-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HIeFyT3HnUu800qKnFAatxmK0KW+3ectbcdxmDYEvinMkMxzdG4p8/rgwY0dl61p /UjBWEYk4TWBU+UOjMO6hA== 0000807397-99-000020.txt : 19991018 0000807397-99-000020.hdr.sgml : 19991018 ACCESSION NUMBER: 0000807397-99-000020 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19991012 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARK SOLUTIONS INC CENTRAL INDEX KEY: 0000807397 STANDARD INDUSTRIAL CLASSIFICATION: PREFABRICATED METAL BUILDINGS & COMPONENTS [3448] IRS NUMBER: 112864481 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-72099 FILM NUMBER: 99727097 BUSINESS ADDRESS: STREET 1: 1515 BROAD ST STREET 2: PARKWAY TECHNICAL CENTER CITY: BLOOMFIELD STATE: NJ ZIP: 07003 BUSINESS PHONE: 9738930500 MAIL ADDRESS: STREET 1: 1515 BROAD ST STREET 2: PARKWAY TECHNICAL CENTER CITY: BLOOMFIELD STATE: NJ ZIP: 07003 FORMER COMPANY: FORMER CONFORMED NAME: SHOWCASE COSMETICS INC DATE OF NAME CHANGE: 19920703 10-K 1 MARK SOLUTIONS, INC. 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, 1999 -------------------- 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. -------------------- (Exact name of registrant as specified in its charter) Delaware 11-2864481 ---------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) Parkway Technical Center 1515 Broad Street, Bloomfield, New Jersey 07003 - ---------------------------------------------- ---------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (973) 893-0500 -------------------- 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) 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 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. [ X ]. The aggregate market value of the 4,776,574 shares of Common Stock held by non-affiliates of the Registrant on September 30, 1999 was $8,060,469 based on the closing sales price of $1.6875 on September 30, 1999. The number of shares of Common Stock outstanding as of September 30, 1999 was 5,618,113. The registrant is obligated to issue an additional 187,500 shares of Common Stock, which have not been issued due to prohibitions on beneficial ownership. DOCUMENTS INCORPORATED BY REFERENCE None 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 designs, manufactures, and installs modular steel cells for correctional institution construction and develops software applications under the name "IntraScan II" for medial diagnostic, 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 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. 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) 1999 1998 1997 ----------- ----------- ----------- Sales to external customers: Mark Correction Systems: Modular Cells . . . $ 8,497 $ 12,714 $ 6,115 ------- -------- ------- MarkCare Medical Systems: IntraScan . . . . . 1,729 150 224 Other . . . . . . . -- 58 111 ------- -------- --------- 1,729 208 336 ------- -------- -------- $ 10,226 $ 12,922 $ 6,450 ======== ======== ======== Operating Profit: Mark Correctional Systems $ (598) $ 73 $(2,706) MarkCare Medical Systems (1,871) (2,064) (1,036) Identifiable Assets: Mark Correctional Systems $ 7,258 $ 4,258 $ 5,002 MarkCare Medical Systems 1,812 916 430 -1- 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 sold security prison cells in 14 states including Indiana, Illinois, New York, New Jersey, Michigan, Missouri, Washington and Wisconsin. Revenues generated by the sale of cells to correctional facilities totaled $8,498,000 or 83.1% of Mark's total operating revenues for the fiscal year ended June 30, 1999. For the year ended June 30, 1999 the following projects accounted for 69.7% of Mark's total operating revenue: Percentage of Fiscal 1999 Project Operating Revenue - ---------------------- ----------------- Administration of Corrections 45.5% Puerto Rico 438 cells (1) Darlington County Detention Center 12.9% Darlington County, South Carolina 117 cells Minnesota Correctional Facility 11.3% Lino Lakes, Minnesota 76 cells (1) Total contract value of $7,300,000 As of September 30, 1999 Mark had a backlog of $9,756,000 in modular cell orders as compared to no backlog in September 1998. 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. -2- 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 more efficient and faster on-site installation. 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. Bid Process, Subcontracting and Bonding Requirements The substantial majority of Mark's revenues has 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's bid. 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 60 to 120 days. In connection with some government construction projects, Mark is required to provide performance and completion bonds as a condition to submission or participation in a bid. Due to Mark's financial condition, it has generally been unable to obtain bonds without the assistance and guarantee of third parties including Mark's President. See "Item 13. Certain Relationships and Related -3- 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 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 operation 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 virtually all of its modular steel business. No assurances can be given that any other markets will develop to any significant degree. Mark designs prototypes of its modular cells for marketing, sales and trade show demonstrations. Mark's marketing and sales efforts are managed by its Vice President of Sales and Marketing and include in-person solicitations, direct mail campaigns and participation in industry trade shows. Mark presently markets and sells its modular cells directly and through independent manufacturers' representatives. Mark's sales network consists of 12 outside sales representatives that service 18 states and 11 foreign countries including Canada, Italy, France and other countries in Latin America. Each representative -4- 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. Certain aspects of Mark's manufacturing process are regulated by state and Federal environmental laws. Mark has obtained all necessary licenses and permits and is in compliance in all material respects with applicable environmental laws. 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. -5- With respect to those projects which incorporate modular cell specifications in its design criteria, Mark competes with several other steel product manufacturers, some of which have greater financial resources than Mark. In addition, a number of manufacturers, which have greater financial and 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, 1999, Mark had three executive management employees, three plant management employees, four sales employees, five engineering employees and eight offices 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. -6- MARKCARE MEDICAL SYSTEMS Mark operates its IntraScan II PACS software business through MarkCare Medical Systems, Inc., a wholly owned Maryland subsidiary ("MarkCare-US") and MarkCare Medical Systems, Ltd., a wholly owned United Kingdom subsidiary ("MarkCare-UK"). MarkCare-US and MarkCare-UK are collectively referred to as "MarkCare". 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) with 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 $1,729,000 or 16.9% of Mark's total operating revenues for the fiscal year ended June 30, 1999. While no assurances can be given, Mark believes that IntraScan II sales will represent a larger percentage of consolidated revenues in the fiscal year ending June 30, 2000 as compared to 1999. As of September 30, 1999 had a backlog of $937,000 in IntraScan II orders as compared to no backlog in September 1998. 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 NT). 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 -7- 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 which 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. 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 -8- 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 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. -9- Current Installations MarkCare's IntraScan II software has been installed 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 Gil 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 1) Includes licensing, installation and long term maintenance and support fees. 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, 1999 MarkCare's product development staff consisted of 14 employees. MarkCare's total product development expenses were $1,225,000 for fiscal year 1999 and $409,000 for fiscal 1998. MarkCare anticipates that it will continue to spend substantial resources on an ongoing basis to develop competitive products. -10- 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 a five person internal sales force which 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 Corporation, a large computer hardware and systems integrator company with 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 licensing/ marketing agreements with the following companies: o Santax A/S, a Danish medical modality distributor o Konica UK, Ltd., a multi-national diversified film and digital imaging company o Worldcare UK, PLC, a United Kingdom telemedicine company o Avantec Medical Systems, Ltd. an Indian systems integration company; o AIS Consulting Group, GMBH, a Swiss systems integration company o Medilink PTY, Limited, an Australian systems integration company -11- 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. MarkCare attempts to negotiate progress payments based on installation milestones such as loading of software, when the PACS system is operational and expiration of a trial period of between 30 and 60 days. 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. -12- 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 Employees As of September 30, 1999, MarkCare-US had two management employees, one sales employee, nine technical support staff and two office and clerical employees. As of September 30, 1999, MarkCare-UK had 14 software engineers, four management employees, three sales employees, eight support staff, and five office staff. 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. -13- 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 $8,125. 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 for the initial five years. The rent for the remaining three years is subject to increases based on the consumer price index at that time. MarkCare-UK leases 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. 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 will pay to Evergreen the sum of $300,000 in installments of $50,000 due by December 31, 1999 and $250,000 by May 31, 2000. If Mark fails to make either payment, Mark has agreed that a confession of judgment may be filed by Evergreen against Mark in the amount of $459,000. In September 1997, the Pulaski County Board of Indiana filed a lawsuit against Mark and Calumet Construction Corporation ("Calumet"), the general contractor, related to a project where Mark provided modular steel cells for $913,731. The County alleges delay claims and other damages caused by, among other things, delays in delivery of the cells and requests a declaratory judgment for the allocation of the remaining balance of $313,700 the County believes it owes Mark and Calumet under the project. The parties attempted to resolve the dispute through mediation, during which Calumet asserted backcharges against Mark in the amount of $399,000. On January 18, 1999, Mark reached a settlement with the other parties wherein Mark received $170,000 in total settlement of all claims, and all parties exchanged mutual releases. -14- In August 1997, Mark filed a demand for arbitration against Demien Construction Company ("Demien") in Missouri with the American Arbitration Association alleging nonpayment of approximately $200,000 related to a contract under which Mark provided modular steel cells for $407,000. Demien has asserted delay claims and backcharges for remedial work of approximately $244,000 against Mark. Mark believes the alleged damages are excessive and intends to vigorously pursue this action. 