UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission file number: 000-25129
MAREX, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 65-0354269
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5835 BLUE LAGOON DRIVE, 4TH FLOOR
MIAMI, FLORIDA 33126
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 285-2003
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant as of March 31, 2002 was approximately $1,159,970 based on the .20
closing price for the Common Stock on the Nasdaq National Market on such date.
For purposes of this computation, all executive officers and directors of the
registrant have been deemed to be affiliates. Such determination should not be
deemed to be an admission that such directors and officers are, in fact,
affiliates of the registrant.
The number of shares of Common Stock of the registrant outstanding as of March
31, 2002 was 7,635,848.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to specified
portions of the registrant's definitive Proxy Statement to be issued in
conjunction with the registrant's 2002 Annual Meeting of Stockholders, which is
expected to be filed not later than 120 days after the registrant's fiscal year
ended December 31, 2001.
MAREX, INC.
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business........................................................................................ 1
Item 2. Properties...................................................................................... 8
Item 3. Legal Proceedings............................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders............................................. 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 9
Item 6. Selected Consolidated Financial Data............................................................ 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................... 19
Item 8. Financial Statements and Supplementary Data..................................................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures........... 40
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................. 41
Item 11. Executive Compensation.......................................................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 41
Item 13. Certain Relationships and Related Transactions.................................................. 41
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 42
i
PART I
ITEM 1. BUSINESS
THE FOLLOWING DESCRIPTION OF OUR BUSINESS CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, AS
DO THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SECTIONS OF THIS FORM 10-K, ALL OF WHICH RELATE TO SUCH MATTERS AS
ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, TECHNOLOGICAL
DEVELOPMENTS, AND SIMILAR MATTERS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL
RESULTS, PERFORMANCE, OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT
FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED ELSEWHERE IN THIS REPORT IN THE
SECTION ENTITLED "RISK FACTORS" AND THE RISKS DISCUSSED IN OUR OTHER SECURITIES
AND EXCHANGE COMMISSION FILINGS.
COMPANY
Marex, Inc. (the "Company" or "Marex") is a software products and technology
services company offering high end technology solutions to businesses. Our
mission is to improve the efficiency of our customers' technology initiatives.
We are currently serving the marine and transportation industries.
The Company has available for the markets it serves three products which
include: an e-commerce solution which enables the electronic exchange of
business documents and product information; a management information solution
which provides a front and back office solution for a retail or dealer store
environment; and a telemetry product which is capable of tracking assets from a
remote location over the Internet.
Marex has developed a line of client server applications under the name of
MarConnect Enterprise, Standard and Advisor ("MarConnect Suite"), which enable
the electronic exchange of business documents including the promotion of new
product information and advisories. The MarConnect offerings include support for
EDI, XML and flat file formats and do not require additional hardware, staff or
specialized training. MarConnect Standard and Enterprise were launched during
January of 2002, whereas MarConnect Advisor was launched during February of
2002.
The MarConnect Suite replaced MarExpress! and MarexPO!. MarExpress! and MarexPO!
provided marine industry buyers and suppliers with an e-procurement solution for
the purchase and sale of new parts, supplies, components and equipment through a
web-based transaction system. Prior to the launch of MarExpress! and MarexPO!,
our Internet based trading exchange, the Exchange, and its successor, Classified
and Auctions, were the only products offered to the marine industry. We
suspended the Classifieds and Auctions product in the first quarter of 2001.
In October 2001, we completed the acquisition of 100% of the outstanding stock
of Software Support Team, Inc. ("Software Support Team"), which is engaged in
the business of developing management information solution software for
retailers, distributors and dealers. Software Support Team's current product,
DockMaster, offers comprehensive business functions to the marine industry
through a series of integrated software modules.
The Company has developed a telemetry solution (the "Telemetry Solution") for
the marine industry, which we believe to be comprehensive, and is currently
marketing this same technology for the transportation industry, as well as other
industries. The Telemetry Solution is designed to enable the remote tracking of
assets from virtually any location in the world via the Internet by using our
MarConnect Suite. Marex has shifted its business strategy from the MarConnect
Suite to the Telemetry
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Solution. A final working prototype has been completed and the marketing of
orders commenced during the last week of March 2002.
Marex was originally incorporated in Florida in September 1992.
INDUSTRY OVERVIEW
GROWTH OF TECHNOLOGY SOLUTIONS OVER THE INTERNET
The Internet has emerged as a mass communications and commerce medium enabling
millions of people worldwide to share information, affiliate themselves with
others who share similar interests and conduct business electronically. The
Internet has created new opportunities for conducting commerce that offers the
potential for organizations to streamline complex processes, lower costs and
improve productivity.
Technology solutions frequently automate or otherwise improve workflows or
processes that are fundamental to a business' operations by replacing various
paper-based transactions with electronic communications. Technology solutions
that offer improved efficiency through the automation of business processes and
workflows are being developed for a variety of industries.
THE INDUSTRIES WE SERVE
Marex currently serves strategic subsets of the OEM, dealer and retail markets
within the U.S. marine industry. During March of 2002, we commenced efforts to
serve the U.S. transportation industry relative to logistics and
telemetry/tracking solutions for cargo and container shipments via truck or
other mode. We believe our core products offer these markets the opportunity to
gain greater efficiencies as well as potential cost savings through the
implementation of Marex's core products which allow for delivery and
transmission of electronic data; the ability to track, monitor, or search for
particular corporate assets in remote locations, which includes, but is not
limited to the use of the Internet; and the ability to operate both front and
back office functionality at a retail or dealer level through the use of our
business critical applications which include the implementation of our
management information systems software modules.
OPPORTUNITY FOR TECHNOLOGY SOLUTIONS FOR THE MARINE AND TRANSPORTATION
INDUSTRIES
We believe that the fragmentation and complexities of the marine and
transportation industries create a need for technology solutions that seamlessly
link suppliers and buyers, enable reliable storage and efficient retrieval of
management information, and allow for dependable asset tracking. To effectively
address the needs of the industries we serve, solutions must be cost-effective,
easily implemented, and easy to use.
BUSINESS STRATEGY
Our objective is to expand our position as a software products and technology
services company in the industries that we serve. The key components of our
strategy to achieve this objective include:
FOCUS OUR EFFORTS ON OUR TELEMETRY AND MANAGEMENT INFORMATION SOLUTIONS
We have shifted our focus from our electronic commerce solutions to our
Telemetry Solution. Our electronic commerce solutions provide the platform for
our Telemetry Solution. We also intend to maintain our focus on our management
information solutions.
BUILD THE MAREX BRAND TO BECOME SYNONYMOUS WITH TECHNOLOGY SOLUTIONS IN THE
INDUSTRIES WE SERVE
We intend to continue our brand development strategy through targeted marketing
venues which may include advertising and promotions, our direct sales force,
press coverage and participation in trade associations and industry events to
continue to develop industry awareness of our solutions.
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INCREASE ADOPTION OF OUR CORE PRODUCTS
We intend to aggressively increase the base of members using our Telemetry
Solution and DockMaster and to increase their usage by current members. We
intend to continue to educate users about the benefits of our solutions and to
provide training in their use, thereby accelerating adoption and use.
PRODUCT DEVELOPMENT
We intend to focus on enhancing the capabilities of all of our core products,
including the possibility of seeking out strategic relationships, which could
enhance the capabilities of our current and future product offerings.
COMPLETE STRATEGIC RELATIONSHIPS
We continue to form strategic relationships with industry leaders such as
manufacturers, technology partners, and other companies ancillary to the
industry that provide value added services.
PRODUCT SUPPORT AND DEVELOPMENT
We have dedicated a significant amount of our resources to developing, enhancing
and supporting our products. Expenses related to the development of our products
primarily consist of compensation for product support and development personnel,
cost of outside contractors, amortization of software development costs, and
general expenses associated with the support and development of our products. We
incurred product support and development expenses of approximately $5.9 million
during the year ended December 31, 2001. We expect future expenses related to
product support and development to decrease as we have completed development of
our core products and decreased the size of our support and development staff.
BUSINESS SEGMENTS
For internal management reporting purposes, the Company currently operates two
primary business segments: electronic commerce products and management
information solutions software products. Electronic commerce products consist of
our internally developed procurement solutions, MarExpress! and MarexPO!.
Management information solution software products consist of those products
obtained through the acquisition of Software Support Team on October 2, 2001.
These operating segments generally follow the management organizational
structure of the Company. Sales are made only to external customers in the
United States of America. Sales for each primary segment for the year ended
December 31, 2001 is as follows:
MANAGEMENT INFORMATION
SOLUTIONS ELECTRONIC COMMERCE TOTAL
--------------------------- ---------------------------- ----------------------
Net sales $ 361,420 $ 261,311 $ 622,731
=========================== ============================ ======================
During 2001 and 2000, revenues from one customer accounted for approximately 51%
and 47% of total revenues of the electronic commerce operating segment.
INTELLECTUAL PROPERTY
We regard obtaining protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as important to our future success and intend to
rely on a combination of copyright, trademark, service mark and trade secret
laws and contractual restrictions to establish and protect our proprietary
rights in products and services. While we plan to pursue the registration of our
trademarks and service marks in the U.S. and internationally, effective
trademark, service mark, copyright and trade secret protection may not be
available in every country in which our services are made available online.
3
We have entered into confidentiality agreements with our employees and certain
vendors in order to limit access to and disclosure of our proprietary
information. There can be no assurance that these contractual arrangements or
the other steps taken by us to protect our intellectual property will prove
sufficient to prevent misappropriation of our technology or to deter independent
third-party development of similar technologies.
To date, we have not been notified that our technologies infringe the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim infringement by us with respect to past, current or
future technologies. We expect that participants in our markets will be
increasingly subject to infringement claims as the number of services and
competitors in our industry segment grows. Any such claim, whether meritorious
or not, could be time-consuming, result in costly litigation, cause service
upgrade delays or require us to enter into royalty or licensing agreements. Such
royalty or licensing agreements might not be available on terms acceptable to us
or at all. As a result, any such claim could have a material adverse effect on
our business, results of operations and financial condition.
SOFTWARE DEVELOPMENT
We have developed proprietary software for our internal needs and our
e-commerce, telemetry and management information solution products. To date, we
have developed several internal proprietary software programs that include a
full suite of administrative, data collections, sorting, and marketing
management tools. All of these programs are maintained in-house. We have also
developed proprietary electronic commerce and management information software
programs.
COMPETITION
The market for software products and technology services is rapidly evolving. We
perceive existing competition to be pervasive and expect it to increase in the
future. We believe that the critical success factors for companies seeking to
create e-commerce and management information solutions include the following:
brand recognition; quality and reliability of the solutions; breadth and depth
of product offerings; base of customers; domain expertise; and ease of use and
convenience. We may face competition from other companies with e-commerce and
management information offerings, and traditional suppliers and distributors in
the industries we serve that have developed their own purchasing solutions. We
may also face further competition in the future from traditional suppliers and
distributors that enter into e-commerce and management information markets
either on their own or by partnering with other companies. In addition, we may
face competition from current online business to consumer companies.
GOVERNMENT REGULATION
Due to the increasing popularity and use of the Internet and other online
services, it is possible that a number of laws and regulations may be adopted
with respect to the Internet or other online services covering issues such as
user privacy, freedom of expression, pricing, content and quality of products
and services, taxation, advertising, intellectual property rights and
information security. The nature of such legislation and the manner in which it
may be interpreted and enforced cannot be fully determined and, therefore,
legislation could be enacted which could subject us and/or our customers to
potential liability, which in turn could have an adverse effect on our business,
results of operations and financial condition. The adoption of any such laws or
regulations might also decrease the rate of growth of Internet use, which in
turn could decrease the demand for our services or increase the cost of doing
business or in some other manner have a material adverse effect on our business,
results of operations and financial condition. In addition, applicability to the
Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy is uncertain. The vast majority of such laws were adopted
prior to the advent of the Internet and related technologies and, as a result,
do not contemplate or address the unique issues of the Internet and related
technologies.
