periods indicated, the
percentages, which certain items bear to revenues and the percentage increases
(decreases) from period to period:
<TABLE>
<CAPTION>
Percentage of Revenues Percentage
Year Ended June 30, Increase/(Decrease)
--------------------------- ------------------------
2000 1999 1998 2000-1999 1999-1998
---- ---- ---- --------- --------
<S> <C> <C> <C> <C> <C>
Revenue 100.0 100.0 100.0 34.2 (20.9)
Cost of sales 85.2 69.6 84.9 64.5 (33.1)
Selling, general & administrative 35.8 54.6 30.5 65.6 23.2
Operating income (loss) (32.1) (24.2) (15.4) 78.5 19.4
Net other income (expenses) (1.1) 2.3 (3.1) (63.9) 152.3
(Loss) from continuing operations (33.2) (26.5) (18.5) 65.1 (28.4)
Net (loss) (32.0) (16.7) (18.5) 156.6 (28.4)
</TABLE>
Fiscal Year Ended June 30, 2000 Compared to
Fiscal Year Ended June 30, 1999
Revenues from sales for the fiscal year ended June 30, 2000,
increased 34.2% to $13,724 from $10,226 for the comparable prior period. This
increase is primarily attributable to more modular steel cell contracts in
fiscal 2000.
Cost of sales for the fiscal year ended June 30, 2000, consisting of
materials, labor and fixed factory overhead expense increased by 64.5% to
$11,698 from $7,113 for the comparable prior period. Cost of sales as a
percentage of revenues was 85.2% for the year ended June 30, 2000 as compared to
69.6% for the comparable prior period. A substantial increase in the cash
demands of MarkCare needed for its continued growth and development negatively
affected the Mark Correctional division and resulted in a loss of manufacturing
continuity causing increased costs of sales both in total dollars and as a
percentage of revenue.
Selling, general and administrative expenses for the fiscal year
ended June 30, 2000, increased 65.6% to $3,454 from $2,085 for the comparable
prior period. The increase in these expenses is attributable generally to the
overall increase in revenues and specifically to the increases in the marketing
of Mark's IntraScan II software.
Marketing, which includes commissions and advertising costs for the
fiscal year ended June 30, 2000, increased 15.0% to $1,454 from $1,264 for the
comparable prior period. This increase is due to the expanded sales efforts for
its two principal products, modular steel cells and IntraScan II PACS software.
Mark's operating loss for the fiscal year ended June 30, 2000
increased by 78.5% to $4,407 from $2,469 for the comparable prior period.
Included in the loss for fiscal 2000 were charges of $250 for items related the
settlement of a lawsuit and $30 for bad debt expense. Included in the loss for
fiscal 1999 were charges for items related to lawsuits and public relations of
$780. The overall increase is attributable primarily to increased operating and
marketing costs incurred in MarkCare.
-18-
<PAGE>
Fiscal Year Ended June 30, 1999 Compared to
Fiscal Year Ended June 30, 1998
Revenues from sales for the fiscal year ended June 30, 1999,
decreased 20.9% to $10,226 from $12,922 for the comparable prior period. This
decrease is primarily attributable to fewer cell contracts in fiscal 1999 and
deferred shipping and billing on a $7.3 million Puerto Rico project caused by
unexcused progress payment delays of the customer.
Cost of sales for the fiscal year ended June 30, 1999, consisting of
materials, labor and fixed factory overhead expense decreased by 33.1% to $7,113
from $10,628 for the comparable prior period. Cost of sales as a percentage of
revenues was 69.6% for the year ended June 30, 1999 as compared to 82.2% for the
comparable prior period. The reduction in cost of sales was caused by more
favorable margins on projects awarded and tighter manufacturing controls.
Selling, general and administrative expenses for the fiscal year
ended June 30, 1999, decreased 13.3% to $2,085 from $2,405 for the comparable
prior period. Stabilization and reduction of these expenses is attributable to
management's focus on cost controls.
Marketing costs for the fiscal year ended June 30, 1999, increased
86.2% to $1,264 from $679 for the comparable period. This increase in due to the
expanded efforts for its two products, modular steel cells and IntraScan II PACS
software. Mark has hired several additional sales personnel in its modular steel
business and is participating in more trade shows than it had in prior years.
Development costs for the fiscal year ended June 30, 1999 related to
IntraScan II, increased 200.0% to $1,225 from $409 for the comparable prior
period. This increase is due to management's decision to focus working capital
on IntraScan II and related items in response to increased interest from
distributors and potential customers.
Mark's operating loss for the fiscal year ended June 30, 1999
increased by 24.0% to $2,469 from $1,991 for the comparable prior period.
Included in the loss for fiscal 1999 were charges items related to lawsuit
settlements, consulting fees and other of $1,008. For the same periods, Mark's
net loss decreased by 28.4%.
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 depended on and, absent
continued improvements in operations, will depend on new capital in the form of
equity or debt financing to meet its working capital deficiencies, although no
assurances can be given that such financing will be available. Mark believes its
present available working capital from existing contracts, from anticipated
contracts, and if required investments from private sources, will be sufficient
to meet its operating requirements through June 30, 2001. If Mark does require
additional capital, it will continue to principally look to private sources.
Mark's inventories increased from $-0- at June 30, 1999 to $60 as of
June 30, 2000. Mark currently accounts for all materials as project costs as
-19-
<PAGE>
reflected by the recording of Costs and estimated earnings in Excess of
Billings. While Mark presently does not have any material commitments for
capital expenditures, management believes that its 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, 2000, Mark had negative cash flow
from operating activities of $1,040. In addition, Mark had negative cash flow
from investing activities of $459. Mark has no present intention of making any
acquisition, which would have a material negative or positive effect on cash
flow.
For the fiscal year ended June 30, 2000, financing activities
provided $2,737 in cash, principally from the private placement of its
securities.
Cash and cash equivalents increased from $298 at June 30, 1999 to
$1,536 at June 30, 2000 due to collections of outstanding receivables on
completed projects and from the proceeds of the issuance of convertible
debentures. Working capital increased to $1,372 at June 30, 2000 from $1,032 at
June 30, 1999 primarily due to the proceeds from the issuance of the convertible
debentures.
On July 1, 1999, Mark borrowed $200,000 payable on or before
September 1, 1999 at an annual interest rate of 10%. The loan agreement provided
that upon failure to repay, the loan would be converted into a Preferred Stock
which is convertible into shares of Common Stock at a rate of 70% of the average
closing bid price the five trading days immediately preceding the conversion
dates.
On April 14, 2000, Mark effected a $2,000,000 private placement
consisting of a two-year principal amount convertible note and warrants to
purchase 400,000 shares of common stock.
Other Matters
As of June 30, 2000, Mark has net operating loss carry-forwards of
approximately $23,569. Such carry-forwards begin to expire in the year 2018 if
not previously used. The $23,569 carry-forward is comprised of approximately
$21,869 which is available to offset taxable income in the tax year ending June
30, 2000. The remaining $1,700 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.
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.
-20-
<PAGE>
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 current plans and expectations of
Mark and involve risks and uncertainties that could cause actual future
activities and results of operations to be materially different from those set
forth in the forward-looking statements. Important factors that could cause
actual results to differ include whether cell and PACS projects are awarded to
Mark and the timing of their completion, meeting current and future financial
requirements, competition and changes in PACS related technology.
Year 2000 Disclosure
There were no material adverse effects to Mark's operations due to
Year 2000 software failures.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
Not Applicable.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements and Supplementary Data to be provided
pursuant to this Item are included under Item 14 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
-21-
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth the names and ages of the members of
Mark's Board of Directors and its executive officers.
Name Age Position
----------------------- ---- ----------
Carl Coppola (1) 61 Chairman of the Board,
President, Chief Executive Officer
Michael J. Rosenberg 55 Vice President - Marketing and Sales
Leonid Futerman 41 Vice President - MarkCare U.S.
