0001125282-01-502211.txt : 20011019
0001125282-01-502211.hdr.sgml : 20011019
ACCESSION NUMBER: 0001125282-01-502211
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 20010630
FILED AS OF DATE: 20011015
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: 1934 Act
SEC FILE NUMBER: 333-72099
FILM NUMBER: 1759608
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
b314129_10k.txt
ANNUAL REPORT
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, 2001
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 (I.R.S. employer identification no.)
of incorporation or organization)
1135 Clifton Avenue, Clifton, New Jersey 07013
------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973)773-8100
-----------------
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. [ ].
The aggregate market value of the 9,321,955 shares of Common Stock
held by non-affiliates of the Registrant on September 28, 2001 was $186,439
based on the closing bid price of $0.02 on September 28, 2001.
The number of shares of Common Stock outstanding as of September 28,
2001 was 9,714,606.
DOCUMENTS INCORPORATED BY REFERENCE
None
-2-
PART I
Item 1. Current Business
Mark Solutions, Inc. ("Mark" or "The Company" or "We") is a Delaware
corporation, which operates its business through its Mark Correctional Systems
division.
At present our business is the design, manufacture, and installation
of modular steel jail cells for correctional institution construction. We market
our modular steel products by responding to public bids and by pursuing joint
ventures and affiliations with other companies to solicit design/build
correctional facilities.
Until March 30, 2001 we operated a subsidiary, MarkCare Medical
Systems, Inc., ("MarkCare), a company engaged in the development of software
applications for medical diagnostic, archiving and communications systems
(PACS).
On April 6, 2001 MarkCare completed a transaction involving the sale
of substantially all of its assets to MMSI Acquisition Corp. ("MMSI"), a newly
established wholly owned subsidiary of MediSolution Ltd. ("MediSolution"), a
Canadian based company engaged in offering information to the health care
industry.
Pursuant to the terms of an Asset and Stock Purchase Agreement, MMSI
purchased substantially all of the assets of MarkCare and assumed certain
specific liabilities. The sale also included all of the issued and outstanding
common stock of MarkCare Medical's wholly owned United Kingdom subsidiary,
MarkCare Medical Systems, Ltd. Under the terms of the Agreement, MarkCare
Medical Systems Korea, Ltd., a wholly owned subsidiary, was to be liquidated.
The total purchase price for the assets was $1,682,633, subject to
certain closing adjustments. Prior to the closing, MarkCare received a $500,000
advance. At the closing, MarkCare received an additional $476,210 after
adjustments. The balance of $500,000 was due on or before June 28, 2001, as
evidenced by a promissory note guaranteed by MediSolution. Additionally,
MarkCare received 200,000 warrants to purchase the Common Stock of MediSolution
at an exercise price of $2.40 (CDN) a share. As of September 28, 2001, the bid
price of MediSolution's Common Stock was $1.50 (CDN). MediSolution's Common
Stock is traded on the Toronto Exchange. As additional compensation, MarkCare is
to receive ten percent (10%) of all license revenues received by MMSI from
certain identified projects for a period of one year from closing.
Prior to the due date of the promissory note, June 28, 2001, we were
advised by MMSI that they were evaluating the value of the net assets
transferred and that they might be entitled to an offset against the promissory
note for differences in the valuation of the net assets. Under a 30-day
standstill agreement, dated July 3, 2001, and extended through September 3,
2001, both parties agreed to take no action until supporting documentation is
prepared. As of September 28, 2001,we have not received documentation to support
their allegations. We have advised MMSI that they have until October 19, 2001,
to produce their supporting documentation, at which time the Company will
revaluate its position. While we dispute MMSI's claims, we have recorded a
liability for potential expenditures arising from this matter.
Under the terms of the agreement MMSI purchased the name "MarkCare
Medical Systems" and as a result MarkCare changed its name to Mark Technical,
Inc. simultaneously with the closing.
-3-
MARK CORRECTIONAL SYSTEMS DIVISION
Our sole business of manufacturing and distributing modular steel
jail cells is operated by our Mark Correctional Systems Division.
Modular Cells
Since the initial sale of our prefabricated modular steel cells for
correctional facilities in 1989, We have manufactured and sold security prison
cells in 16 states including Indiana, Illinois, New York, New Jersey, Michigan,
Missouri, Washington, Wisconsin, South Carolina and Minnesota as well as the
Commonwealth of Puerto Rico. Revenues generated by the sale of cells to
correctional facilities totaled $8,772,000 for the fiscal year ended June 30,
2001. For the year ended June 30, 2001 the following projects accounted for
85.9% of our total operating revenue:
Percentage of Fiscal 2001
Project Operating Revenues
------- --------------------------
Renovation of Cellhouse "G" 38.4%
Pendleton Correctional Facility
Pendleton, Indiana
265 cells
Monroe County Jail Expansion 39.5%
Rochester, New York
424 cells
Administration of Corrections 8.0%
Puerto Rico
438 cells
As of September 28, 2001 we had a backlog of $6,803,000 in modular
cell orders as compared to a backlog of $5,958,000 as of September 30, 2000.
Our modular cell is a prefabricated, installation-ready, lightweight
steel structure, which is manufactured according to the construction and
security specifications of each correctional institution project in sizes that
can vary from 60 to 200 square feet. Each modular cell can be equipped with
lavatory facilities, wall-mounted sleeping bunks, desk and stool, storage bins,
lighting and ventilation systems; and optional components such as fixed or
operable windows and hinged or sliding security doors.
The cells are constructed of durable low maintenance, non-porous
materials including a scratch resistant epoxy polymer finish, which results in
lower ongoing maintenance and life cycle costs. The cells are acoustically and
thermally insulated and are designed to provide easy connection and maintenance
access to all utilities, such as ventilation systems, plumbing and electric,
through a secure exterior access panel.
Each cell is load bearing to allow for multiple-story construction,
and is manufactured to tolerances of 1/16 of an inch, resulting in efficient and
faster on-site installation compared to traditional construction.
-4-
Because the modular steel cell's overall dimensions and weight are
less than traditional concrete cells, the project square footage requirements
can be reduced and the load bearing and foundation requirements (e.g. support
beams, footings and pilings) can be less extensive. These design modifications
can reduce construction time, labor costs and material costs for the project.
The insulated galvaneeled steel cell life cycle savings in energy cost
reductions and maintenance savings are dramatically superior to concrete
construction.
Bid Process, Subcontracting and Bonding Requirements
The substantial majority of our revenues have been from state and
local government correctional projects. Consequently, we are required to prepare
and submit bid proposals based on the design and specifications prepared by the
supervising architectural or engineering firm. We prepare and submit a formal
bid proposal, which includes price quotations and estimates, selected material
options and construction time estimates. Depending on the nature of the project,
we 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 we provide bid information to a general
contractor who is ultimately awarded the project, there is no guarantee that we
will receive the subcontracted business.
The typical time period from submission of bids to awarding of the
contract to the direct bidder (whether to us or a general contractor) is 60 to
120 days. In those instances, where we are not the direct bidder, subcontracts
are generally awarded within an additional 30 to 60 days.
In connection with some government construction projects, we are
required to provide performance and completion bonds as a condition to
submission or participation in a bid. Due to our historical financial condition,
we have generally been unable to obtain bonds without the assistance and
guarantee of third parties including our President and/or another business
entity owned by an outside director. See "Item 13. Certain Relationships and
Related Transactions". To date, we have not limited our bidding activity nor
lost any projects due to our limited bonding capacity. However, in the event we
are awarded multiple projects, the inability to obtain bonds may limit the
number of additional projects we can pursue and this could have a material
adverse effect on operations.
Manufacturing and Assembly
We manufacture and assemble our modular cells at our 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 our
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, we purchase, assemble, and install the ancillary
components including lavatory facilities, shower facilities, desks, stools, and
sleeping bunks. We believe that there are a sufficient number of national
vendors to meet our raw material and component needs, and that we are not
dependent upon a limited number of suppliers. In the event we determine that
-5-
additional space is necessary, we believe that adequate space will be available
on acceptable economic terms.
Marketing and Sales
The market for our modular cells is primarily federal, state and
local governmental agencies responsible for the construction and maintenance of
correctional institutions. While our modular cell technology has other
applications, such as temporary emergency housing, for the foreseeable future
the correctional institutions market will represent the substantial majority of
our modular business. No assurances can be given that any other markets will
develop to any significant degree.
We normally design prototypes of our modular cells for marketing,
sales and trade show demonstrations. Our marketing and sales efforts are managed
by our Executive Vice President and include in-person solicitations, direct mail
campaigns and participation in industry trade shows. We presently market and
sell our modular cells directly and through independent manufacturers'
representatives. Our sales network consists of ten (10) outside sales
representatives that service all of the United States and foreign countries
including Canada and Latin America. Each representative generally enters into an
agreement with us, which contains certain non-disclosure restrictions and
provides for payment on a commission basis.
Delivery and On-Site Services
We normally contract with several third-party carriers to deliver our
modular cells to the project's construction site. In addition, we provide
delivery and support services for our 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. Our modular cells comply with these codes and
regulations in all material respects.
State and Federal environmental laws regulate certain aspects of our
manufacturing process. We have obtained all necessary licenses and permits and
are 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, we compete 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.
-6-
With respect to those projects that incorporate modular cell
specifications in its design criteria, we compete with several other steel
product manufacturers who manufacture a comparable product, some of which have
greater financial resources than us. In addition, a number of manufacturers,
which have greater financial and marketing resources than us and which currently
produce sheet metal products, could ultimately enter in to the manufacture of
modular steel cells in competition with us.
