<PAGE>
As filed with the Securities and Exchange Commission on May 2, 1997
Registration No. 333-________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COMPUTER MARKETPLACE(R), INC.
(Name of small business issuer in its charter)
Delaware 5045 33-0008870
(State or other juris- (Primary Standard Industrial (I.R.S. Employer
diction of organization) Classification Code No.) Identification No.)
(Address and telephone number of principal executive offices)
Computer Marketplace(R), Inc.
1490 Railroad Street
Corona, California 91720
(909) 735-2102
(Address of principal place of business or
intended principal place of business)
L. Wayne Kiley
President
1490 Railroad Street
Corona, California 91720
(909) 735-2102
(Name, address and telephone number of agent for service)
Copies to:
Alan N. Forman, Esq.
Bernstein & Wasserman, LLP
950 Third Avenue
New York, NY 10022
(212) 826-0730
(212) 371-4730 (Fax)
Approximate date of proposed sale to the public: As soon as reasonably
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, please check the following
box and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462 (c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
----------
The Registrant hereby amends this Registration Statement on such date or
dates may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Explanatory Note
This Registration Statement covers the offering ("Offering") of shares of
Common Stock, par value $.0001 ("Common Stock"), and Class D Redeemable Common
Stock Purchase Warrants ("Class D Warrants") of Computer Marketplace(R), Inc.
(the "Company") by certain selling securityholders ("Selling Securityholders").
The prospectus ("Prospectus") included in this Registration Statement covers (i)
the resale of 9,000,000 Class D Warrants being offered by the Selling
Securityholders and (ii) the issuance by the Company of 3,500,000 shares of
Common Stock upon the exercise (a) by the Selling Securityholders of Class D
Warrants exercisable for 1,500,000 shares of Common Stock, (b) by a consultant
to the Company of options exercisable for 1,000,000 shares of Common Stock, and
(c) by employees of the Company of options exercisable for 1,000,000 shares of
Common Stock .
ii
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Proposed maximum
Title of each Amount maximum aggregate Amount of
class of securities to be offering price offering registration
to be registered registered (1) per Security (2) price (2) fee (1)
- ------------------- -------------- ---------------- --------- ------------
<S> <C> <C> <C> <C>
Class D Redeemable Common Stock
Purchase Warrants 9,000,000 $ .027 $ 243,000 $ 73.64
Common Stock, par value $.0001, 1,500,000 $2.50 $3,750,000 $1,136.36
per share(3)(4)
Common Stock, par value $.0001,
per share (5) 1,000,000 $1.00 $1,000,000 $ 303.03
Common Stock, par value $.0001,
per share (6) 1,000,000 $1.00 $1,000,000 $ 303.03
TOTAL: $5,993,000 $1,816.06
</TABLE>
- ----------
(1) Pursuant to Rule 416 under the Securities Act of 1933 (the "Act"), this
Registration Statement covers such additional indeterminate number of
shares of Common Stock, and Class D Redeemable Common Stock Purchase
Warrants ("Class D Warrants") as may be issued by reason of adjustments in
the number of shares of Common Stock and Class D Warrants pursuant to
anti-dilution provisions contained in the Class D Warrants. Because such
additional shares of Common Stock, and Class D Warrants will, if issued, be
issued for no additional consideration, no registration fee is required.
(2) Estimated solely for purposes of calculating registration fee.
(3) The number of shares of Common Stock specified is the number which may be
acquired upon exercise of the Class D Warrants at the maximum exercise
price thereof.
(4) Issuable upon the exercise of Class D Warrants held by certain Selling
Securityholders (the "Warrantholders").
(5) Issuable upon the exercise of an option issued pursuant to a consulting
agreement dated December 9, 1996 (the "Consulting Agreement") by and
between Victoria Holdings, Inc. and the Company (the "Victoria Holdings
Options").
(6) Issuable upon the exercise of options, issued to certain employees and
directors of the Company (the "Management Options").
iii
<PAGE>
COMPUTER MARKETPLACE(R), INC.
CROSS REFERENCE SHEET
(Showing Location in the Prospectus of Information
Required by Items 1 through 23, Part I, of Form SB-2)
<TABLE>
<CAPTION>
<S> <C>
Item in Form SB-2 Prospectus Caption
1. Front of Registration
Statement and Outside Front
Cover of Prospectus................ Facing Page of Registration Statement; Outside Front
Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus.......... Inside Front Cover Page of Prospectus; Outside Back Cover
Page of Prospectus
3. Summary Information and Risk
Factors............................ Prospectus Summary; Risk Factors
4. Use of Proceeds.................... Use of Proceeds
5. Determination of Offering Price.... Outside Front Cover Page of Prospectus; Underwriting;
Risk Factors
6. Dilution...........................* Dilution; Risk Factors
7. Selling Securityholders........... Description of Securities; Selling Securityholders;
8. Plan of Distribution............... Outside Front Cover Page of Prospectus; Risk Factors;
9. Legal Proceedings.................. Business - Legal Proceedings
10. Directors, Executive Officers,
Promoters and Control Persons...... Management
11. Security Ownership of Certain
Beneficial Owners and Management... Principal Stockholders
12. Description of Securities.......... Description of Securities;
13. Interest of Named Experts and
Counsel............................ Experts; Legal Matters
14. Disclosure of Commission Position
on Indemnification for
Securities Act Liabilities......... Inside Front Cover Page of Prospectus;
15. Organization Within Last 5 Years... Prospectus Summary; The Company; Business; Certain
Transactions
16. Description of Business............ Business; Risk Factors
17. Management's Discussion and Analysis
or Plan of Operation............... Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property............ Business - Properties
19. Certain Relationships and
Related Transactions............... Certain Transactions
20. Market for Common Equity and
Related Stockholder Matters........ Outside Front Cover Page of Prospectus; Prospectus
Summary; Description of Securities
21. Executive Compensation.............
Management - Executive Compensation
22. Financial Statements.............. Selected Financial Data; Financial Statements
23. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosures.......... * Selected Financial Data; Financial Statements
</TABLE>
- ----------
* Omitted because Item is not applicable.
iv
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Subject to Completion, Dated ___ __, 1997
PROSPECTUS
COMPUTER MARKETPLACE(R), INC.
9,000,000 Class D Redeemable Common Stock Purchase Warrants
3,500,000 shares of Common Stock
This Prospectus relates to the resale of 9,000,000 Class D Redeemable
Common Stock Purchase Warrants (the "Class D Warrants") of Computer Marketplace,
Inc. (the "Company") by certain selling securityholders (the "Warrantholders")
and of (i) 1,500,000 shares of common stock, par value $.0001 per share ("Common
Stock") underlying the Class D Warrants, (ii) 1,000,000 shares of Common Stock
underlying 1,000,000 Common Stock purchase options (the "Victoria Holdings
Options") held by Victoria Holdings, Inc. ("Victoria Holdings"), a consultant to
the Company, and (iii) 1,000,000 shares of Common Stock underlying 1,000,000
Common Stock purchase options (the "Management Options") held by certain
employees and directors of the Company (the "Management Optionholders"). See
"Risk Factors," "Selling Securityholders," and "Description of Securities."
The Class D Warrants were issued in December 1996 pursuant to a private
placement of 500,000 Units of the Company's Securities, each Unit consisting of
eighteen (18) Class D Warrants and one (1) share of common stock of the
Company's subsidiary, Medical Marketplace, Inc. ("Medical Marketplace") and are
exercisable over a one (1) year period commencing on March 31, 1997. Each six
(6) Class D Warrants entitles the holder to purchase one (1) share of Common
Stock, at a price of $2.50 per share. The Class D Warrants are redeemable by the
Company for $.05 per Warrant, at any time after March 31, 1997, upon thirty (30)
days' prior written notice, if the average closing or bid price of the Common
Stock, as reported by the principal exchange on which the Common Stock is
traded, Nasdaq or the National Quotation Bureau Incorporated, as the case may
be, equals or exceeds $30.00 per share, for twenty (20) consecutive trading days
during a period of thirty (30) trading days ending within ten (10) days prior to
the date of notice of redemption, which notice shall be mailed no later than
five (5) days hereafter. See "Description of Securities" and "Selling
Securityholders."
The Class D Warrants and the Common Stock underlying the Class D Warrants
offered by this Prospectus may not be sold or transferred by the Warrantholders
until July 1, 1998 and the Management Options and the Common Stock underlying
the Management Options offered by this Prospectus may not be sold or transferred
by the Management Optionholders until June 17, 1998, in each case without the
prior written consent of Biltmore Securities, Inc., a licensed broker-dealer and
member of the National Association of Securities Dealers ("Biltmore"). Victoria
Holdings, Inc. is an affiliate of Biltmore. The Victoria Holdings Options and
the Common Stock underlying the Victoria Holdings Options offered by this
Prospectus may be sold from time to time after the effectiveness of this
Registration Statement. No underwriting arrangements have been entered into by
the Selling Securityholders. The distribution of the securities by the Selling
Securityholders may be effected in one or more transactions that may take place
on the over-the-counter market including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more
<PAGE>
dealers for resale of such shares as principals at market prices prevailing at
the time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage fees
or commissions may be paid by the Selling Securityholders in connection with
sales of such securities.
The Company anticipates applying for inclusion of the Class D Warrants on
The Nasdaq SmallCap Market, although there can be no assurances that an active
trading market will develop, even if the securities are acceptable for
quotation. Additionally, even if the Class D Warrants are accepted for quotation
and active trading develops, the Company is still required to maintain certain
minimum criteria established by Nasdaq, of which there can be no assurance. See
"Risk Factors Lack of Prior Market for Class D Warrants."
The Company's Common Stock is traded on The Nasdaq SmallCap Market
("Nasdaq"). Under the rules of Nasdaq in order to qualify for continued
quotation of securities on Nasdaq, the Company, among other things, must have
either (i) $2,000,000 in assets, $1,000,000 in stockholder equity and a minimum
bid price of $1.00 per share (the "Minimum Bid Requirement"), or alternatively,
(ii) $2,000,000 in total capital and surplus and $1,000,000 market value or
public float (the "Capital Market Value Requirement"). On January 21, 1997, the
Staff of Nasdaq advised the Company that the Company failed to satisfy the
Capital Market Value Requirement or the Minimum Bid Requirement with respect to
its shares of Common Stock. The Company was provided 90 days to comply with
either of such requirements in order to continue the listing of its Common Stock
on Nasdaq. Failure to comply would have resulted in delisting the Company's
shares of Common Stock. On March 21, 1997, the Company was informed by Nasdaq
that the Company complied with the Minimum Bid Requirement. On April 3, 1997 the
Staff of Nasdaq advised the Company that the Company's shares of Common Stock
failed to meet the Capital Market Value Requirement and the Minimum Bid
Requirement. In order to continue the listing of its Common Stock on Nasdaq,
the Company, was provided 90 days to meet the Capital Market Value Requirement
or the Minimum Bid Requirement. Following the Reverse Stock Split, the
Company's shares were trading at $1.25 for a period of ten days or more and
therefore the Company believes that it meets such requirements.
The Company will not receive any of the proceeds from the sale of the
securities by the Selling Securityholders, except for the payment of the
exercise price of the Class D Warrants, the Victoria Holdings Options and the
Management Options. All costs incurred in the registration of the securities of
the Selling Securityholders are being borne by the Company. See "Selling
Securityholders."
The Company's Common Stock, is currently listed on The Nasdaq SmallCap
Market under the symbol "MKPLD". On April 28, 1997, the closing price of the
Common Stock, as reported by Nasdaq, was $1.25.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE SECURITIES OFFERED
HEREBY AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "DILUTION" AND "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is ___ __, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained at the Commission at Room
1024, 450 Fifth Street, N.W., Washington, DC 20549. Copies of such material can
be obtained upon written request addressed to the Commission, Public Reference
Section, 450 Fifth Street, N.W., Washington, DC 20549, at prescribed rates.
Pursuant to Release 33-7289, the Commission maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission (including the
Company). The address for the Commission web site is http://www.sec.gov. The
Company has filed with the Commission a registration statement on Form SB-2
(herein together with all amendments and exhibits referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act"), of which this Prospectus forms a part. This Prospectus does not contain
all of the information set forth in the Registration Statement, certain parts of
which have been omitted in accordance with the rules and regulations of the
Commission. For further information reference is made to the Registration
Statement.
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information (including financial
statements and notes thereto) contained in this Prospectus and is qualified in
its entirety by the more detailed information, appearing elsewhere herein. In
addition, unless otherwise indicated to the contrary, all per share information
set forth in this Prospectus has been adjusted to reflect a 373.2849-for-1 stock
split effected by the Company in March 1993, a 2-for-1 stock split effected by
the Company in June 1994 and a 1-for-6 reverse stock split (the "Reverse Stock
Split") effected by the Company in April 1997 but, except as expressly set forth
herein, has not been adjusted to give effect to (i) 726,667 shares of Common
Stock issuable upon exercise of the Class A Warrants; (ii) 726,667 shares of
Common Stock issuable upon exercise of the Class B Warrants; (iii) 73,333 shares
of Common Stock issuable upon exercise of the Class C Warrants; (iv) 1,500,000
shares of Common Stock issuable upon exercise of the Class D Warrants; (v)
307,500 shares of Common Stock issuable upon the exercise of certain options
granted to management and certain employees; (vi) 1,000,000 shares of Common
Stock issuable upon exercise of the Victoria Holdings Options, and (vii)
1,000,000 shares of Common Stock issuable upon exercise of the Management
Options. See "Description of Securities." Each prospective investor is urged to
carefully read this Prospectus in its entirety, including but not limited to,
the Risk Factors.
THE COMPANY
Computer Marketplace, Inc. a California corporation, was incorporated on
July 19, 1983, as Quality Associates, Inc. and changed its name to Computer
Marketplace, Inc. in June 1987. In March 1993, Computer Marketplace changed its
name to Computer Marketplace(R), Inc. ("Computer Marketplace(R)") and its state
of incorporation from California to Delaware. Computer Marketplace(R) 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(R) 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(R) has made significant investments in its employees in
order to increase their technical knowledge of the new product 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(R) not to remarket used equipment manufactured by the Original
Equipment Manufacturer ("OEM").
In June 1993, prior to the 2-for-1 stock split and Reverse Stock
Split mentioned above, the Company consummated its initial public offering of
2,070,000 units, each unit consisting of one (1) share of Common Stock, one
(1) Class A Warrant and one (1) Class B Warrant (the "IPO Units"). See,
"Description of Securities."
The Company received net proceeds of approximately $6,594,179 from its initial
public offering.
4
<PAGE>
In March 1994, Computer Marketplace(R) 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(R) 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 for equipment leasing transactions. In January 1994, Computer Marketplace(R)
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, both 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(R). In light of the
fact that SSI had not been profitable, in June 1996, the Company discontinued
the operations of SSI. Computer Marketplace(R) and its subsidiaries are
hereinafter referred to as the "Company".
Computer Marketplace(R) 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 500 Corporations.
Computer Marketplace's operations and primary selling efforts are conducted from
its principal office in Corona, California. Computer Marketplace(R), which
maintains service and inventory storage centers at its Corona headquarters, also
has arrangements to inventory its equipment on a temporary basis at independent
service centers across the country.
Medical Marketplace buys and resells a wide variety of medical equipment
including Magnetic Resonance Imaging ("MRI"), Computed Tomography Scanners
("CT") and Ultrasound equipment. In addition Medical Marketplace provides
customers with consulting services related to equipment acquisition, equipment
layout and facility design. Medical Marketplace also has a small rental program
which provides new equipment and contract service with mobile MRI and CT
equipment. Medical Marketplace conducts its primary distribution operations from
its main office in Corona, California, which is shared with the Company. It also
has sales representatives in Northern California, Kansas, Washington State and
North Carolina.
In December 1996, the Company entered into a one year consulting agreement
with Victoria Holdings, Inc., an affiliate of Biltmore Securities, Inc.
("Victoria Holdings" and "Biltmore" respectively). Pursuant to the consulting
agreement, Victoria Holdings will act as a consultant to the Company in
connection with, among other things, corporate finance and evaluations of
possible business partners and will seek to find business partners suitable for
the Company and assist in the structuring, negotiating and financing of such
transactions. The consulting agreement provided that the Company have issued to
Victoria Holdings, options (the "Victoria Holdings Options") to purchase
1,000,000 shares of Common Stock at an exercise price of $1.00 per share It
provided further for the additional issuance to Victoria Holdings of 166,667
shares (the "Victoria Fee Shares") of Common Stock upon consummation by the
Company of (i) an acquisition of a company (or companies) introduced to the
Company by Victoria Holdings with net assets of at least $2,500,000
5
<PAGE>
or (ii) a divestiture of the Company's assets, or a sale of a controlling
interest in the Company's capital stock, to a purchaser introduced to the
Company by Victoria Holdings resulting in net proceeds to the Company in excess
of $2,000,000.
In December 1996, the Company issued to certain members of management
options to purchase an aggregate of 1,000,000 shares of the Company's Common
Stock during a four (4) year period commencing on January 1, 1997 at an exercise
price of $1.00 per share (the "Management Options").
On December 16, 1996 the Company concluded a private placement of 500,000
Units (the "December 1996 Private Placement") which were placed by Biltmore on a
firm commitment basis. Each Unit was offered at a price of $2.00 per Unit, and
consisted of one (1) share of Common Stock of Medical Marketplace, Inc., and
eighteen (18) Class D Redeemable Common Stock Purchase Warrants (the "Class D
Warrants"). Each six (6) Class D Warrants are exercisable for one (1) share of
the Company's Common Stock commencing March 31, 1997 at an exercise price of
$2.50 per share for a one (1) year period.
On January 21, 1997 the Staff of Nasdaq advised the Company that the
Company failed to satisfy the Capital Market Value Requirement and the Minimum
Bid Requirement with respect to its shares of Common Stock. The Company was
provided 90 days to comply with either of such requirements in order to continue
the listing of its Common Stock on Nasdaq. Failure to comply would have resulted
in delisting the Company's shares of Common Stock. On March 21, 1997, the
Company was informed by Nasdaq that the Company complied with the Minimum Bid
Requirement.
In March 1997, the Company's Board of Directors approved a 1-for-6 reverse
stock split (the "Reverse Stock Split") with respect to each outstanding share
of the Company's Common Stock, such approval was contingent upon the approval of
a majority of the Company's Stockholders. The Company's Board of Directors
conducted its annual shareholder meeting on April 4, 1997 (the "Annual Meeting")
where, among other things, the Company's shareholders voted to approve the
Reverse Stock Split. At the Annual Meeting the Company's shareholders also voted
(i) to elect five (5) directors to the Board of the Company for a one (1) year
term, including, L. Wayne Kiley, Nancy Kiley, Rick C. Garian, J.R. Achten and
Thomas E. Evans, Jr. and (ii) to ratify the appointment of Moore Stephens, P.C.
as the Company's independent certified public accountant.
On April 3, 1997 the Staff of Nasdaq advised the Company that the Company's
shares of Common Stock failed to meet the Capital Market Value Requirement and
the Minimum Bid Requirement. In order to continue the listing of its Common
Stock on Nasdaq, the Company, was provided 90 days to meet the Capital Market
Value Requirement or the Minimum Bid Requirement. Following the Reverse Stock
Split, the Company's shares were trading at $1.25 for a period of ten days or
more and therefore the Company believes that it meets such requirements.
In light of the fact that the Company has been unable to operate profitably
since fiscal year ended June 1994, the Company believes that substantial
measures need to be taken to address the
6
<PAGE>
Company's financial difficulties. The Board of Directors, after having
considered numerous alternatives, has concluded that the Company must
significantly reduce its expenses in order to reduce the Company's net losses.
Therefore, the Company has embarked upon a cost cutting plan by reducing its
workforce, closing unprofitable locations and discontinuing under performing
product lines. Specifically, the Company (i) closed its branch offices in
Livonia, Michigan, Traverse City, Michigan and Mariposa, California, (ii)
reduced the number of employees from a high of ninety six (96) in September 1995
to twenty two (22) full-time and six (6) part-time as of April 15, 1997 and
(iii) intends to lease or sell its underutilized headquarters facility in
Corona, CA. See "Business-General". In the event that the Company determines
that these measures are insufficient to achieve profitability, the Company may
pursue divesting the Company's computer business and/or acquiring an alternative
business.
The Company's executive office is located at 1490 Railroad Street, Corona,
California. It's telephone number is (909) 735-2102.
7
<PAGE>
THE OFFERING
Securities Offered by the
Selling Securityholders (1) 9,000,000 Class D Warrants.
3,5000,000 shares of Common Stock
issuable upon the exercise of options
held by certain optionholders.