Richard Branca 52 Director
Ronald E. Olszowy 53 Director
William Westerhoff (1) 62 Director
(1) Member of the Compensation Committee
All directors hold office until the next annual meeting of shareholders
of Mark 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 Coppola has been a Director, President and Chief Executive Officer of Mark
since 1984. For more than 30 years, Mr. Coppola has been Chief Executive Officer
of Mark Lighting Fixture Co., Inc., an unaffiliated entity.
Michael J. Rosenberg has been Vice President - Marketing and Sales for Mark
since 1990.
Leonid Futerman has been the Vice President of MarkCare - US since January 1994.
Richard Branca has been a Director of Mark since November 18, 1992. Since 1970
Mr. Branca has been President and Chief Executive Officer of Bergen Engineering
Co., a construction company.
Ronald E. Olszowy has been a Director of Mark since November 18, 1992. Since
1966, Mr. Olszowy has been President and Chief Executive Officer of Nationwide
Bail Bonds, which provides bail, performance and fidelity bonds. Mr. Olszowy has
also been President of Interstate Insurance Agency since 1980.
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.
In August 2000, three directors, Yitz Grossman, Michael Nafash and Jack
Silver resigned from the board for personal reasons. Mr. Grossman served as a
director of Mark from December 1997 until August 2000, Mr. Nafash served as a
director of Mark from December 1995 until August 2000, and Mr. Silver served as
a director from May 2000 until August 2000. Mark intends to fill these vacancies
subject to shareholder approval at the next shareholders' meeting.
-22-
<PAGE>
Directors Compensation
Each outside director receives a $1,000 fee and is reimbursed for
actual 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 the grant.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires Mark's directors, executive officers and 10% shareholders to file with
the Securities and Exchange Commission reports of ownership and changes in
ownership of Mark's equity securities including its Common Stock. Such persons
are also required to furnish Mark with such reports.
To Mark's knowledge during the fiscal year ended June 30, 2000, all
Section 16(a) filing requirements were satisfied except that Mr. Branca filed in
September 2000 a Form 4 related to the issuance in March 2000 of five-year
warrants to purchase 24,466 shares of common stock.
Item 11. Executive Compensation.
The following table sets forth the amount of all compensation paid to
each of Mark's named executive officers whose compensation exceeded $100,000,
including its Chief Executive Officer, for Mark's last three fiscal years.
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards/Payouts
------------------------------------ -----------------------------------
Name and Principal Other Annual Restricted Options/ LTIP All other
Position Year Salary ($) Bonus ($) Compensation Stock Awards $ SARS # Payouts compensation
-------------------- --------- ---------- ----------- ------------ -------------- --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carl Coppola, 2000 $199,992 --- --- --- 109,300 --- ---
President & CEO 1999 200,000 --- --- --- --- --- ---
1998 200,000 --- --- --- 50,000 --- ---
-------------------- ----- -------- ------ ----- ----- -------- ----- ------
Michael Rosenberg, 2000 $161,154 --- --- --- --- --- ---
Vice President 1999 122,892 --- --- --- 37,500 --- ---
1998 88,055 --- --- --- --- --- ---
-------------------- ----- -------- ------ ----- ----- -------- ----- ------
Leonid Futerman, 2000 $188,944 --- --- --- --- --- ---
Vice President 1999 160,052 --- --- --- 62,500 --- ---
1998 97,137 --- --- --- --- --- ---
-------------------- ----- -------- ------ ----- ----- -------- -------- ------
</TABLE>
-23-
<PAGE>
Options / SAR Grants in Fiscal Year 2000
The following table sets forth individual grants of stock options to
the named executive officers in the Summary Compensation Table for the fiscal
year ended June 30, 2000.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
% of Total Options price Appreciation
Options Granted to Exercise for Option Term (1)
Granted Employees in Price Expiration ----------------------
Name (#)(2) Fiscal Year ($/Sh) Date 5% 10%
----------- -------- ------------------ --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Carl Coppola 109,300 40.0% $1.28125 10/19/2002 $22,074 $46,353
</TABLE>
(1) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately prior
to the expiration of their term, assuming the specified compounded rates of
appreciation on the Common Stock over the term of the options. These
numbers do not take into account provisions of certain options providing
for termination of the option following termination of employment,
non-transferability or differences in vesting periods.
(2) The option exercise price is $1.28125 per share which was the closing sales
price on date of the option grants.
2000 Fiscal Year End Option Values
The following table sets forth the value of options granted to the
named officers in the Summary Compensation Table for the fiscal year ended June
30, 2000.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal year (#) At Fiscal Year End ($)
Name Exercisable / Unexercisable Exercisable / Unexercisable
------------- --------------------------- ---------------------------
<S> <C> <C>
Carl Coppola 109,300/-0- -0-/-0-
</TABLE>
(1) Based upon a closing sales price of $0.50 per share of Common Stock on
September 29, 2000
Employment Agreements
Pursuant to a three-year employment agreement expiring on June 30,
2000, that has been extended by action of the Board of Directors to December 31,
2000, Mr. Coppola receives an annual base salary of $200,000 and was granted
three-year options to purchase 62,500 shares of Common Stock at an exercise
price of $4.50, 62,500 shares of Common Stock at an exercise price of $8.00 and
62,500 shares at an exercise price of $11.00. 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 termination.
Pursuant to a three-year employment agreement expiring on December 1,
2001, Mr. Rosenberg receives an annual base salary of $125,000 with salary
increases of $25,000 per year on August 1, 1999 and 2000 and was granted
three-year options to purchase 37,500 shares of Common Stock at an exercise
price of $4.00. Effective October 1, 1999 Mr. Rosenberg's employment agreement
was amended to grant him an additional $25,000 increase. In addition, Mark
provides Mr. Rosenberg with an automobile and maintenance and use reimbursement.
Mr. Rosenberg's employment is terminable by Mark upon written notice and
provides for a one-year non-compete period to take effect upon termination.
Pursuant to a three-year employment agreement expiring on December 1,
2001, Mr. Futerman receives an annual base salary of $150,000 with salary
increases of $25,000 per year on August 1, 1999 and 2000 and was granted
-24-
<PAGE>
three-year options to purchase 62,500 shares of Common Stock at an exercise
price of $4.00. In addition, Mark provides Mr. Futerman with an automobile and
maintenance and use reimbursement. Mr. Futerman's employment is terminable by
the Mark upon written notice and provides for a one-year non-compete period to
take effect upon termination.
Stock Option Plan
Under Mark's 1993 Stock Option Plan (the "Option Plan"), options to
purchase up to 250,000 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. Mark has currently granted all options provided under the Option
Plan. During the fiscal year ended June 30, 2000, Mark granted 147,600
non-qualified options to eight employees at an exercise price of $1.28125.
401(k) Plan
Under its 401(k) retirement plan, Mark makes matching contributions
in shares of Common Stock equal to each employee's cash contribution up to five
percent of the employee's annual salary. The number of shares of Common Stock is
calculated by dividing the amount of the matching contribution by the average
per share closing price for the year.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information with respect to
each beneficial owner of 5% or more of the Common Stock, each Director of Mark,
each Executive Officer of Mark who is named in the Summary Compensation Table
and all Executive officers and Directors as a group as of September 29, 2000.
The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock owned by them, unless otherwise noted.
Number of % of Shares
Beneficial Owner Shares Owned Outstanding
---------------- ----------------- ------------
Carl C. Coppola 722,092 (1) 9.1%
c/o Mark Solutions, Inc.
1515 Broad Street
Bloomfield NJ 07003
William Westerhoff 49,300 (2) (5)
Richard Branca 90,016 (3) 1.2%
Michael Rosenberg 95,975 (4) 1.2%
Ronald E. Olszowy 61,800 (2) (5)
Leonid Futerman 99,750 (6) 1.3%
------------- ------
All executive officer and directors
as a group (7 persons) 1,118,933(7) 13.6%
(1) Includes 15,800 shares held in trust for the benefit of three children of
Mr. Coppola. Mr. Coppola disclaims beneficial ownership of these shares.
