<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
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 000-21561
MIAMI COMPUTER SUPPLY CORPORATION
(Exact name of registrant as specified in its articles of incorporation)
Ohio 31-1001529
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4750 Hempstead Station Drive, Dayton, Ohio 45429
(Address of principal executive offices)
(937) 291-8282
(Registrant's telephone number, including area code)
Indicate by check 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) had been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
At March 31, 1997, 3,538,000 shares of common stock, no par value per
share, of the registrant were outstanding.
<PAGE>
MIAMI COMPUTER SUPPLY CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 1997
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements:
Consolidated Statement of Operations . . . . . . . . . . . . 3
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition . . . . . . . . 6-8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 9
Item 2. Changes in Securities . . . . . . . . . . . . . . . . 9
Item 3. Default Upon Senior Securities. . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of Security Holders . 9
Item 5. Other Information . . . . . . . . . . . . . . . . . . 9
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 9
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MIAMI COMPUTER SUPPLY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------
1997 (1) 1996
-------- ----
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . $ 20,226,020 $ 12,555,983
Operating costs:
Cost of sales. . . . . . . . . . . . . . . . . . . 16,745,304 10,029,524
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . 2,717,073 1,880,514
------------- -------------
Total operating costs . . . . . . . . . . . . 19,462,377 11,910,038
------------- -------------
Operating income . . . . . . . . . . . . . . . . . 763,643 645,945
Interest expense . . . . . . . . . . . . . . . . . (871) (66,938)
Other income . . . . . . . . . . . . . . . . . . 12,121 7,938
------------- -------------
Income before income taxes . . . . . . . . . . . . 774,893 586,945
Provision for income taxes . . . . . . . . . . . . 313,832 243,582
------------- -------------
Net income . . . . . . . . . . . . . . . . . . . . $ 461,061 $ 343,363
------------- -------------
------------- -------------
Earnings per share of common stock . . . . . . . . $ 0.13 $ 0.14
------------- -------------
------------- -------------
Weighted average number of common
shares outstanding . . . . . . . . . . . . . . . 3,538,000 2,388,000
------------- -------------
------------- -------------
</TABLE>
(1) Includes the results of operations of DDP.
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
MIAMI COMPUTER SUPPLY CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
Assets 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . $ 169,963 $ 780,875
Accounts receivable . . . . . . . . . . . . . . . 9,345,864 8,636,657
Inventories . . . . . . . . . . . . . . . . . . . 6,456,293 5,894,838
Prepaid expenses . . . . . . . . . . . . . . . . 128,896 396,450
Deferred income tax assets . . . . . . . . . . . 35,496 35,496
------------- -------------
Total current assets . . . . . . . . . . . . . 16,136,512 15,744,316
------------- -------------
Property and equipment - net of accumulated
depreciation . . . . . . . . . . . . . . . . . . 1,000,315 1,016,164
------------- -------------
Other assets:
Deposits . . . . . . . . . . . . . . . . . . . . 36,394 28,302
Cash surrender value officers' life insurance . . 571,986 571,986
Intangible assets . . . . . . . . . . . . . . . . 382,595 414,440
------------- -------------
Total assets . . . . . . . . . . . . . . . . . $ 18,127,802 $ 17,775,208
------------- -------------
------------- -------------
Liabilities and Stockholders' Equity
Current Liabilities:
Line-of-credit. . . . . . . . . . . . . . . . . . $ 839,421 $ 0
Accounts payable - trade. . . . . . . . . . . . . 3,398,427 4,308,785
Accrued expenses, payroll taxes and withholdings. 1,190,296 1,188,708
Current portion of long-term debt . . . . . . . . 35,567 35,567
------------- -------------
Total current liabilities. . . . . . . . . . . 5,463,711 5,533,060
Long-term debt. . . . . . . . . . . . . . . . . . 55,698 64,696
Other long-term liabilities . . . . . . . . . . . 13,040 43,160
Deferred income taxes . . . . . . . . . . . . . . 61,249 61,249
------------- -------------
Total liabilities. . . . . . . . . . . . . . . 5,593,698 5,702,165
------------- -------------
Stockholders' equity:
Preferred Stock, no par value, 5,000,000 shares
authorized; none outstanding at March 31, 1997
and December 31, 1996. . . . . . . . . . . . -- --
Common stock, no par value; 30,000,000 shares
authorized, 3,538,000 shares outstanding at
