1
SECURITIES AND EXCHANGE COMMISSION
REPORT ON FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission File No. 0-14731
COMPUTER MARKETPLACE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 33-0558415
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(State of or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
1490 Railroad Street
Corona, California 91720
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (909) 735-2102
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.0001 Per Share
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(Title of Class)
Class A Redeemable Common Stock Purchase Warrants
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(Title of Class)
Class B Redeemable Common Stock Purchase Warrants
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(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of the Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $30,000,952.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of such stock as of
September 20, 1996, was approximately $2,627,000.
Number of shares outstanding of the Issuer's common stock, as of September 20,
1996, was 8,114,542.
DOCUMENTS INCORPORATED BY REFERENCE: None.
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PART I
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Item 1. DESCRIPTION OF BUSINESS
Computer Marketplace, a California corporation, was incorporated on July 19,
1983, as Quality Associates, Inc. and changed its name to Computer Marketplace
in June 1987. In March 1993, Computer Marketplace changed its name to
Computer Marketplace, Inc. ("Computer Marketplace") and its state of
incorporation from California to Delaware. Computer Marketplace is currently
engaged in the national wholesale distribution of new and used computer
equipment to dealers, computer maintenance companies, leasing companies,
equipment brokers, and end-users. A majority of this equipment is
manufactured by International Business Machine Corporation ("IBM") and
includes computer peripheral equipment, upgrades and parts, particularly for
AS/400, and RISC System/6000 computer systems. Computer Marketplace also
sells new computer equipment produced by IBM, Digital Equipment Corporation,
Compaq, Hewlett Packard, Motorola, as well as a number of other manufacturers.
Many of the new product lines require value added services, software or
hardware. Computer Marketplace has made significant investments in its
employees in order to increase their technical knowledge of the new product
lines and Computer Marketplace has attracted various value added software
products, many in the document imaging and document management areas, in order
to enhance its value added portfolio. The new product lines generally require
Computer Marketplace not to remarket used equipment manufactured by the
Original Equipment Manufacturer ("OEM").
In March of 1994, Computer Marketplace formed Medical Marketplace, Inc.
("Medical Marketplace") as a wholly owned subsidiary to engage in worldwide
distribution of used medical equipment to health care providers. In September
1994, Computer Marketplace formed Marketplace Asset Recovery Services, Inc.
("MARS") as a wholly owned subsidiary to perform asset recovery assignments,
repossessions and asset verifications. The operations of MARS to date, have
not been material to the consolidated financial statements. In June 1996,
management began the process of closing down the operations of MARS. In
August 1996, MARS was renamed Marketplace Leasing, Inc., ("MLI"). Management
intends to utilize MLI as Computer Marketplace's future equipment leasing
subsidiary. In January 1994, Computer Marketplace formed a wholly owned
subsidiary, Superior Solutions, Inc. ("SSI") (formerly called Computer
Marketplace-SSI, Inc.), to purchase certain assets and assume certain
obligations of Synergy Solutions, Inc. and International Associated Marketing
Corporation, located in Livonia, Michigan. These companies were engaged
principally in the development, installation and maintenance of local and wide
area networks, were Novell Platinum Authorized Resellers, and were also
selling computer hardware. On July 1, 1996, the employees of SSI began
operating as a sales and networking branch of Computer Marketplace. The
distinct business operations of Superior Solutions, Inc., will be gradually
phased down as its operations are fully integrated into Computer Marketplace.
Computer Marketplace and its subsidiaries are hereinafter referred to as the
"Company".
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Item 1. DESCRIPTION OF BUSINESS (Continued)
Computer Marketplace purchases computer equipment from a variety of sources
and suppliers and sells or rents the equipment nationwide and in Europe to
companies ranging in size from small companies to Fortune 50 corporations.
Computer Marketplace's operations and primary selling efforts are conducted
from its principal office in Corona, California. In addition, the Company
maintains sales offices in Mariposa, California; Livonia, Michigan; Traverse
City, Michigan; and Apple Valley, California. Computer Marketplace, which
maintains service and inventory storage centers at its Corona headquarters,
Mariposa and Livonia locations, also has arrangements to inventory its
equipment on a temporary basis at independent service centers across the
country.
In March 1994, the Company's Board of Directors approved a two-for-one stock
split (the "Stock Split") with respect to each outstanding share of the
Company's common stock, such approval to be contingent upon the approval of a
majority of the stockholders of an increase of the Company's common stock from
15,000,000 shares to 50,000,000 shares. In March 1994, stockholders
representing a majority of the shares outstanding approved by written consent
in lieu of a special meeting of stockholders an amendment to the Company's
Certificate of Incorporation increasing the number of authorized shares of
common stock. In May 1994, the Company distributed to its stockholders an
Information Statement summarizing these transactions. On June 6, 1994, each
holder of an outstanding share of the Company's common stock received an
additional share of common stock as a result of the Stock Split. All per
share references contained herein reflect the consummation of the Stock Split.
The Company's executive office is located at 1490 Railroad Street, Corona,
California. It's telephone number is (909) 735-2102. The Company's fiscal
year end is June 30.
Computer Industry
The computer industry has been characterized by rapid and continuous
technological advances permitting cost reductions, increases in computer
processing capacity and broadened user applications. Users frequently upgrade
or replace their equipment in order to take advantage of technological
advances or to increase data processing capacity. As a result, the equipment
which is replaced by different or newer models becomes available to the
secondary market. According to the Computer Dealers and Lessor's Association
("CDLA"), a trade association headquartered in Washington, DC, total sales
revenue for the secondary computer market, both leasing and "buy-sells"
combined, exceeds $20 billion annually. The Company is a member in good
standing of the CDLA, as well as the Association of Service and Computer
Dealers International ("ASCDI") and the Computer Broker Exchange ("CBE"), a
European computer dealer network.
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Item 1. DESCRIPTION OF BUSINESS (Continued)
The large number and diversity of computer resellers renders it more cost
efficient for many manufacturers to rely on wholesale distributors to assume
responsibility for at least some portion of their distribution, marketing and
support requirements. Similarly, due to the large number of computer product
manufacturers, computer resellers often choose not to or cannot efficiently
establish direct purchasing relationships with manufacturers and instead look
to wholesale distributors to satisfy a significant portion of their product,
marketing and technical support needs.
Management believes that the Company has been able to compete successfully
because of its inventory of products, competitive prices, and commitment to
technical support. As a result, the Company has been able to offer its
customers leading products at reasonable prices on a timely basis.
Computer Products
The Company buys and resells computers, features, parts, peripherals, which
include hard disk drives, memory, plug-in boards, modems, monitors and
printers, and other related computer equipment. Sales of computer equipment
constitutes a significant source of revenue for the Company, accounting for
approximately ninety-four percent (94%) and ninety-six percent (96%) of
computer related revenues in fiscal years 1996 and 1995, respectively. The
Company is constantly adjusting its inventory to respond to shifts in product
development, new technology, and shifting consumer demands.
Modems/Communications
The Company has a stocking distributor agreement with Motorola, which is a
leading manufacturer of modems, protocol converters and multiplexes, and is
one of the world's largest OEM modem suppliers, which results in the ability
of the Company to offer a broad range of communication products (UDS and
Codex). The Company has entered into franchise agreements for related
communication products with other vendors in order to significantly increase
the breath of product offerings to its customers.
RISC System/6000 Rental Program
The Company has a rental program which provides software developers, hardware
developers and other customers with equipment necessary to meet their short-
term requirements in this rapidly expanding market. The Company's rental
program is primarily related to the RISC System/6000 market. Rental periods
typically range from one (1) month to over a year with the average rental
period being approximately two (2) months. The Company does not generally
rent equipment with an option to purchase; however, will respond to customer
requests to convert rentals into purchases. Rental rates are based upon the
product's original list price as well as market conditions. The Company
provides rental customers with manufacturers' warranties relating to the
rented equipment or repair or replacement at the Company's option. The
Company may, from time to time, perform repair work when requested to do so;
however, IBM, as well as other manufacturers, often provide technical support,
including the repair and replacement of defective or non-functioning parts.
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Item 1. DESCRIPTION OF BUSINESS (Continued)
Computer Networking and Network Management
The Computer Marketplace branch office, located in Livonia, Michigan, formerly
SSI, is a network sales and consulting group that is also a Novell Platinum
Authorized Reseller. In addition, this location provides network management
and outsourcing services support for the rest of the Company. As a result of
the experience gained from its Livonia branch office, the Corona office formed
a Corporate Solutions Group to focus on systems integration in the local
geographic area. Management believes that the Livonia branch office and its
Corona based Corporate Solutions Group will be able to broaden its market
reach by capitalizing on the Company's established national presence.
Computer Products Sales and Marketing
The Company had a total of twenty-three (23) computer sales representatives
and ten (10) sales support and marketing personnel as of September 9, 1996.
These representatives are located at the Company's headquarters in Corona,
California, and branch offices located in Mariposa, California; Traverse City,
Michigan; Apple Valley, California; and Livonia, Michigan. In addition to
making calls to existing and potential customers, the sales team solicits new
business by personal visits and advertising in trade magazines. The Company
currently advertises in approximately thirteen (13) specialized national and
international trade publications. The Company's customers consist of
companies of all sizes, ranging from small companies to Fortune 50
corporations. A substantial portion of the Company's transactions are with
repeat customers, such as computer maintenance companies, as well as computer
parts suppliers. The loss of one of these companies as a customer could have
a material adverse effect on the Company's business.
Computer Products Distribution Operations
The Company conducts its primary distribution operations from its main office
located in Corona, California, and to a lesser extent from its sales offices
located in Mariposa, California and Livonia, Michigan. It has also developed
relationships with stocking distributors and numerous independent refurbishing
and warehouse facilities throughout the United States and other parts of the
world to handle distribution, engineering and warehousing. By using stocking
distributors, the Company has directly benefited by minimizing the costs of
freight, engineering and distribution.
Computer Equipment Warranty Policy
The Company, like other competing distributors, does not grant any warranties
on the used products it sells. However, most of the new and used computer
equipment which the Company sells is covered under either the manufacturer's
warranty or the manufacturer's maintenance programs. Some of the new and used
computer equipment which the Company sells is still under manufacturer's
warranty. Before any returned merchandise is accepted by the Company for
processing under the original manufacturer's warranty, the customer must call
the Company and obtain a return merchandise authorization number. This
procedure allows the Company to verify the availability of manufacturer's
warranties on a case-by-case basis.
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Item 1. DESCRIPTION OF BUSINESS (Continued)
Computer Products Suppliers
The Company has established distributor arrangements with a number of
manufacturers of computer equipment which provide generally that the Company
may sell certain products within a designated territory and with a targeted
amount of value-added service. In addition, the Company has an established
network of dealers and retail customers that provide products. The Company is
not dependent upon any supplier or dealer and although the Company currently
purchases a significant amount of products from certain suppliers, management
believes the Company would be able to obtain similar products and pricing from
other suppliers.
Computer Products Competition
The Company competes directly with hundreds of other companies which buy, sell
or lease new and used IBM, SUN, Hewlett Packard, Digital Equipment and
Motorola equipment as well as equipment produced by other computer
manufacturers. In addition , the Company also competes with hundreds of
competitors in the area of providing value added services to its customers.
Certain of the Company's competitors have substantially greater financial
resources and larger staffs than the Company. The Company's principal
competitors include IBM, Comdisco, Inc., Sun Data, Inc., LDI, Inc. and El
Camino Resources, Inc. The Company does not believe that a significant amount
of used equipment is sold independently by owner-users of the equipment.
While the aforementioned companies are listed as competitors, they also are
customers of the Company. The majority of the competing companies subscribe
to either of two national databases: "CDLANET" and/or "ATC Network"
nationally and the "CBE Network" internationally. These databases provide the
Company with access to inventory listings from competing companies, similar to
the multiple-listing services to which most real estate companies subscribe.
The Company's continued ability to compete effectively may be affected by the
policies of the large equipment manufacturers. The Company attempts to
provide customers with an unmatched selection of products, a high level of
customer service, the knowledge and competence of its employees, and
competitive pricing.
Used Medical Equipment Industry
The used medical equipment industry is relatively young as compared to the
more established computer industry. Sales of used medical equipment have been
slowed due to a lack of acceptance of used equipment by health care providers
stemming in part from the uncertainty of the equipment's operating condition
and more generous cost reimbursement formulas given to providers by
governmental agencies and insurance companies. The Company believes that
recent growth in the domestic market stems from the uncertainty caused by
various proposals on the domestic health care reform program, and as a result,
health care providers are attempting to minimize their capital expenditures by
purchasing lower-cost used equipment. In addition, foreign-based health care
providers are undergoing significant expansion and have found used equipment a
cost-effective alternative to new equipment.