Also includes 221,800 shares of Common Stock issuable pursuant to options
that are presently exercisable.
(2) Represents or includes 49,300 shares of Common Stock issuable pursuant to
options which are presently exercisable.
(3) Includes 73,766 shares of Common Stock issuable pursuant to options that
are presently exercisable.
(4) Includes 66,250 shares of Common stock issuable pursuant to options which
are presently exercisable.
-25-
<PAGE>
(5) Less than 1%
(6) Includes 97,500 shares of Common stock issuable pursuant to options which
are presently exercisable.
(7) Includes 560,166 shares of Common Stock issuable pursuant to warrants or
options that are presently exercisable.
Item 13. Certain Relationships and Related Transactions.
Mark purchases lighting fixtures, fabricating services and other
related services from Mark Lighting Fixtures 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, 2000, Mark paid Mark Lighting $358,000
for such goods and services.
In connection with all modular steel cell projects that require
performance bonds, Mr. Coppola provides third party guarantees.
In June 1999, three officers of Mark made loans to Mark totaling
$350,000. The loans were payable by September 1, 1999 with an interest rate of
10% per annum. These loans were repaid on September 1, 1999.
In October 1999, two officers of Mark made loans to Mark totaling
$300,000. In December 1999, $200,000 plus accrued interest at 10% was paid to
the officers, completely satisfying one debt. The remaining $100,000 is due to
Mr. Coppola and accrues interest at the rate of 10%.
In November 1999, MarkCare entered into a twelve-month management
consulting agreement with Sherleigh Associates LLC, a company affiliated with
Jack Silver. As part of the agreement, MarkCare agreed to pay to Sherleigh a
monthly fee of $1,000. In addition, Mark agreed to sell to Sherleigh a number of
shares equivalent to 5% of all the issued and outstanding capital stock of
MarkCare in exchange for $60,000. As part of the agreement, Sherleigh was
granted the right to designate one member of the Board of Directors of Mark
Solutions, Inc. and one member of the Board of Directors of MarkCare. This right
was exercised in May 2000, naming Mr. Jack Silver to the respective boards. Mr.
Silver subsequently resigned from such boards of directors in August 2000.
In March 3, 2000, a director of Mark, Richard Branca made a loan of
$125,000 to Mark. This loan accrued interest at the rate of 10% and was repaid
in full on July 12, 2000. In connection with this loan, Mr. Branca was also
issued five-year warrants to purchase 24,466 shares of common stock of Mark at
an exercise price of $1.25 per share.
In August 2000, Mark entered into an agreement with Sherleigh
Associates LLC, a company affiliated with Jack Silver, who had resigned as a
director of Mark, whereby Sherleigh would introduce prospective investors,
lenders or purchasers to Mark in an effort to facilitate a sale of or and
investment in Mark. In the event of a sale transaction, Sherleigh will be due a
cash fee totaling 5% of the transaction value. In the event of an investment,
Sherleigh will be due a cash fee equal to 10% of the investment and an amount of
common stock purchase warrants equal to 10% of common shares issued to, or
derived from options or warrants issued to such investor.
See "Item ii. Executive Compensation - Employment Agreements - for a
description of stock options granted to Michael Rosenberg and Leonid Futerman.
Management believes that each of the foregoing transactions are on terms
no less favorable to Mark than could be obtained from unaffiliated third
parties.
-26-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a)(1) Consolidated Financial Statements
- Reports of Independent Accountants F-1
- Consolidated Balance Sheets for
June 30, 2000 and 1999 F-2
- Consolidated Statements of Operations
for fiscal years ended June 30, 2000,
1999 and 1998 F-4
- Consolidated Statements of Stockholders
Equity for fiscal years ended June 30,
2000, 1999 and 1998 F-5
- Consolidated Statement of Cash Flows
for fiscal years ended June 30,
2000, 1999 and 1998 F-6
- Notes to Consolidated Financial Statements F-7
- Chantrey Vellacott Report F-21
(3) Exhibits.
Exhibit
Number Description
---------- ------------
3. a)-- Amended and Restated Certificate of
Incorporation(Incorporated by reference
to Exhibit 3(i)1 to Mark's Form 10-Q
for the period ended December 31, 1998)
b)-- By-laws (Incorporated by reference to Exhibit 3
b) to Mark's Form 10-K for the fiscal year ended
June 30, 1998)
4. a)-- Specimen Stock Certificate (Incorporated by
reference to Exhibit 4 a) to Mark's Form 10-K
for the fiscal year ended June 30, 1998)
-27-
<PAGE>
10. Material Contracts
a)-- Employment Agreement between Mark
and Carl Coppola (Incorporated by
reference to Exhibit 10 a) to Mark's
Form 10-K for the fiscal year ended
June 30, 1997)
b)-- Employment Agreement between Mark
and Michael Rosenberg
c)-- Employment Agreement between Mark
and Leonid Futerman
d)-- Incentive Stock Option Plan incorporated by
reference to Exhibit 10(b) to Mark's Form
10-k for the year ended June 30, 1998
e)-- Agreement between New York State and Mark dated July 17,
1996. (Incorporated by reference to Exhibit 10 d) to Mark's
Form 10-K for the fiscal year ended June 30, 1996)
f)-- Agreement between Data General Corporation and Mark dated
March 18, 1996 as amended on January 20, 1997. (Incorporated
by reference to Exhibit 10 e) to Mark's Form 10-K
for the fiscal year ended June 30, 1996)
21. Subsidiaries of Mark (Incorporated by reference to Exhibit 21 to
Mark's Form 10-K for the fiscal year ended June 30, 1998.)
24. Power of Attorney (included on page )
27. Financial Data Schedule
(b) Reports on Form 8-K.
The following reports on Form 8-K have been filed by Mark during the
quarter ended June 30, 2000:
Date of Report Items Reported, Financial Statements Filed
-------------- ------------------------------------------
April 17, 2000 Item 5. Other Events
-28-
<PAGE>
POWER OF ATTORNEY
Mark Solutions, Inc., and each of the undersigned do hereby appoint Carl
Coppola, its or his true and lawful attorney to execute on behalf of Mark
Solutions, Inc. and the undersigned any and all amendments to this Report and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MARK SOLUTIONS, INC.
