<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 SEPTEMBER 30, 1998
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 November 11, 1998, 11,235,607 shares of common stock, no par value
per share, of the registrant were outstanding.
<PAGE>
MIAMI COMPUTER SUPPLY CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 6-7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition. . . . . . . . . . . . . . 7-10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 11
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Default Upon Senior Securities.. . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . 11
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 11
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MIAMI COMPUTER SUPPLY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -----------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . $ 75,489,583 $ 29,001,730 $ 197,797,028 $ 71,351,489
Cost of sales. . . . . . . . . . . . . . . . . . . 58,612,237 23,608,006 154,296,662 58,616,014
------------- ------------- ------------- -------------
Gross profit . . . . . . . . . . . . . . . . . . . 16,877,346 5,393,724 43,500,366 12,735,475
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . . 13,394,779 4,364,419 34,660,213 10,121,730
------------- ------------- ------------- -------------
Operating income . . . . . . . . . . . . . . . . . 3,482,567 1,029,305 8,840,153 2,613,745
Interest expense . . . . . . . . . . . . . . . . . (348,369) (51,385) (1,592,844) (75,969)
Other income . . . . . . . . . . . . . . . . . . . 38,582 2,328 117,409 28,921
------------- ------------- ------------- -------------
Income before income taxes . . . . . . . . . . . . 3,172,780 980,248 7,364,718 2,566,697
Provision for income taxes . . . . . . . . . . . . 1,387,778 406,803 3,259,574 1,049,315
------------- ------------- ------------- -------------
Net income . . . . . . . . . . . . . . . . . . . . $ 1,785,002 $ 573,445 $ 4,105,144 $ 1,517,382
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Earnings per share of common stock-
basic . . . . . . . . . . . . . . . . . . . . . $ 0.17 $ 0.10 $ 0.46 $ 0.27
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Earnings per share of common stock-
diluted. . . . . . . . . . . . . . . . . . . . . $ 0.17 $ 0.10 $ 0.45 $ 0.27
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of common
shares outstanding-basic . . . . . . . . . . . . 10,553,191 5,893,077 8,925,673 5,538,015
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of common
shares outstanding-diluted . . . . . . . . . . . 10,788,005 5,923,013 9,129,690 5,570,507
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
MIAMI COMPUTER SUPPLY CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 1,660,721 $ 1,662,420
Accounts receivable . . . . . . . . . . . . . . . . . 48,524,478 21,490,282
Inventories . . . . . . . . . . . . . . . . . . . . . 30,480,339 9,111,620
Prepaid expenses. . . . . . . . . . . . . . . . . . . 920,099 314,060
Deferred income tax assets. . . . . . . . . . . . . . 244,159 275,206
------------- ------------
Total current assets. . . . . . . . . . . . . . . . 81,829,796 32,853,588
Property and equipment - net of accumulated
depreciation. . . . . . . . . . . . . . . . . . . . . 7,942,414 1,885,131
Other assets:
Intangible assets . . . . . . . . . . . . . . . . . . 59,122,227 14,408,481
Other . . . . . . . . . . . . . . . . . . . . . . . . 1,865,891 773,745
------------- ------------
Total assets . . . . . . . . . . . . . . . . . . . $150,760,328 $49,920,945
------------- ------------
------------- ------------
Liabilities and Stockholders' Equity
Current liabilities:
Line-of-credit. . . . . . . . . . . . . . . . . . . . $ $ 8,040,313
Notes payable relating to business combinations . . . 2,791,000
Accounts payable - trade. . . . . . . . . . . . . . . 23,039,970 11,338,272
Accrued expenses, taxes and withholdings. . . . . . . 5,925,613 2,440,737
Current portion of long-term debt . . . . . . . . . . 132,477 55,467
------------- ------------
Total current liabilities . . . . . . . . . . . . . 29,098,060 24,665,789
Long-term debt. . . . . . . . . . . . . . . . . . . . 32,115,898 112,615
Deferred income taxes . . . . . . . . . . . . . . . . 83,218 111,644
------------- ------------
Total liabilities . . . . . . . . . . . . . . . . . 61,297,176 24,890,048
------------- ------------
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares
authorized; none outstanding at September 30, 1998
and December 31, 1997 . . . . . . . . . . . . . . .
Common stock, no par value; 30,000,000 shares
authorized, 11,209,540 shares outstanding at
September 30, 1998; 6,621,164 shares outstanding at
December 31, 1997 . . . . . . . . . . . . . . . . .