4
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. Changes to existing laws, or the passage of new laws
intended to address these issues, could create uncertainty in the marketplace
that could reduce demand for our services or increase the cost of doing business
as a result of litigation costs or increased service delivery costs, or could in
some other manner have a material adverse effect on our business, results of
operations and financial condition. In addition, because our services are
accessible worldwide, and we facilitate sales of goods to users worldwide, other
jurisdictions may claim that we are required to qualify to do business as a
foreign corporation in a particular state or foreign country. We are currently
only qualified to do business in the State of Florida and Australia, and our
failure to qualify as a foreign corporation in a jurisdiction where it is
required to do so could subject us to taxes and penalties for the failure to
qualify and could result in our inability to enforce contracts in such
jurisdictions. Any such new legislation or regulation, or the application of
laws or regulations from jurisdictions whose laws do not currently apply to our
business, could have a material adverse effect on our business, results of
operations and financial condition.
EMPLOYEES
As of March 22, 2002, we had 36 full-time employees. None of our employees is
represented by a collective bargaining agreement, nor have we experienced any
work stoppages.
RISK FACTORS
The following risk factors, together with all information in this Form 10-K,
should be carefully considered in evaluating Marex and its business. Due to the
significant impact that the risk factors set forth below may have on Marex's
business, results of operations and financial condition, actual results could
differ materially from those expressed or implied by any forward-looking
statement.
WE HAVE A LIMITED OPERATING HISTORY
Marex was founded in 1992 but did not launch its main products until June 2000,
which were replaced by new products launched in 2001 and will be replaced by
products launched in 2002. Thus we have a limited operating history on which to
base an evaluation of our software business and prospects. Our prospects must be
considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies in their early stages of development,
particularly companies in new and rapidly evolving markets such as software
development. There can be no assurance that we will be able to address these
risks.
WE HAVE A HISTORY OF LOSSES
We have incurred losses from operations in each period since our inception. The
Company has incurred losses of $19.6 million, $43.4 million and $3.7 million for
the years ended December 31, 2001, 2000 and 1999, respectively. We expect to
incur substantial operating losses and have continued negative cash flows from
operations for the foreseeable future. Moreover, we expect to incur significant
sales and marketing, product support and development, and general and
administrative expenses. In addition, we have no material revenues to date. If
our revenue does not increase substantially or if our expenses are more than we
expect, we may not become profitable.
IF WE FAIL TO ACHIEVE MARKET ACCEPTANCE, OUR BUSINESS WOULD BE ADVERSELY
AFFECTED
The MarConnect Suite replaced MarExpress! and MarexPO! during the first quarter
of 2002. We are currently commencing the marketing of orders for the Telemetry
Solution. Accordingly, our core solutions have a limited market history. If the
MarConnect Suite and the Telemetry Solution do not achieve market acceptance,
our business will be adversely affected.
5
WE FACE INTENSE COMPETITION
We perceive competition to be pervasive and we expect it to increase in the
future. We may face competition from other companies with e-commerce or
management information offerings as well as traditional suppliers and
distributors in industries we serve and companies that have or may develop their
own online solutions. In addition, providers of online marketplaces and online
auction services that currently focus on other industries may expand their
services to include products from industries that we currently target. Our
competitors and potential competitors may develop superior solutions that
achieve greater market acceptance than the Marex solutions. In addition,
substantially all of our prospective customers have established long-standing
relationships with some competitors and potential competitors. We cannot be
certain that we can compete successfully.
OUR SOLUTIONS AND SERVICES ARE NEW AND FACE RAPID TECHNOLOGICAL CHANGES
The market for the Marex solutions is characterized by rapid technological
advances, evolving standards in the software markets, changes in customer
requirements, and frequent new product and service introductions and
enhancements. As a result, we believe that our future success depends upon our
ability to enhance current solutions. If we do not adequately respond to the
need to enhance our solutions or services, then our business will be negatively
affected.
WE WILL NEED TO MANAGE OUR EXPANDING BUSINESS
Our growth has placed, and is expected to continue to place, a significant
demand on our sales, marketing, managerial, operational, information technology
and other resources. If we cannot manage our growth effectively, our business
will be adversely affected. Our current information systems, procedures and
controls may not support expanded operations and may hinder our ability to take
advantage of the markets for e-commerce, telemetry and management information
solutions to the industries we serve.
WE DEPEND ON A MAJOR CUSTOMER
We had an agreement with one of the largest manufacturers of powerboats in the
world for the utilization of our e-procurement solution, which was our largest
customer. This customer accounted for 21% of our total revenue for the year
ended 2001. During 2001, the agreement was terminated. Since we have shifted our
strategic focus from e-commerce solutions to our telemetry and management
information solutions, we do not expect revenues from our e-procurement
solutions to be a significant part of our future gross revenues.
WE DEPEND ON KEY PERSONNEL
Our performance is substantially dependent on the performance of the executive
officers and other key employees. Failure to successfully manage personnel
requirements would have a negative effect on the business. We have experienced
difficulty from time to time in hiring the personnel necessary to support the
growth of our business, and we may experience similar difficulty in hiring and
retaining personnel in the future. Competition for senior management,
experienced sales and marketing personnel, software developers, and other
employees is intense, and we cannot be certain that we will be successful in
attracting and retaining personnel. The loss of the services of any executive
officers or key employees could have a negative effect on the business. Failure
to obtain or retain the services of necessary executive officers or key
employees may not support existing or expanded operations, and may hinder our
ability to take advantage of the market for e-commerce purchasing solutions to
the industries we serve.
WE EXPECT THE PRICE OF OUR COMMON STOCK TO BE VOLATILE
The market price of our Common Stock may fluctuate significantly in response to
a number of factors, some of which are beyond our control, including the
following: Marex common stock is thinly traded;
6
quarterly variations in operating results; changes in market valuation of
Internet commerce companies; announcements of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital commitments;
loss of a major customer or strategic partner, or failure to complete a sale to
a significant customer; additions or departures of any key personnel; future
sales of our Common Stock; and stock market price and volume fluctuations, which
are particularly common among highly volatile securities of Internet companies.
SECURITY PROBLEMS MAY INHIBIT THE GROWTH OF OUR SOLUTIONS
A significant barrier to the adoption of technology solutions is the secure
transmission of confidential information over public networks. Users generally
are concerned with security and privacy on the Internet and any publicized
security problems could inhibit the growth of the Internet, and therefore
inhibit the Marex solutions as means of conducting transactions. If there is a
breach in our security system, we may be required to make significant
expenditures to protect against security breaches and to alleviate problems
caused by such breaches.
SYSTEM FAILURE MAY CAUSE INTERRUPTION OF SERVICES
The performance of our server and networking hardware and software
infrastructure is critical to our business and reputation, and affects our
ability to process transactions, provide high quality customer service and
attract and retain customers, suppliers, users and strategic partners.
Currently, the infrastructure and systems are located at one site in Atlanta,
Georgia. We are in the process of adding a back-up and recovery site at our
headquarters in Miami, Florida. Until then, we depend on single-site
infrastructure. Any disruption to this infrastructure resulting from a natural
disaster or other event could result in an interruption in service, fewer
transactions and, if sustained or repeated, could impair our reputation and the
attractiveness of the services.
WE MAY REQUIRE ADDITIONAL CAPITAL FOR OPERATIONS, WHICH COULD HAVE A NEGATIVE
EFFECT ON YOUR INVESTMENT
We currently anticipate that our available funds will be sufficient to meet our
projected working capital and operating resource requirements through the next
12 months since we have significantly decreased our staff and shifted our focus
from our electronic commerce solutions to our telemetry and management
information solutions. However, any projections of future cash needs and cash
flows are subject to substantial uncertainty. The Company is in process of
launching new product offerings which may or may not be successful. The
Company's cash requirements may be substantial and may exceed the amount of the
Company's existing working capital. If current cash and cash equivalents, and
cash that may be generated from operations are not sufficient to satisfy our
liquidity requirements, we will likely seek to sell additional equity or debt
securities. If we raise additional funds through the issuance of equity or
convertible securities, such securities may have rights, preferences or
privileges senior to those of the rights of our Common Stock. Furthermore, in
the event that we issue or sell Common Stock or securities convertible for
Common Stock, at a price per share less than the conversion price of the
outstanding Series A1 Preferred Stock, the holders of the Series A1 Preferred
Stock have the right to amend the conversion price of the price per share of the
issuance. As a result, our stockholders may experience significant additional
dilution. We cannot be certain that additional capital will be available to us
on acceptable terms or at all. These matters raise substantial doubt and the
Company's ability to continue as a going concern.
A PROLONGED ECONOMIC DOWNTURN WOULD ADVERSELY AFFECT OUR OPERATIONS AND
FINANCIAL CONDITION
Although we have not operated during a period of prolonged general economic
downturn or a recession, these events have historically resulted in unfavorable
results for corporate entities. The United States economy is currently
undergoing a difficult period, which some observers might view as a recession.
This economic condition has been worsened by the September 11th terrorist
attacks in New York City and Washington, D.C. A continued economic downturn
would have a significant adverse impact on our operations and our financial
condition.
7
WE DEPEND ON INTELLECTUAL PROPERTY RIGHTS
Our intellectual property is important to us. We seek to protect intellectual
property through copyrights, trademarks, trade secrets, confidentiality
provisions in customer, supplier and strategic relationship agreements, and
nondisclosure agreements with third parties, employees and contractors. We
cannot assure that measures we take to protect intellectual property will be
successful or that third parties will not develop alternative purchasing
solutions that do not infringe upon our intellectual property. In addition, we
could be subject to intellectual property infringement claims by others. Failure
to protect against misappropriation of intellectual property, or claims that we
are infringing the intellectual property of third parties could have a negative
effect on our business.
SEASONALITY
Our business may be considered to be seasonal due to the impact of the buying
and selling patterns of the members of the marine industry. We believe that the
second and third quarters are the peak periods for the recreational marine
industry. In addition, the recreational marine industry is highly cyclical and
is highly affected by several factors. Some of those factors are: (i) economic
conditions, (ii) consumer confidence levels, and (iii) weather conditions.
ITEM 2. PROPERTIES
During 2001, we relocated our offices to a 32,459 square feet facility in Miami,
FL. Our lease for this facility expires October 31, 2003. We also have under
lease our former offices located in Miami, FL that occupy 7,592 square feet and
expires June 30, 2004. As part of the relocation, we have sublet 2,311 square
feet of the former facility and a portion of the new facility to a third party.
Software Support Team currently has offices in a 4,635 square feet facility in
West Palm Beach, FL.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in only ordinary, routine litigation and claims
incidental to its business. Although the outcome of such matters cannot be
predicted with certainty and some of these matters may be disposed of
unfavorably to the Company, based on currently available information, the
Company does not believe that such legal matters will have a material adverse
effect on its consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the Nasdaq National Market under the symbol
"MRXX". The following table sets forth the high and low sale prices for our
Common Stock for the periods indicated.
HIGH LOW
---- ---
2000
First Quarter .......................... $ 41.75 $ 8.88
Second Quarter ......................... 30.00 11.50
Third Quarter .......................... 20.00 10.00
Fourth Quarter ......................... 14.50 1.13
2001
First Quarter .......................... $ 3.00 $ 1.19
Second Quarter ......................... 2.45 1.17
Third Quarter .......................... 1.41 0.50
Fourth Quarter ......................... 0.82 0.18
As of March 31, 2002, there were approximately 156 holders of record of our
Common Stock, of which 7,635,848 shares were issued and outstanding. The closing
sale price for the Common Stock on March 31, 2002 was $.20 per share.
We have never paid cash dividends on our Common Stock. We intend to retain
future earnings, if any, to finance the expansion of our business and do not
anticipate that any cash dividends will be paid in the foreseeable future. The
future dividend policy will depend on our earnings, capital requirements,
expansion plans, financial condition and other relevant factors.
