10-Q/A 1 b319607_10qa.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------- FORM 10-QA (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2002 ---------------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number: 0-17118 ---------------- Mark Holdings, Inc. -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 01-0564816 ---------------------------------- ---------------------------------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation) Identification No.) 1135 Clifton Avenue Clifton, New Jersey 07013 -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (973) 773-8100 -------------------------- Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report Indicate by check whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date: Common Stock, $ .01 par value: 9,714,606 shares outstanding as of May 3, 2002. MARK HOLDINGS, INC. Form 10-QA for Quarter Ended March 31, 2002 Index
Part I Financial Information Page Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2002 and June 30, 2001................................................................ 3 Consolidated Statements of Operations for the Nine and Three Months Ended March 31, 2002 and 2001..................................... 4 Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2002 and 2001............................................... 5 Notes to Consolidated Financial Statements........................................................ 6-7 Item 2. Management's Discussion and Analysis of Financial Condition............................................................................. 8-9 Part II Other Information Item 1. Legal Proceedings................................................................................. 10 Item 2 Changes in Securities and Use of Proceeds......................................................... 10 Item 3. Defaults Upon Senior Securities................................................................... 10 Item 4. Submission of Matters to a Vote of Security Holders............................................... 10 Item 5. Other Information................................................................................. 10-11 Item 6. Exhibits and Reports on Form 8-K.................................................................. 11 Signatures..................................................................................................... 12
MARK HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
March 31, 2002 June 30, 2001 --------------- --------------- ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 182 $ 536 Notes receivable 401 613 Accounts receivable 1,709 2,969 Cost in excess of contract revenue earned 874 427 Inventories 25 25 Deferred tax asset 86 284 Prepaid expenses 101 41 --------------- --------------- Total Current Assets 3,378 4,895 --------------- --------------- PROPERTY AND EQUIPMENT, NET: 309 485 OTHER ASSETS 36 44 --------------- --------------- Total Assets $ 3,723 $ 5,424 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,020 $ 1,566 Current portion of long-term debt 216 750 Current portion of obligations under capital leases 22 74 Billings in excess of contract revenue earned 3 500 Notes payable to officers/stockholders -- 97 Accrued liabilities 404 979 --------------- --------------- Total Current Liabilities 1,665 3,966 --------------- --------------- OTHER LIABILITIES: Long-term portion of obligations under capital leases 23 5 Convertible notes -- 1,130 --------------- --------------- Total Other Liabilities 23 1,135 --------------- --------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 50,000,000 shares authorized, 9,714,606 shares issued and outstanding at March 31, 2002 and June 30, 2001 97 97 Preferred stock, $1.00 par value, $10 liquidation value; 4,705,000 shares authorized: Additional paid-in capital 36,881 36,881 Deficit (34,892) (36,604) Treasury stock, at cost; 17,500 shares (51) (51) --------------- --------------- Total Stockholders' Equity 2,035 323 --------------- --------------- Total Liabilities and Stockholders' Equity $ 3,723 $ 5,424 =============== ===============
3 MARK HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands)
Nine Months Ended Nine Months Ended Three Months Ended Three Months Ended March 31, 2002 March 31, 2001 March 31, 2002 March 31, 2001 --------------- --------------- --------------- --------------- Revenues $ 9,626 $ 4,356 $ 4,179 $ 2,913 --------------- --------------- --------------- --------------- Costs and Expenses: Cost of sales 6,783 2,928 3,361 1,808 General and administrative expenses 1,986 1,644 696 508 --------------- --------------- --------------- --------------- Total Costs and Expenses 8,769 4,572 4,057 2,316 --------------- --------------- --------------- --------------- Operating Income (Loss) 857 (216) 122 597 --------------- --------------- --------------- --------------- Other Income (Expenses): Interest income 22 14 7 8 Interest expense (51) (249) (7) (140) --------------- --------------- --------------- --------------- Total Other Expenses (29) (235) -- (132) --------------- --------------- --------------- --------------- 828 (451) 122 465 Income tax benefit -- 180 -- 180 --------------- --------------- --------------- --------------- Income (Loss) from Continuing Operations before extraordinary gain 828 (271) 122 645 Discontinued Operations: (Loss) income from sale of discontinued segment, net of income tax provision of $0, $920, $0, $740, respectively (237) 928 (37) 928 (Loss) income from operations of discontinued segment, net of income tax benefit of $0, $740, $0, $740, respectively -- (794) -- 42 Extraordinary gain on extinguishment of debt 1,121 -- -- -- --------------- --------------- --------------- --------------- Net Income (Loss) $ 1,712 $ (137) $ 85 $ 1,615 =============== =============== =============== =============== Basic Income (Loss) per Share Income (loss) per share from continuing operations $ 0.09 $ (0.06) $ 0.01 $ 0.08 (Loss) income from sale of discontinued segment (0.02) 0.12 -- 0.12 Loss from operations of discontinued segment -- (0.10) -- -- Extraordinary gain on extinguishment of debt 0.12 -- -- -- --------------- --------------- --------------- --------------- Income (loss) per share $ 0.18 $ (0.02) $ 0.01 $ 0.20 =============== =============== =============== =============== Fully Diluted Income (Loss) per Share Income (loss) per share from continuing operations $ 0.09 $ (0.07) $ 0.01 $ 0.08 (Loss) income from sale of discontinued segment (0.02) 0.12 -- 0.12 Loss from operations of discontinued segment -- (0.10) -- -- Extraordinary gain on extinguishment of debt 0.12 -- -- -- --------------- --------------- --------------- --------------- Income (loss) per share $ 0.18 $ (0.02) $ 0.01 $ 0.20 =============== =============== =============== =============== Weighted Average Number of Basic Shares Outstanding 9,697,106 7,865,630 9,697,106 8,029,695 =============== =============== =============== =============== Weighted Average Number of Fully Diluted Shares Outstanding 9,697,106 7,865,630 9,697,106 8,029,595 =============== =============== =============== =============== Dividends Paid $ -- $ -- $ -- $ -- =============== =============== =============== ===============
4 MARK HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Nine Months Ended Nine Months Ended March 31, 2002 March 31, 2001 --------------- --------------- Cash Flows From Operating Activities: Net income $ 1,712 $ (137) --------------- --------------- Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 222 461 Allowance for notes receivable 200 -- Gain on extinguishment of debt (1,121) -- Gain on sale of discontinued segment -- (1,848) Deferred tax asset 198 222 Adjustment of net assets of business acquired -- 35 Net Assets of discontinued segment -- (78) (Increase) decrease in assets: Accounts receivable 1,260 (1,183) Billing in excess of contract revenue recognized (447) -- Other current assets (60) (12) Other assets 8 -- Increase (decrease) in liabilities: Accounts payable (546) 330 Billings in excess of contract revenue earned (497) -- Accrued liabilities (68) 135 --------------- --------------- Net adjustments to reconcile net income to net cash (used for) operating activities (851) (1,938) --------------- --------------- Net Cash Provided by (Used for) Operating Activities 861 (2,075) --------------- --------------- Cash Flows From Investing Activities: Acquisition of property and equipment (46) (84) Repayment of note receivable 42 81 Note receivable (330) -- Proceeds from sale of discontined segment -- 1,177 Marketable securities -- 406 --------------- --------------- Net Cash (Used for) Provided by Investing Activities (334) 1,580 --------------- --------------- Cash Flows From Financing Activities: Proceeds from notes payable for equipment and vehicles 27 -- Repayment of convertible debt (750) -- Repayment of notes payable for equipment and vehicles (61) (438) Repayment of short term borrowings -- (250) Notes payable officer/ shareholder (97) 137 Other -- (59) --------------- --------------- Net Cash (Used for) Financing Activities (881) (610) --------------- --------------- Net decrease in Cash (354) (1,105) Cash and Cash Equivalents at Beginning of Period 536 1,138 --------------- --------------- Cash and Cash Equivalents at End of Period $ 182 $ 33 =============== ===============
5 MARK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 INTERIM FINANCIAL INFORMATION The consolidated balance sheet of the Company as of March 31, 2002, the consolidated statements of operations and cash flows for the nine months ended March 31, 2002 and 2001 are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (which included only normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows have been included. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The June 30, 2001 balance sheet data is derived from the audited consolidated financial statements. The attached financial statements should be read in connection with the consolidated financial statements and notes hereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 2001. Certain reclassifications have been made to the current and prior years amounts to conform to the current period presentation. Note 2 COMMON STOCK AND ADDITIONAL PAID-IN-CAPITAL Basic earnings (loss) per common share is computed by dividing the net earning by the weighted average number of shares of common stock outstanding during the period. Dilutive earnings per share gives effect to stock options and warrants which are considered to be dilutive common equivalents. Note 3 REORGANIZATION OF LEGAL STRUCTURE On November 4,2001 the Company effected a change in legal structure whereby the Company became a wholly owned subsidiary of a newly formed holding company, Mark Holdings, Inc. Under the terms of the restructure, the outstanding common stock of Mark Solutions, Inc. was automatically converted on a share for share basis into the common stock of the new holding company. The common stock of Mark Holdings, Inc. now trades on the Over The Counter Bulletin Board under the symbol of "MHDG" instead of the common stock of Mark Solutions, Inc. The purpose of the Reorganization was to put the Company in a position to be able to facilitate a merger or business combination. The business operations of the Company has not changed as a result of the Reorganization. The Reorganization was effected pursuant to Section 251 (g) of the Delaware General Corporate Law and did not require stockholder approval. The stockholders of Mark Solutions, Inc. now have the same rights, privileges and interests in Mark Holdings, Inc. as they previously had in Mark Solutions, Inc. immediately prior to the reorganization. Note 4 CONVERTIBLE NOTES PAYABLE In September 2001, the Company entered into a compromise agreement with the holder of the convertible notes payable in the amount of $1,880,000. Under the terms of the agreement the Company will pay $1,000,000 in full satisfaction of the outstanding indebtedness and accrued interest. The compromise amount is payable in four (4) equal installments of $250,000 due upon the execution of the agreement, November 30, 2001, February 28, 2002 and March 1, 2003. The first three payments were made in September, November 2001 and February 2002. As a result of this transaction the Company realized a gain of $1,121,000 from the extinguishment of debt. 6 Note 5 INCOME TAXES The Company has a federal net operating loss carry forward of approximately $30,000,000 available to offset future taxable income. Accordingly, as of March 31 2002, the Company was not required to record an income tax provision. Note 6 NOTES RECEIVABLE At March 31, 2002, Notes Receivable include $330,000 of Convertible Promissory Notes with interest at 8% due in amounts of $100,000, $100,000, $50,000 and $80,000 on July 1, 2002, August 6, 2002, October 1, 2002 and December 10, 2002, respectively. These notes are convertible at the option of the Company, prior to maturity, into 1% of the outstanding common stock of the maker. In addition, the Company has recorded a total reserve in the amount of $500,000 to cover the Note Receivable due from MMSI Acquisitions Corp. for the sale of the assets of the MarkCare Medical Systems segment of the Company. (See Legal Proceedings). Note 7 PROPOSED SALE OF ASSETS In February 2002 the Company entered into a non-binding agreement to sell substantially all of the net assets of Mark Correctional Systems ("Mark Correctional"), our modular steel cell division, to Rite-Way of New Jersey, a corporation owned by the Company's Executive Vice President. Consideration will consist of $2,500,000 based on an estimated book value of the assets. Any shortfall in the value of the assets will be adjusted at closing. Payment shall consist of $500,000 cash at closing and the balance of $2,000,000 payable in 36 equal monthly installments evidenced by a secured promissory note bearing interest at 8% per annum. The Company will also receive cash on hand and/ or a short-term promissory note for a total of an additional $1,000,000. Completion of the sale is dependent upon shareholder approval. The carrying value of the net assets of the Correctional division at March 31, 2002 consists of the following: Cash $ 125 Accounts Receivable 1,709 Costs in excess of contract revenue earned 874 Inventories 25 Prepaid expenses 32 Property and equipment, net 279 Other assets 36 Accounts payable (890) Obligations under capital leases (22) Billings in excess of contract revenues earned (3) Accrued liabilities (118) Long-term debt (23) ------- $ 2,024 ======= The Company's revenues and cost of sales and a substantial portion of its general and administrative expenses were generated by the modular steel jail cell division. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Revenues from continuing operations for the nine months ended March 31, 2002 increased 121% to $9,626 from $4,356 for the comparable prior period. This increase is attributable to more modular steel cell projects. Revenues from continuing operations, for the three months ended March 31, 2002, increased 43% to $4,179 from $2,913 for the comparable prior period. This increase is also attributable to more modular steel cell projects. Cost of sales from continuing operations for the nine months ended March 31, 2002, consisting of materials, labor and fixed factory overhead expense increased to $6,783 from $2,928 for the comparable prior period. Cost of sales from continuing operations, as a percentage of revenues was 70.5% for the nine months ended March 31,2002 compared to 67.2% for the prior comparable period. The increase in the percentage of cost of sales is attributable to additional labor incurred on the major project that was in process in March 2002. The dollar amount of increase is due to the increase in the number of active projects in the modular steel cell business. Cost of sales from continuing operations for the three months ended March 31, 2002, consisting of materials, labor and fixed factory overhead expense increased to $3,361 from $1,808 for the comparable prior period. Cost of sales, from continuing operations, as a percentage of revenues was 80.4% for the three months ended March 31,2002 compared to 62.1% for the prior comparable period. The dollar amount of increase is due to the increase in the number of active projects in the modular steel cell business. The increase in the percentage of cost of sales is attributable to additional labor incurred on the major project that was in process in March 2002. General and administrative expenses from continuing operations for the nine months ended March 31, 2002 increased to $1,986 from $1,644 for the comparable period primarily due to increased payroll expenses and employee benefits in 2002. General and administrative expenses, from continuing operations for the three months ended March 31, 2002, increased to $696 from $508 for the comparable period primarily due to increased payroll expenses and employee benefits in 2002. For the nine and three months ended March 31, 2002 the loss from sale of the discontinued segment in the amount of $237 was the result of increasing the reserve on the note receivable due from MMSI Acquisition Corp. for the sale of the assets of the MarkCare Medical Systems segment of $200, and $37 for the assumption of a liability which MMSI defaulted in paying. . The extraordinary gain on extinguishment of debt in the amount of $1,121 was the result of the compromise agreement entered into by the Company with the holder of the convertible notes payable. As a result of this agreement interest expense for the nine and three months ended March 31,2002 decreased from $249 to $51 and $140 to $7, respectively as compared to the same periods in the prior year. 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 increased our efforts to obtain new modular steel cell contracts with more favorable margins and are concentrating on obtaining these contracts on a more continuous basis. We believe our present available working capital from existing and anticipated contracts and, if required, investments from private sources, will be sufficient to meet our operating requirements through June 30, 2002. 8 For the nine months ended March 31, 2002, we had a positive cash flow from operating activities of $861, which is primarily attributable to the net operating profit for the period. For the nine months ended March 31, 2001 operating activities utilized $2,075 of cash primarily as a result of the sale of MarkCare. For the nine months ended March 31, 2002, we utilized $334 of cash for investing activities primarily for the issuance of notes receivable. For the same period in 2001 we generated cash in the amount of $1,580, due primarily as a result of the proceeds from the sale of MarkCare and the sale of marketable securities. For the nine months ended March 31, 2002 and 2001, financing activities used $881 and $610 in cash, principally due to the repayment of convertible debt, equipment loans and long-term debt. Cash and cash equivalents decreased to $182 at March 31, 2002 from $536 at June 30, 2001 due primarily to the repayment of convertible debt. Working capital increased to $1,713 at March 31, 2002 from $929 at June 30, 2001 primarily due the compromise agreement reached with the holder of convertible notes payable and operating profits for the period. Since March 30, 2001, our business has consisted solely of the manufacture and distribution of modular steel jail cells through our Mark Correctional Systems division. In view of the lack of any consistent substantial growth in revenue and the fact that there has recently been an overall slowdown in the construction of correctional projects our Board of Directors concluded that it is in the best interests of the Company and its shareholders to dispose of the jail cell manufacturing business and seek to acquire a new business or merge with another business. The decision of the Board to sell the jail cell business is based on a number of factors. We first commenced full scale manufacturing of jail cells in 1989. Since that time, we have not achieved any real consistency in sales growth. Sales have fluctuated widely, and for most years, there has only been limited profitability at best. Further, many of the larger correctional construction projects have required the posting of performance bonds, which are costly. Because of the lack of sufficient capital, we have been limited in the number of jobs we were able to bid on at any one time. As a result of the foregoing factors, our Board concluded that the business as presently constituted will not enjoy and real future growth or consistent