Additional paid-in capital. . . . . . . . . . . . . . 80,074,735 19,095,494
Retained earnings . . . . . . . . . . . . . . . . . . 10,055,547 5,950,403
Less - Treasury stock, at cost . . . . . . . . . . . (667,130) (15,000)
------------- ------------
Total stockholders' equity. . . . . . . . . . . . . 89,463,152 25,030,897
------------- ------------
Total liabilities and stockholders' equity. . . . . $150,760,328 $49,920,945
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
MIAMI COMPUTER SUPPLY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows used in operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,105,144 $ 1,517,382
Adjustments to reconcile net income to cash used in
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 1,556,998 278,739
Changes in assets and liabilities net of effects of acquisitions
of businesses:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . (10,430,480) (3,813,480)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,690,687) (1,548,632)
Prepaid expenses and deposits . . . . . . . . . . . . . . . . . . (461,680) 251,360
Accounts payable - trade. . . . . . . . . . . . . . . . . . . . . 1,545,912 2,384,705
Accrued expenses, taxes and withholding . . . . . . . . . . . . . 1,095,094 (158,397)
------------ ------------
Cash used in operating activities . . . . . . . . . . . . . . . . (10,279,699) (1,088,323)
------------ ------------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (3,371,027) (427,541)
Investment in other assets. . . . . . . . . . . . . . . . . . . . . (482,129) (140,000)
Business combinations . . . . . . . . . . . . . . . . . . . . . . . (28,302,984) (2,485,000)
Cash included in acquisitions . . . . . . . . . . . . . . . . . . . 529,645 83,657
------------ ------------
Cash used in investing activities . . . . . . . . . . . . . . . . . . (31,626,495) (2,968,884)
------------ ------------
Cash flows from financing activities:
Net proceeds from offering of common stock. . . . . . . . . . . . . 35,928,772
Net borrowings (payments) under line-of-credit. . . . . . . . . . . 23,859,686 3,553,440
Increase in long-term debt. . . . . . . . . . . . . . . . . . . . . 236,428
Principal payments on long-term debt. . . . . . . . . . . . . . . . (170,978) (27,238)
Payment of debt acquired in business combinations . . . . . . . . . (14,676,350)
Purchase of treasury shares, net of issuance. . . . . . . . . . . . (3,273,063)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (82,899)
------------ ------------
Cash provided by financing activities . . . . . . . . . . . . . . . . 41,904,495 3,443,303
------------ ------------
Net decrease in cash. . . . . . . . . . . . . . . . . . . . . . . . . (1,699) (613,904)
Cash - beginning of period. . . . . . . . . . . . . . . . . . . . . 1,662,420 780,875
------------ ------------
Cash - end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 1,660,721 $ 166,971
------------ ------------
------------ ------------
Supplemental cash flow information:
Cash paid for interest. . . . . . . . . . . . . . . . . . . . . . . $ 1,452,456 $ 76,456
Cash paid for income taxes. . . . . . . . . . . . . . . . . . . . . 2,989,688 935,358
Common stock issued in business combinations. . . . . . . . . . . . 27,386,398 10,746,245
</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 the instructions and requirements of Form 10-Q.
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.
The results of operations for the period ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the entire
fiscal year or any other interim period. 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, 1997.
NOTE 2 - COMMON STOCK
On March 26, 1998, the Company declared a three for two stock split on
its common stock, which was payable on April 24, 1998. All share and per
share data contained herein has been restated to reflect the stock split.
On June 30, 1998, the Company completed a public stock offering
("Offering") for 2,100,000 shares of its common stock. Proceeds from the
Offering were $16.00 per share less the underwriting discount and related
offering expenses. The Offering closed on July 6, 1998. On July 23, 1998, in
connection with the Offering, the underwriters overallotment of 315,000
shares were sold at $16.00 per share less the underwriting discount.
In September 1998, the Board of Directors authorized the repurchase of up
to 5.0% of the outstanding shares of common stock of the Company through
open-market repurchases and privately negotiated purchases, if any, from time
to time when deemed appropriate by management.
NOTE 3 - ACQUISITIONS
The Company is engaged in an active acquisition program. From April
1997 through December 1997, the Company acquired the stock or assets of six
(6) separate entities: Imperial Data Supply Corporation ("IDS"), Data
Associates, Inc. ("DA"), Force 4 Data Products, Inc. ("Force 4"), NTI Data
Products, Inc. ("NTI"), Britco, Inc. ("Britco"), and TBS Printware, Inc.
("TBS"), all in purchase business combinations. None of the acquired
entities, each of which is engaged in providing computer supply products,
were individually significant to the Company's consolidated financial
statements. Earnings of each of the acquired entities, have been recorded by
the Company beginning with the respective acquisition dates. The aggregate
purchase price of the acquired entities which totaled $17,821,903, was
comprised of cash, 1,314,164 shares of the Company's common stock with a fair
value of $10,746,245, notes payable due to sellers aggregating $2,791,000 due
in January, 1998, and related out of pocket expenses totaling $787,158. One
acquisition calls for contingent consideration of up to $2,200,000 if
certain operating results occur within the thirty-three month period
following the acquisition. The acquisition price has been allocated to the
estimated fair value of the assets acquired and the liabilities assumed, with
the residual being allocated to intangible assets (goodwill) which is being
amortized over a forty year life.