PRIVATE PLACEMENTS OF PREFERRED STOCK
In March 2000, we received net proceeds of $20.4 million in connection with the
sale of 210,000 shares of Series A1 Preferred Stock at $100 per share. In May
2000, we completed the private placement through the sale of an additional
210,000 shares of Series A1 Preferred Stock at $100 per share. Total net
proceeds from the private placement were $40.9 million. The shares of Series A1
Preferred Stock were sold pursuant to Rule 506 of Regulation D of the Securities
Exchange Act of 1933.
Each share of the Series A1 Preferred Stock is convertible into 7.69 shares of
Common Stock at the option of the holder at any time. In the event that the we
issue or sell Common Stock or securities convertible or exchangeable for Common
Stock, subject to certain exclusions, at a price per share less than the
conversion price of the outstanding Series A1 Preferred Stock, the holders of
the Series A1 Preferred Stock shall have the right to amend the conversion price
of the Series A1 Preferred Stock outstanding to the price per share of the
issuance. Automatic conversion occurs upon either of the following: completion
by the Company of a public offering which raises gross proceeds of at least $50
million, at an effective price per share to the public of at least $26.00 as
adjusted for stock splits, stock dividends or other similar transactions; or,
upon the event that the market price per share of the Company's Common Stock
exceeds $26.00, subject to adjustments for stock splits, stock dividends, or
other similar transactions, for a consecutive twenty day period following the
one-year anniversary of the effective date of a registration statement covering
the Common Stock underlying the Series A1 Preferred Stock.
PRIVATE PLACEMENTS OF COMMON STOCK
In 1999, we raised $6.9 million from the sale of 1,122,047 shares of Common
Stock and after deducting $872,000 in commissions and $31,000 in other costs
related to the financing. The shares were primarily
9
sold to overseas investors and were issued pursuant to Rule 505 and 506 of
Regulation D of the Securities Exchange Act of 1933.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and the notes to the consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," which are included elsewhere in this Form
10-K. The selected financial data of Marex as of and for each of the five years
in the period ended December 31, 2001 have been derived from Marex's audited
consolidated financial statements.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Net sales $ 622,731 $ 39,487 $ 7,277 $ -- $ --
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of product sales 102,926 -- -- -- --
Product support and development 5,893,133 9,434,782 1,132,179 89,952 --
Selling and marketing 3,471,697 7,479,601 1,137,554 166,699 --
General and administrative 3,093,931 5,326,858 1,244,727 24,799 --
Impairment of software
development costs 5,864,613 -- -- -- --
Stock-based compensation 476,140 847,919 -- -- --
Fair value of warrants 1,764,402 21,746,581 140,300 -- --
------------ ------------ ------------ ------------ ------------
Total costs and expenses 20,666,842 44,835,741 3,654,760 281,450 --
------------ ------------ ------------ ------------ ------------
Loss from operations (20,044,111) (44,796,254) (3,647,483) (281,450) --
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest income 472,261 1,366,189 106,411 -- --
Interest expense (55,675) (13,298) (6,909) (45,208) (32,800)
Other (237) (2,938) (1,406) (912) (23,213)
------------ ------------ ------------ ------------ ------------
Total other income (expense) 416,349 1,349,953 98,096 (46,120) (56,013)
------------ ------------ ------------ ------------ ------------
Loss from continuing operations (19,627,762) (43,446,301) (3,549,387) (327,570) (56,013)
------------ ------------ ------------ ------------ ------------
Discontinued operations:
Loss from discontinued operations -- -- (100,167) (827,483) (599,844)
Loss on disposal, including
$11,869 for operating losses
during the phase out period -- -- (40,200) -- --
------------ ------------ ------------ ------------ ------------
Total discontinued operations -- -- (140,367) (827,483) (599,844)
------------ ------------ ------------ ------------ ------------
Net loss $(19,627,762) $(43,446,301) $ (3,689,754) $ (1,155,053) $ (655,857)
============ ============ ============ ============ ============
Net loss per share, basic and diluted:
Continuing operations $ (2.67) $ (6.39) $ (0.62) $ (0.07) $ (0.01)
Discontinued operations -- -- (0.03) (0.17) (0.15)
------------ ------------ ------------ ------------ ------------
Net loss $ (2.67) $ (6.39) $ (0.65) $ (0.24) $ (0.16)
============ ============ ============ ============ ============
Basic and diluted weighted average
shares of Common Stock outstanding 7,344,075 6,798,813 5,700,306 4,752,975 3,995,719
============ ============ ============ ============ ============
10
DECEMBER 31,
----------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Cash and equivalents $ 4,479,095 $ 19,624,266 $ 3,434,036 $ 350,042 $ 28,778
Working capital (deficit) 3,038,448 13,031,082 2,922,218 13,821 (226,200)
Total assets 9,661,937 31,471,681 4,315,458 596,596 447,826
Long-term liabilities 817,460 217,306 6,734 28,647 92,215
Accumulated deficit (68,964,006) (49,336,244) (5,889,943) (2,200,189) (1,045,136)
Total shareholders' equity (deficit) 6,542,120 23,927,940 3,704,104 222,093 (27,836)
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS,
WHICH ARE INCLUDED ELSEWHERE IN THIS FORM 10-K. IT CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, WHICH RELATE TO SUCH MATTERS AS ANTICIPATED FINANCIAL
PERFORMANCE, BUSINESS PROSPECTS, TECHNOLOGICAL DEVELOPMENTS, AND SIMILAR
MATTERS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES, AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS,
PERFORMANCE, OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM
THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED ELSEWHERE IN THIS REPORT IN THE SECTION
ENTITLED "RISK FACTORS" AND THE RISKS DISCUSSED IN OUR OTHER SECURITIES AND
EXCHANGE COMMISSION FILINGS.
OVERVIEW
Marex, Inc. (the "Company" or "Marex") is a software products and technology
services company offering high end technology solutions to businesses. Our
mission is to improve the efficiency of our customers' technology initiatives.
We are currently serving the marine and transportation industries.
The Company has available for the markets it serves three products which
include: an e-commerce solution which enables the electronic exchange of
business documents and product information; a management information solution
which provides a front and back office solution for a retail or dealer store
environment; and a telemetry product which is capable of tracking assets from a
remote location over the Internet.
Marex has developed a line of client server applications under the name of
MarConnect Enterprise, Standard and Advisor ("MarConnect Suite"), which enable
the electronic exchange of business documents including the promotion of new
product information and advisories. The MarConnect offerings include support for
EDI, XML and flat file formats and do not require additional hardware, staff or
specialized training. MarConnect Standard and Enterprise were launched during
January of 2002, whereas MarConnect Advisor was launched during February of
2002.
The MarConnect Suite replaced MarExpress! and MarexPO!. MarExpress! and MarexPO!
provided marine industry buyers and suppliers with an e-procurement solution for
the purchase and sale of new parts, supplies, components and equipment through a
web-based transaction system. Prior to the launch of MarExpress! and MarexPO!,
our Internet based trading exchange, the Exchange, and its successor, Classified
and Auctions, were the only products offered to the marine industry. We
suspended the Classifieds and Auctions product in the first quarter of 2001.
In October 2001, we completed the acquisition of 100% of the outstanding stock
of Software Support Team, Inc. ("Software Support Team"), which is engaged in
the business of developing management information solution software for
retailers, distributors and dealers. Software Support Team's current product,
DockMaster, offers comprehensive business functions to the marine industry
through a series of integrated software modules.
The Company has developed a comprehensive telemetry solution (the "Telemetry
Solution") for the marine industry and is currently marketing this same
technology for the transportation industry, as well as others. The Telemetry
Solution enables the remote tracking of assets from virtually any location in
the world via the Internet by using our MarConnect Suite. Marex has shifted its
business strategy from the MarConnect Suite to the Telemetry Solution. A final
working prototype has been completed and the marketing of orders commenced
during the last week of March 2002.
12
CRITICAL ACCOUNTING POLICIES
Marex's discussion and analysis of its financial condition and results of
operations are based upon Marex's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires Marex to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. Marex bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Our significant accounting policies are described in Note 2 to the consolidated
financial statements included in Item 8 of this Form 10-K. We believe our most
critical accounting policies include software and website development costs and
revenue recognition.
Marex follows Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," and Emerging Issues
Task Force Issue No. 00-02, "Accounting for Web Site Development Costs," for the
accounting of development costs. Marex evaluates software and website
development costs for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of any asset to future net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets.
The Company follows SOP 97-2, "Software Revenue Recognition," which requires
companies to defer revenue and profit recognition if certain required criteria
of a sale are not met. In addition, SOP 97-2 requires that revenue recognized
from software arrangements is to be allocated to each element of the arrangement
based on the relative fair values of the elements, such as software products,
upgrades, enhancements, post contract customer support, installation, or
training. The Company licenses software under noncancellable license agreements.
DockMaster, the Company's core management information solutions product acquired
during 2001, generates revenues from the licensing of software modules, customer
support contracts, training, custom programming, and hardware sales. Licensing
and related hardware and service revenues are recognized on a subscription basis
over the term of the related customer support contract, which is typically one
year. Customer support contracts are billed on a monthly or quarterly basis and
revenue is recognized during the month of support.
MarExpress! and MarexPO!, Marex's former core products, generated revenues by
charging a transaction fee which was based on the gross transaction price of
items purchased and sold through the system. The fee was recognized as revenue
when the customers' right to receive a refund for the transaction fee expired.
Classifieds and Auctions, which supplemented MarExpress! and MarexPO!, generated
revenues by charging listing and transaction fees.
DISCONTINUED OPERATIONS
In 1999, we discontinued the operations of our non-core business subsidiary,
Sovereign Financial Information Services, Inc. ("Sovereign"), in order to focus
our business towards our Internet-based services and products for the marine
industry. The financial information in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" refers to our continuing
operations and excludes the operations of Sovereign.
13
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUES
For the year ended December 31, 2001, we recorded revenues of $623,000 compared
to $39,000 for the year ended December 31, 2000. The increase was primarily due
to greater transaction fees from MarExpress! and MarexPO! in 2001 and revenue
from Software Support Team acquired in October 2001.
MarExpress! and MarexPO! generated revenues by charging a transaction fee based
on the gross transaction price of items purchased and sold through the system or
a monthly subscription fee. These products were discontinued during the fourth
quarter of 2001. The fees were recognized as revenue when customers' right to
receive a refund expired. For the year ended December 31, 2001, we recorded
revenues of $261,000 from MarExpress! and MarexPO! compared to $34,000 for the
year ended December 31, 2000.
We launched our MarConnect Suite during the first quarter of 2002 as a successor
to MarExpress! and MarexPO!. We did not recognize any revenue from the
MarConnect Suite in 2001 as it was offered to customers on a trial basis. We do
not expect significant future revenue directly from the sale of the MarConnect
Suite as it will be used primarily for our Telemetry Solution.
Software Support Team generated revenues of $361,000 during the period from the
acquisition date on October 2, 2001 through December 31, 2001. Software Support
Team revenues were primarily comprised of $135,000 in DockMaster software and
hardware sales and $152,000 in related support. The balance was primarily
comprised of income from other software, hardware and seminars.
Classifieds and Auctions generated revenues by charging listing and transaction
fees. For the year ended December 31, 2000, we recorded revenues of $6,000
generated from $114,000 of transactions through the Exchange and Classifieds and
Auctions. Classifieds and Auctions was discontinued in during the first quarter
of 2001.
We expect future revenues to consist primarily of sales from DockMaster and our
Telemetry Solution.
PRODUCT SUPPORT AND DEVELOPMENT
Product support and development expenses consist primarily of compensation for
product support and development personnel, cost of outside contractors,
amortization of software development costs, and other costs associated with the
operations and enhancements of the web site. Product support and development
expenses decreased to $5.9 million for the year ended December 31, 2001,
compared to $9.4 million for the same period in 2000. The change related
primarily to decreases of $328,000 in personnel and personnel related costs and
$3.5 million in outside contractor costs. The decreases were partially offset by
an increase of $425,000 in amortization of software development costs. The
balance was comprised of overhead and operating costs directly associated with
the development, support and maintenance of the web site and e-commerce
products. We expect future expenses related to product support and development
to decrease as we have completed development of our core products and decreased
the size of our support and development staff.