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Item 1. DESCRIPTION OF BUSINESS (Continued)
The Company believes that there are no dominant providers of used equipment in
the industry. In addition, the Company believes that many of the equipment
suppliers operate on a cash basis and only a few companies can deal in larger
transaction sizes of greater than $100,000. The association which provides a
forum for used equipment is relatively new, unlike the association established
for the computer business.
The Company believes that it has the technical competency, financial strength
and marketing strategy to allow its customers to obtain the best used
equipment at the most cost-effective price.
Medical Equipment and Services
Medical Marketplace buys and resells a wide variety of equipment including
Magnetic Resonance Imaging ("MRI"), Computed Tomography Scanner ("CT") and
Ultrasound equipment. In addition, the Company provides customers with
consulting services related to equipment acquisition, equipment layout and
facility design.
Medical Equipment Rental Program
The Company has a small rental program which provides new equipment providers
and contract service providers with mobile MRI and CT equipment. This service
allows these customers to meet their short-term equipment needs. Rentals are
for approximately one month but, weekly rentals also can occur. This program
needs additional capital in order to become a significant revenue source to
the Company.
Medical Equipment Warranty Policy
Medical Marketplace, like other competing resellers, does not grant any
warranties on the used products it sells. However, most of the used medical
equipment which the Company sells is covered under either the manufacturer's
warranty or the manufacturer's or third party maintenance programs.
Medical Equipment Suppliers
Medical Marketplace has established relationships with a small but growing
number of equipment brokers and leasing companies across the United States.
In addition, the Company by expanding its sales force is able to procure
equipment directly from the end-user. Generally, the Company physically
inspects all major equipment before committing to purchase the item.
Medical Equipment Distribution Operations
Medical Marketplace conducts its primary distribution operations from its main
office in Corona, California. This facility is shared with the Company's
computer business. Physically large pieces of medical equipment such as MRI's
and CT's are often transported by the Company from their last installed
location directly to our customer's site. This allows Medical Marketplace to
minimize storage and transportation costs in the transaction.
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Item 1. DESCRIPTION OF BUSINESS (Continued)
Medical Equipment Sales and Marketing
Medical Marketplace had a total sales force at September 9, 1996 of five (5)
people. Three (3) inside sales representatives who are located in Corona,
California, an outside direct sales representative located in Northern
California and another in Georgia. In addition, the Company attends various
industry trade shows and advertises on the Internet and in selected national
and international trade publications. The Company has prospected for sales to
the Latin American countries however, sales have been constrained by the
difficulty of foreign purchasers obtaining the necessary financing. As U.S.
based financing companies develop foreign based lending operations in these
countries, Medical Marketplace intends to become the financing company's used
equipment vendor of choice.
Medical Marketplace intends to significantly grow the number of domestically
based outside sales representatives. This expansion will enable the Company
to call on a far greater number of end-users which will increase the number of
opportunities to provide equipment and to purchase equipment at the most
favorable prices. Medical Marketplace has generally focused on larger
transaction sizes (i.e. greater than $50,000). Due to the complex technical
nature of the equipment, the potential need for the customer to prepare the
equipment site, including obtaining government permits and the significant
sale prices involved in a transaction, a transaction can take up to a year to
complete, although most transactions are completed in four months or less.
Consequently, Medical Marketplace's revenue and operating results can vary
materially from month to month.
Medical Equipment Competition
Medical Marketplace competes directly with the new medical equipment OEM's
like GE Medical Systems, Picker, Toshiba, Philip's and Siemens. Many of these
new equipment OEM's have used equipment divisions. In addition, Medical
Marketplace competes with a growing number of equipment brokers and leasing
companies such as Comdisco, Finova, Access Medical and Remed Par. Certain of
the Company's competitors have substantially greater financial resources and
larger staffs than the Company. The Company believes that only the largest of
our competitors can match the technical ability of our employees in the
Imaging, X-ray and Ultrasound technologies and only our largest competitors
have the financial strength to inventory expensive MRI, CT or Ultrasound
equipment. Consequently, the Company feels that it can effectively compete
against the large OEM's in used equipment transactions and will have
competitive advantages over specialized equipment brokers on end-user
transactions.
Government Regulation
The Company has not been materially affected by government regulations
applicable to either its computer products or its medical equipment business.
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Item 1. DESCRIPTION OF BUSINESS (Continued)
Patents, Trademarks, Licenses and Franchises
The Company has been granted by the United States Patent and Trademark Office
(i) a trademark for the AcceleRAIDer, on October 6, 1992, (ii) a servicemark
for Computer Marketplace, on November 3, 1992, and (iii) a servicemark for
Medical Marketplace, Inc. on August 20, 1996.
The Company does not own any other patents, trademarks, licenses, or
franchises which would be considered significant to the Company's business.
Credit Facilities
In September 1995, the Company entered into a revolving credit facility
agreement ("Credit Facility") with a financing company. This Credit Facility
replaced the then outstanding $2,000,000 revolving credit line with a bank.
The Credit Facility allows the Company to borrow up to $2,500,000 and bears
interest at a rate of 2.25% above the lender's "reference rate" (as defined).
The borrowing capacity under the Credit Facility is dependent upon "eligible"
(as defined) accounts receivable and inventory, and fluctuates daily. The
Credit Facility is collateralized by substantially all of the Company's
assets, except for real property. The Credit Facility expires in September
1997.
Additionally, as of June 30, 1996, the Company had long-term debt financing
collateralized by its Corona headquarters and Mariposa locations, in the
amounts of $1,274,336 and $156,671, respectively.
Employees
As of June 30, 1996, the Company employed eighty (80) full-time persons and
three (3) part-time persons, including forty-six (46) persons in sales,
marketing and related activities, nineteen (19) persons in technical
operations and maintenance, and eighteen (18) persons in general
administration and finance. The Company has experienced no work stoppages and
considers its employee relations to be satisfactory. The Company's employees
are not represented by a labor union. At June 30, 1996 the computer
operations employed seventy-one (71) full-time and part-time people. The
medical operations employed nine (9) full-time people and the asset recovery
operations employed three (3) full-time people.
As a result of management's focus to reduce costs and capitalize on the
efficiencies gained by administrative improvements, as of September 9, 1996,
the Company employed seventy-three (73) full-time persons and two (2) part-
time persons, including thirty-nine (39) persons in sales, marketing and
related activities, nineteen (19) persons in technical operations and
maintenance, and seventeen (17) persons in general administrative and finance.
At September 9, 1996, the computer operations employed sixty-seven (67) full-
time and part-time people and the medical operations employed eight (8) full-
time people.
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Item 2. PROPERTIES
On April 23, 1987, L. Wayne Kiley and Nancy Kiley, the Company's President and
Secretary, respectively, purchased a fifty percent (50%) undivided interest in
the land and 5,000 square-foot building at 205 East Fifth Street, Corona,
California, which had, until February 1994, served as the Company's
headquarters, and subsequently was used as an interim sales office and
temporary headquarters for Medical Marketplace until October, 1995. On June
30, 1987, the Kiley's deeded their fifty percent (50%) interest in the land
and building to the Company in exchange for 952,623 shares of common stock of
the Company. The other fifty percent (50%) interest in the land and building
is owned by Jack Mooney, an unrelated third party. In 1996, the Company listed
this property for sale.
On October 27, 1993, the Company purchased, at a trustee sale, a 68,457 square-
foot building in Corona, California, for approximately $1,757,000. The
building, which currently has over 12,000 square feet of office space, is used
as the Company's headquarters. Due to favorable local real estate market
conditions, in August 1996, the Company listed this facility for sale.
In conjunction with the acquisition of certain assets of Synergy Solutions,
Inc., and International Associated Marketing Corporation, the Company assumed
a lease covering approximately 4,500 square feet of office/warehouse space
located in Livonia, Michigan, which is used by Superior Solutions, Inc. Rent
of $3,000 is due monthly through February 1997.
On January 21, 1994, the Company purchased a two-story, 6,300 square-foot
office building located in Mariposa, California, for $215,000. The Company
uses a part of the building for a sales office, communication products repair
facility and warehouse. The Company has renovated this facility and has fully
leased the unused space.
The Company leases office space for its branch office at Traverse City,
Michigan, from the Company's President. The rent for this approximately 2,700
square foot location is $2,700 per month. The three-year lease, which
contains an option for the Company or the landlord to cancel with six (6)
months notice after each full year, expires on July 31, 1998.
Management believes that the above properties are adequately covered by
insurance.
Item 3. LEGAL PROCEEDINGS
The Company commenced an unfair trade name infringement action entitled
Computer Marketplace, Inc. v. RK Productions/Case No. 260667 in Riverside
County, California Superior Court on January 20, 1995. The defendant failed
to respond to the Company's complaint, and is therefore, in default.
Subsequently, the defendant (under the name National Productions, Inc.) filed
a Federal lawsuit in the Central District of California entitled National
Productions, Inc. v. Computer Marketplace, Inc./Case No. 95-3225 on May 19,
1995. Computer Marketplace has counter claimed in the Federal action which
supersedes the earlier state court action. Discovery in the case is
substantially complete and currently the case is in the negotiation phase. The
outcome of this lawsuit cannot be predicted, but the Company intends to
vigorously defend the action and is of the opinion that the lawsuit will not
have a material effect on the results of operations, cash flows and financial
position of the Company.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
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Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's securities commenced trading on The Nasdaq SmallCap Market
system upon the effectiveness of the Company's Initial Public Offering on June
22, 1993. The Initial Public Offering consisted of 4,140,000 Units, each Unit
consisting of one (1) share of Common Stock, one (1) Class A Redeemable Common
Stock Purchase Warrant and one (1) Class B Redeemable Common Stock Purchase
Warrant. Effective June 22, 1993, the Common Stock, the Class A Warrants and
the Class B Warrants comprising the Units were separated and began trading
under the symbols "MKPL" and "MKPLW" and "MKPLZ", respectively. The Units
began trading under the symbol "MKPLU". The Common Stock, the Class A
Warrants and the Class B Warrants are regularly quoted and traded on the
Nasdaq SmallCap Market system. On the close of business on May 10, 1994, at
the request of the Company, the Units were delisted. As of September 20,
1996, there were approximately 62 holders of record of the Company's common
stock.
The following table indicates the high and low bid prices for the Company's,
Common Stock, the Class A Warrants and the Class B Warrants for each of the
quarters in the period from July 1, 1994, through June 30, 1996, based upon
information supplied by the Nasdaq system. Prices represent quotations
between dealers without adjustments for retail markups, markdowns or
commissions, and may not represent actual transactions.
For the Period from July 1, 1994 to June 30, 1996
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Quoted Bid Price
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1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
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1996 Common Stock:
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High 3/4 9/16 17/32 21/32
Low 9/32 9/32 1/4 1/4
Class A Warrants
High 5/32 1/8 1/8 5/32
Low 1/32 1/32 1/16 1/32
Class B Warrants
High 1/16 3/32 1/16 3/32
Low 1/16 1/16 1/16 1/32
1995 Common Stock:
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High 3 1 7/16 1 11/32 7/16
Low 1 1/4 19/32 3/8 1/4
Class A Warrants
High 1 1/2 7/16 7/16 7/32
Low 5/16 1/4 7/32 1/32
Class B Warrants
High 1 1/4 5/32 7/16 1/8
Low 1/8 1/8 1/8 1/16
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Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS (Continued)
On September 20, 1996, the closing bid prices of the Common Stock, the Class A
Warrants and the Class B Warrants as reported on The Nasdaq SmallCap Market
System were $7/16, $1/16 and $1/32, respectively.
Computer Marketplace has no dividend policy, is restricted by its revolving
credit agreement to pay cash dividends, and does not intend to pay any
dividends in the foreseeable future.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in the
Form 10-KSB.
Results of Operations
Year Ended June 30, 1996 compared to Year Ended June 30, 1995
Total revenues for the year ended June 30, 1996 were $30,000,952 compared to
$31,524,365 for the year ended June 30, 1995. This represents a decrease of
$1,523,413 or 5%. Revenues from product sales for the year ended June 30,
1996 totaled $28,370,434 a $1,782,030 or 6% decrease compared to $30,152,464
for the year ended June 30, 1995. Revenues from rental, service and other for
the year ended June 30, 1996, were $1,630,518, a $258,617 or 19% increase
compared to $1,371,901 for the year ended June 30, 1995.
