<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1997
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HARTFORD COMPUTER GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ILLINOIS 3579 36-2973523
(STATE OR OTHER
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
1610 COLONIAL PARKWAY, INVERNESS, ILLINOIS 60067 (847) 934-3380
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ANTHONY R. GRAFFIA
CHIEF EXECUTIVE OFFICER
HARTFORD COMPUTER GROUP, INC.
1610 COLONIAL PARKWAY, INVERNESS, ILLINOIS 60067 (847) 934-3380
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------
COPIES TO:
WILLIAM N. WEAVER, JR., ESQ. LELAND E. HUTCHINSON, ESQ.
JEFFREY A. SCHUMACHER, ESQ. JOHN L. MACCARTHY, ESQ.
SACHNOFF & WEAVER, LTD. WINSTON & STRAWN
30 S. WACKER DRIVE, 29TH FLOOR 35 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606-7484 CHICAGO, ILLINOIS 60601-9703
TELEPHONE NO. (312) 207-1000 TELEPHONE NO. (312) 558-5600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITE OF EACH CLASS OF SECURITIESL AMOUNT TO BE OFFERING AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value.................... 4,025,000 shares $16.00 $64,400,000 $19,515
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</TABLE>
(1) Includes 525,000 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457, solely for the purposes of computing the
registration fee.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
JANUARY 30, 1997
3,500,000 Shares
Common Stock
LOGO
--------
Of the 3,500,000 shares of Common Stock offered hereby, 2,625,000 shares are
being sold by Hartford Computer Group, Inc. ("Hartford Computer" or the
"Company") and 875,000 shares are being sold by a stockholder of the Company
(the "Selling Stockholder"). See "Principal and Selling Stockholders." The
Company will not receive any of the proceeds from the sale of shares by the
Selling Stockholder. Prior to this offering, there has been no public market
for the Common Stock of the Company. It is currently estimated that the initial
public offering price will be between $14.00 and $16.00 per share. See
"Underwriting" for the factors to be considered in determining the initial
public offering price. Application has been made for the inclusion of the
Common Stock for quotation on the Nasdaq National Market under the symbol
"HCGI."
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDER
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<S> <C> <C> <C> <C>
Per Share.......................... $ $ $ $
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Total(2)........................... $ $ $ $
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</TABLE>
(1) Before deducting expenses of the offering, payable by the Company,
estimated at $700,000.
(2) The Company and the Selling Stockholder have granted the Underwriters a 30-
day option to purchase up to 393,750 and 131,250 additional shares of
Common Stock, respectively, solely to cover over-allotments, if any. To the
extent that the option is exercised, the Underwriters will offer the
additional shares at the Price to Public shown above. If the option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Stockholder will
be $ , $ , $ and $ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of shares of Common Stock will be made at the offices of
Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about , 1997.
Alex. Brown & Sons
INCORPORATED
Robertson, Stephens & Company
Piper Jaffray inc.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
[GRAPHICS]
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. This Prospectus contains certain forward-looking statements
that involve substantial risks and uncertainties. When used in this Prospectus,
the words "anticipate," "believe," "estimate," "intend" and "expect" and
similar expressions are intended to identify such forward-looking statements.
The Company's actual results, performance or achievements could differ
materially from the results expressed in or implied by such forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed in "Risk Factors." As used in this Prospectus, "Fiscal 1992" is
the year ending January 31, 1993; "Fiscal 1993" is the year ending January 31,
1994; "Fiscal 1994" is the year ending January 31, 1995; "Fiscal 1995" is the
year ending January 31, 1996 and "Fiscal 1996" is the eleven months ending
December 31, 1996.
THE COMPANY
Hartford Computer is a leading provider of microcomputer products and related
services, primarily to Fortune 1000 companies and other large enterprises. The
Company has grown rapidly over the past four fiscal years following its entry
into the microcomputer market in the early 1990s, with revenues increasing from
$32.7 million in Fiscal 1993 to $253.1 million in Fiscal 1996 (an eleven month
period), a compound annual growth rate of 101.7%.
The Company's objective is to establish long-term relationships with its
customers and provide them with a single source, cost-effective solution for
all their microcomputer equipment and related services and financing needs. To
achieve this goal, the Company has developed a comprehensive approach, called
the "Full Cycle" solution, that provides its customers with "one-stop shopping"
for their microcomputer needs. Under its Full Cycle solution, the Company (i)
sells a broad range of new microcomputer products at competitive prices,
(ii) sources used or constrained parts and equipment, (iii) rents and leases
equipment, (iv) customizes product and system configurations in a cost-
efficient manner, (v) buys, sells and accepts trade-ins of used equipment and
(vi) offers a wide variety of technical services. Despite growing demand, most
major distributors and resellers remain unable or unwilling to meet short-term
equipment needs, accept trade-ins, dispose of and utilize used equipment or
offer custom configurations in a cost-efficient manner. The Company believes
that its ability to offer these additional services and used equipment
differentiates it from its competitors.
The Company offers over 36,000 microcomputer products to its customers,
including desktop and laptop computers, monitors, servers, memory, peripherals
and networking application tools and software. The Company is authorized to
purchase products directly from IBM and certain peripherals manufacturers, and
is an authorized reseller for most major microcomputer product manufacturers.
In 1996, the Company began offering an expanded range of technical services,
including technology management, enterprise consulting, life cycle management
and application development.
In recent years, the microcomputer industry has grown rapidly due to (i) the
ease of use, relatively low cost and increasing processor power of
microcomputers, (ii) the development of personal productivity software and
(iii) the increase in the popularity of networks using a client/server design.
In addition, the microcomputer products of a variety of manufacturers are
increasingly being integrated into individual systems. As product and service
choices multiply and system designs become more complex, many organizations
require more assistance to understand, evaluate, select and implement cost-
efficient solutions to their information processing needs. At the same time, to
reduce costs and achieve a more
3
<PAGE>
consistent, reliable level of service, many organizations are seeking to reduce
their number of vendors. Based on these trends, the Company believes that
larger resellers which possess substantial buying power and access to
constrained equipment, and which offer a broad range of products and financial
and technical services, have an increasing competitive advantage over smaller
resellers and specialized service providers.
The Company was founded in 1978 as a leasing and rental company for mainframe
computers. In the late 1980s, the Company developed a sophisticated purchasing
and sourcing system for used mainframe computers. In the early 1990s, the
Company leveraged this purchasing and sourcing experience to enter the
microcomputer market and substantially de-emphasized its mainframe business.
The Company significantly expanded its efforts selling and servicing new
microcomputer equipment after it became an authorized reseller of IBM products
in June 1993 and received authorization to purchase products directly from IBM
in November 1993. The Company believes that establishing its direct
relationship with IBM was a critical step in achieving its recent rapid growth
because it provided the Company with improved product acquisition pricing,
better product availability, increased manufacturer support and greater
credibility among prospective customers. The Company continually evaluates
opportunities to establish direct purchasing relationships with additional
manufacturers.
The Company's growth strategy is designed to capitalize on the growing,
consolidating microcomputer product and technical services industry. The
Company has developed several complementary growth strategies, including (i)
leveraging its relationships with existing customers, (ii) leveraging its
recently expanded sales force, (iii) expanding its manufacturer relationships,
(iv) expanding and enhancing its technical services offerings, (v) increasing
rental and leasing activities and (vi) developing its complementary direct
marketing effort. To further these growth strategies, the Company has recently
made significant investments in its infrastructure and added experienced sales
professionals and technical services personnel.
The Company was incorporated in Illinois in 1978. The Company's executive
offices are located at 1610 Colonial Parkway, Inverness, Illinois 60067, and
its telephone number is (847) 934-3380.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..... 2,625,000 shares
Common Stock offered by the Selling
Stockholder............................ 875,000 shares
Common Stock to be outstanding after the
offering............................... 12,405,188 shares(1)
Use of proceeds......................... Repayment of certain indebtedness,
payment of the S Corporation Dividend
and general corporate purposes, in-
cluding working capital. See "Use of
Proceeds" and "S Corporation Divi-
dend."
Proposed Nasdaq National Market symbol.. HCGI
</TABLE>
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(1) Excludes 595,500 shares of Common Stock issuable upon exercise of stock
options outstanding as of January 28, 1997, at a weighted average exercise
price of $12.00 per share. Also excludes 404,500 shares of Common Stock
reserved for future issuance under the Company's Long-Term Incentive Plan.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEARS ENDED JANUARY 31, ENDED
--------------------------------- DECEMBER 31,
1993 1994 1995 1996 1996(1)
------- ------- ------- -------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues..................... $31,041 $32,713 $73,023 $137,258 $253,146
Gross profit................. 5,987 8,338 10,102 17,451 32,150
Operating expenses........... 4,359 7,126 9,302 15,537 25,272
Income from operations....... 1,628 1,212 800 1,914 6,878
Interest expense............. 1,131 435 1,004 2,483 3,284
Reserve for litigation
settlement.................. -- -- 190 -- 525
Income (loss) before
provision (benefit) for
income taxes................ 497 777 (394) (569) 3,069
Provision (benefit) for
income taxes................ 190 298 (153) (221) 611
Net income (loss)............ $ 307 $ 1,033 $ (241) $ (348) $ 2,458
PRO FORMA INFORMATION:
Pro forma net income(2)...... $ 3,922
Pro forma net income per
common share(2)............. $ 0.38
Pro forma weighted average
number of common shares
outstanding(3).............. 10,233
Supplemental pro forma net
income(4)................... $ 5,570
Supplemental pro forma net
income per share(4)......... $ 0.46
Supplemental pro forma
weighted average number of
common shares
outstanding(3)(5)........... 12,080
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1996
--------------------
AS
ACTUAL ADJUSTED(6)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................. $(1,440) $29,479
Total assets.............................................. 84,624 84,624
Total debt................................................ 45,922 15,003
Total stockholders' equity................................ 8,963 39,882
</TABLE>
- --------
(1) Effective February 1, 1996, the Company changed its fiscal year end from
January 31 to December 31 in connection with its election to be treated as
an S corporation.
(2) Effective February 1, 1996, the Company elected to be treated as an S
corporation. As an S corporation, the Company is not subject to federal and
certain state income taxes. The pro forma information for Fiscal 1996 has
been computed by (i) eliminating from operating expenses $3.2 million of
employee compensation that exceeded the compensation that would have been
paid had the compensation agreements adopted in January 1997 been in effect
for all of Fiscal 1996 and $219,000 of certain expenditures related to
employee-stockholders which will not be incurred in the future and (ii)
adjusting the Company's net income to record income tax expense that would
have been recorded had the Company been a C corporation assuming an
effective tax rate of 39.4%. In Fiscal 1995, the Company paid discretionary
bonuses to its officers who are stockholders in the amount of $1.3 million
and incurred a noncash compensation expense related to the issuance of
stock in the amount of $897,000. The Company's S corporation status will
terminate upon consummation of this offering. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 16
of Notes to Financial Statements.
(3) Includes option shares deemed outstanding under the treasury stock method
and shares deemed issued to pay the S Corporation Dividend (as defined in
"S Corporation Dividend").
(4) The supplemental pro forma information for Fiscal 1996 has been computed by
adjusting pro forma net income to eliminate approximately $1.6 million of
interest expense, net of income tax, associated with the assumed repayment
of certain indebtedness with a portion of the proceeds of this offering.
(5) Also includes shares deemed issued in connection with the assumed repayment
of certain indebtedness.
(6) Adjusted to reflect (i) the sale by the Company of 2,625,000 shares of
Common Stock pursuant to this offering at an assumed initial public
offering price of $15.00 and (ii) the application of the estimated net
proceeds therefrom including the declaration and payment of the S
Corporation Dividend, which is expected to be approximately $5.0 million.
See "Use of Proceeds."
----------------
Unless otherwise specified, all information in this Prospectus (i) assumes no
exercise of the Underwriters' over-allotment option and (ii) gives retroactive
effect to the 2,320.88 for 1 split of the shares of Common Stock effected in
January 1997.
5
<PAGE>
RISK FACTORS
In addition to the other information set forth in this Prospectus, the
following factors should be considered carefully in evaluating an investment
in the shares of Common Stock offered by this Prospectus. This Prospectus
contains certain forward-looking statements that involve substantial risks and
uncertainties. When used in this Prospectus, the words "anticipate,"
"believe," "estimate," "intend" and "expect" and similar expressions are
intended to identify such forward-looking statements. The Company's actual
results, performance or achievements could differ materially from the results
expressed in or implied by such forward-looking statements. Factors that could
cause or contribute to such differences include those discussed in the
following Risk Factors.
Reliance on Major Customers. During Fiscal 1996, indirect sales to State
Farm Insurance Company ("State Farm") made pursuant to an interim joint
marketing arrangement with International Business Machines Corporation
("IBM"), direct sales to State Farm and sales to Sears Roebuck & Co. ("Sears")
accounted for 19.4%, 3.3%, and 11.2%, respectively, of the Company's total
revenues. The interim marketing arrangement with IBM was entered into as a
result of IBM's recent decision to discontinue direct sales to corporate
customers. All sales under this arrangement were completed during Fiscal 1996.
The Company expects that any future sales to State Farm will be made on an
open-bid basis. While the Company seeks to build long-term customer
relationships, revenues from any particular customer can fluctuate from period
to period due to such customer's purchasing patterns. Any termination or
significant disruption of the Company's relationships with any of its
principal customers could have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, ten of
the Company's customers accounted for 53.4% of the Company's accounts
receivables at December 31, 1996. A deterioration in the financial condition
of any of its principal customers could expose the Company to the possibility
of large accounts receivable write-offs, which would materially and adversely
affect the Company's results of operations and financial condition. See
"Business--Customers, Sales and Marketing."
Dependence On Key Vendors and Product Supply. Most of the Company's revenues
are derived from sales of microcomputers, network hardware, peripherals and
software of various major manufacturers. For Fiscal 1996, purchases from IBM
and Ingram Micro Inc. totaled $135.3 million, or 63.1% of total equipment
cost, and $31.5 million, or 14.7% of total equipment cost, respectively.
Although the Company believes its vendor relationships are good, such vendors
may terminate their relationship with the Company at will or upon relatively
short notice and there can be no assurance that the Company's relationships
will continue as presently in effect. The loss of a major vendor, the
deterioration of the Company's relationship with a major vendor, the
termination of the Company's authorization to purchase products directly from
a major manufacturer, the termination of its status as an "authorized
reseller" of a major vendor or the failure of the Company to establish good
relationships with major new vendors could have a material adverse effect on
the Company's business, results of operations or financial condition. In
particular, if IBM were to discontinue direct sales to the Company as a result
of insufficient purchase volumes or for any other reason, the Company would be
required to purchase IBM products from a wholesaler or other reseller, which
would likely be on terms less favorable than those currently obtained from
IBM. In addition, the Company's profitability has been affected by its ability
to obtain volume discounts for large customer orders from manufacturers and on
occasion to buy products on special terms from manufacturers. Any adverse
change in the volume discount schedules or other marketing or sales programs
offered by manufacturers could have a material adverse effect on the Company's
business, results of operations and financial condition. Furthermore, as is
typical in its industry, the Company receives credits from most manufacturers
for market development, which are used to offset a portion of the Company's
cost of products sold. Changes in the availability, structure or timing of
these credits could materially and adversely affect the Company's business and
results of operations. The microcomputer industry experiences product supply
shortages and customer order backlogs from time to
6
<PAGE>
time due to the inability of certain manufacturers to supply certain products
on a timely basis. Failure to obtain adequate product supplies or fulfill
customer orders on a timely basis could have a material adverse effect on the
Company's business, results of operations and financial condition.
Limited Operating History in Microcomputer and Technical Services
Market. The Company was founded in 1978 as a leasing and rental company for
mainframe computers. In the early 1990s the Company began buying, selling,
renting, servicing and leasing new and used microcomputer equipment and
substantially de-emphasized its mainframe business. The Company became an
authorized reseller of new IBM products in June 1993 and received
authorization to purchase products directly from IBM in November 1993. The
Company therefore has only a limited operating history in the microcomputer
market. In 1996, the Company significantly expanded its offerings of technical
services and therefore has only limited experience in providing these
services. There can be no assurance that the Company will be successful in
integrating these services with its product sales business or that the Company
will be able to compete effectively in the technical services market. The
Company has significantly increased, and will need to increase further, its
technical staff in order to expand these services and compete in this market.
Competition for such technical personnel is intense and no assurance can be
given that the Company will be able to recruit and retain such personnel. The
failure to recruit and retain management and technical personnel could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, the Company will be subject to the risks
associated with a technical services business, including dependence on
reputation and volatility of workload. Also, a substantial portion of the
Company's technical services revenues may be derived from the performance of
services pursuant to fixed-price contracts. As a result, cost overruns due to
price increases, unanticipated problems, inefficient project management or
inaccurate estimation of costs could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business--Value-Added Technical Services."
Management of Growth. The Company is currently experiencing rapid growth
that has placed, and will continue to place, significant demands on the
Company's managerial and other resources. The Company's ability to manage the
growth of its operations will require it to continue to improve its
operational, financial and other internal systems and to attract new employees
and to develop, motivate and retain its employees. There can be no assurance
that the Company will be successful in maintaining or managing any such
growth. In addition, the Company has significantly increased its sales staff.
These new personnel have not yet generated significant revenues, and there can
be no assurance that they will generate significant revenues in the future. If
the Company's management is unable to maintain and manage growth, or new
employees are unable to achieve anticipated performance levels, the Company's
business, results of operations and financial condition could be materially
and adversely affected.
Competition. The microcomputer market is highly competitive. The Company
believes that its ability to compete successfully depends on a number of
factors, including pricing, breadth of product and service offerings, sales
and marketing efforts, quality and reliability of services, speed of delivery
and other support capabilities. In particular, the microcomputer market is
characterized by intense price competition. Although the Company has achieved
gross margins of 12.7% in each of Fiscal 1995 and Fiscal 1996, there can be no
assurance that the Company will be able to maintain those margins in the
future. Moreover, price competition with respect to customers with volume
buying power is even more intense. In order to attract and retain many of its
larger customers, the Company frequently must agree to volume discounts and
maximum allowable mark-ups which limit margins on sales to such customers.
Accordingly, an increase in sales to such customers may reduce gross margins.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
The Company competes directly with local, regional and national wholesalers,
resellers and mail order providers of microcomputer products and services,
including network integrators, and corporate divisions of superstores. Many of
the Company's competitors are significantly larger and have substantially
greater financial, marketing and other resources than the Company. As a
result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, benefit
7
<PAGE>
from greater purchasing economies, offer more aggressive pricing to their
customers, or devote greater resources to the promotion of their products and
services. In the future, the Company may face further competition from new
market entrants, possible alliances between existing competitors and expanded
service offerings from manufacturers. For example, certain computer
superstores have expanded their marketing efforts to target segments of the
Company's customer base. There can be no assurance that the Company will
continue to compete successfully with existing or new competitors. In
addition, the computer industry has recently experienced a significant amount
of consolidation through mergers and acquisitions. From time to time, certain
manufacturers have instituted programs for the direct sale of large orders of
hardware and software to certain major corporate accounts. These types of
programs may continue to be developed and used by various manufacturers.