Effective January 1, 1998, the Company completed its acquisition of
Minnesota Western/Creative Office Products, Inc. ("MW") in a purchase
business combination. MW is engaged in designing, selling and distributing
audio visual equipment and supplies. The purchase price totaled $24,664,311
and was comprised of cash, 1,322,555 shares of the Company's common stock
with a fair value of $12,343,842 and related out of pocket expenses totaling
$320,469. The purchase price was allocated to the estimated fair values of
the assets acquired and liabilities assumed with the residual being allocated
to intangible assets (goodwill) which is being amortized over a forty year
life.
Effective March 1, 1998 and June 1, 1998, the Company completed its
acquisitions of Computer Showcase, Inc. ("CS") and Electronic Image Systems,
Inc. ("EIS") in purchase business combinations. CS is a distributor of
visual presentation systems and products and EIS is a distributor and
integrator of presentation systems. The acquisitions were not significant to
the Company's consolidated financial statements.
Effective September 1, 1998, the Company completed the acquisition of
Consolidated Media Systems, Inc. ("CMS") in a business purchase combination.
CMS is a distributor of business and professional audio-video products. The
purchase price was comprised of $10,246,500 in cash, and 632,586 shares of the
Company's common stock with a fair value of $10,453,500. The purchase price was
allocated to the estimated fair values of the assets acquired and liabilities
assumed with the residual being allocated to intangible assets (goodwill) which
is being amortized over a forty year life.
6
<PAGE>
The following pro forma data reflects the impact of the foregoing
business combinations as if they had occurred on the first day of each period
indicated.
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . $ 92,051,599 $ 72,687,529 $ 253,716,805 $ 212,490,154
Net income. . . . . . . . . . . . . . . . 1,893,261 181,318 4,220,926 1,933,690
Earnings per share of common stock
basic . . . . . . . . . . . . . . . . . .18 .02 .44 .22
Earnings per share of common stock
diluted . . . . . . . . . . . . . . . . .17 .02 .43 .21
</TABLE>
Effective September 25, 1998, the Company completed its acquisition of
Optical Express Computer Supplies, Inc., ("Optical Express") in a purchase
business combination. Optical Express is a distributor of computer and data
storage supplies in Minneapolis, Minnesota. This acquisition was not
significant to the Company's financial statements.
NOTE 4 - LONG TERM DEBT
As disclosed in the Company's consolidated financial statements included
in its Annual Report on Form 10-K for the year ended December 31, 1997, in
January 1998, the Company entered into a new $50 million borrowing
arrangement permitting the Company to borrow funds for a three year period.
Accordingly, borrowings under the arrangement at September 30, 1998 have been
classified as long-term debt.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
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 continue its aggressive acquisition strategy of
entering new markets domestically and internationally on an opportunistic
basis, to acquire computer and office automation supply and presentation
products 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 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 (or at all), or that the Company will not need additional debt or
equity financing to continue its acquisition strategy.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
NET SALES. Net sales for the three months ended September 30, 1998
increased by $46.5 million, or 160.3%, to $75.5 million from $29.0 million
for the three months ended September 30, 1997. Of the increase, sales to the
Company's core customer base increased 19.5%; the balance of the increase
resulted from acquisitions.
GROSS PROFIT. Gross profit for the three months ended September 30, 1998
increased by $11.5 million, or 212.9% to $16.9 million from $5.4 million for
the three months ended September 30, 1997. Gross profit as a percentage of
net sales for the three months ended September 30, 1998 was 22.4% compared
to18.6% for the three months ended September 30, 1997. The increase in the
gross profit percentage was due primarily to the result of the higher margins
of MW, which was acquired effective January 1, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended September 30, 1998
increased by $9.0 million, to $13.4 million from $4.4 million for the three
months ended September 30, 1997. The majority of the increase resulted from
acquisitions the Company has completed since September 30, 1997. As a
percentage of net sales, selling, general and administrative expenses were
17.7% for the three months ended September 30, 1998 compared to 15.0% for the
three months
7
<PAGE>
ended September 30, 1997. This increase as a percentage of sales is due
primarily from the results of MW, which has a higher selling, general and
administrative expense percentage, while maintaining a higher gross profit
percentage.
OPERATING INCOME. Operating income for the three months ended September
30, 1998 increased by $2.5 million to $3.5 million from $1.0 million for the
three months ended September 30, 1997 for the reasons stated above.
Operating margin increased to 4.6% for the three months ended September 30,
1998 compared to 3.5% for the three months ended September 30, 1997.
INTEREST EXPENSE. Interest expense for the three months ended September
30, 1998 increased by $296,984 to $348,369 from $51,385 for the three months
ended September 30, 1997 due primarily to the increased level of indebtedness
during 1998, utilized to fund business combinations and the growth in working
capital. Proceeds from the June 30, 1998 stock offering were used to reduce
the outstanding debt at that date.