Superior Solutions, Inc., contributed approximately $1,592,000 in revenues for
the year ended June 30, 1996 compared with approximately $2,499,000 for the
year ended June 30, 1995. Superior Solutions, Inc.'s performance was
disappointing and it appears that this below-standard performance will
continue into the next fiscal year. In late January 1996, the local manager
of the subsidiary was replaced. In addition, certain employees, including an
experienced sales representative, resigned. Computer Marketplace, Inc., has
implemented a strategy to more fully integrate Superior Solutions, Inc.'s
networking and sales operations and networking products lines into its
California based networking and sales operations. This integration has
resulted, effective July 1, 1996, in these operations becoming a branch of
Computer Marketplace rather than remaining a separate legal entity.
Medical Marketplace, Inc. contributed approximately $2,880,000 in revenues for
the year ended June 30, 1996, compared to approximately $601,000 for the year
ended June 30, 1995. Continuing investments made by Medical Marketplace, Inc.
in experienced sales representatives and technical staff, as well as a growing
recognition within the industry as an established reseller of previously owned
and upgraded magnetic resonance imaging, computed tomography scanner and
ultrasound equipment have positively impacted the sales of this subsidiary.
Continued revenue growth and sustained profitability for this subsidiary are
expected into the next fiscal year.
<PAGE>
15
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The Company believes that the rapid technological advances in computer
products enhance its market. Many companies purchase used equipment at
significant discounts from new equipment to handle most of their computing
needs, as most applications do not require the latest technology available.
Previously owned medical equipment is just beginning to gain acceptance in the
health care community as a cost effective alternative to new equipment. The
Company believes that its field representative program, financial strength and
support structure will provide Medical Marketplace, Inc. a distinct advantage
over many of the subsidiary's competitors.
Aggregate cost of revenues for the years ended June 30, 1996 and 1995 were
$25,386,732 or 85% of revenues and $26,669,092 or 85% of revenues,
respectively. Cost of revenue percentages are expected to remain relatively
stable during the next fiscal year with small decreases anticipated. Factors
which will favorably reduce the cost of revenues percentage include; a company
focus toward higher margin transactions through a focus on our end user
customer base, a change in computer sales representative compensation plans
which includes a substantially higher base salary and less of a commission
component than prior periods and the positive effect that higher margin
medical equipment sales has on the consolidated percentage.
Selling, general and administrative ("SG&A") expenses for the years ended June
30, 1996 and 1995 were $5,601,670 or 19% of revenues and $5,827,722 or 18% of
revenues, respectively. The aggregate decrease in SG&A expenses from the
prior period was $226,052 or 4%. The decrease in SG&A expenses is attributed
to cost reduction efforts which were partly offset by increases in costs
associated with the expanded operations of Medical Marketplace, Inc. and the
change in computer sales representative compensation plans mentioned above.
SG&A expenses attributed to Medical Marketplace, Inc. were approximately,
$472,000 and $254,000 for the years ended June 30, 1996 and 1995,
respectively.
Operating loss was $987,450 and $972,449 for the years ended June 30, 1996 and
1995, respectively. This $15,001 or 2% unfavorable change was due primarily
to losses incurred in the first and fourth quarters of fiscal 1996.
Interest expense for the year ended June 30, 1996, was $371,728 compared to
$207,281 for the year ended June 30, 1995. Management anticipates that
interest expense will remain stable in the next fiscal year. Decreases in
interest expense are possible depending on the success of selling the
Company's headquarters facility and the success in raising additional money
through a private placement.
The Company's net loss was $1,331,431 or $0.16 per share for the year ended
June 30, 1996, versus $1,224,709 or $0.15 per share for the year ended June
30, 1995. The net loss was a result of the business conditions described
herein.
<PAGE>
16
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Variability of Periodic Results and Seasonality
Results from any one period cannot be used to predict the results for other
fiscal periods. Revenues fluctuate from period to period; however, management
does not see any seasonality or predictability to these fluctuations.
Liquidity and Capital Resources
The Company has historically financed its growth and cash needs primarily
through borrowings and cash generated from operations. The funds received
through the initial public offering in June 1993, in the amount of
approximately $6.6 million, enabled the Company to eliminate most of its long-
term debt at that time. Working capital at June 30, 1996 and 1995, was
$2,724,984 and $3,868,587, respectively.
During the year ended June 30, 1996, the Company used the June 30, 1995
available cash and cash equivalents of approximately $748,000 and the
availability of borrowing under the Company's revolving Credit Facility in
order to fund the operations of the Company. Investments made by the Company
include improvements to its facilities of approximately $123,000, the purchase
of mobile medical equipment to be used for rental of approximately $114,000
and investments of approximately $150,000 for other equipment.
Management has emphasized an inventory reduction program encompassing both
stored inventory, as well as inventory on short-term rental contracts. In
addition, a program has been established to reduce outstanding accounts
receivable. Management believes these disciplined strategic reductions will
enhance the Company's operating effectiveness, provide additional liquidity,
and reduce the exposure to negative accounts receivable and inventory
valuation adjustments caused by changing market conditions. During 1996, the
inventory and accounts receivable reduction programs resulted in decreases of
inventory and accounts receivable of approximately $441,000 and $429,000,
respectively. Certain temporary increases in inventory amounts may occur due
to selected purchases made by the Company which are intended to be sold
quickly. Additional inventory and accounts receivable increases are expected
relating to Medical Marketplace, Inc.'s growth.
In addition, management has investigated alternative financing options which
could be utilized for our foreign customers in order to enhance the
opportunities for the Company's medical equipment subsidiary's growth. The
Company has delayed implementation of these financing options as medical
equipment subsidiary has been focused on domestic sales. Longer-term cash
requirements, other than for normal operating expenses, are anticipated for
acquisition candidates. The Company plans to seek additional funds through
either a private placement or secondary offering in the next six (6) months.
In addition, the Company has listed for sale two properties located in Corona,
California. Management intends to use the additional funding and proceeds
from the building sales in order to pay down related long-term debt and
borrowings on the revolving credit facility in addition to significantly
growing the business of our medical equipment subsidiary.
<PAGE>
17
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See financial statements following Item 13 of this Annual Report on
Form 10-KSB.
Item 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
18
PART III
--------
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following persons are the current executive officers and directors:
Name Age Position
- ---- --- --------
L. Wayne Kiley 53 President, Chief Executive Officer and Director
David L. Roekle (1) 48 Senior Vice President
Thomas Iwanski 38 Vice President, Chief Financial Officer,
Assistant Secretary and Director
Richard S. Pisapia 51 Senior Vice President Sales
A. Evan Windholz 32 Vice President Sales - Eastern Region
Nancy Kiley 38 Secretary and Director
Michael MacQueen 39 Controller
J.R. Achten 53 Director
Thomas E. Evans, Jr. 56 Director
- ------------------------
(1) David L. Roekle resigned as a director and Chief Operating Officer of the
Company in February 1996. Mr. Roekle's employment with the Company ended
in August 1996.
All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Officers are elected
annually by the Board of Directors and, subject to existing employment
agreements, serve at the discretion of the Board.
Outside directors shall receive $10,000 per year as compensation for their
services. Directors who are also officers of the Company do not receive any
compensation for serving on the Board of Directors. All Directors are
reimbursed by the Company for any expenses incurred in attending Directors'
meetings.
<PAGE>
19
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT (Continued)
Background of Executive Officers and Directors
L. Wayne Kiley has been the President and Chief Executive Officer of the
Company since March 2, 1984, and a director since June 19, 1983. From 1978 to
1983, he was a self-employed independent real estate developer in Tucson,
Arizona. From 1970 to 1978, he was the owner of the Business Exchange in
Santa Ana, California. He graduated in 1969 from Michigan State University
with a Bachelor of Arts degree in political science.
David L. Roekle had served as Chief Operating Officer and director of the
Company since June 1995, and as Senior Vice President of the Company since
April 1994. Mr. Roekle began his employment with the Company in 1986 as an
Account Executive where he developed a niche market with the IBM RISC
System/6000 mid-range systems. During 1989 to 1990, Mr. Roekle operated his
own company called Solid Rock Computer Group, Inc. Mr. Roekle then returned
to the Company as an Account Executive until he was promoted to Director of
Marketing in 1993. Mr. Roekle has worked in several production and operation
management capacities for various large companies.
Thomas Iwanski has been a director, Vice President and Chief Financial Officer
of the Company since July 1994, and Assistant Secretary since April 1995.
From 1991 to 1994, Mr. Iwanski was employed at Wahlco Environmental Systems,
Inc., a NYSE-listed international company, where he was Corporate Controller.
From 1981 to 1991, Mr. Iwanski was employed in the public accounting firm of
KPMG Peat Marwick, where he served most recently as a senior manager in the
audit department. Mr. Iwanski is a Certified Public Accountant. Mr. Iwanski
received his Bachelor of Business Administration degree from the University of
Wisconsin-Madison.
Richard S. Pisapia has served as Senior Vice President Sales since November
1995, and previously served as Vice President Sales - Western Region since
July 1995. From 1992 to 1995, Mr. Pisapia operated his own Company, which
specialized in the international distribution of hardware and software
products. During 1990 to 1992, Mr. Pisapia was the Vice President Sales at
CALABCO, a large computer distribution company.
A. Evan Windholz has served as Vice President Sales - Eastern Region since
July 1995, and previously served as Vice President Sales and Operations since
December of 1993. From March of 1992 through December 1993, Mr. Windholz was
employed by the Company as General Manager. From 1985 to 1991, Mr. Windholz
held various sales and management positions for Scher Tire, Inc., a large
Southern California Goodyear automotive franchise. Mr. Windholz received
formal education through the Business School of California State University of
Long Beach.
Nancy Kiley has served as Secretary and director of the Company since March 2,
1984, and is the wife of L. Wayne Kiley, the Company's President and Chief
Executive Officer.
<PAGE>
20
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT (Continued)
Michael MacQueen has served as Controller of the Company since December 1994.
From July 1994 to December 1994, Mr. MacQueen was employed at the Bank of
Hemet, where he served as Vice President, Controller and Consultant. From
1988 to 1994, Mr. MacQueen was employed in the public accounting firm of KPMG
Peat Marwick, where he served most recently as a manager in the audit
department. Mr. MacQueen is a Certified Public Accountant. Mr. MacQueen
received his Bachelor of Arts from the University of California, Los Angeles,
and his Master of Business Administration from the California State
Polytechnic University, Pomona.
J. R. Achten has been a director of the Company since May 1993. Mr. Achten
has been President and Chief Executive Officer of Millennium Enterprises,
Inc., located in Laguna Niguel, California, since 1987. Millennium
Enterprises, Inc. is in the business of real estate sales and development, as
well as computer sales. Mr. Achten attended Long Beach State College and
graduated with a Bachelor of Arts degree in Economics.
Thomas E. Evans, Jr. has been a director since February 1994. Mr. Evans,
since July 1995, has been the President, Orange County Division, of Fidelity
National Title Insurance Company. Since 1993, he served as Vice President,
and prior to that, held various senior management positions with that same
company since 1980. Mr. Evans is a member of the American Land Title
Association and is President of California Land Title Association. Mr. Evans
served from 1984 to 1992 as a director of Fidelity National Financial, Inc.,
which is listed on the New York Stock Exchange.
Nancy Kiley and L. Wayne Kiley are married. Except for such relationship,
there are no family relationships among any of the directors or executive
officers of the Company.
Compliance with Section 16(a) of The Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent
(10%) of a registered class of the Company's equity securities, to file with
the Securities and Exchange Commission ("SEC") initial reports of ownership
and reports of changes in ownership of common stock and other equity
securities of the Company. Officers, directors and greater than ten percent
(10%) stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on its review of the copies of such
reports furnished to the Company during the year ended June 30, 1996, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent (10%) beneficial owners were satisfied.