Failure by the Company to anticipate and adapt successfully to any of these
competitive factors could have a material adverse effect on the Company's
business, results of operations and financial condition.
Significant Fluctuations in Revenues and Operating Results. The Company's
quarterly and annual revenues and operating results have varied and may in the
future vary significantly. Revenues and operating results may fluctuate as a
result of the demand for the Company's products and services, the introduction
of new hardware and software technologies offering improved features, the
introduction of new services by the Company and its competitors, changes in
the level of operating expenses, the timing of major orders or projects,
inventory adjustments, competitive conditions, interest rate fluctuations and
economic conditions in general. For example, the Company's operating results
may be highly sensitive to changes in the mix of the Company's product and
service revenues. Further, the purchase of the Company's products and services
often involves a significant commitment of capital on the part of the
customer, with the attendant delays frequently associated with large capital
expenditures and authorization procedures within an organization. The
Company's operating results may fluctuate due to volume discounts and credits
it receives from certain manufacturers based on the Company's sales and the
terms of the program offered, which may disproportionately affect the results
of a quarter. The Company believes that its business is seasonal, with a
greater proportion of the Company's revenues occurring in the fourth quarter
and a lesser proportion occurring in the first quarter. For these and other
reasons, the Company's revenues and operating results are subject to a number
of significant risks over which the Company has little or no control.
In addition, the general availability of certain products, particularly
state of the art computing and data communications products, is occasionally
constrained as a result of insufficient product supply. While the Company has
not historically experienced significant product supply shortages, any such
shortages in the future could have a material adverse effect on the Company.
The Company has recently significantly increased, and may in the future
increase, certain fixed operating expenses, including personnel-related
expenses, but does not expect to generate a corresponding increase in revenues
as a result of these expenditures, if any, for at least six to twelve months.
This increase in fixed operating expenses could adversely affect the Company's
operating results. In addition, in the event that the growth in the Company's
business does not meet its expectations in the long-term, the Company may be
unable to adjust its spending levels rapidly enough to avoid an adverse effect
upon operating results. Accordingly, the Company believes that historical
growth should not be relied upon as an indication of future performance and
the results of any quarterly period are not necessarily indicative of results
to be expected for a full fiscal year. The Company's growth may obscure
seasonal and other underlying trends, the effect of which may become more
pronounced if the rate of growth declines.
Inventory Management; Product Returns. The microcomputer products industry
is characterized by rapid product improvement and technological change which
results in relatively short product life cycles and rapid product obsolescence
and can place inventory at considerable valuation risk. In addition, failure
by the Company to maintain appropriate inventory levels of computer products,
obtain reasonable amounts of constrained product, effectively react to new
product introductions or otherwise effectively manage its inventory could have
a material adverse effect on the Company's business, results of operations
8
<PAGE>
and financial condition. Furthermore, although it is generally industry
practice for the Company's suppliers to provide price protection to the
Company that is intended to reduce the risk of inventory devaluation, such
policies are subject to change. The Company also has the option of returning,
subject to certain limitations, a percentage of its current product
inventories each quarter to certain manufacturers as it assesses each
product's current and forecasted demand. The amount of inventory that can be
returned to suppliers varies under the Company's agreements and such return
policies may provide only limited protection against excess inventory. There
can be no assurance that suppliers will continue such policies. In addition,
as is typical of the microcomputer industry, the Company incurs expenses as a
result of the return of products by customers. Such returns may result from
defective goods, inadequate performance relative to customer expectations,
distributor shipping errors and other causes which are outside the Company's
control. Although the Company's suppliers generally have specific return
policies that enable the Company to return certain types of goods for credit,
to the extent that the Company's customers return products which are not
accepted for return by the supplier of such products, the Company will be
forced to bear the cost of such returns. Furthermore, the Company has no price
protection or right-of-return on its inventory of used equipment or certain
new equipment purchased on special terms, and the Company would therefore bear
the entire cost of devaluation of such equipment inventory or the returns of
such equipment.
Used Products. The Company offers used and refurbished computer products for
sale, lease or rent, in most instances with a 30-day warranty or right of
return. While the Company has not experienced significant warranty obligations
on or returns of used equipment to date, there can be no assurance that
warranty obligations or returns will not increase in the future. In addition,
used computer equipment is subject to considerable valuation risks. The
Company's inventory of used equipment could be substantially devalued due to a
variety of factors including, without limitation, a decrease in demand for, or
an increase in the supply of, used equipment or the introduction of new
technology. The Company has no right-of-return or price protection on its used
equipment inventory, and the Company would therefore bear the entire cost of
devaluation. Any significant decrease in the price for used computer equipment
could have a material adverse effect on the Company's results of operations
and financial condition.
Capital Intensive Nature of Business; Interest Rate Sensitivity. The
Company's business requires significant levels of capital to finance accounts
receivable and product inventory that is not financed by trade creditors. The
Company is highly leveraged and has relied heavily on debt financing for its
increasing working capital needs in connection with the expansion of its
business. Borrowings under the Company's $60 million credit facility with IBM
Credit Corporation generally bear interest at prime plus 0.75% (9.0% at
December 31, 1996). The Company's results of operations are sensitive to
changes in interest rates and an increase in interest rates could have a
material adverse effect on the Company's results of operations and financial
condition. The Company anticipates that it will repay a substantial portion of
the outstanding borrowings under its credit facility with the net proceeds of
this offering. The credit facility expires on January 22, 1998. In order to
continue its expansion, the Company will need additional financing, including
debt financing, and no assurance can be given that the Company will continue
to be able to borrow in adequate amounts for these or other purposes on terms
acceptable to the Company, and the failure to do so could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company's ability in the future to satisfy its debt obligations
will be dependent upon its future performance, which is subject to prevailing
economic conditions and financial, business and other factors, including
factors beyond the Company's control. See "Use of Proceeds," "Capitalization"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Direct Marketing Effort. As a complementary distribution channel to its core
reseller operations, the Company has recently launched a direct marketing
catalog. The Company has had only limited experience in this market, and there
can be no assurance that the direct marketing catalog will be successfully
integrated with the Company's existing business or operations or that the
Company will be able to
9
<PAGE>
compete effectively in this market. Direct marketing requires substantial
commitments by the Company for advertising expenditures for which certain
manufacturers offer partial reimbursement. There can be no assurance that the
manufacturers will continue to offer their current reimbursement levels, if at
all. If manufacturers were to discontinue or decrease their reimbursement of
advertising expenditures, the Company would remain obligated for the full
amount of the direct marketing costs. The Company's direct marketing effort
requires significant up-front expenditures, and there can be no assurances
that the anticipated level of revenues will be realized or that it will not
experience a substantial increase in operating costs associated with its
direct marketing efforts. The failure of the Company's direct marketing
efforts to meet expectations could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business--Direct Marketing."
Management Information System Upgrade. The Company is in the process of
implementing a major upgrade of its management information system, which the
Company expects to substantially complete by the end of 1997. The new system
will upgrade existing features and add a variety of features which are
expected to improve employee efficiency and increase the level of customer
service which the Company can provide. However, there can be no assurance that
the new management information system will perform in accordance with the
Company's expectations. The Company anticipates that it will continually need
to refine and modify its management information system as the Company grows
and its business needs change. The occurrence of significant system failure or
difficulties or delays in the implementation of the new system could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Management Information System."
Reliance on Key Personnel. The success of the Company is highly dependent
upon the efforts and abilities of Anthony R. Graffia, Anthony R. Graffia II
and certain other senior managers and sales personnel. None of these
individuals have entered into employment agreements. The loss of the services
of any key personnel for any reason could have a material adverse effect upon
the Company's business, results of operations and financial condition. See
"Management."
Control by Principal Stockholder. After completion of this offering, the
Company's principal stockholder, Anthony R. Graffia, will beneficially own
approximately 60.6% of the Company's outstanding shares of Common Stock (57.7%
if the Underwriters' over-allotment option is exercised in full). As a result,
Mr. Graffia will continue to be able to control the outcome of matters
requiring a stockholder vote, including the election of the members of the
Board of Directors, thereby controlling the affairs and management of the
Company. Such control could adversely affect the market price of the Common
Stock or delay or prevent a change in control of the Company. See "Principal
and Selling Stockholders."
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock. Consequently,
the initial public offering price per share of the Common Stock will be
determined by negotiations among management of the Company and the
representatives of the Underwriters (the "Representatives"). See
"Underwriting" for factors to be considered in determining the initial public
offering price per share. Although the Company has applied to have the Common
Stock listed for quotation on the Nasdaq National Market, there can be no
assurance that an active trading market will develop or be sustained after
this offering. The market price of the Common Stock may fluctuate
substantially due to a variety of factors, including quarterly fluctuations in
the Company's results of operations, changes in earnings estimates by
analysts, conditions in the computer industry or general market or economic
conditions. In addition, the stock market has experienced extreme price and
volume fluctuations that have adversely affected the market prices of
securities, often for reasons unrelated to the operating performance of the
specific companies. Such market fluctuations could materially adversely affect
the market price for the Common Stock.
Immediate and Substantial Dilution. The initial public offering price per
share of Common Stock is substantially higher than the net tangible book value
per share of the Common Stock. Purchasers of shares of Common Stock in this
offering will experience immediate and substantial dilution of $11.79 per
10
<PAGE>
share (assuming an initial public offering price of $15.00 per share) in the
pro forma net tangible book value per share of Common Stock. To the extent
outstanding options to purchase the Company's Common Stock are exercised,
there will be further dilution. See "Dilution."
Shares Eligible for Future Sale. Immediately after completion of this
offering, the Company will have 12,405,188 shares of Common Stock outstanding,
of which the 3,500,000 shares sold pursuant to this offering will be freely
tradable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"), except those shares acquired by
affiliates of the Company. Holders of the remaining shares will be eligible to
sell such shares pursuant to Rule 144 under the Securities Act ("Rule 144") at
prescribed times and subject to the manner of sale, volume, notice and
information restrictions of Rule 144. In addition, 595,500 shares of Common
Stock are issuable upon the exercise of outstanding stock options (none of
which are currently exercisable), which shares may be registered by the
Company under the Securities Act and become freely tradable without
restriction. The Company and each of its stockholders (holding, in the
aggregate, 8,905,188 shares of Common Stock upon consummation of this
offering) have agreed not to offer, sell, contract to sell or otherwise
dispose of, directly or indirectly, any shares of Common Stock, or any
securities convertible into or exchangeable or exercisable for shares of
Common Stock without the prior consent of Alex. Brown & Sons Incorporated
until 180 days after the date of this Prospectus. However, Alex. Brown & Sons
Incorporated may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to such lock-up
agreements. Sales of substantial amounts of such shares in the public market
or the availability of such shares for future sale could adversely affect the
market price of the shares of Common Stock and the Company's ability to raise
additional capital at a price favorable to the Company. See "Shares Eligible
for Future Sale" and "Underwriting."
Certain Antitakeover Effects. The Company's Amended and Restated Articles of
Incorporation (the "Articles of Incorporation") authorize the issuance of
1,000,000 shares of "blank check" preferred stock with such designation,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without
stockholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights that could materially adversely affect the
voting power or other rights of the holders of the Company's Common Stock. In
the event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. Although the Company has no present intention to issue
any shares of its preferred stock, there can be no assurance that the Company
will not do so in the future. The issuance of preferred stock could prevent
stockholders from realizing a premium upon the sale of their shares of Common
Stock. See "Description of Capital Stock."
In addition, the Company is subject to provisions of the Illinois Business
Corporation Act that prohibit a publicly-held Illinois corporation from
engaging in a broad range of business combinations with a person who, together
with affiliates and associates, owns 15% or more of the corporation's common
stock (an "interested stockholder") for three years after the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. Those provisions could discourage or make more difficult a
merger, tender offer or similar transaction, even if favorable to the
Company's stockholders. See "Description of Capital Stock--Antitakeover
Effects of Provisions of the Illinois Business Corporation Act."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,625,000 shares of
Common Stock offered by the Company hereby, assuming an initial offering price
of $15.00 per share and after deducting underwriting discounts and commissions
and other offering expenses (estimated to be approximately $700,000), all of
which are payable by the Company, are estimated to be approximately $35.9
million ($41.4 million if the Underwriters' over-allotment option is exercised
in full).
The Company intends to use approximately $30.9 million of such proceeds to
repay certain indebtedness under the Company's $60 million line of credit with
IBM Credit Corporation (the "Credit Facility") and approximately $5.0 million
to pay the S Corporation Dividend. See "S Corporation Dividend." Borrowings
under the Credit Facility bear interest at the rate of prime plus 0.75% (9.0%
at December 31, 1996). The Credit Facility expires January 22, 1998, subject
to extension. At December 31, 1996, there were approximately $28.7 million of
interest-bearing obligations outstanding under the Credit Facility. The
Company estimates that there will be approximately $35.0 million of interest-
bearing obligations outstanding under the Credit Facility immediately prior to
the consummation of this offering. The Company intends to use the remaining
net proceeds, if any, for working capital and other general corporate
purposes. Pending such uses, the Company intends to invest the net proceeds
from this offering in investment-grade, interest-bearing instruments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
S CORPORATION DIVIDEND
Effective February 1, 1996, the Company elected to be treated as an S
corporation for federal income tax purposes under Subchapter S of the Internal
Revenue Code of 1986, as amended (the "Code"), and for certain state income
tax purposes. As a result, all of the Company's income from February 1, 1996
through completion of this offering has been or will be deemed taxable income
of its stockholders rather than of the Company. The Company's S corporation
status will terminate as a result of this offering and the Company will make a
final distribution to its existing stockholders of undistributed S corporation
earnings, as explained below.
The Company will declare an S corporation dividend to its existing
stockholders of an aggregate amount currently estimated to be $5.0 million
(the "S Corporation Dividend"), which will be paid upon the closing of this
offering subject to approval from IBM Credit Corporation as required under the
Credit Facility. The aggregate amount of the S Corporation Dividend will
approximate the estimated undistributed earnings of the Company through the
closing date of this offering, and will be adjusted after the declaration date
if actual earnings are higher or lower than such estimate. Purchasers of
Common Stock in this offering will not receive any portion of the S
Corporation Dividend. Following termination of its status as an S corporation
at the closing of this offering, the Company will be subject to corporate
income taxation as a Subchapter C corporation.
DIVIDEND POLICY
The Company intends to retain any future earnings for funding growth and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. Future cash dividends, if any, will be at the discretion of the
Company's Board of Directors and will depend upon, among other things, the
Company's future operations and earnings, capital requirements and surplus,
general financial condition, contractual restrictions and such other factors
as the Board of Directors may deem relevant. Further, pursuant to the terms of
the Company's Credit Facility, the Company is prohibited from paying cash
dividends on its capital stock.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996, on an actual basis and as adjusted to reflect (i) the sale
of the 2,625,000 shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $15.00 per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses payable by the Company, and (ii) the application of the estimated net
proceeds therefrom, including repayment of the Credit Facility and payment of
the S Corporation Dividend. The following table should be read in conjunction
with the Financial Statements of the Company and Notes thereto included
elsewhere in this Prospectus. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------
ACTUAL AS ADJUSTED
----------- --------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current portion of long-
term debt(1)........................................ $ 43,210 $ 12,291
=========== ===========
Long-term debt, less current portion:
Long-term debt, less current portion............... $ 2,264 $ 2,264
Capital leases..................................... 448 448
----------- -----------
Total long-term debt, less current portion....... 2,712 2,712
----------- -----------
Stockholders' equity:
Preferred Stock, $0.01 par value; 1,000,000 shares
authorized; no shares issued or outstanding....... -- --
Common Stock, $0.01 par value; 20,000,000 shares
authorized; 9,780,188 issued and outstanding,
actual; 12,405,188 shares issued and outstanding,
as adjusted(2).................................... 98 124
Additional paid-in capital......................... 2,842 38,735
Retained earnings.................................. 6,023 1,023
----------- -----------
Total stockholders' equity....................... 8,963 39,882
----------- -----------
Total capitalization........................... $ 11,675 $ 42,594
=========== ===========
</TABLE>
- --------
(1) Includes approximately $28.7 million of interest-bearing obligations
outstanding under the Credit Facility and $10.1 million of interest-bearing
obligations under a supplemental facility provided in connection with the
Company's interim joint marketing arrangement with IBM, in each case as of
December 31, 1996. The Company estimates that there will be approximately
$35.0 million of interest-bearing obligations outstanding under the Credit
Facility and no amounts outstanding under the supplemental facility
immediately prior to the consummation of this offering. All outstanding
amounts under the Credit Facility become due January 22, 1998.
(2) Excludes 595,500 shares of Common Stock issuable upon exercise of stock
options outstanding as of January 28, 1997, at a weighted average exercise
price of $12.00 per share. Also excludes 404,500 shares of Common Stock
reserved for future issuance under the Company's Long-Term Incentive Plan.
See "Management--Long-Term Incentive Plan."
13
<PAGE>
DILUTION
The net tangible book value of the Company as of December 31, 1996 was
$8,963,000 or approximately $0.92 per share. Net tangible book value per share
represents the amount of the Company's stockholders' equity, less intangible
assets, divided by 9,780,188 shares of Common Stock outstanding.
Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of shares of Common Stock in the
offering made hereby and the pro forma net tangible book value per share of
Common Stock immediately after completion of this offering. After giving effect
to the sale by the Company of 2,625,000 shares of its Common Stock in this
offering at an assumed offering price of $15.00 per share and the application
of the estimated net proceeds therefrom, the pro forma net tangible adjusted
book value of the Company at December 31, 1996 would have been $39,882,000 or
$3.21 per share. This represents an immediate increase in net tangible book
value of $2.29 per share to existing stockholders and an immediate dilution in
net tangible book value per share of $11.79 per share to purchasers of Common
Stock in this offering as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $15.00
Net tangible book value per share at December 31, 1996.......... $0.92
Increase per share attributable to new investors................ 2.29
Pro forma net tangible book value per share after this offering... 3.21
------
Dilution in net tangible book value per share to new investors.... $11.79
======
</TABLE>
As of January 28, 1997, there were options outstanding to purchase a total of
595,500 shares of Common Stock at a weighted average exercise price of $12.00
per share. An additional 404,500 shares of Common Stock were reserved for
future issuance under the Company's Long-Term Incentive Plan. To the extent
outstanding options are exercised, there will be further dilution to investors.