October 12, 2000 By: /s/ Carl Coppola
---------------------------------------
(Carl Coppola, Chief Executive
Officer and President)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the persons on behalf of the Registrant and in
the capacities and on the date indicated:
Signature Title Date
--------- ----- ----
/s/ Carl Coppola Chief Executive Officer October 12, 2000
--------------------------- President and Director
(Carl Coppola) (Principal Executive
Officer)
/s/ Richard Branca Director October 12, 2000
--------------------------
(Richard Branca)
/s/ Ronald Olszowy Director October 12, 2000
--------------------------
(Ronald E. Olszowy)
/s/ William Westerhoff Director October 12, 2000
--------------------------
(William Westerhoff)
-29-
<PAGE>
Board of Directors and Shareholders
Mark Solutions, Inc. and Subsidiaries
Bloomfield, New Jersey
We have audited the consolidated balance sheets of Mark Solutions, Inc. and
Subsidiaries as of June 30, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity (deficiency), and cash flows for
the three years ended June 30, 2000. 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 $485 and $155
as of June 30, 2000 and 1999, respectively, and a net loss of $2,617, $1,375 and
$1,301 for the years ended June 30, 2000, 1999, and 1998, respectively. 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 misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the 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, based on our audits 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, 2000 and 1999, and the results of its operations and
cash flows for the three years ended June 30, 2000, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
August 31, 2000
F-1
<PAGE>
MARK SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
June 30,
---------------
2000 1999
------ ------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
(including restricted cash of $191) $1,536 $ 298
Marketable securities 406 --
Note receivable 225 250
Accounts receivable, less allowance for doubtful
accounts of $53 in 2000 and 1999 1,868 4,744
Costs and estimated earnings in excess of
billings on uncompleted contracts -- 1,007
Inventories 60 --
Deferred tax asset 572 500
Prepaid expenses 84 65
------ ------
Total current assets 4,751 6,864
------ ------
PROPERTY AND EQUIPMENT:
Machinery and equipment 1,818 1,550
Demonstration equipment 227 395
Office furniture and equipment 1,006 960
Leasehold improvements 664 424
Vehicles 17 62
Property held under capital lease 393 285
------ ------
4,125 3,676
Less accumulated depreciation and amortization 2,871 2,452
------ ------
Net property and equipment 1,254 1,224
------ ------
OTHER ASSETS:
Costs in excess of net assets of business acquired,
less accumulated amortization of $857 in 2000
and $647 in 1999 193 402
Deferred tax asset -- 500
Other assets 131 80
------ ------
Total other assets 324 982
------ ------
$6,329 $9,070
====== ======
See notes to consolidated financial statements
F-2
<PAGE>
MARK SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Cont'd)
(in thousands, except share and per share data)
June 30,
------------------
2000 1999
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,061 $ 3,617
Short term borrowing 250 --
Current maturities of long-term debt 402 365
Current portion of obligations under capital leases 125 87
Deferred revenue 159 656
Due to related parties -- 178
Notes payable to officers/stockholders 100 375
Accrued liabilities 282 254
Litigation settlement payable -- 300
-------- --------
Total current liabilities 3,379 5,832
-------- --------
OTHER LIABILITIES:
Long-term debt, excluding current maturities 2,000 370
Long-term portion of obligations under capital leases 94 135
-------- --------
2,094 505
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares
authorized, 7,142,373 and 5,525,296 shares issued and
outstanding at June 30, 2000 and 1999, respectively 71 55
Preferred stock, $1.00 par value, $10 liquidation value;
5,000,000 shares authorized:
Series A; authorized and issued 122,000 shares;
24,000 outstanding at June 30, 1999 -- 24
Series B; authorized and issued 153,000 shares;
6,000 outstanding at June 30, 1999 -- 6
Series D; authorized and issued 20,000 shares;
20,000 issued at June 30, 2000 20 --
Additional paid-in capital 36,671 34,433
Deficit (36,305) (31,917)
Accumulated other comprehensive income 450 183
Treasury stock, at cost; 17,500 shares (51) (51)
-------- --------
856 2,733
-------- --------
$ 6,329 $ 9,070
======== ========
See notes to consolidated financial statements
F-3
<PAGE>
MARK SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Years Ended
June 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES $ 13,724 $ 10,226 $ 12,922
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 11,698 7,113 10,628
General and administrative expenses 3,454 2,085 2,405
Marketing costs 1,454 1,264 679
Software costs 778 1,225 409
Amortization expense 210 210 210
Litigation settlement 250 396 --
Contract termination settlement -- -- 115
Consulting fees 257 402 175
Bad debt expense 30 -- 292
----------- ----------- -----------
18,131 12,695 14,913
----------- ----------- -----------
OPERATING LOSS (4,407) (2,469) (1,991)
----------- ----------- -----------
OTHER INCOME (EXPENSES):
Interest income 89 45 13
Interest expense 284 (286) (250)
Imputed interest expense on
convertible debentures (86) -- (160)
Other 127 -- --
----------- ----------- -----------
(154) (241) (397)
----------- ----------- -----------
LOSS BEFORE INCOME TAX BENEFIT (4,561) (2,710) (2,388)
INCOME TAX BENEFIT 173 1,000 --
----------- ----------- -----------
NET LOSS $ (4,388) $ (1,710) $ (2,388)
=========== =========== ===========
BASIC LOSS PER SHARE $ (.72) $ (.36) $ (.58)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 6,112,534 4,945,257 4,145,101
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
MARK SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Common Stock Preferred Series A
------------------------ ------------------------
Total Shares Amount Shares Amount
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1997 $ (153) 3,694,771 $ 37 -- --
Net loss/comprehensive loss (2,388) -- -- -- --
Conversion of convertible debentures 2,200 650,625 7 -- --
Deferred inputed interest on convertible debentures 321 -- -- -- --
Stock issued in lieu of interest 192 11,155 -- -- --
Stock issued for services 114 16,116 -- -- --
Warrants issued for services 92 -- -- -- --
Conversion of warrants 1,516 145,000 -- -- --
Commissions and related fees (187) -- 1 -- --
Issuance of stock through private placement 12 305,000 3 -- --
Issuance of warrants through private placement 176 -- -- -- --
Miscellaneous adjustment -- 1,500 -- -- --
---------- ---------- ---------- ---------- ----------
Balance, June 30, 1998 1,895 4,824,167 48 -- --
---------- ---------- ---------- ---------- ----------
Comprehensive (loss):
Net loss (1,710) -- -- -- --
Translation adjustments 183 -- -- -- --
---------- ---------- ---------- ---------- ----------
Comprehensive loss (1,527) -- -- -- --
Purchase of treasury stock (51) -- -- -- --
Conversion of temporary equity and convertible
debentures to preferred stock, net of expenses
and reclassifications 1,947 (305,000) (3) 122,000 122
Preferred stock conversion to common stock -- 869,012 8 (98,000) (98)
Conversion of convertible debentures 100 31,250 1 -- --
Amortization of financing fees 47 -- -- -- --
Stock issued for services 345 105,867 1 -- --
Imputed dividend on convertible preferred stock -- -- -- -- --
Other (23) -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance, June 30, 1999 2,733 5,525,296 55 24,000 24
Comprehensive (loss):
Net loss (4,388) -- -- -- --
Translation adjustments 267 -- -- -- --
---------- ---------- ---------- ---------- ----------
Comprehensive loss (4,121) -- -- -- --
---------- ---------- ---------- ---------- ----------
Cash investment in subsidiary 60 -- -- -- --
Preferred stock conversion to common stock 11 222,278 2 (24,000) (24)
Conversion of convertible debenture 200 -- -- -- --
Issuance of common stock adjustment provision -- 493,000 5 -- --
Issuance of stock through private placement 200 100,000 1 -- --
Imputed interest on convertible debenture 86 -- -- -- --
Stock for debt conversion 581 291,800 3 -- --
Warrants issued for services 85 -- -- -- --
Employee stock option exercise 131 59,500 1 -- --
Warrant exercise 904 450,499 4 -- --
Commissions and related fees (14) -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance, June 30, 2000 $ 856 7,142,373 $ 71 -- $ --
========== ========== ========== ========== ==========
<CAPTION>
Preferred Series B Preferred Series C
------------------------ ----------------------- Paid in
Shares Amount Shares Amount Capital
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1997 $ -- -- -- -- $ 27,566
Net loss/comprehensive loss -- -- -- -- --
Conversion of convertible debentures -- -- -- -- 2,193