<PAGE>
21
Item 10. EXECUTIVE COMPENSATION
The following table shows all the cash compensation paid or to be paid by the
Company to the Chief Executive Officer, three of the Company's executive
officers and a former officer who received in excess of $100,000 in annual
salary and bonus, for the fiscal years ended June 30, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
---------------- ------
(a) (b) (c) (d) (g) (I)
- --------------------------- ---- -------- ------- ---------- ------------
Number All Other
Name and Principal Position Year Salary Bonus of Options Compensation
- --------------------------- ---- -------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
L. Wayne Kiley, President 1996 $303,814 $ - 1,175,000 (3) $ 1,313
Chief Executive Officer and 1995 $302,500 $ - 1,000,000 $ 3,702
Director 1994 $275,000 $ 1,077 - $ 4,966
David L. Roekle, 1996 $223,717 $ - 250,000 (3) $ -
Senior Vice President, 1995 $218,400 $ - - $ -
Chief Operating Officer and 1994 $ 84,618 $ - 100,000 $ 921
Director (2)
Thomas Iwanski,
Vice President 1996 $ 97,885 $ - 180,000 (3) $ -
Chief Financial Officer, 1995 $ 87,561 $ - $ -
Assistant Secretary and
Director
Richard S. Pisapia, 1996 $ 80,808 $19,423 125,000 $ 3,461
Senior Vice President Sales
Joanne Mitchell, 1995 $ 18,386 $ - - $ -
Account Executive (1) 1994 $305,214 $ 468 - $ 4,285
</TABLE>
(1) Ms. Mitchell resigned in June 1994. The 1995 salary includes amounts paid
in July 1994 related to prior sales.
(2) Mr. Roekle's employment with the Company ended in August 1996.
(3) The number of stock options awarded includes 1,000,000, 100,000 and 30,000
for L. Wayne Kiley, David L. Roekle and Thomas Iwanski, respectively,
which were replacements for an equal number of stock options previously
issued to these individuals.
<PAGE>
22
Item 10. EXECUTIVE COMPENSATION (Continued)
The 1995 and 1994 salaries for David L. Roekle do not include $8,000 and
$128,307, respectively, of consulting fees paid to Mr. Roekle's wholly owned
company, Solid Rock Computer Group, Inc. See "Certain Relationships and
Related Transactions".
The Company adopted a profit sharing plan in January 1991. The plan provided
for voluntary employee contributions and discretionary contributions by the
Company. The plan was intended to qualify as a defined contribution plan
under the Internal Revenue Code of 1986. The amounts earned under the plan by
the named individuals in the Executive Compensation table are reflected under
the column headed "All Other Compensation". Due to the differences between
the plan year and the Company's fiscal year, the 1994 amount represents fifty
percent (50%) of the 1993 plan year contribution for L. Wayne Kiley and David
L. Roekle.
In January 1995, the Company adopted a new combined 401(k) and profit sharing
plan (the "Plan") which replaced the prior plans. The new Plan covers
substantially all of the Company's eligible employees. The new Plan is
available to all employees with more than one (1) year of service or, to
employees employed by the Company on February 1, 1995. Company contributions
to the profit sharing component of the Plan will be at the discretion of
management. Company contributions to the 401(K) component of the Plan will be
based on a percentage of employee contributions as determined by management.
The charge to operations related to the Plan for the years ended June 30, 1996
and 1995, was $18,421 and $23,398, respectively.
The Board of Directors may, in the future, adopt such other employee benefit
and executive compensation programs as it deems advisable and consistent with
the best interest of the stockholders and the financial condition of the
Company.
Outside directors shall receive $10,000 per year as compensation for their
services. Directors who are also officers of the Company do not receive any
compensation for serving on the Board of Directors. All Directors are
reimbursed by the Company for any expenses incurred in attending Directors'
meetings.
In May 1994, the Board of Directors of the Company approved the issuance of up
to 1,800,000 options to certain employees and consultants of the Company (the
"Options"). The Options vested immediately upon the grant thereof and are
exercisable at $2.40 per share (or 80% of the fair market value on the date of
grant) at any time prior to May 10, 1997. The Company granted 800,000 of the
available Options during fiscal year 1994. The remaining 1,000,000 Options
were granted in July 1994 to L. Wayne Kiley, the President and Chief Executive
Officer of the Company. In June 1996, the Board of Directors of the Company
approved the issuance of new non-qualified stock options to those employees
and consultants who currently held the Options. These replacement options
required the cancellation of the prior options, are immediately vested and are
exercisable at $1.00 per share at any time prior to June 11, 2000. A total of
1,683,000 options were issued at $1.00 per share.
<PAGE>
23
Item 10. EXECUTIVE COMPENSATION (Continued)
On January 3, 1996, the Company's Board of Directors approved the issuance of
948,500 non-qualified stock options to substantially all employees of the
Company, its subsidiaries, and the non-employee directors, to purchase shares
of the Company's common stock at an exercise price equal to 100% of the market
value of the Company's common stock on the date of grant. The stock options
require future employment or services to the Company and vest one third each
on January 3, 1997, January 3, 1998, and January 3, 1999, respectively. The
stock options must be exercised by January 3, 2006. On January 3, 1996,
942,500 stock options were granted at an exercise price of $.28125 per share.
On June 11, 1996, the Company's Board of Directors approved the issuance of
65,000 non-qualified stock options to seven employees of the Company. These
stock options require future employment to the Company and vest one third each
on June 11, 1997, June 11, 1998 and June 11, 1999, respectfully. The stock
options must be exercised by June 11, 2006. On June 11, 1996, 65,000 stock
options were granted at an exercise price of $.5625 per share.
In February 1995, the stockholders approved the Company's 1994 Stock Plan
which allows for the issuance of stock options, restricted stock, deferred
stock, bonus shares performance awards, dividend equivalent rights, limited
stock appreciation rights and other stock-based awards, or any combination
thereof. The maximum number of shares of Common Stock with respect to which
awards may be granted is initially 1,000,000 shares.
<PAGE>
24
Item 10. EXECUTIVE COMPENSATION (Continued)
The following table contains information concerning the grant of stock options
to executive officers of the Company during the last fiscal year:
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
---------------------------------
Individual Grants
-----------------
(a) (b) (c) (d) (e) (f) (g)
% of
Total Potential Realizable
Options Value at Assumed
Number Granted Annual Rates Of Stock
of in Exercise Price Appreciation For
Options Fiscal Price Expiration Option Term
Name Granted Year ($/sh) Date 5% 10%
- ------------------------- --------- ------ ------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
L. Wayne Kiley, President 175,000 (1) 44% .28125 1/03/06 $ 30,953 $ 78,442
Chief Executive Officer 1,000,000 (2) 1.00 6/10/00 215,506 464,100
and Director
David L. Roekle 150,000 (1) 9% .28125 1/03/06 26,531 67,236
Senior Vice President 100,000 (2) 1.00 6/10/00 21,550 46,410
Thomas Iwanski 150,000 (1) 7% .28125 1/03/06 26,531 67,236
Vice President, 30,000 (2) 1.00 6/10/00 6,465 13,923
Chief Financial Officer,
Asst. Secretary and Director
Richard S. Pisapia 125,000 (1) 5% .28125 1/03/06 19,818 52,382
Senior Vice President Sales - - 6/10/00
A. Evan Windholz 50,000 (1) 3% .2815 1/03/06 8,843 22,412
Vice President Sales - 40,000 (2) 1.00 6/10/00 8,620 18,564
Eastern Region
Michael MacQueen 10,000 (1) 1% .28125 1/03/06 1,768 4,482
Controller 15,000 (2) 1.00 6/10/00 3,232 6,961
(1) Stock options granted in January 1996.
(2) Stock options granted in June 1996.
</TABLE>
<PAGE>
25
Item 10. EXECUTIVE COMPENSATION (Continued)
The following table contains information concerning the aggregated option
exercises during the last fiscal year and option positions at June 30, 1996,
by executive officers of the Company:
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
-----------------------------------------------
and FY-End Option Values
------------------------
(a) (b) (c) (d) (e)
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options Options at
Number of at FY-End, FY-End,
Shares Acquired Dollar Value Exercisable/ All
Name on Exercise Realized Unexercisable Unexercisable
- ---------------- --------------- ------------ --------------- --------------
<S> <C> <C> <C> <C>
L. Wayne Kiley - - 1,000,000 /
175,000 $ 54,688
David L. Roekle - - 100,000 /
150,000 $ 46,875
Richard S. Pisapia - - 0 /
125,000 $ 39,063
Thomas Iwanski - - 30,000 /
150,000 $ 46,875
A. Evan Windholz - - 40,000 /
50,000 $ 15,625
Michael MacQueen - - 15,000 /
10,000 $ 3,125
</TABLE>
<PAGE>
26
Item 10. EXECUTIVE COMPENSATION (Continued)
Employment Agreements
On October 16, 1992, the Company entered into an employment agreement for a
five (5) year term (the "Employment Term") with an additional one (1)year
renewal term with L. Wayne Kiley, President and Chief Executive Officer of the
Company. Pursuant to such employment agreement, Mr. Kiley will receive an
annual salary of $275,000 per annum with an annual ten percent (10%) increase,
effective on the agreement anniversary date, so long as the Company is
profitable for the preceding fiscal year. The employment agreement also
provides for the use by Mr. Kiley of a Company car, disability insurance and
for bonuses and other incentive compensation as the Board of Directors deems
appropriate, based upon the Company's operating performance or other
reasonable criteria. In addition, Mr. Kiley will have the option (the
"Option") to purchase up to eighteen percent (18%) of the Company's common
stock, so long as the Company achieves certain earnings before the payment of
interest and taxes ("EBIT"), such targets to commence with EBIT of $1,250,000
during any of the Company's fiscal years occurring during the Employment Term.
The purchase price for the shares of common stock purchased pursuant to the
Option is equal to $1.60 per share, which is eighty percent (80%) of the per
share price offered to the public in connection with the Company's initial
public offering.
Nancy Kiley entered into a five (5) year employment agreement with the Company
as Secretary, effective October 1992. This agreement provides for a base
salary of $18,000 for fiscal year 1992 with increases of $2,000 per year
thereafter. The employment agreement also provides annual cost of living
increases, the use of a Company car, bonuses and other incentive compensation
as the Board of Directors deems appropriate, based upon the Company's
operating performance or other reasonable criteria.
<PAGE>
27
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of September 20, 1996,
with respect to the beneficial ownership of the outstanding common stock by
(i) any holder of more than five percent (5%) of the outstanding shares of the
Company's common stock; (ii) each of the Company's executive officers and
directors; and (iii) the directors and executive officers of the Company as a
group:
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Approximate Percent
of Beneficial Owner (1) Beneficial Ownership of Class
--------------------------- -------------------- -------------------
<S> <C> <C>
L. Wayne Kiley (2)(5)(8) 3,230,100 34.8%
Nancy Kiley (2)(8) 2,060,100 25.4%
Kiley Children's Trust (3) 500,000 6.2%
J. R. Achten (4)(6)(8) 605,000 7.4%
David L. Roekle (6)(8) 250,000 3.0%
Thomas Iwanski (6)(8) 194,500 2.3%
Richard S. Pisapia(8) 145,000 1.8%
A. Evan Windholz (6)(8) 90,000 1.1%
Michael MacQueen (7)(8) 25,000 .3%
Thomas E. Evans, Jr. (6)(8) 26,000 .3%
Directors and Executive 4,010,600 40.0%
Officers as a Group
(9 persons) (3)(4)(5)(6)(8)
</TABLE>
<PAGE>
28
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MGMNT (Cont.)
(1) Unless otherwise indicted, the address of the beneficial owner is: c/o
Computer Marketplace, Inc., 1490 Railroad Street, Corona, California,
91720.
(2) L. Wayne Kiley and Nancy Kiley are the joint owners of 1,495,100 shares of
the common stock. The children of L. Wayne Kiley and Nancy Kiley are the
beneficiaries of the Kiley Children's Trust, which trust holds 500,000
shares of common stock. In addition L. Wayne Kiley and Nancy Kiley formed
and are directors of a charitable organization called Operation Frontline
which holds 60,000 shares of common stock. The Kiley's disclaim
beneficial ownership with respect to the shares of common stock held by
the Kiley Children's Trust and Operation Frontline.
(3) The Kiley Children's Trust was formed by L. Wayne Kiley and Nancy Kiley
for the benefit of their children.
(4) Includes 500,000 shares of common stock held by the Kiley Children's
Trust. A sole trustee of such trust, Mr. Achten has the right to vote and
dispose of such shares of common stock. In addition, includes 60,000
shares of common stock held by Operation Frontline for which Mr. Achten is
a director. Mr. Achten disclaims beneficial ownership with respect to the
shares of common stock held by the Kiley Children's Trust and Operation
Frontline.
(5) L. Wayne Kiley in July 1994, was granted 1,000,000 fully vested stock
options which are exercisable at $2.40 per share. These options expire
May 10, 1997. On June 11, 1996 the above stock options were exchanged for
the same quantity of new stock options which are fully vested, exercisable
at $1.00 per share and expire on June 11, 2000.