PROVISION FOR INCOME TAXES. The provision for income taxes for the three
months ended September 30, 1998 increased $980,975 to $1,387,778 from
$406,803 for the three months ended September 30, 1997. The Company's
effective tax rate was 43.7% for the three months ended September 30, 1998
and 41.5% for the three months ended September 30, 1997. Increased
amortization of goodwill, most of which was not deductible for tax purposes,
was the reason for the higher tax rate during the 1998 three month period.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
NET SALES. Net sales for the nine months ended September 30, 1998 increased
by $126.4 million, or 177.0%, to $197.8 million from $71.4 million for the
nine months ended September 30, 1997. Of the increase, sales to the
Company's core customer base increased 18.7%; the balance of the increase
resulted from acquisitions.
GROSS PROFIT. Gross profit for the nine months ended September 30, 1998
increased by $30.8 million, or 242.6% to $43.5 million from $12.7 million for
the nine months ended September 30, 1997. Gross profit as a percentage of
net sales for the nine months ended September 30, 1998 was 22.0% compared to
17.8% for the nine months ended September 30, 1997. The increase in the
gross profit percentage was due primarily to the result of the higher margins
of MW, which was acquired effective January 1, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine months ended September 30, 1998
increased by $24.5 million, to $34.7 million from $10.2 million for the nine
months ended September 30, 1997. The majority of the increase resulted from
acquisitions the Company has completed since September 30, 1997. As a
percentage of net sales, selling, general and administrative expenses were
17.5% for the nine months ended September 30, 1998 compared to 14.2% for the
nine months ended September 30, 1997. This increase as a percentage of sales
is due primarily from the results of MW, which has a higher selling, general
and administrative expense percentage, while maintaining a higher gross
profit percentage.
OPERATING INCOME. Operating income for the nine months ended September 30,
1998 increased by $6.2 million to $8.8 million from $2.6 million for the nine
months ended September 30, 1997, for the reasons stated above. Operating
margins were 4.5% for the nine months ended September 30, 1998 compared to
3.7% for the nine months ended September 30, 1997.
INTEREST EXPENSE. Interest expense for the nine months ended September 30,
1998 increased to $1,592,844 from $75,969 for the nine months ended September
30, 1997 due primarily to the increased level of indebtedness during 1998,
which was used for business combinations and working capital.
PROVISION FOR INCOME TAXES. The provision for income taxes for the nine
months ended September 30, 1998 increased $2.3 million to $3.3 million from
$1.0 million for the nine months ended September 30, 1997. The Company's
effective tax rate was 44.3% for the nine months ended September 30, 1998 as
compared to 40.9% for the corresponding period of the prior year. Increased
amortization of goodwill, most of which was not deductible for tax purposes,
was the reason for the higher tax rate during the 1998 nine month period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used in operating activities totaled $10.3 million for
the first nine months of 1998 compared to $1.1 million used by operating
activities during the first nine months of 1997. The change in net cash flows
from operating activities was due primarily to an increase in accounts
receivable and inventory and to support business growth.
Net cash used in investing activities was $31.6 million for the nine
months ended September 30, 1998 versus $3.0 million for the nine months ended
September 30, 1997. The net cash used in investing activities primarily
reflects the acquisitions completed during the period. Net cash provided by
financing activities totaled $41.9 million for the nine months ended
September 30, 1998 compared with $3.4 million for the nine months ended
September 30, 1997. This increase was due to the June 30, 1998 stock
offering, the proceeds of which were used to repay borrowings in the third
quarter.
8
<PAGE>
Capital expenditures for the nine months ended September 30, 1998
totaled $3.4 million and were used primarily to upgrade the Company's
management information systems.
The Company believes that its cash on hand and borrowing capacity under
the Credit Facility (see below) will be sufficient to fund its ongoing
operations and budgeted capital expenditures for the next twelve months,
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 additional borrowings and other
sources of external financing as needed.
CREDIT FACILITY
On January 8, 1998, the Company revised its Credit Facility. The new
Credit Facility is a $50.0 million secured revolving credit facility provided
by National City Bank, Dayton, Ohio (the "Bank") and two other banks. The
Credit Facility contains restrictive covenants which include, among other
restrictions: (i) the maintenance of certain financial ratios; (ii)
restrictions on ( a ) the purchase or sale of assets, ( b ) any merger, sale
or consolidation activity, ( c ) loans, investments and guarantees made by
the Company, ( d ) lease, sale and leaseback transactions, and ( e ) capital
expenditures; and (iii) certain limitations on the incurrence of other
indebtedness; and (iv) the prohibition of the payment of cash dividends and
the repurchase of the Company's stock which restriction was waived in
connection with the Company's stock repurchase program and the Company's
Employee Payroll Deduction Stock Purchase Plan.