Although competition in the construction industry is intense, we
believe we can compete for market share of correctional facility construction
business by promoting the construction advantages of our technology to the
architectural, engineering and construction industries. In this regard, we
emphasize 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. We also believe 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 28, 2001, we had two executive management employees,
two plant management employees, two sales employees, three engineering employees
and five office and clerical employees. We also employ hourly employees in our
manufacturing facility who are subject to a three-year collective bargaining
agreement, which expired on August 31, 2001.While a new collective bargaining
agreement has not yet been signed, we believe our relationship with our
employees to be good.
Copyrights, Patents and Trade Secrets
We do not own any patents on our modular cells or manufacturing
assembly process. However, we attempt to protect our proprietary trade secrets
regarding the design and manufacture of our products through non-disclosure
agreements between us, our 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.
Item 2. Property
Formerly, we leased our executive offices at 1515 Broad Street,
Bloomfield, New Jersey until March 31, 2001. In connection with the sale of the
MarkCare segment, we terminated the lease at no additional cost. Currently we
maintain our executive offices at 1135 Clifton Avenue, Clifton, New Jersey
07013, on a month-to-month basis, with a monthly rent of $2,000.
In addition, we lease 74,000 square feet of manufacturing space in
Jersey City, New Jersey pursuant to a triple net lease expiring on October 31,
2004. The lease provides for annual rental payments of $215,045 increasing to
$292,901 over the term of the lease, subject to additional increases based on
the consumer price index.
We believe our present manufacturing and administrative facilities
are sufficient for our current and anticipated needs.
-7-
Item 3. Legal Proceedings
In August 2001 we settled a lawsuit, which was pending in the
Delaware Circuit Court, Delaware County, Indiana. The lawsuit was settled
for $98,000 and the action was dismissed.
There are no other material legal proceedings pending.
Item 4. Submission of Matters to Vote of Security Holders
(a) During the fiscal year ending June 30, 2001 no matters were
submitted to a vote of security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information.
The following table sets forth for the fiscal years ended June 30,
1999, 2000 and 2001 indicating the quarterly high and low bid prices of our
Common Stock, after giving effect to the 1-for-4 reverse split effected on June
15, 1999. The Common Stock traded on the Nasdaq SmallCap Market under the symbol
"MSOL" through January 18, 2001. On January 19, 2001 our common stock was
delisted from the NASDAQ SmallCap Market because it traded at prices below the
minimum requirements for listing on that market. The stock is now traded on the
NASDAQ OTC Bulletin Board.
Common Stock
--------------------------------
High Low
1999
1st Quarter 6.00 2.00
2nd Quarter 5.63 2.44
3rd Quarter 5.63 1.75
4th Quarter 4.81 1.13
2000
1st Quarter 6.63 3.25
2nd Quarter 3.25 1.09
3rd Quarter 1.28 . 50
4th Quarter 3.25 1.09
2001
1st Quarter 1.28 .50
2nd Quarter 1.06 .06
3rd Quarter .19 .06
4th Quarter .14 .03
Over-the-counter quotations reflect inter-dealer prices without
retail mark-up, mark-down or commission and do not necessarily represent actual
transactions.
-8-
(b) Holders.
As of September 28, 2001, there were 186 holders of record of the
Common Stock. We estimate the number of beneficial holders of its Common Stock
to be in excess of 575. There are approximately 16 market makers for the Common
Stock.
(c) Dividends.
We have never paid and do not intend to pay in the foreseeable
future, cash dividends on its Common Stock.
(d) Sales of Unregistered Securities in Fiscal Year 2001.
The following sets forth information regarding private placements of
equity securities by us during the fiscal year ended June 30, 2001 which were
not included in previously filed reports.
In July 2000 we issued 85,000 and 4,000 shares of Common Stock to two
suppliers in settlement of outstanding debts in the amount of $76,772 and
$14,755 respectively. We relied upon the private placement exemption as provided
by Section 4(2) of the Securities Act of 1933.
-9-
Item 6. Selected Financial Data
The following Selected Financial Data is 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)
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Revenues $ 8,772 $ 11,671 $ 8,497 $ 12,708 $ 6,115
----------- ----------- ----------- ----------- -----------
Costs and Expenses:
Cost of Sales 5,762 9,728 5,689 9,928 6,010
General and administrative 2,328 1,912 2,449 2,268 2,185
Marketing costs 424 681 562 434 416
Litigation settlement 98 250 396 -- --
----------- ----------- ----------- ----------- -----------
Total Costs and Expenses 8,612 12,571 9,096 12,630 8,611
----------- ----------- ----------- ----------- -----------
Operating Income /(loss) 160 (900) (599) 78 (2,496)
Net Other (Expense) (214) (139) (124) (55) (1,679)
Income Tax Benefit -- 83 760 -- --
----------- ----------- ----------- ----------- -----------
Income (Loss) from Continuing
Operations (54) (956) 37 23 (4,175)
Income from Sale of Discontinued Segment
(net of income tax provision of $477)
716 -- -- -- --
(Loss) From Discontinued Operations (net of
income tax benefit of $477, $24, $240,
$---,$---,respectively) (961) (3,432) (1,747) (2,411) (1,264)
----------- ----------- ----------- ----------- -----------
Net (Loss) $ (299) $ (4,388) $ (1,710) $ (2,388) $ (5,439)
=========== =========== =========== =========== ===========
Income (Loss) per Share from Continuing
Operations $ (.01) $ (.16) $ .01 $--- $ (1.17)
=========== =========== =========== =========== ===========
Weighted Average Shares Outstanding 8,266,676 6,112,534 4,945,257 4,415,101 3,555,402
=========== =========== =========== =========== ===========
Balance Sheet Data:
Fiscal Years Ended June 30,
(in thousands, except share and per share data)
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Working Capital $ 929 $ 1,599 $ 1,135 $ 3,210 $ 1,105
Net Property and Equipment 485 790 920 284 142
Total Assets 5,424 5,304 7,862 5,020 5,172
Current Liabilities 3,966 2,825 4,824 866 3,007
Other Liabilities 1,135 2,073 485 1,039 2,318
Temporary Stockholders' Equity -- -- -- 1220 --
Stockholders' Equity (Deficiency) 323 406 2,553 3,115 (153)
Financial Data (Unaudited)
The following is a summary of unaudited quarterly results of
operations for the years ended June 30, 2001 and 2000.
First Quarter Second Quarter
------------------------------------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues $ 199 $ 3,038 $ 1,244 $ 4,212
--------- --------- --------- ---------
Gross Profit (385) 1,012 708 1,579
--------- --------- --------- ---------
Income (Loss) from Continuing Operations (782) 182 (29) 829
--------- --------- --------- ---------
Income from sale of discontinued segment -- -- -- --
Loss from operations of discontinued segment (107) (49) (833) (778)
--------- --------- --------- ---------
Net Income (Loss) $ (889) $ 133 $ (862) $ 51
========= ========= ========= =========
Basic:
Loss per share from continuing operations $ (0.11) $ 0.03 $ -- $ 0.15
Income from sale of discontinued segment $ -- $ -- $ -- $ --
Loss per share from discontinued operations $ (0.01) $ (0.01) $ (0.11) $ (0.14)
--------- --------- --------- ---------
Net loss per share $ (0.12) $ 0.02 $ (0.11) $ 0.01
========= ========= ========= =========
Diluted:
Loss per share from continuing operations $ (0.11) $ 0.03 $ -- $ 0.15
Income from sale of discontinued segment $ -- $ -- $ -- $ --
Loss per share from discontinued operations $ (0.01) $ (0.01) $ (0.11) $ (0.14)
--------- --------- --------- ---------
Net loss per share $ (0.12) $ 0.02 $ (0.11) $ 0.01
========= ========= ========= =========
Third Quarter Fourth Quarter
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues $ 2,913 $ 3,059 $ 4,416 $ 1,362
--------- --------- --------- ---------
Gross Profit 1,105 (646) 1,582 (2)
--------- --------- --------- ---------
Income (Loss) from Continuing Operations 518 (949) 239 (1,018)
--------- --------- --------- ---------
Income from sale of discontinued segment 2,204 -- (1,488) --
Loss from operations of discontinued segmen (716) (985) 695 (1,620)
--------- --------- --------- ---------
Net Income (Loss) $ 2,006 $ (1,934) $ (554) $ (2,638)
========= ========= ========= =========
Basic:
Loss per share from continuing operations $ 0.06 $ (0.15) $ 0.03 $ (0.17)
Income from sale of discontinued segment $ 0.27 $ -- $ (0.16) $ --
Loss per share from discontinued operations $ (0.09) $ (0.16) $ 0.07 $ (0.27)
--------- --------- --------- ---------
Net loss per share $ 0.24 $ (0.31) $ (0.06) $ (0.44)
========= ========= ========= =========
Diluted:
Loss per share from continuing operations $ 0.06 $ (0.15) $ 0.03 $ (0.17)
Income from sale of discontinued segment $ 0.27 $ -- $ (0.16) $ --
Loss per share from discontinued operations $ (0.09) $ (0.16) $ 0.07 $ (0.27)
--------- --------- --------- ---------
Net loss per share $ 0.24 $ (0.31) $ (0.06) $ (0.44)
========= ========= ========= =========
-10-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(All figures expressed below are in thousands)
General
Our results of operations, liquidity, and working capital position
have been historically impacted by sporadic sales of our principal product,
modular steel cells.
Our 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, we have been, and
will continue to be, subject to sales fluctuations until our modular cell
technology obtains broader acceptance in the construction market. Based on the
increase in the number of projects being designed for steel cells, we believe
our cells are receiving greater market acceptance as a viable alternative to
concrete. We continue to promote our 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.