The following table sets forth as of December 31, 1996, the difference
between the existing shareholders and the purchasers of shares in this offering
(at an assumed offering price of $15.00 per share) with respect to the number
of shares purchased from the Company, the total consideration paid and the
average price paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -----------------------AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ -----------------------
<S> <C> <C> <C> <C> <C>
Existing stockhold-
ers(1)................. 9,780,188 78.8% 2,043,000 4.9% $ 0.21
New investors(1)........ 2,625,000 21.2 39,375,000 95.1 15.00
---------- ----- ------------ -------
Total............... 12,405,188 100.0% 41,418,000 100.0%
===== =======
</TABLE>
- --------
(1) Sales by the Selling Stockholder in this offering will reduce the number of
shares held by existing stockholders of the Company to 8,905,188 shares, or
71.8% of the total number of shares of Common Stock to be outstanding after
this offering (8,773,938 shares or 68.6% if the Underwriters' over-
allotment option is exercised in full), and will increase the number of
shares held by new investors to 3,500,000 shares, or 28.2% of the total
number of shares of Common Stock to be outstanding after this offering
(4,025,000 shares or 31.4% if the Underwriters' over-allotment option is
exercised in full). See "Principal and Selling Stockholders."
14
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for Fiscal 1992 through Fiscal 1996 are
derived from the Company's Financial Statements and related Notes thereto. The
balance sheets of the Company as of January 31, 1996 and December 31, 1996, and
the related statements of operations, stockholders' equity and cash flows for
the years ended January 31, 1995 (Fiscal 1994) and 1996 (Fiscal 1995), and for
the eleven months ended December 31, 1996 (Fiscal 1996), have been audited by
Arthur Andersen LLP, independent public accountants. The statements of
operations and the balance sheet data as set forth below for the years ended
January 31, 1993 (Fiscal 1992) and 1994 (Fiscal 1993) and as of January 31,
1993, January 31, 1994 and January 31, 1995 have been derived from the
Company's financial statements. The selected financial data set forth below
should be read in conjunction with the Financial Statements and Notes thereto
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEARS ENDED JANUARY 31, ENDED
---------------------------------- DECEMBER 31,
1993 1994 1995 1996 1996(1)
------- ------- ------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DA-
TA:
Revenues
Equipment sales............ $22,637 $26,458 $64,362 $128,111 $243,177
Technical services and
equipment rentals......... 8,404 6,255 8,661 9,147 9,969
------- ------- ------- -------- --------
Total revenues............ 31,041 32,713 73,023 137,258 253,146
------- ------- ------- -------- --------
Cost of revenues
Equipment cost............. 19,416 21,189 58,976 114,478 214,541
Technical services and de-
preciation on rental
equipment................. 5,638 3,186 3,945 5,329 6,455
------- ------- ------- -------- --------
Total cost of revenues.... 25,054 24,375 62,921 119,807 220,996
------- ------- ------- -------- --------
Gross profit............. 5,987 8,338 10,102 17,451 32,150
------- ------- ------- -------- --------
Operating expenses.......... 4,359 7,126 9,302 15,537 25,272
------- ------- ------- -------- --------
Income from operations...... 1,628 1,212 800 1,914 6,878
------- ------- ------- -------- --------
Other expenses
Interest expense........... 1,131 435 1,004 2,483 3,284
Reserve for litigation set-
tlement................... -- -- 190 -- 525
------- ------- ------- -------- --------
Total other expenses...... 1,131 435 1,194 2,483 3,809
------- ------- ------- -------- --------
Income (loss) before provi-
sion (benefit) for income
taxes...................... 497 777 (394) (569) 3,069
Provision (benefit) for in-
come taxes................. 190 298 (153) (221) 611
Cumulative effect of change
in accounting principle.... -- (554) -- -- --
------- ------- ------- -------- --------
Net income (loss)........... $ 307 $ 1,033 $ (241) $ (348) $ 2,458
======= ======= ======= ======== ========
PRO FORMA INFORMATION:
Pro forma net income(2)..... $ 3,922
Pro forma net income per
common share(2)............ $ 0.38
Pro forma weighted average
number of common shares
outstanding(3)............. 10,233
Supplemental pro forma net
income(4).................. $ 5,570
Supplemental pro forma net
income per share(4)........ $ 0.46
Supplemental pro forma
weighted average number of
common shares outstand-
ing(3)(5).................. 12,080
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
AS OF JANUARY 31, AS OF
-------------------------------- DECEMBER 31,
1993 1994 1995 1996 1996
------- ------- ------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Inventory....................... $ 3,365 $ 6,347 $22,450 $16,624 $32,228
Working capital (deficit)....... 3,192 2,122 (830) (2,154) (1,440)
Total assets.................... 16,903 19,750 43,168 54,938 84,624
Total debt...................... 10,889 11,291 20,025 35,776 45,922
Total stockholders' equity...... 4,547 5,447 5,206 6,505 8,963
</TABLE>
- --------
(1) Effective February 1, 1996, the Company changed its fiscal year end from
January 31 to December 31 in connection with its election to be treated as
an S corporation.
(2) Effective February 1, 1996, the Company elected to be treated as an S
corporation. As an S corporation, the Company is not subject to federal
and certain state income taxes. The pro forma information for Fiscal 1996
has been computed by (i) eliminating from operating expenses $3.2 million
of employee compensation that exceeded the compensation that would have
been paid had the compensation agreements adopted in January 1997 been in
effect for all of Fiscal 1996 and $219,000 of certain expenditures related
to employee-stockholders which will not be incurred in the future and (ii)
adjusting the Company's net income to record income tax expense that would
have been recorded had the Company been a C corporation assuming an
effective tax rate of 39.4%. In Fiscal 1995, the Company paid
discretionary bonuses to its officers who are stockholders in the amount
of $1.3 million and incurred a noncash compensation expense related to the
issuance of stock in the amount of $897,000. The Company's S corporation
status will terminate upon consummation of this offering. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 16 of Notes to Financial Statements.
(3) Includes option shares deemed outstanding under the treasury stock method
and shares deemed issued to pay the S Corporation Dividend (as defined in
"S Corporation Dividend").
(4) The supplemental pro forma information for Fiscal 1996 has been computed
by adjusting pro forma net income to eliminate approximately $1.6 million
of interest expense, net of income tax, associated with the assumed
repayment of certain indebtedness with a portion of the proceeds of this
offering.
(5) Also includes shares deemed issued in connection with the assumed
repayment of certain indebtedness.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Prospectus, the words
"anticipate," "believe," "estimate," "intend" and "expect" and similar
expressions are intended to identify such forward-looking statements. The
Company's actual results performance or achievements could differ materially
from the results expressed in or implied by these forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed in "Risk Factors."
OVERVIEW
The Company is a leading provider of microcomputer products and related
services, primarily to Fortune 1000 companies and other large enterprises. The
microcomputer industry has grown rapidly as a result of, among other factors,
the ease of use, relatively low cost and increasing power of microcomputers.
The distribution channel for microcomputer products has changed significantly
over the past several years. In particular, many manufacturers have begun to
shift from the traditional single sourcing model, under which resellers are
required to purchase the manufacturer's product exclusively from one master
dealer, to an open sourcing model, under which resellers can purchase the
manufacturer's product from any source on competitively negotiated terms and
conditions. The market for technical services is also evolving and growing
rapidly, with customers increasingly seeking an integrated solution for their
microcomputer and networking needs. The Company believes that these trends
provide larger, more efficient companies which offer a comprehensive range of
products and services with a competitive advantage.
The Company's net sales and revenues have grown rapidly over the past three
fiscal years following its entry in the microcomputer market in the early
1990s. Revenues have grown at a compound annual rate of 91.3% from Fiscal 1994
to Fiscal 1996, increasing from $73.0 million in Fiscal 1994 to $137.3 million
in Fiscal 1995 (an increase of 88.0%) and to $253.1 million in Fiscal 1996, an
eleven month period (an increase of 84.4%). The Company believes that this
rapid growth resulted, in part, from its becoming an authorized reseller of
IBM in June 1993 and receiving authorization to purchase new products directly
from IBM in November 1993. The Company believes that its direct relationship
with IBM was a critical step in achieving this growth because it provided the
Company with improved product acquisition pricing, better product
availability, increased manufacturer support and greater credibility among
prospective customers. The Company also believes that its growth has been
enhanced by its ability to bundle product sales with alternative financing
arrangements (such as renting and leasing), combine new equipment with used
and refurbished parts and equipment, and offer trade-ins on its customers'
existing equipment. There can, however, be no assurance that the Company will
continue to experience such growth. See "Risk Factors."
The primary sources of the Company's revenues consist of (i) sales of new
and used microcomputer products, (ii) leasing and rental of microcomputer
equipment and (iii) technical services. Sales of new microcomputer products
account for the substantial majority of the Company's revenues; however, sales
of used equipment, rentals and technical services each generally generate a
higher gross profit margin than sales of new products. The Company believes
that these complementary offerings and services not only allow the Company to
increase average account size but, more importantly, strengthen long-term
relationships with customers. Equipment cost does not include commissions or
any other selling expenses. Technical services and depreciation on rental
equipment include depreciation allowance on rental equipment, direct costs
associated with technical services and certain other direct costs.
The Company receives volume discounts and credits from major manufacturers
for market development, which are used to offset a portion of the Company's
equipment cost. The amount of the
17
<PAGE>
discounts and credits which the Company receives may fluctuate based on the
Company's sales and the terms of the program offered and may
disproportionately affect the results of a quarter. Thus, the Company's gross
margins have been and may continue to be significantly affected by the timing
and size of the volume discounts and credits.
Equipment sold pursuant to leasing arrangements is recorded in equipment
sales. Leasing revenues generally include a small fee for arranging the third
party financing and the Company's portion of the proceeds from the remarketing
arrangements. The Company typically seeks to limit residual risk associated
with its leasing operations and, to this end, has developed nonrecourse third
party financing arrangements for its customers. In these arrangements, the
third party lessor assumes ownership of the equipment, including any residual
value, and the Company enters into remarketing arrangements pursuant to which
the Company retains the right to remarket the equipment.
To further its growth objectives, the Company has made significant
investments in its corporate infrastructure and increased its operating
expenses. In Fiscal 1996, the Company substantially expanded its sales staff
and hired additional technical services professionals. Operating expenses for
Fiscal 1996 include payments of guarantied salaries to certain of the
Company's new sales staff, most of which guaranties expire during the third
quarter of 1997. Since January 1996, the Company has added 53 sales
professionals (bringing its total sales staff to 100 persons) and has opened
five regional sales offices. While most of these new sales professionals have
significant industry experience, a majority of the Company's revenues are
currently derived from sales professionals who have been employed by the
Company for more than twelve months. The Company believes that even
experienced sales representatives require at least six to twelve months after
joining the Company to begin generating substantial revenues and, accordingly,
although no assurances can be given, the Company believes that it has a
significant opportunity to realize future growth as the recent additions to
its sales force become more productive. See "Risk Factors--Limited Operating
History in Microcomputer and Technical Services Market" and "--Management of
Growth."
To minimize inventory risks and increase inventory turns, much of the
Company's inventory of new product is for specific customer orders or consists
of constrained or commonly requested microcomputer products. The Company
believes that its management information system, its internal monitoring
processes and the constant interaction between its sales, purchasing and
trading departments also improve inventory management. In particular, the
Company carefully monitors the amount of its inventory of used equipment and
parts, which was approximately $1.2 million and $1.7 million as of the end of
Fiscal 1995 and Fiscal 1996, respectively.
Historically, compensation expense included commissions and discretionary
bonuses paid principally to the Company's stockholders. The Company has
entered into compensation agreements with these individuals, to be effective
upon the consummation of this offering through December 31, 1997. The pro
forma data has been computed by eliminating $3.2 million of compensation that
exceeded the compensation that would have been paid had the compensation
agreements adopted in January 1997 been in effect for all of Fiscal 1996 and
$219,000 of certain expenditures related to employee-stockholders which will
not be incurred in the future. In Fiscal 1995, the Company paid discretionary
bonuses to its officers who are stockholders in the amount of $1.3 million and
incurred a noncash compensation expense related to the issuance of stock in
the amount of $897,000.
Effective February 1, 1996, the Company elected to be treated as an S
corporation for federal and state income tax purposes. As a result, all of the
Company's income from February 1, 1996 through completion of this offering has
been or will be deemed taxable income of its stockholders rather than of
18
<PAGE>
the Company. Upon consummation of this offering, the Company's S corporation
status will terminate, and the Company will pay the S Corporation Dividend to
its prior stockholders. The pro forma statement of operations data also
reflect an adjustment to federal and state income taxes for Fiscal 1996
assuming the Company had been a C corporation during such period with an
effective tax rate of 38.8%. See "S Corporation Dividend."
Also effective February 1, 1996, the Company changed its fiscal year end
from January 31 to December 31 in connection with its election to be treated
as an S corporation.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as a percentage
of total revenues, except that individual components of gross profit are shown
as a percentage of their corresponding component of revenues:
<TABLE>
<CAPTION>
ELEVEN MONTHS
ENDED
YEARS ENDED JANUARY 31, DECEMBER 31,
--------------------------- -------------
1993 1994 1995 1996 1996
----- ----- ----- ----- -------------
<S> <C> <C> <C> <C> <C>
Revenues
Equipment sales................. 72.9% 80.9% 88.1% 93.3% 96.1%
Technical services and equipment
rentals........................ 27.1 19.1 11.9 6.7 3.9
----- ----- ----- ----- -----
Total revenues................ 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Gross profit
Equipment profit................ 14.2% 19.9% 8.4% 10.6% 11.8%
Technical services and equipment
rentals profit................. 32.9 49.1 54.5 41.7 35.2
Total gross profit............ 19.3 25.5 13.8 12.7 12.7
Operating expenses................ 14.0 21.8 12.7 11.3 10.0
----- ----- ----- ----- -----
Income from operations............ 5.3 3.7 1.1 1.4 2.7
Interest expense.................. 3.6 1.3 1.4 1.8 1.3
Reserve for litigation settle-
ment............................. -- -- 0.2 -- 0.2
----- ----- ----- ----- -----
Income (loss) before provision
(benefit) for income taxes....... 1.6 2.4 (0.5) (0.4) 1.2
Provision (benefit) for income
taxes............................ 0.6 0.9 (0.2) (0.2) 0.2
Cumulative effect of charge in ac-
counting principle............... -- (1.7) -- -- --
----- ----- ----- ----- -----
Net income (loss)................. 1.0% 3.2% (0.3)% (0.2)% 1.0%
===== ===== ===== ===== =====
Pro forma net income.............. 1.6%
Supplemental pro forma net in-
come............................. 2.2%
</TABLE>
FISCAL 1996 (ELEVEN MONTHS) COMPARED TO FISCAL 1995
Total revenues. Total revenues increased 84.4% to $253.1 million for Fiscal
1996 from $137.3 million for Fiscal 1995. Equipment sales increased 89.8% to
$243.2 million for Fiscal 1996 from $128.1 million for Fiscal 1995, primarily
as a result of increased productivity of the Company's sales force and sales
generated by recently hired sales professionals. Technical services and
equipment rentals revenues increased 9.0% to $10.0 million for Fiscal 1996
from $9.1 million for Fiscal 1995, primarily as a result of an increase in
equipment rentals by new and existing customers, increased leasing activities
and increased microcomputer technical services, offset in part by a decline in
certain mainframe technical services related to the Company's de-emphasis of
its mainframe service business.
Total gross profit. Total gross profit increased 84.2% to $32.2 million for
Fiscal 1996 from $17.5 million for Fiscal 1995 and remained constant as a
percentage of total revenues at 12.7%. Equipment profit increased 110.0% to
$28.6 million for Fiscal 1996 from $13.6 million for Fiscal 1995. Equipment
profit, as a percentage of equipment sales, increased to 11.8% for Fiscal 1996
from 10.6% for Fiscal 1995, primarily
19
<PAGE>
as a result of the Company's higher sales volume which enabled it to achieve
larger discounts and credits from certain manufacturers. In addition, the
Company believes that its higher purchasing levels resulted in improved
efficiencies within its purchasing department. Technical services and
equipment rentals profit decreased 8.0% to $3.5 million for Fiscal 1996 from
$3.8 million for Fiscal 1995. Technical services and equipment rentals
profits, as a percentage of technical services and equipment rentals revenues,
decreased to 35.2% for Fiscal 1996 from 41.7% for Fiscal 1995, primarily as a
result of (i) a decrease in the utilization rate of the Company's rental
portfolio caused by the conversion of one large customer's short-term rental
arrangements to long-term leases, (ii) the Company's decision to increase
inventory levels to permit more rapid delivery of rental equipment to
customers, (iii) the Company's hiring additional technical services staff in
connection with the expansion of its technical services offerings and (iv) the
creation of a $300,000 reserve for used mainframe equipment in connection with
the Company's decision to significantly reduce its mainframe inventory.
Operating expenses. Operating expenses increased 62.7% to $25.3 million for
Fiscal 1996 from $15.5 million for Fiscal 1995 but decreased as a percentage
of total revenues to 10.0% from 11.3%. The increase in dollar amounts was
primarily as a result of increased selling expenses and the Company's
investment in its infrastructure to further its growth objectives, offset in
part by the realization of economies of scale in support and administrative
areas. In particular, operating expenses include payments of guarantied
salaries to certain of the Company's new sales staff, most of which expire
during the third quarter of 1997. Operating expenses for Fiscal 1996 and
Fiscal 1995 also include $3.0 million and $1.3 million, respectively, of
discretionary bonuses paid to the Company's stockholders. Operating expenses
also include, for Fiscal 1996, $219,000 of certain expenditures related to
employee-stockholders which will not be incurred in the future and, for Fiscal
1995, $897,000 of noncash stock compensation expense.
Other expenses. Interest expense increased 32.3% to $3.3 million for Fiscal
1996 from $2.5 million for Fiscal 1995, primarily as a result of increased
borrowings to fund the Company's sales growth. As a percentage of total
revenues, interest expense decreased to 1.3% for Fiscal 1996 from 1.8% for
Fiscal 1995, primarily as a result of improvements in inventory turns and
accounts receivable collections which reduced the Company's borrowing
requirements. The reserve for litigation settlement of $525,000 for Fiscal
1996 includes $450,000 paid in connection with the settlement of a legal
dispute.
Provision (benefit) for income taxes. Provision (benefit) for income taxes
increased to $611,000 for Fiscal 1996 from $(221,000) for Fiscal 1995.
Provision for income taxes for Fiscal 1996 resulted primarily from the write-
off of net deferred tax assets in connection with the Company's election to be
treated as an S corporation. For Fiscal 1995, during which the Company was
treated as a C corporation, the Company's effective tax rate was 38.8%.