March 31, 1997 and December 31, 1996 . . . . . -- --
Additional paid-in capital . . . . . . . . . . . 8,349,249 8,349,249
Retained earnings . . . . . . . . . . . . . . . 4,199,855 3,738,794
------------- -------------
12,549,104 12,088,043
Less - Treasury common stock, at
cost 1,200 shares. . . . . . . . . . . . . . 15,000 15,000
------------- -------------
Total stockholders' equity . . . . . . . . . . 12,534,104 12,073,043
------------- -------------
Total liabilities and stockholders' equity . . $ 18,127,802 $ 17,775,208
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
MIAMI COMPUTER SUPPLY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------
1997 1996
---- ----
<S> <C> <C>
Cash flows (used in) provided by operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . $ 461,061 $ 343,363
Adjustments to reconcile net income to cash (used in)
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . 107,481 70,412
Changes in assets and liabilities net of effects of
acquisitions of businesses:
Accounts receivable. . . . . . . . . . . . . . . . . . . (709,207) (535,474)
Inventories . . . . . . . . . . . . . . . . . . . . . . (561,455) 276,503
Prepaid expenses . . . . . . . . . . . . . . . . . . . . 267,554 14,620
Deposits . . . . . . . . . . . . . . . . . . . . . . . . (8,092) (242)
Accounts payable - trade . . . . . . . . . . . . . . . . (910,358) (98,547)
Accrued expenses . . . . . . . . . . . . . . . . . . . . (176,750) (9,692)
Accrued income taxes . . . . . . . . . . . . . . . . . 178,338 (37,491)
--------- ---------
Cash (used in) provided by operating activities. . . (1,351,428) 23,452
--------- ---------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . (59,787) (48,498)
Investment in cash surrender value officers'
life insurance . . . . . . . . . . . . . . . . . . . . -- (14,304)
--------- ---------
Cash (used in) provided by investing activities. . . . . (59,787) (62,802)
--------- ---------
Cash flows from financing activities:
Borrowings under line-of-credit . . . . . . . . . . . . 2,217,628 2,902,163
Payments under line-of-credit . . . . . . . . . . . . . (1,378,207) (2,830,391)
Principal payments on long-term debt. . . . . . . . . . (8,998) (1,302)
Payments under non-competition agreements . . . . . . . (30,120) (31,120)
--------- ---------
Cash provided by financing activities. . . . . . . . . 800,303 39,350
--------- ---------
Net increase (decrease) in cash . . . . . . . . . . . . (610,912) --
Cash - Beginning of period. . . . . . . . . . . . . . . 780,875 1,900
--------- ---------
Cash - End of period . . . . . . . . . . . . . . . . . $ 169,963 $ 1,900
--------- ---------
--------- ---------
Supplemental cash flow information:
Cash paid for interest. . . . . . . . . . . . . . . . 871 66,938
Cash paid for income taxes . . . . . . . . . . . . . 99,257 281,473
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
MIAMI COMPUTER SUPPLY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Rule 10-01 of SEC Regulation S-X. Consequently, they do not
include all the disclosures required under generally accepted accounting
principles for complete financial statements. However, in the opinion of the
management of Miami Computer Supply Corporation (the "Company"), the
consolidated financial statements presented herein contain all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows of the Company and
its consolidated subsidiaries. For further information regarding the Company's
accounting policies and the basis of presentation of the financial statements,
refer to the consolidated financial statements and notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
NOTE 2 - ORGANIZATION
The Company sells a wide variety of computer supplies to corporate customers,
governmental agencies, universities, hospitals and, to a lesser extent, computer
supply dealers. Its primary sales products include laser toner, ink jet
cartridges, printer ribbons, computer tape cartridges, diskettes, presentation
products, paper supplies and printer cartridges.
NOTE 3 - ACQUISITION OF DDP
Effective May 30, 1996, Pittsburgh Investment Group, LLC ("LLC") contributed its
stock in Diversified Data Products, Inc. ("DDP") to the Company. The acquisition
has been accounted for using the purchase method of accounting, and accordingly,
the purchase price has been allocated to the assets based upon the fair value of
the liabilities assumed as of May 30, 1996.
In connection with the acquisition of DDP, LLC issued a loan to certain former
stockholders in an amount of $250,000. This amount was subject to repayment
based upon DDP generating specified income levels for the period May 30, 1996 to
December 31, 1996. DDP generated such income levels for this period, and
accordingly the loan was forgiven. The value of the assets acquired has been
adjusted to reflect this additional consideration.