Terms of Class D Warrants The Class D Warrants are exercisable for
one (1) share of Common Stock commencing
on March 31, 1997 for a one (1) year
period. The Class D Warrants are each
redeemable by the Company for $.05 per
Warrant, at any time after March 31,
1997, upon thirty (30) days' prior
written notice, if the average closing
price or bid price of the Common Stock,
as reported by the principal exchange on
which the Common Stock is traded, Nasdaq
or the National Quotation Bureau
Incorporated, as the case may be, equals
or exceeds $30.00 per share for twenty
(20) consecutive trading days during a
period of thirty (30) trading days
ending within ten (10) days prior to the
date of the notice of redemption, which
notice shall be mailed no later than
five (5) days thereafter. The Company,
in its sole discretion, upon thirty (30)
days', prior written notice may reduce
the purchase price per share to be paid
upon exercise or extend the warrant
expiration date. See "Description of
Securities."
Securities Outstanding
Prior to the Offering:
Common Stock.. 1,352,424 Shares
Class A Warrants.. 2,180,000 Warrants
Class B Warrants.. 2,180,000 Warrants
Class C Warrants.. 220,000 Warrants
Class D Warrants 9,000,000 Warrants
Securities Outstanding
After the Offering:
Common Stock.. 1,352,424 Shares
Class A Warrants.. 2,180,000 Warrants
Class B Warrants.. 2,180,000 Warrants
Class C Warrants.. 220,000 Warrants
Class D Warrants.. 9,000,000 Warrants
8
<PAGE>
Use of Proceeds.. The Company will receive no proceeds
from the sale of the securities offered
hereby, except for the payment of the
exercise price of the Class D Warrants,
the Victoria Holdings Options and the
Management Options. See "Use of
Proceeds."
Risk Factors.. The securities offered hereby involve
substantial risks including but not
limited to History of Losses; Need to
Restructure; Availability of Funds;
Dependence upon Availability of
Equipment; Possible Adverse Effect on
the Market of Shares Owned by Selling
Securityholders; Impact on Market of
Warrant Exercise; Competition;
Attraction and Retention of Sales and
Marketing Personnel; Uncertainty of
Proposed Sale or Purchase of Business;
Technological Obsolescence; Dependence
Upon Key Personnel; Control by Principal
Stockholders; Rule 144 Sales; Future
Sales of Common Stock; Lack of Prior
Market for the Class D Warrants;
Possible Delisting of Securities from
Nasdaq; "Penny Stock" Regulations;
Limited Number of Management Personnel;
Future Issuances of Stock by the
Company; Trademark Protection;
Outstanding Warrants and Options;
Current Prospectus and State Blue Sky
Registration in Connection with the
Exercise of the Warrants; No Dividends;
Limitation on Director Liability;
Redemption of Redeemable Warrants;
Anti-Takeover Effect of General
Corporation Law of Delaware.
Current Nasdaq SmallCap
Market Symbols .................. Common Stock-MKPLD
Proposed Nasdaq SmallCap
Market Symbols(1)................... Class D Warrants - MKPL
- ----------
(1) Although the Company has applied for inclusion of the Class D Warrants on
The Nasdaq SmallCap Market, there can be no assurance that the Class D Warrants
will be included for quotation, or if so included that the Company will be able
to continue to meet the requirements for continued quotation, or that a public
trading market will develop or that, if such a market develops, it will be
sustained. See "Risk Factors," "Lack of Prior Market for the Class D Warrants,"
and "Possible Delisting of Securities from Nasdaq; "Penny Stock" Regulations."
9
<PAGE>
SUMMARY FINANCIAL INFORMATION
The selected historical financial data presented below are derived from
financial statements of the Company, which have been audited by Moore Stephens,
P.C. independent accountants, whose reports are included elsewhere herein,
except for the financial statements for the six months ended December 31, 1996
which are unaudited. The data set forth below should be read in conjunction with
and is qualified in its entirety by the Company's Financial Statements, Related
Notes and Management's Discussion and Analysis of Financial Condition and
Results of Operations. The following summary financial information has been
summarized from the Company's Financial Statements included elsewhere in this
Prospectus. The information should be read in conjunction with the Financial
Statements and the related Notes thereto. See "Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SUMMARY BALANCE SHEET DATA
December 31, 1996
------------------
Actual (unaudited)
------------------
Working Capital (Deficit) ............................... $ 2,521,068
Total Assets ............................................ $10,896,710
Total Liabilities ....................................... $ 5,377,833
Long-Term Obligations ................................... $ 1,695,849
Stockholders' Equity (Deficit) .......................... $ 3,823,028
SUMMARY INCOME STATEMENT DATA
<TABLE>
<CAPTION>
Six Months
Ended
December 31 Years Ended June 30,
--------------------------- -----------------------------------
1996 1995 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 13,868,292 $ 14,498,649 $ 30,000,912 $31,524.,365 $ 26,874,587 $ 10,507,272 $ 16,820,979
Gross Profit 1,732,535 2,272,921 4,614,220 4,855,273 3,261,986 1,068,294 1,520,978
(Loss) Income from (1,226,216) (321,158) (987,450) (972,449) 374,457 (384,873) 367,648
Operations
Net (Loss) Income (1,431,814) (469,528) (1,331,431) (1,224,709) 415,114 (787,512) 152,103
Pro forma Net
(Loss) Income (1) (1,431,814) (469,528) (1,331,431) (1,224,709) 415,114 (787,512) 111,760
Net Income (Loss)
per Share (1) (1.06) (.35) (.98) (.91) .31 (2.55) .36
Average Number of
Common Shares
Outstanding 1,352,424 1,352,424 1,352,424 1,350,144 1,344,828 308,786 308,333
</TABLE>
- ----------
(1) Gives effect to income tax expense as if the Company had been a C
Corporation.
10
<PAGE>
RISK FACTORS
An investment in the securities offered hereby is speculative and involves
a high degree of risk and should only be purchased by investors who can afford
to lose their entire investment. Prospective purchasers, prior to making an
investment, should carefully consider the following risks and speculative
factors, as well as others described elsewhere in this Prospectus, associated
with this offering, including the information contained in the Financial
Statements herein.
1. History of Losses; Need to Restructure. The Company incurred net losses for
the years ended June 30, 1996 and 1995 of $1,331,431 and $1,224,709,
respectively, and for the six months ended December 31, 1996 and 1995 of
$1,431,814 and $469,528, respectively. The Company intends to reduce its
expenses by restructuring its business which may include the sale of all or part
of the Company's computer business. See, "Business - General." The continuation
of the Company as a going concern is dependent on these plans. There can be no
assurance that the Company will not continue to incur net losses in the future.
The Company's cash requirements have been and will continue to be significant.
2. Availability of Funds. The Company is dependent upon the availability of
funds or sources of financing which will permit it to purchase equipment in
sufficient quantities, as it becomes available, and to do so at the lowest
possible prices. While the Company believes that it has sufficient funds to
permit the Company to acquire products in sufficient quantity during the six (6)
months following this offering, increased costs, technological advances,
availability of products, and shifting consumer demand could necessitate the
expenditure of greater sums than the Company presently anticipates. In such
event, there is no assurance that the Company will have access to such
additional funds, or that it will be able to obtain such funds in a timely
manner.
3. Dependence upon Availability of Equipment. Most of the sales by the Company
are derived from products which the Company obtains in the computer
"aftermarket." As a supplier of used equipment, the Company must constantly
identify sources for products at costs which permit the Company to resell or
lease such equipment on a competitive and profitable basis. The Company believes
that it has developed a network of product suppliers which will assure
availability of equipment. Technical advances and shifts in consumer preference
may, however, require the Company to offer additional or different products and
could render a portion of the Company's inventory unmarketable. From time to
time the Company may experience shortages in availability of some products. The
occurrence of such shortages in the future may have an adverse effect on the
business of the Company and. See "Business- Computer Products Competition" and
"Business-Medical Equipment Competition."
4. Possible Adverse Effect on the Market of Shares Owned by Selling
Securityholders. The registration statement of which this Prospectus forms a
part covers the offering of 3,500,000
11
<PAGE>
shares of Common Stock, (i) 1,500,000 of which are issuable upon exercise of the
Class D Warrants, (ii) 1,000,000 of which are issuable upon the exercise of the
Victoria Holdings Options pursuant to the Consulting Agreement and (iii)
1,000,000 which are issuable pursuant to the Management Options. The sale of
such Common Stock in the future may have an adverse effect on the market price
of the Company's Common Stock in any market which may develop for such shares.
5. Impact on Market of Warrant Exercise. In the event of the exercise of a
substantial number of the Company's Class A Warrants, Class B Warrants, Class C
Warrants or Class D Warrants, the resulting increase in the amount of Common
Stock of the Company in the trading market could substantially affect the market
price of the Common Stock. See "Description of Securities - Class A Warrants,
Class B Warrants, Class C Warrants and Class D Warrants."
6. Competition. The Company faces substantial competition in connection with the
distribution of new and used computer systems. Among its competitors are
numerous national and regional distributors of the same and equivalent products.
Many such competitors are well established, have substantially greater financial
and other resources than the Company and have established reputations for
success in the distribution and support of computer-related products. In
addition, IBM may sell directly to the Company's customers, and the Company's
continued ability to compete effectively may be affected by policies of IBM. The
Company's competitors include IBM, Comdisco, Inc., Sun Data, Inc.. and El Camino
Resources, Inc. The used medical equipment industry is relatively young as
compared to the more established computer industry. Medical Marketplace's
competitors include General Electric Corporation, Siemens and Access Medical.
There can be no assurance that the Company or Medical Marketplace will be able
to compete successfully or that they will maintain profitability. See "Business
- - Computer Products Competition and "Business - Medical Equipment Competition."
7. Attraction and Retention of Sales and Marketing Personnel. The Company's and
Medical Marketplace's ability to expand its operations will depend in
significant part on its ability to attract and retain qualified sales
representatives experienced in the purchase and sale of new and used computer
systems and parts and medical equipment. There is significant demand for such
individuals and, accordingly, there is no assurance that the Company or Medical
Marketplace will be able to hire or retain qualified representatives when
needed. All of the Company's and Medical Marketplace's existing sales personnel
are on multiple-year employment contracts with the Company or Medical
Marketplace and all new sales personnel must sign a three-year employment
contract as a condition of employment. All of the existing sales personnel have
been developed and trained within the Company. See "Business-Computer Products
Sales and Marketing" and "Business-Medical Equipment Sales and Marketing."
8. Uncertainty of Proposed Sale or Purchase of Business. In the event that the
Company determines that certain cost cutting measures are insufficient to
achieve profitability, the Company may pursue divesting the Company's computer
business, and/or acquiring an alternative business. The Company has identified
several companies engaged in complementary businesses, but has not reached a
definitive agreement to sell to or acquire any such companies. The Company can
make
12
<PAGE>
no assurances that it will be able to divest its computer business or acquire
any alternative business. See "Business - General."
9. Technological Obsolescence. The computer equipment industries have been
characterized in recent years by significant and rapid technological advances.
Changes in systems and components may require the Company to liquidate its
inventory of certain products at significant markdowns or replace such products
with new or products on a continual basis, which may result in losses.
10. Dependence Upon Key Personnel. The success of the business of the Company is
largely dependent upon the active participation of L. Wayne Kiley, its President
and Chief Executive Officer. In the event that the services of Mr. Kiley are
lost for any reason whatsoever, the business operations of the Company and
Medical Marketplace may be adversely affected. In October 1992, Mr. Kiley
entered into a five (5) year employment agreement with the Company and in
October 1996, the Company extended such Employment Agreement for two years. See
"Management," "Executive Compensation," and "Certain Relationships and
Transactions." The Company has obtained a key-man life insurance policy on its
President in the amount of $1 million, with the Company as beneficiary.
11. Control by Principal Stockholders. The Company's current principal
stockholders beneficially own approximately 52.5 percent of the Company's
outstanding Common Stock. Accordingly, the current principal stockholders will
be able to elect all of the Company's directors, and generally direct the
affairs of the Company. See "Management," "Certain Relationships and Related
Transactions" "Principal Stockholders" and "Description of Securities - Common
Stock."
12. Rule 144 Sales; Future Sales of Common Stock. There are currently 356,001
shares of the Company's Common Stock currently outstanding which may be deemed
"restricted securities" as that term is defined by Rule 144 of the Securities
Act of 1933 (the "Act") and, in the future, may be sold in compliance with Rule
144 of the Act. Ordinarily, under Rule 144, a person who is an affiliate of the
Company (as that term is defined in Rule 144) and has beneficially owned
restricted securities for a period of one (1) year may, every three (3) months,
sell in brokerage transactions an amount that does not exceed the greater of (i)
1% of the outstanding class of such securities or (ii) the average weekly
trading volume of trading in such securities on all national exchanges and/or
reported through the automated quotation system of a registered securities
association during the four (4) weeks prior to the filing of a notice of sale by
a securities holder. A person who is not an affiliate of the Company who
beneficially owns restricted securities is also subject to the foregoing volume
limitations but may, after the expiration of two (2) years, sell unlimited
amounts of such securities under certain circumstances. Possible or actual sales
of the Company's outstanding Common Stock by certain of the present stockholders
under Rule 144 may, in the future, have a depressive effect on the price of the
Company's Common Stock.
13. Lack of Prior Market for the Class D Warrants. Following this offering, no
public trading market will exist for the Class D Warrants. There can be no
assurance that a public trading market for the Class D Warrants will develop or
that a public trading market, if developed, will be
13
<PAGE>
sustained. No assurance can be given that the Company's Class D Warrants will be
listed on Nasdaq or any other trading market or exchange. If such securities are
not listed on Nasdaq or a public trading market does not develop, purchasers of
such securities may have difficulty in selling their securities should they
desire to do so.
14. Possible Delisting of Securities from Nasdaq; "Penny Stock" Regulations. The
Company's Common Stock, is currently listed on The Nasdaq SmallCap Market
("Nasdaq"). Under the rules of the National Association of Securities Dealers,
Inc. ("NASD"), in order to qualify for continued listing ( the "Listing
Requirements") on Nasdaq, the Company, among other things, must have total
assets of at least $2,000,000, $1,000,000 of stockholders equity and a minimum
bid price of $1.00 per share (the "Minimum Bid Requirement"), or alternatively,
$2,000,000 in total capital and surplus and $1,000,000 market value or public
float (the "Capital Market Value Requirement"). In the event the Company is
unable to satisfy any one of the Listing Requirements and, as a result, is
delisted from Nasdaq, trading in the Company's securities, if any, would be
conducted in the over-the-counter market in what are commonly referred to as the
"pink sheets" or on the NASD electronic bulletin board. As a result, an investor
may find it more difficult to dispose of or obtain accurate quotations as to the
price of the securities offered hereby. The Commission has adopted regulations
which generally define "penny stock" to be any equity security that has a market
price (as defined) less than $5.00 per share or an exercise price of less than
$5.00 per share, subject to certain exceptions. If the securities offered hereby
are removed from Nasdaq, the Company's securities may become subject to rules
that impose additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors (generally those with assets in excess of $1,000,000 or annual income
exceeding $200,000, or $300,000 together with their spouse). For transactions
covered by these rules, the broker-dealer must make a special suitability
determination for the purchase of such securities and have received the
purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock unless exempt, the
rules require the delivery, prior to the transaction, of a disclosure schedule
prepared by the Commission relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell the Company's securities and may affect the ability of purchasers in the
offering to sell the Company's securities in the secondary market. On January
21, 1997 the Staff of Nasdaq advised the Company that the Company failed to
satisfy the Capital Market Value Requirement and the Minimum Bid Requirement
with respect to its shares of Common Stock. The Company was provided 90 days to
comply with either of such requirements in order to continue the listing of its
Common Stock on Nasdaq. Failure to comply would have resulted in delisting the
Company's shares of Common Stock. On March 21, 1997, the Company was informed by
Nasdaq that the Company complied with the Minimum Bid Requirement. On April 3,
1997 the Staff of Nasdaq advised the Company that the Company's shares of Common
Stock failed to meet the Capital Market Value Requirement and the Minimum Bid
Requirement. In order
14
<PAGE>
to continue the listing of its Common Stock on Nasdaq, the Company, was provided
90 days to meet the Capital Market Value Requirement or the Minimum Bid
Requirement. Following the Reverse Stock Split, the Company's shares were
trading at $1.25 for a period of ten days or more and therefore the Company
believes that it meets such requirements. Although the Company believes it is
in compliance with the Minimum Bid Requirement, it should be noted that, Nasdaq
filed in early March 1997, with the SEC, proposed rule changes to the
maintenance standards required by Nasdaq. Upon SEC approval the Company would
have six (6) months to meet the new maintenance standards. Under the proposed
new standards for continued inclusion on The SmallCap Market the Company will
have to have net tangible assets of $2,000,000 or net income of $500,000 in
two of the last three years or a market capitalization of at least $35,000,000.
If the proposed rule changes are approved by the SEC and adopted by Nasdaq,
it is unlikely that the Company would be able to comply with such new standards.
15. Limited Number of Management Personnel. There are currently only three (3)
executive officers of the Company. Following this offering, there can be no
assurance that, if the Company grows, the current management team will be able
to continue to properly manage the Company's affairs. Further, there can be no
assurance that the Company will be able to identify additional qualified
managers on terms economically feasible to the Company.
16. Future Issuances of Stock by the Company. The Company has outstanding
1,352,424 shares of Common Stock out of a total of 50,000,000 shares of Common
Stock authorized. The remaining shares of Common Stock not issued or reserved
for specific purposes may be issued without any action or approval of the
Company's shareholders. Although there are no present plans, agreements or
undertakings involving the issuance of such shares, except as disclosed in this
Prospectus, any such issuance could be used as a method of discouraging,
delaying or preventing a change in control of the Company or could dilute the
public ownership of the Company. There can be no assurance that the Company will
not undertake to issue such shares if it deems it appropriate to do so. Pursuant
to a consulting agreement dated December 9, 1996 between the Company and
Victoria Holdings, Inc. (the "Consulting Agreement") the Company has agreed to
issue 166,667 shares of Common Stock to Victoria Holdings, Inc. upon (i) the
acquisition of one or more businesses introduced to the Company by Victoria
Holdings, Inc. which in the aggregate have net assets of not less than
$2,500,000, or (ii) the divestiture of assets outside the ordinary course of
business, or the sale of a majority of the Company's capital stock outside the
ordinary course of business, by merger or otherwise, to a purchaser introduced
to the Company by Victoria Holdings, Inc. resulting in net proceeds to the
Company of not less than $2,000,000 in cash or stock.
17. Trademark Protection. Although the Company has obtained a registered
trademark for the AcceleRAIDer(R) and a service mark for Computer Marketplace(R)
with the United States Patent and Trademark Office ("PTO") and intends to
register any new trademarks developed by the Company with the PTO, there can be
no assurance as to the breadth or degree of protection which such existing or
future trademarks may afford the Company from competitors.
18. Outstanding Warrants and Options. As of March 25, 1996, the Company had
15
<PAGE>
outstanding (i) 2,180,000 Class A Warrants, (ii) 2,180,000 Class B Warrants,
(iii) 220,000 Class C Warrants and (iv) an aggregate of 307,500 options held by
management and certain employees (the "Options"). As of April 17, 1997, each six
(6) Class A Warrants, six (6) Class B Warrants and six (6) Class C Warrants were
exercisable to acquire two shares of Common Stock at an exercise price of
$28.50, $33.00, and $93.00, respectively. The Options are exercisable at prices
ranging from $1.6875 to $6.00. In addition, the Company has reserved 166,667
shares of Common Stock for issuance upon exercise of options under the Company's
1995 Stock Plan. In December 1996, the Company issued to certain members of
management options to purchase an aggregate of 1,000,000 shares of the Company's
Common Stock during a four (4) year period commencing on January 1, 1997 at an
exercise price of $1.00 per share (the "Management Options"). In exchange for
the issuance of the Management Options, certain option holders surrendered for
cancellation an aggregate of 238,833 options issued in June 1996 for 716,667 of
the Management Options. Also, in December 1996, the Company issued to Victoria
Holdings, Inc. an option pursuant to the Consulting Agreement by and between
Victoria Holdings, Inc. and the Company to purchase 1,000,000 shares of Common
Stock, at an exercise price of $1.00 per share. If the Class A Warrants, Class B
Warrants, Class C Warrants, Class D Warrants or any of the options are
exercised, the percentage of shares of Common Stock held by the stockholders
will be reduced accordingly. See "Certain Transactions."