Deferred inputed interest on convertible debentures -- -- -- -- 321
Stock issued in lieu of interest -- -- -- -- 192
Stock issued for services -- -- -- -- 114
Warrants issued for services -- -- -- -- 92
Conversion of warrants -- -- -- -- 1,516
Commissions and related fees -- -- -- -- (188)
Issuance of stock through private placement -- -- -- -- 9
Issuance of warrants through private placement -- -- -- -- 176
Miscellaneous adjustment -- -- -- -- --
----------- ---------- ---------- ---------- ----------
Balance, June 30, 1998 -- -- -- -- 31,991
----------- ---------- ---------- ---------- ----------
Comprehensive (loss):
Net loss -- -- -- -- --
Translation adjustments -- -- -- -- --
----------- ---------- ---------- ---------- ----------
Comprehensive loss -- -- -- -- --
Purchase of treasury stock -- -- -- -- --
Conversion of temporary equity and convertible
debentures to preferred stock, net of expenses
and reclassifications 153,000 153 -- -- 1,675
Preferred stock conversion to common stock (147,000) (147) -- -- 237
Conversion of convertible debentures -- -- -- -- 99
Amortization of financing fees -- -- -- -- 47
Stock issued for services -- -- -- -- 344
Imputed dividend on convertible preferred stock -- -- -- -- 63
Other -- -- -- -- (23)
----------- ---------- ---------- ---------- ----------
Balance, June 30, 1999 6,000 6 -- -- 34,433
Comprehensive (loss):
Net loss -- -- -- -- --
Translation adjustments -- -- -- -- --
----------- ---------- ---------- ---------- ----------
Comprehensive loss -- -- -- -- --
----------- ---------- ---------- ---------- ----------
Cash investment in subsidiary -- -- -- -- 60
Preferred stock conversion to common stock (6,000) (6) -- -- 39
Conversion of convertible debenture -- -- 20,000 20 180
Issuance of common stock adjustment provision -- -- -- -- (5)
Issuance of stock through private placement -- -- -- -- 199
Imputed interest on convertible debenture -- -- -- -- 86
Stock for debt conversion -- -- -- -- 578
Warrants issued for services -- -- -- -- 85
Employee stock option exercise -- -- -- -- 130
Warrant exercise -- -- -- -- 900
Commissions and related fees -- -- -- -- (14)
----------- ---------- ---------- ---------- ----------
Balance, June 30, 2000 $ -- $ -- 20,000 $ 20 $ 36,671
=========== ========== ========== ========== ==========
<CAPTION
Other Treasury Stock
Comprehensive -----------------------
Deficit Income Shares Amount
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, July 1, 1997 $ (27,756) -- -- --
Net loss/comprehensive loss (2,388) -- -- --
Conversion of convertible debentures -- -- -- --
Deferred inputed interest on convertible debentures -- -- -- --
Stock issued in lieu of interest -- -- -- --
Stock issued for services -- -- -- --
Warrants issued for services -- -- -- --
Conversion of warrants -- -- -- --
Commissions and related fees -- -- -- --
Issuance of stock through private placement -- -- -- --
Issuance of warrants through private placement -- -- -- --
Miscellaneous adjustment -- -- -- --
---------- ---------- ---------- ----------
Balance, June 30, 1998 (30,144) -- -- --
---------- ---------- ---------- ----------
Comprehensive (loss):
Net loss (1,710) -- -- --
Translation adjustments -- 183 -- --
---------- ---------- ---------- ----------
Comprehensive loss (1,710) 183 -- --
Purchase of treasury stock -- -- 17,500 (51)
Conversion of temporary equity and convertible
debentures to preferred stock, net of expenses
and reclassifications -- -- -- --
Preferred stock conversion to common stock -- -- --
Conversion of convertible debentures -- -- -- --
Amortization of financing fees -- -- -- --
Stock issued for services -- -- -- --
Imputed dividend on convertible preferred stock (63) -- -- --
Other -- -- -- --
---------- ---------- ---------- ----------
Balance, June 30, 1999 (31,917) 183 17,500 (51)
Comprehensive (loss):
Net loss (4,388) -- -- --
Translation adjustments -- 267 -- --
---------- ---------- ---------- ----------
Comprehensive loss (4,388) 267 -- --
---------- ---------- ---------- ----------
Cash investment in subsidiary -- -- -- --
Preferred stock conversion to common stock -- -- -- --
Conversion of convertible debenture -- -- -- --
Issuance of common stock adjustment provision -- -- -- --
Issuance of stock through private placement -- -- -- --
Imputed interest on convertible debenture -- -- -- --
Stock for debt conversion -- -- -- --
Warrants issued for services -- -- -- --
Employee stock option exercise -- -- -- --
Warrant exercise -- -- -- --
Commissions and related fees -- -- -- --
---------- ---------- ---------- ----------
Balance, June 30, 2000 $ (36,305) $ 450 17,500 $ (51)
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
MARK SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands, except share and per shared data)
<TABLE>
<CAPTION>
Years Ended
June 30,
-----------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,388) $(1,710) $(2,388)
------- ------- -------
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 655 523 360
Amortization of debt issue costs -- 110 --
Securities issued for services 171 345 207
Stock issued for interest expense -- -- 193
Deferred taxes (173) (1,000) --
Gain on disposition of equipment (4) -- --
(Increase) decrease in assets:
Restricted cash -- 1,234 (1,234)
Accounts receivable 3,009 (3,937) 2,555
Costs and estimated earnings in excess
of billings on contract in progress 1,007 (1,007) --
Deferred taxes 601 -- --
Inventories (60) 112 224
Other current assets (19) 2 22
Due from officer -- 102 (102)
Other assets (51) (33) 48
Increase (decrease) in liabilities:
Accounts payable (841) 2,901 (923)
Due to related parties (178) 163 (282)
Accrued liabilities 28 114 (118)
Litigation settlement payable (300) 300 --
Deferred revenue (497) 656 --
------- ------- -------
Net adjustments to reconcile net loss to
net cash used for operating activities 3,348 585 950
------- ------- -------
Net cash used for operating activities (1,040) (1,125) (1,438)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (98) (877) (216)
Proceeds from the sale of equipment 20 -- --
Note receivable 25 (250) --
Marketable securities (406) -- --
------- ------- -------
Net cash used for investing activities (459) (1,127) (216)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,000 379 1,033
Repayments of long-term debt (224) (31) (457)
Proceeds from short-term borrowings 450 1,050 1,080
Repayment of short-term borrowings (109) (675) (1,515)
Repayment of notes payable for equipment and vehicles (397) (50) (11)
Advances from officer 530 375 --
Repayment of advances from officer (805) -- (160)
Repayment of offering costs and commissions -- (243) (46)
Proceeds from issuance of securities 1,292 -- 1,872
Collection of subscription receivable -- 1,231 --
Purchase of treasury stock -- (51) --
------- ------- -------
Net cash provided by financing activities 2,737 1,985 1,796
------- ------- -------
Net increase (decrease) in cash and cash equivalents 1,238 (267) 142
Cash and cash equivalents at beginning of year 298 565 423
------- ------- -------
Cash and cash equivalents at end of year $ 1,536 $ 298 $ 565
======= ======= =======
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
MARK SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 2000
(in thousands, except share and per share data)
1. Management Plans and Description of Business:
Mark Solutions, Inc.'s (the "Company") ("Mark") financial statements
for the year ended June 30, 2000 have been prepared on a going concern basis
which contemplates the realization of assets and the settlement of liabilities
in the normal course of business. The Company incurred net losses of
approximately $4,388, $1,710, and $2,388 in the years ended June 30, 2000, 1999,
and 1998, respectively, and its stockholders' equity at June 30, 2000
approximated $856. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
The Company is actively pursuing additional equity funding. Further, it
is continuing to market its InterScan II Pacs Software worldwide, and is taking
measures to reduce recurring costs. The financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern.
The Company's 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, the
entity which developed the IntraScan II PACS software, to more effectively
control development and marketing strategy. In addition, the Company has entered
into a software supplier agreement with Data General Corporation/EMC
Corporation, a large computer hardware and integration provider, pursuant to
which Data General/EMC will include the IntraScan II PACS software program in
proposals to health care institutions. Management believes that these actions
have improved the effectiveness of its marketing plan and enabled the Company to
generate material revenues from the IntraScan II PACS system in fiscal 2000.
Mark received its first purchase order for its IntraScan II PACS software on
August 10, 1999 from Data General.