SELLING AND MARKETING
Selling and marketing expenses consist primarily of compensation for sales and
marketing personnel, cost of outside contractors, advertising, trade shows and
related marketing costs. Selling and marketing expenses decreased to $3.5
million for the year ended December 31, 2001, compared to $7.5 million for the
year ended December 31, 2000. The change was primarily due to decreases of $1.1
million in personnel and personnel related costs, $1.5 million in advertising
and marketing costs, and $899,000 in outside contractor costs. The balance was
comprised of overhead and operating costs directly associated
14
with selling and marketing activities. We expect future selling and marketing
expenses to decrease as we will perform fewer advertising and marketing
activities as we believe our target markets are aware of our brand and we have
decreased the size of our sales and marketing staff.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of compensation for
administrative personnel, facilities expenses, professional fees, and general
corporate expenses. General and administrative expenses decreased to $3.1
million for the year ended December 31, 2001, compared to $5.3 million for the
same period in 2000. The change related primarily to decreases of $1.0 million
in personnel and personnel related costs and $858,000 in professional fees.
Professional fees in 2001 included $25,000 for strategic business consulting
services provided by a consultant who is also a shareholder, compared to
$435,000 for the year ended December 31, 2000. The balance was comprised of
corporate charges directly associated with the administrative functions of our
Company. We expect future general and administrative expenses to decrease as we
have decreased our general and administrative staff.
IMPAIRMENT OF SOFTWARE DEVELOPMENT COSTS
Impairment of software development costs of $5.9 million was recognized for the
year ended December 31, 2001. The development of our new products, the
MarConnect Suite, which replaced MarExpress! and MarexPO!, led to the
recognition of $6.7 million of impairment of software development costs. The
impairment was offset by the favorable settlement of a litigation matter with a
consultant in the amount of $815,000.
STOCK-BASED COMPENSATION
For the year ended December 31, 2001, we recognized non-cash compensation
expense of $476,000 relating to options granted to a director, compared to
$848,000 for the year ended December 31, 2000.
FAIR VALUE OF WARRANTS
For the year ended December 31, 2001, we recognized an expense of $1.8 million
relating to the fair value of warrants issued in connection with a strategic
relationship agreement, compared to $21.7 million recorded for the year ended
December 31, 2000.
OTHER INCOME AND EXPENSE
We recognized $472,000 of interest income for the year ended December 31, 2001,
compared to $1.4 million for the year ended December 31, 2000. The decrease was
a result of lower balances of marketable securities derived from the net
proceeds of our private placements. Interest expense for the year ended December
31, 2001 was $56,000, compared to $13,000 for the year ended December 31, 2000.
The increase was primarily due to the increase in capital lease obligations and
the seller-financed note payable related to the acquisition of Software Support
Team.
LOSS FROM CONTINUING OPERATIONS
Our loss from continuing operations decreased to $19.6 million for the year
ended December 31, 2001, from $43.4 million for the year ended December 31,
2000. The change resulted from decreases in the fair value of warrants issued
and decreases in costs, which were partially offset by the impairment of
software development costs, as described above.
15
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999
REVENUES
For the year ended December 31, 2000, we recorded revenues of $39,000, compared
to $7,000 for the year ended December 31, 1999. The increase was primarily due
to the launch of MarExpress! and MarexPO! in June 2000.
For the year ended December 31, 2000, MarExpress! and MarexPO! generated
revenues of $34,000 from $1.9 million of transactions. MarExpress! and MarexPO!
were not launched until June 2000, therefore no revenue was recognized from
these products during 1999.
For the year ended December 31, 2000, Classifieds and Auctions and the Exchange
generated revenues of $6,000 generated from $114,000 of transactions. For the
same period in 1999, we recorded revenues of $7,000 generated from $194,000 of
transactions. The decrease resulted primarily from the decreased use of
Classifieds and Auctions by our customers during the year due to Classifieds and
Auctions becoming a supplement to MarExpress! and MarexPO!.
PRODUCT SUPPORT AND DEVELOPMENT
Product support and development expenses consist primarily of compensation for
product support and development personnel, cost of outside contractors,
amortization of software development costs, and other costs associated with the
operations and enhancements of the web site. Product development expenses
increased to $9.4 million for the year ended December 31, 2000, compared to $1.1
million for the year ended December 31, 1999. The change related primarily to
increases of $1.7 million in personnel and personnel related costs, $3.8 million
in outside contractor costs and $1.4 million in amortization of software
development costs. The balance was comprised of overhead and operating costs
directly associated with the development, support and maintenance of the web
site and e-commerce products.
SELLING AND MARKETING
Selling and marketing expenses consist primarily of compensation for sales and
marketing personnel, cost of outside contractors, advertising, trade shows and
related marketing costs. Selling and marketing expenses increased to $7.5
million for the year ended December 31, 2000, compared to $1.1 million for the
year ended December 31, 1999. The change was primarily due to increases of $2.6
million in personnel and personnel related costs, $1.2 million in advertising
and marketing costs, and $1.1 million in outside contractor costs. The balance
was comprised of overhead and operating costs directly associated with selling
and marketing activities.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of compensation for
administrative personnel, facilities expenses, professional fees, and general
corporate expenses. General and administrative expenses increased to $5.3
million for the year ended December 31, 2000, compared to $1.2 million for the
year ended December 31, 1999. The change related primarily to increases of $1.9
million in personnel and personnel related costs and $1.2 million in
professional fees, which include $435,000 for strategic business consulting
services provided by a consultant who is also a shareholder. The balance was
comprised of corporate charges directly associated with the administrative
functions of our company.
STOCK-BASED COMPENSATION
For the year ended December 31, 2000, we recognized non-cash compensation
expense of $848,000 relating to options granted to a director. We did not incur
any stock-based compensation expense in 1999.
16
FAIR VALUE OF WARRANTS
For the year ended December 31, 2000, we recognized an expense of $21.7 million
relating to the fair value of warrants issued in connection with a strategic
relationship agreement, compared to $140,000 recorded for the year ended
December 31, 1999 relating to the fair value of warrants issued to consultants.
OTHER INCOME AND EXPENSE
We recognized $1.4 million of interest income for the year ended December 31,
2000, compared to $106,000 for the year ended December 31, 1999. The increase
was a result of higher balances of marketable securities derived from the net
proceeds of our private placements. Interest expense for the year ended December
31, 2000 was $13,000, compared to $7,000 for the year ended December 31, 1999.
The increase was primarily due to the increase in capital lease obligations.
LOSS FROM CONTINUING OPERATIONS
Our loss from continuing operations increased to $43.4 million for the year
ended December 31, 2000, from $3.5 million for the year ended December 31, 1999.
The change resulted from the increase in costs, as described above, associated
with the development and launch of our products and the charges relating to the
stock based compensation and fair value of warrants.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through the private sales of Common
Stock and Preferred Stock.
Net cash used in operating activities was $12.5 million for the year ended
December 31, 2001, primarily as a result of the net loss from continuing
operations and a decrease of $4.3 million in accounts payable and accrued
expenses. The net loss and decrease in accounts payable and accrued expenses
were partially offset by non-cash charges of $5.9 million for the impairment of
software development costs, $1.8 million for the fair value of warrants issued,
amortization expense of $1.9 million, depreciation expense of $857,000, and a
decrease in prepaid expenses and other current assets of $575,000.
Net cash used in investing activities was $2.4 million for the year ended
December 31, 2001, primarily due to $969,000 of software development costs
related to the continuing development of our e-commerce solutions, $294,000
relating to leasehold improvements, the purchase of computer and office
equipment, and the purchase of furniture and fixtures, and $672,000 related to
the acquisition of Software Support Team.
Net cash used in financing activities was $328,000 for the year ended December
31, 2001, which was primarily due to $141,000 of principal payments on capital
lease obligations and $189,000 of principal payments related to a
seller-financed note payable obtained in connection with the purchase of
Software Support Team.
At December 31, 2001, cash and cash equivalents totaled $4.5 million, while our
working capital was $3.0 million. In comparison, as of December 31, 2000, cash
and cash equivalents totaled $19.6 million, while our working capital was $13.0
million. To date, our primary uses of cash have been in operating activities to
fund the development and promotion of our e-commerce solutions.
We currently anticipate that our available funds will be sufficient to meet our
projected working capital and operating resource requirements through the next
12 months since we have significantly decreased our staff and shifted our focus
from our electronic commerce solutions to our telemetry and management
information solutions. However, any projections of future cash needs and cash
flows are subject to substantial uncertainty. If current cash and cash
equivalents, and cash that may be generated from operations are not sufficient
to satisfy our liquidity requirements, we will likely seek to sell additional
17
equity or debt securities. If we raise additional funds through the issuance of
equity or convertible securities, such securities may have rights, preferences
or privileges senior to those of the rights of our Common Stock. Furthermore, in
the event that we issue or sell Common Stock or securities convertible for
Common Stock, at a price per share less than the conversion price of the
outstanding Series A1 Preferred Stock, the holders of the Series A1 Preferred
Stock have the right to amend the conversion price of the price per share of the
issuance. As a result, our stockholders may experience significant additional
dilution. We cannot be certain that additional capital will be available to us
on acceptable terms or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
requires the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. As required, the Company adopted SFAS No. 133 in the first quarter of
2001. The adoption of this statement did not have an effect on the Company's
financial position, results of operations or cash flows as it does not hold any
derivative instruments.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations." SFAS No. 141 addresses financial accounting and
reporting for business combinations and supercedes Accounting Principles Board
("APB") Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises." All business
combinations in the scope of SFAS No. 141 are to be accounted for under the
purchase method. SFAS No. 141 is effective June 30, 2001. The Company elected to
adopt the provisions of SFAS 141 beginning July 1, 2001. On October 2, 2001, the
Company purchased Software Support Team. The purchase was accounted for under
the purchase method.
In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other assets (but not
those acquired in a business combination) at acquisition. SFAS No. 142 also
addresses financial accounting and reporting for goodwill and other intangible
assets subsequent to their acquisition. With the adoption of SFAS No. 142,
goodwill is no longer subject to amortization. Rather, goodwill will be subject
to at least an annual assessment for impairment by applying a fair value-based
test. The impairment loss is the amount, if any, by which the implied fair value
of goodwill is less than the carrying or book value. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001. Impairment loss for goodwill
arising from the initial application of SFAS No. 142 is to be reported as
resulting from a change in accounting principle. As a result of the purchase of
Software Support Team, the Company recognized goodwill in the amount of
$304,000. The Company does not believe the adoption of SFAS No. 142 will have a
material effect on the Company's financial position, results of operations or
cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business as previously defined in that opinion.
This statement also amends Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely temporary. For purposes of this
statement, impairment is the condition that exists when the carrying amount of a
long-lived asset exceeds its fair value. An impairment loss recognized for a
long-lived asset to be held and used shall be included in income from continuing
operations before income taxes in the income statement of a business enterprise.
A long-lived asset shall be tested for recoverability whenever events or changes
in circumstances indicate that its carrying amount may not be recoverable. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years,
18
with early application encouraged. The Company does not believe the adoption of
SFAS No. 144 will have a material effect on the Company's financial position,
results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold any market risk sensitive instruments. As a result, this item is
not applicable to the Company's consolidated balance sheet as of December 31,
2001.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MAREX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants ................... 21
Consolidated Balance Sheets as of December 31, 2001 and 2000 ......... 22
Consolidated Statements of Operations
For the Years Ended December 31, 2001, 2000 and 1999 ............... 23
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 2001, 2000 and 1999 ............... 24
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2001, 2000 and 1999 ............... 25
Notes to Consolidated Financial Statements ........................... 27
20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Marex, Inc.:
We have audited the accompanying consolidated balance sheets of Marex, Inc., (a
Florida Corporation) and Subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall 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 financial position of Marex, Inc. and
Subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company incurred net losses during each
of the three years in the period ended December 31, 2001 and has an accumulated
deficit of $68,964,006. The Company is in process of launching new product
offerings which may or may not be successful. The Company's cash requirements
may be substantial and may exceed the amount of the Company's existing working
capital. In order to fund working capital needs, the Company may be required to
raise capital through loans or issuance of debt or equity securities, which may
not be available to the Company on acceptable terms, or at all. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Arthur Andersen LLP
Miami, Florida, February 8, 2002 (except with respect to the matter discussed in
the first paragraph of Note 10, as to which the date is March 26, 2002).