(6) The amount includes stock options granted in May 1994, which are fully
vested while employed by the Company but expire on the earlier of 90 days
after termination or resignation, or on May 10, 1997, and are exercisable
at $2.40 per share. The following are the current directors and executive
officers who received stock options with the number of stock options
indicated in parenthesis: J. R. Achten (40,000), Thomas E. Evans, Jr.
(20,000), David L. Roekle (100,000), A. Evan Windholz (40,000) and Thomas
Iwanski (30,000). On June 11, 1996 the above stock options were exchanged
for the same quantity of new stock options which are fully vested,
exercisable at $1.00 per share and expire on June 11, 2000.
(7) A total of 15,000 stock options were granted in June 1995. Terms of the
stock options are the same as the May 1994 grant. On June 11, 1996 the
above stock options were exchanged for the same quantity of new stock
options which are fully vested, exercisable at $1.00 per share and expire
on June 11, 2000.
(8) The amount includes stock options granted in January 1996. The following
are the current Directors and Executive Officers who received stock
options with the number of stock options indicated in parenthesis: L.
Wayne Kiley (175,000), Nancy Kiley (5,000), J.R. Achten (5,000), David
Roekle (150,000), Thomas Iwanski (150,000), Richard Pisapia (125,000), A.
Evan Windholz (50,000), Michael MacQueen (10,000) and Thomas Evans
(5,000).
<PAGE>
29
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 16, 1987, the Board of Directors of the Company approved the issuance
of shares of the Company's common stock to L. Wayne Kiley and Nancy Kiley as
the purchase price for their one-half (1/2) interest in the premises located
at 205 East Fifth Street, Corona, California, along with the assumption of
certain debt owing on such premises.
The Company leased, on a month-to-month basis, 3,000 square feet of warehouse
space located at 8509 Bedford Motorway, Corona, California, from L. Wayne
Kiley, the Company's President and founder, for $1,000 per month. The Company
terminated this arrangement shortly after the Company's closing on the Corona
headquarters/warehouse facility. Total rent paid on this lease was $8,000 for
fiscal year 1994.
In May 1994, the Board of Directors of the Company approved the issuance of up
to 1,800,000 options to certain employees and consultants of the Company (the
"Options"). The Options vested immediately upon the grant thereof and are
exercisable at $2.40 per share (or 80% of the fair market value on the date of
grant) at any time prior to May 10, 1997. The Company granted 800,000 of the
available Options during fiscal year 1994. The remaining 1,000,000 Options
were granted in July 1994 to L. Wayne Kiley, the President and Chief Executive
Officer of the Company. In June 1996, the Board of Directors of the Company
approved the issuance of new non-qualified stock options to those employees
and consultants who currently held the Options. These replacement options
required the cancellation of the prior options, are immediately vested and are
exercisable at $1.00 per share at any time prior to June 11, 2000. A total of
1,683,000 options were issued at $1.00 per share.
On January 3, 1996, the Company's Board of Directors approved the issuance of
948,500 non-qualified stock options to substantially all employees of the
Company, its subsidiaries, and the non-employee directors, to purchase shares
of the Company's common stock at an exercise price equal to 100% of the market
value of the Company's common stock on the date of grant. The stock options
require future employment or services to the Company and vest one third each
on January 3, 1997, January 3, 1998, and January 3, 1999, respectively. The
stock options must be exercised by January 3, 2006. On January 3, 1996,
942,500 stock options were granted at an exercise price of $.28125 per share.
On June 11, 1996, the Company's Board of Directors approved the issuance of
65,000 non-qualified stock options to seven employees of the Company. These
stock options require future employment to the Company and vest one third each
on June 11, 1997, June 11, 1998 and June 11, 1999, respectfully. The stock
options must be exercised by June 11, 2006. On June 11, 1996, 65,000 stock
options were granted at an exercise price of $.5625 per share.
In February 1995, the stockholders approved the Company's 1994 Stock Plan
which allows for the issuance of stock options, restricted stock, deferred
stock, bonus shares performance awards, dividend equivalent rights, limited
stock appreciation rights and other stock-based awards, or any combination
thereof. The maximum number of shares of Common Stock with respect to which
awards may be granted is initially 1,000,000 shares. No awards or shares have
been granted under this Plan.
<PAGE>
30
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued)
The Company has made consulting fee payments to David L. Roekle's wholly owned
Company, Solid Rock Computer Group, Inc., in the amounts of $8,000 and
$128,307 for fiscal years 1995 and 1994, respectively. On August 15, 1994,
the consulting arrangement with Solid Rock Computer Group, Inc. was
terminated.
The Company leases office space for its branch office at Traverse City,
Michigan, from the Company's President. The rent for this approximately 2,700
square foot location is $2,700 per month. The three-year lease, which
contains an option for the Company or the landlord to cancel with six (6)
months notice after each full year, expires on July 31, 1998.
<PAGE>
31
PART IV
-------
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) Financial Statements.
The following financial statements are included in Part II, Item 7:
Report of Independent Auditors F-1
Consolidated Balance Sheet as of June 30, 1996 F-2
Consolidated Statements of Operations for the years ended
June 30, 1996, and 1995 F-3
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the years ended
June 30, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6 - F-21
(a) (2) Financial Statement Schedules
All schedules are omitted because they are not applicable or the information
required is included in the consolidated financial statements and notes
thereto.
(a) (3) Exhibits
The following is a list of exhibits filed as part of this Annual Report.
Where so indicated by footnote, the exhibits have either been previously
filed, and are hereby incorporated by reference:
Exhibit
Number
- -------
1.01 Form of Underwriting Agreement. (1)
1.02 Form of Selected Dealers Agreement. (1)
3.01 Certificate of Incorporation of the Company. (1)
3.02 By-Laws of the Company. (1)
3.03 Certificate of Amendment of Certificate of Incorporation. (3)
4.01 Certificate for shares of Common Stock. (1)
<PAGE>
32
Item 13. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
4.02 Specimen Certificate for Class A Warrants. (1)
4.03 Specimen Certificate for Class B Warrants. (1)
4.04 Intentionally left blank.
4.05 Form of Warrant Agreement. (1)
4.06 Form of Underwriter's Unit Purchase Option. (1)
5.01 Opinion of Brandeis, Bernstein & Wasserman, as counsel to
the Company. (1)
10.01 Agreement between International Business Machines
Corporations and the Company. (1)
10.02 Employment Agreement between the Company and L. Wayne Kiley. (1)
10.03 Stock purchase Agreement among the Company, L. Wayne Kiley, Nancy
Kiley and Jordan Belfort. (1)
10.04 Loan Documents between the Company and Sharon Allen. (1)
10.05 Lease for office space at 205 East Fifth Street, Corona, California.
(1)
10.06 Lease for office space at 3439-B Woodland Drive, Mariposa,
California. (1)
10.07 Lease for office space at Pennington, New Jersey. (1)
10.09 Form of Bridge Loan Documents. (1)
10.10 Installment Payment Master Agreement between IBM Credit Corporation
and the Company. (1)
10.11 Non-exclusive Domestic Dealer Agreement between Autodesk, Inc. and
the Company. (1)
10.12 Distributorship Agreement between Sparks Ind., Inc., Delphi Data
Division, and the Company. (1)
10.13 End-User Distribution Agreement between Universal Software, Inc. and
the Company. (1)
10.14 Non-exclusive Sales Distributorship Agreement between Universal Data
Systems, Inc. and the Company. (1)
10.15 Changes in Terms Agreement between Western Community Bank and the
Company. (1)
10.16 Term Loan Promissory Note issued by the Company in favor of Jack
Mooney. (1)
<PAGE>
33
Item 13. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
10.17 Consulting and List Purchase Contract between David L. Wieseler and
the Company. (1)
10.18 Commercial Real Estate Contract between the Company and Mariposa
County Unified School District dated August 25, 1993. (2)
10.19 Retainer Agreement dated January 3, 1994, between the Company and
Alan M. Novich, Esq. (3)
10.20 Revolving Credit Agreement between Union Bank and Computer
Marketplace, Inc. (3)
10.21 Commercial Promissory Note between Union Bank and Computer
Marketplace, Inc. (3)
10.22 Note Secured by Deed of Trust dated July 8, 1994, between The J.
David Gladstone Institutes and Computer Marketplace, Inc. (3)
10.23 Deed of Trust with Assignment of Rents and Fixtures filing by
Computer Marketplace, Inc. dated July 8, 1994. (3)
10.24 Absolute Assignment of Leases and Rents by Computer Marketplace,
Inc. to The J. David Gladstone Institutes, dated July 8, 1994. (3)
10.25 Security Agreement dated July 8, 1994, by Computer Marketplace,
Inc., in favor of The J. David Gladstone Institutes. (3)
10.26 Representations and Warranties to The J. David Gladstone Institutes
made by Computer Marketplace, Inc. dated July 11, 1994. (3)
10.27 Environmental Indemnity dated July 8, 1994, by Computer Marketplace,
Inc. for the benefit of The J. David Gladstone Institutes. (3)
10.28 Promissory Note dated December 28, 1993, between Computer Marketplace,
Inc. and Yosemite Bank. (3)
10.29 Business Loan Agreement dated December 28, 1993, between Computer
Marketplace, Inc. and Yosemite Bank. (3)
10.30 Deed of Trust dated December 28, 1993, among Computer Marketplace,
Inc., Yosemite Bank and Fidelity National Title. (3)
10.31 Commercial Guaranty of Computer Marketplace, Inc. Indebtedness,
dated January 18, 1991, by L. Wayne Kiley to Western Community Bank.
(3)
10.32 Promissory Not dated January 18, 1991, by Computer Marketplace and
Western Community Bank. (3)
10.33 Business Loan Agreement dated January 18, 1991, between Computer
Marketplace, Inc. and Western Community Bank. (3)
<PAGE>
34
Item 13. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
10.34 Asset Purchase Agreement by and among SSI/PC Outlet Acquisition
Corporation, Synergy Solutions, Inc., International Associated
Marketing Corporation, and The Dean Family, dated a of January 1,
1994. (3)
10.35 Assignment and Assumption Agreement dated as of January 1, 1994, by
and among SSI/PC Outlet Acquisition Corporation, Synergy Solutions,
Inc., International Associated Marketing Corporation, Donald Dean,
Mark Dean, Randy Dean and Katherine Vitale. (3)
10.36 Bill of Sale dated January 1, 1994, by Synergy Solutions, Inc., and
International Associated Marketing Corporation to SSI/PC Outlet
Acquisition Corporation. (3)
10.37 Software Purchase Agreement, dated as of January 1, 1994, between
SSI/PC Outlet Acquisition Corp. and Donald Dean, Mark Dean, Randy
Dean and Katherine Vitale. (3)
10.38 Asset Purchase Agreement, dated November 12, 1993, between Computer
Marketplace, Inc. and International Computer Sales, Inc. (3)
10.39 Sun Microsystems Computer Corporation U.S. Indirect Value Added
Reseller ("IVAR") Agreement dated September 7, 1994, between Sun
Microsystems Computer Company and Computer Marketplace, Inc. (3)
10.40 IBM Surplus PC Reseller Profile Agreement dated June 15, 1994,
between IBM and Computer Marketplace, Inc. (3)
10.41 Loan Agreement dated October 24, 1994, between ComputerMarketplace,
Inc. and Union Bank. (4)
10.42 Commercial Promissory Note between Union Bank and Computer
Marketplace, Inc. (4)
10.43 Security Agreement dated October 24, 1994, by Computer Marketplace,
Inc., in favor of Union Bank. (4)
10.44 Arbitration Agreement between Union Bank and Computer Marketplace,
Inc. (4)
10.45 Loan and Security Agreement dated September 14, 1995, by Computer
Marketplace, Inc., Superior Solutions, Inc. and Medical Marketplace,
Inc., in favor of CoastFed Business Credit Corporation. (5)
10.46 Accounts Collateral Security Agreement dated September 14, 1995, by
Computer Marketplace, Inc., Superior Solutions, Inc. and Medical
Marketplace, Inc., in favor of CoastFed Business Credit Corporation.
(5)
10.47 Inventory Collateral Security Agreement dated September 14, 1995, by
Computer Marketplace, Inc., Superior Solutions, Inc. and Medical
Marketplace, Inc., in favor of CoastFed Business Credit Corporation.
(5)
<PAGE>
35
Item 13. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
10.48 Joint and Several Borrower Rider dated September 14, 1995, by
Computer Marketplace, Inc., Superior Solutions, Inc. and Medical
Marketplace, Inc., in favor of CoastFed Business Credit Corporation.