FISCAL 1995 COMPARED TO FISCAL 1994
Total revenues. Total revenues increased 88.0% to $137.3 million for Fiscal
1995 from $73.0 million for Fiscal 1994. Equipment sales increased 99.0% to
$128.1 million for Fiscal 1995 from $64.4 million for Fiscal 1994, primarily
as a result of increased productivity of the Company's sales force and sales
generated by recently hired sales professionals. Technical services and
equipment rentals revenues increased 5.6% to $9.1 million for Fiscal 1995 from
$8.7 million for Fiscal 1994, primarily as a result of an increase in
equipment rentals by new and existing customers. Revenues from technical
services did not experience any significant increase because increases in
microcomputer technical services were offset by decreases in mainframe
technical services as the Company began to de-emphasize its mainframe service
business.
Total gross profit. Total gross profit increased 72.7% to $17.5 million for
Fiscal 1995 from $10.1 million for Fiscal 1994 but decreased as a percentage
of total revenue to 12.7% from 13.8%. Equipment profit increased 153.1% to
$13.6 million for Fiscal 1995 from $5.4 million for Fiscal 1994. Equipment
profit, as a percentage of equipment sales, increased to 10.6% for Fiscal 1995
from 8.4% for Fiscal 1994, primarily as a result of the Company's higher sales
volume which enabled it to achieve larger discounts and credits from certain
manufacturers. In addition, the Company believes that its higher volume levels
resulted in increased efficiencies within its purchasing department. Technical
services and
20
<PAGE>
equipment rental profit decreased 19.0% to $3.8 million for Fiscal 1995 from
$4.7 million for Fiscal 1994. Technical services and equipment rental profit,
as a percentage of technical services and equipment rental revenues, decreased
to 41.7% for Fiscal 1995 from 54.5% for Fiscal 1994, primarily as a result of
increased recruiting, training and compensation costs associated with the
Company's continued investment in its microcomputer technical services
business, offset in part by decreased depreciation on rental equipment as a
result of the sale of excess rental inventory.
Operating expenses. Operating expenses increased 67.0% to $15.5 million for
Fiscal 1995 from $9.3 million for Fiscal 1994, primarily as a result of the
Company's increased revenues and its investment in management infrastructure.
Operating expenses decreased as a percentage of total revenues to 11.3% from
12.7%, primarily as a result of the realization of economies of scale in
support and administrative areas and an increase in sales revenues generated
by noncommissioned sales management. Operating expenses for Fiscal 1995 and
Fiscal 1994 include $1.3 million and $200,000, respectively, of discretionary
bonuses paid to the Company's employee-stockholders. Operating expenses for
Fiscal 1995 also include $897,000 of noncash stock compensation expense.
Other expenses. Interest expense increased 147.3% to $2.5 million for Fiscal
1995 from $1.0 million for Fiscal 1994, primarily as a result of increased
borrowings to fund the Company's sales growth. Other expenses in Fiscal 1994
included the establishment of a $190,000 reserve in connection with a legal
dispute.
Provision (benefit) for income taxes. Provision (benefit) for income taxes
decreased 44.4% to $(221,000) for Fiscal 1995 from $(153,000) for Fiscal 1994.
The Company's effective tax rate was 38.8% in each of Fiscal 1995 and Fiscal
1994.
SEASONALITY AND UNAUDITED QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly operating
information for each of the eight quarters ending December 31, 1996. The
change in the Company's fiscal year end from January 31 to December 31
resulted in a two month period ending March 31, 1996. This data has been
prepared on the same basis as the audited financial statements contained
elsewhere in this Prospectus and includes all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
information for the periods presented, when read in conjunction with the
Company's Financial Statements and related Notes thereto. Results for any
previous fiscal quarter are not necessarily indicative of results for the full
year or for any future quarter.
<TABLE>
<CAPTION>
TWO
MONTHS
THREE MONTHS ENDED ENDED THREE MONTHS ENDED
------------------------------------ -------- -----------------------------
APRIL 30, JULY 31, OCT. 31, JAN. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1996 1996 1996 1996 1996
--------- -------- -------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $26,927 $27,854 $40,194 $42,283 $29,538 $55,808 $55,576 $112,224
Cost of revenues........ 24,121 24,285 35,024 36,377 25,742 47,269 47,892 100,093
------- ------- ------- ------- ------- ------- ------- --------
Gross profit............ 2,806 3,569 5,170 5,906 3,796 8,539 7,684 12,131
------- ------- ------- ------- ------- ------- ------- --------
Operating expenses(1)... 2,521 2,829 4,356 5,831 2,932 5,338 5,720 11,282(1)
------- ------- ------- ------- ------- ------- ------- --------
Income from operations.. 285 740 814 75 864 3,201 1,964 849
Other expenses.......... 525 424 696 838 544 690 1,426(2) 1,149
------- ------- ------- ------- ------- ------- ------- --------
Income (loss) before
provision
(benefit) for income
taxes.................. (240) 316 118 (763) 320 2,511 538 (300)
Provision (benefit) for
income
taxes.................. (93) 123 46 (297) 12 590 20 (11)
------- ------- ------- ------- ------- ------- ------- --------
Net income (loss)....... $ (147) $ 193 $ 72 $ (466) $ 308 $ 1,921 $ 518 $ (289)
======= ======= ======= ======= ======= ======= ======= ========
</TABLE>
- --------
(1) In the fourth quarter of Fiscal 1996, the Company accrued discretionary
bonuses for certain officers who are stockholders in the aggregate amount
of $3.0 million.
(2) Includes $525,000 accrued in connection with the settlement of a legal
dispute.
21
<PAGE>
The Company believes that its business is seasonal, with a greater
proportion of the Company's revenues occurring in the fourth quarter and a
lesser proportion in the first quarter. The Company believes that this
seasonality is partially attributable to the capital budgeting and expenditure
patterns of its customers. Revenues and operating results may also fluctuate
as a result of the demand for the Company's products and services, the
introduction of new hardware and software technologies offering improved
features, the introduction of new services by the Company and its competitors,
changes in the level of operating expenses, the timing of major orders or
projects, inventory adjustments, competitive conditions, interest rate
fluctuations and economic conditions in general. The Company's operating
results also may fluctuate due to variations in volume discounts and credits
it receives based on programs offered by certain manufacturers. See "--
Overview." The Company has recently significantly increased, and may in the
future increase, certain fixed operating expenses, including personnel-related
expenses, but does not expect to generate a corresponding increase in revenues
as a result of these expenditures, if any, for at least six to twelve months.
See "Risk Factors--Significant Fluctuations in Revenues and Operating
Results."
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary source of liquidity was cash flow from
operations, supplemented by borrowings under its Credit Facility. The Credit
Facility generally permits the Company to borrow up to the lesser of $60
million and the Company's Borrowing Base, which is generally equal to the sum
of (i) 85% of eligible accounts receivables, (ii) 100% of the net invoice
price of IBM products purchased through authorized suppliers, (iii) 40% of the
depreciated value of rental inventory up to $1.75 million (subject to certain
limitations and a phased reduction of such percentage and cap through
September 1998) and (iv) 50% of the lower of cost or market value of certain
other inventory, subject to certain limitations. The Credit Facility
categorizes amounts outstanding by current trade accounts payable to IBM (non-
interest bearing), trade accounts payable to IBM greater than 45 days
outstanding (interest bearing) and other draws against the Credit Facility
(interest bearing). Interest is payable monthly with respect to trade accounts
payable to IBM which are 45 to 90 days outstanding and with respect to draws
against the Credit Facility at prime plus 0.75% (9.0% at December 31, 1996).
Interest is payable monthly for trade accounts payable to IBM which are
greater than 90 days outstanding at prime plus 3%. There were no trade
accounts payable to IBM greater than 90 days outstanding during Fiscal 1995 or
Fiscal 1996. Borrowings under the Credit Facility are collateralized by
certain trade accounts receivable, inventory, rental equipment and a second
mortgage on the property under capital leases. The Credit Facility expires
January 22, 1998 and contains customary events of defaults and covenants,
including financial covenants and prohibitions on the payment of dividends. At
December 31, 1996, approximately $43.8 million was outstanding under the
Credit Facility, of which approximately $15.1 million represented current
noninterest-bearing accounts payable and approximately $28.7 million
represented interest-bearing obligations. At December 31, 1996, approximately
$1,819,000 was available to be drawn under the Credit Facility. The Company
intends to repay approximately $30.9 million of the interest-bearing portion
of the Credit Facility with the proceeds of this offering.
The Company also has a $30 million supplemental credit facility with IBM
Credit Corporation (the "Supplemental Facility") which permitted the Company
to borrow additional funds in connection with sales to State Farm pursuant to
the interim marketing arrangement with IBM. Borrowings under the Supplemental
Facility bear interest at the rate of prime plus 0.75% (9.0% at December 31,
1996). At December 31, 1996, approximately $10.1 million was outstanding under
the Supplemental Facility. The Company cannot make any additional borrowings
under the Supplemental Facility and expects that all amounts will be repaid
and the Supplemental Facility will terminate prior to March 1, 1997.
Cash provided by operating activities was $22.2 million in Fiscal 1996,
consisting of (i) $9.2 million of income before depreciation and amortization
and other non-cash charges and (ii) $13.0 million from decreases in non-cash
components of working capital requirements. Cash used in investing activities
for
22
<PAGE>
Fiscal 1996 was $9.4 million, principally for the purchase of rental equipment
inventory. Cash used in financing activities for Fiscal 1996 was $10.3
million, principally representing repayments of outstanding amounts under the
Credit Facility and the Supplemental Facility.
Cash used in operating activities was $9.7 million in Fiscal 1995,
consisting of (i) $5.4 million of income before depreciation and amortization
and other non-cash charges and (ii) $15.1 million from increases in non-cash
components of working capital requirements. Cash used in investing activities
for Fiscal 1995 was $7.2 million, principally for the purchase of
microcomputer rental equipment. Cash provided by financing activities was
$15.6 million, principally representing borrowings under the Credit Facility.
Cash provided by operating activities was $9.6 million in Fiscal 1994,
consisting of (i) $3.1 million of income before depreciation and amortization
and other non-cash charges and (ii) $6.5 million from decreases in non-cash
components of working capital requirements. Cash used in investing activities
for Fiscal 1994 was $6.3 million, principally for the purchase of
microcomputer rental equipment. Cash used in financing activities was $2.4
million, principally representing repayments of outstanding amounts under the
Credit Facility.
Net capital expenditures were $0.6 million, $1.5 million, and $2.5 million
in Fiscal 1994, 1995, and 1996, respectively. The Company plans to spend
approximately $1.0 million on capital expenditures in Fiscal 1997, primarily
for the upgrade of the Company's management information system. See
"Business--Management Information System."
The Company believes that funds generated from operations, together with
existing cash, the net proceeds of this offering and available credit under
its Credit Facility, will be sufficient to finance its current operations and
planned capital expenditure requirements and internal growth at least through
Fiscal 1997.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," and SFAS No. 123, "Accounting for Stock Based
Compensation" which are effective for fiscal years beginning after December
15, 1995. Effective February 1, 1996, the Company adopted SFAS No. 121. The
Company also adopted the disclosure requirements of SFAS No. 123 effective
February 1, 1996. The Company will continue to account for stock based
compensation arrangements in accordance with APB Opinion 25. The adoption of
SFAS Nos. 121 and 123 did not have a material effect on the Company's
financial statements.
23
<PAGE>
BUSINESS
GENERAL
Hartford Computer is a leading provider of microcomputer products and
related services, primarily to Fortune 1000 companies and other large
enterprises. The Company offers over 36,000 microcomputer products to its
customers, including desktop and laptop computers, monitors, servers, memory,
peripherals and networking application tools and software. The Company is
authorized to purchase products directly from IBM and certain peripherals
manufacturers, and is an authorized reseller for most major microcomputer
product manufacturers. In 1996, the Company began offering an expanded range
of technical services, including technology management, enterprise consulting,
life cycle management and application development. The Company has grown
rapidly over the past four fiscal years following its entry in the
microcomputer market in the early 1990s, with revenues increasing from $32.7
million in Fiscal 1993 to $253.1 million in Fiscal 1996 (an eleven month
period), a compound annual growth rate of 101.7%.
COMPANY BACKGROUND
The Company was founded in 1978 as a leasing and rental company for
mainframe computers. In the late 1980s, the Company developed a sophisticated
purchasing and sourcing system for used mainframe computers. In the early
1990s, the Company leveraged this purchasing and sourcing experience to enter
the microcomputer market and substantially de-emphasized its mainframe
business. The Company significantly expanded its efforts selling and servicing
new microcomputer equipment after it became an authorized reseller of IBM
product in June 1993 and received authorization to purchase product directly
from IBM in November 1993. The Company believes that establishing its direct
relationship with IBM was a critical step in achieving its recent rapid growth
because it provided the Company with improved product acquisition pricing,
better product availability, increased manufacturer support and greater
credibility among prospective customers. The Company continually evaluates
opportunities to establish direct purchasing relationships with additional
manufacturers. In 1996, the Company began offering an expanded array of
technical services to complement its microcomputer product sales business and
expects to continue to enhance and expand these offerings.
INDUSTRY TRENDS
The microcomputer sales and technical services industry is estimated by
Dataquest Incorporated to have annual revenues in excess of $200 billion. The
worldwide microcomputer products distribution industry generally consists of
(i) manufacturers, (ii) distributors, which purchase a wide range of products
in bulk directly from manufacturers and sell to resellers, and (iii)
resellers, which sell to other resellers and directly to end-users. Different
types of resellers are defined and distinguished both by the end-user market
they service, such as large corporate accounts, small and medium sized
businesses, or home users, and by the level of value they add to the basic
product they sell. Resellers may become "authorized resellers" of particular
manufacturers, which allows these resellers to offer products under
manufacturers' warranties and gain credibility with prospective customers.
Furthermore, authorized resellers which purchase in sufficient product volume
may be able to become authorized to purchase directly from manufacturers.
Direct purchasing can provide resellers with improved product acquisition
pricing, better product availability, increased manufacturer support and
greater access to information on future products.
Until recently in the United States, branded computer systems from large
manufacturers, such as IBM, Compaq, Hewlett-Packard Co. and Apple Computer,
Inc., were sold only through authorized master dealers (commonly referred to
as "aggregators"). Under this single sourcing model, resellers were required
to purchase these products exclusively from one aggregator. In the past
several years, certain computer manufacturers, such as IBM and Compaq, have
authorized open sourcing, a model under which resellers can purchase the
manufacturer's product from any source on competitively negotiated terms and
24
<PAGE>
conditions. The Company believes that continued movement towards open sourcing
allows larger and more efficient resellers to obtain better pricing for and
improved availability of manufacturers' equipment.
In addition to these changes in the distribution channel, there has been
rapid growth in the microcomputer industry due to (i) the ease of use,
relatively low cost and increasing processor power of microcomputers, (ii) the
development of personal productivity software and (iii) the increase in the
popularity of local and wide area networks using a client/server design. The
products of a variety of manufacturers are frequently integrated in a single
system as a result of the trend toward client/server design and open
architecture systems. In addition, organizations today are finding it
increasingly difficult to understand, evaluate, select and implement a cost-
effective solution to their computer and information processing needs. As
products and services become more complex and product and service choices
multiply, these organizations require more expertise or assistance to make
intelligent purchasing decisions, install systems properly and maximize the
utility of new systems.
Many organizations are also finding that rapid changes in technology are
causing them to upgrade or replace their systems more frequently. In addition,
many organizations seek access to equipment on a short-term basis for specific
projects or while awaiting availability of constrained product or new
technology. At the same time, as system upgrades become more frequent,
organizations are increasingly seeking to dispose of their older microcomputer
equipment. Used microcomputer parts and equipment can also provide a cost-
effective and efficient alternative to new equipment. Many organizations also
desire to custom configure equipment in a manner not offered by manufacturers.
Despite these growing demands, many distributors and resellers remain unable
or unwilling to meet short-term equipment needs, accept trade-ins, dispose of
and utilize used equipment or offer custom configurations in a cost-efficient
manner. The Company believes that its ability to offer these additional
services and used equipment and parts differentiates it from its competitors.
To reduce costs and achieve a more consistent, reliable level of service,
organizations are seeking an integrated solution for their microcomputer and
networking needs. As part of this trend, organizations are reducing the number
of their vendors; therefore, it is increasingly important for vendors to
provide a broad range of both microcomputer products and technical services.
The Company believes that there has been consolidation in the microcomputer
distribution and reseller industry, both through larger resellers increasing
their market share and acquisitions. The Company believes that large resellers
which possess substantial buying power and access to constrained equipment,
and which offer a broad range of products and financial and technical
services, will continue to have a competitive advantage over smaller resellers
and specialized service providers.
BUSINESS STRATEGY
The Company's objective is to establish long-term relationships with its
customers and provide them with a single source, cost-effective solution for
all their microcomputer equipment and related services and financing needs. To
achieve this goal, the Company has developed a comprehensive approach, called
its "Full Cycle" solution, that provides its customers with "one-stop
shopping" for their microcomputer needs. Under the Company's Full Cycle
solution, the Company (i) sells a broad range of new microcomputer products at
competitive prices, (ii) sources used or constrained parts and equipment,
(iii) rents and leases equipment, (iv) customizes product and system
configuration in a cost-efficient manner, (v) buys, sells and accepts trade-
ins of used equipment and (vi) offers a wide variety of technical services.
The Company believes that its Full Cycle solution positions it to become its
customers' preferred vendor for their microcomputer products and related
services and financing needs. To implement its Full Cycle solution effectively
and efficiently, the Company's business strategy includes the following:
Comprehensive Product Selection. The Company offers a comprehensive array of
new microcomputer products, including over 36,000 products from over 1,100
manufacturers. The Company also offers used equipment, which the Company
believes differentiates it from substantially all of its major
25
<PAGE>
competitors. This comprehensive product offering enables the Company to
satisfy virtually all of its customers' microcomputer product needs.
Competitive Pricing. The Company offers its products at competitive prices,
while maintaining a high level of service and support. The Company is able to
maintain its competitive prices as a result of its (i) buying power, (ii)
effective purchasing management, (iii) ability to bundle product sales with
alternative financing arrangements (such as renting and leasing) and (iv)
ability to combine new equipment with used and refurbished parts and equipment
and offer trade-ins on its customers' existing equipment. Many customers
include used equipment as part of their system configurations, particularly
where the parts are not prone to failure, which enables them to minimize
system costs or purchase better equipment with the savings. In addition to
benefiting customers, used equipment is generally sold at higher margins than
new products.
Effective Purchasing Management. The Company has leveraged its 18 years of
experience in the computer industry in developing its purchasing operations
and sources of supply. The Company uses its extensive sourcing experience and
integrated management information system to (i) identify and obtain
microcomputer products, including constrained and used products, from a
variety of manufacturers, distributors, resellers and other dealers world-wide
at the lowest available cost, (ii) provide integration between the Company's
purchasing and sales functions and (iii) tightly control its inventory of new
and used equipment and parts. The Company's effective purchasing management
capabilities provide its customers with better product availability and
competitive pricing while improving the Company's profitability.