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 "MCSI". Common Stock ---------------------------------------------- --------------------- -- --------------------- High Low --------------------- --------------------- --------------------- --------------------- 1997 1st Quarter 11 3-3/4 2nd Quarter 18 7-7/8 3rd Quarter 18 7-3/4 4th Quarter 17-1/2 8-3/4 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 1-5/8 - ------------------------------------------------------------------------------- Over-the-counter quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and do not necessarily represent actual transactions. -15- (b) Holders. As of September 30, 1999, there were 196 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 1999. The following sets forth information regarding private placements of equity securities by Mark during the fiscal year ended June 30, 1999 which were not included in previously filed Mark reports. On December 28, 1998, Mark issued five-year warrants to purchase 25,000 shares of Common Stock at $4.00 per share to a consulting company for software support services related to IntraScan II. This issuance was effected in reliance on the registration exemption provided by Section 4(2) of the Securities Act as not involving a public offering due to the limited nature of the offering and the company's relationship with Mark. On December 28, 1998, Mark issued three-year options to purchase 5,000 shares of Common Stock at $4.00 per share to two employees as incentive compensation. Each of the issuance's was effected in reliance on the registration exemption provided by Section 4(2) of the Securities Act as not involving a public offering due to the limited nature of the offering and the individuals' relationship with Mark. On January 4, 1999, Mark issued two-year warrants to purchase 41,250 shares of Common Stock at $2.00 per share to a consulting company for financial public relations services. This issuance was effected in reliance on the registration exemption provided by Section 4(2) of the Securities Act as not involving a public offering due to the limited nature of the offering, the company's relationship with Mark and the investor sophistication of the company. On February 28, 1999, Mark granted 6,000 shares of Common Stock to an employee as a hiring bonus, subject to a three-year vesting schedule. This grant was effected in reliance on the registration exemption provided by Section 4(2) -16- of the Securities Act as not involving a public offering due to the limited nature of the offering and the individuals' relationship with Mark. In connection with the conversion of $750,000 principal amount convertible debentures in June 1998, Mark agreed to issue additional shares of Common Stock to the holder if the per share trading price of the Common Stock fell below $5.00 per share on specified dates through January 31, 2000, provided such issuance's do not result in the holder beneficially owning over five percent of Mark's Common Stock. As of September 30, 1999, Mark is obligated to issue this holder an additional 187,500 shares of Common Stock under this adjustment provision price but has not formally done so due to the beneficial ownership restriction. Mark is also obligated to issue additional shares of Common Stock if the per share trading price of the Common Stock is below $2.50 on either October 31, 1999 or January 31, 2000. The conversion agreement was effected in reliance on the registration exemption provided by Section 4(2) of the Securities Act as not involving a public offering due to the limited nature of the offering and the investor sophistication of the holder. 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: Fiscal Years Ended June 30, (in thousands, except share and per share data) 1999 1998 1997 1996 1995 ------------ ------------- ------------ ------------ ------------ Revenues $ 10,226 $12,922 $ 6,450 $ 3,454 $ 6,125 Costs and Expenses: Costs of Sales 7,113 10,628 6,201 4,022 5,976 General and administrative 2,085 2,405 2,312 3,152 3,451 Software costs 1,225 409 256 13 --- Marketing Costs 1,264 679 604 554 425 Amortization Expense 210 210 210 --- --- Other Costs 798 582 609 --- --- Reduction of carrying value of assets --- --- --- 777 --- ------------ ------------- ------------ ------------ ------------ Total Costs and Expenses 12,695 14,913 10,192 8,518 9,852 ------------ ------------- ------------ ------------ ------------ Operating (Loss) (2,469) (1,991) (3,742) (5,064) (3,727) Net Other (Expense) (241) (397) (1,697) (47) (86) Income Tax Benefit 1,000 --- --- --- --- ------------ ------------- ------------ ------------ ------------ (Loss) From Continuing Operations (1,710) (2,388) (5,439) (5,111) (3,813) (Loss) From Discontinued Operations --- --- --- (104) (1,377) ------------ ------------- ------------ ------------ ------------ Net (Loss) $(1,710) $(2,388) $(5,439) $(5,215) $(5,190) ============ ============= ============ ============ ============ (Loss) per Share (.36) (.58) (1.53) (1.64) (1.94) ============ ============= ============ ============ ============ Weighted Average Shares Outstanding 4,945,257 4,145,101 3,555,402 3,183,006 2,681,551
-17-
Balance Sheet Data: Fiscal Years Ended June 30, (in thousands, except share and per share data) ------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------ ------------- ------------ ------------ ------------ Working Capital (Deficit) $ 1,032 $ 3,077 $ 923 $ 676 $ (48) Net Property and Equipment 1,224 439 347 377 318 Total Assets 9,070 5,174 5,432 3,084 3,978 Current Liabilities 5,832 999 3,245 954 2,170 Other Liabilities 505 1,060 2,340 50 20 Temporary Stockholders' Equity --- 1,220 --- --- --- Stockholders' Equity (Deficiency) 2,733 1,895 (153) 2,079 1,789
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 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 cell 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 $2,000 in modular cell projects. Mark also expects to bid on approximately $60,000 in additional cell projects which are specified steel only, and $40,000 which include steel as an equal to concrete during the -18- fiscal year ended June 30, 2000. 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, 1999, Mark was awarded $16,970 of the $25,295 in correctional cell projects it bid on. Of the projects Mark was not awarded, $4,375 were awarded to other steel manufacturers, $1,950 were awarded to conventional construction and $2,000 remains pending. 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 2000 although no assurances can be given in this regard. 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, 1999. (in thousands) Mark Correctional MarkCare Systems Medical Total ------------- ------------ ------------- Revenues $ 8,497 $ 1,729 $ 10,226 Cost of Sales 6,565 548 7,113 General and Administrative 1,908 177 2,085 Operating (loss) (1,871) (598) (2,469) 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, 2000. -19- 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:
Percentage of Revenues Year Ended June 30, Increase/(Decrease) -------------------------------------------- ---------------------------- 1999 1998 1997 1999-1998 1998-1997 ------------ ------------- ------------- ------------ ------------ Revenue 100.0 100.0 100.0 (20.9) 100.3 Cost of sales 69.6 82.2 96.1 (33.1) 71.4 Selling, general & administrative 54.6 33.2 61.9 30.3 7.4 ------------ ------------- ------------- ------------ ------------ Operating income (loss) (24.2) (15.4) (58.0) 24.0 (46.8) Other income (expenses) (2.3) ( 3.1) (26.3) 39.3 (76.6) ------------ ------------- ------------- ------------ ------------ (Loss) before income tax benefit (26.5) (18.5) (84.3) 13.5 (56.1) Income tax benefit 9.8 --- --- --- --- ------------ ------------- ------------- ------------ ------------ Net (loss) (16.7) (18.5) (84.3) (28.4) (56.1) ============ ============= ============= ============ ============
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 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 and decreased by 33.1% to $7,113 from $10,628 for the comparable 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 period. The reduction in cost of sales was caused by more favorable margins on projects awarded and tighter manufacturing controls. General and administrative expenses for the fiscal year ended June 30, 1999 decreased 13.3% to $2,085 from $2,405 for the comparable 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. Software costs for the fiscal year ended June 30, 1999 related to IntraScan II, increased 200.0% to $1,225 from $409 for the comparable 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. -20- 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 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%. Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1997 Revenues from sales for the fiscal year ended June 30, 1998, increased 100.3% to $12,922 from $6,450 for the comparable period. This increase is primarily attributable to the awarding of a $12,000 project under the New York State agreement. Cost of sales for the fiscal year ended June 30, 1998, consists of materials, labor and fixed factory overhead expense and increased by 71.4% to $10,628 from $6,201 for the comparable period. Cost of sales as a percentage of revenues was 82.2% for the year ended June 30, 1998 as compared to 96.1% for the comparable period. Management expects continued gross profit improvement as sales become less sporadic and as the plant achieves additional operating efficiencies. For the year ended June 30, 1998 fixed factory overhead expenses were $264 as compared to $273 for the comparable 1997 period. Management believes that the substantial majority of the revenues of the MarkCare line will be attributable to software sales and support services, which have higher gross profits. General and administrative expenses for the fiscal year ended June 30, 1998, increased 4.0% to $2,405 from $2,312 for the comparable 1997 period. Stabilization of these expenses is attributable to management's focus on cost controls. Marketing costs for the fiscal year ended June 30, 1998, increased 12.4% to $679 from $604 for the comparable period. Development costs for the fiscal year ended June 30, 1998 related to IntraScan II, increased 60.0% to $409 from $256 for the comparable period. Mark's operating loss for the year ended June 30, 1998 decreased by 46.8% to $1,991 from $3,742 for the comparable period. For the same periods, Mark's net loss decreased by 56.1%. 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 -21- 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 and from anticipated contracts is sufficient to meet its operating requirements through June 30, 2000. If Mark requires additional capital, it will continue to principally look to private sources. Mark's inventories decreased from $112 at June 30, 1998 to $-0- at June 30, 1999. Mark currently accounts for all materials as project costs as 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, 1999, Mark had negative cash flow from operating activities of $1,125. For the fiscal year ended June 30, 1999, Mark had negative cash flow from investing activities of $1,127 the majority of which is attributable to the purchase of property and equipment. 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, 1999, financing activities provided $1,985 in cash, principally from the private placement of its securities and short term loans from officers, which were repaid on September 1, 1999. Cash and cash equivalents decreased from $565 at June 30, 1998 to $298 at June 30, 1999 due to operating losses incurred during the year. Working capital decreased to $1,032 at June 30, 1999 from $3,077 at June 30, 1998 primarily due to losses incurred by Mark during the year. On July 1, 1999, Mark borrowed $200,000 payable on or before July 31,2000, at an annual interest rate of 10%. The loan agreement provided that upon failure to repay the loan by September 1,1999, the loan could 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. The loan was converted to Preferred Stock in September 1999. -22- Other Matters As of June 30, 1999, Mark had net operating loss carry-forwards of approximately $21,900. Such carry-forwards begin to expire in the year 2009 if not previously used. Approximately $1,700 of the 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. 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 After an evaluation and analysis of its operations, including its financial and operational computer systems applications, Mark has concluded no material adverse effect on its operations will occur due to Year 2000 software failures. To the extent modifications are required, management believes the related costs will not materially affect Mark's financial position. -23- 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. -24- 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) 59 Chairman of the Board, President, Chief Executive Officer Michael Nafash 38 Chief Financial Officer, Director Michael J. Rosenberg 54 Vice President - Sales and Marketing Leonid Futerman 40 Vice President - MarkCare U.S. Richard Branca (2) 51 Director Yitz Grossman 44 Director Ronald E. Olszowy 53 Director William Westerhoff (1) 61 Director ------------------------------------ (1) Member of the Compensation Committee (2) Member of the Audit Committee All directors hold office until the next annual meeting of shareholders of Mark (currently expected to be held during December 1999) 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 President and Chief Executive Officer of Mark Lighting Fixture Co., Inc., an unaffiliated entity. Michael Nafash has been the Chief Financial Officer of Mark since January 1998 and has been a Director since December 18, 1995. From February 1994 to January 1998, Mr. Nafash was employed by Evolutions, Inc. (OTC), an environmental oriented apparel company, as Chairman of the Board, President and Chief Executive Officer. On January 5, 1998, Evolutions, Inc. filed a Chapter 7 bankruptcy petition (Case no. 98-20010) in the U.S. Bankruptcy Court in Newark, New Jersey. From 1992 to June 1996, Mr. Nafash was employed by Pure Tech International, Inc., a plastics and metal recycling company, including as Chief Financial Officer from October 1993 to March 1995. Michael J. Rosenberg has been Vice President - Marketing and Sales for Mark since 1990. -25- 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. Yitz Grossman has been a Director of Mark since December 4, 1997. Since 1983 he has been President and Chairman of Target Capital Corporation, a financial consulting company. Ronald E. Olszowy has been a Director of Mark since November 18, 1992. Since 1966, Mr. Olszowy has been President and Chief Executive Officer of Nationwide Bail Bonds, which provides bail, performance and fidelity bonds. Mr. Olszowy has also been President of Interstate Insurance Agency since 1980. William Westerhoff has been a director of Mark since November 18, 1992. Mr. Westerhoff has been retired since June 1992. Prior thereto, and for more than five years, Mr. Westerhoff was a partner of Sax, Macy, Fromm & Co., certified public accountants. Directors Compensation Each outside director receives a $1,000 fee and is reimbursed for 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 the Company'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, 1999, all Section 16(a) filing requirements were satisfied. -26- 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 $100,000, including its Chief Executive Officer, for Mark's last three fiscal years.