19. Current Prospectus and State Blue Sky Registration in Connection with the
Exercise of the Warrants. The Company will be able to issue shares of Common
Stock underlying the Class A, the Class B, the Class C Warrants and the Class D
Warrants only if (i) there is a current prospectus relating to the Common Stock
issuable upon the exercise of such Warrants under an effective registration
statement filed with the Securities and Exchange Commission, and (ii) such
Common Stock is then qualified for sale or exempt therefrom under applicable
state securities laws of the jurisdictions in which the various holders of
Warrants reside. There can be no assurance, however, that the Company will be
successful in maintaining a current registration statement. After a registration
statement becomes effective, it may require updating by the filing of a
post-effective amendment. A post-effective amendment is required (i) anytime
after nine months subsequent to the Effective Date when any information
contained in the prospectus is over sixteen months old (e.g., the date of the
audited financial statements), (ii) when facts or events have occurred which
represent a fundamental change in the information contained in the registration
statement, or (iii) when any material change occurs in the information relating
to the plan of distribution of the securities registered by such registration
statement. The Company anticipates that this Registration Statement will remain
effective for at least nine (9) months following the date of this Prospectus or
until January 31, 1998. The Company intends to qualify the sale of the Warrants
in a limited number of states, although certain exemptions under certain state
securities ("blue sky") laws may permit the Warrants to be transferred to
purchasers in states other than those in which Warrants were initially
qualified. The Company will be prevented, however, from issuing Common Stock
upon exercise of the Warrants in those states where exemptions are unavailable
and the Company has failed to qualify the Common Stock issuable upon exercise of
the Warrants. The Company may decide not to seek, or may not be able to obtain,
qualification of the issuance of such Common Stock in all of the states in which
the ultimate purchasers of the Warrants reside. In such a case, the Warrants of
those purchasers will expire and have no value if such Warrants cannot be
exercised or sold. Accordingly, the market for the Warrants may be limited
because of the Company's obligation to fulfill both of the foregoing
requirements. See "Description of Securities."
20. No Dividends. The Company has not paid any dividends on its Common Stock
since its inception and does not intend to pay dividends on its Common Stock in
the foreseeable future and
16
<PAGE>
is restricted by its revolving credit agreement to pay cash dividends. Any
earnings which the Company may realize in the foreseeable future will be
retained to finance the growth of the Company. See "Dividend Policy."
21. Limitation on Director Liability. As permitted by Delaware Corporation law,
the Company's Certificate of Incorporation limits the liability of Directors to
the Company or its stockholders to monetary damages for breach of a Director's
fiduciary duty except for liability in certain instances. As a result of the
Company's charter provision and Delaware law, stockholders may have a more
limited right to recover against Directors for breach of their fiduciary duty
other than as existed prior to the enactment of the law. See "Description of
Securities - Limitation on Liability of Directors."
22. Redemption of Redeemable Warrants. The Class D Warrants are subject to
redemption by the Company, at any time, commencing March 31, 1997 at a price of
$.05 per Warrant if the closing bid price for the Common Stock equals or exceeds
$30.00 per share for any twenty (20) trading days within a period of thirty (30)
consecutive trading days ending within ten (10) days prior to the date of the
notice of redemption. In the event that the Warrants are called for redemption
by the Company, Warrantholders will have thirty (30) days during which they may
exercise their rights to purchase shares of Common Stock. If holders of the
Warrants elect not to exercise them upon notice of redemption thereof, and the
Warrants are subsequently redeemed prior to exercise, the holders thereof would
lose the benefit of the difference between the market price of the underlying
Common Stock as of such date and the exercise price of such Warrants, as well as
any possible future price appreciation in the Common Stock. The Company does not
intend to redeem the Class D Warrants at a time when a current prospectus is not
in effect. As a result of an exercise of the Warrants, existing stockholders
would be diluted and the market price of the Common Stock may be adversely
affected. If a Warrantholder fails to exercise his rights under the Warrants
prior to the date set for redemption, the Warrantholder will be entitled to
receive only the redemption price, or $.05 per Warrant. In addition, the
Warrants may only be exercised when a Prospectus is current and meets the
requirements of Section 10 of the Securities Act of 1933. See "Description of
Securities Class D Warrants."
23. Anti-Takeover Effect of General Corporation Law of Delaware. The Company is
governed by the provisions of Section 203 of the General Corporation Law of
Delaware, an anti- takeover law enacted in 1988. As a result of Section 203,
potential acquirors of the Company may be discouraged from attempting to effect
acquisition transactions with the Company, thereby possibly depriving holders of
the Company's securities of certain opportunities to sell or otherwise dispose
of such securities at above market prices pursuant to such transactions. See
"Description of Securities."
17
<PAGE>
USE OF PROCEEDS
The Company will receive no proceeds from the sale of the securities
offered hereby. An aggregate of $5,993,000 will be received by the Company in
the event that all of the Class D Warrants, Victoria Holdings Options and
Management Options are exercised. The proceeds received by the Company from the
exercise of all or a portion of such securities will be utilized by the Company
to supplement its working capital.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996. This table should be read in conjunction with the financial
statements of the Company, including the notes thereto, appearing elsewhere in
this Prospectus.
Actual
------
Long term debt obligations, less current maturities: ........ $ 1,509,701
Stockholders' equity:
Preferred Stock, par value $.0001 per share, 1,000,000 shares
authorized, no shares issued and outstanding ................ $ -0-
Common Stock, par value $.0001 per share, 50,000,000 shares
authorized, 1,352,424 shares issued and outstanding ......... $ 135
Capital in excess of par value Accumulated deficit .......... $ 8,406,741
Accumulated deficit ......................................... $(4,050,362)
Deferred compensation ....................................... $ (533,486)
TOTAL STOCKHOLDERS' EQUITY .................................. $ 3,823,028
-----------
TOTAL CAPITALIZATION ........................................ $ 5,332,729
===========
19
<PAGE>
DIVIDEND POLICY
Holders of the Company's Common Stock are entitled to dividends when, as
and if declared by the Board of Directors out of funds legally available
therefore. The Company has not in the past and does not currently anticipate the
declaration or payment of any dividends in the foreseeable future and is
restricted by its revolving credit agreement to pay cash dividends. The Company
intends to retain earnings, if any, to finance the development and expansion of
its business. Future dividend policy will be subject to the discretion of the
Board of Directors and will be contingent upon future earnings, if any, the
Company's financial condition, capital requirements, general business conditions
and other factors. Therefore, there can be no assurance that any dividends of
any kind will ever be paid.
20
<PAGE>
SELECTED FINANCIAL DATA
The selected historical financial data presented below are derived from
financial statements of the Company, which have been audited by Moore Stephens,
P.C. independent accountants, whose reports are included elsewhere herein,
except for the financial statement for the six months ended December 31, 1996
which are unaudited. The data set forth below should be read in conjunction with
and is qualified in its entirety by the Company's Financial Statements, Related
Notes and Management's Discussion and Analysis of Financial Condition and
Results of Operations. The following summary financial information has been
summarized from the Company's Financial Statements included elsewhere in this
Prospectus. The information should be read in conjunction with the Financial
Statements and the related Notes thereto. See "Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SUMMARY BALANCE SHEET DATA
December 31, 1996
-----------------
Actual (unaudited)
------------------
Working Capital (Deficit) ............................... $ 2,521,068
Total Assets ............................................ $10,896,710
Total Liabilities ....................................... $ 5,377,833
Long-Term Obligations ................................... $ 1,695,849
Stockholders' Equity (Deficit) .......................... $ 3,823,028
SUMMARY INCOME STATEMENT DATA
<TABLE>
<CAPTION>
Six Months
Ended
December 31 Years Ended June 30,
----------------------------- -----------------------------------
1996 1995 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 13,868,292 $ 14,498,649 $ 30,000,912 $31,524.,365 $ 26,874,587 $ 10,507,272 $ 16,820,979
Gross Profit 1,732,535 2,272,921 4,614,220 4,855,273 3,261,986 1,068,294 1,520,978
(Loss) Income from (1,226,216) (321,158) (987,450) (972,449) 374,457 (384,873) 367,648
Operations
Net (Loss) Income (1,431,814) (469,528) (1,331,431) (1,224,709) 415,114 (787,512) 152,103
Pro forma Net
(Loss) Income (1) (1,431,814) (469,528) (1,331,431) (1,224,709) 415,114 (787,512) 111,760
Net Income (Loss)
per Share (1) (1.06) (.35) (.98) (.91) .31 (2.55) .36
Average Number of
Common Shares
Outstanding 1,352,424 1,352,424 1,352,424 1,350,144 1,344,828 308,786 308,333
</TABLE>
- ------
(1) Gives effect to income tax expense as if the Company had been a C
Corporation.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto appearing elsewhere in this
prospectus.
Results of Operations
Six Months Ended December 31,1996 Compared to Six Months Ended December 31,1995
Total revenues for the six months ended December 31, 1996, were $13,868,292
compared to $14,498,649 for the six months ended December 31, 1995. This
represents a decrease of $630,357 or 4%.
Revenues from computer product sales and rentals for the six months ended
December 31, 1996 totaled $9,139,025, a $4,663,403 or 34% decrease compared to
$13,802,428 for the six months ended December 31, 1995. The sales decrease is
reflective of a general industry sales decrease which results in part from price
reductions in new computer hardware which negatively impacts selling prices and
sales of used computer hardware. The Company anticipates the lower computer
products sales trend to continue into the second six months.
Medical product sales and rentals contributed $4,729,267 in revenues for
the six months ended December 31, 1996, compared to $696,221 for the six months
ended December 31, 1995. The current six month's result represents a $4,033,046
or 579% increase in revenues over the same period in 1995. Continuing
investments 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 tomograph scanner and ultrasound equipment have positively
impacted the sales of this subsidiary. Continued growth and sustained
profitability for this subsidiary are expected into the next six months.
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.
Total aggregate cost of revenues for the six months ended December 31, 1996
and 1995 were $12,135,757 or 88% of revenues and $12,225,728 or 84% 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.
Cost of revenues for computer products were $8,136,556 or 89% of revenues
and
22
<PAGE>
$11,704,286 or 85% of revenues for the six months ended December 31, 1996 and
1995, respectively. The higher cost of revenues percentage in the current six
months is reflective of the reduced operating leverage resulting from lower
computer product sales and the Company's focus on liquidating older inventory
which has a lower profit margin.
Costs of revenues for medical products were $3,999,201 or 85% of revenues
and $521,442 or 75% of revenues for the six months ended December 31, 1996 and
1995, respectively.
Total selling, general and administrative ("SG&A") expenses for the six
months ended December 31, 1996 and 1995 were $2,958,751 or 21% of revenues and
$2,594,079 or 18% of revenues, respectively. The aggregate increase in SG&A
expenses from the prior period was $364,672 or 14%. The increase in SG&A
expenses was negatively impacted by the increase in Medical Marketplace, Inc.
personnel expense and the change in computer sales representative compensation
plans mentioned above, as well as charges relating to the December 1996 Private
Placement. These increases were partially offset by personnel cutbacks during
the prior year and during the current six months.
SG&A expenses attributed to computer products were $2,608,702 or 29% of
revenues and $2,385,424 or 17% of revenues for the six months ended December 31,
1996 and 1995, respectively. The increase in SG&A expenses as a percentage of
revenues is due primarily to the sales volume decrease previously mentioned, as
well as charges relating to the December 1996 Private Placement.
SG&A expense attributed to medical products were $350,049 or 7% of revenues
and $208,655 or 30% of revenues for the six months ended December 31, 1996 and
1995, respectively.
Total operating loss was $1,226,216 and $321,158 for the six months ended
December 31, 1996 and 1995, respectively. This $905,058 unfavorable change was
due to a combination of factors including: a decline in computer product
revenues, the delayed impact of additional cost reductions during the six
months, and lower margin sales associated with the Company's inventory reduction
program.
Operating loss for computer products was $1,606,233 and $287,282 for the
six months ended December 31, 1996 and 1995, respectively.
Operating income (loss) for medical products was $380,017 and $(33,876) for
the six months ended December 31, 1996 and 1995, respectively.
Interest expense for the six months ended December 31, 1996, was $206,106
compared to $180,989 for the six months ended December 31, 1995. Management
anticipates that interest expense will remain stable during the current fiscal
year over similar periods in the prior year, with small decreases possible.
The Company's consolidated net loss was $1,431,814 or $1.08 per share for
the six months ended December 31, 1996, versus $469,528 or $.36 per share for
the six months ended December 31, 1995. The net loss was a result of the
business conditions described herein.
23
<PAGE>
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 $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.
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.
24
<PAGE>
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 $.98 per share for the year ended
June 30, 1996, versus $1,224,709 or $.91 per share for the year ended June 30,
1995. The net loss was a result of the business conditions described herein.
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 December 31, 1996 and 1995 was $2,521,068 and
$3,434,078, respectively. Working capital at June 30, 1996 and 1995, was
$2,724,984 and $3,868,587, respectively.
During the six months ended December 31, 1996, the Company used the June
30, 1996 available cash and cash equivalents of approximately $595,000, the
availability of borrowing under the Company's revolving Credit Facility, vendor
extended credit and approximately $774,000 of reductions in the Company's
inventory levels in order to fund the operations of the Company.
25
<PAGE>
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 continued to emphasize an inventory reduction program
encompassing both the stored inventory, as well as the 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 are due
to selected purchases made by the Company which are intended to be sold quickly.
Additional inventory increases are expected relating to Medical Marketplace,
Inc.'s growth.
In addition, management intends to investigate alternative financing
options to 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 the medical
equipment subsidiary has been focused on domestic sales. Longer-term cash
requirements, other than for normal operating expenses, are anticipated for
acquisition candidates. 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.
In October 1996, the Company amended its employment agreement with L. Wayne
Kiley, the Company's Chairman of the Board, President and Chief Executive
Officer. Pursuant to such amendment, (i) the employment agreement's expiration
date of October 16, 1997 was extended to October 16, 1999, (ii) Mr. Kiley was
granted the right to purchase a number of shares of Common Stock for a period of
four (4) years, at a price equal to seventy five percent (75%) of the closing
bid price of the Company's shares of Common Stock on the date of grant equal to
2.5%, 3% and 3.5% of the shares outstanding, should the Company report annual
earnings before the payment of interest and taxes of $635,000, $875,000 and
$1,000,000, respectively, (iii) Mr. Kiley will be paid a cash bonus equal to 5%
of any profit realized by the Company from the sale of assets outside the
ordinary course of business, and (iv) an insurance policy covering the life of
Mr. Kiley whereby Mr. Kiley's estate will be paid $2,000,000 in exchange for the
redemption of the shares of the Company's capital stock beneficially owned by
Mr. Kiley. The employment agreement contains other customary terms and
conditions including termination for cause, non-competition and confidentiality
provisions.
In December 1996 the Company entered into a one (1) year consulting
agreement with
26
<PAGE>
Victoria Holdings, Inc. an affiliate of Biltmore Securities, Inc.. Pursuant to
the consulting agreement, Victoria Holdings agreed to act as a consultant to the
Company in connection with, among other things, corporate finance and
evaluations of possible business partners and will seek to find business
partners suitable for the Company. In addition, Victoria Holdings has agreed to
assist the Company in the structuring, negotiating and financing of such
transactions. The consulting agreement provided that the Company have issued to
Victoria Holdings, options (the "Victoria Holdings Options") exercisable to
purchase 1,000,000 shares of Common Stock at an exercise price of $1.00 per
share. If provided further for the additional issuance to Victoria Holdings of
166,667 shares (the "Victoria Fee Shares") of Common Stock upon consummation by
the Company of (i) an acquisition of a company (or companies) introduced to the
Company by Victoria Holdings with net assets of at least $2,500,000 or (ii) a
divestiture of the Company's assets, or the sale of a controlling interest in
the Company's capital stock, to a purchaser introduced to the Company by
Victoria Holdings resulting in net proceeds to the Company in excess of
$2,000,000.
In December 1996, the Company issued to certain employees, officers and
directors options to purchase an aggregate of 1,000,000 shares of the Company's
Common Stock during a four (4) year period commencing on January 1, 1997 at an
exercise price of $1.00 per share (the "Management Options"). In exchange for
the issuance of certain of the Management Options, certain option holders
surrendered for cancellation an aggregate of 242,500 options previously issued
in June 1996 for 722,500 of the Management Options.
On December 31, 1996 the Company concluded a private placement of 500,000
Units (the "December 1996 Private Placement") which were placed by Biltmore
Securities, Inc., a broker-dealer and a member of the National Association of
Securities Dealers ("Biltmore"), on a firm commitment basis. Each Unit was
offered at a price of $2.00 per Unit, and consisted of one (1) share of Common
Stock of Medical Marketplace, Inc., a subsidiary of the Company, and eighteen
(18) Class D Redeemable Common Stock Warrants (the "Class D Warrants"). Each six
(6) Class D Warrants are currently exercisable for one (1) share of the
Company's Common Stock commencing March 31, 1997 at an exercise price of $2.50
per share for a one (1) year period. The Company intends to use the proceeds
from the December 1996 Private Placement to expand the business of Medical
Marketplace, repay advances made by the Company to Medical Marketplace, and for
working capital purposes. Prior to the December 1996 Private Placement, Medical
Marketplace issued options to certain key employees to purchase an aggregate of
1,000,000 shares of Medical Marketplace Common Stock at $.80 per share.
The Company, its officers, directors and employees and holders of 5% or
more of the outstanding shares of Common Stock have agreed not to sell, pledge,
transfer or hypothecate any shares of Common Stock of the Company or any
securities convertible into, or exercisable or exchangeable for, shares of
Common Stock of the Company for a period of eighteen (18) months from December
31, 1996 without Biltmore's prior consent.
The Company's Common Stock is traded on The Nasdaq SmallCap Market
("Nasdaq"). Under the rules of Nasdaq in order to qualify for continued
quotation of securities on Nasdaq, the
27
<PAGE>
Company, among other things, must have either (i) $2,000,000 in assets,
$1,000,000 in stockholder equity and a minimum bid price of $1.00 per share (the
"Minimum Bid Requirement") or alternatively (ii) $2,000,000 in total capital and
surplus, and $1,000,000 in market value of public float (the "Capital Market
Value Requirement"). On January 21, 1997, the Staff of Nasdaq advised the
Company that the Company failed to satisfy the Capital Market Value Requirement
and the Minimum Bid Requirement with respect to its shares of Common Stock. The
Company was then provided 90 days to comply with either of such requirements in
order to continue the listing of its Common Stock on Nasdaq. Failure to do so
would have resulted in delisting the Company's shares of Common Stock. On March
21, 1997 the Company was informed by Nasdaq that the Company complied with the
Minimum Bid Requirement. On April 3, 1997 the Staff of Nasdaq advised the
Company that the Company's shares of Common Stock failed to meet the Capital
Market Value Requirement and the Minimum Bid Requirement. In order to continue
the listing of its Common Stock on Nasdaq, the Company, was provided 90 days to
meet the Capital Market Value Requirement or the Minimum Bid Requirement.
Following the Reverse Stock Split, the Company's shares were trading at $1.25
and therefore the Company believes that it meets such requirements. Although the
Company believes it is now in compliance with the Minimum Bid Requirement, it
should be noted that, Nasdaq filed in early March 1997, with the SEC, proposed
rule changes to the maintenance standards required by Nasdaq. Upon SEC approval
the Company would have six (6) months to meet the new maintenance standards.
Under the proposed new standards for continued inclusion of The SmallCap Market
the Company would have to maintain net tangible assets of $2,000,000 or net
income of $500,000 in two of the last three years or a market capitalization of
at least $35,000,000. If the proposed rule changes are approved by the SEC and
adopted by Nasdaq, it is unlikely that the Company would be able to comply with
such new standards. In March 1997, the Company's Board of Directors approved a
1-for-6 reverse stock split with respect to its shares of Common Stock, (the
"Reverse Stock Split"). The Company's shareholders approved the Reverse Stock
Split at the Company's Annual Meeting on April 4, 1997 and the Reverse Stock
Split became effective on April 17, 1997. The Board of Directors believes that
the Reverse Stock Split will, among other things, enable the Company to continue
to meet the Minimum Bid Requirement Furthermore, a relatively low stock price
may affect not only the liquidity of the Company's Common Stock, but also its
ability to raise additional capital through the sale of equity securities. Thus,
the Company believes that the anticipated increase in trading price will be
attractive to the financial community, the investing public, and to users of the
Company's products.
The Company cautions readers that there can be no assurance that actual
results or business conditions will not differ materially from those projected
or suggested in such forward-looking statements as a result of various factors.
Such forward-looking statements are intended to come within the "safe harbor"
provision of the Private Securities Litigation Reform Act of 1995.
28
<PAGE>
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 2,070,000 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 (without giving effect to the stock split or the Reverse Stock Split
mentioned above). 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 is 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. The
Class A Warrants and Class B Warrants were delisted from The Nasdaq SmallCap
Market as of the close of business on December 18, 1996. As of February 10,
1997, there were approximately 57 holders of record of the Company's common
stock and approximately 1,300 beneficial owners.
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. In March 1997, the Company's Board of Directors
approved the Reverse Stock Split which was subsequently approved by the
Company's shareholders on April 4, 1997 and became effective on April 17, 1997.
All price per share references contained herein reflect the consummation of the
Stock Split, but not the consummation of the Reverse Stock Split.