Flexible Financing Options. The Company offers its customers the option to
purchase, lease or rent equipment. Leasing and rentals provide customers who
desire or require the latest technology with the ability to change their
equipment on a more frequent and cost-efficient basis. Rentals also provide a
cost-efficient solution for customers' short-term needs or immediate access to
existing technology until constrained or new products become available. In
addition to these customer benefits, the Company's leasing and rental services
enhance the Company's gross margin and frequently serve as the basis for the
Company's developing relationships with new customers. The Company believes
this initial introduction often results in significant additional business
from such customers. For example, the Company's relationship with one of its
largest customers began with the rental of a single laptop computer.
Efficient Asset Reutilization. The Company offers its customers a means of
disposing of their older equipment and obtaining customized systems in a cost-
efficient manner. Unlike most other distributors and resellers, the Company
accepts as trade-ins or purchases used equipment from its customers and
resells, rents or leases such equipment or its component parts. Also, the
Company has the capability to upgrade systems with enhancements such as
increased memory, larger hard drives and more efficient components, while
providing the customer with a credit for the original parts.
Value-Added Technical Services. The Company has recently begun to offer an
expanded array of technical services, including technology management,
enterprise consulting, life cycle management and application development
services. These services integrate the Company more closely with its customers
and enable it to identify and develop timely solutions for their changing
needs. These services also provide the Company with higher margins than from
the sale of new products, while enabling customers to outsource their non-core
business activities.
GROWTH STRATEGY
The Company has developed a number of complementary growth strategies,
including the following:
Leverage Relationships with Existing Customers. The Company's customers
consist primarily of Fortune 1000 and other large enterprises. The Company
seeks to become the preferred source for all of
26
<PAGE>
its customers' microcomputer and related service needs. The Company believes
that it can continue to increase revenues by cross-selling additional products
and services to existing customers, in particular those who initially use the
Company's ancillary products and services such as trade-ins or rentals.
Leverage Recently Expanded Sales Force; Expand Geographic Presence. The
Company believes there is a significant opportunity to gain new customers by
leveraging recent additions to its sales force and expanding its geographic
presence. Since January 1, 1996 the Company has added 53 sales professionals
(bringing its total sales staff to 100 persons). While most of these new sales
professionals have significant industry experience, a majority of the
Company's revenues are currently derived from sales professionals who have
been employed by the Company for more than twelve months. The Company believes
that even experienced sales representatives require at least six to twelve
months after joining the Company to begin generating substantial revenues and
that the Company therefore has a significant opportunity to realize future
growth as the recent additions to its sales force become more productive. In
addition, while most of the sales professionals are located in the Chicago
area, in 1996 the Company expanded its geographic presence by opening five
regional sales offices.
Expand Manufacturer Relationships. The Company became authorized to purchase
products directly from IBM in November 1993 and intends to develop direct
purchasing relationships with additional manufacturers. The Company believes
that direct manufacturer relationships typically provide it with improved
product acquisition pricing, better product availability, increased
manufacturer support and greater credibility among prospective customers. The
Company has also been certified by IBM as one of twelve participants in its
Authorized Assembly Program, which is expected to provide improved access to
IBM equipment while decreasing inventory requirements.
Expand and Enhance Value-Added Technical Services. While the Company's
revenues have been derived primarily from equipment sales, the Company has
recently begun to offer an expanded array of technical services. The Company
intends to utilize its position as a reseller of microcomputer products to
market its comprehensive range of technical services to its customers. These
services typically generate higher gross margins than new product sales, and
the Company believes that these technical services not only allow it to
increase average account size but, more importantly, strengthen long-term
relationships with customers.
Increase Rental and Leasing Activities. The Company believes that its rental
and leasing activities not only provide additional revenues but also support
its core reseller business by offering customers additional flexibility and
providing cross-marketing opportunities. The Company has established separate
rental and leasing departments to pursue rental and leasing opportunities and
has expanded its relationships with third party financing sources to provide
additional benefits to customers. The Company believes that the establishment
of the rental and leasing departments and the capital provided by this
offering will enable it to expand its rental and leasing activities.
Develop Complementary Direct Marketing Effort. The Company has recently
launched a limited direct marketing effort, releasing its first full-length
catalog in November 1996. The Company intends to expand this business slowly
and does not expect the catalog to account for a significant portion of its
business in the near future. However, the Company believes that its direct
marketing efforts will generate additional revenues and support the Company's
core reseller operations by generating additional sales leads. The catalog
leverages the Company's strengths in servicing customers, sourcing new and
used products at the lowest available cost and fulfilling orders. The direct
marketing effort also utilizes the Company's existing operational and
distribution facilities.
PRODUCTS
The Company offers over 36,000 microcomputer products to its customers,
including desktop and laptop computers, monitors, servers, memory, peripherals
and networking application tools and software. The Company is authorized to
purchase products directly from IBM and certain peripherals manufacturers,
27
<PAGE>
and is an authorized reseller for most other major microcomputer product
manufacturers. The Company offers the products of over 1,100 manufacturers,
including:
<TABLE>
<S> <C> <C>
Admore Memory Hitachi Okidata
Apple IBM Sony
AST Intel 3Com
Canon Iomega Toshiba
Compaq Lexmark Unisys
Ctx Lotus U.S. Robotics
Epson Microsoft Viking
Golden Ram NEC Visiontek
Hewlett-Packard Novell Western Digital
</TABLE>
The Company believes that its success has and will continue to be due in
part to its ability to obtain a wide assortment of products at the lowest
available cost and provide customers with up-to-date information regarding
pricing and availability. As a result of the Company's purchasing power, the
Company typically receives volume discounts from its major suppliers.
Purchases by the Company from IBM exceeded $135.3 million, or 63.1% of total
revenues, and purchases from Ingram Micro, Inc. exceeded $31.5 million, or
14.7% of total revenues, for Fiscal 1996.
The Company has been authorized to purchase products directly from IBM since
November 1993. The Company believes that direct purchasing relationships with
manufacturers provide it with superior pricing, improved product availability,
increased manufacturer support and greater credibility among prospective
customers. However, these relationships generally require the Company to
purchase a sufficient product volume to obtain favorable pricing terms and may
also result in higher inventory levels. The Company has deferred pursuing
direct purchasing relationships with additional major manufacturers until the
Company's sales volume of products of those manufacturers warrants a direct
purchasing relationship. The Company anticipates that it will become
authorized to purchase products directly from additional manufacturers during
1997.
The Company also offers used products for sale, rent or lease, including
desktops, laptops, memory, printers and other peripheral devices. The Company
believes that used and refurbished equipment can provide substantial savings
to customers, particularly to users who do not need the latest technology. In
addition, many customers desire to include used equipment as part of their
system configurations to minimize costs or to enable them to purchase
additional equipment. The Company's purchasing department is active in the
used equipment market, enabling the Company to keep constantly abreast of
price fluctuations, availability and marketability. The Company has a
dedicated refurbishing lab where it cleans, fixes and restores used equipment.
In most instances, the Company offers a 30-day warranty or right of return in
connection with the sale of its used and refurbished equipment.
PURCHASING AND INVENTORY MANAGEMENT
The Company uses its extensive sourcing experience and management
information system to (i) identify and obtain computer products, including
constrained and used products, from a variety of manufacturers, distributors,
resellers and other dealers world-wide at the lowest available cost, (ii)
provide integration between the Company's purchasing and sales functions and
(iii) tightly control its inventory of new and used equipment and parts. The
Company's purchasing operation employs both a traditional purchasing
department as well as a trading group which sources new and used products on a
worldwide basis. The Company's experienced trading group can frequently locate
hard-to-find new and used equipment and parts.
To minimize inventory risks and increase inventory turns, much of the
Company's inventory of new product is for specific customer orders or consists
of constrained or commonly requested microcomputer
28
<PAGE>
products. The Company believes that its management information system, its
internal monitoring processes and the constant interaction between its sales,
purchasing and trading departments also improve inventory management. In
particular, the Company carefully monitors the amount of its inventory of used
equipment and parts, which was approximately $1.2 and $1.7 as of the end of
Fiscal 1995 and Fiscal 1996, respectively.
The Company is generally entitled to credits from most manufacturers for
declines in inventory value resulting from the manufacturer's price
reductions, subject to certain conditions. In addition, the Company has the
right to return for credit or exchange for other products a portion of
inventory items purchased within a designated period of time. While these
industry practices are sometimes not embodied in written agreements and do not
protect the Company in all cases from declines in inventory value, the Company
believes that these practices provide a significant level of protection from
such declines. No assurance can be given, however, that such practices will
continue or that they will adequately protect the Company against declines in
inventory value. Furthermore, the Company has no price protection or right-of-
return on its inventory of used equipment or certain new equipment purchased
on special terms, and the Company would therefore bear the entire cost of a
devaluation of this inventory. See "Risk Factors--Inventory Management;
Product Returns" and "--Used Products."
VALUE-ADDED TECHNICAL SERVICES
In 1996, the Company significantly expanded the range of technical services
that it offers. The Company combines these technical services, offered on an
individual or bundled basis, with its expertise in sourcing and distributing
products to provide a Full Cycle solution for its customers' information
needs. The Company believes that services are becoming an important part of
its market as products become increasingly complex and as customers desire
fully integrated solutions. The Company also believes that the trend toward
outsourcing services required for those solutions is increasing. To meet the
current and anticipated demand for technical services, the Company has
recently added experienced technical professionals and expects to add a
significant number of such professionals in 1997. The Company's technical
service offerings include the following:
Technology Management Services. The Company's technology management service
offerings include in and out of warranty maintenance for microcomputer
equipment, technology deployment and relocation, and technical support for
hardware and software (including help desk functions). The Company is
authorized by most major manufacturers to provide warranty services, as well
as upgrade and enhancement services, for desktops, laptops, printers,
monitors, peripherals, servers and other microcomputer products. The Company's
help desk support is available for most major hardware products and many major
applications and operating systems for microcomputers, including network
operating systems. The Company also offers remote LAN monitoring and
administration services. The Company also provides its customers with the
resources necessary to complete large scale deployment and relocation
projects, whether within a single facility or across facilities nationwide. In
recognition of its deployment and maintenance records, the Company was
recently named as one of Sears' Partners in Progress.
Enterprise Consulting Services. The Company's enterprise consulting service
offerings include network operating systems, LAN technology audit and project
management services. The Company's migration services allow organizations to
identify and implement information technologies on a timely basis with minimal
disruption to the users. Migration services include four critical components:
systems design, implementation design, implementation, and support. The
Company's LAN technology audit services provide analysis of current technology
configurations to enable the customer to evaluate baseline performance and
formulate recommendations to optimize the system. The Company's project
management services enable its customers' resources to be efficiently
organized and allocated to specific projects.
Life Cycle Management Services. The Company's life cycle management service
offerings include planning and design of technical architecture, acquisition,
deployment, asset management, surplus
29
<PAGE>
management, project management and support for the customer's microcomputer
systems. The Company's asset management system captures and maintains detailed
information about a customer's installed base of microcomputer hardware and
software assets and all subsequent service events related to those assets. The
system also generates reports and schedules enabling the Company to provide a
detailed analysis of a customer's installed base of microcomputer equipment
for use in managing asset costs.
Application Development Services. The Company's application development
service offerings include application development for Lotus Notes, Microsoft
Access, Visual Basic and other databases, creation of customized automated
systems, integration of automated processes and provision of training and
education services. Customized automated systems enable customers to create
and change the processes used to manage their microcomputer infrastructure,
while automated processes provide efficient access to technology procurement,
call tracking and asset management. The Company's education services enable
customers to outsource registration, course planning, training and proficiency
testing.
RENTALS AND LEASING
As part of its Full Cycle solution, the Company offers its customers the
ability to rent and lease new and used equipment. The Company has established
separate rental and leasing departments to pursue rental and leasing
opportunities and has expanded its relationship with third party financing
sources. The Company believes that providing these flexible arrangements not
only provides incremental revenues but often serves as an introduction to a
potential new customer which can lead to a more significant relationship. For
example, the Company's relationship with one of its largest customers began
with the rental of a single laptop computer. In addition, as rental and leased
equipment is returned at the end of the applicable term, the Company is
ensured a dependable source of used equipment for subsequent rental, leasing
or sale.
Rentals and leasing provide customers who desire or require the latest
technology with the ability to change their equipment on a more frequent and
cost-efficient basis. Rentals also provide a cost-efficient solution for
customers' short-term needs as well as immediate access to existing technology
until constrained or new products become available. The term of the Company's
rental agreements ranges from a few days to twelve months, and rentals often
continue after the expiration of the initial term.
The Company offers leasing arrangements to its customers as an additional
financing option, with terms generally ranging from one to three years.
Equipment sold pursuant to leasing arrangements is recorded in equipment
sales. Leasing revenues generally include a small fee for arranging the third
party financing and the Company's portion of the proceeds from remarketing
arrangements. The Company typically seeks to limit residual risk associated
with its leasing operations and, to that end, has developed nonrecourse third
party financing arrangements for its customers. In these arrangements, the
third party lessor assumes ownership of the equipment, including any residual
value, and the Company enters into remarketing arrangements pursuant to which
the Company retains the right to remarket the equipment.
CUSTOMERS, SALES AND MARKETING
The Company has a broad customer base of primarily Fortune 1000 companies
and other large enterprises in a variety of industries, including insurance,
information processing, retail, computer products, telecommunications and
financial services. The Company also sells microcomputer products to other
resellers, distributors and dealers. During Fiscal 1996, indirect sales to
State Farm made pursuant to an interim marketing arrangement with IBM, direct
sales to State Farm and sales to Sears accounted for 19.4%, 3.3% and 11.2% of
the Company's total revenues, respectively. The interim marketing arrangement
with IBM was entered into as a result of IBM's recent decision to discontinue
direct sales to its corporate customers. All sales under this arrangement were
completed during Fiscal 1996. The Company expects that any future sales to
State Farm will be made on an open-bid basis.
30
<PAGE>
The Company focuses its sales and marketing efforts on large corporate
accounts, targeting the decision-making executives at these organizations. The
Company seeks to use its relationships with its existing customers,
manufacturers and other business partners to generate sales opportunities. The
Company also leverages its Full Cycle solution, often initially becoming
involved in a sale by meeting a particular need of the customer and then
seeking to expand the relationship. During 1996, the Company also launched its
direct marketing catalog, which the Company believes will provide it with an
additional source of lead generation for corporate sales.
The Company has approximately 100 sales professionals, 43 of whom were hired
since June 1996 and over half of whom were hired since January 1996. In
addition, during Fiscal 1996, the Company opened five regional offices. While
most of the Company's new sales professionals have significant industry
experience, a majority of the Company's revenues are currently derived from
sales professionals who have been employed by the Company for more than twelve
months. The Company believes that even experienced sales representatives
require at least six to twelve months after joining the Company to begin
generating substantial orders and that the Company therefore has a significant
opportunity to realize future growth as the recent additions to its sales
force become more productive.
The Company's sales professionals consist of sales representatives and sales
support specialists. The sales representatives are responsible for prospecting
new business, maintaining and expanding relationships with current customers,
while the sales support specialists ensure customer satisfaction, process
particular orders and provide administrative support for the day-to-day
management of the account. Sales representatives work in conjunction with
personnel from technical services, rental and leasing to market the Company's
Full Cycle solution to customers. Sales representatives are equipped with a
complete suite of marketing and account management tools which provide
information across multiple departments. In particular, sales representatives
can obtain current availability and market prices for assessing trade-ins and
use of used equipment from the Company's trading desk. The Company also
requires sales representatives to attend product and systems educational
training, as well as frequent seminars on increasing productivity. All junior
sales representatives are assigned a senior sales representative who acts a
mentor for further training and development.
DIRECT MARKETING
The Company recently launched a limited direct marketing effort, releasing
its first full-length catalog in November 1996. The catalog targets large and
medium sized businesses as well as the growing population of home office
users. The Company intends to expand this business slowly and does not
currently expect the catalog to account for a significant portion of its
business in the near future. However, the Company believes that its direct
marketing efforts will generate additional revenues and support the Company's
core reseller operations by generating additional sales leads. The catalog
builds on the Company's strengths in sourcing new and used products at the
lowest available price, fulfilling orders and servicing customers. The direct
marketing effort also utilizes the Company's existing operational and
distribution facilities. Although the Company must make significant
commitments for advertising in connection with its direct marketing efforts
certain manufacturers offer joint marketing programs which may reimburse the
Company for a portion of these costs. See "Risk Factors--Direct Marketing
Effort."
MANAGEMENT INFORMATION SYSTEM
The Company believes that its ability to provide its Full Cycle solution and
meet the needs of its diverse customers is enhanced by its management
information system. The Company's management information system is fully
integrated, combining accounting, purchasing, inventory control, sales order
processing and service work-order management. The management information
system is a real-time, on-line system which allows for remote access of
customer and product information. The Company upgraded its rental information
system in 1996 to provide for the specific needs of its growing rental
business. While the Company believes its management information system is
adequate for its current needs, the Company
31
<PAGE>
is currently in the process of implementing a major upgrade in its management
information system to support its growth objectives. In addition to upgrading
existing features, the new system will add (i) real-time links to supplier
inventory information, (ii) trading partner Electronic Data Interchange
("EDI"), (iii) customer access to order entry and (iv) sophisticated computer
telephone integration that will automatically route calls and update the
customer database. The new management information system enhancements are
expected to improve employee efficiency and increase the level of customer
service which the Company can provide. The Company continually evaluates the
need to refine and modify its management information system as the Company
grows and the needs of its business change. See "Risk Factors--Management
Information System Upgrade."
FULFILLMENT
The Company seeks to provide superior execution and service to its
customers, including rapid response to customer calls, quick access to
relevant product information, high order fill rates and on-time, accurate
shipments. Orders from existing customers are generally received by telephone
by the assigned sales support specialist. The sales support specialist assists
the customer with product lookups, inventory availability, price inquiries and
status of previous orders. As an order is entered, key information, such as
product description, price, availability and adjusted gross margin, is
provided by the system.
The Company's objective is to ship substantially all orders received by 5:00
p.m. the same day. When an order is released, it is immediately available for
processing at the Company's distribution center. The Company relies on a bar-
code-reading system and automated conveyor system for picking, packing and
shipping products accurately and cost-effectively. To monitor product
inventory, the purchasing staff uses system inventory reports, which provide
product inventory levels, six months' sales history, month-to-date and year-
to-date sales statistics by SKU number. Buyers analyze current and future
inventory positions and profitability potential, particularly with respect to
used equipment. The Company's trading group also continually monitors special
sourcing and sales opportunities for new and used equipment.