============================= ======================================== ===================================== =============== Long Term Compensation Annual Compensation Awards/Payouts ============================= ======================================== ===================================== =============== Name and Principal Restricted Position Other Annual Stock Options/ LTIP All other Year Salary ($) Bonus ($) Compensation Awards $ SARS # Payouts compensation - --------------------- ------- ----------- ---------- ----------------- ------------ ------------- ---------- -------------- Carl Coppola, 1999 $200,000 -0- -0- -0- -0- -0- -0- President & CEO 1998 200,000 -0- -0- -0- 50,000 -0- -0- 1997 300,000 -0- -0- -0- 187,500 -0- -0- - --------------------- ------- ----------- ---------- ----------------- ------------ ------------- ---------- -------------- Michael Nafash, CFO 1999 100,000 -0- -0- -0- -0- -0- -0- 1998 50,000 -0- -0- -0- 37,500 -0- -0- - --------------------- ------- ----------- ---------- ----------------- ------------ ------------- ---------- -------------- Michael Rosenberg, 1999 122,892 -0- -0- -0- 37,500 -0- -0- Vice President 1998 88,055 -0- -0- -0- -0- -0- -0- 1997 79,519 -0- -0- -0- -0- -0- -0- - --------------------- ------- ----------- ---------- ----------------- ------------ ------------- ---------- -------------- Leonid Futerman, 1999 160,052 -0- -0- -0- 62,500 -0- -0- Vice President 1998 97,137 -0- -0- -0- -0- -0- -0- 1997 90,455 -0- -0- -0- -0- -0- -0- - --------------------- ------- ----------- ---------- ----------------- ------------ ------------- ---------- --------------
Options / SAR Grants in Fiscal Year 1999 The following table sets forth individual grants of stock options to the named executive officers in the Summary Compensation Table for the fiscal year ended June 30, 1999.
================================================================================================== ==================== Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term (1) ============================ ============== ==================== =============== ================= ========= ========== % of Total Options Options Granted to Exercise Granted Employees in Price Expiration Name (#)(2) Fiscal Year ($/Sh) Date 5% ($) 10%($) - ---------------------------- -------------- -------------------- --------------- ----------------- --------- --------- Michael Rosenberg 37,500 25.0% $4.00 09/16/01 23,625 49,650 - ---------------------------- -------------- -------------------- --------------- ----------------- --------- --------- Leonid Futerman 62,500 41.7% $4.00 09/16/01 39,406 95,775 - ---------------------------- -------------- -------------------- --------------- ----------------- --------- --------- (1) The potential realizable value portion of the foregoing table illustrates value that might be realized upon exercise of the options immediately prior to the expiration of their term, assuming the specified compounded rates of appreciation on the Common Stock over the term of the options. These numbers do not take into account provisions of certain options providing for termination of the option following termination of employment, nontransferability or differences in vesting periods. (2) The closing sales price on date of option grants was $4.00 per share.
-27- 1999 Fiscal Year End Option Values The following table sets forth the value of options granted to the named officers in the Summary Compensation Table for the fiscal year ended June 30, 1999. Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options at Fiscal year (#) At Fiscal Year End ($) Name Exercisable / Unexercisable Exercisable / Unexercisable - ----------- ---------------------------- --------------------------- Michael Rosenberg 37,500/-0- -0-(1) Leonid Futerman 62,500/-0- -0-(1) - -------------------------------- (1) Based upon a closing sales price of $1.875 per share of Common Stock on September 30, 1999 Employment Agreements Pursuant to a three-year employment agreement expiring on June 30, 2000, Mr. Coppola receives an annual base salary of $200,000 and was granted three-year options to purchase 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. In addition, Mark provides Mr. Rosenberg with an automobile and maintenance and use reimbursement. Mr. Rosenberg's employment is terminable for cause 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 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 for cause by Mark upon written notice and provides for a one-year non-compete period to take effect upon termination. -28- 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. 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 daily per share closing price. 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 30, 1999. The persons named in the table have sole voting and investment power with respect to all shares of Common Stock owned by them, unless otherwise noted. - ------------------------------------------------------------------------------- Number of % of Shares Beneficial Owner Shares Owned Outstanding - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Carl C. Coppola % Mark Solutions, Inc. 1515 Broad Street Bloomfield NJ 07003 699,275 (1) 11.9% - ------------------------------------------------------------------------------- William Westerhoff 40,000 (2) (4) - ------------------------------------------------------------------------------- Richard Branca 56,250 (2) (4) - ------------------------------------------------------------------------------- Michael Rosenberg 80,975 (3) 1.4% - ------------------------------------------------------------------------------- Ronald E. Olszowy 52,500 (2) (4) - ------------------------------------------------------------------------------- Leonid Futerman 99,750 (5) 1.7% - ------------------------------------------------------------------------------- Michael Nafash 53,375 (6) (4) - ------------------------------------------------------------------------------- Yitz Grossman 29,833 (7) (4) - ------------------------------------------------------------------------------- All executive officer and directors as a group (7 persons) 1,111,958(8) 17.9% - ------------------------------------------------ ------------------------------ -29- (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 250,000 shares of Common Stock issuable pursuant to options that are presently exercisable. (2) Represents or includes 40,000 shares of Common Stock issuable pursuant to options which are presently exercisable. (3) Includes 66,250 shares of Common stock issuable pursuant to options which are presently exercisable. (4) Less than 1% (5) Includes 97,500 shares of Common stock issuable pursuant to options which are presently exercisable. (6) Includes 52,500 shares of Common Stock issuable pursuant to options that are presently exercisable. (7) Includes 4,833 shares held in charitable trust of which Mr. Grossman serves as one of the trustees. Mr. Grossman disclaims beneficial ownership of these shares. Also includes 25,000 shares of Common Stock issuable pursuant to options that are presently exercisable. (8) Includes 611,250 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, 1999, Mark paid Mark Lighting $244,000 for such goods and services. In connection with all modular steel cell projects which require performance bonds, Mr. Coppola provides third party guarantees. In May 1998, Mark loaned Mr. Coppola $100,000 at 10% interest per annum. The loan was payable on demand and was repaid in full in September 1998. 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. See Item 11. 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. -30- 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, F-2 - Consolidated Balance Sheets for June 30, 1999 and 1998 F-3 - Consolidated Statements of Operations for fiscal years ended June 30, 1999, 1998 and 1997 F-5 - Consolidated Statements of Stockholders Equity for fiscal years ended June 30, 1999, 1998 and 1997 F-6 - Consolidated Statement of Cash Flows for fiscal years ended June 30, 1999, 1998 and 1997 F-8 - Notes to Consolidated Financial Statements F-9 - Chantrey Vellacott Report F-26 - Baker Tilly Report F-28 (3) Exhibits. Exhibit Number Description 2. a)-- Stock purchase Agreement between Mark and Ian Baverstock, Jonathan Newth, David Payne and Joanna Tubbs dated April 5, 1996. (Incorporated by reference to Exhibit 1 to Mark's Form 8-K-Dated of Report May 28, 1996 referred to herein as "Mark's May 1996 Form 8-K") b)-- Stock Purchase Agreement between Mark and Christopher Cummins and Moria Addington dated April 24, 1996. (Incorporated by reference to Exhibit 2 to Mark's May 1996 Form 8-K) 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) -31- b)-- Certificate of Designation of Series "A" Preferred Stock.(Incorporated by reference to Exhibit 3(i)2 to Mark's Form 10-Q for the period ended December 31, 1998) c)-- Certificate of Designation of Series "B" Preferred Stock. (Incorporated by reference to Exhibit 3(i)3 to Mark's Form 10-Q for the period ended December 31, 1998) d)-- 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) 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) -32- 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 34) 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, 1999: Date of Report Items Reported, Financial Statements Filed ---------------- ------------------------------------------- April 16, 1999 Item 5. Other Events -33- 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, 1999 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, 1999 - ---------------------- President and Director (Carl Coppola) (Principal Executive Officer) /s/Michael Nafash Chief Financial Officer, October 12, 1999 - ---------------------- Vice President and (Michael Nafash) Director /s/ Richard Branca Director October 12, 1999 - ---------------------- (Richard Branca) /s/ Ronald Olszowy Director October 12, 1999 - --------------------- (Ronald E. Olszowy) /s/William Westerhoff Director October 12, 1999 - --------------------- (William Westerhoff) /s/Yitz Grossman Director October 12, 1999 - --------------------- (Yitz Grossman) -34- Report of Independent Certified Public Accountants Board of Directors and Shareholders Mark Solutions, Inc. and Subsidiaries Bloomfield, New Jersey We have audited the consolidated balance sheets of Mark Solutions, Inc. and Subsidiaries as of June 30, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our 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, 1999 and 1998, respectively, and a net loss of $1,375 and $1,301 for the years then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for MarkCare Medical Systems Limited, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material 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, 1999 and 1998, and the results of its operations and cash flows for the years then ended, in conformity with generally accepted accounting principles. HOLTZ RUBENSTEIN & CO., LLP Melville, New York September 2, 1999 F-1 Independent Auditors' Report To the Board of Directors and Stockholders of Mark Solutions, Inc. and Subsidiaries We have audited the accompanying consolidated statements of operations, stockholders' equity (impairment), and cash flows of Mark Solutions, Inc. and Subsidiaries for the year ended June 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We did not audit the financial statements of MarkCare Medical Systems Limited, a wholly owned subsidiary, which statements reflect total revenues of $224 for the year ended in June 30, 1997. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofor as it relates to the amounts included for MarkCare Medical Systems Limited, is based solely on the report of the other auditors. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of its operations and cash flows of Mark Solutions, Inc. and Subsidiaries for the year ended June 30, 1997 in conformity with generally accepted accounting principles. Sax Macy Fromm & Co., PC Certified Public Accountants Clifton, New Jersey August 22, 1997 Except for Note 1 as to which the date is September 23, 1997 F-2