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 designs, manufactures, and installs modular steel cells for
correctional institution construction and develops software
applications under the name IntraScan for medical diagnostic picture,
archiving and communication computer systems (PACS).
b. Basis of consolidation - The consolidated financial statements include
the accounts of Mark and its majority owned Subsidiaries. The accounts
of MarkCare include its wholly owned subsidiaries, MarkCare Medical
(LTD) and MarkCare Medical Systems Korea Limited (Korea). Prior to
consolidation, the financial statements of non-U.S. subsidiaries are
reconciled to U.S. Generally Accepted Accounting Principles.
F-7
<PAGE>
2. Summary of Significant Accounting Policies: (Cont'd)
c. Revenue recognition - Revenues for the modular steel products segment
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. 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.
Product revenue related to software sales is recorded at the time of
shipment provided that no significant vendor and post contract support
obligations remain outstanding and collection of the resulting
receivable is deemed probable of collection by management.
Maintenance and support service agreements are recognized on a
straight-line basis over the life of the service agreement, generally
twelve months, and are reflected in deferred revenue in the
accompanying balance sheets.
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. 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
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 ($1,049) 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.
F-8
<PAGE>
2. Summary of Significant Accounting Policies: (Cont'd)
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
liabilities. Deferred taxes are also recognized for operating losses
that are available to offset future taxable income.
i. Loss per common share - Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("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.
Basic and diluted loss per share amounts were equivalent for the years
ended June 30, 2000, 1999 and 1998.
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. Software costs - Software costs, consisting of salaries and materials,
are charged to the specific contract or program to which they relate.
Those that do not relate to a specific contract are expensed as
incurred.
m. Reclassifications - Certain prior year amounts have been reclassified
to conform with the current year presentation.
n. Comprehensive income - Other comprehensive income refers to revenues,
expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income but are excluded from
net income as these amounts are recorded directly as an adjustment to
stockholders' equity. The Company's other comprehensive income is
comprised of foreign currency translation adjustments. The tax benefit
or expense, as well as any reclassifications related to the components
of other comprehensive income were not significant. Comprehensive loss
was equivalent to net loss for the years ended June 30, 1998.
o. Foreign currencies - Assets and liabilities recorded in foreign
currencies on the books of the foreign subsidiary are translated at the
exchange rate on the balance sheet date. Translation adjustments
resulting from this process are charged or credited to equity.
Revenues, costs and expenses are translated at average rates of
exchange prevailing during the year.
p. Reclassifications - Certain reclassifications have been made to the
prior years financial statements to conform with the classifications
used in 2000.
F-9
<PAGE>
3. Inventories:
Inventories at June 30, 2000 consists of raw materials to be used in
the construction of jail cells.
4. Litigation Settlement Payable:
On August 25, 1999, the Company agreed to settle an ongoing lawsuit
related to a modular cell project in Hawaii. The Company agreed to pay its
customer $50 prior to December 31, 1999 and an additional $250 by May 31, 2000
to satisfy all claims against the Company. The accompanying financial statements
at June 30, 1999 include a charge to operations for the $300 settlement and
related legal fees approximating $96.
5. Related Party Transactions:
The Company purchased materials and is reimbursed for various expenses
from Mark Lighting Fixtures 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:
Years Ended
June 30,
---------------------
2000 1999 1998
----- ----- -----
Purchases $ 358 $ 181 $ 421
Expense reimbursement -- -- 58
Consulting services -- 33 1
Bonding fees -- -- (5)
As a result of current and prior years' transactions, the Company has
net balances due to the following related parties, which will be settled in the
ordinary course of business:
Years Ended
June 30,
--------------
2000 1999
---- ----
Mark Lighting Fixture Co., Inc. $-- $172
Metalite, Inc. -- 6
Carl Coppola 100 100
Other officers/shareholders -- 275
---- ----
Due to related parties $100 $553
==== ====
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 25,000 shares of Common Stock at between
$11.50 and $13.50 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 to purchase 25,000 shares of Common Stock at $4.50 per share, the
closing price on the date of the grant.
F-10
<PAGE>
6. Long-Term Debt:
a. Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30,
---------------
2000 1999
------ ------
<S> <C> <C>
Convertible notes payable, with interest accruing at a rate of 7% per
annum, principal and interest will be due and payable in April
2002; the note is immediately convertible into shares of Common
Stock in whole or in part in minimum increments of $25,000 of
principal $2,000 $ --
Note payable, bearing interest at prime plus 2%,
monthly installments of $16 plus interest
through December 1, 2000; balloon payment
of $234 due in December 2000 266 375
Note payable, payable in monthly installments
of $14, including interest, through April 2001
collateralized by equipment 136 287
Note payable, payable in monthly installments
of $6, including interest, through June 2000
collateralized by software -- 69
Other -- 4
------ ------
Total long-term debt 2,402 735
Less current portion 402 365
------ ------
Long-term debt, excluding current portion $2,000 $ 370
====== ======
Maturities of total long-term debt are as follow:
Years Ending
June 30,
------------
2001 $ 402
2002 2,000
</TABLE>
b. Convertible securities
On January 21, 1997, the Company sold $750 principal amount 7%
convertible debentures due January 1999. Those debentures were convertible into
shares of common stock at a conversion price which is the lesser of (i) $8.50
per share or (ii) 80% of the average closing bid price on the five trading days
immediately preceding the date(s) of conversion. On May 1, 1998 these debentures
were converted into 187,500 shares of common stock. Based on certain adjustment
provisions related to the trading value of the stock, the Company issued 493,000
shares of common stock to the holder in 2000.
On June 2, 1997, the Company sold $1,250 principal amount 7%
convertible debentures due June 2, 1999. The debentures were immediately
converted into shares of common stock at a conversion price of $0.80 per share.
During 1998, the Company issued 11,155 shares of common stock (valued
at $192) in connection with the conversion of accrued interest on convertible
debentures.
F-11
<PAGE>
6. Long-Term Debt: (Cont'd)
b. Convertible securities (cont'd)
On June 27, 1997, the Company sold $300 principal amount 7% convertible
debentures due June 29, 1999. The debentures were converted, on or after
December 30, 1997, into shares of common stock at a conversion price of $0.80
per share. On June 19, 1998, $200 of these debentures were converted into 62,500
shares of common stock. The Company issued 75,000 warrants with an exercise
price of $6.00 as part of the conversion. On June 24, 1999, the balance of $100
of these debentures was converted into 31,250 shares of common stock.
In June 1998, the Company completed a $2,750 private placement of
equity and debt units (the "Private Placement") pursuant to which the Company
issued (i) 305,000 shares of common stock (the "Private Placement Shares "),
(ii) convertible debentures (face amount $1,530) due December 28, 1999, (the
"Convertible Debentures"), (iii) warrants to purchase 343,750 shares of common
stock, and (iv) an option exercisable by the investors to purchase additional
convertible debentures (face amount $2,550) with warrants to purchase 318,750
shares of common stock (the "Debt Unit Option").
Of the $1,530 proceeds received in connection with the Convertible
Debentures and its related options, $505 was attributed to the debenture
conversion features and options and was classified as additional paid-in
capital, and the remaining $1,025 was classified as a long-term obligation at
June 30, 1998. The Convertible Debentures were exchanged for equity securities
in January, 1999.
On July 1, 1999, the Company borrowed $200 under a 10% note. The note
was exchanged for 20,000 shares of Series D Preferred Stock in September 1999.
The Company has charged to operations for the years ending June 30,
2000, 1999 and 1998, $86, $0 and $160 of imputed interest expense on Convertible
Debentures, which represents the discount on conversion of each of the above
Convertible Debentures.
7. Fair Value of Financial Instruments:
The estimated fair value of the Company's convertible debt as of June
30, 2000 is as follows:
Carrying Fair
Amount Value
---------- -----------
Convertible debt $ 2,000 $ 2,000
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-12
<PAGE>
8. Stockholders' Equity:
a. Capitalization
The Company's authorized capital consists of 50,000,000 shares of $.01
par value common stock and 5,000,000 shares of preferred stock.