We have continued to aggressively pursue steel cell projects and
persuade the construction industry to increase the use of steel cells. We
believe we have been successful in our efforts to achieve profitability. We will
continue to review our overhead and personnel expenses based on operating
results and prospects.
We are continually bidding on and soliciting joint venture
opportunities regarding construction projects. We currently have bids pending on
approximately $6,856 in modular cell projects. We also project to bid on
approximately $190,000 in additional cell projects during the fiscal year ended
June 30, 2002, however, there can be no assurances that our current or planned
bids will be accepted.
For the year ended June 30, 2001, we were awarded $6,318 of the
$11,676 in correctional cell projects we bid on.
Results of Operations
All of our operating revenues for the reported periods were derived
from the sale of our modular steel cells.
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 Percentage
Year Ended June 30, Increase/(Decrease)
--------------------------------------- ------------------------
2001 2000 1999 2001-2000 2000-1999
--------- --------- --------- --------- -----------
Revenue 100.0 100.0 100.0 (24.8) 37.4
Cost of sales 65.7 83.4 67.0 (40.8) 71.0
Selling, general & administrative 32.5 24.4 40.1 -- (16.6)
Operating income (loss) 1.8 (7.7) (7.0) 117.8 (50.3)
Net other income (expenses) (2.4) (1.2) (1.5) 54.0 12.1
Income (Loss) from continuing operations (.6) (8.2) .4 84.1 (2683.8)
Net income (loss) (3.4) (37.6) (20.1) 93.2 156.6
Fiscal Year Ended June 30, 2001 Compared to
Fiscal Year Ended June 30, 2000
Revenues from continuing operations for the fiscal year ended June
30, 2001, decreased 24.8% to $8,772 from $11,671 for the comparable period. The
decrease is attributable to fewer modular steel cell contracts in fiscal 2001.
-11-
Cost of sales from continuing operations for the fiscal year ended
June 30, 2001, consisting of materials, labor and fixed factory overhead expense
decreased 40.8% to $5,762 from $9,728 for the comparable period. Cost of sales
as a percentage of revenues was 65.7% for the year ended June 30, 2001 as
compared to 83.4% for the comparable period. As a result of obtaining modular
steel cell contracts at more profitable margins, cost of sales as a percentage
of sales decreased for the fiscal year ended June 30, 2001.
Selling, general and administrative expenses from continuing
operations, exclusive of marketing costs for the fiscal year ended June 30,2001
increased 12.2% to $2,426 from $2,162 for the comparable period. The increase is
primarily due the recording of an accrual for compensatory time earned.
Marketing costs from continuing operations, which includes
commissions and advertising costs for the fiscal year ended June 30, 2001
decreased $37.7% to $424 from $681 for the comparable period. This decrease was
due to our continued focus on cost containment.
For the fiscal year ended June 30, 2001 our loss from continuing
operations was $54, a decrease of 94.8% from a loss of $956 for the comparable
period. The primary reason for the increase in the income from continuing
operations was the increased profit margins on modular steel cell contracts. In
addition, profits were diminished in fiscal 2001 by charges of $98 for a lawsuit
settlement as compared to charges of $250 in fiscal 2000.
The loss from discontinued operations, net of taxes, decreased 72.0%
to $961 from $3,432 as a result of the sale of MarkCare's Assets on March 30,
2001 and the decrease in administrative and operating costs for the MarkCare
segment.
Fiscal Year Ended June 30, 2000 Compared to
Fiscal Year Ended June 30, 1999
Revenues from continuing operations for the fiscal year ended June
30, 2000, increased 37.4% to $11,671 from $8,497 for the comparable prior
period. This increase is attributable to more modular steel cell contracts in
fiscal 2000.
Cost of sales from continuing operations for the fiscal year ended
June 30, 2000, consisting of materials, labor and fixed factory overhead expense
increased by 71.0% to $9,728 from $5,689 for the comparable prior period. Cost
of sales as a percentage of revenues was 83.4% for the year ended June 30, 2000
as compared to 67.0% for the comparable prior period. A substantial increase in
the cash demands of our discontinued operation, MarkCare negatively affected the
Mark Correctional division causing increased costs of sales both in total
dollars and as a percentage of revenue.
Selling, general and administrative expenses from continuing
operations, exclusive of marketing costs for the fiscal year ended June 30,
2000, decreased 24.0% to $2,162 from $2,845 for the comparable prior period. The
decrease in these expenses is attributable generally to our focus on cost
controls for continued operations.
Marketing costs from continuing operations, which includes
commissions and advertising costs for the fiscal year ended June 30, 2000,
-12-
increased 21.2% to $681 from $562 for the comparable prior period. This increase
is due to the expanded sales efforts for modular steel cells.
Our operating loss from continuing operations for the fiscal year
ended June 30, 2000 increased by $993 to $956 from a profit of $37 for the
comparable prior period. The primary reason for the increase in the operating
loss from continuing operations was the decrease in the gross margin of $865
from $2,808 for the fiscal year ended June 30, 1999 to $1,943 in 2000. In
addition, included in the loss for fiscal 2000 were charges of $250 for items
related the settlement of a lawsuit. Included in the profit for fiscal 1999 were
charges for items related to lawsuits of $396.
The loss from discontinued operations increased 96.5% to $3,432 from
$1,747. The overall increase in the loss from discontinued operations was
attributable primarily to increased operating and marketing costs for the
MarkCare segment.
Liquidity and Capital Resources
Our working capital requirements result principally from staff and
management overhead, office expense and marketing efforts. Our working capital
requirements have historically exceeded our working capital from operations due
to sporadic sales. With the sale of the MarkCare subsidiary in March of 2001 we
have reduced our working capital requirements. We continue to increase our
efforts to obtain new modular steel cell contracts with more favorable margins
and are concentrating on obtaining these contracts on a less sporadic basis. We
believe our present available working capital from existing contracts, from
anticipated contracts, and if required, investments from private sources, will
be sufficient to meet our operating requirements through June 30, 2002. If we do
require additional capital, we will continue to principally look to private
sources in the form of equity or debt financing.
On April 14, 2000, we effected a $2,000 private placement consisting
of a two-year principal amount convertible note and warrants to purchase 400,000
shares of common stock.
On September 26, 2001, we entered into a compromise agreement with
the holder of convertible notes in the amount of $1,880 which are due on April
20,2002. The holder of the notes has agreed to accept $1,000 in full settlement.
The agreement provides for the payment of four (4) installment payments of $250.
The first payment was made upon the execution of the agreement and the other
three payments are due on November 30, 2001, February 28, 2002 and March 1,
2003. We believe the working capital will be sufficient to meet these
obligations.
Our inventories decreased from $60 at June 30, 2000 to $25 as of
June 30, 2001. We currently account for substantially all materials as project
costs as reflected by the recording of Costs and estimated earnings in Excess of
Billings. While we presently do not have any material commitments for capital
expenditures, we believe that our 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, 2001, we had negative cash flow
from operating activities of $1,799. In addition, we had a positive cash flow
from investing activities of $1,936 primarily due to the sale of MarkCare. We
have no present intention of making any acquisition, which would have a material
negative or positive effect on cash flow.
For the year ended June 30, 2001, financing activities utilized $739
of cash due to the repayment of existing obligations. For the year ended
June 30, 2000, financing activities provided $2,997 in cash primarily from the
private placement of our securities and the proceeds of a convertible note.
Cash and cash equivalents decreased from $1,138 at June 30, 2000 to
$536 at June 30, 2001 due primarily to an increase in outstanding receivables on
completed projects and an increase in notes receivable, as a result of the sale
of MarkCare. Working capital decreased from $1,599 at June 30, 2000 to $929 at
June 30, 2001 primarily reflecting the proceeds from the issuance of the
convertible debentures in 2000.
-13-
Other Matters
As of June 30, 2001, we have net operating loss carry-forwards of
approximately $30,276. Such carry-forwards begin to expire in the year 2018 if
not previously used. The $30,276 carry-forward is available to offset future
taxable income. 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
We have 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, We pass on increased costs by increasing our 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 our current plans and expectations
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 projects are awarded to us and the timing of their
completion, meeting current and future financial requirements and competition.
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.
-14-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth the names and ages of the members of
Our Board of Directors and its executive officers.
Name Age Position
---- --- --------
Carl Coppola (1) 62 Chairman of the Board,
President, Chief Executive Officer
Michael J. Rosenberg (2) 56 Vice President - Marketing and Sales
Richard Branca (2) 53 Director
Ronald E. Olszowy (2) 54 Director
William Westerhoff (1)(2) 63 Director
(1) Member of the Compensation Committee
(2) Members of the Audit Committee - Mr. Westerhoff is a retired C.P.A.
All directors hold office until our next annual meeting of shareholders
and until their successors are elected and qualified. Officers hold office until
the first meeting of directors following the annual meeting of shareholders and
until their successors are elected and qualified, subject to earlier removal by
the Board of Directors.
Carl Coppola has been a Director, President and Chief Executive Officer of Mark
since 1984. For more than 30 years, Mr. Coppola has been Chief Executive Officer
of Mark Lighting Fixture Co., Inc., an unaffiliated entity.
Michael J. Rosenberg has been Vice President - Marketing and Sales for Mark
since 1990.
Richard Branca has been a Director of Mark since November 18, 1992. Since 1970
Mr. Branca has been President and Chief Executive Officer of Bergen Engineering
Co., a construction company.
Ronald E. Olszowy has been a Director of Mark since November 18, 1992. Since
1966, Mr. Olszowy has been President and Chief Executive Officer of Nationwide
Bail Bonds, which provides bail, performance and fidelity bonds. Mr. Olszowy has
also been President of Interstate Insurance Agency since 1980.
William Westerhoff has been a director of Mark since November 18, 1992. Mr.