MARK SOLUTIONS, INC. AND SUBSIDIARIES ------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- (in thousands, except share and per share data) June 30, -------------------------------- 1999 1998 ASSETS ---------- ----------- ------ CURRENT ASSETS: Cash and cash equivalents $ 298 $ 565 Restricted cash - 1,234 Subscriptions receivable - 1,231 Note receivable 250 - Accounts receivable, less allowance for doubtful accounts of $6 in 1999 and 1998 4,744 624 Costs and estimated earnings in excess of billings on uncompleted contracts 1,007 - Due from officer - 102 Inventories (Note 3) - 112 Deferred tax asset (Note 12) 500 - Prepaid expenses 65 208 ---------- ----------- Total current assets 6,864 4,076 ---------- ----------- PROPERTY AND EQUIPMENT: Machinery and equipment 1,550 1,546 Demonstration equipment 395 436 Office furniture and equipment 960 398 Leasehold improvements 424 189 Vehicles 62 62 Property held under capital lease 285 47 ---------- ----------- 3,676 2,678 Less accumulated depreciation and amortization 2,452 2,239 ---------- ----------- Net property and equipment 1,224 439 ---------- ----------- OTHER ASSETS: Costs in excess of net assets of business acquired, less accumulated amortization of $647 in 1999 and $437 in 1998 (Note 2) 402 612 Deferred tax asset (Note 12) 500 - Other assets 80 47 ---------- ----------- Total other assets 982 659 ---------- ----------- $ 9,070 $ 5,174 ========== ===========
The accompanying notes are an Integral Part of these Consolidated Financial Statements F-3
MARK SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Cont'd) (in thousands, except share and per share data) June 30, -------------------------------- 1999 1998 ---------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 3,617 $ 716 Current maturities of long-term debt (Note 6) 365 108 Current portion of obligations under capital leases (Note 10) 87 20 Deferred revenue 656 - Due to related parties (Note 5) 178 15 Notes payable to officers/stockholders (Note 5) 375 - Accrued liabilities 254 140 Litigation settlement payable (Note 4) 300 - ---------- ----------- Total current liabilities 5,832 999 ---------- ----------- OTHER LIABILITIES: Long-term debt, excluding current maturities (Note 6) 370 1,029 Long-term portion of obligations under capital leases (Note 10) 135 31 ---------- ----------- 505 1,060 ---------- ----------- COMMITMENTS AND CONTINGENCIES (Note 11) TEMPORARY EQUITY (Note 7) - 1,220 ---------- ----------- STOCKHOLDERS' EQUITY: (Note 6, 7 and 9) Common stock, $.01 par value, 50,000,000 shares authorized, 5,525,296 and 4,824,167 shares issued and outstanding at June 30, 1999 and 1998, respectively 55 48 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 - Additional paid-in capital 34,433 31,991 Deficit (31,917) (30,144) Accumulated other comprehensive income 183 - Treasury stock, at cost; 17,500 shares at June 30, 1999 (51) - ---------- ----------- 2,733 1,895 ---------- ----------- $ 9,070 $ 5,174 ========== ===========
The accompanying notes are an Integral Part of these Consolidated Financial Statements F-4
MARK SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) Years Ended June 30, ----------------------------------------------------- 1999 1998 1997 ---------- --------- --------- REVENUES (Note 14) $ 10,226 $ 12,922 $ 6,450 ---------- --------- --------- COSTS AND EXPENSES: (Notes 4, 5, 10 and 11) Cost of sales 7,113 10,628 6,201 General and administrative expenses 2,085 2,405 2,312 Marketing costs 1,264 679 604 Software costs 1,225 409 256 Amortization expense 210 210 210 Litigation settlement 396 - - Contract termination settlement - 115 - Consulting fees 402 175 504 Bad debt expense - 292 105 ---------- --------- --------- 12,695 14,913 10,192 ---------- --------- --------- OPERATING LOSS (2,469) (1,991) (3,742) ---------- --------- --------- OTHER INCOME (EXPENSES): Interest income 46 13 21 Interest expense (286) (250) (290) Imputed interest expense on convertible debentures - (160) (1,423) Other (1) - (5) ---------- --------- --------- (241) (397) (1,697) ---------- --------- --------- LOSS BEFORE INCOME TAX BENEFIT (2,710) (2,388) (5,439) INCOME TAX BENEFIT (Note 12) 1,000 - - ---------- --------- --------- NET LOSS $ (1,710) $ (2,388) $ (5,439) ========== ========== ========= BASIC LOSS PER SHARE (Note 9) $ (.36) $ (.58) $ (1.53) ========= ========== ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (Note 9) 4,945,257 4,145,101 3,555,402 ========== ========== ==========
The accompanying notes are an Integral Part of these Consolidated Financial Statements F-5
MARK SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (in thousands, except share and per share data) Common Stock Preferred Series A Preferred Series B ------------ ------------------ ------------------ Total Shares Amount Shares Amount Shares Amount ----- ------ ------ ---------- -------- --------- ------- Balance, July 1, 1996 $ 2,079 3,394,078 $ 34 - $ - - - Net loss/comprehensive loss (5,439) - - - - - - Conversion of convertible debentures 1,409 248,049 2 - - - - Imputed interest expense in convertible debentures 1,423 - Deferred inputed interest on convertible debentures 160 - - - - - - Warrants issued for services 131 - - - - - - Conversion of warrants - - - - - - - Commissions and related fees (22) - - - - - - Issuance of stock through private placement 106 52,644 1 - - - - ------- --------- -------- ---------- -------- ---------- -------- Balance, June 30, 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 debenture 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) 122,000 122 153,000 153 Preferred stock conversion to common stock - 869,012 8 (98,000) (98) (147,000) (147) 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 - - - - - - - Imputed interest on convertible Preferred Stock (23) - - - - - - ------- --------- ------ ---------- -------- ---------- -------- Balance, June 30, 1999 $ 2,733 5,525,296 $ 55 24,000 $ 24 6,000 $ 6 ======= ========= ====== ========== ======== ========== ========
The accompanying notes are an integral part of these consolidated financial statements F-6
MARK SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (in thousands, except share and per share data) Other Treasury Stock Paid in Retained Comprehensive ------------------ Capital Deficit Income Shares Amount ------- ------- --------------- ------- ------ Balance, July 1, 1996 $24,362 $(22,317) $ - - $ - Net loss/comprehensive loss - (5,439) - - - Conversion of convertible debentures 1,407 - - - - Imputed interest expense in convertible debentures 1,423 - - - - Deferred inputed interest on convertible debentures 160 - - - - Warrants issued for services 131 - - - - Conversion of warrants - - - - - Commissions and related fees (22) - - - - Issuance of stock through private placement 105 - - - - ------- -------- ---------- ------- ------ Balance, June 30, 1997 27,566 (27,756) - - - ------- -------- ---------- ------- ------ Net loss/comprehensive loss - (2,388) - - - Conversion of convertible debentures 2,193 - - - - Deferred inputed interest on convertible debenture 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 (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 1,675 - - - - Preferred stock conversion to common stock 237 - - - - Conversion of convertible debentures 99 - - - - Amortization of financing fees 47 - - - - Stock issued for services 344 - - - - Imputed dividend on convertible Preferred Stock 63 (63) - - - Imputed interest on convertible Preferred Stock (23) - - - - ------- -------- ---------- ------- ------ Balance, June 30, 1999 $34,433 $(31,917) $ 183 17,500 $ (51) ======= ======== ========== ======= ====== The accompanying notes are an integral part of these consolidated financial statements
F-7
MARK SOLUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands) Years Ended June 30, ------------------------------------------- 1999 1998 1997 ---------- ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (1,710) $ (2,388) $ (5,439) --------- ---------- --------- Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 523 360 377 Amortization of debt issue costs 110 - 148 Deferred imputed interest on convertible debentures - - 160 Securities issued for services 345 207 131 Stock issued for interest expense - 193 1,472 Deferred taxes (1,000) - - Loss on disposition of property and equipment - - 5 (Increase) decrease in assets: Restricted cash 1,234 (1,234) 182 Accounts receivable (3,937) 2,555 (2,274) Costs and estimated earnings in excess of billings on contract in progress (1,007) - - Inventories 112 224 (190) Other current assets 2 22 (98) Due from officer 102 (102) - Other assets (33) 48 (34) Increase (decrease) in liabilities: Accounts payable 2,901 (923) 1,139 Due to related parties 163 (282) 251 Accrued liabilities 114 (118) (65) Litigation settlement payable 300 - - Deferred revenue 656 - - --------- ---------- --------- Net adjustments to reconcile net loss to net cash used for operating activities 585 950 1,204 --------- ---------- --------- Net cash used for operating activities (1,125) (1,438) (4,235) --------- ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (877) (216) (139) Note receivable (250) - - Proceeds from sale of assets - - 2 --------- ---------- --------- Net cash used for investing activities (1,127) (216) (137) --------- ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 379 1,033 4,500 Repayments of long-term debt (31) (457) (399) Proceeds from short-term borrowings 1,050 1,080 1,186 Repayment of short-term borrowings (675) (1,515) (820) Repayment of notes payable for equipment and vehicles (50) (11) (17) Advances to officer 375 - 160 Repayment of advances from officer - (160) - Repayment of offering costs and commissions (243) (46) (22) Proceeds from issuance of securities - 1,872 106 Payment of debt issue costs - - (163) Collection of subscription receivable 1,231 - - Purchase of treasury stock (51) - - --------- ---------- --------- Net cash provided by financing activities 1,985 1,796 4,531 --------- ---------- --------- Net (decrease) increase in cash and cash equivalents (267) 142 159 Cash and cash equivalents at beginning of year 565 423 264 --------- ---------- --------- Cash and cash equivalents at end of year $ 298 $ 565 $ 423 ========= ========== =========