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, 1995, through March 30, 1997, 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.
29
<PAGE>
For the Period from July 1, 1995 to March 30, 1997
Quoted Bid Price
1997 1st Quarter 2nd Quarter 3rd Quarter* 4th Quarter*
- ---- ----------- ----------- ------------ ------------
Common Stock:
High 21/32 12/32 7/32
Low 11/31 1/32 1/32
Class A Warrants
High 1/8 1/16 1/32
Low 1/16 1/32 1/32
Class B Warrants
High 3/32 1/32 1/32
Low 1/32 1/32 1/32
1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ---- ----------- ----------- ----------- -----------
Common Stock:
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
- ----------
* The Class A and Class B Warrants were delisted from the Nasdaq SmallCap
Market on December 18, 1996.
On April 28, 1997, the closing bid prices of the Common Stock, as reported
on The Nasdaq SmallCap Market System was $1.25 (which gives effect to the
Reverse Stock Split).
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.
30
<PAGE>
BUSINESS
General
Computer Marketplace, Inc. a California corporation, was incorporated on
July 19, 1983, as Quality Associates, Inc. and changed its name to Computer
Marketplace, Inc. in June 1987. In March 1993, Computer Marketplace changed its
name to Computer Marketplace(R), Inc. ("Computer Marketplace(R)") and its state
of incorporation from California to Delaware, Computer Marketplace(R) 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(R) 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(R) has made significant investments in its employees in
order to increase their technical knowledge of the new product lines and
Computer Marketplace(R) 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(R) not to remarket used equipment manufactured by the Original
Equipment Manufacturer ("OEM").
In June 1993, prior to the 2-for-1 stock split and the Reverse Stock Split
mentioned above, the Company consummated its initial public offering of
2,070,000 units, each unit consisting of one (1) share of Common Stock, one (1)
Class A Warrant and one (1) Class B Warrant (the "IPO Units"). See "Description
of Securities." The Company received net proceeds of approximately $6,594,179
from its initial public offering.
In March of 1994, Computer Marketplace(R) 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(R) 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 for equipment leasing transactions. In January 1994, Computer Marketplace(R)
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, both 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,
31
<PAGE>
the employees of SSI began operating as a sales and networking branch of
Computer Marketplace(R). The distinct business operations of SSI., will be
gradually phased down as its operations are fully integrated into Computer
Marketplace(R). In June 1996, the Company discontinued the operation of SSI.
Computer Marketplace(R) and its subsidiaries are hereinafter referred to as the
"Company".
Computer Marketplace(R) 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 500 corporations.
Computer Marketplace's operations and primary selling efforts are conducted from
its principal office in Corona, California. Computer Marketplace(R), which
maintains a service and inventory storage center at its Corona headquarters,
also has arrangements to inventory its equipment on a temporary basis at
independent service centers across the country.
Medical Marketplace buys and resells a wide variety of medical equipment
including Magnetic Resonance Imaging ("MRI"), Computed Tomography Scanners
("CT") and Ultrasound equipment. In addition Medical Marketplace provides
customers with consulting services related to equipment acquisition, equipment
layout and facility design. Medical Marketplace also has a small rental program
which provides new equipment and contract service with mobile MRI and CT
equipment. Medical Marketplace conducts its primary distribution operations from
its main office in Corona, California, which is shared with the Company. It also
has sales representatives in Northern California, Kansas, Washington State and
North Carolina.
In December 1996, the Company entered into a one year consulting agreement
with Victoria Holdings, Inc., an affiliate of Biltmore Securities, Inc.
("Victoria Holdings" and "Biltmore" respectively). Pursuant to the consulting
agreement, Victoria Holdings will act as a consultant to the Company in
connection with, among other things, corporate finance and evaluations of
possible business partners and will seek to find business partners suitable for
the Company and assist in the structuring, negotiating and financing of such
transactions. The consulting agreement provided that the Company have issued to
Victoria Holdings, options (the "Victoria Holdings Options") to purchase
1,000,000 shares of Common Stock at an exercise price of $1.00 per share It
provided further for the additional issuance to Victoria Holdings of 166,667
shares (the "Victoria Fee Shares") of Common Stock upon consummation by the
Company of (i) an acquisition of a company (or companies) introduced to the
Company by Victoria Holdings with net assets of at least $2,500,000 or (ii) a
divestiture of the Company's assets, or a sale of a controlling interest in the
Company's capital stock, to a purchaser introduced to the Company by Victoria
Holdings resulting in net proceeds to the Company in excess of $2,000,000.
In December 1996, the Company issued to certain members of management
options to purchase an aggregate of 1,000,000 shares of the Company's Common
Stock during a four (4) year period commencing on January 1, 1997 at an exercise
price of $1.00 per share (the "Management Options").
On December 16, 1996 the Company concluded a private placement of 500,000
Units (the
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<PAGE>
"December 1996 Private Placement") which were placed by Biltmore, on a firm
commitment basis. Each Unit was offered at a price of $2.00 per Unit, and
consisted of one (1) share of Common Stock of Medical Marketplace, Inc., and
eighteen (18) Class D Redeemable Common Stock Purchase Warrants (the "Class D
Warrants"). Each six (6) Class D Warrants are exercisable for one (1) share of
the Company's Common Stock commencing March 31, 1997 at an exercise price of
$2.50 per share for a one (1) year period.
On January 21, 1997 the Staff of Nasdaq advised the Company that the
Company failed to satisfy the Capital Market Value Requirement and the Minimum
Bid Requirement with respect to its shares of Common Stock. The Company was
provided 90 days to comply with either of such requirements in order to continue
the listing of its Common Stock on Nasdaq. Failure to comply would have resulted
in delisting the Company's shares of Common Stock. On March 21, 1997, the
Company was informed by Nasdaq that the Company complied with the Minimum Bid
Requirement.
In March 1997, the Company's Board of Directors approved a 1-for-6 reverse
stock split (the "Reverse 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 Company's Stockholders. The Company's Board of Directors
conducted its annual meeting of shareholders on April 4, 1997 (the "Annual
Meeting") where, among other things, the Company's shareholders voted to approve
the Reverse Stock Split. At the Annual Meeting the Company's shareholders also
voted (i) to elect five (5) directors to the Board of the Company for a one (1)
year term, including, L. Wayne Kiley, Nancy Kiley, Rick C. Garian, J.R. Achten
and Thomas E. Evans, Jr. and (ii) to ratify the appointment of Moore Stephens,
P.C. as the Company's independent certified public accountant.
On April 3, 1997 the Staff of Nasdaq advised the Company that the Company's
shares of Common Stock failed to meet the Capital Market Value Requirement and
the Minimum Bid Requirement. In order to continue the listing of its Common
Stock on Nasdaq, the Company, was provided 90 days to meet the Capital Market
Value Requirement or the Minimum Bid Requirement. Following the Reverse Stock
Split, the Company's shares were trading at $1.25 for a period of ten days or
more and therefore the Company believes that it meets such requirements.
In light of the fact that the Company has been unable to operate profitably
since fiscal year ended June 1994, the Company believes that substantial
measures need to be taken to address the Company's financial difficulties. The
Board of Directors, after having considered numerous alternatives, has concluded
that the Company must significantly reduce its expenses in order to reduce the
Company's net losses. Therefore, the Company has embarked upon a cost cutting
plan by reducing its workforce, closing unprofitable locations and discontinuing
under performing product lines. Specifically, the Company (i) closed its branch
offices in Livonia, Michigan, Traverse City, Michigan and Mariposa, California
(ii) reduced the number of employees from a high of ninety six (96) in September
1995 to twenty two (22) full-time and six (6) part-time as of April 15, 1997 and
(ii) intends to lease or sell its underutilized headquarters facility in Corona.
See "The Company". In the event that the Company determines that these
measures are insufficient
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<PAGE>
to achieve profitability, the Company may pursue divesting the Company's
computer business and/or acquiring an alternative business
The Company's executive office is located at 1490 Railroad Street, Corona,
California. It's telephone number is (909) 735-2102.
The 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,
total sales revenue for the secondary computer market, both leasing and
"buy-sells" combined, exceeds $25 billion annually. The Company is a member in
good standing of the Computer Dealers and Lessor's Association ("CDLA"), a trade
association headquartered in Washington, DC, as well as the Association of
Service and Computer Dealers International ("ASCDI") and the Computer Broker
Exchange ("CBE"), a European computer dealer network.
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.
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 (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 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
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<PAGE>
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.
Computer Products Sales and Marketing
The Company had a total of five (5) computer sales representatives and four
(4) sales support and marketing personnel as of April 15, 1997. These
representatives are located at the Company's headquarters in Corona, California.
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. 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
35
<PAGE>
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.
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 an 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. 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
36
<PAGE>
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.
Medical Marketplace 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.
Medical Marketplace believes that there are no dominant providers of used
equipment in the industry. In addition, Medical Marketplace 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.
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, Medical Marketplace provides customers with
consulting services related to equipment acquisition, equipment layout and
facility design.
Medical Equipment Rental Program
Medical Marketplace 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, however, weekly rentals can also occur. This
program needs additional capital in order to become a significant revenue source
to Medical Marketplace.
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 Medical Marketplace 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, Medical Marketplace by expanding its sales force is able to procure
equipment directly from the end-user. Generally, Medical Marketplace physically
inspects all major equipment before committing to purchase the item.
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<PAGE>
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 Medical Marketplace from their last installed
location directly to our customer's site. This allows Medical Marketplace to
minimize storage and transportation costs in the transaction.
Medical Equipment Sales and Marketing.
Medical Marketplace had a total sales force at March 25, 1997 of six (6)
people. Three (3) inside sales representatives who are located in Corona,
California, an outside direct sales representative located in Northern
California, Kansas and Washington State. In addition, Medical Marketplace
attends various industry trade shows and advertises on the Internet and in
selected national and international trade publications. Medical Marketplace has
prospected for sales to 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
Medical Marketplace 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
Medical Marketplace's competitors have substantially greater financial resources
and larger staffs than Medical Marketplace. Medical Marketplace 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, Medical Marketplace 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.
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<PAGE>
Government Regulation
Neither the Company nor Medical Marketplace has been materially affected by
government regulations applicable to either its computer products or its medical
equipment business, respectively.
Patents, Trademarks, Licenses and Franchises
The Company has been granted by the United States Patent and Trademark
Office (i) a trademark for the AcceleRAIDer(R), on October 6, 1992, (ii) a
servicemark for Computer Marketplace(R), 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 December 31, 1996, the Company had long-term debt
financing collateralized by its Corona headquarters and Mariposa locations, in
the amounts of $1,275,000 and $150,000, respectively.
Employees
As a result of management's focus to reduce costs and capitalize on the
efficiencies gained by administrative improvements, as of March 31, 1997, the
Company employed twenty two (22) full-time persons and six (6) part-time
persons, including eleven (11) persons in sales, marketing and related
activities, seven (7) persons in technical operations and maintenance, and nine
(9) 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.
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.
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<PAGE>
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.
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
intends to sell this facility in the near future. The Company has renovated this
facility and has leased fifty percent of the unused space.
The Company currently intends to lease or sell its underutilized
headquarters facility in Corona, California and has closed certain satellite
locations in Michigan and Mariposa, California,
Management believes that the above properties are adequately covered by
insurance.
Legal Proceedings
The Company commenced an unfair trade name infringement action entitled
Computer Marketplace(R), 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(R), Inc./Case No. 95-3225 on May 19, 1995. Computer
Marketplace(R) has counterclaimed 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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<PAGE>
MANAGEMENT
Directors and Executive Officers
The following persons are the current executive officers, directors and key
employees of the Company:
Name Age Position
- ---- --- --------
L. Wayne Kiley 53 President, Chief Executive Officer
and Director
Rick C. Garian 50 Chief Operating Officer and Director
Carmella Hume 32 Controller (Chief Accounting Officer)
Nancy Kiley 38 Secretary and Director
J. R. Achten 53 Director
Thomas E. Evans, Jr. 56 Director
- ----------
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.
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.
Rick C. Garian has served as Chief Operating Officer of the Company since
January, 1997 and as a Director since April 1997. Prior to becoming Chief
Operating Officer, Mr. Garian served as an executive consultant to the Company,
as part of his own management consulting practice,
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which was established in 1991. He graduated from Michigan State University with
a Business Administration degree.
Carmella Hume has served as Controller of the Company since January 1997 and
previously served as a Senior Accountant from July 1995 to January 1997. From
1993 to 1995, Ms. Hume served as a Controller of Triple M. Apparel, a clothing
manufacturer, and from 1991 to 1993 she was the Controller of LeaJoy
Corporation, an artificial plant manufacturer. Ms. Hume received her Bachelor of
Science Degree in Business Administration from Chapman University.
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.
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.
There are no family relationships among any of such persons, except that L.
Wayne Kiley, the Company's President and Chief Executive Officer, is married to
Nancy Kiley, the Company's Secretary.
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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>
Annual Compensation
Compensation Awards
(a) (b) (c) (d) (g) (i)
Number of All Other
Name and Principal Position Year Salary Bonus Options Compensation
- --------------------------- ---- ------ ----- ------- ------------
<S> <C> <C> <C> <C> <C>
L. Wayne Kiley, President 1996 $ 303,814 $ -- 195,833(5) $ 1,313
Chief Executive Officer and 1995 $ 302,500 $ -- 166,667 $ 3,702
Director 1994 $ 275,000 $ 1,077 -- $ 4,966
David L. Roekle, 1996 $ 223,717 $ -- 41,667(5) $ --
Senior Vice President 1995 $ 218,400 $ -- -- $ --
Chief Operating Officer and 1994 $ 84,618 $ -- 16,667 $ 921
Director(1)
Thomas Iwanski
Vice President
Chief Financial Officer 1996 $ 97,885 $ -- 30,000(5) $ --
Assistant Secretary and 1995 $ 87,561 $ -- $ --
Director(2)
Richard S. Pisapia
Senior Vice President 1996 $ 80,808 $19,423 20,833 $ 3,461
Sales(3)
Joanne Mitchell 1995 $ 18,386 $ -- -- $ --
Account Executive(4) 1994 $ 305,214 $ 468 -- $ 4,285
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Roekle's employment with the Company terminated in August 1996.
(2) Mr. Iwanski's employment with the Company terminated in January 1997.
(3) Mr. Pisapia's employment with the Company terminated in December 1996.
(4) Ms. Mitchell's employment with the Company terminated in June 1994. Her
1995 salary includes amounts paid in July 1994 related to prior sales.
(5) The number of stock options awarded includes 166,667, 16,667 and 5,000 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.
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 Transactions."
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<PAGE>
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.
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 166,667 shares.
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.
In May 1994, the Board of Directors of the Company approved the issuance of
up to 300,000 options to certain employees and consultants of the Company (the
"Options"). The Options vested immediately upon the grant thereof and are
exercisable at $14.40 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 133,333 of the
available Options during fiscal year 1994. The remaining 166,667 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, vested immediately and were exercisable
at $6.00 per share at any time prior to June 11, 2000. A total of 280,500
options were issued at $6.00 per share. In December 1996, the Company's
Compensation Committee approved the issuance to certain employees, officers and
directors options to purchase an aggregate of 1,000,000 shares of Common Stock
(the "December Options"). In exchange for the issuance of these options, certain
option holders surrendered for cancellation an aggregate of 242,500 options
issued in June 1996 for 722,500 of the December Options. These options vest
immediately and are exercisable over a four (4) year period at $1.00 per share.
On January 3, 1996, the Company's Board of Directors approved the issuance
of 158,083 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
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<PAGE>
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, 157,083 stock options were
granted at an exercise price of $1.6875 per share of which 69,333 are currently
outstanding.
On June 11, 1996, the Company's Board of Directors approved the issuance of
10,833 non-qualified stock options to seven employees of the Company. These
stock options require future employment with 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, 10,833 stock
options were granted at an exercise price of $3.375 per share.
As of December 1996, the Company's subsidiary, Medical Marketplace, Inc.,
issued to certain employees of, and a consultant to, Medical Marketplace options
to purchase an aggregate of 1,000,000 shares of Medical Marketplace common stock
at an exercise price of $.80 per share. Such options vest over a two (2) year
period commencing in December 1997; provided however, that in the event of an
initial public offering of Medical Marketplace such options vest immediately.
As of December 1996, the Company issued to certain employees, officers and
directors options to purchase an aggregate of 1,000,000 shares of the Company's
Common Stock during a four (4) year period commencing on January 1, 1997 at an
exercise price of $1.00 per share (the "Management Options"). In exchange for
the issuance of certain of the Management Options, certain option holders
surrendered for cancellation an aggregate of 240,833 options previously issued
in June 1996 for 722,500 of the Management Options.
45
s r m 132
<PAGE>
The following table contains information concerning the grant of stock
options to executive officers of the Company during the fiscal year ended June
30, 1996:
<TABLE>
<CAPTION>
Potential Realizable Value
% of Total at Assumed Annual Rates
Number of Options of Stock Price Appreciation
Options Granted in Exercise Expiration for Option Term
Name Granted Fiscal Year Price ($/sh) Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
L. Wayne Kiley,
President 29,167(5) 44% $1.6875 1/03/06 $ 30,953 $ 78,442
Chief Executive 166,667(6) $6.00 6/10/00 $215,506 $464,100
Officer and
Director
David L. Roekle 25,000(5) 9% $1,6875 1/03/06 $ 26,531 $ 67,236
Senior Vice 16,667(6) $6.00 6/10/00 $ 21,550 $ 46,410
President(1)
Thomas Iwanski 25,000(5) 7% $1.6875 1/03/06 $ 26,531 $ 67,236
Vice President 5,000(6) $6.00 6/10/00 $ 6,465 $ 13,923
Chief Fin. Officer
Asst. Sec. and
Director (2)
Richard S. Pisapia 20,833(5) 5% $1.6875 1/03/06 $ 19,818 $ 52,382
Senior Vice -- -- -- -- -- --
President Sales (3)
A. Evan Windholz 8,333(5) 3% $1.6857 1/03/06 $ 8,843 $ 22,412
Vice President - 6,667(6) $6.00 6/10/00 $ 8,620 $ 18,564
Sales Eastern
Region(7)
Michael MacQueen 1,667(5) 1% $1.6875 1/03/06 $ 1,768 $ 4,482
Controller (4) 2,500(6) $6.00 6/10/00 $ 3,232 $ 6,961
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Roekle's employment with the Company terminated in August 1996.
(2) Mr. Iwanski's employment with the Company terminated in January 1997.
(3) Mr. Pisapia's employment with the Company terminated in December 1996.
(4) Mr. MacQueen's employment with the Company terminated in January 1997,
although Mr. MacQueen continues to serve as a consultant to the Company.
(5) Stock options granted in January 1996.
(6) Stock options granted in June 1996.
(7) Mr. Windholz's employment with the Company terminated in March 1997.
46
<PAGE>
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:
Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values
<TABLE>
<CAPTION>
(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 -- -- 166,667/
29,167 $54,688
David L. Roekle -- -- 16,667/
25,000 $46,875
Richard S. Pisapia -- -- 0/
20,833 $39,063
Thomas Iwanski -- -- 5,000/
25,000 $46,875
A. Evan Windholz -- -- 6,667/
8,333 $15,625
Michael MacQueen -- -- 2,500/
1,667 $ 3,125
</TABLE>
47
<PAGE>
Employment Agreements
On October 16, 1992, the Company entered into an employment agreement for a
five (5) year term (the "Employment Term") including 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 "Original 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 Original Option was equal to
$1.60 per share, which was eighty percent (80%) of the per share price offered
to the public in connection with the Company's initial public offering.
In October 1996, the Company amended its employment agreement with L. Wayne
Kiley, the Company's Chairman of the Board, President and Chief Executive
Officer. Pursuant to such amendment, (i) the employment agreement's expiration
date of October 16, 1997 was extended to October 16, 1999, (ii) in exchange for
termination of the Original Option Mr. Kiley was granted the right to purchase a
number of shares of Common Stock for a period of four (4) years, at a price
equal to seventy five percent (75%) of the closing bid price of the Company's
shares of Common Stock on the date of grant equal to 2.5%, 3% and 3.5% of the
shares outstanding, should the Company report annual earnings before the payment
of interest and taxes of $635,000, $875,000 and $1,000,000, respectively, (iii)
Mr. Kiley will be paid a cash bonus equal to 5% of any profit realized by the
Company from the sale of assets outside the ordinary course of business, and
(iv) an insurance policy covering the life of Mr. Kiley whereby Mr. Kiley's
estate will be paid $2,000,000 in exchange for the redemption of the shares of
the Company's capital stock beneficially owned by Mr. Kiley. The Agreement
contains other customary terms and conditions including termination for cause,
non-competition on confidentiality provisions.