PROPERTIES
The Company leases a 100,000 square foot distribution center in Des Plaines,
Illinois, a suburb of Chicago approximately five miles from O'Hare
International airport and approximately fifteen miles from the Company's
executive offices. The distribution center supports all of the Company's
businesses, including sales, leasing, rental and services. The facility has
two dedicated configuration labs which currently can accommodate the
configuration of more than 3,000 computer systems in an eight hour shift. One
of the configuration labs, which was recently completed, is expected to be
dedicated to high volume orders and the assembly of new IBM desktop systems
under IBM's Authorized Assembly Program. The distribution center has recently
become ISO 9002 certified and is automated to enable same day processing of
orders.
The Company's sales operations are conducted from its executive offices in
Inverness, Illinois and through several regional sales offices. The Company's
leased facilities include the following:
<TABLE>
<CAPTION>
LOCATION PRINCIPAL USE
-------- -------------
<S> <C>
Inverness, IL Executive offices
Plantation, FL Sales office
Atlanta, GA Sales office
Indianapolis, IN Hardware service
Baltimore, MD Sales office
Rockville, MD Sales office
Walpole, MA Sales office
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
LOCATION PRINCIPAL USE
-------- -------------
<S> <C>
Apple Valley, MN Sales office
St. Louis, MO Sales office
Omaha, NE Hardware service
Houston, TX Sales office
Irving, TX Sales office
</TABLE>
These facilities are leased under various terms. The Company does not
anticipate any material difficulty in renewing any of its leases as they
expire or securing replacement facilities, in each case on commercially
reasonable terms. See "Certain Transactions--Executive Office Lease."
COMPETITION
The microcomputer market is highly competitive. The Company believes that
its ability to compete successfully depends on a number of factors, including
pricing, breadth of product and service offerings, sales and marketing
efforts, quality and reliability of services, speed of delivery and other
support capabilities. In particular, the microcomputer market is characterized
by intense price competition, particularly price competition with respect to
customers with volume buying power. In order to attract and retain many of its
larger customers, the Company frequently must agree to volume discounts and
maximum allowable mark-ups which limit margins on sales to such customers.
The Company competes directly with local, regional and national wholesalers,
resellers and mail order providers of microcomputer products and services,
including network integrators, and corporate divisions of superstores. Many of
the Company's competitors are significantly larger and have substantially
greater financial, marketing and other resources than the Company. As a
result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, benefit from greater
purchasing economies, offer more aggressive hardware and service pricing to
their customers, or devote greater resources to the promotion of their
products and services. In addition, the computer industry has recently
experienced a significant amount of consolidation through mergers and
acquisitions. In the future, the Company may face further competition from new
market entrants, possible alliances between existing competitors and expanded
service offerings from manufacturers. For example, certain computer
superstores have expanded their marketing efforts to target segments of the
Company's customer base. In addition, from time to time, certain manufacturers
have instituted programs for the direct sale of large orders of hardware and
software to certain major corporate accounts. These types of programs may
continue to be developed and used by various manufacturers. See "Risk
Factors--Competition."
EMPLOYEES
As of December 31, 1996, the Company had 273 full-time employees consisting
of the following: 46 service and technical personnel, 100 direct sales and
sales support personnel; 36 management personnel; and 91 administrative and
distribution personnel. The Company has no collective bargaining agreements
and believes its relations with its employees are good.
PATENTS AND TRADEMARKS
The Company owns no trademarks or patents; however, the Company's various
reseller agreements permit the Company to refer to itself as an "authorized
dealer" of the products of those manufacturers and to use their trademarks and
tradenames for marketing purposes.
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings that are incidental to
the conduct of its business. These proceedings are not, in the opinion of
management, material.
33
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Anthony R. Graffia........... 48 Chairman and Chief Executive Officer; Director
Anthony R. Graffia II........ 26 President; Director
Robert L. Zirk............... 42 Chief Financial Officer; Director
Steven J. Harmantas.......... 42 Vice President--Operations
Andrea L. Landwer............ 25 Vice President; Co-Director of Dealer Sales
John D. Marks................ 37 Vice President--Purchasing
Paul A. Skordilis............ 30 Vice President--Corporate Sales
Aladar F. Siles.............. 54 General Counsel
Timothy J. Colby............. 32 Director of Direct Marketing
Jaynie L. Falduto............ 33 Co-Director of Dealer Sales
Timothy M. Nieder............ 33 Co-Director of Leasing
Rosanna Pellegrino........... 32 Director of Services
Douglas M. Steen............. 36 Co-Director of Leasing
Dennis W. Ventler............ 57 Director of Rentals
</TABLE>
Mr. Graffia co-founded the Company in July 1978, and served as Chairman and
Executive Vice President from 1978 until early 1986 when he assumed the role
of President. In January 1997, Mr. Graffia became Chief Executive Officer of
the Company. From 1973 to 1978, Mr. Graffia was Treasurer of Mutual Leasing
Associates, Inc., a Chicago-based regional leasing company. Prior to 1973, he
was a staff auditor with Grant Thornton (f/k/a Alexander Grant & Co.). Mr.
Graffia is a Certified Public Accountant.
Mr. Graffia II has served as President and a director of the Company since
January 1997. From May 1990 through January 1997, Mr. Graffia served as Vice
President of the Company. During his employment with the Company, Mr. Graffia
has been responsible for developing the Company's microcomputer business,
initially building its trading operations and overseeing the early development
of its rental operations and its technical services business. Mr. Graffia
currently oversees substantially all of the operations of the Company.
Mr. Zirk has served as Chief Financial Officer of the Company since October
1988 and as a director of the Company since January 1997. From March 1987
through October 1988, Mr. Zirk served as Autoelectric Group Controller of
Kearney National Corporation, a diversified manufacturer. Mr. Zirk is a
Certified Public Accountant and previously was an auditor for KPMG Peat
Marwick LLP.
Mr. Harmantas has served as Vice President--Operations of the Company since
December 1996. From January 1996 through December 1996, Mr. Harmantas served
as Director of Operations of the Company. From October 1994 through January
1996, Mr. Harmantas served as Director of Operations of Educational Resources,
Inc., a distributor of educational software. From April 1994 through October
1994, Mr. Harmantas served as Distribution Center Manager for Colonial
Healthcare Supply Company, a healthcare products distributor. From August 1991
through April 1994, Mr. Harmantas served as Operations Manager of CDW Computer
Centers, Inc. ("CDW"), a retail and corporate microcomputer reseller.
Ms. Landwer has served as Vice President and Co-Director of Dealer Sales of
the Company since June 1996. Ms. Landwer joined the Company in the purchasing
area in December 1993. Ms. Landwer founded
34
<PAGE>
the Company's dealer division, which subsequently merged with its trading
division. Ms. Landwer currently co-manages the combined division and is
responsible for inventory management. Prior to her employment by the Company,
Ms. Landwer attended college at Indiana University, graduating in March 1994.
Mr. Marks has served as Vice President--Purchasing of the Company since
December 1996. From March 1995 through December 1996, Mr. Marks served as
Director of Purchasing of the Company. From 1993 through March 1995, Mr. Marks
was Director of Corporate Accounts of Elek-Tek, Inc., a retail and corporate
computer reseller. From 1992 to 1993, he served as President of GEM Specialty
Companies, Inc., a specialty food distributor, and during 1991 was a founder
of King Seafood Enterprises, an international food distributor. Prior thereto,
Mr. Marks was an executive officer and director of CDW.
Mr. Skordilis has served as Vice President--Corporate Sales since December
1996. From July 1995 through December 1996, Mr. Skordilis served first as
Sales Manager and then as Director of Sales of the Company. Prior to joining
the Company, Mr. Skordilis held various positions with Elek-Tek, Inc.,
including Branch Manager and Corporate Sales Manager.
Mr. Siles has served as General Counsel of the Company since March 1996. Mr.
Siles has practiced law in the State of Illinois since 1969. From 1981 through
1996, Mr. Siles practiced as a sole practitioner and from 1974 through 1980,
he practiced with the firm of Frankle McKay & Orlikoff. From 1969 through
1974, Mr. Siles served as Assistant State's Attorney in Cook County, Illinois.
Mr. Colby has served as Director of Direct Marketing of the Company since
June 1996. From May 1994 through May 1996, Mr. Colby managed the Midwest and
Texas territories for PC Magazine, a Ziff Davis/Softbank publication. From
January 1993 through May 1994, Mr. Colby served as the National Sales Manager
of Compaq DirectPlus, the direct sales unit of Compaq. Prior thereto, Mr.
Colby held various positions with Zenith Data Systems Corporation, a
microcomputer product manufacturer, including District Sales Manager and
National Sales Manager.
Ms. Falduto has served as Co-Director of Dealer Sales of the Company since
June 1996. From August 1994 through June 1996, Ms. Falduto served as Manager
of Dealer Sales. Prior to joining the Company, Ms. Falduto served as a Product
Specialist for Comdisco, Inc., a computer leasing services company.
Mr. Nieder has served as Co-Director of Leasing of the Company since January
1996. From June 1994 through January 1996, Mr. Nieder served as Regional Vice
President of LCA Leasing, Inc., a general business equipment lessor, and from
1985 through June 1994, he served as Regional Sales Manager of Textron
Financial Corporation, a general equipment lessor and a division of Textron
Inc.
Ms. Pellegrino has served as Director of Services of the Company since
November 1996. From July 1994 through February 1996, Ms. Pellegrino served as
Practice Director of Professional Services of The Future Now Inc., a
microcomputer reseller. From March 1992 through July 1994, she served as
Manager of Desktop Implementation of Safety-Kleen, Inc., a manufacturer of
solvents and cleaners, and prior thereto, she served as MIS Manager of AGI
Incorporated, a commercial printer.
Mr. Steen has served as Co-Director of Leasing of the Company since May
1996. Prior thereto, Mr. Steen served as Vice President--Leasing Products
Division at Comdisco, Inc., where his responsibilities included worldwide
management of Comdisco's $1 billion capital equipment portfolio and its Vendor
Lease Division.
Mr. Ventler has served as Director of Rentals of the Company since September
1992. From September 1991 through September 1992, Mr. Ventler served as Sales
Manager of Computer Rental Corporation of America, and prior thereto he served
as Central Regional Sales Manager of Data Preference Inc., a personal computer
rental business.
Mr. Graffia II and Ms. Landwer are brother and sister and are the children
of Mr. Graffia.
35
<PAGE>
TERM OF OFFICE
The Company's officers are appointed annually by, and serve at the
discretion of, the Board of Directors. The Board of Directors currently
consists of three members. The Company expects to expand the Board of
Directors by adding three independent directors following the consummation of
this offering.
COMMITTEES OF THE BOARD OF DIRECTORS
Executive Compensation Committee. Following the consummation of this
offering, the Board of Directors will form the Executive Compensation
Committee, a majority of the members of which will be non-employee directors.
The Executive Compensation Committee will make recommendations to the full
Board of Directors concerning compensation and benefits for executive officers
of the Company.
Audit Committee. Following the consummation of this offering, the Board of
Directors will form the Audit Committee, a majority of the members of which
will be non-employee directors. The Audit Committee, among other things, will
make recommendations concerning the engagement of independent auditors, review
the results and scope of the annual audit and other services provided by the
Company's independent auditors, and review the adequacy of the Company's
internal accounting controls.
Stock Option Committee. Following the consummation of this offering, the
Board of Directors will form the Stock Option Committee, a majority of the
members of which will be non-employee directors. The Stock Option Committee
will administer the Long-Term Incentive Plan.
DIRECTOR COMPENSATION
Directors who are not executive officers of the Company will be paid a fee
of $1,000 for each board meeting attended in person, and all directors will be
reimbursed for travel expenses incurred in connection with attending board and
committee meetings. Directors are not entitled to additional fees for serving
on committees of the Board of Directors. Pursuant to the terms of the formula
program of the Company's Long-Term Incentive Plan, each director of the
Company appointed after the completion of this offering who is not otherwise
employed by the Company automatically will be granted an option to purchase
3,000 shares of Common Stock upon his or her initial election or re-election
to the Board of Directors. The options will have an exercise price equal to
the fair market value of the Common Stock on the date of grant, and will be
exercisable in equal annual installments over the term to be served beginning
on the first anniversary of the date of grant.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
information regarding the Company's Chief Executive Officer and the other
executive officer who received in excess of $100,000 in compensation during
Fiscal 1996 (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- --------------------------- -------- ---------- ------------
<S> <C> <C> <C>
Anthony R. Graffia(1)......................... $366,666 $ -- $45,582(2)
Chairman and Chief Executive Officer
Anthony R. Graffia II(1)...................... 427,983 2,000,000 --
President
</TABLE>
- --------
(1) The Company has entered into agreements, effective as of the closing of
this offering through December 31, 1998, with Messrs. Graffia and Graffia
II, which provide these two executives with annual base compensation in
the aggregate of $850,000 and annual bonus compensation up to an aggregate
of $850,000.
(2) Includes $15,050 of premiums paid under a split dollar life insurance
policy and $22,274 of automobile related expenses.
36
<PAGE>
LONG-TERM INCENTIVE PLAN
The Company has adopted the Hartford Computer Group, Inc. Long-Term
Incentive Plan (the "Long-Term Incentive Plan"). The Long-Term Incentive Plan
is designed to enhance the long-term profitability and stockholder value of
the Company by offering Common Stock, Common Stock-based and other performance
incentives to those individuals who are key to the growth and success of the
Company, to attract and retain employees with experience and ability on a
basis competitive with industry practice and to encourage employees to acquire
and maintain stock ownership in the Company.
The Long-Term Incentive Plan is administered by the Stock Option Committee,
which, except for the formula program (the "Formula Program") noted below for
non-employee directors, has exclusive authority to grant awards under the
Long-Term Incentive Plan and to make all interpretations and determinations
affecting the Long-Term Incentive Plan. The Stock Option Committee has the
discretion to determine the individuals to whom Awards (as defined below) are
granted, the amount of such Award, any applicable vesting schedule and other
terms of any Award.
Participation in the Long-Term Incentive Plan is limited to employees,
consultants, advisors and independent contractors of the Company who are
selected from time to time by the Stock Option Committee. In addition, non-
employee directors automatically participate in the Formula Program. Awards
under the Long-Term Incentive Plan may be in the form of stock options
(including both incentive stock options that meet the requirements of Section
422 of the Internal Revenue Code and nonqualified stock options), stock
awards, restricted stock grants, stock appreciation rights ("SARs") and
performance awards (collectively, "Awards"). Any Award issued under the Long-
Term Incentive Plan that is forfeited, expired, canceled or terminated prior
to vesting or exercise will again become available for grant under the Long-
Term Incentive Plan.
The Long-Term Incentive Plan also includes the Formula Program. The Formula
Program provides for the automatic grant of options to purchase shares of
Common Stock to nonemployee directors of the Company. Pursuant to the terms of
the Formula Program, each director of the Company who is not otherwise
employed by the Company automatically will be granted an option to purchase
3,000 shares of Common Stock upon his or her initial election to the Board of
Directors and 3,000 shares upon his or her reelection to the Board of
Directors. The option will vest in three annual installments of 1,000 shares
each, with the first such installment to vest on the first anniversary of the
option grant date.
The maximum number of shares of Common Stock authorized to be issued and
sold under the Long-Term Incentive Plan is 1,000,000 shares, of which 595,500
have been granted at a weighted average exercise price of $12.00 per share. In
the event of any stock dividend, stock split, recapitalization, merger, other
change in the capitalization of the Company or similar corporate transaction
or event affecting the Common Stock the Stock Option Committee may make
appropriate adjustments to the Awards. Alternatively, the Company may
accelerate the timing of the exercise of any Awards or cancel any Award and
provide instead for the payment to the participant of cash in an amount equal
to the economic value of the Award at the time of cancellation.
CERTAIN TRANSACTIONS
Executive Office Lease. The Company's facility in Inverness, Illinois is
leased to the Company by a trust, the beneficiary of which is Inverness
Investments, a partnership controlled by Messrs. Graffia and Graffia II and
Ms. Landwer. The leases for various portions of the facility commenced
September 1994 and October 1985 and expire on September 30, 1999. The facility
consists of an aggregate of approximately 16,000 square feet, and the monthly
payments under the lease, which include rent and certain utilities, taxes and
other charges, currently aggregate approximately $40,000, subject to
adjustments based on increases in the Consumer Price Index, taxes and certain
other items. The Company believes that the terms of this lease are no less
favorable to the Company than could have been obtained from unaffiliated
parties at the time of execution.
37
<PAGE>
Boat Charter. Prior to consummation of this offering, the Company chartered
a boat from a partnership which is an affiliate of Messrs. Graffia and Graffia
II and Ms. Landwer. The charter, which provided for monthly rent of
approximately $16,000, will be terminated effective immediately upon
consummation of this offering. The Company may in the future, on an event by
event basis, charter the boat upon terms no less favorable than could be
obtained from unaffiliated parties.
Employment Relationships. Anthony R. Graffia's daughter and son-in-law,
Andrea L. Landwer and Mark A.B. Landwer, are employed by the Company on a
full-time basis. Their combined salaries and bonuses for Fiscal 1996
aggregated $1.8 million. Ms. Landwer and Mr. Landwer have entered into
compensation agreements with the Company, effective as of the closing of this
offering through December 31, 1997, which provide them with annual salary in
the aggregate amount of $500,000 and annual bonus compensation up to an
additional $250,000.
Certain Legal Proceedings. In early 1994, North Shore Computers, Inc., an
affiliate of the Company ("North Shore"), acquired all of the assets of a
computer distributor based in Milwaukee, Wisconsin for approximately $400,000
and a contingent payment and an earn-out amount capped at an aggregate of
$400,000. The business conducted by North Shore thereafter rapidly declined,
and on May 27, 1994, an involuntary bankruptcy petition was filed in the U.S.
Bankruptcy Court, Eastern District of Wisconsin by three unsecured creditors
of North Shore. A trustee was thereafter appointed to supervise the affairs of
North Shore. In December 1995, the trustee filed suit against the Company in
the bankruptcy court to recover (i) certain amounts alleged to constitute
preferential payments and other improper transfers to the Company by North
Shore in the amount of approximately $1.0 million and (ii) $2.5 million for
the alleged fraudulent transfer of the assets of North Shore to the Company.
In February 1996, the trustee filed suit against Anthony R. Graffia, the sole
director of North Shore, alleging breaches of fiduciary duty by Mr. Graffia
and violations of 18 U.S.C. (S)(S) 1961-1968 and seeking damages totaling $5.0
million plus attorneys' fees. In January 1997, the Company paid $450,000 in
settlement of all claims against it and Mr. Graffia. The Company had
previously fully reserved for this settlement amount and related costs and
expenses. The Company expects to receive approximately $100,000 from the
bankruptcy estate in connection with its unsecured claims against North Shore.
In 1990, the Minnesota Commission of Commerce, acting as receiver of
Diversified Insurers Company ("Diversified"), filed a civil suit alleging
violations of 18 U.S.C. (S)(S) 1961-1968 against numerous defendants,
including, among others, the Company, Anthony R. Graffia, Paul W. Graffia (a
former employee of an affiliate of the Company and the brother of Anthony R.