Westerhoff has been retired since June 1992. Prior thereto, and for more than
five years, Mr. Westerhoff was a partner of Sax, Macy, Fromm & Co., certified
public accountants.
In August 2000, three directors resigned from the board for personal
reasons. We intend to fill these vacancies subject to shareholder approval in
the near future.
-15-
Directors Compensation
As of March 2, 2001 the fee paid to each director for attendance at
Board meetings was increased to $2 from $1. Each director is also reimbursed for
actual travel expenses for each meeting attended. We have 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. See "Security Ownership of Certain
Beneficial Owners and Management."
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 our directors, executive officers and 10% shareholders to file with the
Securities and Exchange Commission reports of ownership and changes in ownership
of our equity securities including its Common Stock. Such persons are also
required to furnish us with such reports.
In October 2001 Mr. Branca, Mr. Coppola, Mr. Olszowy and Mr.
Westerhoff each filed a Form 4 and Form 5 relating to the issuance in March 2001
of five-year options to each purchase 150,000 shares of common stock. Mr.
Coppola's Forms 4 and 5 also included three-year options to purchase 50,000
shares issued in July 2000. Other than these reports, we believe all other
reports required under Section 16(a) were filed on a timely basis.
Item 11. Executive Compensation.
The following table sets forth the amount of all compensation paid to
each of our named executive officers whose compensation exceeded $100,000,
including its Chief Executive Officer, for our last three fiscal years.
Summary Compensation Table
(expressed in actual dollars)
Long Term Compensation
Annual Compensation Awards/Payouts
---------------------------------------------------------------------------------------------------------------------
Restricted
Name and Principal Other Annual Stock Options/ LTIP All other
Position Year Salary ($) Bonus($) Compensation Awards $ SARS# Payouts compensation
-------------------- --------- ------------- -------- -------------- ------------ --------- ---------- --------------
Carl Coppola, 2001 $199,992 --- $29,999 --- 200,000 --- ---
President & CEO 2000 199,992 --- --- --- 109,300 --- ---
1999 200,000 --- --- --- 50,000 --- ---
-------------------- --------- ------------- -------- -------------- ------------ --------- ---------- --------------
Michael Rosenberg, 2001 $197,500 --- $108,074 --- --- --- ---
Vice President 2000 161,154 --- --- --- 37,500 --- ---
1999 122,892 --- --- --- --- --- ---
-------------------- --------- ------------- -------- -------------- ------------ --------- ---------- --------------
-16-
Options / SAR Grants in Fiscal Year 2001
The following table sets forth individual grants of stock options to
the named executive officers in the Summary Compensation Table for the fiscal
year ended June 30, 2001.
Individual Grants Potential Realizable
-------------------------------------------------------------------- Value at Assumed
% of Total Options Annual Rates of Stock
Granted to price Appreciation
Options Employees in Exercise for Option Term (1)
Granted Fiscal Year Price Expiration ---------------------
Name (#)(2) ($/Sh) Date 5% 10%
------ ----------- --------------- ---------- ------------ -------- ----------
Carl Coppola, CEO 50,000 7.7% 1.00 7/14/03 $8,275 $16,551
Carl Coppola, CEO 150,000 23.1% $.08 3/2/06 $1,892 $3,783
(1) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately
prior to the expiration of their term, assuming the specified compounded
rates of appreciation on the Common Stock over the term of the options.
These numbers do not take into account provisions of certain options
providing for termination of the option following termination of
employment, non-transferability or differences in vesting periods.
(2) The option exercise prices of $1.00 and $.08 per share are the closing
sales prices on date of the option grants.
Aggregated Option/SAR Exercises and Values for the fiscal Year Ended June 30,
2001.
Aggregate Option Exercises and Option Values
Value of Unexercised
Number of Securities In-the-Money Options
Underlying Unexercised At Fiscal Year End ($)
Shares Acquired on Options at Fiscal Year (#) Exercisable /
Name Exercise (#) Value Realized ($) Exercisable/ Unexercisable Unexercisable
---- ----------------- ----------------- --------------------------- ----------------------
Carl Coppola, CEO -0- -0- 50,000/-0- -0-/-0-
Carl Coppola, CEO -0- -0- 150,000/-0- -0-/-0-
Employment Agreements
Pursuant to a three-year employment agreement expiring on June 30,
2000, that has been extended by action of the Board of Directors to December 31,
2002, Mr. Coppola receives an annual base salary of $200 and was granted
three-year options to purchase 50,000 shares of Common Stock at an exercise
price of $1.00, and 150,000 shares at an exercise price of $.08. In addition,
Mr. Coppola is entitled to reimbursement of expenses not to exceed $15 annually
and is provided with an automobile and maintenance and use reimbursement by us.
Mr. Coppola's employment is terminable by us upon 90 days written notice and
provides for a two-year non-compete period to take effect upon termination.
We also have a three-year employment agreement with Mr. Rosenberg
expiring on December 1, 2001. Mr. Rosenberg receives an annual base salary of
$125 with salary increases of $25 per year, which were granted on August 1, 1999
and 2000 and Mr. Rosenberg was also granted three-year options to purchase
37,500 shares of Common Stock at an exercise price of $4.00. Effective October
1, 1999 Mr. Rosenberg's employment agreement was amended to grant him an
additional $25 increase. At the present time Mr. Rosenberg receives a total
salary of $200. In addition, we provide Mr. Rosenberg with an automobile and
maintenance and use reimbursement. Mr. Rosenberg's employment is terminable by
us upon written notice and provides for a one-year non-compete period to take
effect upon termination.
-17-
Stock Option Plan
Under Our 1993 Stock Option Plan (the "Option Plan"), options to
purchase up to 250,000 shares of Common Stock may be granted to our key
employees and officers or any of our subsidiaries. The Option Plan is designed
to qualify under Section 422 of the Internal Revenue Code as an "incentive stock
option" plan. We currently have 173,500 options available for grant under the
Option Plan.
401(k) Plan
Under our 401(k) retirement plan, we may make matching contributions
in shares of Common Stock equal to each employee's cash contribution up to five
percent of the employee's annual salary. The number of shares of Common Stock is
calculated by dividing the amount of the matching contribution by the average
per share closing price for the year.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information with respect to
each beneficial owner of 5% or more of the Common Stock, each of our Directors,
each Executive Officer who is named in the Summary Compensation Table and all
Executive officers and Directors as a group as of September 28, 2001. 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.
Beneficial Owner Number of Shares Owned % of Shares Outstanding
---------------- ---------------------- -----------------------
Carl C. Coppola 709,276 (1) 6.8%
c/o Mark Solutions, Inc.
1135 Clifton Avenue
Clifton NJ 07013
William Westerhoff 199,300 (2) 2.0%
Richard Branca 240,016 (3) 2.4%
Michael Rosenberg 92,225 (4) (5)
Ronald E. Olszowy 211,800 (2) 2.1%
Executive officers and directors
as a group (5 persons) 1,452,617 (6) 13.5%
(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 359,300 shares of Common Stock issuable
pursuant to options that are presently exercisable.
(2) Represents 199,300 shares of Common Stock issuable pursuant to options
which are presently exercisable.
(3) Includes 233,766 shares of Common Stock issuable pursuant to options
that are presently exercisable.
(4) Includes 62,500 shares of Common stock issuable pursuant to options
which are presently exercisable.
(5) Less than 1%
(6) Includes 1,044,166 shares of Common Stock issuable pursuant to warrants
or options that are presently exercisable.
-18-
Item 13. Certain Relationships and Related Transactions.
We purchase lighting fixtures, fabricating services and other related
services from Mark Lighting Fixtures Co., Inc. ("Mark Lighting"), a company
wholly owned by Carl Coppola, our President and Chief Executive Officer. For the
fiscal year ended June 30, 2001, we paid Mark Lighting $239,000 for such goods
and services.
In the past, in connection with specific modular steel cell projects
that require performance bonds, Mr. Coppola has provided third party guarantees.
In October 1999, Mr. Coppola made a loan to us in the amount of
$100,000. In December 2000 Mr. Coppola made an additional loan to us of $137,000
and was repaid $140,000 in April 2001. The remaining $97,000 is due to Mr.
Coppola and accrues interest at the rate of 10%.
In August 2000, we entered into an agreement with Sherleigh
Associates LLC, a company affiliated with Jack Silver, who had resigned as a
director of the Company. The agreement provided that Sherleigh will introduce
prospective investors, lenders or purchasers to us in an effort to facilitate a
sale of or an investment in the Company. In the event of a sale transaction,
Sherleigh will be due a cash fee totaling 5% of the transaction value. In the
event of an investment, Sherleigh was to receive a cash fee equal to 10% of the
investment and an amount of common stock purchase warrants equal to 10% of
common shares issued to, or derived from options or warrants issued to such
investor. As of September 28, 2001 Sherleigh has been unsuccessful in its
efforts and did not receive any compensation during the fiscal year ended June
30, 2001.
-19-
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a)(1) Consolidated Financial Statements
- Report of Independent Accountants F-1
- Consolidated Balance Sheets for
June 30, 2001 and 2000 F-2
- Consolidated Statements of Operations
for fiscal years ended June 30, 2001,
2000 and 1999 F-4
- Consolidated Statements of Stockholders
Equity for fiscal years ended June 30,
2001, 2000 and 1999 F-5
- Consolidated Statement of Cash Flows
for fiscal years ended June 30,
2001, 2000 and 1999 F-6
- Notes to Consolidated Financial Statements F-7
- Chantrey Vellacott Report F-19
(3) Exhibits.