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 provided annual cost of living
increases, the use of a Company car, bonuses and other incentive compensation as
the Board of Directors deemed appropriate, based upon the Company's operating
performance or other reasonable criteria. As of March 1, 1997, the Company
suspended, indefinitely, Ms. Kiley's employment agreement.
48
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of February 10,
1997, 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:
Approximate
Name and Address Amount and Nature of Percent
of Beneficial Owner (1) Beneficial Ownership of Class
- ----------------------- -------------------- -----------
L. Wayne Kiley (2) 946,405 (3) 48.5%
Nancy Kiley (2) 342,794 (4) 25.3%
Kiley Children's Trust (5) 83,333 6.2%
J. R. Achten 113,611 (6) 8.3%
A. Evan Windholz 32,779 (7) 2.4%
Thomas E. Evans, Jr. 10,278 (8) .8%
Rick Garian 75,000 (9) 5.2%
Thomas Iwanski 32,417 (10) 2.3%
Carmella Hume 10,167 (11) 0.7%
Victoria Holdings, Inc. 1,000,000 (12) 42.5%
c/o Biltmore Securities, Inc.
6700 North Andrews Avenue
Ft. Lauderdale, FL 333094
Directors and Executive 1,117,211 52.5%
Officers as a Group
(7 persons)(3)(4)(6)(7)(8)(9)(10)(11)
- ----------
(1) Unless otherwise indicated, the address of the beneficial owner is: c/o
Computer Marketplace(R), Inc., 1490 Railroad Street, Corona, California,
91720.
(2) L. Wayne Kiley and Nancy Kiley are the joint owners of 249,183 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 83,333
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 10,000 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.
49
<PAGE>
(3) Includes (a) 83,333 shares of Common Stock held by the Kiley Children's
Trust, (b) 10,000 shares of Common Stock held by Operation Frontline, (c)
options issued in January 1996 exercisable for 29,166 shares of Common
Stock at $1.6875 per share, one-third of which vested on January 3, 1997
and (d) options issued as of December 1996 exercisable for 594,167 shares
of Common Stock at $1.00 per share. See "Executive Compensation." Mr. Kiley
disclaims the beneficial ownership of the Company's securities held
individually by his wife, Nancy Kiley.
(4) Includes (a) 83,333 shares of Common Stock held by the Kiley Children's
Trust, (b) 10,000 shares of Common Stock held by Operation Frontline, and
(c) options issued in January 1996 exercisable for 833 shares of Common
Stock at $1.6875 per share, one-third of which vested on January 3, 1997.
Ms. Kiley disclaims the beneficial ownership of the Company's securities
held individually by her husband, L. Wayne Kiley.
(5) The Kiley Children's Trust was formed by L. Wayne Kiley and Nancy Kiley for
the benefit of their children.
(6) Includes (a) 833 shares of common stock held by the Kiley Children's Trust
of which Mr. Achten is the sole trustee, (b) 10,000 shares of common stock
held by Operation Frontline of which Mr. Achten is a director, (c) options
issued in January 1996 exercisable for 833 shares of Common Stock at
$1.6875 one-third of which vested on January 3, 1997, and (d) options
issued as of December 1996 exercisable for 20,000 shares of Common Stock at
$1.00 per share. Mr. Achten disclaims beneficial ownership with respect to
the shares of common stock held by the Kiley Children's Trust and Operation
Frontline.
(7) Includes (a) options issued in January 1996 exercisable for 8,333 shares of
Common Stock at $1.6875 per share, one-third of which vested on January 3,
1997 and (b) options issued as of December 1996 exercisable for 30,000
shares of Common Stock at $1.00 per share.
(8) Includes (a) options issued in January 1996 exercisable for 833 shares of
Common Stock at $1.6875 per share, one-third of which vested on January 3,
1997, and (b) options issued as of December 1996 exercisable for 10,000
shares of Common Stock at $1.00 per share.
(9) Includes options issued as of December 1996 exercisable for 75,000 shares
of Common Stock at $1.00 per share.
(10) Includes (a) options issued as of June 1996 exercisable for 5,000 shares of
Common Stock at $6.00 per share and (b) options issued in January 1996
exercisable for 25,000 shares of Common Stock at $1.6875 per share.
(11) Includes (a) options issued as of January 1996 exercisable for 167 shares
of Common Stock at $1.6875 per share, one-third of which vested on January
3,1997, and (b) options issued in December 1996 exercisable for 10,000
shares of Common Stock at $1.00 per share.
(12) Includes options issued as of December 1996 exercisable for 1,000,000
shares of Common Stock at $1.00 per share pursuant to a Consulting
Agreement with the Company. See "Certain Transactions."
50
<PAGE>
CERTAIN 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 January 1994, the Company entered into a one-year consulting agreement
with Alan M. Novich, a director of the Company pursuant to which it paid Mr.
Novich $10,000 per month. This agreement expired and was not renewed.
In May 1994, the Board of Directors of the Company approved the issuance of
up to 300,000 options to certain employees and consultants of the Company (the
"Options"). The Options vest immediately upon the grant thereof and are
exercisable at $14.40 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 133,333 of the
available Options during fiscal year 1994. The remaining 166,667 Options were
granted in July 1994 to L. Wayne Kiley, the President and Chief Executive
Officer of the Company.
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 166,667 shares. No awards or shares have been
granted under this Plan.
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. The Company has closed this
office and on April 21, 1997 the Company provided the landlord with six (6)
months prior written notice of its intent to cancel the lease upon the
expiration of the six month notice period.
51
<PAGE>
In January 1996, the Board of Directors of the Company approved the
issuance of up to 158,083 options to certain employees and consultants of the
Company (the "Options"). The Options vest over a three (3) year period of time
and are exercisable at $1.6875 per share (the fair market value on the date of
grant) at any time prior to January 3, 2006.
As of October 1996, the Company amended its employment agreement with L.
Wayne Kiley, the Company's Chairman of the Board, President and Chief Executive
Officer. Pursuant to such amendment, (i) the employment agreement's expiration
date of October 16, 1997 was extended to October 16, 1999, (ii) Mr. Kiley was
granted the right to purchase a number of shares of Common Stock for a period of
four (4) years, at a price equal to seventy five percent (75%) of the closing
bid price of the Company's shares of Common Stock on the date of grant equal to
2.5%, 3% and 3.5% of the shares outstanding, should the Company report annual
earnings before the payment of interest and taxes of $635,000, $875,000 and
$1,000,000, respectively, (iii) Mr. Kiley will be paid a cash bonus equal to 5%
of any profit realized by the Company from the sale of assets outside the
ordinary course of business, and (iv) an insurance policy covering the life of
Mr. Kiley whereby Mr. Kiley's estate will be paid $2,000,000 in exchange for the
redemption of the shares of the Company's capital stock beneficially owned by
Mr. Kiley. The Agreement contains other customary terms and conditions including
termination for cause, non-competition on confidentiality provisions.
In December 1996, the Company entered into a one year consulting agreement
with Victoria Holdings, Inc., an affiliate of Biltmore Securities, Inc.
("Victoria Holdings" and "Biltmore" respectively). Pursuant to the consulting
agreement, Victoria Holdings will act as a consultant to the Company in
connection with, among other things, corporate finance and evaluations of
possible business partners and will seek to find business partners suitable for
the Company and assist in the structuring, negotiating and financing of such
transactions. The consulting agreement provided that the Company have issued to
Victoria Holdings, options (the "Victoria Holdings Options") to purchase
1,000,000 shares of Common Stock at an exercise price of $1.00 per share It
provided further for the additional issuance to Victoria Holdings of 166,667
shares (the "Victoria Fee Shares") of Common Stock upon consummation by the
Company of (i) an acquisition of a company (or companies) introduced to the
Company by Victoria Holdings with net assets of at least $2,500,000 or (ii) a
divestiture of the Company's assets, or a sale of a controlling interest in the
Company's capital stock, to a purchaser introduced to the Company by Victoria
Holdings resulting in net proceeds to the Company in excess of $2,000,000.
As of December 1996, the Company issued to certain employees, officers and
directors options to purchase an aggregate of 1,000,000 shares of the Company's
Common Stock during a four (4) year period commencing on January 1, 1997 at an
exercise price of $1.00 per share (the "Management Options"). In exchange for
the issuance of certain of the Management Options, certain option holders
surrendered for cancellation an aggregate of 240,832 options previously issued
in June 1996 for 722,500 of the Management Options.
As of December 1996, the Company's subsidiary, Medical Marketplace, Inc.,
issued to certain employees of, and a consultant to, Medical Marketplace options
to purchase an aggregate of
52
<PAGE>
1,000,000 shares of Medical Marketplace common stock at an exercise price of
$.80 per share. Such options vest over a two (2) year period commencing in
December 1997; provided however, that in the event of an initial public offering
of Medical Marketplace such options vest immediately.
On December 31, 1996 the Company concluded a private placement of 500,000
Units (the "December 1996 Private Placement") which were placed by Biltmore, on
a firm commitment basis. Each Unit was offered at a price of $2.00 per Unit, and
consisted of one (1) share of Common Stock of Medical Marketplace, Inc., and
eighteen (18) Class D Redeemable Common Stock Purchase Warrants (the "Class D
Warrants"). Each, six (6) Class D Warrants are exercisable for one (1) share of
the Company's Common Stock commencing March 31, 1997 at an exercise price of
$2.50 per share for a one (1) year period. The Company intends to use the
proceeds of the offering to expand the business of Medical Marketplace, repay
advances made by the Company to Medical Marketplace, and for working capital
purposes. Prior to the December 1996 Private Placement, Medical Marketplace
issued options to certain key employees to purchase an aggregate of 1,000,000
shares of Medical Marketplace Common Stock at $.80 per share.
The Company, its officers, directors and employees and holders of 5% or
more of the outstanding shares of Common Stock have agreed not to sell, pledge,
transfer or hypothecate any shares of capital stock of the Company or any
securities convertible into, or exercisable or exchangeable for, shares of
capital stock of the Company for a period eighteen (18) months from December 16,
1996 without Biltmore's prior consent.
The Company's Common Stock is traded on The Nasdaq SmallCap Market
("Nasdaq"). Under the rules of Nasdaq in order to qualify for continued
quotation of securities on Nasdaq, the Company, among other things, must have
either (i) $2,000,000 in assets, $1,000,000 in stockholder equity and a minimum
bid price of $1.00 per share (the "Minimum Bid Requirement") or alternatively
(ii) $2,000,000 in total capital and surplus, and $1,000,000 in market value of
public float (the "Capital Market Value Requirement"). On January 21, 1997, the
Staff of Nasdaq advised the Company that the Company failed to satisfy the
Capital Market Value Requirement and the Minimum Bid Requirement with respect to
its shares of Common Stock. The Company was provided 90 days to comply with
either of such requirements in order to continue the listing of its Common Stock
on Nasdaq. Failure to do so would have resulted in delisting the Company's
shares of Common Stock. On March 21, 1997 the Company was informed by Nasdaq
that the Company complied with the Minimum Bid Requirement. On April 3, 1997 the
Staff of Nasdaq advised the Company that the Company's shares of Common Stock
failed to meet the Capital Market Value Requirement and the Minimum Bid
Requirement. In order to continue the listing of its Common Stock on Nasdaq, the
Company, was provided 90 days to meet the Capital Market Value Requirement or
the Minimum Bid Requirement. Following the Reverse Stock Split, the Company's
shares were trading at $1.25 for a period of ten days or more and therefore the
Company believes that it meets such requirements.
53
<PAGE>
DESCRIPTION OF SECURITIES
The Selling Securityholders are offering 9,000,000 Class D Warrants and
3,500,000 shares of Common Stock.
Preferred Stock
The Certificate of Incorporation of the Company authorizes the issuance of
up to 1,000,000 shares of preferred stock, $.0001 par value per share, none of
which are issued and outstanding as of the date of this Prospectus. Pursuant to
the Certificate of Incorporation, the Company's Board of Directors is authorized
to issue shares of Preferred Stock from time to time in one or more series and,
subject to the limitations contained in the Certificate of Incorporation and any
limitations prescribed by law, to establish and designate any such series and to
fix the number of shares and the relative conversion rights, voting rights and
terms of redemption (including sinking fund provisions) and liquidation
preferences.
Common Stock
The Company is currently authorized to issue up to 50,000,000 shares of
Common Stock, of which 1,352,424 shares were issued and outstanding as of the
date of this Prospectus. All of the issued and outstanding shares of Common
Stock are fully paid, validly issued and non-assessable.
Subject to the rights of holders of Preferred Stock, holders of shares of
Common Stock of the Company are entitled to share equally on a per share basis
in such dividends as may be declared by the Board of Directors out of funds
legally available therefor. There are presently no plans to pay dividends with
respect to the shares of Common Stock. See "Dividend Policy." Upon liquidation,
dissolution or winding up of the Company, after payment of creditors and the
holders of any senior securities of the Company, including Preferred Stock, if
any, the assets of the Company will be divided pro rata on a per share basis
among the holders of the shares of Common Stock. The Common Stock is not subject
to any liability for further assessments. There are no conversion or redemption
privileges nor any sinking fund provisions with respect to the Common Stock and
the Common Stock is not subject to call. The holders of Common Stock do not have
any preemptive or other subscription rights.
Holders of shares of Common Stock are entitled to cast one vote for each
share held at all stockholders' meetings including the Annual Meeting, for all
purposes, including the election of directors. The Common Stock does not have
cumulative voting rights.
Class A Warrants
Each six (6) Class A Warrants entitles the holder to purchase two (2)
shares of Common Stock at a price of $28.50 per two shares for a period of four
(4) years commencing one (1) year from June 22, 1993. Each Class A Warrant is
redeemable by the Company for $.05 per Warrant, at
54
<PAGE>
any time after June 22, 1994, upon thirty (30) days' prior written notice, if
the average closing price or bid price of the Common Stock, as reported by the
principal exchange on which the Common Stock is traded, Nasdaq OTC Bulletin
Board or the National Quotation Bureau Incorporated, as the case may be, equals
or exceeds $27.00 per share for twenty (20) consecutive trading days ending
within ten (10) days prior to the date of the notice of redemption. Upon thirty
(30) days' written notice to all holders of Class D Warrants, the Company shall
have the right, subject to compliance with Rule 13e-4 under the Securities
Exchange Act of 1934 and the filing of Schedule 13e-4, to reduce the exercise
price and/or extend the term of the Class D Warrants.
Class B Warrants
Each six (6) Class B Warrants entitles the holder to purchase two (2)
shares of Common Stock at a price of $33.00 per two shares for a period of four
(4) years commencing one (1) year from June 22, 1993. Each Class B Warrant is
redeemable by the Company for $.05 per Warrant, at any time after June 22, 1994,
upon thirty (30) days' prior written notice, if the average closing price or bid
price of the Common Stock, as reported by the principal exchange on which the
Common Stock is traded, Nasdaq OTC Bulletin Board or the National Quotation
Bureau Incorporated, as the case may be, equals or exceeds $33.00 per share for
twenty (20) consecutive trading days ending within ten (10) days prior to the
date of the notice of redemption. Upon thirty (30) days' written notice to all
holders of Class B Warrants, the Company shall have the right, subject to
compliance with Rule 13e-4 under the Securities Exchange Act of 1934 and the
filing of Schedule 13e-4, to reduce the exercise price and/or extend the term of
the Class B Warrants.
Class C Warrants
Each six (6) Class C Warrants entitles the holder to purchase two (2)
shares of Common Stock at a price of $93.00 per two shares for a period of four
(4) years commencing one (1) year from June 22, 1993. Each Class C Warrant is
redeemable by the Company for $.05 per Warrant, at any time after June 22, 1994,
upon thirty (30) days' prior written notice if the average closing price or bid
price of the Common Stock, as reported by the principal exchange on which the
Common Stock is traded, Nasdaq OTC Bulletin Board or the National Quotation
Bureau Incorporated, as the case may be, equals or exceeds $33.00 per share for
twenty (20) consecutive trading days ending within ten (10) days prior to the
date of the notice of redemption. Upon thirty (30) days' written notice to all
holders of Class C Warrants, the Company shall have the right, subject to
compliance with Rule 13e-4 under the Securities Exchange Act of 1934 and the
filing of Schedule 13e-4, to reduce the exercise price and/or extend the term of
the Class B Warrants. .
Class D Warrants
Each six (6) Class D Warrants entitle the holder to purchase one (1) share
of Common Stock at a price of $2.50 per share for a period of one (1) year
commencing March 31, 1997. Each Class D Warrant is redeemable by the Company for
$.05 per Warrant, at any time upon thirty (30) days' prior written notice, if
the average closing price or bid price of the Common Stock, as reported by
55
<PAGE>
the principal exchange on which the Common Stock is traded, Nasdaq OTC Bulletin
Board or the National Quotation Bureau Incorporated, as the case may be, equals
or exceeds $30.00 per share for twenty (20) consecutive trading days during a
thirty (30) day period ending within 10 days prior to the date of the notice of
redemption, which Notice shall be mailed no later than five (5) days thereafter.
Upon thirty (30) days' written notice to all holders of Class D Warrants, the
Company shall have the right, subject to compliance with Rule 13e-4 under the
Securities Exchange Act of 1934 and the filing of Schedule 13e-4, to reduce the
exercise price and/or extend the term of the Class D Warrants.
Delaware Anti-Takeover Law
The Company is governed by the provisions of Section 203 of the General
Corporation Law of Delaware, an anti-takeover law enacted in 1988. In general,
the law prohibits a Delaware public corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three (3) years
after the date of the transaction in which the person became an interested
stockholder, unless it is approved in a prescribed manner. As a result of
Section 203, potential acquirors of the Company may be discouraged from
attempting to effect acquisition transactions with the Company, thereby possibly
depriving holders of the Company's securities of certain opportunities to sell
or otherwise dispose of such securities at above-market prices pursuant to such
transactions.
Limitation on Liability of Directors
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of the performance of their duties as directors and
officers provided that this provision shall not eliminate or limit the liability
of a director (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
arising under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, vote of stockholders or otherwise.
Article Ninth of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the fullest extent permitted by Section 102
of the Delaware General Corporation Law.
The effect of the foregoing is to require the Company to the extent
permitted by law to indemnify the officers and directors of the Company for any
claim arising against such persons in their official capacities if such person
acted in good faith and in a manner that he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal
56
<PAGE>
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the "Commission), such indemnification is against public policy as expressed
in the Act and is therefore unenforceable.
Securities and Exchange Commission Policy
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and other agents of the Company, the Company
has been informed that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
Transfer Agent and Registrar
The transfer agent for the Company's shares of Common Stock, Class A
Warrants, Class B Warrants and Class D Warrants is American Stock Transfer &
Trust Company, located at 40 Wall Street, New York, NY 10005.
57
<PAGE>
SELLING SECURITYHOLDERS
The registration statement of which this Prospectus forms a part covers the
sale of (i) 9,000,000 Class D Redeemable Common Stock Purchase Warrants held by
those purchasers who purchased such warrants in the December 1996 private
placement (the "Warrantholders"); (ii) the 1,500,000 shares of Common Stock
which are issuable upon exercise of the Class D Warrants; (iii) 1,000,000 shares
of Common Stock which are issuable upon the exercise of Options held by Victoria
Holdings, Inc.; and (iv) 1,000,000 shares which are issuable to certain members
of management pursuant to the Management Options. Together, the holders of the
9,000,000 Class D Warrants and 3,500,000 shares of Common Stock being registered
hereunder are referred to as the "Selling Securityholders." The Company will not
receive any of the proceeds from the sale of the securities by the Selling
Securityholders. The resale of the securities of the Selling Securityholders are
subject to Prospectus delivery and other requirements of the Securities Act of
1933, as amended (the "Act"). Sales of such securities or the potential of such
sales at any time may have an adverse effect on the market prices of the
securities offered hereby. See "Risk Factors - Shares Eligible for Future Sale
May Adversely Affect the Market."
At the time a particular offer of securities is made by or on behalf of a
Selling Securityholder, to the extent required, a Prospectus will be distributed
which will set forth the number of shares being offered and the terms of the
Offering, including the name or names of any underwriters, dealers or agents, if
any, the purchase price paid by any underwriter for sales purchased from the
Selling Securityholder and any discounts, commissions or concessions allowed or
reallowed or paid to dealers and the proposed selling price to the public.
Sales of securities by the Selling Securityholder or even the potential of
such sales would likely have an adverse effect on the market prices of the
securities offered hereby.
PLAN OF DISTRIBUTION
The securities offered hereby may be sold from time to time directly by the
Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Securityholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders in connection with such sales of securities. The securities
offered by the Selling Securityholders may be sold by one or more of the
following methods, without limitations: (a) a block trade in which a broker or
dealer so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (c) ordinary brokerage transactions
and transactions in which the broker solicits
58
<PAGE>
purchasers, and (d) face-to-face transactions between sellers and purchasers
without a broker-dealer. In effecting sales, brokers or dealers engaged by the
Selling Securityholders may arrange for other brokers or dealers to participate.