21
MAREX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 4,479,095 $ 19,624,266
Accounts receivable, net .............................. 275,680 18,901
Inventories ........................................... 14,546 --
Prepaid expenses and other current assets ............. 145,835 714,350
Loan to related party ................................. 425,649 --
------------ ------------
Total current assets ............................... 5,340,805 20,357,517
------------ ------------
Property and equipment, net ............................... 1,533,872 2,004,853
------------ ------------
Other assets:
Trademark, net ........................................ -- 6,771
Software development costs, net ....................... 2,311,551 8,904,897
Goodwill .............................................. 304,086 --
Deposits and other assets ............................. 171,623 197,643
------------ ------------
Total other assets ................................. 2,787,260 9,109,311
------------ ------------
Total assets ................................... $ 9,661,937 $ 31,471,681
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of seller-financed note payable ....... $ 684,718 $ --
Current portion of capital lease obligations .......... 163,775 130,481
Accounts payable and accrued expenses ................. 1,453,864 7,195,954
------------ ------------
Total current liabilities .......................... 2,302,357 7,326,435
------------ ------------
Long-term liabilities:
Seller-financed note payable, net of current portion .. 726,735 --
Capital lease obligations, net of current portion ..... 90,725 217,306
------------ ------------
Total long-term liabilities ........................ 817,460 217,306
------------ ------------
Total liabilities .............................. 3,119,817 7,543,741
------------ ------------
Commitments and contingencies (Note 12)
Shareholders' equity:
Series A1 Convertible Preferred Stock, par value
$.01 per share, 1,000,000 shares authorized,
301,750 and 304,693 shares issued and outstanding as
of December 31, 2001 and 2000, respectively ........ 30,175,000 30,469,300
Common Stock, par value $.01 per share,
25,000,000 shares authorized, 7,366,617 and
7,339,780 shares issued and outstanding as of
December 31, 2001 and 2000, respectively ........... 73,666 73,398
Additional paid-in capital ............................ 45,257,460 42,721,486
Accumulated deficit ................................... (68,964,006) (49,336,244)
------------ ------------
Total shareholders' equity ......................... 6,542,120 23,927,940
------------ ------------
Total liabilities and shareholders' equity ..... $ 9,661,937 $ 31,471,681
============ ============
See Notes to Consolidated Financial Statements
22
MAREX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Net sales ................................... $ 622,731 $ 39,487 $ 7,277
------------ ------------ ------------
Costs and expenses:
Cost of product sales .................. 102,926 -- --
Product support and development ........ 5,893,133 9,434,782 1,132,179
Selling and marketing .................. 3,471,697 7,479,601 1,137,554
General and administrative ............. 3,093,931 5,326,858 1,244,727
Impairment of software development costs 5,864,613 -- --
Stock-based compensation ............... 476,140 847,919 --
Fair value of warrants ................. 1,764,402 21,746,581 140,300
------------ ------------ ------------
Total costs and expenses .......... 20,666,842 44,835,741 3,654,760
------------ ------------ ------------
Loss from operations ........................ (20,044,111) (44,796,254) (3,647,483)
------------ ------------ ------------
Other income (expense):
Interest income ....................... 472,261 1,366,189 106,411
Interest expense ...................... (55,675) (13,298) (6,909)
Other ................................. (237) (2,938) (1,406)
------------ ------------ ------------
Total other income ................... 416,349 1,349,953 98,096
------------ ------------ ------------
Loss from continuing operations ............. (19,627,762) (43,446,301) (3,549,387)
------------ ------------ ------------
Discontinued operations:
Loss from discontinued operations ..... -- -- (100,167)
Loss on disposal, including $11,869
for operating losses during
the phase out period ............. -- -- (40,200)
------------ ------------ ------------
Total discontinued operations ........ -- -- (140,367)
------------ ------------ ------------
Net loss .................................... $(19,627,762) $(43,446,301) $ (3,689,754)
============ ============ ============
Net loss per share, basic and diluted:
Continuing operations ................ $ (2.67) $ (6.39) $ (0.62)
Discontinued operations .............. -- -- (0.03)
------------ ------------ ------------
Net loss ............................. $ (2.67) $ (6.39) $ (0.65)
============ ============ ============
Basic and diluted weighted average shares
of Common Stock outstanding .......... 7,344,075 6,798,813 5,700,306
============ ============ ============
See Notes to Consolidated Financial Statements
23
MAREX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN ACCUMULATED SHAREHOLDERS'
STOCK STOCK CAPITAL DEFICIT EQUITY
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 . $ -- $ 49,282 $ 2,373,000 $ (2,200,189) $ 222,093
Exercise of stock options .. -- 3,466 135,534 -- 139,000
Issuance of 1,122,047 shares
of Common Stock ......... -- 11,220 6,881,245 -- 6,892,465
Fair value of warrants ..... -- -- 140,300 -- 140,300
Net loss ................... -- -- -- (3,689,754) (3,689,754)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 . -- 63,968 9,530,079 (5,889,943) 3,704,104
Exercise of stock options
and warrants ............ -- 560 174,072 -- 174,632
Issuance of 420,000 shares
of Preferred Stock ...... 42,000,000 -- (1,098,995) -- 40,901,005
Conversion of Preferred
Stock ................... (11,530,700) 8,870 11,521,830 -- --
Fair value of warrants ..... -- -- 21,746,581 -- 21,746,581
Stock-based compensation ... -- -- 847,919 -- 847,919
Net loss ................... -- -- -- (43,446,301) (43,446,301)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 . 30,469,300 73,398 42,721,486 (49,336,244) 23,927,940
Exercise of stock options
and warrants ............ -- 42 1,358 -- 1,400
Conversion of Preferred
Stock ................... (294,300) 226 294,074 -- --
Fair value of warrants ..... -- -- 476,140 -- 476,140
Stock-based compensation ... -- -- 1,764,402 -- 1,764,402
Net loss ................... -- -- -- (19,627,762) (19,627,762)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 . $ 30,175,000 $ 73,666 $ 45,257,460 $(68,964,006) $ 6,542,120
============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements
24
MAREX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations ............................. $(19,627,762) $(43,446,301) $ (3,549,387)
Adjustments to reconcile loss from continuing operations
to net cash used in continuing operations
Provision for doubtful accounts ........................ 8,887 170 --
Depreciation ........................................... 856,593 476,986 71,006
Amortization ........................................... 1,935,640 1,556,087 27,765
Impairment of software development costs ............... 5,864,613 -- --
Stock-based compensation ............................... 476,140 847,919 --
Fair value of warrants ................................. 1,764,402 21,746,581 140,300
Loss on disposal of property and equipment ............. -- 72,446 1,406
Increase in accounts receivable ........................ (16,816) (19,071) --
Increase in inventories ................................ (5,698) -- --
Decrease (increase) in prepaid expenses and
other current assets .............................. 575,287 (643,748) (70,602)
Decrease (increase) in deposits ........................ 43,219 (196,047) --
(Decrease) increase in accounts payable and
accrued expenses .................................. (4,330,903) 6,598,179 509,540
------------ ------------ ------------
Net cash used in operating activities ............. (12,456,398) (13,006,799) (2,869,972)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ......................... (294,205) (1,481,508) (693,477)
Acquisition of trademark .................................... -- -- (32,500)
Additions to software development costs ..................... (969,081) (10,373,066) --
Acquisition of net assets of subsidiary, net of cash
acquired ............................................... (671,683) -- --
(Increase) decrease in loan to related party ................ (425,649) 22,200 (22,200)
------------ ------------ ------------
Net cash used in investing activities ............. (2,360,618) (11,832,374) (748,177)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party borrowings ...................... -- -- 224,551
Principal payments on due to related party .................. -- -- (260,301)
Principal payments on notes payable ......................... (188,547) -- (139,727)
Principal payments on capital lease obligations ............. (141,008) (46,234) (2,843)
Proceeds from exercise of stock options and warrants ........ 1,400 174,632 139,000
Proceeds from issuance of Common Stock ...................... -- -- 6,892,465
Proceeds from issuance of Preferred Stock ................... -- 40,901,005 --
------------ ------------ ------------
Net cash (used in) provided by financing activities (328,155) 41,029,403 6,853,145
------------ ------------ ------------
Net cash (used in) provided by continuing operations ............ (15,145,171) 16,190,230 3,234,996
Net cash used in discontinued operations ........................ -- -- (151,002)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents ............ (15,145,171) 16,190,230 3,083,994
CASH AND CASH EQUIVALENTS, beginning of year .................... 19,624,266 3,434,036 350,042
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year .......................... $ 4,479,095 $ 19,624,266 $ 3,434,036
============ ============ ============
(Continued)
See Notes to Consolidated Financial Statements
25
MAREX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2001 2000 1999
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest ..................... $ 34,503 $ 13,298 $ 5,988
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH INFORMATION:
Acquisition of equipment under capital lease obligations ... $ -- $ 380,442 $ 8,454
============ ============ ============
Details of acquisition of subsidiary
Assets acquired ........................................ $ 2,608,109
Liabilities assumed .................................... (220,479)
------------
Net assets acquired .................................... 2,387,630
Cash paid for acquisition, including transaction fees .. (787,630)
------------
Seller-financed note payable ........................... $ 1,600,000
============
Net cash paid for acquisition .......................... $ 671,683
Cash acquired in acquisition ........................... 115,947
------------
Cash paid for acquisition, including transaction fees .. $ 787,630
============
See Notes to Consolidated Financial Statements
26
MAREX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Marex, Inc. (the "Company" or "Marex") is a provider of software products and
technology services. The Company's products provide businesses with a
procurement solution that enables electronic system-to-system exchange of
business documents, a product advisory service that enables companies to market
and receive critical product information, a management information solutions
product that offers comprehensive business functions through a series of
integrated software modules, and a telemetry solution that enables remote
tracking of assets from virtually any location in the world via the Internet.
The financial statements have been prepared assuming the Company will continue
as a going concern. The Company has incurred losses of $19.6 million, $43.4
million and $3.7 million for the years ended December 31, 2001, 2000 and 1999,
respectively and has an accumulated deficit of $68,964,006 as of December 31,
2001. The Company is in process of launching new product offerings which may or
may not be successful. If current cash and cash equivalents, and cash that may
be generated from operations are not sufficient to satisfy our liquidity
requirements, the Company will likely seek to sell additional equity or debt
securities. If the Company raises additional funds through the issuance of
equity or convertible securities, such securities may have rights, preferences
or privileges senior to those of the rights of the Company's Common Stock.
Furthermore, in the event that the Company issues or sells Common Stock or
securities convertible for Common Stock, at a price per share less than the
conversion price of the outstanding Series A1 Preferred Stock, the holders of
the Series A1 Preferred Stock have the right to amend the conversion price of
the price per share of the issuance. As a result, the Company's shareholders may
experience significant additional dilution. The Company cannot be certain that
additional capital will be available on acceptable terms or at all. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Marex
and its subsidiaries. All intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents.