Exhibit
Number Description
3. a)-- Amended and Restated Certificate of Incorporation (Incorporated
by reference to Exhibit 3(i)1 to our Form 10-Q for the period
ended December 31, 1998)
b)--- By-laws (Incorporated by reference to Exhibit 3 b) to our Form
10-K for the fiscal year ended June 30, 1998)
4. a)-- Specimen Stock Certificate (Incorporated by reference to
Exhibit 4 a) to our Form 10-K for the fiscal year ended June
30, 1998)
-20-
10. Material Contracts
a)-- Employment Agreement between us and Carl Coppola (Incorporated
by reference to Exhibit 10 a) to our Form 10-K for the fiscal
year ended June 30, 1997)
b)--- Employment Agreement between us and Michael Rosenberg
c)-- Incentive Stock Option Plan incorporated by reference to
Exhibit 10(b) to our Form 10-K for the year ended June 30,
1998
d)-- Agreement between New York State and us dated July 17, 1996.
(Incorporated by reference to Exhibit 10 d) to our Form 10-K
for the fiscal year ended June 30, 1996)
e)-- Agreement between Data General Corporation and us dated March
18, 1996 as amended on January 20, 1997. (Incorporated by
reference to Exhibit 10 e) to our Form 10-K for the fiscal
year ended June 30, 1996)
f)-- Asset and Stock Purchase Agreement between Mark Technical,
Inc. and MMSI Acquisition Corp. dated March 30, 2001.
(Incorporated by reference to Exhibit 10q) to our Form 8-K)
21. Our subsidiaries Incorporated by reference to Exhibit 21 to our
Form 10-K for the fiscal year ended June 30, 1998.)
24. Power of Attorney (included on page 23)
25. Consent of Independent Certified Public Accountant
-21-
27. Financial Data Schedule
(b) Reports on Form 8-K.
We have filed the following reports on Form 8-K during the year ended
June 30,2001 and through the date of this report:
Date of Report Items Reported, Financial Statements Filed
July 24, 2000 Item 5. Other Events
April 6, 2001 Item 2. Acquisition or Disposition of Assets
- Sale of Assets of MarkCare Medical Systems, Inc.
October 3, 2001 Item 5. Other Events - Compromise of Outstanding Debt
-22-
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 11, 2001 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 11, 2001
----------------
(Carl Coppola) President and Director
(Principal Executive
Officer)
/s/ Richard Branca Director October 11, 2001
------------------
(Richard Branca)
/s/ Ronald Olszowy Director October 11, 2001
-------------------
(Ronald E. Olszowy)
/s/ William Westerhoff Director October 11, 2001
----------------------
(William Westerhoff)
-23-
Board of Directors and Shareholders
Mark Solutions, Inc. and Subsidiary
Clifton, New Jersey
We have audited the consolidated balance sheets of Mark Solutions, Inc. and
Subsidiary as of June 30, 2001 and 2000, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the three years ended
June 30, 2001. 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, as of June 30, 2000 and for the two years ended June 30, 2000, which
statements reflect total assets of $485 as of June 30, 2000, and a net loss of
$2,617 and $1,375 for the years ended June 30, 2000, and 1999, respectively.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for
MarkCare Medical Systems Limited, is based solely on the report of the other
auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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
Subsidiary as of June 30, 2001 and 2000, and the results of its operations and
cash flows for the three years ended June 30, 2001, in conformity with
accounting principles generally accepted in the United States of America.
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
October 4, 2001
F-1
MARK SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
ASSETS
June 30,
--------------------
2001 2000
------ ------
CURRENT ASSETS:
Cash and cash equivalents
(including restricted cash of $191 in 2000) $ 536 $1,138
Marketable securities -- 406
Notes receivable 613 225
Accounts receivable, less allowance for doubtful
accounts of $53 in 2000 2,969 1,647
Costs in excess of contract revenue earned 427 --
Inventories 25 60
Deferred tax asset 284 506
Net assets of discontinued segment -- 420
Prepaid expenses 41 22
------ ------
Total current assets 4,895 4,424
------ ------
PROPERTY AND EQUIPMENT:
Machinery and equipment 1,650 1,650
Demonstration equipment 227 227
Office furniture and equipment 284 284
Leasehold improvements 414 439
Vehicles 17 17
Property held under capital leases 275 275
------ ------
2,867 2,892
Less accumulated depreciation and amortization 2,382 2,102
------ ------
Net property and equipment 485 790
------ ------
OTHER ASSETS 44 90
------ ------
$5,424 $5,304
====== ======
See notes to consolidated financial statements
F-2
MARK SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (cont'd)
(in thousands, except share and per share data)
June 30,
--------------------
2001 2000
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,566 $ 1,787
Short term borrowings -- 250
Current maturities of long-term debt 750 402
Current portion of obligations under capital leases 74 94
Billings in excess of contract revenue earned 500 --
Notes payable to officers/stockholders 97 100
Accrued liabilities 979 192
-------- --------
Total current liabilities 3,966 2,825
-------- --------
TOTAL OTHER LIABILITIES:
Long-term portion of obligations under capital leases 5 73
Long-term debt, excluding current maturities 1,130 2,000
-------- --------
Total other liabilities 1,135 2,073
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares
authorized, 9,714,606 and 7,142,373 shares issued
and outstanding at June 30, 2001 and 2000, respectively 97 71
Preferred stock, $1.00 par value, $10 liquidation
value; 4,705,000 shares authorized:
Series D; authorized -0- and 20,000 shares;
20,000 shares outstanding at June 30, 2000 -- 20
Additional paid-in capital 36,881 36,671
Deficit (36,604) (36,305)
Treasury stock, at cost; 17,500 shares (51) (51)
-------- --------
Total Stockholders' Equity 323 406
-------- --------
$ 5,424 $ 5,304
======== ========
See notes to consolidated financial statements
F-3
MARK SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Years Ended June 30,
2001 2000 1999
----------- ----------- -----------
Revenues $ 8,772 $ 11,671 $ 8,497
----------- ----------- -----------
Costs and Expenses:
Cost of sales 5,762 9,728 5,689
General, and administrative expenses 2,328 1,912 2,449
Marketing costs 424 681 562
Litigation settlement 98 250 396
----------- ----------- -----------
Total Costs and Expenses 8,612 12,571 9,096
----------- ----------- -----------
Operating Income (Loss) 160 (900) (599)
----------- ----------- -----------
Other Income (Expenses):
Interest income 17 87 46
Interest expense (231) (339) (169)
Other -- 113 (1)
----------- ----------- -----------
Total Other Expenses (214) (139) (124)
----------- ----------- -----------
Loss from Continuing Operations Before Income Tax Benefit (54) (1,039) (723)
Income Tax Benefit -- 83 760
----------- ----------- -----------
Income (Loss) from Continuing Operations (54) (956) 37
----------- ----------- -----------
Discontinued Operations:
Income from sale of discontinued segment, net
of income tax provision of $477 716 -- --
Loss from operations of discontinued segment, net
of income tax benefit of $477, $24, $240, respectively (961) (3,432) (1,747)
----------- ----------- -----------
Net Loss $ (299) $ (4,388) $ (1,710)
=========== =========== ===========
Basic Income (Loss) per Share
Income (loss) per share from continuing operations $ (0.01) $ (0.16) $ 0.01
Income from sale of discontinued segment 0.09 -- --
Loss from operations of discontinued segment (0.12) (0.56) (0.36)
----------- ----------- -----------
Loss per share $ (0.04) $ (0.72) $ (0.35)
=========== =========== ===========
Weighted Average Number of
Basic Shares Outstanding 8,266,676 6,112,534 4,945,257
=========== =========== ===========
Dividends Paid $ -- $ -- $ --
=========== =========== ===========
See notes to consolidated financial statements
F-4
MARK SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share and per share data)
Common Stock Preferred Series A Preferred Series B
---------- ---------------------- ---------------------- ----------------------
Total Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 1998 $ 1,895 4,824,167 $ 48 -- $ -- -- $ --
Net loss (1,710) -- -- -- -- -- --
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 -- -- -- -- -- -- --
Other (23) -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 1999 2,550 5,525,296 55 24,000 24 6,000 6
Net loss (4,388) -- -- -- -- -- --
Cash investment in subsidiary 60 -- -- -- -- -- --
Preferred stock conversion to common stock 11 222,278 2 (24,000) (24) (6,000) (6)
Conversion of convertible debenture 200 -- -- -- -- -- --
Issuance of common stock adjustment provision -- 493,000 5 -- -- -- --
Issuance of stock through private placement 200 100,000 1 -- -- -- --
Imputed interest on convertible debenture 86 -- -- -- -- -- --
Stock for debt conversion 581 291,800 3 -- -- -- --
Warrants issued for services 85 -- -- -- -- -- --
Employee stock option exercise 131 59,500 1 -- -- -- --
Warrant exercise 904 450,499 4 -- -- -- --
Commissions and related fees (14) -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2000 406 7,142,373 71 -- -- -- --
Net loss (299) -- -- -- -- -- --
Stock issued for debt 92 89,000 1
Preferred stock conversion to common stock 387,816 4
Conversion of convertible debentures 120 2,095,417 21
Other 4 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2001 $ 323 9,714,606 $ 97 -- $ -- -- $ --
========== ========== ========== ========== ========== ========== ==========
Preferred Series D Treasury Stock
--------------------- Paid in ---------------------
Shares Amount Capital Deficit Shares Amount
-------- -------- -------- -------- -------- --------
Balance, June 30, 1998 -- $ -- $ 31,991 $(30,144) -- $ --
Net loss -- -- -- (1,710) -- --
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) -- --
Other -- -- (23) -- -- --
-------- -------- -------- -------- -------- --------
Balance, June 30, 1999 -- -- 34,433 (31,917) 17,500 (51)
Net loss -- -- -- (4,388) -- --