The Selling Securityholders and intermediaries through whom such securities are
sold may be deemed "underwriters" within the meaning of the Act with respect to
the securities offered, and any profits realized or commissions received may be
deemed underwriting compensation.
At the time a particular offer of securities is made by or on behalf of the
Selling Securityholders, to the extent required, a Prospectus will be
distributed which will set forth the number of shares being offered and the
terms of the Offering, including the name or names of any underwriters, dealers
or agents, if any, the purchase price paid by any underwriter for sales
purchased from the Selling Securityholders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers and the proposed selling
price to the public.
Sales of securities by the Selling Securityholders or even the potential of
such sales would likely have an adverse effect on the market prices of the
securities offered hereby.
Since the average closing bid price for the shares of Common Stock does not
satisfy the requirements necessary to enable the Company to call the Class A
Warrants, Class B Warrants, Class C Warrants and Class D Warrants for
redemption, the Company does not currently anticipate calling the Warrants for
redemption in the near future. However, in the event that the average closing
bid price of the Common Stock does satisfy the requirements necessary to enable
the Company to call the Class A Warrants, Class B Warrants, Class C Warrants and
Class D Warrants, the Company may, in accordance with the terms of the Warrants,
call such securities for redemption.
SHARES ELIGIBLE FOR FUTURE SALE
Rule 144
Upon completion of this Offering, there will be 1,352,424 shares of Common
Stock issued and outstanding, and, upon the exercise of the Class D Warrants,
the Victoria Holdings Options and the Management Options there will be an
additional 3,500,000 shares of Common Stock issued and outstanding. All of these
shares will be freely tradeable without restrictions under the Act. None of the
shares of Common Stock are "restricted securities" within the meaning of Rule
144 and are eligible for sale in public markets subject to the resale
limitations of Rule 144. In the event that any of the other warrants or options
issued by the Company are exercised, such shares of capital stock underlying
such securities will be deemed to be "restricted securities," except for any
securities registered under any stock option plan, or pursuant to other
registration rights granted by the Company, if any. In general, under Rule 144,
a person (or persons whose shares are aggregated) including persons who may be
deemed to be "affiliates" of the Company, as that term is defined under the Act,
is entitled to sell within any three (3) month period, the amount of shares
beneficially owned for at least one (1) year that does not exceed the greater of
(i) 1% of the then outstanding
59
<PAGE>
shares of Common Stock, or (ii) the average weekly trading volume in the Common
Stock in the four (4) calendar weeks preceding such sale. Sales under Rule 144
are also subject to certain requirements as to the manner of sale, notice and
availability of certain public information about the Company. A person who has
not been an affiliate of the Company for the three months prior to any proposed
sale, and has beneficially owned such shares for at least two (2) years is
entitled to sell all such shares without regard to the volume, manner of sale,
notice requirements or any restrictions.
No predictions can be made as to the effect, if any, that sales of shares
under Rule 144 or the availability of shares for sale will have on the market,
if any, prevailing from time to time. Sales of substantial amounts of the Common
Stock pursuant to Rule 144 may adversely affect the market price of the Common
Stock or the Class D Warrants offered hereby.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Bernstein & Wasserman, LLP, 950 Third Avenue, New York, NY 10022.
EXPERTS
Certain of the financial statements and financial statement schedules of
the Company included in this Prospectus and elsewhere in the Registration
Statement, to the extent and for the periods indicated in their reports, have
been audited by Moore Stephens, P.C., independent certified public accountants,
whose reports thereon appear elsewhere herein and in the Registration Statement.
Such financial statements have been included in reliance upon the reports of
Moore Stephens, P.C., given upon their authority as experts in accounting and
auditing.
ADDITIONAL INFORMATION
This Prospectus constitutes part of a Registration Statement on Form SB-2
filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act and omits certain information contained
in the Registration Statement. Reference is hereby made to the Registration
Statement and to its exhibits for further information with respect to the
Company and the Units, Common Stock and Warrants offered hereby. Statements
contained herein concerning provisions of documents are necessarily summaries of
such documents, and each statement is qualified in its entirety by reference to
the copy of the applicable document filed with the Commission.
The Registration Statement, including the exhibits thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, Washington, D.C. 20549; and copies of such
material may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, Washington, D.C. 20549 at prescribed rates. Pursuant to
Release 33-7289, the Commission maintains a web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission (including the Company). The
address for the Commission web site is http://www.sec.gov.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report ..................................... F-1
Balance Sheets as of December 31, 1996 [Unaudited]
and June 30, 1996 ................................................ F-2 - F-3
Statements of Operations for the three and six months ended,
December 31, 1996 and 1995 [Unaudited] and the years ended
June 30, 1996 and 1995 ........................................... F-4 - F-5
Statements of Stockholders' Equity for the years ended
June 30, 1996 and 1995 ........................................... F-6
Statements of Cash Flows for the six months ended
December 31, 1996 and 1995 [Unaudited] and the
years ended June 30, 1996 and 1995 ............................... F-7 - F-9
Notes to Financial Statements, December 31, 1996
[Unaudited] and June 30, 1996 .................................... F-10 - F-29
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders of Computer Marketplace(R), Inc.
We have audited the accompanying consolidated balance sheet of Computer
Marketplace(R), 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(R), 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
F-1
<PAGE>
Computer Marketplace(R), Inc., and Subsidiaries
Condensed Consolidated Balance Sheet
December 31, 1996
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 397,710
Cash held in escrow (note 5) 930,000
Accounts receivable, less allowance for
doubtful accounts of $156,589 3,682,951
Inventory, net (note 2) 2,447,029
Notes receivable - related parties 276,745
Other current assets 164,466
------------
Total current assets 7,898,901
------------
Property held for sale, net (note 3) 2,158,518
Property and equipment, net (note 3) 785,750
Other assets 53,541
------------
Total assets $ 10,896,710
============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable (note 4) $ 2,363,840
Accounts payable 2,358,416
Accrued payroll and payroll related liabilities 283,522
Current portion of long-term debt 53,999
Other current liabilities 318,056
------------
Total current liabilities 5,377,833
------------
Long-term debt 1,509,701
Other liabilities 44,792
Minority interest in net assets of subsidiary (note 5) 141,356
Commitments and contingencies (note 5)
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, 1,352,424 shares issued and outstanding 135
Capital in excess of par value 8,406,741
Accumulated deficit (4,050,362)
Deferred compensation (note 5) (533,486)
------------
Total stockholders' equity 3,823,028
------------
Total liabilities and stockholders' equity $ 10,896,710
============
See notes to condensed consolidated financial statements.
F-2
<PAGE>
Computer Marketplace(R), Inc., and Subsidiaries
Consolidated Balance Sheet
June 30, 1996
Assets
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, 1,352,424 shares issued and outstanding 135
Capital in excess of par value 6,907,269
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.
F-3
<PAGE>
Computer Marketplace(R), Inc., and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues -
Product sales, rental,
service and other $ 6,688,413 $ 7,965,946 $ 13,868,292 $ 14,498,649
Cost and expenses:
Cost of revenues -
product sales, rental,
service and other 5,876,096 6,597,441 12,135,757 12,225,728
Selling, general and
administrative 1,698,921 1,369,840 2,958,751 2,594,079
------------ ------------ ------------ ------------
7,575,017 7,967,281 15,094,058 14,819,807
------------ ------------ ------------ ------------
Operating loss (886,604) (1,335) (1,226,216) (321,158)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (90,596) (104,803) (206,106) (180,989)
Interest income -- 1,220 234 2,015
Miscellaneous income 9,883 29,617 19,374 30,604
------------ ------------ ------------ ------------
(80,713) (73,966) (186,498) (148,370)
------------ ------------ ------------ ------------
Loss before income taxes
and minority interest (967,317) (75,301) (1,412,714) (469,528)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Loss before minority
interest (967,317) (75,301) (1,412,714) (469,528)
Minority interest (19,100) -- (19,100) --
------------ ------------ ------------ ------------
Net loss $ (986,417) $ (75,301) $ (1,431,814) $ (469,528)
============ ============ ============ ============
Net loss per share $ (0.73) $ (0.05) $ (1.06) $ (0.35)
============ ============ ============ ============
Weighted average common
shares outstanding 1,352,424 1,352,424 1,352,424 1,352,424
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
Computer Marketplace(R), Inc. and Subsidiaries
Consolidated Statements of Operations
Years ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
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 $ (.98) $ (.91)
============ ============
Weighted average common shares outstanding 1,352,424 1,350,144
============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
Computer Marketplace(R), Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
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 1,348,384 $ 135 $ 6,891,362 $ (62,408) $ 6,829,089
Issuance of common stock
in connection with asset
purchase (note 16) 4,040 0 15,907 -- 15,907
Net loss -- -- -- (1,224,709) (1,224,709)
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1995 1,352,424 $ 135 $ 6,907,269 $(1,287,117) $ 5,620,287
Net loss -- -- -- (1,331,431) (1,331,431)
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1996 1,352,424 $ 135 $ 6,907,269 $(2,618,548) $ 4,288,856
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
Computer Marketplace(R), Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
December 31
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,431,814) $ (469,528)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 138,303 137,698
Provisions for losses on accounts receivable 48,125 (10,306)
Provisions for losses on inventory 60,000 44,905
Other valuation provisions -- (1,196)
Loss on sale of equipment -- 1,278
Minority interest in subsidiary 141,356 --
Changes in assets and liabilities:
Accounts receivable (685,336) 53,325
Inventory 773,825 (171,221)
Other current assets 230,282 90,203
Accounts payable 308,679 (576,474)
Accrued payroll and payroll related
liabilities (11,671) (105,954)
Other current liabilities 52,661 128,844
Other liabilities (1,387) (48,464)
----------- -----------
Net cash used in operating activities (376,977) (926,890)
----------- -----------
Cash flows from investing activities:
Decrease in notes receivable -
related parties 18,999 5,326
Purchase of property and equipment (9,909) (300,009)
Proceeds from sale of equipment -- 10,775
Decrease (increase) in other assets 7,735 (38,253)
----------- -----------
Net cash provided by (used in)
investing activities 16,825 (322,161)
----------- -----------
Cash flows from financing activities:
Net increase in notes payable 188,999 1,087,746
Proceeds from long-term debt -- 21,255
Net proceeds from issuance of stock 930,000 --
Payments on long-term debt (26,058) (30,188)
----------- -----------
Net cash provided by financing activities 1,092,941 1,078,813
----------- -----------
</TABLE>
(continued)
F-7
<PAGE>
Computer Marketplace(R), Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows, Continued
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
December 31
1996 1995
----------- -----------
<S> <C> <C>
Decrease in cash and cash equivalents $ 732,789 $ (170,238)
Cash and cash equivalents, beginning of period 594,921 747,665
---------- ----------
Cash and cash equivalents, end of period $1,327,710 $ 577,427
========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 206,105 $ 180,989
========== ==========
</TABLE>
Supplemental disclosures of non-cash operating activities:
During the six months ended December 31, 1996 $90,312 of other liabilities
were reclassified to accounts payable, and fixed assets with a net book
value of $93,511 were reclassified to inventory.
During the six months ended December 31, 1995, $274,235 of accounts payable
was reclassified to other liabilities to reflect the negotiated payment
terms.
See notes to condensed consolidated financial statements.
F-8
<PAGE>
Computer Marketplace(R), Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
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)
</TABLE>
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.
F-9
<PAGE>
Computer Marketplace(R), Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.BASIS OF PRESENTATION
---------------------
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation of the
consolidated financial position of Computer Marketplace, Inc. and
subsidiaries (the "Company") as of December 31, 1996, the consolidated
results of its operations for the three and six month periods ending
December 31, 1996 and 1995 and its cash flows for the six month periods
ending December 31, 1996 and 1995. Although the Company believes that the
disclosures in these financial statements are adequate to make the
information presented not misleading, certain information and footnote
information normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. Results of operations for the period ended December 31, 1996 are
not necessarily indicative of results to be expected for the full year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Form 10-KSB for the year ended
June 30, 1996.
Certain amounts in the three and six month periods ended December 31, 1996
condensed consolidated financial statements have been reclassified to
conform to the current presentation.
2.INVENTORY
---------
Computer Medical
Products Products Total
---------- ---------- ----------
Inventory $1,484,059 $ 466,077 $1,950,136
Inventory on short-term rental 778,109 -- 778,109
---------- ---------- ----------
2,262,168 466,077 2,728,245
Less inventory valuation allowance 281,216 -- 281,216
---------- ---------- ----------
Inventory, net $1,980,952 $ 466,077 $2,447,029
========== ========== ==========
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
re-marketed 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 increases to the
inventory valuation allowance were $60,000 for each of the six month periods
ending December 31, 1996 and 1995, respectively.
F-10
<PAGE>
Computer Marketplace(R), Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
3.PROPERTY AND EQUIPMENT
----------------------
Property and equipment at December 31, 1996, consists of the following:
Land $ 53,750
Buildings and property improvements 254,490
Machinery and equipment 793,598
Furniture and fixtures 147,503
Automobiles and trucks 167,507
Long-term rental equipment 16,513
----------
1,433,361
Less accumulated depreciation 647,611
----------
Property and equipment, net $ 785,750
==========
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 December 31, 1996 was
$24,506 and $141,400, respectively. The decision to classify this property
as held for sale was made at June 30, 1996.
4.NOTES PAYABLE
-------------
In September 1995, the Company entered into a new revolving credit facility
agreement ("Credit Facility") with a financing company. This 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. At December 31,
1996, borrowings under the Credit Facility and additional amounts available
for borrowing under the Credit Facility were $2,363,840 and $26,562,
respectively. The Credit Facility is collateralized by substantially all of
the Company's assets, except for real property. The Credit Facility expires
on September 30, 1997, but is automatically renewed for an additional one
(1) year term unless either party provides written notice to the other party
of the desire to cancel the Credit Facility.
5.COMMITMENTS AND CONTINGENCIES
-----------------------------
In October 1996, the Company amended its employment agreement with L. Wayne
Kiley, the Company's Chairman of the Board, President and Chief Executive
Officer. Pursuant to such amendment, (i) the employment agreement's
expiration date of October 16, 1997 was extended to October 16, 1999, (ii)
Mr. Kiley was granted the right to purchase a number of shares of Common
Stock for a period of four (4) years, at a price equal to seventy five
percent (75%) of the closing bid price of the Company's shares of Common
Stock on the date of grant equal to 2.5%, 3% and 3.5% of the shares
outstanding, should the Company report annual earnings before the payment of
interest and taxes of $635,000, $875,000 and $1,000,000, respectively, (iii)
Mr. Kiley will be paid a cash bonus equal to 5% of any profit realized by
the Company from the sale of assets outside the ordinary course of business,
and (iv) an insurance policy covering the life of Mr. Kiley whereby Mr.
Kiley's estate will be paid $2,000,000 in exchange for the redemption of the
shares of the Company's
F-11
<PAGE>
Computer Marketplace(R), Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
5.COMMITMENTS AND CONTINGENCIES (Continued)
-----------------------------------------
capital stock beneficially owned by Mr. Kiley. The employment agreement
contains other customary terms and conditions including termination for
cause, non-competition and confidentiality provisions.
In December 1996 the Company entered into a one (1) year consulting
agreement with Victoria Holdings, Inc. an affiliate of Biltmore Securities,
Inc. (Victoria Holdings and Biltmore, respectively). Pursuant to the
consulting agreement, Victoria Holdings agreed to act as a consultant to the
Company in connection with, among other things, corporate finance and
evaluations of possible business partners and will seek to find business
partners suitable for the Company. In addition, Victoria Holdings has agreed
to assist the Company in the structuring, negotiating and financing of such
transactions. The consulting agreement provides for the issuance to Victoria
Holdings of options (the Victoria Holdings Options) exercisable to purchase
1,000,000 shares of Common Stock at an exercise price of $1.00 per share and
for the additional issuance to Victoria Holdings of 166,667 shares (the
"Victoria Fee Shares) of Common Stock upon consummation by the Company of
(i) an acquisition of a company (or companies) introduced to the Company by
Victoria Holdings with net assets of at least $2,500,000 or (ii) a
divestiture of the Company's assets, or the sale of a controlling interest
in the Company's capital stock, to a purchaser introduced to the Company by
Victoria Holdings resulting in net proceeds to the Company in excess of
$2,000,000.
In December 1996, the Company issued to certain employees, officers and
directors options to purchase an aggregate of 1,000,000 shares of the
Company's Common Stock during a four (4) year period commencing on January
1, 1997 at an exercise price of $1.00 per share (the Management Options). In
exchange for the issuance of certain of the Management Options, certain
option holders surrendered for cancellation an aggregate of 242,500
options previously issued in June 1996 for 722,500 of the Management
Options.
On December 31, 1996 the Company concluded a private placement of 500,000
Units (the December 1996 Private Placement) which were placed by Biltmore
Securities, Inc., a broker-dealer and a member of the National Association
of Securities Dealers ("Biltmore"), on a firm commitment basis. Each Unit
was offered at a price of $2.00 per Unit, and consisted of one (1) share of
Common Stock of Medical Marketplace, Inc., a subsidiary of the Company, and
eighteen (18) Class D Redeemable Common Stock Warrants (the "Class D
Warrants"). The Class D Warrants are exercisable for one (1) share of the
Company's Common Stock commencing March 31, 1997 at an exercise price of
$.417 per share for a one (1) year period. The Company intends to use the
proceeds from the December 1996 Private Placement to expand the business of
Medical Marketplace, repay advances made by the Company to Medical
Marketplace, and for working capital purposes. Prior to the December 1996
Private Placement, Medical Marketplace issued options to certain key
employees to purchase an aggregate of 1,000,000 shares of Medical
Marketplace Common Stock at $.80 per share.
The Company, its officers, directors and employees and holders of 5% or more
of the outstanding shares of Common Stock have agreed not to sell, pledge,
transfer or hypothecate any shares of Common Stock of the Company or any
securities convertible into, or exercisable or exchangeable for, shares of
Common Stock of the Company for a period of eighteen (18) months from
December 31, 1996 without Biltmore's prior consent.
F-12
<PAGE>
Computer Marketplace(R), Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
5.COMMITMENTS AND CONTINGENCIES (Continued)
-----------------------------------------
The Company's Common Stock is traded on The Nasdaq SmallCap Market
("Nasdaq"). Under the rules of Nasdaq in order to qualify for continued
quotation of securities on Nasdaq, the Company, among other things, must
have either (i) $2,000,000 in assets, $1,000,000 in stockholder equity and a
minimum bid price of $1.00 per share (the "Minimum Bid Requirement") or
alternatively (ii) $2,000,000 in total capital and surplus, and $1,000,000
in market value of public float (the "Capital/Market Value Requirement"). On
February 12, 1997, the Company's Common Stock had a closing price of $.156.
On January 21, 1997, the Staff of Nasdaq advised the Company that the
Company failed to satisfy the Capital/Market Value Requirement and the
Minimum Bid Requirement with respect to its shares of Common Stock. The
Company was then provided 90 days to comply with either of such requirements
in order to continue the listing of its Common Stock on Nasdaq. Failure to
do so would result in delisting the Company's shares of Common Stock. The
Company's Board of Directors approved a 1-for-6 reverse stock split with
respect to its shares of Common Stock, subject to shareholder approval (the
"Reverse Stock Split"). It is anticipated that the Company's shareholders
will be requested to approve the Reverse Stock Split at the Company's Annual
Meeting currently scheduled for the end of March 1997. The Board of
Directors believes that a Reverse Stock Split will, among other things,
enable the Company to meet the Minimum Bid Requirement. Furthermore, a
relatively low stock price may affect not only the liquidity of the
Company's Common Stock, but also its ability to raise additional capital
through the sale of equity securities. Thus, the Company believes that the
anticipated increase in trading price will be attractive to the financial
community, the investing public, and to users of the Company's products.
F-13
<PAGE>
Computer Marketplace(R), 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(R), 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.
F-14
<PAGE>
Computer Marketplace(R), 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.
F-15
<PAGE>
Computer Marketplace(R), 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
==========
F-16
<PAGE>
Computer Marketplace(R), 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.
F-17
<PAGE>
Computer Marketplace(R), 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.
6. Long-term Debt
--------------
As of June 30, 1996, long-term debt consisted of the following:
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
==========
F-18
<PAGE>
Computer Marketplace(R), 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.
F-19
<PAGE>
Computer Marketplace(R), 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.
F-20
<PAGE>
Computer Marketplace(R), 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.
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
---------------------
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
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.
F-21
<PAGE>
Computer Marketplace(R), 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
=========
F-22
<PAGE>
Computer Marketplace(R), 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.
F-23
<PAGE>
Computer Marketplace(R), 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 2,070,000
units (including the 270,000 underwriters over-allotment units) at $4.00 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 674,192 then outstanding
shares of common stock, par value $.0001 per share, into 1,348,384 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 300,000 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 166,667 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 280,500 options
were issued at $1.00 per share.