Graffia) and HCG Financial Services, Inc. (a former affiliate of the Company
("HCG")). The complaint alleged that the defendants acted together in a scheme
to artificially inflate the capital of Diversified. The complaint against the
Company, Anthony R. Graffia, Paul W. Graffia and HCG was based primarily on
the actions of Paul W. Graffia, who was discharged from any position of
responsibility with the Company and its affiliate soon after the complaint was
filed. The suit sought more than $8.8 million in damages from the defendants.
The Company, Anthony R. Graffia, Paul W. Graffia and HCG settled all claims
against them in August 1993 for a total payment of $115,000.
Certain Advances. As of December 31, 1996, there were outstanding advances
payable by the Company to Mr. Graffia II and Ms. Landwer in the amount of
$314,000 and $96,000, respectively. As of December 31, 1996, there were
outstanding advances payable by Mr. Graffia to the Company in the amount of
$304,000. All of these advances will be repaid prior to consummation of this
offering.
38
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of January 28, 1997, and as adjusted to reflect
the sale of the shares offered hereby, by: (i) each stockholder of the
Company, including the Selling Stockholder, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers, and (iv) all directors
and executive officers of the Company as a group. Unless otherwise indicated
in the footnotes to the table set forth below, each person or entity named
below has an address in care of the Company's principal executive offices. The
Company believes that each person or entity named below has sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by such holder, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED
TO OFFERING NUMBER OF AFTER OFFERING
----------------------- SHARES BEING -----------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED(1) NUMBER PERCENT
---------------- ------------ ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Anthony R. Graffia...... 8,387,660 85.7% 875,000 7,512,660 60.6%
Anthony R. Graffia II... 953,882 9.8 -- 953,882 7.7
Andrea L. Landwer....... 438,646 4.5 -- 438,646 3.5
Robert L. Zirk (2)...... -- -- -- -- --
All directors and execu-
tive officers as a
group (3 persons)...... 9,341,542 95.5% 875,000 8,466,542 68.3%
</TABLE>
- --------
(1) Excludes 131,250 shares which are subject to the Underwriters' over-
allotment option.
(2) Does not include 45,000 shares issuable upon exercise of options, none of
which is exerciseable within 60 days of the date hereof.
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, par value $0.01 per share, and 1,000,000 shares of Preferred
Stock, par value $0.01 per share (the "Preferred Stock"). Prior to the
consummation of this offering, the Company will have 9,780,188 shares of
Common Stock outstanding and no shares of Preferred Stock outstanding. Upon
completion of this offering, the Company will have 12,405,188 shares of Common
Stock outstanding. As of January 28, 1997, there were three record holders of
Common Stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share for the election
of directors and all other matters submitted for stockholder vote, except
matters submitted to the vote of another class or series of shares. Holders of
Common Stock are not entitled to cumulative voting rights. Therefore, the
holders of a majority of the shares voting for the election of directors can
elect all of the directors if they choose to do so. The holders of Common
Stock are entitled to dividends in such amounts and at such times, if any, as
may be declared by the Board of Directors out of funds legally available
therefor. The Company has not paid any dividends on its Common Stock, other
than dividends paid in connection with the Company's S corporation status, is
currently prohibited from paying cash dividends on its Common Stock pursuant
to the terms of its Line of Credit and does not anticipate paying any cash
dividends on such stock in the foreseeable future. See "S Corporation
Dividend" and "Dividend Policy." Upon liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to share ratably in
all net assets available for distribution to stockholders after payments to
creditors. The Common Stock is not redeemable and has no preemptive or
conversion rights.
The rights of the holders of Common Stock are subject to the rights of the
holders of any Preferred Stock which may, in the future, be issued. All
outstanding shares of Common Stock are, and the shares of Common Stock to be
sold by the Company in this offering when issued will be, duly authorized,
validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the Preferred Stock in one
or more series and to fix the price, rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the
stockholders. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders and may adversely affect the voting and other
rights of the holders of Common Stock. The issuance of Preferred Stock with
voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE ILLINOIS BUSINESS CORPORATION ACT
Following this offering, the Company will be subject to Section 7.85 of the
Business Corporation Act of Illinois ("Section 7.85"). Section 7.85 prohibits
a publicly-held Illinois corporation from engaging in a "business combination"
with an "interested stockholder," unless the proposed "business combination"
receives (i) the affirmative vote of the holders of at least 80% of the
combined voting power of the then outstanding shares of all classes and series
of the corporation entitled to vote generally in the election of directors
(the "Voting Shares"), voting together as a single class and (ii) the
affirmative vote of a majority of the combined voting power of the then
outstanding Voting Shares held by disinterested stockholders voting together
as a single class. For purposes of Section 7.85 and Section 11.75 described
below, a
40
<PAGE>
"business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder and, for
purposes of Section 7.85, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or, within the prior two years,
did own) directly or indirectly 10% or more of the combined voting power of
the outstanding Voting Shares.
Further, the Company is also subject to Section 11.75 of the Business
Corporation Act of Illinois ("Section 11.75") which prohibits "business
combinations" with "interested stockholders" for a period of three years
following the date that such stockholder became an "interested stockholder,"
unless (i) prior to such date, the Board of Directors approved the "business
combination" or the transaction which resulted in the stockholder becoming an
"interested stockholder," or (ii) upon consummation of such transaction, the
"interested stockholder" owned at least 85% of the Voting Shares outstanding
at the time such transaction commenced (excluding shares owned by directors
who are also officers and shares reserved under an employee stock plan), or
(iii) on or after such date, the "business combination" is approved by the
Board of Directors and authorized at an annual or special meeting of the
stockholders (and not by written consent) by at least 66 2/3% of the
outstanding Voting Shares not owned by the "interested stockholder." For
purposes of Section 11.75, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or, within the prior three
years, did own) 15% of the Voting Shares.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitation of Liability. As permitted by the Illinois Business Corporation
Act, the Company's Articles of Incorporation provide that directors shall not
be personally liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 8.65 of the
Illinois Business Corporation Act or (iv) for any transaction from which the
director derives an improper personal benefit. In addition, the Company's
Amended and Restated By-laws (the "By-laws") provide that the Company shall,
to the fullest extent authorized by the Illinois Business Corporation Act, as
amended from time to time, indemnify all directors and officers and may, at
the election of the Company as determined by the Board of Directors, indemnify
all other persons serving at the request of the Company as a director,
officers, employee or agent of another corporation or of a partnership, trust
or other enterprise.
Indemnification. The Company's Articles of Incorporation provide that
directors and officers shall be indemnified by the Company to the fullest
extent authorized by Illinois law, as it now exists or may in the future be
amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company. The Articles of
Incorporation also authorize the Company to enter into one or more agreements
with any person that provide for indemnification greater or different from
that provided in the Articles of Incorporation. The Company has entered into
indemnification agreements with all current members of the Board of Directors
and executive officers. The Company believes that these provisions and
agreements are desirable to attract and retain qualified directors and
officers. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
41
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 12,405,188 shares of
Common Stock outstanding. Of these shares, the 3,500,000 shares sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act, except that any shares purchased by "affiliates" of
the Company, as that term is defined under the Securities Act ("Affiliates"),
may generally only be sold in compliance with the limitations of Rule 144
described below.
The remaining 8,905,188 shares of Common Stock are deemed "Restricted
Shares" under Rule 144. The number of shares of Common Stock available for
sale in the public market is limited by restrictions under the Securities Act
and lock-up agreements under which the holders of such shares have agreed not
to sell or otherwise dispose of any of their shares for a period of 180 days
after the effective date of this offering (the "Lock-Up Period") without the
prior written consent of Alex. Brown & Sons Incorporated. Alex. Brown & Sons
Incorporated, in its discretion, may waive the foregoing restriction in whole
or in part, with or without a public announcement of such action. Because of
these restrictions, on the date of this Prospectus, no shares other than the
3,500,000 shares offered hereby will be eligible for sale. Beginning after the
expiration of the Lock-Up Period (or earlier with the written consent of Alex.
Brown & Sons Incorporated) all 8,905,188 Restricted Shares will become
available for sale in the public market, subject to Rule 144 and Rule 701 of
the Securities Act.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person (or persons whose shares are
aggregated) who has beneficially owned "restricted" shares for at least two
years, including a person who may be deemed an Affiliate of the Company, is
entitled to sell within any three-month period a number of shares of Common
Stock that does not exceed the greater of 1% of the then-outstanding shares of
Common Stock of the Company (approximately 124,000 shares after giving effect
to this offering) or the average weekly trading volume of the Common Stock as
reported through the Nasdaq National Market during the four calendar weeks
preceding such sale. Sales under Rule 144 of the Securities Act are subject to
certain restrictions relating to manner of sale, notice and the availability
of current public information about the Company. In addition, under Rule
144(k) of the Securities Act, a person who is not an Affiliate of the Company
at any time during at least 90 days preceding a sale, and who has beneficially
owned shares for at least three years, would be entitled to sell such shares
immediately following this offering without regard to the volume limitations,
manner of sale provisions or notice or other requirements of Rule 144 of the
Securities Act.
Rule 701 under the Securities Act provides that shares of Common Stock
acquired on the exercise of outstanding options may be resold by persons other
than Affiliates, beginning 90 days after the date of this Prospectus, subject
only to the manner of sale provisions of Rule 144, and by Affiliates,
beginning 90 days after the date of this Prospectus, subject to all provisions
of Rule 144 except its two-year minimum holding period. The Company intends to
register on a registration statement on Form S-8, within 90 days of the
effective date of this offering, all 1,000,000 shares of Common Stock reserved
for issuance under the Long-Term Incentive Plan.
42
<PAGE>
UNDERWRITING
Subject to certain terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, Robertson, Stephens & Company LLC and Piper
Jaffray Inc., have severally agreed to purchase from the Company and the
Selling Stockholder the following respective number of shares of Common Stock
at the initial public offering price per share less the underwriting discounts
and commissions set forth on the cover of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Alex. Brown & Sons Incorporated......................................
Robertson, Stephens & Company LLC....................................
Piper Jaffray Inc....................................................
---------
Total................................................................ 3,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to approval of certain conditions precedent and that
the Underwriters will purchase all shares of Common Stock offered hereby if
any of such shares are purchased.
The Company and the Selling Stockholder have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
Shares to the public at the public offering price set forth on the cover page
of this Prospectus and to certain dealers at such price less a concession not
in excess of $ per share. The Underwriters may allow, and such dealers may
re-allow, a concession not in excess of $ per share to certain other
dealers. After the public offering, the offering price and other selling terms
may be changed by the Representatives of the Underwriters.
The Company and the Selling Stockholder have granted to the Underwriters an
option, exercisable not later than 30 days after the date of this Prospectus,
to purchase up to 525,000 additional shares at the offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. Up to 393,750 of the shares covered by such option will be made
available by the Company, and up to an additional 131,250 shares will be made
available by the Selling Stockholder. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares
to be purchased by it shown in the above table bears to 3,500,000 and the
Company and the Selling Stockholder will be obligated, pursuant to the option,
to sell such shares to the Underwriters. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of the
shares offered hereby. If purchased, the Underwriters will sell such
additional shares on the same terms as those on which the 3,500,000 shares are
being offered.
43
<PAGE>
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under
the Securities Act.
The Company and each of its stockholders (holding, in the aggregate,
8,905,188 shares of Common Stock upon consummation of this offering) have
agreed not to offer, sell, contract to sell or otherwise dispose of, directly
or indirectly, any shares of Common Stock, or any securities convertible into
or exchangeable or exerciseable for shares of Common Stock, for a period of
180 days after the date of this Prospectus without the prior written consent
of Alex. Brown & Sons Incorporated, except that the Company may issue and
grant options to purchase shares of Common Stock under the Long-Term Incentive
Plan, and individual stockholders may dispose of shares of Common Stock under
certain circumstances, provided that the transferee agrees to be bound by the
terms of such agreement. See "Shares Eligible for Future Sale."
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiation among the Company and the
Representatives of the Underwriters. Among the factors to be considered in
such negotiations will be prevailing market conditions, the results of
operations of the Company in recent periods, the market capitalizations and
stages of development of other companies which the Company and the
Representatives of the Underwriters believed to be comparable to the Company,
estimates of the business potential of the Company, the present state of the
Company's development and other factors deemed relevant. See "Risk Factors--No
Prior Public Market; Possible Volatility of Stock Price."
The Underwriters have reserved for sale, at the initial public offering
price, up to % of the shares of Common Stock offered hereby for certain
employees, customers and vendors of the Company, and certain other individuals
and entities, who have expressed an interest in purchasing such shares of
Common Stock in this offering. The number of shares available for sale to the
general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same basis as other shares offered
hereby.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Sachnoff & Weaver, Ltd., Chicago, Illinois. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Winston & Strawn, Chicago, Illinois.
EXPERTS
The balance sheets as of January 31, 1996, and December 31, 1996, and the
statements of operations, stockholders' equity and cash flows for the years
ended January 31, 1995 and 1996, and for the eleven months ended December 31,
1996 included in this prospectus and elsewhere in the registration statement
have been audited by Arthur Anderson LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
44
<PAGE>
ADDITIONAL INFORMATION
The Company has filed through the Electronic Data Gathering, Analysis and
Retrieval System with the Commission in Washington, D.C. 20549, a Registration
Statement, of which this Prospectus constitutes a part, on Form S-1 under the
Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules to the Registration
Statement. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and the
exhibits and schedules filed as a part of the Registration Statement.
Statements contained in this Prospectus concerning the contents of any
contract or any other document referred to are not necessarily complete;
reference is made in each instance to the copy of such contract or document
filed as an exhibit to the Registration Statement. Each such statement is
qualified in all respects by such reference to such exhibit. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the Commission at 450
Fifth Street N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and Citicorp Center, 500 Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such materials may be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Registration Statement, including the exhibits and
schedules thereto, is also available at the Commission's site on the World
Wide Web at http//www.sec.gov.
45
<PAGE>
HARTFORD COMPUTER GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants (Arthur Andersen LLP)........... F-2
Balance Sheets as of January 31, 1996 (Fiscal 1995), and December 31,
1996 (Fiscal 1996)...................................................... F-3
Statements of Operations for the years ended January 31, 1995 (Fiscal
1994) and 1996 (Fiscal 1995), and for the eleven months ended December
31, 1996 (Fiscal 1996).................................................. F-5
Statements of Stockholders' Equity for the years ended January 31, 1995
(Fiscal 1994) and 1996 (Fiscal 1995), and for the eleven months ended
December 31, 1996 (Fiscal 1996)......................................... F-6
Statements of Cash Flows for the years ended January 31, 1995 (Fiscal
1994) and 1996 (Fiscal 1995), and for the eleven months ended December
31, 1996 (Fiscal 1996).................................................. F-7
Notes to Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Hartford Computer Group, Inc.:
We have audited the accompanying balance sheets of HARTFORD COMPUTER GROUP,
INC. (an Illinois corporation) as of January 31, 1996, and December 31, 1996,
and the related statements of operations, stockholders' equity and cash flows
for the years ended January 31, 1995 (fiscal 1994) and 1996 (fiscal 1995), and
the eleven months ended December 31, 1996 (fiscal 1996). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hartford Computer Group, Inc.
as of January 31, 1996, and December 31, 1996, and the results of its
operations and its cash flows for the years ended January 31, 1995 and 1996,
and the eleven months ended December 31, 1996, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois,
January 29, 1997
F-2
<PAGE>
HARTFORD COMPUTER GROUP, INC.
BALANCE SHEETS
AS OF JANUARY 31, 1996 (FISCAL 1995), AND DECEMBER 31, 1996 (FISCAL 1996)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1995 1996
------ ------- -------
<S> <C> <C>
Current Assets
Cash and cash equivalents.................................... $ 883 $ 3,346
Accounts receivable--
Trade, net of allowance for doubtful accounts of $589 and
$706,
respectively.............................................. 21,813 32,756
Stock subscription receivable.............................. 750 --
Inventory.................................................... 16,624 32,228
Net investment in sales-type leases--current portion......... 1,426 1,843
Advances to stockholders..................................... 1,461 304
Refundable income taxes...................................... 711 711
Prepaid expenses and deposits................................ 658 321
------- -------
Total current assets..................................... 44,326 71,509
------- -------
Rental Equipment, at cost, net of accumulated depreciation of
$2,969 and $4,603, respectively............................... 5,854 4,515
------- -------
Property and Equipment, at cost, net of accumulated deprecia-
tion and amortization of $3,134 and $3,926, respectively...... 2,581 4,181
------- -------
Net Investment in Sales-Type Leases............................ 1,538 4,188
------- -------
Deferred Income Taxes.......................................... 580 --
------- -------
Other Assets................................................... 59 231
------- -------
$54,938 $84,624
======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE>
HARTFORD COMPUTER GROUP, INC.