The operating results of DDP have been included in the statement of operations
from the date of acquisition. The following unaudited pro forma information has
been prepared assuming that this acquisition had taken place at the beginning of
the respective period. This pro forma financial information is presented for
informational purposes only and may not be indicative of what the actual results
of operations might have been if the acquisition had been effective at the
beginning of 1996.
Three Months Ended
March 31, 1996
--------------
Net sales . . . . . . . . . . . . . . $ 15,739,218
Net income. . . . . . . . . . . . . . 367,481
Earnings per share. . . . . . . . . . $ 0.15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in conjunction with the information
contained in the (unaudited) Consolidated Financial Statements and Notes to
Consolidated Financial Statements. The following information contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Act") and is subject to the safe harbor
created by that Act. The words "estimate," "project," "anticipate," "expect,"
"intend," "believe," "plans" and similar expressions are intended to identify
forward-looking statements. Because such forward-looking statements involve
risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, changes in general economic and
business conditions, the availability of capital on acceptable terms, actions
of competitors, and changes in business strategies and other factors as
discussed in Exhibit 99.
The Company intends to implement an aggressive acquisition strategy of entering
new markets domestically and internationally on an opportunistic basis, to
acquire computer and office automation supply distribution companies and to hire
certain experienced sales representatives in and outside of the Company's
current market areas, some of whom may be constrained from working in their
present
6
<PAGE>
locations for a period of time. The Company actively continues to evaluate
other potential acquisitions and to identify and have preliminary discussions
and negotiations with potential acquisition candidates. There can be no
assurance that any acquisition can or will be consummated on terms favorable
to the Company.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
NET SALES. Net sales for the three months ended March 31, 1997 increased by $7.7
million, or 61.1%, to $20.2 million from $12.6 million for the three months
ended March 31, 1996. Approximately 79.5% of the increase resulted from the
acquisition of DDP on May 30, 1996. The remaining increase was primarily a
result of increased sales to the Company's current customer base.
GROSS PROFIT. Gross profit for the three months ended March 31, 1997 increased
by $1.0 million, or 37.8% to $3.5 million from $2.5 million for the three months
ended March 31, 1996. Gross profit as a percentage of net sales for the three
months ended March 31, 1997 was 17.2% compared to 20.1% for the three months
ended March 31, 1996. The decrease in the gross profit percentage was due
primarily to the acquisition of DDP which had lower operating gross margins
primarily due to volume discounts associated with sales to other computer supply
dealers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended March 31, 1997 increased by
$0.8 million, or 44.4% to $2.7 million from $1.9 million for the three months
ended March 31, 1996. Approximately 19.4% of the increase resulted from
increased salary expenses, while 9.1% was due to increased commission expense
resulting from the Company's increased sales volume. The remainder of the
increase related primarily to the acquisition of DDP. As a percentage of net
sales, selling, general and administrative expenses were 13.4% for the three
months ended March 31, 1997 compared to 15.0% for the three months ended March
31, 1996. This decrease as a percentage of sales reflects the Company's ability
to support increased sales volumes without a significant increase in its
overhead structure.
OPERATING INCOME. Operating income for the three months ended March 31, 1997
increased by $0.2 million to $0.8 million from $0.6 million for the three months
ended March 31, 1996 for the reasons stated above.
INTEREST EXPENSE. Interest expense for the three months ended March 31, 1997
decreased by $66,067 or 98.7% to $871 from $66,938 for the three months ended
March 31, 1996 due primarily to the decreased level of indebtedness during 1997.
PROVISION FOR INCOME TAXES. The provision for income taxes for the three months
ended March 31, 1997 increased $0.1 million to $0.3 million from $0.2 million
for the three months ended March 31, 1996. The Company's effective tax rate was
40.5% for the three months ended March 31, 1997 as compared to 41.5% for the
corresponding period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used in operating activities totaled $1.4 million for the first
three months of 1997 compared to $.02 million provided by operating activities
during the first three months of 1996. The change in net cash flows from
operating activities in the first three months of 1997, compared to the first
three months of 1996, was due primarily to an increase in working capital as the
Company supported its expanded business activities. Working capital amounted to
$10.7 million at March 31, 1997 compared to $10.2 million at December 31, 1996.