The accompanying notes are an integral part of these consolidated financial statements F-8 MARK SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED JUNE 30, 1999 (in thousands, except share and per share data) 1. Management Plans: ---------------- Mark Solutions, Inc.'s (the "Company") modular cell products represent an alternative to traditional construction methods, and penetration into the construction market has met resistance typically associated with an unfamiliar product. Accordingly, the Company has been and will continue to be subject to significant sales fluctuations until its modular cell technology receives greater acceptance in the construction market, which management believes will occur as new projects are awarded and completed. In May 1996, the Company acquired MarkCare Medical Systems Limited, 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, a large computer hardware and integration provider, pursuant to which Data General will include the IntraScan II PACS software program in proposals to health care institutions. Although no assurances can be given, management believes that these actions will improve the effectiveness of its marketing plan and will enable the Company to generate 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, 1998 from Data General. The Company's working capital requirements have historically exceeded its working capital from operations. Accordingly, the Company has been dependent, and absent significant improvements in operations, will continue to be dependent on the infusion of new capital in the form of equity or debt financing. The Company will initially look to the exercise of presently outstanding warrants and options to meet working capital deficits, however if sufficient securities are not exercised, the Company will consider additional private sales of its securities. The Company believes the existing modular cell and IntraScan II contracts, presently available working capital, projected modular cell and IntraScan II contracts and other financial developments will result in improved operating results. F-9 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 Solutions, Inc. ("Mark") and its wholly owned Subsidiaries, MarkCare Medical Systems, Inc. ("MarkCare"), and MarkCare Medical Systems Limited (LTD). Prior to consolidation, the financial statements of LTD are reconciled to U.S. Generally Accepted Accounting Principles. c. Revenue recognition - Revenues are recorded at the time services are ------------------- performed or when products are shipped except for manufacturing contracts which are recorded on the percentage-of-completion method which measures the percentage of costs incurred over the estimated total costs for each contract. This method is used because management considers incurred costs to be the best available measure of progress on these contracts. Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The Company provides an allowance for bad debts and returns based upon its historical experience. 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-10 2. Summary of Significant Accounting Policies: (Cont'd) ------------------------------------------ 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. h. Income taxes - Deferred income taxes are recognized for tax ------------- consequences of "temporary differences" by applying enacted statutory tax rates, applicable to future years, to differences between the financial reporting and the tax basis of existing assets and liability. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. 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, 1999, 1998 and 1997. F-11 2. Summary of Significant Accounting Policies: (Cont'd) ------------------------------------------ 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 engineering 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 and 1997. 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. F-12 3. Inventories: ------------ Inventories consist of the following: June 30, --------------------------- 1999 1998 ----------- ----------- Raw materials $ - $ 85 Finished goods - 27 ----------- ----------- Total inventories $ - $112 =========== =========== 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. In the event either of the payments are not made, Mark has agreed to a stipulated judgment against it for $459. 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: June 30, 1999 1998 1997 ----------- ----------- ----------- Purchases $ 181 $ 421 $ 231 Expense reimbursement - 58 135 Consulting 33 1 34 Bonding fees - (5) 96 F-13 5. Related Party Transactions: (Cont'd) --------------------------- As a result of current and prior years' transactions, the Company has net balances due to (from) the following related parties, which will be settled in the ordinary course of business: June 30, --------------------------- 1999 1998 ----------- ----------- Mark Lighting Fixture Co., Inc. $ 172 $ 3 Metalite, Inc., 6 9 Laborstat, Inc. - (1) Carl Coppola 100 (102) Other officers/shareholders 275 4 ----------- ----------- Due to (from) related parties $ 553 $ (87) =========== =========== In connection with several modular cell projects, the Company's Chief Executive Officer, Carl Coppola, provided third party guarantees to assist the Company in obtaining performance and completion bonds. As compensation for providing these guarantees, the Company recorded $96 representing five percent of the gross proceeds from these projects for the year ended June 30, 1997. During May 1997, the Company received an aggregate of $160 and issued 10% promissory notes payable to its Chief Executive Officer with principal and interest due August 20, 1997 and September 30, 1997, respectively, and interest due semi-annually. The entire balance was paid during fiscal 1998. The Company grants non-employee directors, options for serving on the Board of Directors. On December 3, 1997, each of the Company's directors were granted five-year options to purchase 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 purchase 25,000 shares of Common Stock at $4.50 per share, the closing price on the date of the grant. The loan made to Carl Coppola during fiscal 1998 of $102 was repaid in September 1998. F-14 6. Long-Term Debt: --------------- a. Long-term debt consists of the following: June 30, ------------------- 1999 1998 -------- -------- Note payable, bearing interest at prime plus 2%, monthly installments of $16 plus interest through September 2000; balloon payment of $234 due in October 2000. $ 375 $ - Note payable, payable in monthly installments of $14, including interest, through April 2001 collateralized by equipment. 287 - Note payable, payable in monthly installments of $6, including interest, through June 2000 collateralized by software. 69 - 7% convertible debentures - 1,125 Other 4 12 -------- -------- Total long-term debt 735 1,137 Less current portion 365 108 -------- -------- Long-term debt, excluding current portion $ 370 $ 1,029 ======== ======== Maturities of total long-term debt are as follow: Years Ending June 30, ----------- 2000 $ 365 2001 370 b. Convertible securities ---------------------- On August 23, 1996, the Company sold $2,200 principal amount 7% convertible debentures. The entire debenture had been converted at June 30, 1998. In connection with the issuance of these debentures, the Company incurred $163 of debt issue costs. These costs were charged to operations over the remaining term of these debentures. On January 21, 1997, the Company sold $750 principal amount 7% convertible debentures due January 1999. These 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. F-15 6. Long-Term Debt: (Cont'd) -------------- Based on certain adjustment provisions, the Company is obligated to issue an additional 187,500 shares of common stock if the per share stock price is below $2.50 on October 31, 1999 or July 31, 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. On June 27, 1997, the Company sold $300 principal amount 7% convertible debentures due June 29, 1999. These debentures were convertible, 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 an 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 (see Note 9b). The Company has charged to operations for the years ending June 30, 1999, 1998 and 1997, $0, $160 and $1,423 of imputed interest expense on convertible debentures, which represents the discount on conversion of each of the above convertible debentures. 7. Temporary Stockholders' Equity: ------------------------------ Due to issues regarding certain terms of the Private Placement, each of the investors was an "underwriter" of the Private Placement Shares in connection with any resale and had rescission rights through November 4, 1999. The intention of the January 1999 exchange placement (see Note 9b) was to address the underwriter status and terminate the recession rights. If any of the investors had asserted rescission rights and ultimately prevailed`, the investors would be entitled to (i) return the Private Placement Shares, related warrants and the rights to certain adjustment shares, if any, and receive a refund of their purchase price of F-16 7. Temporary Stockholders' Equity: (Cont'd) ------------------------------ $1,220 plus interest or (ii) if the Private Placement Shares, related warrants and the rights to the adjustment shares, if any, are sold, sue for the difference between the purchase price of $1,220 and the sales price of these securities. Accordingly, $1,220 of the proceeds from the Private Placement was classified in the Consolidated Balance Sheet at June 30, 1998 as "Temporary Stockholders Equity". Securities issued under the Private Placement were exchanged for equity securities in January 1999 (see Note 9b). 8. Fair Value of Financial Instruments: ----------------------------------- The estimated fair value of the Company's convertible debt as of June 30, 1998 is as follows: Carrying Fair Amount Value -------- -------- Convertible debt $ 1,125 $ 1,125 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. 9. 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 F-17 9. Stockholders' Equity: (Cont'd) -------------------- 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). The Preferred Stock will automatically convert into Common Stock on June 30, 2000 at the then applicable conversion price. Except as otherwise required by law, the holders of shares of Preferred Stock have four votes per share voting as a single class with the Common Stock. Each share of Preferred Stock receives a quarterly dividend with an annual rate of $0.70 per share. The dividends of the Preferred Stock are payable in cash or Common Stock, at the option of Mark. In the event of any liquidation, the holders of the Preferred Stock will share equally in any balance of Mark's assets available for distribution to them up to $10.00 per share plus unpaid dividends, after satisfaction of creditors and the holders of Mark's senior securities, if any. b. Exchange placement ------------------ 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. 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. The Preferred Stock Unit Option is exercisable until January 28, 2000. 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. F-18 9. Stockholders' Equity: (Cont'd) -------------------- c. Preferred stock conversion -------------------------- 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, 1999, 1998 and 1997 is as follows: June 30, ---------------------------------------- 1999 1998 1997 ----------- ---------- --------- Net loss $ (1,710) $ (2,388) $ (5,439) Less imputed preferred stock dividend 63 - - ---------- ---------- --------- Loss available to common shareholders $ (1,773) $ (2,388) $ (5,439) ========== ========== ========== Weighted average shares outstanding 4,945,257 4,145,101 3,555,402 ========== ========== ========= Loss per share $(.36) $(.58) ($1.53) ====== ====== ======= 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. F-19 9. Stockholders' Equity; (Cont'd) --------------------- The following information relates to shares under option and shares available for grant under the Plan:
June 30, -------------------------------------------------------------------------------------- 1999 1998 1997 -------------------------- -------------------------- -------------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average ----------- ----------- ----------- ----------- ----------- ----------- Outstanding, beginning of year 99,875 $ 5.80 95,250 $ 8.16 91,750 $ 4.00 Granted 17,250 4.00 131,000 10.86 70,625 6.40 Canceled (9,375) (5.58) (126,375) 11.80 (67,125) 15.24 Exercised - - - - - - ----------- ---------- ----------- -------- -------- ------ Outstanding, end of year 107,750 $5.53 99,875 $ 5.80 95,250 $ 8.16 =========== ========== =========== ======== ========= ====== Available for issuance under Plan 122,250 130,125 134,750 Weighted average contractual life (years) 1.23 1.95 2.24 Shares subject to exercisable option 107,750 99,875 95,250
g. Stock warrants ---------------
Outstanding warrants are as follows: June 30, --------------------------------------------------------------------------------------- 1999 1998 1997 --------------------------- -------------------------- -------------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average ------------ ----------- ----------- ----------- ----------- ----------- Warrants outstanding, beginning of year 1,061,667 $ 9.72 810,440 $ 14.56 983,470 $ 16.40 Granted 198,750 3.58 641,250 6.32 348,750 11.64 Exercised - - (145,000) (10.44) (10,893) 9.72 Expired (125,417) 13.44 (245,023) (16.80) (510,887) 16.08 --------- -------- ---------- -------- --------- -------- Warrants outstanding, end of year 1,135,000 $ 8.23 1,061,667 $ 9.72 810,440 $14.56 ========= ======== ========== ======== ========= ======== Weighted average contractual life (years) 2.17 2.56 1.51
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 1999, 1998 and 1997: risk-free interest rate of 6.50%, 6.40% and 5.57%; 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, 3.3 and 2.0 years. The weighted average fair value of options granted during fiscal 1999, 1998 and 1997 were $.57, $1.76 and $1.84, respectively. F-20 9. Stockholders' Equity: (Cont'd) --------------------- The Company's pro forma information follows: June 30, ----------------------------------- 1999 1998 1997 ------- ------- -------- Pro forma net (loss) $(1,772) $(3,017) $(5,702) Pro forma loss per common share (.37) (.73) (1.60) 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. The Company also leases various automobiles and small office equipment. Future minimum rental payments under these operating leases are as follows: Year Ended June 30, ---------- 2000 $ 460 2001 459 2002 388 2003 327 2004 322 Thereafter 2,969 -------- Total future minimum rental payments $ 4,925 ======== Rent expense for the years ending June 30, 1999, 1998 and 1997 was $300, $330 and $254, respectively. b. Capital leases -------------- The Company leases certain equipment under capital leases with expiration dates ranging from April 2000 through April 2002. F-21 10. Leases: (Cont'd) ------ Future minimum lease payments are as follows: Year Ended June 30, ---------- 2000 $126 2001 105 2002 53 ---- Total future minimum lease payments 284 Less: amount representing interest 62 ---- Present value of net future minimum lease payments 222 Less: current portion of obligations under capital leases 87 ----- Long-term portion of obligations under capital leases $135 ==== 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, 1999 under such contracts approximated $904. 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, 1999 and 1998, the Company's uninsured cash balances approximated $176 and $1,576, 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, 1999, the Company has Federal net operating loss carry forwards of approximately $21,900. Such carry forwards begin to expire in 2009 if not previously used. Approximately $1,700 carry forward is restricted as to utilization subject to the provisions of Internal Revenue Code Section 382. F-22 12. Income Taxes: (Cont'd) ------------ 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 $7,450 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. This program has a $50,000 cap for the fiscal year ended June 30, 2000. Upon acceptance of an application, each applicant receives $250. Any additional monies are distributed until the cap is met. 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, --------- 1999 1998 -------- ------- Sale of net operating loss $ 1,200 $ - Valuation allowance (200) - -------- ------- $ 1,000 $ - ======== ======= 13. Supplemental Cash Flow Information: ---------------------------------- a. Cash paid for interest during the years ended June 30, 1999, 1998 and 1997 amounted to $191, $65 and $41, respectively. b. The Company acquired certain equipment with an aggregate cost of $221, $25 and $6 under capital leases obligations for the years ended June 30, 1999, 1998 and 1997, respectively. c. 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 (see Note 9b). During 1998, $2,200 of debentures were converted into 650,625 shares of common stock. During 1997, $360 of converted debentures were liquidated through the issuance of common stock. d. During 1998, the Company granted outside consultants options to acquire 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 1998 options ($92) 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. F-23 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:
Modular Steel Medical Intersegment Products Products Charges Total -------- -------- ------------- ----- 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 (204) (2,296) - (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) 23 (2,411) - (2,388) Segment assets 10,375 917 (6,118) 5,174 Capital expenditures 216 42 - 216 Year ended June 30, 1997: Revenues $ 6,114 $ 336 $ - $ 6,450 Interest income 20 1 - 21 Interest expense 273 17 - 290 Depreciation and amortization 283 94 - 377 Segment pre-tax loss (4,386) (1,053) - (5,439) Segment assets 5,002 430 - 5,432 Capital expenditures 139 - - 139
The following table presents revenues by country based on the location of the use of the product or service: June 30, 1999 1998 1997 ---------- --------- --------- United States $ 9,094 $ 12,872 $ 6,226 Korea 492 - - Spain 400 - - United Kingdom 150 50 224 Other 90 - - ---------- --------- --------- $ 10,226 $ 12,922 $ 6,450 ========== ========= ========= F-24 14. Segment Information: (Cont'd) ------------------- The following table presents long-lived assets by country based on the location of the assets: June 30, ------------------- 1999 1998 --------- ------- United States $ 1,190 $ 406 United Kingdom 114 33 --------- ------ $ 1,304 $ 439 ========= ====== For the year ended June 30, 1999, three customers accounted for 46%, 13% and 11% of total revenues, respectively. For the years ended June 30, 1998 and 1997, one customer accounted for 93% and 48% of the total revenues. 15. Subsequent Event: --------------- On July 1, 1999, the Company borrowed $200 under a 10% note, payable on or before July 31, 2000. The loan agreement provided that, in the event the loan was not repaid before September 1, 1999, the loan would be converted into preferred stock which would be convertible into shares of common stock at a rate of 70% of the average closing bid price of the five trading days immediately preceding the conversion date. The loan was converted to in September 1999. F-25 CHANTREY VELLACOTT MARKCARE MEDICAL SYSTEMS LIMITED Auditors' Report To The Members of MarkCare Medical Systems Limited We have audited the financial statements, [for the year ended June 30, 1999]. Which have been prepared under the historical cost convention [ ]. Respective Responsibilities Of Directors And Auditors As described [ ] the company's directors are responsible for the preparation of the financial statements. It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion to you. Basis Of Opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting polices are appropriate to the company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Going concern In forming our opinion we have considered the adequacy of the disclosures made in the financial statements [ ] concerning the basis on which the financial statements have been prepared. The financial statements have been prepared on a going concern basis. We considered that this matter should be drawn to your attention but our opinion is not qualified in this respect. US GAAP and US GAAS With respect to the information disclosed in the financial statements, we are not aware of any material differences between UK Generally Accepted Accounting Principles and US Generally Accepted Accounting Principles or between UK Auditing Standards and US Generally Accepted Auditing Standards. F-26 Opinion In our opinion the financial statements give a true and fair view of the state of the company's affairs at 30 June 1999 and of its loss for the year then ended and have been properly prepared in accordance with the Companies Act of 1985. /s/ Chantrey Vellacott Chartered Accountants Registered Auditors LONDON F-27 BAKER TILLY AUDITORS REPORT TO THE MEMBERS OF MARKCARE MEDICAL SYSTEMS, LTD. We have audited the financial statements. [for the year ended June 30, 1997]. Respective responsibilities of directors and auditors As described [ ] the company's directors are responsible for the preparation of the financial statements. It is our responsibility to form and independent opinion, based on our audit, on those statements and to report our opinion to you. Basis of opinion We conducted our audit, in accordance with Auditing Standards issued by the Auditing Practice Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit, as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Fundamental Uncertainty These accounts have been prepared under the going concern accounting policy. This is on the basis that the holding company and the directors will continue to provide sufficient finance to enable the company to meet its liabilities. The balance sheet position at June 30, 1997, is insolvent by L 340,319. As stated in the financial statements amounts owned to the holding company and a company owned by a director total L 324,476. The company is therefore reliant on the holding company and directors support in order to continue trading. Our opinion is not qualified in this respect. US GAAP and US GAAS With respect to the information disclosed in the financial statements, we are not aware of any material differences between UK Generally Accepted Accounting Principles and US Generally Accepted Accounting Principles or between UK Auditing Standards and US Generally Accepted Auditing Standards. F-28 Opinion In our opinion the financial statements give a true and fair view of the state of the company's affairs at 30 June 1997 and of its loss for the period then ending and have been properly prepared in accordance with the provisions of the Companies Act 1985. /s/ Baker Tilly Registered Auditors Chartered Accountants Old Sarum House 49 Princes Street Yeovil, Somerset BA20 1EG F-29 EX-10 2 EMPLOYMENT CONTRACT - MICHAEL ROSENBERG Exhibit 10 b) EMPLOYMENT AGREEMENT Employment Agreement ("Agreement") dated as of December 1, 1998 by and between, Mark Solutions, Inc. a Delaware Corporation (the "Company"), and Michael Rosenberg, residing at 11 Kingsley Drive, Manalapan, New Jersey 07726 the ("Executive"). W I T N E S E T H ------------------ NOW THEREFORE, and in consideration of the promises and covenants herein contained and intending to be legally bound hereby, the parties agree as follows: 1. Employment ---------- (a) The Company hereby employs the Executive as Executive Vice President of Sales and Marketing of the Company for and during the term hereof, subject to the supervision and control of the Company's Board of Directors. The Executive hereby accepts employment. (b) The Executive shall have such duties as may be reasonably assigned to him from time to time by the Board of Directors consistent with his status as Executive Vice President of Sales and Marketing of the Company. (c) The Executive agrees to devote his full business time and services to the faithful performance of the duties, responsibilities, and authorities which may be reasonably assigned to him and which are consistent with his executive status under this Agreement. During the term of his employment, Executive shall engage in no other business activities whatsoever, except for the passive supervision of his investments. 