ACCOUNTS RECEIVABLE
The Company provides for doubtful accounts by reserving a percentage of monthly
revenues as a general reserve and by specifically identifying accounts for which
collection is not probable. The rollforward of the allowance for doubtful
accounts is as follows:
2001 2000
------- -------
Balance, beginning of year $ 170 $ --
Provision 8,887 170
------- -------
Balance, end of year $ 9,057 $ 170
======= =======
INVENTORIES
Inventories are stated at the lower of cost or market. Components of inventories
include the costs incurred for duplicating computer software, printed material
included with the sale of products, and
27
related training materials. The Company considers factors such as the amount of
inventory on hand, estimated time required to sell such inventories, and current
market conditions to determine whether inventories are stated at the lower of
cost or market. Reserves are provided as appropriate.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets or lease term as follows:
YEARS
----------------------
Computer hardware and software 3
Office equipment and furniture 5
Leasehold improvements Life of Lease or
Estimated Useful
Life, if Shorter
Equipment held under capital leases Life of Lease or
Estimated Useful
Life, if Shorter
TRADEMARK
The cost of the trademark acquired is being amortized using the straight-line
method over two years. Amortization of trademark totaled approximately $7,000,
$16,000 and $9,000 for the years ended December 31, 2001, 2000 and 1999,
respectively, and is included in "General and administrative" in the
accompanying consolidated statements of operations. Accumulated amortization
related to a trademark at December 31, 2001 and 2000 was $32,000 and $25,000,
respectively.
SOFTWARE AND WEBSITE DEVELOPMENT COSTS
The Company follows Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," and Emerging Issues
Task Force Issue No. 00-02, "Accounting for Web Site Development Costs," for the
accounting of development costs. During the years ended December 31, 2001 and
2000, the Company capitalized approximately $969,000 and $10.4 million,
respectively, of development costs associated with development of its software
products. The Company did not capitalize any development costs during the year
ended December 31, 1999.
In connection with the acquisition of Software Support Team, Inc. ("Software
Support Team") during the year ended December 31, 2001, the Company acquired
$1.8 million of capitalized software development costs.
During the year ended December 31, 2001, the Company recognized an impairment of
software development costs in the amount of $5.9 million resulting from the
Company's decision to change its strategy and develop Marconnect
Standard/Enterprise ("Standard/Enterprise") and MarConnect Advisor ("Advisor"),
which replace its previous offerings of MarExpress! and MarexPO!. The impairment
of software development costs was comprised of a charge in the amount of $6.7
million, which was offset by a favorable litigation settlement in the amount of
$815,000.
Amortization of software development costs is computed using the straight-line
method over the useful life of the related products ranging from two to three
years. Amortization expense of software development costs totaled approximately
$1.9 million, $1.5 million and $18,000 for the years ended December 31, 2001,
2000 and 1999, respectively, and is included in "Product support and
development" in the accompanying consolidated statements of operations.
Accumulated amortization related to software development costs at December 31,
2001 and 2000 was $300,000 and $1.6 million, respectively.
28
LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of any asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. During the year ended December 31, 2001, the Company recognized
an impairment of software development costs in the amount of $5.9 million
resulting from the Company's decision to change its strategy and develop
Standard/Enterprise and Advisor, which replaced MarExpress! and MarexPO!. The
impairment of software development costs was comprised of a charge in the amount
of $6.7 million, which was offset by a favorable litigation settlement in the
amount of $815,000. There were no impairment charges recorded in the years ended
December 31, 2000 and 1999.
GOODWILL
Goodwill represents the excess of cost over fair value of net assets acquired.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
goodwill is no longer subject to amortization. Rather, goodwill is subject to at
least an annual assessment for impairment by applying a fair value-based test.
The impairment loss is the amount, if any, by which the implied fair value of
goodwill is less than the carrying or book value.
As a result of the acquisition of Software Support Team, the Company recorded
$304,000 of goodwill during the year ended December 31, 2001. No impairment of
goodwill was recorded during 2001.
CAPITAL LEASES
Leases that transfer substantially all of the benefits and risks of ownership to
the Company are accounted for as the acquisition of assets and assumption of
obligations. Accordingly, capitalized leased assets are recorded as property and
equipment and the present values of the minimum lease payments are recorded as
capital lease obligations. Depreciation of such assets is computed using the
shorter of the lease terms or estimated useful lives of the assets.
INCOME TAXES
The Company utilizes an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax basis
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to effect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change in deferred tax assets and
liabilities and the change in any valuation allowance during the year.
REVENUE RECOGNITION
The Company follows SOP 97-2, "Software Revenue Recognition," which requires
companies to defer revenue and profit recognition if certain required criteria
of a sale are not met. In addition, SOP 97-2 requires that revenue recognized
from software arrangements is to be allocated to each element of the arrangement
based on the relative fair values of the elements, such as software products,
upgrades, enhancements, post contract customer support, installation, or
training. The Company licenses software under noncancellable license agreements.
DockMaster, the Company's core management information solutions product acquired
during 2001, generates revenues from the licensing of software modules, customer
support contracts, training, custom programming, and hardware sales. Licensing
and related hardware and service revenues are recognized on a subscription basis
over the term of the related customer support contract, which is typically one
year. Customer support contracts are billed on a monthly or quarterly basis and
revenue is recognized
29
during the month of support. DockMaster-related revenue for the period from the
acquisition date through December 31, 2001 was $361,000.
MarExpress! and MarexPO!, the Company's former core products, generated revenues
by charging a transaction fee which was based on the gross transaction price of
items purchased and sold through the system or a monthly subscription fee. These
products were discontinued during the fourth quarter of 2001. The fees were
recognized as revenue when the customers' right to receive a refund for the
transaction fees expired. Transaction and subscription fees related to these
products were $261,000 and $34,000 in 2001 and 2000, respectively. No revenues
were generated from these products in 1999 as the products were launched in June
2000.
Standard/Enterprise and Advisor, the Company's core e-commerce products,
generate revenues by charging a monthly subscription fee. The subscription fee
is recognized as revenue during the month that the service is provided. No
revenue was recognized from Standard/Enterprise or Advisor as
Standard/Enterprise was being offered to customers on a trial basis during 2001,
and Advisor was not launched until after December 31, 2001.
Classifieds and Auctions, the successor of the Exchange, generated revenues by
charging listing and transaction fees. Listing and transaction fees related to
these products were $6,000 and $7,000 in 2000 and 1999, respectively.
Classifieds and Auctions was suspended during the first quarter of 2001. No
revenue was generated from this product in 2001.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense for 2001, 2000
and 1999 was $143,000, $1.7 million and $438,000, respectively.
ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses. Actual results
could differ from those estimates. Significant estimates include the useful
lives of trademarks, software development costs and the realizability of
goodwill.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate their fair value. Loan to related party and
seller-financed note payable bear interest at prevailing market rates and are
carried at amounts which approximate fair value.
ACCOUNTING FOR STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company accounts for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees" and related Interpretations. Under APB Opinion
No. 25, compensation is measured as the excess, if any, of the quoted market
price of the Company's Common Stock at the date of grant over the exercise price
of the option granted. Compensation cost for stock options, if any, is
recognized ratably over the vesting period.
WARRANTS
As required by SFAS No. 123, the Company accounts for warrants issued to
non-employees not issued in conjunction with debt by amortizing the fair value,
determined by using the Black-Scholes method, of such warrants over the vesting
period. The fair value of warrants issued in conjunction with debt is amortized
over the life of the loan agreement as interest expense. Expense related to
warrants totaled approximately $1.8 million, $21.7 million and $140,000 in 2001,
2000 and 1999, respectively. See Note 9 for the factors used in determining the
fair value of such warrants.
30
EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," requires two presentations of earnings per
share -- "basic" and "diluted." Basic earnings per share is computed by dividing
income available to common shareholders (the numerator) by the weighted average
number of common shares (the denominator) for the period. The computation of
diluted earnings per share is similar to basic earnings per share, except that
the denominator is increased to include the number of additional common shares
that would have been outstanding if the potentially dilutive common shares had
been issued.
The following options and warrants to purchase shares of common stock were
outstanding at the end of each year, but were not included in the computation of
diluted earnings per share because the Company reported a net loss for all years
presented and, therefore, the effect would be antidilutive:
December 31,
---------------------------------------------------
2001 2000 1999
------------- ------------- -------------
OPTIONS
Outstanding 3,258,635 2,862,050 2,416,000
Weighted average exercise prices $ 4.10 $ 6.20 $ 5.00
WARRANTS
Outstanding 409,971 1,852,052 436,971
Weighted average exercise prices $ 9.68 $ 3.57 $ 9.19
The Company had 301,750 shares of Preferred Stock outstanding as of December 31,
2001 that were convertible into 2,321,154 shares of Common Stock.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Comprehensive income is defined as the
change in equity during the financial reporting period of a business enterprise
resulting from non-owner sources. For 2001, 2000 and 1999, the Company had no
comprehensive income items and, accordingly, comprehensive loss was the same as
net loss for all periods presented.
SEGMENT REPORTING
For internal management reporting purposes, the Company currently operates two
primary business segments: electronic commerce products and management
information solution software products. Electronic commerce products consist of
our internally developed procurement solutions, MarExpress! and MarexPO!.
Management information solution software products consist of those products
obtained through the acquisition of Software Support Team on October 2, 2001.
These operating segments generally follow the management organizational
structure of the Company. Sales are made only to external customers in the
United States of America. See Note 11 for information related to the Company's
business segments.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
requires the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. As required, the Company adopted SFAS No. 133 in the first quarter of
2001. The adoption of this statement did not have an effect on the Company's
financial position, results of operations or cash flows as it does not hold any
derivative instruments.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations." SFAS No. 141 addresses financial accounting and
reporting for business combinations and supercedes APB Opinion No. 16, "Business
Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." All business combinations in the scope of SFAS No. 141
are to be accounted for under the purchase method. SFAS No. 141 is effective
June 30, 2001. The
31
Company elected to adopt the provisions of SFAS No. 141 beginning July 1, 2001.
Accordingly, the Company's purchase of Software Support Team on October 2, 2001
was accounted for under the provisions of SFAS No. 141. The purchase was
accounted for under the purchase method. In June 2001, the FASB also issued SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses
financial accounting and reporting for intangible assets acquired individually
or with a group of other assets (but not those acquired in a business
combination) at acquisition. SFAS No. 142 also addresses financial accounting
and reporting for goodwill and other intangible assets subsequent to their
acquisition. With the adoption of SFAS No. 142, goodwill is no longer subject to
amortization. Rather, goodwill will be subject to at least an annual assessment
for impairment by applying a fair value-based test. The impairment loss is the
amount, if any, by which the implied fair value of goodwill is less than the
carrying or book value. SFAS No. 142 is effective for fiscal years beginning
after December 15, 2001. Impairment loss for goodwill arising from the initial
application of SFAS No. 142 is to be reported as resulting from a change in
accounting principle. As a result of the purchase of Software Support Team, the
Company recognized goodwill in the amount of $304,000. The Company does not
believe the adoption of SFAS No. 142 will have a material effect on the
Company's financial position, results of operations or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business as previously defined in that opinion.
This statement also amends Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely temporary. For purposes of this
statement, impairment is the condition that exists when the carrying amount of a
long-lived asset exceeds its fair value. An impairment loss recognized for a
long-lived asset to be held and used shall be included in income from continuing
operations before income taxes in the income statement of a business enterprise.
A long-lived asset shall be tested for recoverability whenever events or changes
in circumstances indicate that its carrying amount may not be recoverable. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
The Company does not believe the adoption of SFAS No. 144 will have a material
effect on the Company's financial position, results of operations or cash flows.
NOTE 3 - ACQUISITION
On October 2, 2001, the Company completed the acquisition of 100% of the
outstanding stock of Software Support Team for $2.4 million pursuant to the
terms of a Stock Purchase Agreement dated September 21, 2001. The purchase price
was based on arms' length negotiations between the Company and the sellers.
Software Support Team is engaged in the business of developing management
information solutions software.
The purchase price was funded with $800,000 cash from internally available funds
and $1.6 million through a seller-financed note payable. The note payable bears
an interest rate of 6% payable in equal quarterly installments and matures in
October 2003.