Cash investment in subsidiary -- -- 60 -- -- --
Preferred stock conversion to common stock -- -- 39 -- -- --
Conversion of convertible debenture 20,000 20 180 -- -- --
Issuance of common stock adjustment provision -- -- (5) -- -- --
Issuance of stock through private placement -- -- 199 -- -- --
Imputed interest on convertible debenture -- -- 86 -- -- --
Stock for debt conversion -- -- 578 -- -- --
Warrants issued for services -- -- 85 -- -- --
Employee stock option exercise -- -- 130 -- -- --
Warrant exercise -- -- 900 -- -- --
Commissions and related fees -- -- (14) -- -- --
-------- -------- -------- -------- -------- --------
Balance, June 30, 2000 20,000 20 36,671 (36,305) 17,500 (51)
Net loss -- -- -- (299) -- --
Stock issued for debt 91
Preferred stock conversion to common stock (20,000) (20) 16
Conversion of convertible debentures 99
Other -- -- 4 (299) -- --
-------- -------- -------- -------- -------- --------
Balance, June 30, 2001 -- $ -- $ 36,881 $(36,604) 17,500 $ (51)
======== ======== ======== ======== ======== ========
See notes to consolidated financial statements
F-5
MARK SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands, except share and per share data)
Year Ended Year Ended Year Ended
June 30, June 30, June 30,
2001 2000 1999
------- ------- -------
Cash Flows From Operating Activities:
Net income (loss) $ (299) $(4,388) $(1,710)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 449 491 363
Amortization of debt issue costs -- -- 110
Securities issued for services -- 171 345
Securities issued for settlement of liabilities 92 -- --
Deferred tax asset 222 494 (1,000)
Gain on sale of discontinued segment (943) -- --
Gain on disposition of equipment -- (5) --
Net assets of discontinued segment (449) (111) 33
(Increase) decrease in assets:
Restricted cash -- -- 1,234
Accounts receivable (1,322) 2,016 (3,146)
Inventory 35 (60) 112
Costs in excess of contract revenue earned (427) 1,007 (1,007)
Other current assets (19) 38 138
Due from officer -- -- 102
Other assets 46 (10) (33)
Increase (decrease) in liabilities: --
Accounts payable (221) (994) 2,764
Due to related parties -- (56) 167
Billings in excess of contract revenue earned 500 -- --
Litigation settlement payable -- (300) 300
Accrued liabilities 537 14 34
------- ------- -------
Net adjustments to reconcile net loss to
net cash provided by (used for) operating activities (1,500) 2,695 516
------- ------- -------
Net Cash (Used for) Operating Activities (1,799) (1,693) (1,194)
------- ------- -------
Cash Flows From Investing Activities:
Acquisition of property and equipment -- (84) (737)
Proceeds from the sale of equipment -- 20 --
Repayment of note receivable 112 25 --
Note receivable -- -- (250)
Proceeds from sale of discontinued segment 1,418 -- --
Marketable securities 406 (406) --
------- ------- -------
Net Cash Provided by (Used for) Investing Activities 1,936 (445) (987)
------- ------- -------
Cash Flows From Financing Activities:
Proceeds from long term-debt -- 2,000 379
Repayments of long-term debt (402) (224) (31)
Increase in short term borrowings -- --
Repayment of notes payable for equipment and vehicles (88) (137) (108)
Proceeds from short term borrowing -- 450 1,050
Repayment of short term borrowings (250) (109) (675)
Proceeds from notes payable officer -- 530 375
Repayment of notes payable officer (3) (805) --
Proceeds from issuance of securities -- 1,292 --
Collection of subscription receivable -- -- 1,231
Purchase of treasury stock -- -- (51)
Repayment of offering costs and commission -- -- (243)
Other 4 -- --
------- ------- -------
Net Cash Provided by (Used for) Financing Activities (739) 2,997 1,927
------- ------- -------
Net increase (decrease) in Cash (602) 859 (254)
Cash and Cash Equivalents at Beginning of Year 1,138 279 533
------- ------- -------
Cash and Cash Equivalents at End of Year $ 536 $ 1,138 $ 279
======= ======= =======
See notes to consolidated financial statements
F-6
MARK SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 30, 2001
(in thousands, except share and per share data)
1. Management Plans and Description of Business:
Mark Solutions, Inc.'s (the "Company") financial statements for the year
ended June 30, 2001 have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities in the
normal course of business. The Company incurred income/(loss) from continuing
operations of $(54), ($956) and $37 for the three years ended June 30, 2001. Its
stockholders' equity at June 30, 2001 approximated $323.
The Company's operating division is the construction of modular cell
products which represents an alternative to traditional construction methods.
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. These
factors raise substantial doubt about the Company's ability to continue as a
going concern.
The Company adopted the following plan to mitigate these factors. First,
on April 6, 2001, the Company consummated a transaction for the sale of the
assets of its medical imaging segment. Second, on September 26, 2001, the
Company entered into a compromise agreement with the holder of its convertible
notes payable in the amount of $1,880. Under the terms of the compromise
agreement, the Company will remit four equal installments of $250 in full
satisfaction of the outstanding indebtedness and accrued interest. The final
installment is due in March 2003. Third, the Company is in the final stages of
various contract negotiations for the sale of its modular cell product. These
contracts have an approximate aggregate value of $7,000.
The Company believes that its present financial position and the above
plan will result in improved operating results and generate sufficient working
capital to allow it to continue as a going concern.
2. Sale of Business Segment
On April 6, 2001, the Company closed a transaction involving sale of
assets by its majority owned subsidiary Mark Technical, Inc. ("Mark Technical"),
formerly known as MarkCare Medical Systems, Inc. ("MarkCare") to MMSI
Acquisitions Corp. ("MMSI"), a newly established wholly owned subsidiary of
MediSolutions Ltd. ("MediSolution"), a Canadian based company engaged in
offering information systems to the health care industry.
Pursuant to the terms of an Asset and Stock Purchase agreement, MMSI
purchased substantially all of the assets of Mark Technical and assumed certain
specific liabilities. The sale also included all of the issued and outstanding
stock of Mark Technical's wholly owned United Kingdom subsidiary, MarkCare
Medical Systems Ltd. Under the terms of the agreement, MarkCare Medical Systems
Korea is to be liquidated.
The total purchase price was $1,683, subject to certain closing
adjustments. Prior to the closing, Mark Technical received from MMSI a $500
advance.
F-7
At closing, Mark Technical received $476 after adjustments. A balance
of $500 was due within 90 days of closing as evidenced by a promissory note
guaranteed by MediSolution. Additionally, MarkCare received 200,000 warrants to
purchase the Common Stock of MediSolition at an exercise price of $2.40 (CDN) a
share. MediSolution's Common Stock is traded on the Toronto Exchange. As
additional compensation, MarkCare is to receive ten percent (10%) of all license
revenues received by MMSI from certain projects for a period of one year from
closing.
Under the terms of the agreement MMSI purchased the name "MarkCare
Medical Systems" and as a result MarkCare Medical Systems changed its name to
Mark Technical, Inc. simultaneously with the closing. As a result of the sale,
Mark Technical will no longer be operating in the medical imaging industry.
Prior to the due date of the promissory note, June 28, 2001, the Company
was advised by MMSI that they were evaluating the value of the net assets
transferred and they might be entitled to an offset against the promissory note
for differences in the valuation of the net assets. Under a 30-day standstill
agreement, dated July 3, 2001, and extended through September 3, 2001, both
parties agreed to take no action until supporting documentation is prepared. As
of September 28, 2001, the Company has not received documentation to support
their allegations. The Company has advised MMSI that they have until October 19,
2001, to produce their supporting documentation, at which time the Company will
revaluate its position. While the Company disputes MMSI's claims, it has
recorded a liability for potential expenditures arising from this matter.
The Company has restated the prior financial statements of Mark Technical
and Subsidiaries as discontinued operations. Net assets to be disposed of, at
their book values, have been separately classified in the accompanying balance
sheet as of June 30, 2000. Revenues from this segment for the years ended June
30, 2001, 2000 and 1999 were $2,077, $2,054 and $1,729, respectively. Net assets
relating to this discontinued operation primarily relate to cash, accounts
receivable and property and equipment.
3. Summary of Significant Accounting Policies:
a. Nature of business - The Company is a Delaware corporation, which
designs, manufactures, and installs modular steel cells for
correctional institution construction.
b. Basis of consolidation - The consolidated financial statements
include the accounts of Mark and its majority owned subsidiary, Mark
Technical, Inc. (formerly MarkCare).
c. Revenue recognition - Revenues for the modular steel products are
recorded at the time services are performed or when products are
shipped except for manufacturing contracts which are recorded on the
percentage-of-completion method which measures the percentage of
costs incurred over the estimated total costs for each contract.
This method is used because management considers incurred costs to
be the best available measure of progress on these contracts.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance. Provisions for
estimated losses on uncompleted contracts are made in the period in
which such losses are determined. The Company provides an allowance
for bad debts and returns based upon its historical experience.
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.