The increase in working capital resulted primarily from an increase in accounts
receivable and inventories.
Net cash used in investing activities remained consistent at $.06 million for
the three months ended March 31, 1997 and March 31, 1996. Net cash provided by
financing activities totaled $0.8 million for the three months ended March 31,
1997 compared with $.04 million for the three months ended March 31, 1996. This
increase was due primarily to increased borrowing under the Credit Facility.
Capital expenditures for the three months ended March 31, 1997 of $59,787 were
used primarily to upgrade the computer system at DDP, the Company's marketing
department and a new Nashville, TN sales office.
For fiscal year 1997, the Company expects capital expenditures of approximately
$0.3 million (comprised of approximately $0.2 million to be used for upgrading
and enhancing the Company's MIS and approximately $0.1 million for capital
maintenance items). Actual expenditures for fiscal 1997 may be greater than
budgeted amounts depending on the level of acquisition activity and other
factors.
The Company believes that its cash on hand, borrowing capacity under the Credit
Facility, capital resources and cash flows will be sufficient to fund its
ongoing operations and budgeted capital expenditures for the remainder of 1997,
although actual capital needs may change, particularly in connection with
acquisitions which the Company may make in the future. The Company's long-term
requirements including capital expenditures and acquisitions, are expected to be
financed by a combination of internally generated funds, additional borrowings
and other sources of external financing as needed.
7
<PAGE>
CREDIT FACILITY
On September 11, 1996, the Company increased the amount of its line-of-credit
from $6,500,000 to $15,000,000 in order to facilitate the planned expansion of
the Company's business activities, including acquisitions. The amount of the
Credit Facility that will be available to the Company may not exceed the lesser
of $15.0 million or an amount equal to the sum of: (i) 85.0% of the net book
value of all eligible receivables (i.e., those receivables less than 90 days
old, except that all receivables from any particular customer will be ineligible
if more than 15.0% of the total due from such customer are aged 90 days or more)
plus (ii) an amount equal to the lesser of either 50.0% of the value of all
inventory, not to exceed 45.0% of the aggregate unpaid principal balance less
the amount secured by inventory acquired by the Company from Hewlett-Packard
Company and not yet paid for, or if advances are made against foreign accounts
receivables, not to exceed $2.0 million (the "Borrowing Base"). Under the Credit
Facility, the Company's borrowing availability at March 31, 1997 approximated
$9.7 million. At March 31, 1997, $0.8 million was outstanding under the Credit
Facility.
The Borrowing Base may be changed by the Bank, in its sole discretion, from time
to time. Borrowings under the Credit Facility bear interest, at the Company's
option, (i) on amounts in excess of $500,000, at the applicable London Interbank
Offered Rate ("LIBOR") per annum determined by the Bank plus 2.0%, adjustable at
the end of each contract period (one, two, three, four or six months), as
defined in the Credit Facility, or (ii) at the Bank's applicable prime rate (as
defined in the Credit Facility). Interest on the Credit Facility is payable in
arrears on the last day of each month and at maturity, except that interest on
loans bearing interest utilizing the LIBOR option is payable on the last day of
the contract period and at maturity, unless the contract period is longer than
90 days in which case interest is payable every three months.
The indebtedness under the Credit Facility is secured by substantially all of
the assets of the Company, including accounts receivable, equipment and
inventory. In addition, the Credit Facility requires that the Company maintain a
tangible net worth of $3.2 million in 1997 and thereafter increasing by an
amount equal to 50.0% of the Company's net income annually thereafter, maintain
a debt to tangible net worth ratio of 450.0% and annual pre-tax interest
coverage (net income plus interest expense plus income tax) of 150.0% or more of
the Company's annual interest expense. The Company was, at March 31, 1997 and is
as of the date hereof, in compliance with these financial covenants.
8
<PAGE>
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings incidental to the
conduct of its business as of the date hereof. The Company maintains general
liability and business interruption insurance coverage in amounts which it
believes to be adequate.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
99 Safe Harbor Under the Private Securities Litigation Reform Act of 1995
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended March 31,
1997.