Loans may be made at the Bank's prime rate (the "Prime Rate") or at the
defined published eurodollar rate plus a "eurodollar margin" which ranges
from 150 to 225 basis points ("Applicable Eurodollar Margin") based on the
Company's ratio of consolidated total indebtedness to consolidated earnings
before interest, taxes, depreciation and amortization (the "Debt/EBITDA
Ratio") ranging from greater than 2.75:1 (for which the Applicable
Eurodollar Margin would be the highest) to less than 2.0:1 (for which the
Applicable Eurodollar Margin would be the lowest). In addition, the Company
has agreed to pay a commitment fee ranging from 20.0 to 37.5 basis points per
annum, depending upon the Company's EBITDA Ratio and a letter of credit fee
equal to the Applicable Eurodollar Margin then in effect, plus a facing fee
of 1/8 of 1% per annum on the credit amount.
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 as of September 30, 1998 a net worth of $17.7 million and thereafter
increasing by an amount equal to 50.0% of the Company's net income and 90% of
stock issued beginning with the fourth quarter of 1997, maintain the ratio of
total indebtedness to earnings before interest, taxes, depreciation and
amortization below 3.75, and maintain a fixed charge coverage ratio of at
least 1.40. The Credit Facility also contains certain other covenants. The
Company was, at September 30, 1998 and is, as of the date hereof, in
compliance with all covenants.
Loans under the Credit Facility have a maturity date of December 29,
2000. All borrowings under the Credit Facility are classified as long-term
debt.
YEAR 2000
1) THE RISKS AND THE COMPANY'S STATE OF READINESS:
The Company is aware of the issues associated with the hardware,
software and operating systems in existing computer and telecommunication
systems as the millennium approaches. The "year 2000" problem is pervasive
and complex as virtually every computer operation will be affected in some
way by the rollover of the two digit year value to 00. The issue is whether
computer and other computer operated systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do
not properly recognize such information could generate erroneous data or
cause a system to fail.
The Company is utilizing internal and external resources to identify and
correct, or reprogram, all systems for year 2000 compliance. The Company's
AS/400 hardware and operating system are already compliant. The Company is
in the process of implementing a corporate wide financial and distribution
software package from J. D. Edwards Company in response to the Company's
expansion and acquisition program. This software package is already year
2000 compliant, and installation is expected to be complete January 1, 1999.
Implementation of the J.D. Edwards Company software package is on schedule
for the January 1, 1999 installation. The Company's subsidiaries will be
converted to this software package during the first six months of 1999.
All other equipment is currently undergoing compliance testing. In
cases of non-compliance, equipment will be replaced by January 1, 1999. This
equipment includes PCs, networking equipment, telecommunication equipment,
phone and alarm systems.
The Company has not completed an assessment of third party readiness.
The Company regularly carries products and accessories manufactured by over
500 original equipment manufacturers. Approximately 54.3% of the Company's
net sales for the nine
9
<PAGE>
months ended September 30, 1998 were provided by its key suppliers. The
Company intends to obtain written assurance from these suppliers that they
expect to be Year 2000 compliant on a timely basis. Should a significant
number of the Company's suppliers not be Year 2000 compliant, the Company
might not be able to supply its customers with product on a timely basis.
Such a disruption could have a material adverse affect on the Company's
operation and financial performance. The Company expects to complete its
evaluation of third party readiness during the first quarter of 1999.
2) THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES:
The cost of year 2000 compliance and J.D. Edwards conversion to date has
approximated $1.5 million. The cost to bring the Company into compliance and
convert its financial and distribution systems to the J. D. Edwards system is
currently estimated to be approximately $4.8 million.
3) THE COMPANY'S CONTINGENCY PLANS:
The Company is continuing to develop contingency plans as needed in the
future.
10
<PAGE>
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is, from time to time, involved in litigation in the
ordinary course of its business. As of the date of this Form 10-Q,
management does not believe that such litigation is material.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 30, 1997, the Company purchased certain specified assets and
assumed certain liabilities of Imperial Data Supply Corporation, a Washington
Corporation ("IDSC"). The Company issued 106,383 shares of its Common Stock to
John Keegan, the President and a stockholder of IDSC, Valerie Keegan, the wife
of John Keegan a stockholder of IDSC, Melva Potter, a stockholder of IDSC and
the William H. Potter Testamentary Trust, also a stockholder of IDSC, as a
portion of the consideration paid for said assets.
On July 1, 1997, the Company acquired Force 4 D.P. Supplies, Inc., an
Oregon corporation ("Force 4"), by means of Force 4's merger with and into MCSC
Oregon Acquisition Corporation, a subsidiary of the Company organized in Oregon.
The Company issued 129,730 shares of its Common Stock to Daniel W. Wisdom,
President and sole stockholder of Force 4, as a portion of the consideration
paid for 100% of the issued and outstanding common stock of Force 4.