The acquisition, completed on October 2, 2001, was accounted for as a purchase
under SFAS No. 141 and, accordingly, the results of Software Support Team's
operations are included in the Company's consolidated results from the date of
the acquisition.
The following table summarizes the fair values of assets acquired and
liabilities assumed at the date of acquisition:
Assets acquired $ 2,608,109
Liabilities assumed (220,479)
-----------
Net assets acquired $ 2,387,630
===========
32
Current and long-term assets and liabilities were recorded at their net book
value, which approximated their fair value at the date of acquisition. Software
development costs of $1.8 million were determined through a valuation analysis
performed by an independent third party.
The following table reflects the unaudited pro forma combined results of the
Company as if the acquisition had taken place at the beginning of the periods
presented:
Year Ended December 31,
-------------------------------
2001 2000
------------ ------------
Net sales $ 2,425,540 $ 2,938,505
Net loss $(19,505,838) $(43,082,119)
Net loss per share $ (2.66) $ (6.34)
The unaudited pro forma results have been prepared for comparison purposes only.
The unaudited pro forma combined results do not purport to represent what our
actual results of operations would have been had the acquisition occurred as of
the beginning of the periods presented and may not be indicative of our future
results of operations.
NOTE 4 - DISCONTINUED OPERATIONS
On August 24, 1999, the Company's Board of Directors approved a plan to
discontinue the operations of its non-core business subsidiary, Sovereign
Financial Information Services, Inc. ("Sovereign"), in order to focus its
business towards its Internet-based e-commerce solutions for the marine
industry. Sovereign was engaged in the publishing of research reports, stock
handbooks and global industry guides. Sovereign ceased operations on September
30, 1999. The loss on the disposal of Sovereign totaled $40,000, consisting of a
write-down of Sovereign assets totaling $28,000 and a provision of $12,000 for
operating losses until the date of disposal.
The accompanying consolidated statement of operations and consolidated
statement of cash flows have been reclassified to report separately the
discontinued operations in the prior periods. Selected results of the
discontinued operations in 1999 were as follows:
Revenues $ --
=========
Gross profit $ --
=========
Selling, general and administrative $ 140,367
=========
Net loss $(140,367)
=========
NOTE 5 - PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
December 31,
-----------------------------
2001 2000
----------- -----------
Computer hardware and software $ 1,801,410 $ 1,690,125
Office equipment and furniture 432,563 405,735
Leasehold improvements 283,299 87,633
Equipment held under capital leases 430,386 389,077
----------- -----------
2,947,658 2,572,570
Less accumulated depreciation (1,413,786) (567,717)
----------- -----------
Property and equipment, net $ 1,533,872 $ 2,004,853
=========== ===========
Depreciation expense charged to operations during 2001, 2000 and 1999 was
$857,000, $477,000, and $71,000, respectively.
33
NOTE 6 - INCOME TAXES
The Company has recorded a 100% valuation allowance on its deferred tax assets
due to the uncertainty of the realization of the deferred tax assets. At
December 31, 2001 and 2000, the significant components of the Company's
deferred tax assets are as follows:
2001 2000
------------ ------------
Net operating loss carryforwards $ 16,453,213 $ 10,192,989
Depreciation and amortization (89,878) 448,093
Accrual to cash adjustment 23,207 23,208
Other 23,948 67
------------ ------------
Total 16,410,490 10,664,357
Less valuation allowance (16,410,490) (10,664,357)
------------ ------------
$ -- $ --
============ ============
The provision for income taxes differs from the amount computed by applying the
statutory federal and state income tax rates to income before income taxes. The
sources and tax effects of the difference are as follows:
2001 2000 1999
----------- ----------- -----------
Expected tax benefit at 39.5% $ 7,752,966 $17,161,289 $ 1,457,452
Non-deductible expenses,
primarily warrants (2,006,832) (8,734,130) (52,127)
Change in valuation allowance (5,746,134) (8,427,159) (1,405,325)
------------ ----------- -----------
$ -- $ -- $ --
============ =========== ===========
As of December 31, 2001, the Company's net operating loss carryforwards for
income tax purposes amounted to approximately $41.7 million and expire at
various dates from 2011 through 2021.
NOTE 7 - SELLER-FINANCED NOTE PAYABLE
In October 2001, in connection with the acquisition of Software Support Team,
the Company issued a note payable for $1,600,000 to the sellers, who are
currently employees of the Company. The note bears an interest rate of 6% and
matures in quarterly principal and interest payments of $188,548 through October
2003. During 2001, the Company accrued interest expense of approximately
$21,000.
NOTE 8 - CAPITAL LEASES
The Company is the lessee of certain equipment under capital leases expiring in
various years through the year 2006. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset and are included in property and
equipment, net. The assets are depreciated over the lesser of their estimated
useful lives or the term of the lease. Depreciation of assets under capital
leases is included in depreciation expense.
Minimum future lease payments under capital leases as of December 31, 2001 are
as follows:
2002 $ 181,687
2003 72,294
2004 16,217
2005 7,430
2006 1,238
---------
Total minimum lease payments 278,866
Less amount representing interest (24,366)
---------
Present value of net minimum lease payments $ 254,500
=========
Interest rates on capitalized leases vary from 9.00% to 11.31% and are based on
the Company's incremental borrowing rate. Interest expense on capital lease
obligations during 2001, 2000 and 1999 was $35,000, $13,000 and $2,000,
respectively.
34
NOTE 9 - SHAREHOLDERS' EQUITY
STOCK OPTION PLAN
In January 1997, the Company approved a 1996 and 1997 Incentive Stock Option
Plan (ISO). The 1996 and 1997 Incentive Stock Option Plans, as amended, provide
options for 900,000 and 4,000,000 shares, respectively, to be purchased for the
greater of $.33 or the fair market value on the date of grant. In general,
options have vesting terms of 4 to 5 years and expire 5 years after date of
grant. Shares available for future option grants at December 31, 2001 totaled
1,236,165. As of December 31, 2001, the Company had granted options to purchase
5,721,185 shares of Common Stock to employees and Directors of the Company. The
following is a summary of stock option activity during the years ended December
31, 2001, 2000 and 1999:
Weighted
Average
Shares Exercise Price
---------------- -----------------
Outstanding at December 31, 1998 1,911,000 $ 1.38
Granted 1,070,000 9.65
Exercised (372,000) 1.06
Canceled (193,000) 2.57
----------------
Outstanding at December 31, 1999 2,416,000 5.00
Granted 762,400 12.31
Exercised (29,000) 4.32
Canceled (287,350) 12.53
----------------
Outstanding at December 31, 2000 2,862,050 6.20
Granted 1,788,785 1.59
Exercised (4,200) 0.33
Canceled (968,000) 7.17
Expired (420,000) 0.37
----------------
Outstanding at December 31, 2001 3,258,635 4.10
================
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2001:
Outstanding Options Exercisable Options
-------------------------------------------------------- --------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Remaining Exercise Exercise
Price Range Number Life (Yrs.) Price Number Price
-------------------- ------------- --------------- ------------------ ------------------ ----------------
$0.33-$0.37 750,500 2.75 $ 0.34 335,600 $ 0.35
$0.57-$0.60 121,735 4.73 0.60 -- --
$1.14 17,500 4.58 1.14 -- --
$1.83-$2.38 1,354,000 2.56 2.05 694,000 1.93
$3.00-$3.86 122,150 3.88 3.81 24,430 3.81
$5.50 150,000 0.06 5.50 150,000 5.50
$8.03-$12.38 501,000 2.56 10.14 428,000 10.22
$13.00-$18.50 203,500 3.33 13.14 70,700 13.23
$27.75-$37.44 38,250 3.16 29.98 7,650 29.98
------------- ------------------
$0.33-$37.44 3,258,635 2.68 4.10 1,710,380 4.62
============= ==================
As permitted by SFAS No. 123, the Company accounts for options issued to
employees under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." In 2000, the Company granted options to a Director
at an exercise price below the quoted market price, which resulted in total
non-cash compensation of $2.4 million. The non-cash compensation cost is being
recognized ratably over the vesting period. For the years ended December 31,
2001 and 2000, compensation expense relating to these options totaled
approximately $476,000 and $848,000, respectively.
35
If compensation cost for options issued to employees had been determined
consistent with SFAS No. 123, the Company's net loss and net loss per share
would have been the pro forma amounts shown in the following table:
2001 2000 1999
-------------- -------------- --------------
Net loss:
As reported $ (19,627,762) $ (43,446,301) $ (3,689,754)
Pro forma (22,720,510) (45,793,724) (4,469,977)
Net loss per share,
basic and diluted:
As reported $ (2.67) $ (6.39) $ (0.65)
Pro forma (3.09) (6.74) (0.78)
During the year ended December 31, 2001, stock options granted were all granted
at exercise prices equal to market and had a weighted average fair value of
$1.59. During the year ended December 31, 2000, the weighted average fair values
of stock options granted at exercise prices below market price and at market
price were $23.82 and $9.37, respectively.
The estimated fair value of each option granted is calculated using the
Black-Scholes option-pricing model. The weighted average assumptions used in the
model were as follows:
Risk-free Expected
Grant Interest Expected Term
Date Volatility Rate Dividends (Years)
------------------ -------------- -------------- ---------------- ----------------
2001 100% 4.67% 0% 4
2000 100% 6.11% 0% 4
1999 80% 5.50% 0% 4
PREFERRED STOCK
The Company has authorized 1,000,000 shares of Preferred Stock of $.01 par value
with preferences to be determined by the Board of Directors. On March 2, 2000,
the Board of Directors designated 430,000 shares as Series A1 Convertible
Preferred Stock ("Series A1 Preferred Stock").
In March 2000, the Company received net proceeds of $20.4 million in connection
with the sale of 210,000 shares of Series A1 Preferred Stock at $100 per share.
In May 2000, the Company completed the private placement through the sale of an
additional 210,000 shares of Series A1 Preferred Stock at $100 per share. Total
net proceeds from the private placement were $40.9 million. During 2001, 2,943
shares of Series A1 Preferred Stock were converted into 22,637 shares of Common
Stock. During 2000, 115,307 shares of Series A1 Preferred Stock were converted
into 886,974 shares of Common Stock.
Each share of the Series A1 Preferred Stock is convertible into 7.69 shares of
Common Stock at the option of the holder at any time. In the event that the
Company issues or sells Common Stock or securities convertible or exchangeable
for Common Stock, subject to certain exclusions, at a price per share less than
the conversion price of the outstanding Series A1 Preferred Stock, the holders
of the Series A1 Preferred Stock shall have the right to amend the conversion
price of the Series A1 Preferred Stock outstanding to the price per share of the
issuance. Automatic conversion occurs upon either of the following: completion
by the Company of a public offering which raises gross proceeds of at least $50
million, at an effective price per share to the public of at least $26.00 as
adjusted for stock splits, stock dividends or other similar transactions; or,
upon the event that the market price per share of the Company's Common Stock
exceeds $26.00, subject to adjustments for stock splits, stock dividends, or
other similar transactions, for a consecutive twenty day period following the
one-year anniversary of the effective date of a registration statement covering
the Common Stock underlying the Series A1 Preferred Stock.
36
The holders of the Series A1 Preferred Stock are entitled to the number of votes
equal to the number of shares of Common Stock into which such Preferred Stock is
convertible.
Upon declaration by the Board of Directors, holders of Series A1 Preferred Stock
shall be entitled to receive dividends ratably in an amount per share equal to
that which the holders would have been entitled had they converted their Series
A1 Preferred Stock into shares of Common Stock.
Upon any liquidation of the Company, holders of record of the Series A1
Preferred Stock shall be entitled to receive, out of the assets of the Company
and before any distribution or payment is made upon any class of security of
lesser rank, an amount per share equal to the lesser of $100 per share or the
assets of the Company available for distribution to its shareholders,
distributed ratably among holders of the outstanding Series A1 Preferred Stock.
After the distribution to the holders of Series A1 Preferred Stock has been
made, the remaining assets of the Company available for distribution to
shareholders shall be distributed pro rata solely among the holders of Common
Stock.