9
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
MIAMI COMPUTER SUPPLY CORPORATION
(Registrant)
Date: May 14, 1997
By: /s/ MICHAEL E. PEPPEL
Michael E. Peppel
Vice President - Chief Financial Officer
10
<PAGE>
EXHIBIT 99
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The Company desires to
take advantage of the "safe harbor" provisions of the Act. Certain information,
particularly information regarding future economic performance and finances and
plans and objectives of management, contained, or incorporated by references, in
the Company's Quarterly Report on Form 10-Q for three months ended March 31,
1997 is forward-looking. In some cases, information regarding certain important
factors that could cause actual results to differ materially from any such
forward-looking statement appear together with such statement. Also, the
following factors, in addition to other possible factors not listed, could
affect the Company's actual results and cause such results to differ materially
from those expressed in forward-looking statements.
Highly Competitive Industry. The computer and office automation product supply
industry is highly competitive. The Company competes with major full-service
office products distributors, other national and regional computer supply
distributors, office products superstores, direct mail order companies, and, to
a lesser extent, non-specialized retailers. Certain of the Company's
competitors, such as office products superstores and major full-service office
products distributors have substantially greater financial and other resources
and purchasing power than the Company. The Company believes that the computer
supply industry will become more consolidated in the future and consequently
more competitive. Increasing competition will result in greater price
discounting which will continue to have a negative impact on the industry's
gross margins. There can be no assurance that the Company will not encounter
increased competition in the future, which could have a material adverse effect
on the Company's business.
Dependence on Certain Key Suppliers. Although the Company regularly carries
products and accessories manufactured by approximately 500 original equipment
manufacturers, 50.6% of the Company's net sales in fiscal year 1996 were derived
from products supplied by the Company's ten largest suppliers, In addition, the
Company's business is dependent upon terms provided by its key suppliers,
including pricing and related provisions, product availability and dealer
authorizations. While the Company considers its relationships with its key
suppliers, including Hewlett-Packard Company ("Hewlett-Packard"), Lexmark
International, Inc. ("Lexmark") and Imation Corp. ("Imation") to be good, there
can be no assurance that these relationships will not be terminated or that such
relationships will continue as presently in effect. In addition, changes by one
or more of such key suppliers of their policies regarding distributors or volume
discount schedules or other marketing programs applicable to the Company may
have a material adverse effect on the Company's business. Certain distribution
agreements require the Company to make minimum annual purchases. Under its
distribution agreements with Hewlett-Packard, Lexmark and Imation, the Company
is required to make minimum annual purchases of $5.0 million, $250,000 and
$50,000, respectively.
<PAGE>
Restrictions Imposed by Debt Arrangements. The Company's outstanding
indebtedness consists primarily of borrowings under the $15.0 million secured
revolving credit facility (the "Credit Facility") provided by National City Bank
of Dayton (the "Bank"). The Credit Facility contains restrictive covenants which
may have an adverse effect on the Company's operations in the future. These
covenants include, among other restrictions: (i) the maintenance of certain
financial ratios; (ii) prior notice to the Bank with respect to (a) the purchase
or sale of assets; (b) any merger, sale or consolidation activity; (c) the
creation or acquisition of any subsidiary or the investment in any equity
securities; (d) the entering into any partnership or joint venture; or (e) the
issuance of any equity securities; and (iii) certain limitations on the
incurrence of other indebtedness. These provisions may constrain the Company's
acquisition strategy, may delay, deter, or prevent a takeover attempt that a
shareholder might consider in its best interests and may have an adverse effect
on the market price of the Company's Common Stock. In addition, the Credit
Facility restricts the payment of dividends to no more than 50.0% of the net
income of the Company in the year that the dividend is to be paid.
Ability to Manage Growth. The Company expects to experience rapid growth that
will likely result in new and increased responsibilities for management
personnel and which will challenge the Company's management, operating and
financial systems and resources. To compete effectively and manage future
growth, if any, the Company will be required to continue to implement and
improve its operational, financial and management information systems,
procedures and internal controls on a timely basis and to expand, train,
motivate and manage its work force. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate to support the
Company's future operations. Any failure to implement and improve the Company's
operational, financial and management systems or to expand, train motivate or
manage employees could have a material adverse effect on the Company's operating
results and financial condition.
Dependence on Computer Systems. The Company's operations are generally
dependent on its proprietary software applications. Modifications to the
Company's computer systems and applications software will be necessary as the
Company executes its expansion
11
<PAGE>
plans and responds to customer needs, technological developments, electronic
commerce requirements and other factors. Such modifications may cause
disruptions in the operations of the Company, delay the schedule for
implementing the integration of newly acquired companies, or cost more to
design, implement or operate than currently budgeted. Such disruptions,
delays or costs could have a material adverse effect on the Company's
operations and financial performance.