F-8
e. Inventories - Inventories are valued at the lower of cost or market
on a first-in, first-out basis. The Company evaluates the levels of
inventory based on historical movement and current projections of
usage of the inventory. If this evaluation indicates obsolescence
and or slow movement, the Company would record a reduction in the
carrying value by the amount the cost basis exceeded the estimated
net realizable value of the inventory.
f. Property and depreciation - All property and equipment items are
stated at cost. Leasehold improvements are amortized under the
straight-line method. Substantially all other items are depreciated
under straight-line and accelerated methods. Depreciation and
amortization is provided in amounts sufficient to write-off the cost
of depreciable assets, less salvage value, over the following
estimated useful lives:
Machinery and equipment 7 years
Demonstration equipment 5-7 years
Office furniture and equipment 5-7 years
Leasehold improvements 5-7 years
Vehicles 5 years
Property held under capital lease 5 years
g. Income taxes - Deferred income taxes are recognized for tax
consequences of "temporary differences" by applying enacted
statutory tax rates, applicable to future years, to differences
between the financial reporting and the tax basis of existing assets
and liabilities. Deferred taxes are also recognized for operating
losses that are available to offset future taxable income.
h. 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, 2001, 2000 and 1999.
i. 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.
j. 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.
k. Reclassifications - Certain prior year amounts have been
reclassified to conform with the current year presentation.
F-9
l. 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 tax benefit or expense,
as well as any reclassifications related to the components of other
comprehensive income were not significant.
m. Concentration of risk - 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, 2001 and 2000, the Company's
uninsured cash balances approximated $336 and $489, respectively.
The Company's customer base consists principally of government
agencies, or general contractors engaged by such agencies, located
in the United States and Puerto Rico.
The Company employs hourly employees in its manufacturing facility
who are subject to a collective bargaining agreement.
Revenues from two customers approximated 39% and 38% of total
revenues for the year ending 2001. For the year ended 2000, revenues
from three customers approximated 28%, 22% and 18% of total
revenues. Revenues from three customers approximated 46%, 13% and
11% of total revenues for 1999.
3. Inventories:
Inventories at June 30, 2001 and 2000 consists of raw materials to be
used in the construction of jail cells.
4. Litigation Settlement Payable:
In August 2001, the Company settled a lawsuit, which was pending in the
Delaware Circuit Court, Delaware County, Indiana, with a general contractor for
$98.
On August 25, 1999, the Company agreed to settle an ongoing lawsuit
related to a modular cell project in Hawaii. The Company agreed to pay its
customer $50 prior to December 31, 1999 and an additional $250 by May 31, 2000
to satisfy all claims against the Company. The accompanying financial statements
at June 30, 1999 include a charge to operations for the $300 settlement and
related legal fees approximating $96.
5. Related Party Transactions:
The Company purchased materials and is reimbursed for various expenses
from Mark Lighting Fixtures Co., Inc. ("Mark Lighting"), an entity owned by the
Company's Chief Executive Officer and Metalite, Inc. ("Metalite"), an entity
owned by the brother of the Company's Chief Executive Officer.
The following related party transactions are included in the accompanying
financial statements:
Years Ended
June 30,
----------------------------------------
2001 2000 1999
------- ------ ------
Purchases $ 223 $ 358 $ 181
Consulting services 31 - 33
F-10
As a result of current and prior years' transactions, the Company has net
balances due to the following related parties, which will be settled in the
ordinary course of business:
Years Ended
June 30,
----------------------------
2001 2000
------ ------
Mark Lighting Fixture Co., Inc. $ 21 $ -
Carl Coppola 97 100
------ ------
Due to related parties $ 118 $ 100
====== ======
The Company grants non-employee directors, options for serving on the
Board of Directors. On July 14, 2000 the Company issued three-year options to
purchase 50,000 shares of Common Stock at $1.00, the closing price on the date
of grant, to the Company's Chief Executive Officer. On March 2, 2001 the Company
issued, five year options to purchase 150,000 shares of Common Stock to each of
the four members of the Board of Directors, at $.08, the closing price on the
date of grant.
6. Long-Term Debt:
a. Long-term debt consists of the following:
June 30,
------------------------
2001 2000
-------- -------
Convertible notes payable, with interest
accruing at a rate of 7% per annum,
principal and interest will be due
and payable in April 2002; the note
is immediately convertible into
shares of Common Stock in whole or in
part in minimum increments of $25 of
principal $ 1,880 $ 2,000
Other - 402
-------- -------
Total long-term debt 1,880 2,402
Less current portion 750 402
-------- -------
Long-term debt, excluding
current portion $ 1,130 $ 2,000
======== =======
On September 26, 2001, the Company entered into a compromise agreement
with the holder of the convertible notes payable in the amount of $1,880. Under
the terms of the agreement the Company will pay $1,000 in full satisfaction of
the outstanding indebtedness and accrued interest. The comprise amount is
payable in four (4) equal installments of $250 due upon execution of the
agreement, November 30, 2001, February 28, 2002 and March 1, 2003. The initial
payment was made on September 26, 2001.
b. Convertible securities
On January 21, 1997, the Company sold $750 principal amount 7%
convertible debentures due January 1999. Those debentures were convertible into
shares of common stock at a conversion price which is the lesser of (i) $8.50
per share or (ii) 80% of the average closing bid
F-11
price on the five trading days immediately preceding the date(s) of conversion.
On May 1, 1998 these debentures were converted into 187,500 shares of common
stock. Based on certain adjustment provisions related to the trading value of
the stock, the Company issued 493,000 shares of common stock to the holder in
2000.
On June 2, 1997, the Company sold $1,250 principal amount 7%
convertible debentures due June 2, 1999. The debentures were immediately
converted into shares of common stock at a conversion price of $0.80 per share.
On June 27, 1997, the Company sold $300 principal amount 7%
convertible debentures due June 29, 1999. The debentures were converted, on or
after December 30, 1997, into shares of common stock at a conversion price of
$0.80 per share. On June 19, 1998, $200 of these debentures were converted into
62,500 shares of common stock. The Company issued 75,000 warrants with an
exercise price of $6.00 as part of the conversion. On June 24, 1999, the balance
of $100 of these debentures was converted into 31,250 shares of common stock.
In June 1998, the Company completed a $2,750 private placement of
equity and debt units (the "Private Placement") pursuant to which the Company
issued (i) 305,000 shares of common stock (the "Private Placement Shares "),
(ii) convertible debentures (face amount $1,530) due December 28, 1999, (the
"Convertible Debentures"), (iii) warrants to purchase 343,750 shares of common
stock, and (iv) an option exercisable by the investors to purchase additional
convertible debentures (face amount $2,550) with warrants to purchase 318,750
shares of common stock (the "Debt Unit Option").
Of the $1,530 proceeds received in connection with the Convertible
Debentures and its related options, $505 was attributed to the debenture
conversion features and options and was classified as additional paid-in
capital, and the remaining $1,025 was classified as a long-term obligation at
June 30, 1998. The Convertible Debentures were exchanged for equity securities
in January, 1999.
On July 1, 1999, the Company borrowed $200 under a 10% note. The note
was exchanged for 20,000 shares of Series D Preferred Stock in September 1999.
The Company has charged to operations for the years ending June 30,
2000, $86 of imputed interest expense on Convertible Debentures, which
represents the discount on conversion of each of the above Convertible
Debentures.
7. Fair Value of Financial Instruments:
The estimated fair value of the Company's convertible debt as of June 30,
2001 is as follows:
Carrying Fair
Amount Value
-------- --------
Convertible debt $ 1,880 $ 1,000
The estimated fair value amount has been based on the settlement agreed
to between the lender and the Company in September 2001 (see Note 6a).
The fair value of the Company's other financial instruments approximates
their carrying amounts.
F-12
8. Stockholders' Equity:
a. Capitalization
The Company's authorized capital consists of 50,000,000 shares of $.01
par value common stock and 4,705,000 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.
At June 30, 2001, there are 100,000 shares of Series C Preferred Stock
authorized. There are no authorized shares of Series A, B, or D Preferred Shares
as of June 30, 2001.There are no outstanding shares of Series C Preferred Stock
as of June 30, 2001.
Series C Preferred Stock is convertible, at the option of the holder,
into shares of Common Stock equal to $10.00 per share dividend by of the average
per share closing bid price of the Common Stock for the five trading days
immediately preceding the conversion date(s).
Series D Preferred Stock is convertible, at the option of the holder,
into shares of Common Stock equal to $10.00 per share dividend by 70% of the
average per share closing bid price of the Common Stock for the five trading
days immediately preceding the conversion date(s).
In the event of any liquidation, the holders of the Preferred Stock will
share equally in any balance of the Company's assets available for distribution
to them up to $10.00 per share plus unpaid dividends, after satisfaction of
creditors and the holders of the Company's senior securities, if any.
b. Exchange placement
In January 1999, Mark effected an exchange placement (the "Exchange
Placement") pursuant to which the investors agreed to exchange the securities
received in the Private Placement (see Note 7) for (i) 122,000 shares of Series
A Preferred Stock, (ii) 153,000 shares of Series B Preferred Stock, (iii)
warrants to purchase 343,750 shares of common stock (the "Warrants") and (iv) an
option exercisable by the investors to purchase an additional 275,000 shares of
Preferred Stock with warrants to purchase 343,750 shares of common stock (the
"Preferred Stock Unit Option").
The Warrants consist of 343,750 warrants each to purchase one share of
Common Stock for $6.00 per share expiring on June 28, 2002.
F-13
8. Stockholders' Equity: (Cont'd)
The Preferred Stock Unit Options expired in 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.
c. Preferred stock conversion
During the year ended June 30, 2001, investors converted 20,000 shares
of Series D Preferred Stock into 387,816 shares of common stock.
During the year ended June 30, 2000, investors converted 24,000 shares
of Series A Preferred Stock and 6,000 shares of Series B Preferred Stock into
222,278 shares of common stock.