On July 15, 1997, the Company acquired Data Associates, Inc., a Georgia
corporation ("Data"), by means of Data's merger with and into MCSC Georgia
Acquisition Corporation, a subsidiary of the Company organized in Georgia. The
Company issued 154,996 shares of its Common Stock to Gerald G. Gould, President
and 50.1% stockholder of Data, and J. Philip Crone, Vice President and 49.9%
stockholder of Data, as a portion of the consideration paid for 100% of the
issued and outstanding common stock of Data.
On October 8, 1997, the Company acquired NTI Data Products, Inc. a New
Hampshire corporation ("NTI"), by means of NTI's merger with and into MCSC New
Hampshire Acquisition Corporation, a subsidiary of the Company organized in New
Hampshire. The Company issued 137,501 shares of its Common Stock to Thomas R.
James, President and a stockholder of NTI, and Stephen M. Mulloy, Vice President
and a stockholder of NTI, as a portion of the consideration paid for 100.0% of
the issued and outstanding common stock of NTI.
On December 5, 1997, the Company acquired Britco, Inc., a Texas corporation
("Britco"), by means of Britco's merger with and into MCSC Texas Acquisition
Corporation, a subsidiary of the Company organized in Texas. The Company issued
275,000 shares of its Common Stock to Gretchen K. Ferguson, the President and a
stockholder of Britco, and Charles L. Ferguson, the Vice President and a
stockholder of Britco, as a portion of the consideration paid for 100.0% of the
issued and outstanding common stock of Britco.
On December 31, 1997, the Company acquired TBS Printware Corporation, a
California corporation ("TBS"), by means of TBS's merger with and into MCSC
Fremont Acquisition Corporation, a subsidiary of the Company organized in
California. The Company issued 315,000 shares of its Common Stock to Robert
Salomon, a director, the Chief Executive Officer and a stockholder of TBS, John
McCoubrie, a director, the President and a stockholder of TBS and Lothar Rowe, a
director and a stockholder of TBS as a portion of the consideration paid for
100.0% of the issued and outstanding common stock of TBS.
On January 15, 1998, the Company acquired Minnesota Western/Creative Office
Products, Inc., a California corporation ("MW"), by means of MW's merger with
and into MCSC California Acquisition Corporation, a subsidiary of the Company
organized in California. The Company issued 1,322,555 shares of its Common Stock
to H. Clark Gilson, a director, the President and a stockholder of MW,
individually and together with Kay A. Gilson, his spouse, as Trustees of the
Gilson Trust, dated November 5, 1993, Ruy J. Pereira, a director, a Vice
President and a stockholder of MW, individually and as Trustee of the Pereira
Trust, dated November 12, 1992, Mr. Larry R. Goodman, a director, a Vice
President and a stockholder of MW, individually and together with Linda D.
Goodman, his spouse, as Trustees of the Goodman Trust, dated February 7, 1994,
as a portion of the consideration paid for 100.0% of the issued and outstanding
common stock of MW.
On March 3, 1998, the Company acquired Computer Showcase, Inc., a Georgia
corporation ("CSI"), by means of CSI's merger with and into MCSC Bulldog
Acquisition Corporation, a subsidiary of the Company organized in Georgia. The
Company issued 180,269 shares of its Common Stock to Deborah Smith, a director,
the President and a stockholder of CSI and Jerrold H. Smith, a director, the
Vice President and a stockholder of CSI, as a portion of the consideration paid
for 100.0% of the issued and outstanding common stock of CSI.
On June 15, 1998, the Company acquired Electronic Image Systems, Inc., a
Washington corporation ("EIS"), by means of EIS's merger with and into MCSC
Cougar Acquisition Corporation, a subsidiary of the Company organized in
Washington. The Company issued 132,136 shares of its Common Stock to Michael C.
Richardson, a director, the Chief Executive Officer, Secretary, and Vice
President and a stockholder of EIS and Michael A. Clark, a director, the
President and a stockholder of EIS, as a portion of the consideration paid for
100% of the issued and outstanding common stock of EIS.
On September 11, 1998, the Company acquired Consolidated Media Systems,
Inc., a Tennessee Corporation, by means of CMS' merger with and into MCSC
Tennessee Acquisition Corporation, a subsidiary of the Company organized in
Tennessee. The Company issued 632,586 shares of its Common Stock to Donald
W. Sandlin, President and a stockholder of CMS, John W. Miles,
Secretary-Treasurer and a stockholder of CMS, and John D. Lentz, board member
and a stockholder of CMS, as a portion of the consideration paid for 100% of
the issued and outstanding common stock of CMS.
On September 25, 1998, the Company acquired Optical Express, Inc., a
Minnesota Corporation ("Optical") by means of Optical's merger with and into
MCSC. The Company issued 39,966 shares of its Common Stock to Warren Michael
Adams, President and a stockholder of Optical, Michael G. Brown,
Vice-President of Marketing and a stockholder of Optical, and Thomas R.
Murphy, Sales Manager and a stockholder of Optical, as a portion of the
consideration paid for said assets.