The Company does not currently have redundant computer systems or redundant
dedicated communication lines linking its computers to its warehouses, although
all data is stored on two separate hard drives on a continual basis. The Company
has taken precautions to protect itself from events that could interrupt its
operations, including back-up power supplies that allow the Company's computer
system to function in the event of a power outage, off-site storage of back-up
data, fire protection, physical security systems and an early warning detection
and fire extinguishing system. The occurrence of any of these events could have
a material adverse effect on the Company's operations and financial performance.
Failure to Implement Acquisition Strategy. The Company's business strategy
includes the acquisition of other computer and office automation supply
companies in the U.S. and overseas. Competition for desirable new acquisitions
in attractive major metropolitan markets is expected to increase. No assurance
can be given that the Company will be able to find attractive acquisition
candidates or that such acquisitions can be effected at reasonable prices or in
a timely manner, or that once acquired, the Company will be able to profitably
manage such companies. The failure to complete acquisitions and continue the
Company's expansion could have a material adverse effect on its financial
performance.
Integration of Acquisitions. The Company has acquired four computer and office
automation supply businesses in the past five years and intends to actively
pursue additional acquisitions. No assurance can be given that the Company will
be able to successfully integrate its future acquisitions with the Company's
existing systems and operations. The integration of acquired businesses may also
lead to the resignation of key employees of the acquired companies and diversion
of management attention from other ongoing business concerns. The costs of
integration could have an adverse effect on short-term operating results. Any or
all of these factors could have a material adverse effect on the Company's
operations in the future.
Financing for Acquisitions; Leverage. If acquisitions are consummated for cash,
it is likely that the Company will borrow the necessary funds and, accordingly,
the Company may become highly leveraged as a result thereof. If it becomes
highly leveraged, the Company may be more vulnerable to extended economic
downturns and its flexibility in responding to changing economic and industry
conditions may be limited. The degree to which the Company is leveraged could
have important consequences to purchasers of the Common Stock, including the
impairment of the Company's ability to obtain additional financing for working
capital, capital expenditures, acquisitions and general corporate purposes. The
Company's ability to make principal and interest payments on its current and
future indebtedness and to repay its current and future indebtedness at maturity
will be dependent on the Company's future operating performance, which is itself
dependent on a number of factors, many of which are beyond the Company's
control, and may be dependent on the availability of borrowings under the Credit
Facility or other financings. A substantial portion of the Company's current
borrowing capacity under the Credit Facility could be consumed by increased
working capital needs, including future acquisitions.
<PAGE>
Possible Need for Additional Financing to Implement Acquisition Strategy. No
portion of the Company's working capital has been set aside for the specific
purpose of funding future acquisitions and, therefore, the Company may require
additional funds to implement its acquisition strategy. While the Company's
Credit Facility may be utilized to finance acquisitions, the amount which may be
drawn upon by the Company may be limited. Accordingly, the Company may require
additional debt or equity financing for future acquisitions. There can be no
assurance that the Company will be able to obtain additional debt or equity
financing on terms favorable to the Company, or at all, or if obtained, there
can be no assurance that such debt or equity financing will be sufficient for
the financing needs of the Company.
Risks Relating to International Acquisitions. Expansion into international
markets may involve additional risks relating to such things as currency
exchange rates, new and different legal and regulatory requirements, political
and economic risks relating to the stability of foreign governments and their
trading relationship with the United States, difficulties in staffing and
managing foreign operations, differences in financial reporting, differences in
the manner in which different cultures do business, operating difficulties and
other factors.
Exchange Rate Fluctuations. Although the Company's operations are not currently
subject to material operational risks associated with fluctuations in exchange
rates, because the Company intends to expand the size and scope of its
international operations, its exposure to fluctuations in exchange rates will be
increased. Accordingly, no assurance can be given that the Company's results of
operations will not be adversely affected in the future by fluctuations in
foreign currency exchange rates. The Company has, at times, entered into forward
foreign currency exchange contracts in order to hedge the Company's accounts
receivable and accounts payable. In the future, the Company may, from time to
time, consider entering into other forward foreign currency exchange contracts,
although no assurances can be given that the Company will do so, or will be able
to do so, or that such arrangements will adequately protect the Company from
fluctuations in foreign currency exchange rates.
12
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