During the year ended June 30, 1999, investors converted 98,000 shares
of Series A Preferred Stock and 147,000 shares of Series B Preferred Stock into
869,012 shares of common stock.
d. Loss per common share
The reconciliation of EPS for the years ended June 30, 2001, 2000 and
1999 is as follows:
Years Ended
June 30,
------------------------------------------------------
2001 2000 1999
---------- ---------- -----------
Net income/( loss) $ (299) $ (4,388) $ (1,710)
Less imputed preferred stock dividend - - 63
---------- ---------- -----------
Loss available to common
shareholders $ (299) $ (4,388) $ (1,773)
========== ========== ===========
Weighted average shares outstanding 8,266,676 6,112,534 4,945,257
========== ========== ===========
Loss per share $ (.04) $ (.72) $ (.36)
========== ========== ===========
F-14
8. Stockholders' Equity: (Cont'd)
e. Stock option plan
The Company has a Stock Option Plan which is administered by the Board
of Directors. Under the terms of the Plan, options to purchase 250,000 shares of
common stock may be granted to key employees. Options become exercisable as
determined by the Board of Directors and expire over terms not exceeding
employment, six months after death or one year in the case of permanent
disability of the option holder. The option price for all shares granted under
the Plan is equal to the fair market value of the common stock at the date of
grant, as determined by the Board of Directors, except in the case of a ten
percent shareholder where the option price shall not be less than 110% of the
fair market value at the date of grant.
The following information relates to shares under option and shares
available for grant under the Plan:
Years Ended
June 30,
-----------------------------------------------------------------
2001 2000 1999
--------------------- -------------------- --------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
--------- --------- --------- --------- --------- ---------
Outstanding, beginning of year 95,125 $ 3.29 107,750 $ 5.53 99,875 $ 5.80
Granted -- -- 108,500 1.32 17,250 4.00
Canceled (78,125) (3.56) (81,625) (5.93) (9,375) (5.58)
Exercised -- -- (39,500) (1.13) -- --
--------- --------- --------- --------- --------- ---------
Outstanding, end of year 17,000 $ 2.06 95,125 $ 3.29 107,750 $ 5.53
========= ========= ========= ========= ========= =========
Available for issuance under Plan 173,500 95,375 122,250
Weighted average contractual
life (years) 1.32 1.97 1.23
Shares subject to exercisable option 17,000 95,125 107,750
f. Stock warrants
Outstanding warrants are as follows:
Years Ended
June 30,
-----------------------------------------------------------------
2001 2000 1999
--------------------- -------------------- --------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
--------- --------- --------- --------- --------- ---------
Warrants outstanding,
beginning of year 667,050 $ 3.44 1,135,000 $ 8.23 1,061,667 $ 9.72
Granted 650,000 .15 293,300 2.05 198,750 3.58
Exercised (214,550) (3.70) (467,500) (2.09) -- --
Expired -- -- (293,750) (2.46) (125,417) 13.44
--------- --------- --------- --------- --------- ---------
Warrants outstanding,
end of year 1,102,500 $ 1.94 667,050 $ 3.44 1,135,000 $ 8.23
========= ========= ========= ========= ========= =========
Weighted average contractual
life (years) 3.30 2.09 2.17
F-15
8. Stockholders' Equity: (Cont'd)
g. 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 2001,
2000 and 1999: risk-free interest rate of 5.48%, 6.38% and 6.50%; dividend yield
-0-; volatility factor related to the expected market price of the Company's
common stock of .35; and weighted average expected option life of 3.0, 3.0 and
3.3 years. The weighted average fair value of options granted during fiscal
2001, 2000 and 1999 were $.08, $.70 and $.57, respectively.
The Company's pro forma information follows:
Years Ended
June 30,
----------------------------------
2001 2000 1999
--------- -------- --------
Pro forma net (loss) $ (379) $ (4,458) $ (1,772)
Pro forma loss per common share (.05) (.73) (.37)
h. Stock for debt conversion
During 2001 and 2000, vendors and other debtors converted $92 and $581
of liabilities into 89,000 and 291,800 shares of the Company's common stock.
i. Private placement
In January 2000, an investor notified Mark of his intention to
exercise an option to purchase 20,000 shares of preferred stock each convertible
into Common Stock at $10.00 per preferred share divided by 75% of the trading
price and warrants to purchase 25,000 shares of Common Stock at $6.00 per share.
On January 19, 2000, Mark agreed to issue 100,000 shares of Common Stock in lieu
of the convertible preferred stock and also issued the warrants.
9. Short Term Borrowings:
On March 3, 2000, Mark issued to two investors an aggregate of $250,
120-day principal amount convertible notes having an interest rate of 10% per
annum. The investors were a director of Mark and his brother. On July 12, 2000,
these notes were repaid in accordance with their terms. In connection with the
loan represented by these notes, Mark issued five-year warrants to purchase
48,933 shares of Common Stock at $1.25 per share.
10. Leases:
a. Facility leases
The Company occupies its executive offices pursuant to a month to
month lease. The Company conducts its manufacturing operations pursuant to an
operating lease expiring October 31, 2004. Under the terms of these leases, the
Company is obligated to pay maintenance, insurance, and its allocable share of
real estate taxes.
F-16
Future minimum rental payments under these operating leases are as
follows:
Year Ended
June 30,
----------
2002 $ 235
2003 264
2004 287
2005 98
------
Total future minimum rental payments $ 884
======
Rent expense for the years ending June 30, 2001, 2000 and 1999 was
$250, $381 and $300, respectively.
The Company also leases various automobiles and small office equipment.
b. Capital leases
The Company leases certain equipment under capital leases with
expiration dates ranging from April 2000 through April 2003.
Future minimum lease payments are as follows:
Year Ended
June 30,
----------
2002 $ 82
2003 5
------
Total future minimum lease payments 87
Less: amount representing interest 8
------
Present value of net future minimum lease payments 79
Less: current portion of obligations under capital leases 74
------
Long-term portion of obligations under capital leases $ 5
======
Property and equipment held under capital leases at June 30, 2001 has a
value, net of accumulated amortization, of $74.
11. Commitments and Contingencies:
Pursuant to employment agreements with certain key executives, which
expire at various dates through December 2002, the Company granted options to
acquired 487,500 shares of common stock at various exercise prices ranging from
$.08 to $4.00. The Company's remaining aggregate commitment at June 30, 2001
under such contracts approximated $500.
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.
F-17
12. Income Taxes:
As of June 30, 2001, the Company has Federal net operating loss carry
forwards of approximately $30,277. Such carry forwards begin to expire through
2019 if not previously used. 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 $10,294, as required by
SFAS No. 109.
The State of New Jersey has enacted a program that allows new or
expanding emerging technology and biotechnology businesses to sell their Unused
Net Operating Loss (NOL) carryover to any corporate taxpayer in the state of at
least 75% of the value of the tax benefits. Upon acceptance of an application,
each applicant receives $250. The remaining NOL carryover is treated in the same
manner for the fiscal year ended June 30, 2001.
The deferred tax asset arising from the New Jersey NOL is comprised of
the following:
June 30,
----------------------
2001 2000
-------- --------
Sale of net operating loss $ 284 $ 572
======== ========
13. Supplemental Cash Flow Information:
a. Cash paid for interest during the years ended June 30, 2001, 2000 and
1999 amounted to $100, $284 and $191, respectively.
b. The Company acquired certain equipment with an aggregate cost of $397
and $221 under capital lease obligations for the years ended June 30, 2000, and
1999, respectively. There were no purchases of equipment under capital lease
obligations for the year ended June 30, 2001
c. During 2001 and 2000, vendors and other debtors converted $92 and $581
of liabilities into 89,000 and 291,800 shares of the Company's common stock.
During 1999, $1,530 of debentures and $1,220 of securities classified as
temporary equity were exchanged for shares of preferred stock, warrants and
options.
d. During 2000 and 1999, the Company granted outside consultants options
to acquire 21,000 and 66,250 shares, respectively, of common stock at exercise
prices ranging from $4.64 to $16.00. The fair value of the 1999 options was
immaterial. The fair value of the 2000 options ($10) 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-18
The Directors
Mark Solutions Inc
1135 Clifton Avenue
Clifton
N J 07013
New Jersey
USA 11 October 2001
Dear Sirs
Markcare Medical Systems Limited
In connection with the 10-K filing of your consolidated financial statements for
the year ended June 30 2001, we hereby confirm that we are not aware of any
subsequent events that would lead us to withdraw or alter our audit opinion
given in respect of the financial statements of Markcare Medical Systems Limited
for the year ended 30 June 1999, year ended 30 June 2000 and the Balance Sheet
at 30 June 2000. Our audit reports were dated 11 October 1999 and 13 October
2000 respectively.
Yours faithfully
CHANTREY VELLACOTT DFK
Chartered Accountants
Registered Auditors.
F-19
MARKCARE MEDICAL SYSTEMS LIMITED
Auditors' report to the members of Markcare Medical Systems Limited
We have audited the financial statements on pages 5 to 12 which have been
prepared under the historical cost convention and the accounting policies set
out in pages 7 and 8.
Respective responsibilities of directors and auditors
As described on page 3, the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those financial statements and to
report our opinion to you.
Basis of opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Going concern
In forming our opinion we have considered the adequacy of the disclosures made
in the financial statements in note 18 concerning the uncertainty of adequate
financial support being made available by the parent company in the future. The
financial statements have been prepared on a going concern basis. In view of the
significance of this uncertainty we consider that it should be drawn to your
attention but our opinion is not qualified in this respect.
UK GAAP and US GAAS
With respect of the information disclosed in the financial statements, we are
not aware of any material differences between UK Generally Accepted Accounting
Principles and US Generally Accepted Accounting Principles or between UK
Auditing Standards and US Generally Accepted Auditing Standards.
Opinion
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 30 June 2000 and of its loss for the year then
ended and have been properly prepared in accordance with the Companies Act 1985.
CHANTREY VELLACOTT DFK
Chartered Accountants
Registered Auditors
LONDON
13 October 2000
F-20