profitability and that as such will not result in any significant appreciation of our stockholders' investment in the Company. In February 2002 the Company entered into a non-binding agreement to sell substantially all of the net assets of Mark Correctional Systems ("Mark Correctional"), our modular steel cell division, to Rite-Way of New Jersey, a corporation owned by the Company's Executive Vice President. Consideration will consist of $2,500,000 based on an estimated book value of the assets. Any shortfall in the value of the assets will be adjusted at closing. Payment shall consist of $500,000 cash at closing and the balance of $2,000,000 payable in 36 equal monthly installments evidenced by a secured promissory note bearing interest at 8% per annum. The Company will also receive cash on hand and/ or a short-term promissory note for a total of an additional $1,000,000. Completion of the sale is dependent upon shareholder approval. 9 Forward Looking Statements Except for the historical information contained herein, the matters discussed in this report are forward looking statements under the federal securities law. These statements are based on current plans and expectations of the Company 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. PART II OTHER INFORMATION Item 1. Legal Proceedings On June 28, 2001, the Company was scheduled to receive the final installment of the payment for the sale of the assets of the MarkCare Medical Systems segment from MMSI Acquisition Corp. ("MMSI"). This final installment was evidenced by a $500,000 promissory note. Prior to the due date of the promissory note, 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 was prepared and furnished. The Company had requested written substantiation of the claims and as of October 22, 2001 had not received such substantiation. As a result, on October 26, 2001 the Company filed a complaint for an accounting, the imposition of a constructive trust and other relief in the Superior Court of New Jersey, Chancery Division, for Essex County. The defendant, MMSI, defaulted in answering the complaint and the Company has obtained, on February 26,2002, a final judgment against MMSI and MediSolution, Ltd., the parent company, under its corporate guarantee. MMSI has filed a motion to vacate the default judgment. A hearing on this motion is currently pending. Item 2. Changes In Securities and Use Of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information On April 5, 2002, the Company filed a preliminary Notice of Annual Meeting and Proxy Statement with the Securities and Exchange Commission (the "Commission"). The Commission Staff is currently reviewing the preliminary Proxy Statement for possible comments. Once the preliminary Proxy Statement receives approval from the Staff, the Notice of Annual Meeting and Proxy Statement will be transmitted to shareholders. The purpose of the proposed Meeting is to ask shareholders to consider and vote upon the following proposals: (i) the sale of the assets of Mark Correctional Systems, a division of Mark Solutions, Inc. This division manufactures modular steel jail cells; (ii) approval of an amendment to the Certificate of Incorporation increasing the authorized capital stock from 50,000,000 shares to 100,000,000 shares; (iii) the election of directors to serve until the next annual meeting; (iv) ratification of the appointment of the Company's auditors for the year ended June 30, 2002. 10 With respect to the sale of the Mark Correctional Systems' assets, the Board of Directors has approved the sale subject to shareholder approval. If shareholders approve the sale at the proposed annual meeting then the Company will cease to be an operating company. Thereafter, management intends to acquire a new business or merge with another operating company. This Form 10-QA amends the Form 10-Q originally filed with the Commission on May 3, 2002. All adjustments relate to the comparative March 31, 2001 period. The original filing reflected income from the sale of the discontinued segment of $2,204,000 for the period ended March 31, 2001. However, in view of certain adjustments originally recorded in the quarter ended June 30, 2001,which should have been recorded in the quarter ending March 31, 2001, the income from the sale should have been reflected as $1,848,000. In addition, the original report reflected loss from the operations of the discontinued segment of $1,499,000 for the period ended March 31, 2001. However, in view of the adjustments to the net assets disposed of on March 30, 2001, which were recorded in the quarter ended June 30, 2001, the loss from the operations of the discontinued segment should have been $$1,534,000. As a result of the forgoing adjustments, net income was reduced to $137,000 from $254,000 for the period ended March 31, 2001. All of the foregoing adjustments have been reported in an amendment to the Form 10-Q for the period ending March 31, 2001. Item 6. Exhibits and Reports on Form 8-K None. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. Date: July 26, 2002 MARK HOLDINGS, INC. By: /s/ Carl Coppola ------------------------- President and Chief Executive Officer 12