(5)
21.01 Subsidiaries of the Registrant
- ---------------
(1) Previously filed with the Securities and Exchange Commission as
Exhibits to the Registrant's Registration. Statement of Form SB-2,
File No. 33-60346LA, dated June 22, 1993, and incorporated herein by
reference.
(2) Incorporated herein by reference to the Form 10-KSB of the
Registrant for the year ended June 30, 1993.
(3) Incorporated herein by reference to the Form 10-KSB of the
Registrant for the year ended June 30, 1994.
(4) Incorporated herein by reference to the Form 10-QSB of the
Registrant for the quarterly period ended December 31, 1994.
(5) Incorporated herein by reference to the Form 10-KSB of the
Registrant for the year ended June 30, 1995.
(b) Reports on Form 8-K
None.
<PAGE>
36
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly executed on this 20th day of September, 1996.
COMPUTER MARKETPLACE, INC.
By: /s/ L. Wayne Kiley
----------------------------------------
L. Wayne Kiley, President
By: /s/ Thomas Iwanski
----------------------------------------
Thomas Iwanski, Chief Accounting Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the
dates indicated.
Signature Title Date
- --------- ----- ----
/s/ L. Wayne Kiley President, September 20, 1996
- --------------------------- Chief Executive Officer and
L. Wayne Kiley Director
/s/ Thomas Iwanski Vice President, September 20, 1996
- --------------------------- Chief Financial Officer,
Thomas Iwanski Assistant Secretary and
Director
/s/ Nancy Kiley Secretary and September 20, 1996
- --------------------------- Director
Nancy Kiley
/s/ J. R. Achten Director September 20, 1996
- ---------------------------
J. R. Achten
/s/ Thomas E. Evans, Jr. Director September 20, 1996
- ---------------------------
Thomas E. Evans, Jr.
<PAGE>
37
Index to Consolidated Financial Statements
Pages
-----
Report of Independent Auditors......................................F-1
Consolidated Balance Sheet as of June 30, 1996......................F-2
Consolidated Statements of Operations for the
years ended June 30, 1996 and 1995...............................F-3
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 1996 and 1995...............................F-4
Consolidated Statements of Cash Flows for the
years ended June 30, 1996 and 1995...............................F-5
Notes to Consolidated Financial Statements......................... F-6 - F-21
<PAGE>
F-1
Report of Independent Auditors
To the Board of Directors and Stockholders of Computer Marketplace, Inc.
We have audited the accompanying consolidated balance sheet of Computer
Marketplace, Inc., and its subsidiaries, as of June 30, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the two fiscal years in the period ended June 30, 1996. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Computer Marketplace, Inc. and its subsidiaries, as of June 30, 1996, and
the consolidated results of their operations and their cash flows for each of
the two fiscal years in the period ended June 30, 1996, in conformity with
generally accepted accounting principles.
MOORE STEPHENS, P.C.
Certified Public Accountants
Cranford, New Jersey
August 16, 1996
<PAGE>
F-2
<TABLE>
<CAPTION>
Computer Marketplace, Inc., and Subsidiaries
Consolidated Balance Sheet
June 30, 1996
Assets
- ------
<S> <C>
Current assets:
Cash and cash equivalents $ 594,921
Accounts receivable (less allowance for
doubtful accounts of $108,464) 3,045,740
Inventory, net (note 3) 3,151,837
Notes receivable - related parties 295,744
Other current assets 394,748
-----------
Total current assets 7,482,990
Property held for sale, net 2,183,453
Property and equipment, net (note 4) 969,684
Other assets 73,832
-----------
Total assets $ 10,709,959
===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Notes payable (note 5) $ 2,174,841
Accounts payable 1,959,425
Accrued payroll and payroll related liabilities 295,193
Current portion of long-term debt (note 6) 63,152
Other current liabilities 265,395
-----------
Total current liabilities 4,758,006
Long-term debt (note 6) 1,526,606
Other liabilities 136,491
Commitments and contingencies (note 10)
Stockholders' equity:
Preferred stock - $.0001 par value, 1,000,000 shares
authorized, no shares issued and outstanding
Common stock - $.0001 par value, 50,000,000 shares -
authorized, 8,114,542 shares issued and outstanding 811
Capital in excess of par value 6,906,593
Accumulated deficit (2,618,548)
-----------
Total stockholders' equity 4,288,856
-----------
Total liabilities and stockholders' equity $ 10,709,959
===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
F-3
<TABLE>
<CAPTION>
Computer Marketplace, Inc. and Subsidiaries
Consolidated Statements of Operations
Years ended June 30, 1996 and 1995
1996 1995
------------- -------------
<S> <C> <C>
Revenues -
Product sales, rental, service and other $ 30,000,952 $ 31,524,365
Cost and expenses:
Cost of revenues - product sales, rental,
service and other 25,386,732 26,669,092
Selling, general and administrative 5,601,670 5,827,722
---------- ----------
30,988,402 32,496,814
---------- ----------
Operating loss (987,450) (972,449)
---------- ----------
Other income (expense):
Interest expense (371,728) (207,281)
Interest income 3,840 14,116
Miscellaneous income 23,907 2,577
---------- ----------
(343,981) (190,588)
---------- ----------
Loss before income taxes (1,331,431) (1,163,037)
Provision for income taxes (note 12) - 61,672
---------- ----------
Net loss $ (1,331,431) $ (1,224,709)
---------- ----------
Net loss per share $ (.16) $ (.15)
========== ==========
Weighted average common shares outstanding 8,114,542 8,100,861
========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
F-4
<TABLE>
<CAPTION>
Computer Marketplace, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1996 and 1995
Common Stock
------------------- Capital in Total
excess of Accumulated stockholders'
Shares Amount par value deficit equity
----------- ------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1994 8,090,302 $809 $6,890,688 $ (62,408) $ 6,829,089
Issuance of common stock
in connection with asset
purchase (note 16) 24,240 2 15,905 15,907
Net loss (1,224,709) (1,224,709)
--------- ----- --------- --------- ---------
Balance, June 30, 1995 8,114,542 $811 $6,906,593 $(1,287,117) $ 5,620,287
Net loss (1,331,431) (1,331,431)
--------- ---- --------- --------- ---------
Balance, June 30, 1996 8,114,542 $811 $6,906,593 $(2,618,548) $ 4,288,856
========= ==== ========= ========= =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
F-5
<TABLE>
<CAPTION>
Computer Marketplace, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended June 30, 1996 and 1995
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,331,431) $ (1,224,709)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 302,062 220,446
Provisions for losses on accounts receivable (104,253) 187,717
Provisions for losses on inventory (289,823) 351,372
Other valuation provisions (5,004) 162,223
Write-off of other assets and goodwill 174,218 204,298
Other (1,492) (2,770)
Changes in assets and liabilities:
Accounts receivable 429,137 (516,175)
Inventory 441,264 (1,728,253)
Other current assets (86,656) (49,068)
Accounts payable 5,261 414,810
Accrued payroll and related liabilities (171,063) 157,526
Other current liabilities 28,977 (71,163)
---------- ----------
Net cash used in operating activities (608,803) (1,893,746)
---------- ----------
Cash flows from investing activities:
Cash paid for acquisition - (36,791)
Decrease in notes receivable - related parties 14,485 9,276
Purchase of property and equipment (370,631) (572,949)
Proceeds from sale of equipment 10,775 -
Increase in other assets (41,317) (433)
---------- ----------
Net cash used in investing activities (386,688) (600,897)
---------- ----------
Cash flows from financing activities:
Net increase in notes payable 874,841 700,000
Proceeds from long-term debt 21,255 1,320,688
Payments on long-term debt (53,349) (92,656)
---------- ----------
Net cash provided by financing activities 842,747 1,928,032
---------- ----------
Decrease in cash and cash equivalents (152,744) (566,611)
Cash and cash equivalents, beginning of year 747,665 1,314,276
---------- ----------
Cash and cash equivalents, end of year $ 594,921 $ 747,665
========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 354,553 $ 197,537
Net cash paid for (received from) income taxes $ 4,776 $ (129,011)
Supplemental disclosures of non-cash operating and investing activities:
In September 1995, $274,235 of accounts payable was reclassified to other
liabilities to reflect the negotiated payment terms.
During the year ended June 30, 1995, capital stock valued at $15,907 was
issued as consideration for acquisitions.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
F-6
Computer Marketplace, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization and Business
-------------------------
Computer Marketplace, a California corporation, was incorporated
on July 19, 1983, as Quality Associates, Inc. and changed its name to
Computer Marketplace in June 1987. In March 1993, Computer Marketplace
changed its name to Computer Marketplace, Inc. ("Computer Marketplace")
and its state of incorporation from California to Delaware. Computer
Marketplace is currently engaged in the national wholesale distribution
of new and used computer equipment to dealers, computer maintenance
companies, leasing companies, equipment brokers, and end-users. Computer
Marketplace purchases computer equipment from a variety of sources and
suppliers and sells or rents the equipment nationwide and in Europe to
companies ranging in size from small companies to Fortune 50
corporations. The computer industry is highly competitive and may be
affected by rapid changes in technology and customer spending habits.
Management believes the Company's ability to provide customers with an
unmatched selection of products, a high level of customer service and
competitive pricing allows it to compete effectively against other
companies in the industry. In March 1994, a wholly owned subsidiary,
Medical Marketplace, Inc. ("Medical Marketplace"), was formed to engage
in distribution of used medical equipment to health care providers. In
September 1994, a wholly owned subsidiary, Marketplace Asset Recovery
Services, Inc. ("MARS") was formed to perform asset recovery assignments,
repossessions and asset verifications. In June 1996, management began
the process of closing down the operations of MARS. In August 1996, the
subsidiary was renamed Marketplace Leasing, Inc., ("MLI"). Management
intends to utilize MLI as the Company's future equipment leasing
subsidiary. The operation of MARS to date, has not been material to the
consolidated financial statements. In January 1994, Computer Marketplace
formed a wholly owned subsidiary, Superior Solutions, Inc. ("SSI")
(formerly called Computer Marketplace-SSI, Inc.), located in Livonia,
Michigan, to purchase certain assets and assume certain obligations of
Synergy Solutions, Inc., and International Associated Marketing
Corporation. These companies were engaged principally in the
development, installation and maintenance of local and wide area
networks, were Novell Platinum Authorized Resellers, and were also
selling computer hardware. On July 1, 1996, the employees of SSI began
operating as a sales and networking branch of Computer Marketplace. The
distinct business operations of SSI will be gradually phased down as the
operations are better integrated into Computer Marketplace. Computer
Marketplace and its subsidiaries are hereinafter referred to as the
"Company".
2. Summary of Significant Accounting Policies
------------------------------------------
Basis of Consolidation
----------------------
The accompanying consolidated financial statements include the accounts
of Computer Marketplace, Medical Marketplace, SSI and MARS. All material
intercompany balances and transactions have been eliminated.
<PAGE>
F-7
Computer Marketplace, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Revenue Recognition
-------------------
The Company records product sales revenue when goods have been shipped
and rental revenue ratably over the term of the rental.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid instruments with a maturity of
three (3) months or less when purchased to be cash equivalents.
Inventory
---------
Inventory, which consists primarily of previously owned finished goods,
is stated at the lower of cost or net realizable value. Cost is
generally determined by specific identification.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
related assets. Improvements to rented office space are amortized over
the shorter of the lease term or the life of the improvement.
Impairment
----------
The Company's intangible assets, including software development costs,
and customer lists, are reviewed at least annually as to whether their
carrying value has become impaired. Management considers these assets to
be impaired if the carrying value exceeds the discounted future projected
cash flows from related operations. If impairment is deemed to exist,
these assets will be written down to the lower of projected discounted
cash flow or management's estimate of fair value. Management also
evaluates the periods of amortization to determine whether later events
and circumstances warrant revised estimates of the useful life of these
assets. In June 1996, the Company charged operations $174,218 related to
the write-off of goodwill. In June 1995, the Company charged operations
$162,050 related to impaired software development costs and deferred
offering costs. As of June 30, 1996, management expects the remaining
intangible assets to be fully recoverable.
Other Liabilities
-----------------
Other liabilities represents the long-term portion of a balance owed to a
vendor under negotiated extended payment terms. The final payment under
this arrangement is expected to be made in March, 1998.