Each of the foregoing transactions was exempt from the registration
requirements of the Securities Act under Section 4(2) therof and Rule 506 of
Regulation D of the General Rules and Regulations promulgated thereunder
("Regulation D"). the securities in each of the foregoing acquisitions were
privately placed with individuals, who represented their status as accredited
investors as that term is defined in Rule 501(a) of Regulation D.
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
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description
- --------------------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of Miami Computer
Supply Corporation.(1)
3.2 Amended and Restated Code of Regulations of Miami Computer Supply
Corporation.(1)
4.0 Form of Stock Certificate of Miami Computer Supply
Corporation.(1)
10.1 Lease by and between Draft Partnership and Miami Computer Supply,
Inc. dated October 26, 1995.(1)
10.2 Lease by and between John Schwarz, Sr., Marcella Schwarz, John
and Robert T. Schwarz and Miami Computer Supply, Inc., dated June
30, 1994.(1)
10.3 Miami Computer Supply, Inc. Profit Sharing Plan.(1)
10.4 Miami Computer Supply, Inc. Section 125C Cafeteria Plan.(1)
10.5 Credit Facility between Miami Computer Supply, Inc. and National
City Bank, as Administrative Agent, and the Named Lending
Institutions, dated January 8, 1998.(2)
10.5.1 Amendment No. 1 to Credit Facility dated February 13, 1998.(2)
10.5.2 Amendment No. 2 to the Credit Facility dated May 15, 1998.(3)
10.6 Epson Authorized Reseller Agreement dated June 28, 1995.(1)
10.7 Proxima Reseller Agreement dated May 29, 1996.(1)
10.8 Hewlett Packard U.S. Reseller Channel Agreement as amended
January 1, 1996.(1)
10.9 Lexmark Dealer Agreement dated November 1986.(1)
10.10 3M Authorized Distributor Agreement dated January 27, 1987.(1)
10.11 Employment Agreement by and between Miami Computer Supply, Inc.,
and Thomas C. Winstel dated May 30, 1996.(1)
10.12 Employment Agreement by and between Miami Computer Supply, Inc.
and Richard A. Newkold dated May 30, 1996.(1)
10.13 Employment Agreement by and between Miami Computer Supply, Inc.
and Roger E. Turvy dated May 30, 1996.(1)
10.14 Employment Agreement by and between Miami Computer Supply, Inc.
and Michael E. Peppel dated May 30, 1996.(1)
10.15 Employment Agreement by and between Miami Computer Supply, Inc.
and John C. Huffman III dated May 30, 1996.(1)
10.16 Split Dollar Agreement by and between Miami Computer Supply, Inc.
and Thomas C. Winstel dated December 1, 1995.(1)
10.17 Split Dollar Agreement by and between Miami Computer Supply, Inc.
and Richard A. Newkold dated December 1, 1995.(1)
10.18 Split Dollar Agreement by and between Miami Computer Supply, Inc.
and Roger E. Turvy dated December 1, 1995.(1)
10.19 Miami Computer Supply Corporation 1996 Stock Option Plan.(1)
10.20 Miami Computer Supply Corporation Non-employee Director Stock
Option Plan.(1)
10.21 Severance Agreement for Albert L. Schwarz dated December 23,
1997.(4)
10.22 Miami Computer Supply Corporation 1998 Employee Payroll Deduction
Stock Purchase Plan.(3)
10.23 Miami Computer Supply 1998 Stock Option Plan.(3)
10.24 Agreement and Plan of Reorganization by and between Miami
Computer Supply Corporation, MCSC Texas Acquisition Corporation,
Britco, Inc., Gretchen K. Ferguson and Charles L. Ferguson dated
November 26, 1997.(5)
10.25 Agreement and Plan of Reorganization by and among Miami Computer
Supply Corporation, MCSC California Acquisition Corporation,
Minnesota Western/Creative Office Products, Inc. and the Named
Stockholders dated November 21, 1997.(6)
10.26 Agreement and Plan of Reorganization by and among Miami Computer
Supply Corporation, MCSC Fremont Acquisition Corporation, TBS
Printware Corporation and the Named Stockholders dated December
23, 1997.(7)
10.27 Lease Agreement by and between 921 Parker Street, a California
General Partnership, and Minnesota Western/Creative Office
Products, Inc. dated July, 1994.(3)
10.28 Lease Agreement by and between 180 S. Prospect Partners and
Minnesota Western/Creative Office Products, Inc. dated August 26,
1996.(3)
10.29 Agreement and Plan of Reorganization by and among Miami Computer
Supply Corporation, MCSC Tennessee Acquisition Corporation,
Consolidated Media Systems, Inc. and the Named Stockholders,
dated July 16, 1998.(8)
27.0 Financial Data Schedule.
99.0 Safe Harbor Under the Private Securities Litigation Reform Act of
1995.
</TABLE>
- ------------------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 as filed with the Commission on November 11, 1996, SEC File No.
333-12689.