2. Term ---- (a) The term of this Agreement shall commence effective on this date and shall terminate on the third anniversary of this date. 3. Compensation and Benefits ------------------------- (a) Executive shall be paid a salary at the rate of $125,000 per year (the "Base Salary"), subject to withholding taxes, which Base Salary shall be payable at least monthly in periodic payroll installments. This amount shall be increased at each anniversary date by $25,000. (b) The Executive shall be entitled to participate in all bonus and benefit programs that the Company establishes and makes available to its management level employees, if any. 1 (c) The Executive shall receive paid vacation each year during the term of this Agreement, which vacation may be taken or accrued by the Executive in accordance with the written business policies of the Company. (d) The Company shall directly pay or shall immediately reimburse the Executive for all reasonable travel, entertainment and other expenses incurred or paid by the Executive in connection with, or related to, the performance of his duties, responsibilities or services under this Agreement, inclusive of the use of a company vehicle. (e) The Executive shall receive three-year options to purchase 150,000 shares of the Company's Common Stock at $1.00 per share (the "Options"). The Options shall be exercisable as follows: 50,000 shares of Common Stock on the date of this agreement, an additional 50,000 shares of Common Stock on October 1, 1999 and an additional 50,000 shares of Common Stock on October 1, 2000; provided, however, the Options hall become immediately exercisable as to all 150,000 shares of Common stock for a period of sixty(60) days after the effective date of a termination of the Executive's employment by the company other than for "cause" as defined in Section 4(c). In the event the Executive resigns or is terminated for "cause"; the Options shall immediately expire on the effective date of the resignation or termination. If the employee is terminated for cause, all options are immediately terminated. 4. Termination. Notwithstanding any other provisions in this Agreement: ----------- (a) If the Executive dies during the term of this Agreement and while in the employ of the Company, this Agreement shall automatically terminate, effective thirty (30) days after the date of the Executive's death; and the Company shall pay the Executive's estate his full compensation for the month during which the Executive died, but shall have no further compensation under this Agreement, other than accrued vacation. (b) If, during the term of this Agreement, the Executive is unable to perform his duties hereunder as a result of any physical or mental disability which continues (i) for 90 consecutive days or (ii) for 180 days in any 365 day period, then the Company, may terminate this Agreement upon written notice to the Executive. (c) At any time during the term of this Agreement, the Company may discharge the Executive for cause and terminate this Agreement without any further liability hereunder to the Executive or his estate, provided that the Company shall first be required to deliver written notice to the Executive of the event or acts or omissions which constitute "cause" and the Executive shall have had thirty (30) days to cure such event, act or omission. For purposes of this Agreement, "cause" shall mean one or more of the following events: i. Conviction by a court of competent jurisdiction in the United States for fraud, misappropriation or embezzlement by the Executive in connection with the Company; or 2 ii. Gross neglect of duties which has a detrimental effect on the Company; or iii.Conviction by a court of competent jurisdiction in the United States of a felony or a crime involving moral turpitude; or iv. Willful and unauthorized disclosure of confidential or proprietary trade secret information of the Company; or v. The Executive's breach of any material term or provision of this Agreement, after notice to the Executive of the particular details thereof. vi. In the event of termination of the employment for cause, Executive shall only be entitled to receive any Base Salary, bonus compensation and other benefits accruing prior to such termination and shall not be entitled to any other payments or compensation. In the event of termination without cause, Executive shall be entitled to receive any Base Salary, bonus compensation and other benefits accruing prior to such termination plus an amount equal to Executive's base salary for a period of 12 months. 5. Covenants --------- (a) Executive covenants that, while he is an employee of the Company and for 12 months thereafter neither he nor any of his affiliates will, directly or indirectly (whether as an investor, shareholder, employee or otherwise), anywhere in the world: i. Engage in or participate in any business, which is in competition with any aspect of any business now or hereafter conducted by Company. ii. Employ or retain any person who was employed or retained by the Company at any time during the six months prior to the termination of the Executive's employment. (b) Executive recognizes that his position with the Company is one of the highest trust and confidence by reason of Executive's access to and contact with trade secrets and confidential and proprietary information of the Company, if any. Executive shall use his best efforts and exercise utmost diligence to protect and safeguard and keep confidential the trade secrets and confidential and proprietary information of the Company to the extent that the same exists. 3 (c) Executive covenants that while he is an employee of the Company and thereafter, he will not disclose disseminate or distribute to another, nor induce any other person to disclose, disseminate, or distribute, any trade secret or proprietary or confidential information of the Company to the extent that the same exists, directly or indirectly, either for Executive's own benefit or for the benefit of another, whether or not acquired, learned, obtained or developed by Executive, or use of or cause to be used, any trade secret, proprietary or confidential information in any way except as is required in the course of his employment with the Company. (d) All trade secrets and confidential and proprietary information relating to the business of the Company whether prepared by Executive or otherwise coming into his possession, shall remain the exclusive property of the Company and shall not, except in the furtherance of the business of the Company, be removed from the premises of the Company under any circumstances whatsoever without the prior written consent of the Company. (e) In the event of breach or threatened breach by Executive of any provision of this Section, the Company shall be entitled to apply for relief by temporary restraining order, temporary injunction, or permanent injunction and to all other relief to which it may be entitled, including any and all monetary damages which the Company may incur as a result of said breach, violation or threatened breach or violation. The Company shall not be obligated to post bond or other security. The Company may pursue any remedy available to it concurrently or consecutively in any order as to any breach, violation, and the pursuit of one of such remedies at any time will not be deemed an election of remedies or waiver of the right to pursue any other of such remedies as to such breach, violation, or as to any other breach, violation, or threatened breach or violation. (f) The Executive acknowledges that the scope of the restrictions set forth in this Section 5 is reasonably required to protect the Company's business interests for which the Executive is being compensated under this Agreement, and if any such restriction is nevertheless determined to be too broad for enforcement in accordance with its terms, the Executive agrees that such restriction shall be enforced to the maximum extent permitted by law. 6. Miscellaneous ------------- (a) All notices, requests, service of process, consents, and other communications under this Agreement shall be in writing and shall be deemed to have been delivered (i) on the date personally delivered or (ii) two (2) days after the date deposited in a receptacle maintained by the United States Postal Service for such purpose, postage prepaid, by certified mail, return receipt requested, addressed as set forth below or (iii) one(1) day after properly sent by Federal Express, addressed to the respective parties at their address set forth above. Either party hereto may designate a different address by providing written notice of such new address to the other party hereto as provided above. 4 (b) If any provision contained in this Agreement is determined to be void, illegal or unenforceable, in whole or in part, then the other provisions contained herein shall remain in full force and effect as if the provision which was determined to void, illegal, or unenforceable had not been contained herein. (c) The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of any party. This instrument and the documents referred to herein contain the entire agreement of the parties concerning employment and supersede any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of the Executive by the Company and contain all of the covenants and agreements between the parties with respect to such employment in any manner whatsoever. This Agreement may not be modified, altered or amended except by written agreement of all the parties hereto. (d) This Agreement is a contract for personal services and shall not be assigned, delegated or transferred in whole or in part by Executive. This Agreement shall be binding and effective upon the Company and its successors and permitted assigns, and upon the Executive, his heirs and representatives. (e) This Agreement shall be governed by the laws of the State of New Jersey. (f) All disputes arising under the Agreement shall be resolved through arbitration in the State of New Jersey in accordance with the rules of the American Arbitration Association then in effect. The award and decision rendered by such arbitration shall be final and binding upon the parties and a judgement upon the award and decision may be entered into any court of competent jurisdiction. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. Mark Solutions, Inc. By: __________________________ -------------------------- (Print Name and Title) And ------------------------- Executive 5 EX-10 3 EMPLOYMENT CONTRACT - LEONID FUTERMAN Exhibit 10 c) EMPLOYMENT AGREEMENT Employment Agreement ("Agreement") dated as of December 1, 1998 by and between, MarkCare Medical Systems, Inc. a Maryland Corporation (the "Company"), and Leonid Futerman, residing at 66 Petra Drive, Morganville, New Jersey 07551 the ("Executive"). W I T N E S E T H ----------------- NOW THEREFORE, and in consideration of the promises and covenants herein contained and intending to be legally bound hereby, the parties agree as follows: 1. Employment ---------- (a) The Company hereby employs the Executive as Vice President of the Company for and during the term hereof, subject to the supervision and control of the Company's Board of Directors. The Company will not hire anyone in a position of authority above that of this executive. The Executive hereby accepts employment. (b) The Executive shall have such duties as may be reasonably assigned to him from time to time by the Board of Directors consistent with his status as Vice President of the Company. (c) The Executive agrees to devote his full business time and services to the faithful performance of the duties, responsibilities, and authorities which may be reasonably assigned to him and which are consistent with his executive status under this Agreement. During the term of his employment, Executive shall engage in no other business activities whatsoever, except for the passive supervision of his investments. 