The Board of Directors has the authority to issue preferred stock in
one or more series and to fix the rights, voting rights, and other terms.
Except for the conversion price, the terms, conditions and preferences
of the Series A and B Preferred Stock are identical. Each share of Series 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) $4.00 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 Series
B Preferred Stock equal to $10.00 per share divided by the lesser of (a) $6.00
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).
Except as otherwise required by law, the holders of shares of Series A
and B Preferred Stock have four votes per share voting as a single class with
the Common Stock.
Each share of Series A and B 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.
Series D Preferred Stock ("D Preferred Stock") is convertible, at the
option of the holder, into shares of Common Stock equal to $10.00 per share
dividend by 70% of the average per share closing bid price of the Common Stock
for the five trading days immediately preceding the conversion date(s). Mark has
the option to redeem all or part of the D Preferred Stock any time after
September 30, 2000 at $10 per share plus accrued dividends, if such shares are
not previously converted into Common Stock. Except as otherwise required by law,
the holders of shares of Preferred Stock have no voting rights. Each share of
Preferred Stock receives a quarterly dividend with an annual rate of $1.00 per
share. The dividends of the Preferred Stock are payable in cash or Common Stock,
at the option of Mark. The D Preferred Stock contains anti-dilution provisions
in the event of stock dividends, stock splits, reverse stock splits and similar
transactions.
In the event of any liquidation, the holders of the Preferred Stock
will share equally in any balance of the Company's assets available for
distribution to them up to $10.00 per share plus unpaid dividends, after
satisfaction of creditors and the holders of the Company's senior securities, if
any.
b. Exchange placement (cont'd)
In January 1999, Mark effected an exchange placement (the "Exchange
Placement") pursuant to which the investors agreed to exchange the securities
received in the Private Placement (see Note 7) for (i) 122,000 shares of Series
A Preferred Stock, (ii) 153,000 shares of Series B Preferred Stock, (iii)
warrants to purchase 343,750 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 343,750 shares of common stock (the
"Preferred Stock Unit Option").
The Warrants consist of 343,750 warrants each to purchase one share of
Common Stock for $6.00 per share expiring on June 28, 2002.
F-13
<PAGE>
8. Stockholders' Equity: (Cont'd)
The Preferred Stock Unit Options allow the investors 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) 343,750 four-year warrants, each to purchase one share of Common
Stock at $6.00 per share.
Investors owning 74,000 shares of Series A Preferred Stock, 148,000
Warrants and the Preferred Stock Unit Option to purchase 74,000 units granted
Mark an option which expired March 26, 1999 to repurchase such securities for
$740. Mark paid the investors a nonrefundable deposit of $222. The investors
have agreed that this deposit be credited towards accrued dividends on the
Preferred Stock Unit Option.
The discount on the conversion rate of the Preferred Shares issued on
the Exchange Placement ($63) was recorded as an imputed dividend in the year
ended June 30, 1999.
c. Preferred stock conversion
During the year ended June 30, 2000, investors converted 24,000 shares
of Series A Preferred Stock and 6,000 shares of Series B Preferred Stock into
222,278 shares of common stock.
During the year ended June 30, 1999, investors converted 98,000 shares
of Series A Preferred Stock and 147,000 shares of Series B Preferred Stock into
869,012 shares of common stock.
d. Reverse stock split
Effective June 15, 1999, the Company's Board of Directors authorized a
one for four reverse stock split of common stock outstanding. All per share and
weighted average share amounts have been restated to reflect this stock split.
e. Loss per common share
The reconciliation of EPS for the years ended June 30, 2000, 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
Years Ended
June 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net loss $ (4,388) $ (1,710) $ (2,388)
Less imputed preferred stock dividend -- 63 --
----------- ----------- -----------
Loss available to common
shareholders $ (4,388) $ (1,773) $ (2,388)
=========== =========== ===========
Weighted average shares outstanding 6,112,534 4,945,257 4,145,101
=========== =========== ===========
Loss per share $ (.72) $ (.36) $ (.58)
=========== =========== ===========
</TABLE>
F-14
<PAGE>
8. Stockholders' Equity: (Cont'd)
f. Stock option plan
The Company has a Stock Option Plan which is administered by the Board
of Directors. Under the terms of the Plan, options to purchase 250,000 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>
Years Ended
June 30,
-------------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- -------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 107,750 $ 5.53 99,875 $ 5.80 95,250 $ 8.16
Granted 108,500 1.32 17,250 4.00 131,000 10.68
Canceled (81,625) (5.93) (9,375) (5.58) (126,375) (11.80)
Exercised (39,500) (1.13) -- -- -- --
-------- -------- -------- -------- -------- --------
Outstanding, end of year 95,125 $ 3.29 107,750 $ 5.53 99,875 $ 5.80
======== ======== ======== ======== ======== ========
Available for issuance under Plan 95,375 122,250 130,125
Weighted average contractual
life (years) 1.97 1.23 1.95
Shares subject to exercisable option 95,125 107,750 99,875
</TABLE>
g. Stock warrants
Outstanding warrants are as follows:
<TABLE>
<CAPTION>
Years Ended
June 30,
-------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Warrants outstanding,
beginning of year 1,135,000 $ 8.23 1,061,667 $ 9.72 810,440 $ 14.56
Granted 293,300 2.05 198,750 3.58 641,250 6.32
Exercised (467,500) (2.09) -- -- (145,000) (10.44)
Expired (293,750) (2.46) (125,417) 13.44 (245,023) (16.80)
---------- ---------- ---------- ---------- ---------- ----------
Warrants outstanding,
end of year 667,050 $ 3.44 1,135,000 $ 8.23 1,061,667 $ 9.72
========== ========== ========== ========== ========== ==========
Weighted average contractual
life (years) 0 2.09 0 2.17 0 2.56
</TABLE>
F-15
<PAGE>
8. Stockholders' Equity: (Cont'd)
h. Pro forma information
Pro forma information regarding net loss and loss 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 2000,
1999 and 1998: risk-free interest rate of 6.38%, 6.50% and 6.40%; dividend yield
-0-; volatility factor related to the expected market price of the Company's
common stock of .35; and weighted average expected option life of 3.0, 3.0 and
3.3 years. The weighted average fair value of options granted during fiscal
2000, 1999 and 1998 were $.70, $.57 and $1.76, respectively.
The Company's pro forma information follows:
Years Ended
June 30,
--------------------------------
2000 1999 1998
--------- -------- --------
Pro forma net (loss) $ (4,458) $ (1,772) $ (3,017)
Pro forma loss per common share (.73) (.37) (.73)
i. Minority Investor in MarkCare
On November 11, 1999, Mark retained Sherleigh Associates LLC
("Sherleigh") to provide financial and investor related services to MarkCare
Medical Systems, Inc. ("MarkCare") under a one-year consulting agreement.
Pursuant to the agreement, Sherleigh purchased five percent of MarkCare for $60
and was issued a warrant, exercisable until May 10, 2000 for $1.00 to purchase
additional shares of MarkCare to insure that Sherleigh beneficially owns 5% of
MarkCare on a fully diluted basis. Under certain circumstances MarkCare has the
right to repurchase the shares and warrant for $160. Sherleigh will also receive
a monthly fee of $1 under the agreement.
j. Stock for debt conversion
During 2000, vendors and other debtors converted $581 of liabilities
into 291,800 shares of the Company's common stock.
k. Private placement
In January 2000, an investor notified Mark of his intention to exercise
an option to purchase 20,000 shares of preferred stock each convertible into
Common Stock at $10.00 per preferred share divided by 75% of the trading price
and warrants to purchase 25,000 shares of Common Stock at $6.00 per share. On
January 19, 2000, Mark agreed to issue 100,000 shares of Common Stock in lieu of
the convertible preferred stock and also issued the warrants.