(2) Incorporated by reference from the Company's Registration Statement on Form
S-3 as filed with the Commission on March 5, 1998, SEC File No. 333-36299.
(3) Incorporated by reference from the Company's Registration Statement on Form
S-1 filed with the Commission on May 27, 1998, as amended, SEC File No.
333-53639.
(4) Incorporated by reference from the Company's Form 8-K as filed with the
Commission on January 2, 1998.
(5) Incorporated by reference from the Company's Current Report on Form 8-K as
filed with the Commission on December 15, 1997.
(6) Incorporated by reference from the Company's Current Report on Form 8-K as
filed with the Commission on January 30, 1998.
(7) Incorporated by reference from the Company's Current Report on Form 8-K as
filed with the Commission on February 12, 1998.
(8) Incorporated by reference from the Company's Current Report on Form 8-K as
filed with the Commission on September 23, 1998.
(b) Reports on Form 8-K
Report on Form 8-K, Item 5--Other Events, regarding the Company's Stock
Repurchase Plan filed with the Securities and Exchange Commission on
September 17, 1998.
Report on Form 8-K, Item 2--Acquisition or Disposition of Assets and Item 7
Financial Statements And Exhibits, Regarding the Company's acquisition of
Consolidated Media Systems, Inc. filed with the Securities and Exchange
Commission on September 23, 1998. This form 8-K includes the following
financial statements and pro forma data: unaudited financial statements of
CMS as of June 30, 1998 and for the six months ended June 30, 1998 and
1997, and the audited financial statements of CMS as of December 31, 1997
and 1996 and for each of the three years in the period ended December 31,
1997; unaudited proforma financial information of the Company reflecting
the CMS acquisition as of June 30, 1998 and for the six months ended June
30, 1998 and for the year ended December 31, 1997.
(c) Prospectus
Report on Prospectus, regarding secondary offering of additional shares
filed with the Securities and Exchange Commission on July 1, 1998.
11
<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: November 16, 1998
By:/s/ Ira H. Stanley
Ira H. Stanley
Vice President, Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,660,721
<SECURITIES> 0
<RECEIVABLES> 48,753,700
<ALLOWANCES> 229,222
<INVENTORY> 30,480,339
<CURRENT-ASSETS> 81,829,796
<PP&E> 11,229,239
<DEPRECIATION> 3,286,825
<TOTAL-ASSETS> 150,760,328
<CURRENT-LIABILITIES> 29,098,060
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 89,463,152
<TOTAL-LIABILITY-AND-EQUITY> 150,760,328
<SALES> 75,489,583
<TOTAL-REVENUES> 75,489,583
<CGS> 58,612,237
<TOTAL-COSTS> 72,007,016
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 348,369
<INCOME-PRETAX> 3,172,780
<INCOME-TAX> 1,387,778
<INCOME-CONTINUING> 1,785,002
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,785,002
<EPS-PRIMARY> .17
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<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 September 30, 1998 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 and
projection presentation 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 and projection presentation 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, approximately 54.3% of the Company's net sales for the nine
months ended September 30, 1998 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"), Canon Corporation ("Canon") 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 $10.0 million, $250,000 and $180,000, respectively.
Restrictions Imposed by Debt Arrangements. The Company's outstanding
indebtedness consists primarily of borrowings under the $50.0 million secured
revolving credit facility (the "Credit Facility") provided by National City
Bank, PNC Bank and Key Corporate Capital, Inc. (the "Bank"). The Credit
Facility also requires that the Company submit certain reports to the Bank,
maintain proper books and records and insurance coverage, and comply with
applicable laws and regulations. The Company has further agreed that it will
not; (i) change the nature of its business; (ii) liquidate or dissolve its
affairs, merge, consolidate or acquire the property or assets of any person
(provided that such acquisitions comply with the financial covenants of the
Credit Agreement), certain intercompany mergers, permitted investments,
permitted dispositions, capital expenditures and losses; (iii) permit the
issuance of any lien on the Company's property and assets secure the
repayment of the Credit Agreement; (iv) incur other indebtedness except for
certain capital leases up to $3.0 million, certain guaranties, and existing
indebtedness; (v) lend money or buy the securities of, or make an investment
in any person, hold any subsidiary, or become a party to any partnership or
joint venture except for cash, receivables, certain loans, investments in
wholly-owned subsidiaries, loans by subsidiaries, permitted acquisitions,
certain subordinated indebtedness or certain investments up to $1.0 million;
(vi) pay cash dividends or repurchase its capital stock; (vii) violate
certain financial covenants relating to debt coverage or; (viii) engage in
certain other transactions. 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.
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,
13
<PAGE>
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 relies on its computer systems
for financial accounting, order processing and inventory control.
Modifications to the Company's computer systems and applications software
will be necessary as the Company executes its expansion 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 and
projection presentation products 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 nine computer and
office automation supply and two projection presentation products 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.
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.
14
<PAGE>
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.
15