<PAGE>
F-8
Computer Marketplace, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Net Loss Per Share of Common Stock
----------------------------------
Net loss per share of common stock is computed on the basis of the
weighted average share of common stock outstanding plus equivalent shares
arising from the effect of dilutive stock options and warrants using the
treasury stock method. For fiscal years 1996 and 1995, the per share
results were computed without consideration for contingently issuable
shares underlying stock options and warrants as the effect on the per
share results would be anti-dilutive. Fully diluted and primary loss per
share are the same of all periods presented.
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
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassification
----------------
Certain reclassifications have been made to prior year consolidated
financial statements to conform to classifications used in the current
year.
3. Inventory
---------
Inventory $ 2,182,448
Inventory on short-term rental 1,190,605
---------
3,373,053
Less inventory valuation allowance 221,216
---------
Inventory, net $ 3,151,837
=========
<PAGE>
F-9
Computer Marketplace, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Inventory on short-term rental consists of new and previously owned
computer-related equipment which is typically rented to customers for a
few months to fulfill their temporary computing needs. The Company,
based on the satisfactory economics of the transaction, will allocate
existing inventory to the transaction if the product is available in-
house, or purchase the equipment to meet the customer's needs. At the
expiration of the rental period, upon the return of the equipment to the
Company, the equipment is remarketed for sale along with similar
equipment in the Company's inventory. The Company charges operations for
an estimate of the inventory's valuation decrease while it is on
temporary rental. Net (decreases) increases to the inventory valuation
allowance associated with the Company's inventory were $(289,823) and
$351,372 for the years ending June 30, 1996 and 1995, respectively.
4. Property and Equipment
----------------------
Property and equipment consists of the following as of June 30, 1996:
Land $ 53,750
Building and property improvements 252,816
Machinery and equipment 782,577
Furniture and fixtures 147,503
Automobiles and trucks 170,507
Long-term rental equipment 129,763
---------
1,536,916
Less accumulated depreciation 567,232
---------
Property and equipment, net $ 969,684
=========
Property Held For Sale
----------------------
Property held for sale consists of the fifty percent (50%) Company owned
facility at 205 East Fifth Street in Corona, California and the Company's
main facility located at 1490 Railroad Street in Corona. Accumulated
depreciation associated with the two facilities at June 30, 1996 was
$21,122 and $119,155, respectively. The decision to classify this
property as held for sale was made at June 30, 1996.
<PAGE>
F-10
Computer Marketplace, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
5. Notes Payable
-------------
In September 1995, the Company entered into a new revolving credit
facility agreement ("Credit Facility") with a financing company. This
Credit Facility replaced the then outstanding $2,000,000 revolving credit
line with a bank. The Credit Facility allows the Company to borrow up to
$2,500,000 and bears interest at rate of 2.25% above the lender's
"reference rate" (as defined). The borrowing capacity under the Credit
Facility is dependent upon "eligible" (as defined) accounts receivable
and inventory, and fluctuates daily. At June 30, 1996, borrowings under
the Credit Facility and additional amounts available for borrowing under
the Credit Facility were $2,174,841 and $195,758, respectively. The
Credit Facility is collateralized by substantially all of the Company's
assets, except for real property. The Credit Facility expires in
September 1997.
<TABLE>
<CAPTION>
6. Long-term Debt
--------------
As of June 30, 1996, long-term debt consisted of the following:
<S> <C>
Note payable, due August 1, 2004, interest at 9.50%,
payment of principal and interest of $11,364 per
month, balloon payment of $1,086,485 due
August 1, 2004, collateralized by a real estate
deed of trust $ 1,274,336
Note payable to a bank, due February 2, 1999, interest
at 9.25%, payment of principal and interest of
$1,391 per month, balloon payment of $151,421 due
February 2, 1999, collateralized by real estate
deed of trust 156,671
Note payable to a bank, due July 15, 2018, interest at a
variable rate, collateralized by a real estate deed
of trust(note 8 "Notes Receivable - Related Parties") 99,959
Note payable to a bank due February 5, 1997, interest at
a variable rate, balloon payment of $19,554 due
February 5, 1997, collateralized by a real estate
deed of trust (note 8 "Other Transactions") 25,554
Other 33,238
---------
1,589,758
Less current portion of long-term debt 63,152
---------
Total long-term debt $ 1,526,606
=========
</TABLE>
<PAGE>
F-11
Computer Marketplace, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
The prime rate at June 30, 1996, was 8.25%
Maturities of principal due in the following years are set forth
below:
Year ending
June 30,
-----------
1997 $ 63,152
1998 30,842
1999 179,073
2000 23,712
2001 23,550
Thereafter 1,269,429
---------
Total $ 1,589,758
=========
7. Employment Contracts
--------------------
The Company has employment contracts with most of its sales
representatives for terms ranging from one (1) to three (3) years.
Commissions are paid monthly based on a Company formula. As part of the
contracts, the sales representatives agree to a restrictive covenant not-
to-compete upon termination.
In October 1992, the Company entered into 5-year employment agreements
with two (2) officers for an aggregate annual salary of $293,000. These
agreements provide for an aggregate increase of approximately ten percent
(10%) each year, if the Company is profitable. One of the agreements
provides for stock purchase rights (aggregating up to 18% of the
Company's outstanding common stock) priced at $1.60 per share if certain
earnings before the payment of interest and taxes are met.
In January 1994, the Company, in connection with an asset purchase
agreement (note 16), entered into 5-year employment agreements with two
(2) individuals for an initial annual salary of $40,000 each, then
increasing to $45,000 for the second year. The agreements provide for
annual ten percent (10%) increases, if the Company is profitable, and for
sales and performance bonuses. In addition, in January 1995, each of the
four (4) individuals associated with Synergy Solutions, Inc. and
International Associated Marketing Corporation received 6,060 shares of
common stock of the Company.
<PAGE>
F-12
Computer Marketplace, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
8. Related Party Transactions
--------------------------
At June 30, 1996, amounts due to or from related individuals have been
included in the accompanying consolidated financial statements as
follows:
Notes Receivable - Related Parties
----------------------------------
On June 30, 1990, the Company sold an investment in residential property
to a business associate of the principal stockholder. The Company
received an all-inclusive note and deed of trust for $250,000. The note
was originally due on December 31, 1993, and interest-only payments are
due monthly at twelve percent (12%). This note is currently in default;
however, management has decided not to call the note as interest payments
continue to be made. The Company is obligated to pay the underlying
mortgages on the property (note 6). Additional advances are made to
cover repairs and other related expenses on the above property. The
balance owed on these advances amounted to $63,209 as of June 30, 1996.
The original amount of the note is personally guaranteed by the Company's
President and a reserve has been established for amounts in excess of the
guaranteed amount.
Short-term loans were made to several employees during the years ended
June 30, 1996 and 1995. These loans, which bear interest at rates
between ten percent (10%) and twelve percent (12%), amounted to $18,999
and $32,235 as of June 30, 1996 and 1995, respectively.
The Company's subsidiary, Superior Solutions, Inc., has two (2)
agreements outstanding with the former owners of Synergy Solutions, Inc.
and International Associated Marketing Corporation, totaling, with
interest $26,745, as of June 30, 1996. The agreements bear interest at
five percent (5%) and are due by November 1, 1997.
Other Transactions
------------------
The Company owns an undivided fifty percent (50%) interest in its former
Corona headquarters building. The other fifty percent (50%) interest is
owned by a business associate of the principal stockholder. Accordingly,
the Company recorded fifty percent (50%) of the total cost of land and
building on its financial statement, as well as fifty percent (50%) of
the mortgage balance (note 6).
Effective August 1, 1995, the Company entered into a lease with the
Company's President for office space at the Traverse City, Michigan
location. The rent for this approximately 2,700 square foot location is
$2,700 per month. Rent Expense for the year ended June 30, 1996 was
$29,700. The three-year lease, which contains an option for the Company
or the landlord to cancel with six (6) months notice after each full
year, expires on July 31, 1998.
The Company paid consulting fees to a company owned by an officer in the
amount of $8,000 for fiscal year 1995. The consulting arrangement with
the company was terminated in August 1994.
<PAGE>
F-13
Computer Marketplace, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
9. Fair Value Of Financial Instruments
-----------------------------------
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments" ("Statement 107"). The estimated fair value
amounts have been determined using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that could be realized in a current
market exchange. The use of different market assumptions or estimation
methodologies may have a material effect on the estimated fair value
assumptions.
<TABLE>
<CAPTION>
Estimated fair values of the Company's financial instruments (all of
which are held for nontrading purposes) are as follows:
June 30, 1996
-----------------------
Carrying Fair
Amount Value
-----------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 594,921 $ 594,921
Notes receivable - related parties 295,744 295,744
Financial liabilities:
Notes payable 2,174,841 2,174,841
Long-term debt 1,589,758 1,584,432
</TABLE>
Cash and Cash Equivalents
-------------------------
The fair value of cash and cash equivalents approximates the carrying
amount reported in the balance sheet.
Notes Receivable - Related Parties
----------------------------------
The fair value of notes receivable - related parties is based on current
rates at which the Company would lend funds with similar characteristics
and maturities. At June 30, 1996, the fair value of these notes
approximates the carrying amounts reported in the balance sheets.
Notes Payable
-------------
The fair value of notes payable is based on current rates at which the
Company could borrow funds with similar characteristics. At June 30,
1996, the fair value of notes payable approximates the carrying amount
reported in the balance sheet.
<PAGE>
F-14
Computer Marketplace, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Long-term Debt
--------------
The fair value of long-term debt is based on current rates at which the
Company could borrow funds with similar remaining maturities.
10. Commitments and Contingencies
-----------------------------
Litigation
----------
The Company commenced an unfair trade name infringement action entitled
Computer Marketplace, Inc. v. RK Productions/Case No. 260667 in Riverside
County, California Superior Court on January 20, 1995. The defendant
failed to respond to the Company's complaint, and was therefore, in
default. Subsequently, the defendant (under the name National
Productions, Inc.) filed a Federal lawsuit in the Central District of
California entitled National Productions, Inc. v. Computer Marketplace,
Inc./Case No. 95-3225 on May 19, 1995. Computer Marketplace has counter
claimed in the Federal action which supersedes the earlier state court
action. Discovery in the case is substantially complete and currently
the case is in the negotiation phase. The outcome of this lawsuit cannot
be predicted, but the Company intends to vigorously defend the action and
is of the opinion that the lawsuit will not have a material effect on the
results of operations, cash flows and financial position of the Company.
Lease Commitments
-----------------
The Company leases various office facilities and equipment under
operating leases expiring through 1999. Rent expense related to these
leases for the years ended June 30, 1996 and 1995, was $114,629 and
$102,314, respectively.
As of June 30, 1996, aggregate future minimum rental payments on
noncancelable operating leases with initial terms in excess of one (1)
year, which are all for office space, are as follows:
June 30,
----------
1997 $ 56,400
1998 32,400
1999 2,700
---------
$ 91,500
=========
<PAGE>
F-15
Computer Marketplace, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
11. Profit Sharing Plan and 401(k) Plan
-----------------------------------
In January 1995, the Company adopted a new combined 401(k) and profit
sharing plan (the "Plan") which replaced the prior plans. The new Plan
will cover substantially all of the Company's eligible employees. The
new Plan is available to all employees with more than one (1) year of
service or, to employees employed by the Company on February 1, 1995.
Company contributions to the profit sharing component of the Plan will be
at the discretion of management. Company contributions to the 401(k)
component of the Plan is based on a percentage of employee contributions,
but is at the discretion of management. The charge to operations related
to the Plan for the years ended June 30, 1996 and 1995, was $18,421 and
$23,398, respectively.
12. Income Taxes
------------
Deferred income taxes reflect the impact of temporary differences between
amounts of assets and liabilities for financial reporting purposes and
tax purposes. Temporary differences are caused primarily by
depreciation, inventory valuation allowances and accounts receivable
allowance for doubtful accounts.
Generally accepted accounting principles require the establishment of a
deferred tax asset for all deductible temporary differences and operating
loss carryforwards. The deferred tax asset attributable to operating
loss carryforwards amounted to approximately $1,000,000 at June 30, 1996.
Because the Company does not as yet have a history of continuing
profitability, any deferred tax asset established for the operating loss
carryforward would correspondingly require a valuation of allowance of
the same amount. Accordingly, no deferred tax asset is reflected in
these consolidated financial statements.
No provision for Federal income taxes has been made during the fiscal
years ended June 30, 1996 and 1995, because of the Company's net loss
position and utilization of net operating losses. The 1995 provision for
income taxes reflects current and prior year provisions for minimum state
taxes, as well as adjustments for prior year state tax refunds not
realized in 1995.