9. Short Term Borrowings:
On March 3, 2000, Mark Solutions, Inc. ("Mark") issued to two investors
an aggregate of $250, 120-day principal amount convertible notes having an
interest rate of 10% per annum. The investors were a director of Mark and his
brother. On July 12, 2000, these notes were repaid in accordance with their
terms. In connection with the loan represented by these notes, Mark issued
five-year warrants to purchase 48,933 shares of Common Stock at $1.25 per share.
F-16
<PAGE>
10. Leases:
a. Facility leases
The Company occupies its offices pursuant to an operating lease
expiring on December 31, 2001. The Company conducts its manufacturing operations
pursuant to an operating lease expiring November 15, 2004. Under the terms of
these leases, the Company is obligated to pay maintenance, insurance, and its
allocable share of real estate taxes.
Future minimum rental payments under these operating leases are as
follows:
Year Ended
June 30,
---------
2001 $ 452
2002 434
2003 411
2004 434
2005 245
Thereafter 2,793
--------
Total future minimum rental payments $ 4,769
========
Rent expense for the years ending June 30, 2000, 1999 and 1998 was
$381, $300 and $330, respectively.
The Company also leases various automobiles and small office equipment.
b. Capital leases
The Company leases certain equipment under capital leases with
expiration dates ranging from April 2000 through April 2003.
Future minimum lease payments are as follows:
Year Ended
June 30,
----------
2001 $ 97
2002 297
2003 7
------
Total future minimum lease payments 401
Less: amount representing interest 182
------
Present value of net future minimum lease payments 219
Less: current portion of obligations under capital leases 125
------
Long-term portion of obligations under capital leases $ 94
======
11. Commitments and Contingencies:
Pursuant to employment agreements with certain key executives, which
expire at various dates through November 2001, the Company granted options to
acquired 287,500 shares of common stock at various exercise prices ranging from
$4.00 to $11.00. The Company's remaining aggregate commitment at June 30, 2000
under such contracts approximated $696.
F-17
<PAGE>
11. Commitments and Contingencies: (Cont'd)
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 in the initial year with U.K. Pounds 5
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 $115.
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. As of June 30, 2000 and 1999, the
Company's uninsured cash balances approximated $489 and $176, 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.
12. Income Taxes:
As of June 30, 2000, the Company has Federal net operating loss carry
forwards of approximately $23,569. Such carry forwards begin to expire through
2018 if not previously used. Approximately $1,700 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 100% valuation allowance was recorded against the related tax
asset of approximately $8,013, as required by SFAS No. 109.
The State of New Jersey has enacted a program that allows new or
expanding emerging technology and biotechnology businesses to sell their Unused
Net Operating Loss (NOL) carryover to any corporate taxpayer in the state of at
least 75% of the value of the tax benefits. Upon acceptance of an application,
each applicant receives $250. The remaining NOL carryover is treated in the same
manner for the fiscal year ended June 30, 2001.
The deferred tax asset arising from the New Jersey NOL is comprised of
the following:
June 30,
------------------------------
2000 1999
-------- --------
Sale of net operating loss $ 572 $ 1,200
Valuation allowance - (200)
-------- --------
$ 572 $ 1,000
======== ========
13. Supplemental Cash Flow Information:
a. Cash paid for interest during the years ended June 30, 2000, 1999
and 1998 amounted to $284, $191 and $65, respectively.
b. The Company acquired certain equipment with an aggregate cost of
$397, $221 and $25 under capital leases obligations for the years ended June 30,
2000, 1999 and 1998, respectively.
c. During 2000, vendors and other debtors converted $581 of liabilities
into 291,800 shares of the Company's common stock. During 1999, $1,530 of
debentures and $1,220 of securities classified as temporary equity were
exchanged for shares of preferred stock, warrants and options. During 1998,
$2,200 of debentures were converted into 650,625 shares of common stock.
F-18
<PAGE>
13. Supplemental Cash Flow Information: (Cont'd)
d. During 2000, 1999, and 1998, the Company granted outside consultants
options to acquire 21,000, 66,250, and 90,000 shares, respectively, of common
stock at exercise prices ranging from $4.64 to $16.00. In addition, in 1998 the
Company modified the terms of 160,000 options held by outside consultants. The
fair value of the 1999 options was immaterial. The fair value of the 2000 and
1998 options ($10 and $92, respectively) has been charged to operations in
accordance with SFAS No. 123.
e. The Company issued stock and/or options to various parties in
consideration for services provided.
14. Segment Information:
The Company's two industry segments are modular steel prison cells for
the corrections industry and software applications for the medical industry. The
following is a summary of selected consolidated financial information for the
Company's industry segments:
<TABLE>
<CAPTION>
Modular
Steel Medical Intersegment
Products Products Charges Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended June 30, 2000:
Revenues $ 11,670 $ 2,054 $ -- $ 13,724
Other income 105 -- -- 105
Interest income 816 2 (729) 89
Dividend income 5 -- -- 5
Interest expense 341 759 (729) 371
Gain on disposal of asset 4 -- -- 4
Depreciation and amortization 206 166 -- 372
Rental income -- 14 -- 14
Segment pre-tax loss (1,038) (4,251) 728 (4,561)
Segment assets 17,371 1,445 (12,487) 6,329
Capital expenditures 25 73 -- 98
Year ended June 30, 1999:
Revenues $ 8,497 $ 1,729 $ -- $ 10,226
Interest income 564 1 (519) 46
Interest expense 169 637 (519) 286
Depreciation and amortization 149 374 -- 523
Segment pre-tax loss (932) (2,296) 518 (2,710)
Segment assets 15,512 2,022 (8,464) 9,070
Capital expenditures 877 201 -- 877
Year ended June 30, 1998:
Revenues $ 12,714 $ 208 $ -- $ 12,922
Interest income 347 -- (334) 13
Interest expense 250 334 (334) 250
Depreciation and amortization 48 312 -- 360
Segment pre-tax income (loss) (311) (2,411) 334 (2,388)
Segment assets 10,375 917 (6,118) 5,174
Capital expenditures 216 42 -- 216
</TABLE>
F-19
<PAGE>
14. Segment Information: (Cont'd)
The following table presents revenues by country based on the location
of the use of the product or service:
Years Ended
June 30,
---------------------------------
2000 1999 1998
------- ------- -------
United States $12,081 $ 9,094 $12,872
Korea 136 492 --
Spain 257 400 --
Norway 332 -- --
United Kingdom 710 150 50
Other 208 90 --
------- ------- -------
$13,724 $10,226 $12,922
======= ======= =======
The following table presents long-lived assets by country based on the
location of the assets:
June 30,
------------------------------
2000 1999
--------- --------
United States $ 870 $ 1,110
United Kingdom 426 114
--------- --------
$ 1,296 $ 1,224
========= ========
For the years ended June 30, 2000 and 1999, three customers accounted
for 28%, 22%, 18% and 46%, 13% and 11% of total revenues, respectively. For the
year ended June 30, 1998, one customer accounted for 93% of the total revenues.
F-20
<PAGE>
MARKCARE MEDICAL SYSTEMS LIMITED
Auditors' report to the members of Markcare Medical Systems Limited
We have audited the financial statements on pages 5 to 12 which have been
prepared under the historical cost convention and the accounting policies set
out in pages 7 and 8.
Respective responsibilities of directors and auditors
As described on page 3, the company's directors are responsible for the
preparation of 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 policies 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 in note 18 concerning the uncertainty of adequate
financial support being made available by the parent company in the future. The
financial statements have been prepared on a going concern basis. In view of the
significance of this uncertainty we consider that it should be drawn to your
attention but our opinion is not qualified in this respect.
UK GAAP and US GAAS
With respect of 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.
Opinion
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 30 June 2000 and of its loss for the year then
ended and have been properly prepared in accordance with the Companies Act 1985.
CHANTREY VELLACOTT DFK
Chartered Accountants
Registered Auditors
LONDON
13 October 2000
F-21