F-24
<PAGE>
Computer Marketplace(R), 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.
F-25
<PAGE>
Computer Marketplace(R), 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.
F-26
<PAGE>
Computer Marketplace(R), 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.
F-27
<PAGE>
Computer Marketplace(R), Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
17. Industry Segments
-----------------
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:
<TABLE>
<CAPTION>
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
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------------------
Computer Medical
Products Products Consolidated
------------ ------------ ------------
<S> <C> <C> <C>
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.
F-28
<PAGE>
Computer Marketplace(R), 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.
F-29
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus and
if given or made, such information or representations must not be relied upon as
having been authorized by the Company or any Underwriter. Neither the delivery
of this Prospectus nor any sale made hereunder shall under any circumstances
create any implication that there has been no change in the affairs of the
Company since the date hereof. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any of the securities offered hereby
in any jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
TABLE OF CONTENTS
Page
Available Information .....................................................
Prospectus Summary ........................................................
The Company ...............................................................
The Offering ..............................................................
Summary of Financial
Information ............................................................
Risk Factors ..............................................................
Use of Proceeds ...........................................................
Capitalization ............................................................
Selected Financial Data ...................................................
Management's Discussion and
Analysis of Financial ....................................................
Condition and Results of
Operations ...............................................................
Business ..................................................................
Properties ................................................................
Legal Proceedings .........................................................
Management ................................................................
Executive Compensation ....................................................
Principal Stockholders ....................................................
Certain Relationships and
Related Transactions ......................................................
Description of
Securities ................................................................
Selling Securityholders ...................................................
Plan of Distribution ......................................................
Shares Eligible for
Future Sale ..............................................................
Legal Matters .............................................................
Experts ...................................................................
Additional Information ....................................................
Financial Statements ......................................................
COMPUTER MARKETPLACE(R), INC.
9,000,000 Class D Redeemable Common Stock
Purchase Warrants and 3,500,000 Shares of
Common Stock
--------------------
PROSPECTUS
--------------------
___ __, 1997
--------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of the performance of their duties as directors and
officers provided that this provision shall not eliminate or limit the liability
of a director (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
arising under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, vote of Stockholders or otherwise.
Article Tenth of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the fullest extent permitted by Section
102(b)(7) of the Delaware General Corporation Law.
The effect of the foregoing is to require the Company to the extent
permitted by law to indemnify the officers and directors of the Company for any
claim arising against such persons in their official capacities if such person
acted in good faith and in a manner that he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with this offering are as follows:
SEC filing fee .................................... $ 1,815.89
Accounting fees and expenses* ..................... $ 25,000.00
Legal fees and expenses* .......................... $ 25,000.00
Printing and engraving* ........................... $ 25,000.00
Miscellaneous expenses* ........................... $ 25,000.00
Total ............................................. $ 101,815.89
-----------
- ----------------
* Estimated
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
In May 1994, the Board of Directors of the Company approved the issuance of
up to 250,000 options to certain employees and consultants of the Company in
exchange for services rendered (the "Options"). The Options vest immediately and
are exercisable at $14.40 per share (or 80% of the fair market value on the date
of grant) at any time prior to May 10, 1997. L. Wayne Kiley, the President and
Chief Executive Officer of the Company, has been issued 166,667 Options of the
250,000 Options authorized for issuance.
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 166,667 shares. No awards or shares have been
granted under this Plan.
On January 3, 1996, the Company's Board of Directors approved the issuance
of 158,083 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, 157,083 stock
options were granted at an exercise price of $1.6875 per share.
On June 11, 1996, the Company's Board of Directors approved the issuance of
10,833 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, 10,833 stock
options were granted at an exercise price of $3.375 per share.
In December 1996, the Company issued to certain members as management
options to purchase an aggregate of 1,000,000 shares of the Company's Common
Stock during a four (4) year period commencing on January 1, 1997 at an exercise
price of $1.00 per share.
On December 16, 1996 the Company commenced a private placement of 500,000
Units (the "December 1996 Private Placement") which were placed by the Biltmore
Securities, Inc., on a firm commitment basis. Each Unit, which was offered at a
price of $2.00 per Unit, and consisted of one (1) share of Common Stock of
Medical Marketplace, Inc., a wholly owned subsidiary of the Company, and
eighteen (18) Class D Redeemable Common Stock Purchase Warrants (the "Class D
Warrants"). Each six (6) Class D Warrants are exercisable for one (1) share of
the Company's Common Stock commencing three (3) months following the date of
issuance at an exercise price of $2.50 per share during a one (1) year period.
II-2
<PAGE>
Item 27. Exhibits.
The following is a list of exhibits filed as part of the Registration
Statement. Where so indicated by footnote, the exhibits have either been
previously filed, and are hereby incorporated by reference, or will be filed by
amendment:
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)
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 Specimen Certificate for Class D Warrants+
4.06 Form of Class A and Class B Warrant Agreement.(1)
4.07 Form of Underwriter's Unit Purchase Option.(1)
4.08 Form of Class D Warrant Agreement+
5.01 Opinion of Bernstein & Wasserman, LLP, as counsel to the Company.+
10.01 Agreement between International Business Machines Corporation 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)
II-3
<PAGE>
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 Lease for office space at Traverse City Michigan.(1)
10.11 Lease for office space at Dallas, Texas.(1)
10.12 Lease for office space at Livonia, Michigan.(1)
10.13 Lease for office space at Apple Valley, California.(1)
10.14 Installment Payment Master Agreement between IBM Credit Corporation and
the Company.(1)
10.15 Non-exclusive Domestic Dealer Agreement between Autodesk, Inc. and the
Company. (1)
10.16 Distributorship Agreement between Sparks Ind., Inc., Delphi Data
Division, and the Company.(1)
10.17 End-User Distribution Agreement between Universal Software, Inc. and the
Company. (1)
10.18 Non-exclusive Sales Distributorship Agreement between Universal Data
Systems, Inc. and the Company.(1)
10.19 Changes in Terms Agreement between Western Community Bank and the
Company. (1)
10.20 Term Loan Promissory Note issued by the Company in favor of Jack
Mooney.(1)
10.21 Consulting and List Purchase Contract between David L. Wieseler and the
Company. (1)
10.22 Stock Purchase Agreement by and between L. Wayne Kiley, Nancy Kiley and
Jordan Belfort dated as of June 10, 1993.
10.23 Commercial Real Estate Contract between the Company and Mariposa County
Unified School District dated August 25, 1993.(2)
10.24 Retainer Agreement dated January 3, 1994, between the Company and Alan
M. Novich, Esq.(3)
II-4
<PAGE>
10.25 Revolving Credit Agreement between Union Bank and Computer Marketplace,
Inc.(3)
10.26 Commercial Promissory Note between Union Bank and Computer Marketplace,
Inc.(3)
10.27 Note Secured by Deed of Trust dated July 8, 1994, between The J. David
Gladstone Institutes and Computer Marketplace, Inc.(3)
10.28 Deed of Trust with Assignment of Rents and Fixtures filing by Computer
Marketplace, Inc. dated July 8, 1994.(3)
10.29 Absolute Assignment of Leases and Rents by Computer Marketplace, Inc. to
The J. David Gladstone Institutes, dated July 8, 1994.(3)
10.30 Security Agreement dated July 8, 1994, by Computer Marketplace, Inc., in
favor of The J. David Gladstone Institutes.(3)
10.31 Representations and Warranties to The J. David Gladstone Institutes made
by Computer Marketplace, Inc. dated July 11, 1994.(3)
10.32 Environmental Indemnity dated July 8, 1994, by Computer Marketplace,
Inc. for the benefit of The J. David Gladstone Institutes.(3)
10.33 Promissory Note dated December 28, 1993, between Computer Marketplace,
Inc. and Yosemite Bank.(3)
10.34 Business Loan Agreement dated December 28, 1993, between Computer
Marketplace, Inc. and Yosemite Bank.(3)
10.35 Deed of Trust dated December 28, 1993, among Computer Marketplace, Inc.,
Yosemite Bank and Fidelity National Title.(3)
10.36 Commercial Guaranty of Computer Marketplace, Inc. Indebtedness, dated
January 18, 1991, by L. Wayne Kiley to Western Community Bank.(3)
10.37 Promissory Note dated January 18, 1991, by Computer Marketplace and
Western Community Bank.(3)
10.38 Business Loan Agreement dated January 18, 1991, between Computer
Marketplace, Inc. and Western Community Bank.(3)
10.39 Asset Purchase Agreement by and among SSI/PC Outlet Acquisition
Corporation, Synergy Solutions, Inc., International Associated Marketing
Corporation, and The Dean Family, dated as of January 1, 1994.(3)
10.40 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
II-5
<PAGE>
Katherine Vitale.(3)
10.41 Bill of Sale dated January 1, 1994, by Synergy Solutions, Inc., and
International Associated Marketing Corporation to SSI/PC Outlet
Acquisition Corporation.(3)
10.42 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)
10.43 Asset Purchase Agreement, dated November 12, 1993, between Computer
Marketplace, Inc. and International Computer Sales, Inc.(3)
10.44 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)
10.45 IBM Surplus PC Reseller Profile Agreement dated June 15, 1994, between
IBM and Computer Marketplace, Inc.(3)
10.46 Loan Agreement dated October 24, 1994, between Computer Marketplace,
Inc. and Union Bank.(4)
10.47 Commercial Promissory Note between Union Bank and Computer Marketplace,
Inc.(4)
10.48 Security Agreement dated October 24, 1994, by Computer Marketplace,
Inc., in favor of Union Bank.(4)
10.49 Arbitration Agreement between Union Bank and Computer Marketplace,
Inc.(4)
10.50 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)
10.51 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)
10.52 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)
10.53 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)
10.54 Amended Employment Agreement between the Company and L.Wayne Kiley
II-6
<PAGE>
10.55 Consulting Agreement between the Company and Victoria Holdings, Inc.
21.01 Subsidiaries of the Registrant (6)
23.01 Consent of Bernstein & Wasserman, LLP (to be included in Exhibit 5.01)+
23.02 Consent of Moore Stephens, P.C.
- ---------------
+ To be filed by amendment
(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.
(6) Incorporated herein by reference to the Form 10-KSB of the Registrant for
the year ended June 30, 1996.
Item 28. Undertakings.
(a) Rule 415 Offering
The undersigned registrant will:
1. File, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) of any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424 (b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the
maximum aggregate offering price net profit in the
"Calculation of Registration Fee" table in the effective
registration statement.
II-7
<PAGE>
(iii) Include any additional or changed material information on
the plan of distribution;
2. For determining liability under the Securities Act, treat each
such Post-effective amendment as a new registration statement of
the securities offered, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering.
3. File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(b) Indemnification
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or controlling
persons of the Registrant pursuant to the provisions referred to in
Item 22 of this Registration Statement or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) Rule 430A
The undersigned Registrant will:
1. For determining any liability under the Securities Act, treat the
information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and
contained in the form of a prospectus filed by the small business
issuer under Rule 424(b)(1) or (4) or 497(h) under the Securities
Act as part of this Registration Statement as of the time the
Commission declared it effective.
2. For any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a
new registration statement for the securities offered in the
Registration Statement, and that the offering of the securities
at that time as the initial bona fide offering of those
securities.
II-8
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant, certifies that it has reasonable grounds to believe
that it meets all the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Corona, State of California on May 2, 1997
COMPUTER MARKETPLACE(R), INC.
By: /s/ L. Wayne Kiley
-------------------
L. Wayne Kiley
President, Chief Executive Officer
and Director
By: /s/ Carmella Hume
--------------------------------------
Carmella Hume
Controller (Chief Accounting Officer)
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
- --------- ----- ----
/s/ L. Wayne Kiley President, Chief Executive Officer May 2, 1997
- ------------------- and Director
L. Wayne Kiley
/s/ Nancy Kiley Secretary and Director May 2, 1997
- --------------------
Nancy Kiley
/s/ Rick C. Garian Chief Operating Officer and May 2, 1997
- ----------------------- Director
Rick C. Garian
/s/ Carmella Hume Controller May 2, 1997
- ---------------------- Chief Accounting Officer)
Carmella Hume
/s/ J.R. Achten Director May 2, 1997
- ----------------------
J.R. Achten
/s/ Thomas E. Evans, Jr. Director May 2, 1997
- ------------------------
Thomas E. Evans, Jr.
II-9
<PAGE>
EXHIBIT INDEX
Exhibit
Number Page
- ------ ----
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)
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 Specimen Certificate for Class D Warrants+
4.06 Form of Class A and Class B Warrant Agreement.(1)
4.07 Form of Underwriter's Unit Purchase Option.(1)
4.08 Form of Class D Warrant Agreement+
5.01 Opinion of Bernstein & Wasserman, LLP, as counsel to the
Company.+
10.01 Agreement between International Business Machines Corporation
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)
II-10
<PAGE>
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 Lease for office space at Traverse City Michigan.(1)
10.11 Lease for office space at Dallas, Texas.(1)
10.12 Lease for office space at Livonia, Michigan.(1)
10.13 Lease for office space at Apple Valley, California.(1)
10.14 Installment Payment Master Agreement between IBM Credit
Corporation and the Company.(1)
10.15 Non-exclusive Domestic Dealer Agreement between Autodesk, Inc.
and the Company. (1)
10.16 Distributorship Agreement between Sparks Ind., Inc., Delphi
Data Division, and the Company.(1)
10.17 End-User Distribution Agreement between Universal Software,
Inc. and the Company. (1)
10.18 Non-exclusive Sales Distributorship Agreement between
Universal Data Systems, Inc. and the Company.(1)
10.19 Changes in Terms Agreement between Western Community Bank and
the Company. (1)
10.20 Term Loan Promissory Note issued by the Company in favor of
Jack Mooney.(1)
10.21 Consulting and List Purchase Contract between David L.
Wieseler and the Company. (1)
10.22 Stock Purchase Agreement by and between L. Wayne Kiley, Nancy
Kiley and Jordan Belfort dated as of June 10, 1993.
10.23 Commercial Real Estate Contract between the Company and
Mariposa County Unified School District dated August 25,
1993.(2)
10.24 Retainer Agreement dated January 3, 1994, between the Company
and Alan M. Novich, Esq.(3)
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10.25 Revolving Credit Agreement between Union Bank and Computer
Marketplace, Inc.(3)
10.26 Commercial Promissory Note between Union Bank and Computer
Marketplace, Inc.(3)
10.27 Note Secured by Deed of Trust dated July 8, 1994, between The
J. David Gladstone Institutes and Computer Marketplace,
Inc.(3)
10.28 Deed of Trust with Assignment of Rents and Fixtures filing by
Computer Marketplace, Inc. dated July 8, 1994.(3)
10.29 Absolute Assignment of Leases and Rents by Computer
Marketplace, Inc. to The J. David Gladstone Institutes, dated
July 8, 1994.(3)
10.30 Security Agreement dated July 8, 1994, by Computer
Marketplace, Inc., in favor of The J. David Gladstone
Institutes.(3)
10.31 Representations and Warranties to The J. David Gladstone
Institutes made by Computer Marketplace, Inc. dated July 11,
1994.(3)
10.32 Environmental Indemnity dated July 8, 1994, by Computer
Marketplace, Inc. for the benefit of The J. David Gladstone
Institutes.(3)
10.33 Promissory Note dated December 28, 1993, between Computer
Marketplace, Inc. and Yosemite Bank.(3)
10.34 Business Loan Agreement dated December 28, 1993, between
Computer Marketplace, Inc. and Yosemite Bank.(3)
10.35 Deed of Trust dated December 28, 1993, among Computer
Marketplace, Inc., Yosemite Bank and Fidelity National
Title.(3)
10.36 Commercial Guaranty of Computer Marketplace, Inc.
Indebtedness, dated January 18, 1991, by L. Wayne Kiley to
Western Community Bank.(3)
10.37 Promissory Note dated January 18, 1991, by Computer
Marketplace and Western Community Bank.(3)
10.38 Business Loan Agreement dated January 18, 1991, between
Computer Marketplace, Inc. and Western Community Bank.(3)
10.39 Asset Purchase Agreement by and among SSI/PC Outlet
Acquisition Corporation, Synergy Solutions, Inc.,
International Associated Marketing Corporation, and The Dean
Family, dated as of January 1, 1994.(3)
10.40 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
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<PAGE>
Katherine Vitale.(3)
10.41 Bill of Sale dated January 1, 1994, by Synergy Solutions,
Inc., and International Associated Marketing Corporation to
SSI/PC Outlet Acquisition Corporation.(3)
10.42 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)
10.43 Asset Purchase Agreement, dated November 12, 1993, between
Computer Marketplace, Inc. and International Computer Sales,
Inc.(3)
10.44 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)
10.45 IBM Surplus PC Reseller Profile Agreement dated June 15, 1994,
between IBM and Computer Marketplace, Inc.(3)
10.46 Loan Agreement dated October 24, 1994, between Computer
Marketplace, Inc. and Union Bank.(4)
10.47 Commercial Promissory Note between Union Bank and Computer
Marketplace, Inc.(4)
10.48 Security Agreement dated October 24, 1994, by Computer
Marketplace, Inc., in favor of Union Bank.(4)
10.49 Arbitration Agreement between Union Bank and Computer
Marketplace, Inc.(4)
10.50 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)
10.51 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)
10.52 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)
10.53 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)
10.54 Amended Employment Agreement between the Company and L.Wayne
Kiley
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<PAGE>
10.55 Consulting Agreement between the Company and Victoria
Holdings, Inc.
21.01 Subsidiaries of the Registrant
23.01 Consent of Bernstein & Wasserman, LLP (to be included in
Exhibit 5.01)+
23.02 Consent of Moore Stephens, P.C.
II-14
<PAGE>
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of October 16,1996, by and between Computer
Marketplace, Inc. a Delaware corporation (the "Company"), having its principal
executive offices at 1490 Railroad Street, Corona, California 91720, and L.
WAYNE KILEY, an individual residing at 8401 Bedford Motorway, Corona, CA 91719
("Employee").
WHEREAS, the Company and the Employee entered into that certain employment
agreement dated as of October 16, 1992 (the Original Agreement"); and
WHEREAS, the Company and the Employee wish to amend certain terms of the
Original Agreement, including the term of employment thereunder; and
NOW, THEREFORE, in consideration of the provisions and covenants contained
herein, the parties hereto agree as follows:
1. TERM
The term of this Agreement shall be for a period of three (3) years
commencing on the date hereof (the "Employment Term"), and shall be renewed at
the end of the Employment Term for an additional one (1) year period upon mutual
agreement by the parties, in writing, at least sixty (60) days prior to the end
of the term of this Agreement.
2. COMPENSATION
(a) The Company shall pay to Employee an annual salary of $302,500 per
annum, payable biweekly or at such other intervals as the Company makes payment
of its payroll in the regular
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course of business (the "Base Amount"). The Base Amount shall be increased by
six percent (6%) during each year of the Employment Term.
(b) Employee may participate in the Company's group health insurance,
long-term disability and life insurance coverage that the Company makes
available to its employees generally. The respective carriers shall make all
determinations as to insurability and coverage.
(c) The Company and Employee contemplate that the Company will pay to
Employee bonuses, on an annual basis, based upon the operating performance of
the Company or other reasonable criteria. The Company and Employee will
negotiate in good faith to achieve a reasonable and fair bonus arrangement to
incentive and reward Employee for services performed and to be performed for the
Company hereunder.
(d) The Company shall provide the Employee with an automobile for his use.
(e) If the Company has certain pre-tax earnings during a fiscal year,
during the Employment Term, then Employee shall be granted an option exercisable
for a period of four (4) years to purchase from the Company shares of the
Company's common stock at an exercise price equal to seventy five percent (75%)
of the closing bid price of the Company's shares of Common Stock on the date of
grant, subject to customary anti-dilution adjustments. If the Company has
earnings before the payment of interest and taxes ("EBIT") of at least six
hundred twenty five thousand dollars ($625,000) during any fiscal year during
the Employment Term, then Employee shall have the right to purchase a number of
shares of common stock equal to two and one-half percent (2.5%) of the shares of
common stock outstanding on the date of grant of such option to Employee. If the
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<PAGE>
Company has EBIT of at least eight hundred seventy five thousand dollars
($875,000) during any fiscal year during the Employment Term then Employee shall
have the right to purchase a number of shares of common stock equal to three
percent (3%) of the shares of common stock outstanding on the date of grant of
such option to Employee. If the Company has EBIT of at least one million dollars
($1,000,000) during any fiscal year during the Employment Term, Employee shall
have the right to purchase a number of shares of common stock equal to three and
one-half percent (3.5%) of the shares of common stock outstanding on the date of
exercise of such option by the Employee. In no event shall Employee be entitled
to receive options for the Company's satisfaction of a financial target
described above on more than one occasion.