The Company has net operating loss carryforwards of approximately
$2,600,000 which begin to expire in 2005.
<PAGE>
F-16
Computer Marketplace, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
13. Stockholders' Equity
--------------------
Initial Public Offering
-----------------------
On June 22, 1993, the Company completed the initial public offering of
4,140,000 units (including the 540,000 underwriters over-allotment units)
at $2.00 per unit resulting in net proceeds to the Company of $6,594,179.
Each unit consists of one (1) share of common stock and one (1) Class A
Redeemable Common Stock Purchase Warrant and one (1) Class B Redeemable
Common Stock Purchase Warrant. Each Class A and B Redeemable Common
Stock Purchase Warrant entitles the holder to purchase two (2) shares of
common stock for $4.75 and $5.50, respectively, commencing one (1) year
from the effective date of the offering. In connection with the
offering, the Company sold to the Underwriter, for nominal consideration,
warrants to purchase an aggregate of 360,000 units ("Underwriters Unit
Purchase Options"). The Underwriters Unit Purchase Option is exercisable
for a four (4) year period commencing two (2) years after the effective
date of the offering at an exercise price of $3.30 per Unit.
Stock Split
-----------
In June 1994, the Company effected a two-for-one stock split of the
outstanding shares of common stock of the Company by changing the
4,045,151 then outstanding shares of common stock, par value $.0001 per
share, into 8,090,302 shares of common stock of the Company, par value
$.0001 per share. All share data has been adjusted to reflect this
change.
Stock Options and Other Stock-Based Awards
------------------------------------------
In May 1994, the Board of Directors of the Company approved the issuance
of up to 1,800,000 options to certain employees and consultants of the
Company (the "Options"). The Options vest immediately upon the grant
thereof and are exercisable at $2.40 per share (or 80% of the fair market
value on the date of grant) at any time prior to May 10, 1997. The
Company granted 1,000,000 options in July 1994 to the President of the
Company. In June 1996 the Board of Directors of the Company approved the
issuance of new non-qualified stock options to those employees and
consultants who currently held any of the options exercisable at $2.40
per share. These replacement options required the cancellation of the
prior options are immediately vested and are exercisable at $1.00 per
share at any time prior to June 11, 2000. A total of 1,683,000 options
were issued at $1.00 per share.
<PAGE>
F-17
Computer Marketplace, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
On January 3, 1996, the Company's Board of Directors approved the
issuance of 948,500 non-qualified stock options to substantially all
employees of the Company, its subsidiaries, and the non-employee
directors, to purchase shares of the Company's common stock at an
exercise price equal to 100% of the market value of the Company's common
stock on the date of grant. The stock options require future employment
or services to the Company and vest one third each on January 3, 1997,
January 3, 1998, and January 3, 1999, respectively. The stock options
must be exercised by January 3, 2006. On January 3, 1996, 942,500 stock
options were granted at an exercise price of $.28125 per share.
On June 11, 1996, the Company's Board of Directors approved the issuance
of 65,000 non-qualified stock options to seven employees of the Company.
These stock options require future employment to the Company and vest one
third each on June 11, 1997, June 11, 1998 and June 11, 1999,
respectfully. The stock options must be exercised by June 11, 2006. On
June 11, 1996, 65,000 stock options were granted at an exercise price of
$.5625 per share.
The following is a summary of transactions under the plan:
Options outstanding at July 1, 1994 800,000 $ 2.40
Granted 1,015,000 2.40
Cancelled (40,000) 2.40
---------
Options outstanding at June 30, 1995 1,775,000 2.40
Granted 2,690,500 .28125-1.00
Cancelled (1,790,000) .28125-2.40
---------
Options outstanding at June 30, 1996 2,675,500 $.28125-1.00
========= ===========
Options exercisable at June 30, 1996 1,683,500 $ 1.00
========= ===========
In February 1995, the stockholders approved the Company's 1994 Stock Plan
which allows for the issuance of stock options, restricted stock,
deferred stock, bonus shares performance awards, dividend equivalent
rights, limited stock appreciation rights and other stock-based awards,
or any combination thereof. The maximum number of shares of Common Stock
with respect to which awards may be granted is initially 1,000,000
shares. No awards or shares have been granted under the 1994 stock plan.
<PAGE>
F-18
Computer Marketplace, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
14. Concentrations of Credit Risk
-----------------------------
The Company currently maintains cash accounts with financial institutions
which exceed the maximum amounts insured by the Federal Depository
Insurance Corporation. At June 30, 1996, these uninsured amounts totaled
approximately $555,000.
Generally, the Company does not require collateral or other security to
support customer receivables, however the Company routinely assesses the
financial strength of its customers and, as a consequence, believes that
its trade receivable credit risk exposure is limited.
15. New Authoritative Pronouncements
--------------------------------
Effective July 1, 1996, the Company will adopt Statement of Financial
Accounting Standards ("SFAS") 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of". Under SFAS
121, management will consider its long-lived assets to be impaired if the
carrying value exceeds the sum of net cash flows generated by the asset
(and from it disposition). These cash flows are not discounted for this
purpose. Currently, management evaluates impairment utilizing a
discounted cash flow approach. Adoption of this SFAS is not expected to
have a material effect on these consolidated financial statements.
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation," in October 1995. SFAS No. 123 uses a fair
value based method of accounting for stock options and similar equity
instruments as contrasted to the intrinsic value based method of
accounting prescribed by Accounting Principles Board [APB] Opinion No.
25, "Accounting for Stock Issued to Employees." The Company has not
decided if it will adopt SFAS No. 123 or continue to apply APB Option No.
25 for financial reporting purposes. SFAS No. 123 will have to be
adopted for financial note disclosure purposes in any event. The
accounting and disclosure requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15,
1995. SFAS No. 123 also applies to transactions on which an entity
issues its equity instruments to acquire goods or services from non-
employees. Those transactions must be accounted for based on the fair
value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable. This
requirement is effective for transactions entered into after December 15,
1995. This provision of SFAS No. 123 did not have a material effect on
the consolidated financial statements as of and for the year ended June
30, 1996.
<PAGE>
F-19
Computer Marketplace, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
16. Asset Purchase Agreement
------------------------
In January 1994, the Company signed an asset purchase agreement to
acquire certain assets and assume certain obligations of Synergy
Solutions, Inc. and International Associated Marketing Corporation (note
1) in exchange for $20,000 and 24,242 shares of common stock of the
Company, which had a fair market value of $100,000. In January 1995, the
Company issued an additional 24,240 shares of common stock, which had a
fair market value of approximately $15,907.
The acquisition was recorded under the purchase method of accounting and,
accordingly, the operating results of Synergy Solutions, Inc. and
International Associated Marketing Corporation have been included in the
consolidated operating results since the date of acquisition. The total
purchase price of $120,000 was allocated to assets acquired based on
their estimated fair values. Acquisition related expenses totaling
$52,759 were included in goodwill.
At June 30, 1996, the Company expensed the unamortized goodwill of
$174,218 due to the substantial uncertainty that the future cash flows
from operations will adequately support the previously recorded goodwill
amount.
<PAGE>
F-20
Computer Marketplace, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
17. Industry Segments
-----------------
<TABLE>
<CAPTION>
The Company classifies its product lines into two segments: Computer
Products and Medical Products. Information about those segments for the
year ended June 30, 1996 and 1995 is as follows:
1996
------------------------------------
Computer Medical
Products Products Consolidated
----------- ---------- ------------
<S> <C> <C> <C>
Operating revenue $27,120,944 $2,880,008 $30,000,952
========== ========= ==========
Operating profit (loss) $(1,029,182) $ 41,732 $ (987,450)
========== =========
Interest expense (371,728)
Other nonoperating revenues and expenses 27,747
----------
Loss before income taxes $(1,331,431)
==========
Identifiable assets at June 30, 1996 $ 9,513,177 $1,196,782 $10,709,959
========== ========= ==========
1995
------------------------------------
Computer Medical
Products Products Consolidated
----------- ---------- ------------
Operating revenue $30,923,670 $ 600,695 $31,524,365
========== ========= ==========
Operating loss $ (926,085) $ (46,364) $ (972,449)
========== =========
Interest expense (207,281)
Other nonoperating revenues and expenses 16,693
----------
Loss before income taxes $(1,163,037)
==========
Identifiable assets at June 30, 1995 $10,543,744 $ 794,493 $11,338,237
========== ======== ==========
</TABLE>
Operating profit (loss) is total operating revenue less operating
expenses, and excludes interest expense and other nonoperating revenues
and expenses. Intersegment sales during 1996 and 1995 were immaterial to
the consolidated financial statements. Shared operating expenses were
allocated to the Medical Products segment at a rate of $5,000 per month
for a total of $60,000 in 1996. For 1996, depreciation and amortization
expense for the Computer Products and Medical Products industry segments
was $264,197 and $11,767, respectively. For 1995, deprecation and
amortization expense for the Computer Products and Medical Products
industry segments was $217,343 and $3,103, respectively. Capital
expenditures for the two segments in 1996 were $224,475 and $146,156,
respectively. Capital expenditures for the two segments in 1995 were
$548,014 and $24,935, respectively.
<PAGE>
F-21
Computer Marketplace, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Identifiable assets are those used by each segment of the Company's
operations and do not include advances from the Computer Products segment
to the Medical Products segment totaling $1,219,628 and $787,223 as of
June 30, 1996 and 1995, respectively.
18. Fourth Quarter Adjustments
--------------------------
There were certain adjustments recorded in the fourth quarter of fiscal
1996, and 1995, and the aggregate effect of such adjustments was material
to the results of that quarter.
The Company beginning in January 1995, moved to more aggressively reduce
the quantity of inventory on hand in a concerted effort to enhance
operating efficiency and improve cash flow. During the fourth quarter
1995, the Company charged operations approximately $225,000 for increases
to the inventory valuation allowance in excess of normal quarterly
charges.
In addition, the Company, after an extended focus on accounts receivable
collections, took charges in the fourth quarter of 1995, of approximately
$240,000 related to valuation of the remaining accounts receivable.
Approximately $130,000 of this charge related to a single customer.
Management continues to actively pursue timely collection on all of the
Company's customer accounts.
Equally significant, in June 1996, the Company charged operations
$174,218 related to the write off of goodwill. In June 1995, the Company
charged operations $162,050 related to impaired software development
costs and deferred offering costs (note 2).
19. Management's Plans
------------------
The Company has experienced significant losses during each of the past
two years aggregating $2,556,140. These losses have caused a
corresponding reduction in the Company's working capital. While
Management believes that the Company has sufficient working capital,
Management has nevertheless, developed plans to improve the working
capital position of the Company. During the first quarter of the next
fiscal year, Management anticipates a further reduction of operating
expenses through additional personnel cutbacks and additional operating
expense consolidation. Management's plans also include the sale of the
Company's two Corona, California facilities which are expected to reduce
substantially all of the Company's long-term debt and are expected to
provide an additional $1,000,000 in working capital. In addition,
Management intends to seek either a private placement of funds involving
either Medical Marketplace or Computer Marketplace or initiate a
secondary stock offering. The Company intends to expand the sales forces
of both Medical Marketplace and Computer Marketplace as a means to
increase sales production and obtain better operating leverage.
<PAGE>
Exhibit 21.01
- -------------
Subsidiaries of the Registrant.
Name of Subsidiary State of Incorporation
--------------------- ----------------------
Medical Marketplace, Inc. Delaware
Superior Solutions, Inc., Delaware
formerly Computer Marketplace-SSI, Inc.
Marketplace Asset Recovery Services, Inc. Delaware
(Effective August 8, 1996, the company
was renamed Marketplace Leasing, Inc.)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 594,921
<SECURITIES> 0
<RECEIVABLES> 3,045,740
<ALLOWANCES> 108,464
<INVENTORY> 3,151,837
<CURRENT-ASSETS> 7,482,990
<PP&E> 969,684
<DEPRECIATION> 567,232
<TOTAL-ASSETS> 10,709,959
<CURRENT-LIABILITIES> 4,758,006
<BONDS> 1,526,606
0
0
<COMMON> 811
<OTHER-SE> 4,288,045
<TOTAL-LIABILITY-AND-EQUITY> 10,709,959
<SALES> 30,000,952
<TOTAL-REVENUES> 30,000,952
<CGS> 25,386,732
<TOTAL-COSTS> 25,386,732
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 371,728
<INCOME-PRETAX> (1,331,431)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,331,431)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,331,431)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> 0
</TABLE>