Holders may redeem shares of Series A1 Preferred Stock in the event that the
Company does not honor a conversion. In such a case, the redemption amount is
equal to, at the option of the holder, the market value of the Common Stock that
the shares of Series A1 Preferred Stock would otherwise have been convertible
into or $100 per share.
WARRANTS
During 1997, the Company issued 6,000 warrants to two lenders as partial
consideration for loans. Each warrant is convertible into one share of the
Company's Common Stock and is exercisable at $1.83 per share. The warrants
expire 5 years from the effective date.
The Company has issued warrants to consultants in consideration of having acted
as agents for the Company's private placements. The Company issued warrants to
purchase 353,971 and 27,000 shares of Common Stock to placement agents in 1999
and 1997, respectively. The weighted average exercise price of warrants issued
to placement agents in 1999 and 1997 was $9.48 and $1.83, respectively. Each
warrant was exercisable at the date of grant and expires 5 years from such date.
The costs of warrants issued in conjunction with private placements were costs
of raising capital and thus were deducted from additional paid-in capital. The
fair value of the warrants, which was determined in accordance with SFAS No.
123, offset the deductions to additional paid-in capital.
On October 27, 1999, the Company granted 50,000 warrants to a consultant as
consideration for general corporate services. The warrants expire in October of
2002 and had a weighted average exercise price of $12.00. The Company used the
Black-Scholes model to calculate the fair value of these warrants by using the
following weighted average assumptions: Volatility, 80%; Risk-free Interest
Rate, 5.80%; Expected Dividends, $0; and Expected Term, 2 years. Based on these
assumptions, the computed fair value of warrants issued to consultants was
$140,000 and is charged to expense in the accompanying 1999 consolidated
statement of operations.
On April 26, 2000, the Company entered into a Strategic Relationship Agreement
(the "Strategic Relationship Agreement") with Genmar Holdings, Inc. ("Genmar").
The Strategic Relationship Agreement provides that Genmar will utilize the
Company as its exclusive provider of an online procurement system. In connection
with the Strategic Relationship Agreement, the Company entered into a Warrant
Agreement (the "Warrant Agreement") pursuant to which the Company issued to
Genmar, on April 26, 2000 and April 26, 2001, warrants to purchase 1,442,081 and
1,495,256 shares, respectively, of Common Stock. All such warrants were
exercisable immediately, subject to certain restrictions, and had an exercise
price of $1.83.
The Company accounted for the warrants issued to Genmar in accordance with EITF
Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services"
and SFAS No. 123, "Accounting for Stock-Based Compensation." In 2001, the
Black-Scholes value of the warrants issued was calculated using the following
assumptions: Volatility, 100%; Risk-fee Interest Rate, 4.19%; Expected
Dividends, $0; and Expected Term, 2 years. Based on these assumptions, the
computed fair value of the warrants issued on
37
April 26, 2001 was $1.8 million. In 2000, the Black-Scholes value of the
warrants issued was calculated using the following assumptions: Volatility, 80%;
Risk-fee Interest Rate, 6.42%; Expected Dividends, $0; and Expected Term, 3
years. Based on these assumptions, the computed fair value of the warrants
issued on April 26, 2000 was $21.7 million. The computed fair values of the
warrants issued are charges to expense in the accompanying unaudited
consolidated statements of operations as "Fair value of warrants."
In August 2001, the Company and Genmar entered into agreement to terminate the
Strategic Relationship Agreement and the Warrant Agreement. In its place, the
Company and Genmar executed a Premiere Builder Agreement (the "Premiere Builder
Agreement") to govern their business relationship prospectively. In connection
with the Premiere Builder Agreement, all 2,937,337 warrants issued in accordance
with the terms of the Warrant Agreement were cancelled.
The following is a summary of warrant activity during the years ended December
31, 2001, 2000 and 1999:
Weighted
Average
Number of Warrants Exercise Price
------------------- -----------------
Outstanding at December 31, 1998 33,000 $ 1.83
Issued 403,971 9.79
-------------------
Outstanding at December 31, 1999 436,971 9.19
Issued 1,442,081 1.83
Exercised (27,000) 1.83
-------------------
Outstanding at December 31, 2000 1,852,052 3.57
Issued 1,495,256 1.83
Cancelled (2,937,337) 1.83
-------------------
Outstanding at December 31, 2001 409,971 9.68
===================
NOTE 10 - RELATED PARTY TRANSACTIONS
In April 2001, the Company loaned its Chief Executive Officer, who is also a
Director and shareholder, $400,000. The loan accrues interest at an annual rate
of 8.0% and had an original maturity date on December 29, 2001. On March 26,
2002, the chairman of the Compensation Committee of the Board of Directors
approved the extension of the maturity date to December 31, 2002.
On December 7, 2001, the Company loaned its Chief Executive Officer $125,000.
The loan, which accrued interest at an annual rate of 8.0% and matured on
December 31, 2001, was repaid on its maturity date.
In November 2001 and March 2000, the Company made payments of $25,000 and
$435,000, respectively, to a consultant, who is also a shareholder of the
Company, pursuant to strategic business consulting agreements. Consulting
expense related to the agreements totaled $25,000 and $435,000 in 2001 and 2000,
respectively. The consulting expenses are included in the accompanying
consolidated statements of operations as a component of "General and
administrative" expenses.
In July 1999, the Company loaned its Chief Executive Officer, who is also a
Director and a shareholder, $22,200. The loan bore an interest rate of 1% over
the prime rate and was repaid upon maturity in July of 2000. Interest income
earned by the Company from this loan was approximately $875 and $900 during 2000
and 1999, respectively.
The Chief Executive Officer owns another company, which prior to 1999, made
loans to the Company pursuant to a revolving loan agreement. The loan agreement
specified interest at 2.5% over the prime rate, with principal due upon demand.
The loan was paid during 1999. The Company incurred approximately $2,000 of
interest expense under the revolving loan agreement during 1999.
38
NOTE 11 - SEGMENT INFORMATION
For internal management reporting purposes, the Company currently operates two
primary business segments: electronic commerce products and management
information solutions software products. Electronic commerce products consist of
our internally developed procurement solutions, MarExpress! and MarexPO!.
Management information solution software products consist of those products
obtained through the acquisition of Software Support Team on October 2, 2001.
These operating segments generally follow the management organizational
structure of the Company. Sales are made only to external customers in the
United States of America. Information on operating segments in 2001 is as
follows:
Management Information
Solutions Electronic Commerce Total
----------------------- ----------------------- --------------
Net sales $ 361,420 $ 261,311 $ 622,731
============ ============ ============
Cost and expenses $ 683,162 $ 19,983,680 $ 20,666,842
============ ============ ============
Interest income $ 737 $ 471,524 $ 472,261
============ ============ ============
Interest expense $ 1,074 $ 54,601 $ 55,675
============ ============ ============
Net loss $ (321,745) $(19,306,017) $(19,627,762)
============ ============ ============
Total assets at year end $ 2,395,059 $ 7,266,878 $ 9,661,937
============ ============ ============
Long-lived assets at year end $ 1,723,926 $ 2,121,497 $ 3,845,423
============ ============ ============
During 2001 and 2000, revenues from one customer accounted for approximately 51%
and 47% of total revenues of the electronic commerce operating segment.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its office space under non-cancelable operating leases, which
expire at various dates through 2004. In 2001, the Company subleased office
space under non-cancelable operating leases, which expire in 2004.
Future minimum lease payments under non-cancelable operating leases and sublease
payments to be received under non-cancelable subleases as of December 31, 2001
are as follows:
Future Future Future
Minimum Lease Sublease Minimum Lease
Payments Payments Payments, Net
--------------------- ------------------- -------------------
2002 $ 582,268 $ (47,753) $ 534,515
2003 476,539 (49,934) 426,605
2004 122,417 (16,215) 106,202
----------- ----------- -----------
$ 1,181,224 $ (113,902) $ 1,067,322
=========== =========== ===========
Rental expense on operating leases, net of sublease income, was $701,000,
$239,000 and $84,000 during 2001, 2000 and 1999, respectively.
EMPLOYMENT AGREEMENTS
The Company has employment contracts with its executive officers, which expire
at various dates through December 31, 2004. The agreements provide for minimum
salary levels, annual bonuses at the sole discretion of the Board of Directors
and other benefits upon a change of control. The commitment for future salaries
at December 31, 2001, excluding bonuses, are as follows:
2002 $ 265,000
2003 265,000
2004 265,000
----------
Total $ 795,000
==========
39
LEGAL MATTERS
The Company is involved in only ordinary, routine litigation and claims
incidental to its business. Although the outcome of such matters cannot be
predicted with certainty and some of these matters may be disposed of
unfavorably to the Company, based on currently available information, the
Company does not believe that such legal matters will have a material adverse
effect on its consolidated financial position or results of operations.
On February 13, 2002, the Company entered into a settlement agreement with a
consultant, related to $815,000 of disputed invoices. Under the settlement
agreement, neither party shall pay any amounts related to the dispute. The
$815,000, which had previously been recognized as impairment of software
development costs in the consolidated statement of operations as of December 31,
2001, was reversed, and consequently partially offset the $6.7 million charge
related to software development costs.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this item is incorporated by reference
to the registrant's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is incorporated by reference
to the registrant's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is incorporated by reference
to the registrant's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is incorporated by reference
to the registrant's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) EXHIBITS
EXHIBITS DESCRIPTION OF DOCUMENT
-------- -----------------------
3.1 Form of Amended and Restated Articles of Incorporation of the
Company (1)
3.2 Form of Amended and Restated Bylaws of the Company (1)
3.3 Articles of Amendment to Amended and Restated Articles of
Incorporation of the Company (3)
4.1 Certificate of Designation for the Series A1 Convertible
Preferred Stock, par value $.01 (3)
4.2 Securities Purchase Agreement among Marex, Inc. and Certain
Purchasers, dated March 2, 2000 (3)
4.3 Registration Rights Agreement among Marex, Inc. and Certain
Purchasers, dated March 2, 2000 (3)
10.1 1996 Incentive Stock Option Plan, as amended (1)
10.2 Amended and Restated 1997 Stock Option Plan (2)
10.3 Company's Office Lease, 2701 South Bayshore Dr., Miami, FL,
as amended (4)
10.4 Company's Office Lease, 5835 Blue Lagoon Dr., Miami, FL, as
amended (5)
10.5 Stock Purchase Agreement among Marex, Inc., Software Support
Team, Inc., Arthur M. Peacock and Albert L. Peacock, dated
September 21, 2001 (6)
21.1 Subsidiaries of the Registrant (7)
23.1 Consent of Arthur Andersen LLP (7)
99.1 Letter to the Securities and Exchange Commission dated
April 15, 2002 regarding Arthur Andersen LLP quality
control (7)
----------------
(1) Previously filed as an exhibit to the Company's Form 10-SB and Amendment
No. 1 to Form 10-SB.
(2) Previously filed as part of the Company's Form DEFS14A filed on October
19, 1999.
(3) Previously filed as an exhibit to the Company's Form 8-K filed on March 8,
2000.
(4) Previously filed as an exhibit to the Company's Form 10-K filed on March
23, 2000.
(5) Previously filed as an exhibit to the Company's Form 10-K filed on March
23, 2001.
(6) Previously filed as an exhibit to the Company's Form 8-K filed on
October 16, 2001.
(7) Filed herewith.
(b) REPORTS ON FORM 8-K
On October 16, 2001, the Company filed a report on Form 8-K which announced that
the Stock Purchase Agreement among Marex, Inc., Software Support Team, Inc.,
Arthur M. Peacock and Albert L. Peacock had been executed.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MAREX, INC.
Date: APRIL 15, 2002 BY: /s/ DAVID A. SCHWEDEL
-------------- -------------------------
David A. Schwedel
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID A. SCHWEDEL Director, Chairman of the Board, April 15, 2002
----------------------- and Chief Executive Officer
David A. Schwedel (Principal Accounting Officer)
43