(f) In addition to other compensation hereunder, the Company shall pay for
and maintain a policy of disability income insurance to provide Employee with
income in the amount of seventy-five percent (75%) of Employee's salary if
Employee becomes disabled.
(g) In the event that Employee shall become permanently disabled,
(Employee's inability, by reason of physical or mental illness, or other cause,
to perform the majority of his usual duties in a normal and professional manner
on a full-time basis which continues for a period beyond six (6) months) then,
at Employer's option, Employer's obligation to said Employee to pay any part of
his salary shall cease and Employee shall assign its interest in Employee's
disability policy to Employee and Employee shall thereafter be responsible for
paying all subsequent premiums required to maintain and keep said policy in full
force and effect.
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(h) The Company will promptly reimburse the Employee for all reasonable
business expenses incurred by the Employee in promoting the business of the
Company, including expenditures for entertainment, gifts, and travel, provided
that:
(i) each such expenditure is of a nature qualifying it as a proper
deduction on the Federal and State income tax return of the Company;
and
(ii) the Employee furnishes to the Company adequate records and other
documentary evidence required by Federal and State statutes and
regulations issued by the appropriate taxing authorities for the
substantiation of each such expenditure as an income tax deduction.
(i) The Company shall maintain a life insurance policy on the life of the
Employee providing Employee's spouse or other heirs with two million dollars
($2,000,000) in the event Employee becomes deceased prior to the end of the
Employment Term; provided however, that Employee's spouse or other heirs must
deliver to the Company for cancellation all of the shares of Common Stock of the
Company beneficially owned by Employee prior to his death. In addition, the
Company shall also maintain a $1,000,000 split dollar life insurance policy on
the life of the Employee, the policy amount to be paid to the Employee's
beneficiary and to the Company for reimbursement of premium amounts previously
paid.
(j) In the event that during the Term the Company sells assets outside the
ordinary course of business, the Employee shall be entitled to a cash bonus
equal to five percent (5%) of the amount
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<PAGE>
by which the sale price exceeds the book value for such asset(s) as reflected on
the Company's balance sheet for the quarter ending just prior to the date of
such sale.
3. SCOPE OF EMPLOYMENT
The Company agrees to employ Employee on the terms and conditions contained
herein during the Employment Term, and Employee agrees to be so employed.
Employee shall serve as President and Chief Executive Officer of the Company
during the Employment Term. Employee will serve the Company faithfully,
industriously, and to the best of Employee's ability, experience and talents.
Employee shall be responsible to carry out all corporate and administrative
duties, functions and responsibilities customarily incumbent upon chief
executive officers of companies such as the Company.
4. TERMINATION FOR CAUSE
The Company may terminate this Agreement, upon thirty (30) days prior
written notice, for cause prior to the end of its term because any of the
following have occurred: (i) Employee has materially breached this Agreement,
including without limitation the material breach of any of his duties hereunder;
(ii) Employee has misrepresented or failed to fully disclose facts to the
Company or has otherwise been dishonest to or with respect to the Company; (iii)
Employee has not worked for a period of 100 consecutive days or any 180 days
(other than vacation days) within any 12-month period; or (iv) death of
Employee; provided however, that the Company shall continue to pay Employee's
estate. If Employee has cured any of the foregoing reasons for termination of
this
5
<PAGE>
Agreement by the Company within thirty (30) days following receipt by him of
notice thereof, then the Company may not terminate this Agreement therefor.
5. CONFIDENTIALITY AND NON-COMPETITION COVENANTS
All information concerning customers that Employee shall gain knowledge of,
all records concerning customers that shall come into Employee's possession, and
all other information pertaining to the Company's operations, are confidential
and shall not at any time be communicated by Employee to any person, firm,
corporation or entity not affiliated with the Company, other than in the
ordinary course of business. At the end of the Employment Period, Employee shall
surrender all copies of all such records, regardless of whether made by him or
otherwise created. During the Employment Term and for a period of two (2) years
after termination of the Employment Term, Employee shall not directly or
indirectly compete with the Company, solicit or otherwise communicate with any
customer of the Company, or otherwise interfere with the carrying on by the
Company of its business including without limitation by soliciting, directly or
indirectly, any other employee at the Company to leave his employment. Employee
recognizes that a breach of these provisions concerning confidentiality and
non-solicitation of customers of the Company will cause irreparable damage to
the Company. Employee therefore agrees, notwithstanding the provisions in
Section 7 herein for the resolution of all disputes by way of arbitration, that
the Company shall be entitled to the entry of a preliminary injunction by a
court of competent jurisdiction in California or elsewhere, restraining Employee
in accordance with the foregoing provisions concerning
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<PAGE>
confidentiality and non-solicitation in the event of any breach or threatened
breach of any such provision, and submits to the jurisdiction of such court in
any such action.
If any of the restrictions contained in this Section 6 are deemed to be
unenforceable by reason of the extent, duration or geographical scope thereof,
or otherwise, then the Court making such determination shall have the right to
reduce such extent, duration, geographical scope or other provisions hereof and
in its reduced form this Section shall then be enforceable in the manner
contemplated hereby.
6. MISCELLANEOUS
Any dispute which the parties hereto are unable amicably to resolve shall
be submitted to binding arbitration in California in accordance with the Rules
and Constitution of the American Arbitration Association. Either party hereto
may request that any decision of the arbitrators set forth the findings of fact
and conclusions of law upon which their award is based. Judgment upon any such
arbitration award may be entered in any court of competent jurisdiction, and
Employee submits to the jurisdiction of any such court.
In the event any suit or other action is commenced with respect to the
interpretation or enforcement of any provision of this agreement, the prevailing
party shall be entitled, in addition to any other sums to which such party may
be entitled, to recover from the other party the reasonable fees and
disbursements of counsel retained to investigate and pursue such matter.
7. NOTICES
7
<PAGE>
Any notice required or permitted to be delivered hereunder shall be deemed
effective five (5) days after mailing when sent by United States mail, postage
prepaid, certified mail, return receipt requested, addressed to the Company or
Employee, as the case may be, at the addresses set forth below:
If to the Company:
Computer Marketplace
1490 Railroad Street
Corona, CA 91719
Attention: President
With a copy to:
Hartley T. Bernstein, Esq.
Bernstein & Wasserman
950 Third Avenue
New York, NY 10022
If to Employee:
Mr. L. Wayne Kiley
8401 Bedford Motorway
Corona, CA 91719
With a copy to:
Stuart Wallach, Esq.
20271 Southwest Birch Street
Suite 100
Newport Beach, CA 92660
(714) 474-2221
8. SURVIVAL
8
<PAGE>
The representations, warranties and agreements herein made shall survive
the expiration or termination of the Employment Term hereof.
9. SEVERABILITY
The invalidity of any section, paragraph, sentence or clause ("provision")
set forth in this Agreement shall not affect the validity of any other
provision. All provisions of this Agreement shall be enforced to the fullest
extent permitted by law.
10. ASSIGNMENT
Employee acknowledges that the services to be rendered by him are unique
and personal. Employee may not assign any of his rights or delegate any of his
duties or obligations under this Agreement. The rights and obligations of the
Company under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Company.
11. GOVERNING LAW
This Agreement is executed and delivered in the State of California and
shall be construed, governed and enforced in accordance with the laws and
decisions of the State of California without regard to its conflict of laws
doctrine. Each of the parties hereto irrevocably consents to the jurisdiction of
the Federal and State Courts located in the State of California.
12. WAIVER OF BREACH
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<PAGE>
The waiver by either party of a breach of any of the provisions of this
Agreement shall not operate as or be construed as a waiver of any subsequent
breach thereof.
13. INDEMNIFICATION
The Company agrees to and shall indemnify, defend, and hold harmless
Employee, both during and following the term of this Agreement, from and against
any and all losses, claims, damages, liabilities, judgments, fines, penalties,
assessments, and costs and expenses as incurred (including attorneys' fees and
costs) which may arise from or be based upon: (i) Employee performance of
services pursuant to this Agreement; and (ii) any actions or alleged actions or
omissions or alleged omissions by Employee in his performance under this
Agreement, so long as Employee acted in good faith and in a manner which he
believes to be in the best interest of the Company. The foregoing
indemnification and hold harmless shall not apply if Employee is found by a
court of competent jurisdiction to be guilty of wanton or willful misconduct or
gross negligence with respect to the matter upon which a claim of
indemnification or hold harmless is made by Employee. In addition, the Company
agrees to use its best efforts to obtain, at a reasonable cost to the Company,
officers and directors liabilities insurance.
14. ENTIRE AGREEMENT
This Agreement contains the entire understanding of the parties. It may not
be changed orally but only by an agreement in writing signed by the party
against whom enforcement of any waiver, change, modification, extension or
discharge is sought.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.
COMPUTER MARKETPLACE, INC.
By: /s/ Robert V. Von Boeckmann
-----------------------------
ROBERT V. VON BOECKMANN
Vice President - Finance
By: /s/ L. Wayne Kiley
--------------------------
L. WAYNE KILEY
11
<PAGE>
CONSULTING AGREEMENT
Agreement made and entered into as of the 9th day of December, 1996, by and
between Computer Marketplace, Inc., a Delaware corporation having offices at
1490 Railroad Street, Corona, CA 91720 (the "Company"), and Victoria Holdings,
Inc., a Delaware corporation and an affiliate of Biltmore Securities, Inc., a
Florida corporation having offices at 6700 North Andrews Avenue, Fort
Lauderdale, Florida 33309 (the "Consultant").
W I T N E S S E T H:
WHEREAS, the Company desires to secure the services of the Consultant to
provide assistance with respect to corporate finance and evaluations of possible
business partners, and the Consultant desires to provide such services to the
Company, subject to and in accordance with the terms and conditions hereinafter
set forth.
NOW THEREFORE, in consideration of the foregoing and the mutual promises
and covenants herein contained, it is hereby agreed as follows:
1. Retention.
The Company hereby retains the Consultant and the Consultant hereby
accepts such retention by Company, for the period and upon the terms and
conditions set forth in this Agreement.
1. Duties.
(a) The Consultant shall serve the Company generally as a consultant to
assist the Company with regard to corporate finance, evaluations of possible
business partners and such other matters relating to the Company as may be
requested by the Company from time to time. The Consultant will seek to find
business partners suitable for the Company and assist in the structuring,
negotiating and financing of such transactions.
(b) Throughout the Term (as hereinafter defined in Paragraph 3), the
Consultant shall devote its best efforts to the performance of its duties
hereunder in a manner which will faithfully and
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<PAGE>
diligently further the business interests of the Company. It is anticipated that
over the Term the Consultant will devote such time to the performance of its
duties hereunder as is reasonably requested by the Company from time to time.
1. Term.
This Agreement shall be in effect for a term (the "Term") of three (3)
years commencing as of the date hereof and terminating on the third anniversary
of such date. Thereafter, this Agreement may be extended by mutual agreement of
the parties.
1. Compensation.
(a) Future Services. As compensation for services to be rendered by the
Consultant during the Term, the Company is issuing simultaneously with the
execution and delivery of this Agreement options (the "Options") to purchase
6,000,000 shares (or 1,000,000 shares of Common Stock following the 1-for- 6
reverse stock split proposed by the Company) (the "Options Shares") of the
Company's common stock, par value $.0001 per share (the "Common Stock"), for an
exercise price of $.167 per share (or $1.00 per share after giving effect to the
proposed 1-for-6 reverse stock split). The Options will be exercisable for a
period commencing upon the consummation by the Company and/or its affiliates of
a financing providing gross proceeds to the Company of approximately $1,000,000
(the "Financing") and terminating on the fifth anniversary of the date hereof;
provided, that if the Financing has not occurred by January 27, 1997, the
Options shall terminate. The Options will be issued pursuant to an option
agreement substantially in the form annexed hereto as Exhibit A.
(b) Corporate Finance Transactions. In the event that during the Term the
Company consummates (i) the acquisition of one or more businesses introduced to
the Company by the Consultant which in the aggregate have net assets of not less
than $2,500,000 or (ii) the divestiture of assets outside the ordinary course of
business, or the sale of a majority of the Company's capital
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<PAGE>
stock outside the ordinary course of business, by merger or otherwise, to a
purchaser introduced to the Company by the Consultant resulting in net proceeds
to the Company of not less than $2,000,000 in cash or stock (collectively, an
"Introduced Acquisition"), then the Consultant shall be entitled to receive
1,000,000 shares of Common Stock simultaneously with the closing of such
transaction (the "Shares"), such number of shares shall be subject to customary
anti-dilution protection in the event of stock splits or other reclassification
or reorganization.
(c) Registration of Options Shares and Shares. The Company agrees to grant
registration rights to the Consultant with respect to the Options Shares and
Shares in accordance with the registration rights provisions attached as Exhibit
B to this Agreement which are incorporated herein and made a part hereof.
5. Reimbursement for Out-of-Pocket Expenses. The Company shall reimburse the
Consultant for all reasonable expenses incurred during the Term which are
directly related to the performance of its services hereunder, provided that
such expenses have been previously authorized in writing by an executive officer
of the Company. The Consultant shall be reimbursed at such times and with such
frequency as is the custom of the Company with regard to reimbursement of
employees for expenses. For such purposes, the Consultant shall submit to the
Company periodic reports of such expenses, including a statement of the related
services performed by the Consultant to which such expenses relate.
6. Authority to Bind the Company. Nothing herein shall imply that the Consultant
is either an employee or agent of the Company, except to such an extent as might
be agreed upon in writing for a specified purpose. Except as expressly agreed,
the Consultant shall not have the authority to obligate or commit the Company in
any manner whatsoever.
7. Company Property. All advertising, sales, marketing and other materials or
articles or information, including without limitation data processing reports,
sales analyses, invoices, price lists
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<PAGE>
or information, or any other materials or data of any kind furnished to the
Consultant by the Company or developed by the Consultant for the Company at the
Company's direction or for the Company's use or otherwise in connection with the
Consultant's services hereunder, are and shall remain the sole and confidential
property of the Company; if the Company requests the return of such materials at
any time during or after the Term, the Consultant shall immediately deliver the
same to Company.
8. Non-Competition, Trade Secrets.
(a) During the Term and as long as this Agreement is in effect and for a
period of two (2) years thereafter, the Consultant shall not directly or
indirectly induce or attempt to influence any employee of the Company to
terminate his employment with the Company or solicit or divert any business or
customer or supplier from the Company.
(b) During the Term and at all times thereafter, the Consultant shall not
use for its benefit, or disclose, communicate or divulge to, or use for the
direct or indirect benefit of any person, firm, association or company other
than the Company, any material referred to in Paragraph 7 above or any
information regarding the business methods, business policies, procedures,
techniques, trade secrets, or other knowledge or processes of or developed by
the Company or any names and addresses of the Company's customers or clients or
any data on or relating to past, present or prospective customers or clients of
the Company or any other confidential information relating to or dealing with
the business operations or activities of the Company, made known to the
Consultant or learned or acquired by the Consultant while retained by the
Company, provided that this provision shall not be construed to restrict the use
or disclosure of any information which (i) is generally publicly known at the
time of its disclosure to, or use by, the Consultant or (ii) is lawfully
received by the Consultant from a third party not bound in a confidential
relationship to the Company or any subsidiary or affiliate thereof..
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(c) Any and all writings, inventions, improvements, processes, procedures
and/or techniques which the Consultant may make, conceive, discover or develop,
either solely or jointly with any person or person, at any time during the Term,
whether during working hours or at any other time and whether at the request or
upon the suggestion of the Company or otherwise, which relate to or are useful
in connection with any business now or hereafter carried on including
developments or expansions of its present fields of operations, shall be the
sole and exclusive property of the Company. The Consultant shall promptly make
full disclosure to the Company of all such writings, inventions, improvements,
processes, procedures and techniques and otherwise aid and assist the Company so
that the Company can prepare and present applications for copyright or letters
of patents therefor, can secure such copyright or letters of patent wherever
possible, as well as reissues, renewals, and extension thereof, and can obtain
the record title to such copyright or patents so that the Company shall be the
sole and absolute owner thereof in all countries in which it may desire to have
copyright or patent protection. The Consultant shall not be entitled to any
additional or special compensation or reimbursement regarding any and all such
writings, inventions, improvements, processes, procedures and techniques.
(d) The Consultant acknowledges that the restrictions contained in the
foregoing subparagraphs (a), (b) and (c), in view of the nature of the business
in which the Company is engaged, are reasonable and necessary in order to
protect the legitimate interests of the Company and that any violation thereof
would result in irreparable injuries to the Company, and the Consultant
therefore acknowledges that, in the event of its violation of any of these
restrictions, the Company shall be entitled to obtain from any court of
competent jurisdiction preliminary and permanent injunctive relief as well as
damages and an equitable accounting of all earnings, profits and other benefits
arising from such violation, which rights shall be cumulative and in addition to
any other rights or remedies to which the Company may be entitled.
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(e) If the period of time or the area specified in subparagraph (a) above
should be adjudged unreasonable in any proceeding, then the period of time shall
be reduced by such number of months or the area shall be reduced by the
elimination of such portion thereof or both so that such restrictions may be
enforced in such areas and for such time as adjudged to be reasonable. If the
Consultant violates any of the restrictions contained in the foregoing
subparagraph (a), the restrictive period shall not run in favor of the
Consultant from the time of the commencement of any such violation until such
time as such violation shall be cured by the Consultant to the satisfaction of
the Company.
9. Indulgences. Neither the failure nor any delay on the part of either party to
exercise any right, remedy, power or privilege under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, power or privilege preclude any other or further exercise of the
same or of any other right, remedy, power or privilege with respect to any
occurrence. No waiver shall be effective unless it is in writing and is signed
by the party asserted to have granted such waiver.
10. Assignment. Neither party may assign its rights or obligations under the
Agreement without the written consent of the other party.
11. Termination. Either party may, upon 30 days prior written notice to the
other, terminate this Agreement; provided however, that in the event that the
Company consummates an Introduced Acquisition within eighteen (18) months
following termination, then the Consultant shall be entitled to receive the
Shares.
12. Notice. All notices, requests, demands and other communications required or
permitted under this Agreement will be in writing and will be deemed to have
been duly given, made and received when personally delivered, three (3) days
after deposited in the United States mails, certified mail
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return receipt requested, or one (1) day after sent by a reputable overnight
courier service, addressed as set forth below:
(i) If to the Company:
Computer Marketplace, Inc.
1490 Railroad Street
Corona, California 91720
Attn:Wayne Kiley, President
(ii) If to the Consultant:
Victoria Holdings, Inc.
c/o Biltmore Securities, Inc.
6700 North Andrews Avenue
Suite 5500
Fort Lauderdale, FL 33309
Attn: Elliot Loewenstern, President
13. Controlling Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida, notwithstanding any
conflict-of-law doctrine of such state or jurisdiction to the contrary.
14. Entire Agreement. This Agreement contains the entire agreement between the
parties, may not be altered or modified, except in a writing signed by the party
to be charged thereby, and supersedes any and all previous agreements between
the parties.
15. Execution and Counterparts. This Agreement may be executed by the parties in
separate counterparts, each of which when so executed and delivered will be
deemed to be an original and all of which taken together will be considered one
and the same Agreement.
16. Arbitration. Any dispute, controversy or claim arising out of or in
connection with this Settlement Agreement shall be determined and settled by
arbitration in the County of Broward, State of Florida conducted by the American
Arbitration Association in accordance with its then existing rules, regulations,
practices and procedures. The arbitration proceedings shall be conducted before
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a single neutral arbitrator selected by the Association in accordance with its
then existing rules, regulations, practices and procedures. Any decision
rendered by the arbitrator shall be final, conclusive and binding upon the
parties to the arbitration and may be enforced by the judgement and order of the
court of proper jurisdiction in the State of Florida for Broward County and the
parties hereto hereby waive any objection to such jurisdiction or venue in any
such proceeding commenced in such court. In any proceeding between the parties
hereto arising out of or in connection with this Agreement, the prevailing party
shall be entitled to recover its reasonable legal fees and expenses from the
losing party.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
on the date first above written.
COMPUTER MARKETPLACE, INC.
By: /s/ L. Wayne Kiley
--------------------------
Name: L. Wayne Kiley
Title: President and
Chief Executive Officer
VICTORIA HLDINGS, INC.
By: /s/ Elliot Loewenstern
---------------------------
Name: Elliot Loewenstern
Title: President
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CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
Computer Marketplace(R), Inc.
We hereby consent to the use in the Registration Statement of our report
dated August 16, 1996 relating to the consolidated financial statements of
Computer Marketplace(R), Inc. and subsidiaries for the years ended June 30, 1996
and 1995.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ MOORE STEPHENS, P.C.
-------------------------
MOORE STEPHENS, P.C.
Certified Public Accountants
Cranford, New Jersey
April 30, 1997