2. Term ---- (a) The term of this Agreement shall commence effective on this date and shall terminate on the third anniversary of this date. 3. Compensation and Benefits ------------------------- (a) Executive shall be paid a salary at the rate of $150,000 per year (the "Base Salary"), subject to withholding taxes, which Base Salary shall be payable at least monthly in periodic payroll installments. This amount shall be increased at each anniversary date by $25,000. 6 (b) The Executive shall be entitled to participate in all bonus and benefit programs that the Company establishes and makes available to its management level employees, if any. (c) The Executive shall receive paid vacation each year during the term of this Agreement, which vacation may be taken or accrued by the Executive in accordance with the written business policies of the Company. (d) The Company shall directly pay or shall immediately reimburse the Executive for all reasonable travel, entertainment and other expenses incurred or paid by the Executive in connection with, or related to, the performance of his duties, responsibilities or services under this Agreement, including the usage of a company vehicle. (e) The Executive shall receive three-year options to purchase 250,000 shares of the Company's Common Stock at $1.00 per share (the "Options"). The Options shall be exercisable as follows: 100,000 shares of Common Stock on the date of this agreement, an additional 75,000 shares of Common Stock on October 1, 1999 and an additional 75,000 shares of Common Stock on October 1, 2000; provided, however, the Options hall become immediately exercisable as to all 150,000 shares of Common stock for a period of sixty (60) days after the effective date of a termination of the Executive's employment by the company other than for "cause" as defined in Section 4(c). In the event the Executive resigns or is terminated for "cause"; the Options shall immediately expire on the effective date of the resignation or termination. If the employee is terminated for cause, all options are immediately terminated. 4. Termination. Notwithstanding any other provisions in this Agreement: ----------- (a) If the Executive dies during the term of this Agreement and while in the employ of the Company, this Agreement shall automatically terminate, effective thirty (90) days after the date of the Executive's death; and the Company shall pay the Executive's estate his full compensation for the month during which the Executive died, but shall have no further compensation under this Agreement, other than accrued vacation. (b) If, during the term of this Agreement, the Executive is unable to perform his duties hereunder as a result of any physical or mental disability which continues (i) for 90 consecutive days or (ii) for 180 days in any 365 day period, then the Company, may terminate this Agreement upon written notice to the Executive. (c) At any time during the term of this Agreement, the Company may discharge the Executive for cause and terminate this Agreement without any further liability hereunder to the Executive or his estate, provided that the Company shall first be required to deliver written notice to the Executive of the event or acts or omissions which constitute "cause" and the Executive shall have had thirty (30) days to cure such event, act or omission. For purposes of this Agreement, "cause" shall mean one or more of the following events: 7 i. Conviction by a court of competent jurisdiction in the United States for fraud, misappropriation or embezzlement by the Executive in connection with the Company; or ii. Gross neglect of duties which has a detrimental effect on the Company; or iii. Conviction by a court of competent jurisdiction in the United States of a felony or a crime involving moral turpitude; or iv. Willful and unauthorized disclosure of confidential or proprietary trade secret information of the Company; or v. The Executive's breach of any material term or provision of this Agreement, after notice to the Executive of the particular details thereof. vi. In the event of termination of the employment for cause, Executive shall only be entitled to receive any Base Salary, bonus compensation and other benefits accruing prior to such termination and shall not be entitled to any other payments or compensation. In the event of termination without cause, Executive shall be entitled to receive any Base Salary, bonus compensation and other benefits accruing prior to such termination plus an amount equal to Executive's base salary for a period of 12 months. vii. If this agreement expires in accordance with its term on October 1, 2001, Executive shall not be subject to the covenants of Section 5(a) i and ii. 5. Covenants --------- (a) Executive covenants that, while he is an employee of the Company and for 12 months thereafter neither he nor any of his affiliates will, directly or indirectly (whether as an investor, shareholder, employee or otherwise), anywhere in the world: i. Engage in or participate in any business, which is in competition with any aspect of any business now or hereafter conducted by Company. ii. Employ or retain any person who was employed or retained by the Company at any time during the six months prior to the termination of the Executive's employment. (b) Executive recognizes that his position with the Company is one of the highest trust and confidence by reason of Executive's access to and contact with trade secrets and confidential and proprietary 8 information of the Company, if any. Executive shall use his best efforts and exercise utmost diligence to protect and safeguard and keep confidential the trade secrets and confidential and proprietary information of the Company to the extent that the same exists. (c) Executive covenants that while he is an employee of the Company and thereafter, he will not disclose disseminate or distribute to another, nor induce any other person to disclose, disseminate, or distribute, any trade secret or proprietary or confidential information of the Company to the extent that the same exists, directly or indirectly, either for Executive's own benefit or for the benefit of another, whether or not acquired, learned, obtained or developed by Executive, or use of or cause to be used, any trade secret, proprietary or confidential information in any way except as is required in the course of his employment with the Company. (d) All trade secrets and confidential and proprietary information relating to the business of the Company whether prepared by Executive or otherwise coming into his possession, shall remain the exclusive property of the Company and shall not, except in the furtherance of the business of the Company, be removed from the premises of the Company under any circumstances whatsoever without the prior written consent of the Company. (e) In the event of breach or threatened breach by Executive of any provision of this Section, the Company shall be entitled to apply for relief by temporary restraining order, temporary injunction, or permanent injunction and to all other relief to which it may be entitled, including any and all monetary damages which the Company may incur as a result of said breach, violation or threatened breach or violation. The Company shall not be obligated to post bond or other security. The Company may pursue any remedy available to it concurrently or consecutively in any order as to any breach, violation, and the pursuit of one of such remedies at any time will not be deemed an election of remedies or waiver of the right to pursue any other of such remedies as to such breach, violation, or as to any other breach, violation, or threatened breach or violation. (f) The Executive acknowledges that the scope of the restrictions set forth in this Section 5 is reasonably required to protect the Company's business interests for which the Executive is being compensated under this Agreement, and if any such restriction is nevertheless determined to be too broad for enforcement in accordance with its terms, the Executive agrees that such restriction shall be enforced to the maximum extent permitted by law. 6. Miscellaneous ------------- (a) All notices, requests, service of process, consents, and other communications under this Agreement shall be in writing and shall be deemed to have been delivered (i) on the date personally delivered or (ii) two (2) days after the date deposited in a receptacle maintained by the United States Postal Service for such purpose, postage prepaid, by certified mail, return receipt requested, addressed as set forth below or (iii) one (1)day after 9 properly sent by Federal Express, addressed to the respective parties at their address set forth above. Either party hereto may designate a different address by providing written notice of such new address to the other party hereto as provided above. (b) If any provision contained in this Agreement is determined to be void, illegal or unenforceable, in whole or in part, then the other provisions contained herein shall remain in full force and effect as if the provision which was determined to void, illegal, or unenforceable had not been contained herein. (c) The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of any party. This instrument and the documents referred to herein contain the entire agreement of the parties concerning employment and supersede any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of the Executive by the Company and contain all of the covenants and agreements between the parties with respect to such employment in any manner whatsoever. This Agreement may not be modified, altered or amended except by written agreement of all the parties hereto. (d) This Agreement is a contract for personal services and shall not be assigned, delegated or transferred in whole or in part by Executive. This Agreement shall be binding and effective upon the Company and its successors and permitted assigns, and upon the Executive, his heirs and representatives. (e) This Agreement shall be governed by the laws of the State of New Jersey. (f) All disputes arising under the Agreement shall be resolved through arbitration in the State of New Jersey in accordance with the rules of the American Arbitration Association then in effect. The award and decision rendered by such arbitration shall be final and binding upon the parties and a judgement upon the award and decision may be entered into any court of competent jurisdiction. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. MarkCare Medical Systems, Inc. By: ---------------------------- (Print Name and Title) And ---------------------------- Executive 10 EX-27 4 FDS JUNE 30, 1999
5 1,000 12-mos Jun-30-1999 Jun-30-1999 298 0 4,750 6 0 6,864 3,676 2,452 9,070 5,832 505 0 30 55 2,648 9,070 10,226 10,226 7,113 12,695 0 0 286 (2,710) (1,000) (1,710) 0 0 0 (1,710) (.36) (.36)
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