BALANCE SHEETS
AS OF JANUARY 31, 1996 (FISCAL 1995), AND DECEMBER 31, 1996 (FISCAL 1996)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996 1996 1996
- -------------------------------------------- ------- ------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current Liabilities
Line of credit with vendor/customer....... $15,964 $ 1,937
Current portion of long-term liabilities--
Notes payable to bank................... 30 112
Capital lease obligation to affiliate... 180 202
Discounted lease rentals................ 1,384 3,655
Advances from stockholders................ 1,409 410
Trade accounts payable--
Interest bearing........................ 14,856 36,894
Non-interest bearing.................... 9,914 23,620
Accrued liabilities and other............. 2,660 6,119
Deferred income taxes..................... 83 --
------- -------
Total current liabilities............. 46,480 72,949
------- -------
Long-Term Liabilities
Notes payable to bank..................... 60 177
Capital lease obligation to affiliate..... 634 448
Discounted lease rentals.................. 1,259 2,087
------- -------
Total long-term liabilities........... 1,953 2,712
------- -------
Commitments and Contingent Liabilities
Stockholders' Equity
Preferred stock, $0.01 par value;
1,000,000 shares authorized, no shares
issued and outstanding................... -- --
Common stock, $0.01 par value; 20,000,000
shares authorized; 9,780,188 shares
issued and outstanding................... 98 98 3 101
Additional paid-in capital................ 2,842 2,842 4,997 7,839
Retained earnings......................... 3,565 6,023 (5,000) 1,023
------- ------- ------ -----
Total stockholders' equity............ 6,505 8,963 0 8,963
------- ------- ------ -----
$54,938 $84,624
======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-4
<PAGE>
HARTFORD COMPUTER GROUP, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 1995 (FISCAL 1994) AND 1996 (FISCAL 1995),
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1996 (FISCAL 1996)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- ----------
<S> <C> <C> <C>
Revenues
Equipment sales................................ $64,362 $128,111 $ 243,177
Technical services and equipment rentals....... 8,661 9,147 9,969
------- -------- ----------
Total revenues............................... 73,023 137,258 253,146
------- -------- ----------
Cost of Revenues
Equipment cost................................. 58,976 114,478 214,541
Technical services and depreciation on rental
equipment..................................... 3,945 5,329 6,455
------- -------- ----------
Total cost of revenues....................... 62,921 119,807 220,996
------- -------- ----------
Gross profit................................. 10,102 17,451 32,150
------- -------- ----------
Operating Expenses
Selling, general and administrative............ 8,510 14,195 22,835
Commissions.................................... 792 1,342 2,437
------- -------- ----------
Total operating expenses..................... 9,302 15,537 25,272
------- -------- ----------
Income from operations....................... 800 1,914 6,878
------- -------- ----------
Other Expenses
Interest expense............................... 1,004 2,483 3,284
Reserve for litigation settlement.............. 190 -- 525
------- -------- ----------
Total other expenses......................... 1,194 2,483 3,809
------- -------- ----------
Income (loss) before provision (benefit) for
income taxes................................ (394) (569) 3,069
Provision (Benefit) for Income Taxes............. (153) (221) 611
------- -------- ----------
Net Income (Loss)................................ $ (241) $ (348) $ 2,458
======= ======== ==========
Pro Forma Income Data (Unaudited)
Income before provision for income taxes, as
reported...................................... $ 3,069
Adjustment for employee compensation expense... 3,180
Adjustment for boat lease rentals paid to the
stockholders.................................. 174
Adjustment for automobile expenses of stock-
holders....................................... 45
----------
Pro forma income before pro forma provision for
income taxes.................................. 6,468
Pro forma provision for income taxes........... 2,546
----------
Pro forma net income........................... $ 3,922
----------
Pro forma net income per common share ......... $ 0.38
==========
Pro forma weighted average number of common
shares outstanding............................ 10,232,621
==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
HARTFORD COMPUTER GROUP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 1995 (FISCAL 1994) AND 1996 (FISCAL 1995),
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1996 (FISCAL 1996)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS EQUITY
--------- ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 31,
1994..................... 8,441,040 $85 $1,208 $4,154 $5,447
Net loss................ -- -- -- (241) (241)
--------- --- ------ ------ ------
Balance at January 31,
1995..................... 8,441,040 85 1,208 3,913 5,206
Stock issuance.......... 1,339,148 13 1,634 -- 1,647
Net loss................ -- -- -- (348) (348)
--------- --- ------ ------ ------
Balance at January 31,
1996 9,780,188 98 2,842 3,565 6,505
Net income.............. -- -- -- 2,458 2,458
--------- --- ------ ------ ------
Balance at December 31,
1996..................... 9,780,188 $98 $2,842 $6,023 $8,963
========= === ====== ====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
HARTFORD COMPUTER GROUP, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 1995 (FISCAL 1994) AND 1996 (FISCAL 1995),
AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1996 (FISCAL 1996)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss).............................. $ (241) $ (348) $ 2,458
Adjustments to reconcile net income (loss) to
net cash and cash equivalents provided by
(used in) operating activities--
Depreciation and amortization................ 2,176 2,467 3,430
Amortization of unearned income and deferred
finance charges ............................ (95) (83) (41)
Sales-type rentals received.................. 1,797 1,923 2,845
Deferred income taxes........................ (574) 490 497
Stock compensation expense................... -- 897 --
Changes in assets and liabilities--
Trade accounts receivable, net............. (4,499) (14,843) (10,943)
Inventory.................................. (15,387) 5,685 (15,604)
Refundable income taxes.................... -- (711) --
Prepaid expenses and deposits.............. 177 63 337
Trade accounts payable..................... 26,882 (5,399) 35,744
Accrued liabilities and other.............. (672) 138 3,459
-------- -------- --------
Net cash and cash equivalents provided by
(used in) operating activities.......... 9,564 (9,721) 22,182
-------- -------- --------
Cash Flows from Investing Activities:
Purchases of rental equipment, net............. (5,730) (5,711) (6,753)
Purchases of property and equipment, net....... (599) (1,460) (2,466)
Increase in other assets....................... -- -- (172)
-------- -------- --------
Net cash and cash equivalents used in
investing activities.................... (6,329) (7,171) (9,391)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from line of credit with
vendor/customer............................... 9,206 52,573 53,817
Repayments of line of credit with
vendor/customer............................... (11,039) (39,029) (67,844)
Proceeds from notes payable to bank............ 45 96 253
Repayments of notes payable to bank............ (18) (33) (54)
Payment of capital lease obligation to affili-
ate........................................... (53) (158) (164)
Proceeds from discounted lease rentals......... 1,374 2,144 5,355
Rentals paid by lessees to financing institu-
tions on discounted leases.................... (1,635) (1,259) (2,599)
Advances (to) from stockholders................ (311) 1,262 158
Proceeds from sales of stock................... -- -- 750
-------- -------- --------
Net cash and cash equivalents provided by
(used in) financing activities.......... (2,431) 15,596 (10,328)
-------- -------- --------
Increase (Decrease) in Cash and Cash Equiva-
lents........................................... 804 (1,296) 2,463
Cash and Cash Equivalents, beginning of year..... 1,375 2,179 883
-------- -------- --------
Cash and Cash Equivalents, end of year........... $ 2,179 $ 883 $ 3,346
======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for--
Interest..................................... $ 889 $ 2,314 $ 3,211
Income taxes................................. 523 541 16
======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-7
<PAGE>
HARTFORD COMPUTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1995 (FISCAL 1994), JANUARY 31, 1996 (FISCAL 1995)
AND DECEMBER 31, 1996 (FISCAL 1996)
1. DESCRIPTION OF THE BUSINESS
Hartford Computer Group, Inc. (the "Company"), is a full cycle computer
reseller engaged in the sale, service, support, leasing and rental of new and
used computer equipment. The Company sells its products and services to a wide
range of customers primarily throughout the United States.
Effective February 1, 1996, the Company changed its fiscal year-end from
January 31 to December 31 concurrent with a change in tax status from a "C"
corporation to an "S" corporation (see Note 9). Accordingly, the Company's
Fiscal 1994 and 1995 include the twelve month periods ended January 31, 1995
and 1996, respectively; the Company's Fiscal 1996 includes the eleven months
ended December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies applied in the preparation of
the financial statements is as follows:
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash investments and trade accounts
receivable. The Company has cash investment policies that limit cash
investments to short-term investment-grade instruments. With respect to trade
accounts receivable, the Company performs ongoing credit evaluations of its
customers' financial condition and requires letters of credit whenever deemed
necessary. In addition, the Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific customers,
historical trends and other information.
Stock Subscription Receivable
During Fiscal 1995, the Company issued 1,339,148 shares of common stock to
the existing stockholders. The purchase price was equal to book value at the
date of issuance, for aggregate consideration of approximately $750,000. The
subscription receivable related to the issuance of this common stock was paid
in its entirety during April 1996. There were no subscription receivables
outstanding as of Fiscal 1996 year-end.
The Company estimated the fair market value of the common stock at the time
of issuance to equal book value. Accordingly, no compensation had been
recorded in connection with the transaction. Subsequently, the Company engaged
an independent appraiser to perform a valuation of the Company's common stock
as of the date of the issuance of the 1,339,148 shares. Based upon the results
of the independent valuation, the Company reflected compensation expense on
the stock transaction of $897,000, net of an income tax benefit of $348,000,
in Fiscal 1995.
F-8
<PAGE>
HARTFORD COMPUTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Inventory
Inventory of computer equipment is stated at the lower of cost or market.
Cost is determined using the weighted-average method. At Fiscal 1995 and 1996
year-end, inventory was composed of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
New personal computer equipment.......................... $15,377 $30,506
Used personal computer equipment......................... 307 1,064
Mainframe equipment...................................... 588 166
Service parts............................................ 326 421
Other.................................................... 26 71
------- -------
$16,624 $32,228
======= =======
</TABLE>
Rental Equipment
The Company rents personal computer equipment ("rental equipment") to
customers under operating rental arrangements generally ranging from one week
to one year. Rental equipment is stated at purchased cost. Depreciation is
computed using the straight-line method over a 3 year period. Depreciation
expense was $1,814,000, $1,878,000 and $2,564,000 for Fiscal 1994, 1995 and
1996, respectively.
Property and Equipment
Property and equipment are stated at cost and include assets held under
capital leases. Major renewals and betterments are capitalized, while
maintenance and repairs which do not substantially improve or extend the
useful lives of the respective assets are expensed currently. When properties
are disposed of, the related costs and accumulated depreciation and
amortization are removed from the accounts and any gain or loss is reflected
in income. The cost of property and equipment is depreciated using the
straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
ASSET DESCRIPTION ASSET LIFE
----------------- -----------
<S> <C>
Property under capital leases................................. 14-15 years
Leasehold improvements........................................ 3-5 years
Warehouse equipment........................................... 5 years
Computer equipment............................................ 5 years
Furniture and fixtures........................................ 5-7 years
Automobiles................................................... 5 years
</TABLE>
Lease Accounting
Completed lease transactions are classified as either operating or sales-
type leases in accordance with Statement of Financial Accounting Standards
("SFAS") No. 13, "Accounting for Leases." Sales-type leases are defined as
those leases which transfer substantially all of the benefits and risks of
ownership of the equipment to the lessee. The Company utilizes information
provided by independent third parties and internal estimates to establish the
residual value at lease expiration.
Equipment Allowances on Sales-Type Leases
The Company periodically reviews its estimates of residual values in light
of current market factors. The Company establishes allowances in cases in
which a decrease in the estimated residual value is determined to be
permanent. Net investment in sales-type leases in the accompanying balance
sheets is net of equipment allowances of $27,000 and $71,000 for Fiscal 1995
and 1996, respectively.
F-9
<PAGE>
HARTFORD COMPUTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Investment in Restricted Equity Securities of a Vendor
During Fiscal 1996, the Company invested in certain equity securities of a
vendor, the disposal of which by the Company is restricted by Securities and
Exchange Commission ("SEC") regulations for a two year period from the date of
acquisition. Accordingly, the investment in restricted equity securities is
reported at the purchase cost of $150,000 and is included in other assets in
the accompanying balance sheet as of Fiscal 1996 year-end. The quoted market
value of the unrestricted, but otherwise comparable, equity securities is
approximately $1.3 million at Fiscal 1996 year-end. In the year in which the
restriction will be lifted, the Company will classify these equity securities
as available for sale in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Compensated Absences
The Company accrues a liability for amounts to be paid as a result of
employees' rights to compensated absences, considering anticipated
forfeitures, in the year in which earned.
Returns and Allowances
As is typical of the microcomputer industry, the Company incurs expenses as
a result of the return of products by customers. The Company estimates an
allowance for returns.
Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument held by the Company:
Current Assets and Current Liabilities--The carrying value approximates fair
value due to the short maturity of these items.
Long-Term Debt--The fair value of the Company's long-term debt is based on
secondary market indicators. Since the Company's debt is not publicly quoted,
estimates are based on each obligation's characteristics, including remaining
maturities, interest rate, credit rating, collateral, amortization schedule
and liquidity. The carrying amount approximates fair value.
Revenue Recognition
Revenues from the sales of equipment and the related direct costs are
included in income at the time of shipment to the customer. Revenues from
operating leases, which are included in technical services and equipment
rentals, are recognized on a monthly basis. Revenues from sales-type leases
are recognized at the time of shipment to the customer in an amount equal to
the present value of the total lease payments. The difference between the
revenue recognized at the time of shipment to the customer and the total lease
payments is recognized over the lease term to produce a constant percentage
return on investment. Technical service revenues include fees related to
customer service agreements. Revenues associated with these agreements are
recognized ratably over their term, which is typically for a period of one
year.
Significant Customers
The Company's revenues are derived primarily from sales of microcomputers,
network hardware, peripherals and software to a large customer base. Sales to
Sears, Roebuck & Co. ("Sears") accounted for 16.9% of the Company's total
revenues during Fiscal 1994. There were no individual customers to whom sales
accounted for 10% or more of the Company's total revenues during Fiscal 1995.
During Fiscal 1996, the Company entered into an interim joint marketing
arrangement with International Business Machines Corporation ("IBM"). In
connection with the interim joint marketing arrangement, IBM subcontracted
F-10
<PAGE>
HARTFORD COMPUTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
with the Company for the distribution of its products to State Farm Insurance
Company ("State Farm"). Indirect sales to State Farm through IBM accounted for
19.4% of the Company's total revenues during Fiscal 1996. The Company also
sold products directly to State Farm during Fiscal 1996. Direct sales to State
Farm and Sears accounted for 3.3% and 11.2%, respectively, of the Company's
total revenues during Fiscal 1996.
Significant Vendors
The Company purchases new and used personal computer equipment from various
major manufacturers and distributors. Purchases from IBM accounted for 72.4%,
65.7% and 63.1% of the Company's total equipment cost during Fiscal 1994, 1995
and 1996, respectively. Purchases from Ingram Micro Inc. accounted for 14.7%
of the Company's total equipment cost during Fiscal 1996.
Vendor Promotional Funds
Primary vendors of the Company provide various incentives for promoting and
marketing their product offerings. The funds earned are based on the Company's
sales of the vendors' products and are recognized upon completion of
objectives outlined by the vendors. The funds earned are applied to equipment
cost.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain Fiscal 1994 and 1995 amounts have been reclassified to conform with
the Fiscal 1996 presentation.
New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," and SFAS No. 123, "Accounting for Stock Based
Compensation," which are effective for fiscal years beginning after December
15, 1995. Effective February 1, 1996, the Company adopted SFAS No. 121. The
Company also adopted the disclosure requirements of SFAS No. 123 effective
February 1, 1996. The Company will continue to account for stock based
compensation arrangements in accordance with APB Opinion 25. The adoption of
SFAS Nos. 121 and 123 did not have a material effect on the accompanying
financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Property under capital leases........................... $ 1,825 $ 1,825
Leasehold improvements.................................. 155 217
Warehouse equipment..................................... 201 657
Computer equipment...................................... 1,867 3,264
Furniture and fixtures.................................. 1,229 1,445
Automobiles............................................. 438 699
------- -------
5,715 8,107
Less--accumulated depreciation and amortization......... (3,134) (3,926)
------- -------
Property and equipment, net............................. $ 2,581 $ 4,181
======= =======
</TABLE>
F-11
<PAGE>
HARTFORD COMPUTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Depreciation and amortization expense was $362,000, $589,000 and $866,000
for Fiscal 1994, 1995 and 1996, respectively.
4. NET INVESTMENT IN SALES-TYPE LEASES
The components of the net investment in sales-type leases as of Fiscal 1995
and 1996 year-end are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Future minimum lease payments receivable................ $ 3,004 $ 5,997
Estimated residual values of leased equipment........... 292 509
Less--Unearned income................................... (332) (475)
------- -------
Net investment in sales-type leases..................... 2,964 6,031
Less--Current portion................................... (1,426) (1,843)
------- -------
Noncurrent net investment in sales-type leases.......... $ 1,538 $ 4,188
======= =======
</TABLE>
As of Fiscal 1996 year-end, the future minimum lease payments to be received
are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal--
1997............................................................ $2,006
1998............................................................ 1,740
1999............................................................ 1,187
2000............................................................ 1,064
------
Total minimum lease payments receivable....................... $5,997
======
</TABLE>
The Company finances the majority of lease transactions by assigning the
noncancellable rentals to various lenders on a nonrecourse basis at fixed
interest rates (see Note 8).
5. CREDIT AGREEMENTS
IBM Credit Corporation
As of Fiscal 1996 year-end, the Company has a $90 million credit arrangement
with IBM Credit Corporation, $60 million of which matures in January 1998 and
$30 million of which is expected to mature in February 1997. The credit
arrangement includes current trade accounts payable with IBM (non-interest
bearing), trade accounts payable greater than 45 days outstanding with IBM
(interest bearing) and draws against the line of credit (interest bearing).
Interest is payable monthly for trade accounts payable outstanding 45-90 days
and draws against the line of credit at prime (8.25% at December 31, 1996)
plus 0.75%, which is also the weighted average interest rate on all short-term
borrowings at Fiscal 1996 year-end. Interest is payable monthly for trade
accounts payable outstanding greater than 90 days at prime plus 3%. There were
no trade accounts payable to IBM greater than 90 days outstanding during
Fiscal 1995 or 1996. Borrowings under the credit arrangement are
collateralized by certain trade accounts receivable, inventory, rental
equipment and a second mortgage on the property under capital leases. Total
net book value of assets collateralized under the credit arrangement
approximated $43.4 million and $61.8 million at Fiscal 1995 and 1996 year-end,
respectively. Total borrowings under the credit arrangement approximated $35.4
million and $53.9 million at Fiscal 1995 and 1996 year-end, respectively.
Available borrowings under the credit arrangement approximated $991,000 and
$1,819,000 at Fiscal 1995 and 1996 year-end, respectively. The credit
arrangement requires the Company to maintain minimum ratios of revenue on an
annual basis to working capital, net profit after tax to revenue and total
liabilities to tangible
F-12
<PAGE>
HARTFORD COMPUTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
net worth. As of Fiscal 1996 year-end, the Company was in default of the
covenants requiring minimum ratios of revenues on an annual basis to working
capital and net profit after tax to revenues. The Company has obtained waivers
for these covenants through December 31, 1996, and is in compliance with all
other covenants as of Fiscal 1996 year-end.
Bank
The Company has various loan arrangements to finance the purchase of certain
automobiles. These notes payable to bank bear interest at rates ranging from
8.25% to 8.50%. Principal and interest of approximately $11,000 are payable
monthly. These notes mature at various dates through September 1999, and are
collateralized by the automobiles.
6. CAPITAL LEASE OBLIGATION TO AFFILIATE
The Company has two capital lease arrangements for its office facilities with
a trust, whose beneficiaries are the current stockholders of the Company. The
first lease, a noncancelable lease with an original 15-year term, provides for
a monthly lease payment of $21,000 as adjusted annually based on the change in
the Consumer Price Index ("CPI"). An additional lease with an original term of
13 years and 11 months provides for a monthly lease payment of $5,000 as
adjusted annually based on the change in the CPI. All executory costs such as
building maintenance, taxes and insurance are reimbursed to the lessor.
As of Fiscal 1996 year-end, the future minimum lease payments under these
leases are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal--
1997.............................................................. $276
1998.............................................................. 276
1999.............................................................. 230
----
Total future minimum lease payments............................. 782
Less--Amounts representing interest................................. (132)
----
Capital lease obligation to affiliate............................... 650
Less--Current portion............................................... (202)
----
Noncurrent capital lease obligation to affiliate.................... $448
====
</TABLE>
7. LEASE COMMITMENTS
At Fiscal 1996 year-end, the Company was obligated under several
noncancelable operating leases for facilities and equipment. Under the terms of
certain leases, the Company is required to pay all utilities, real estate taxes
and insurance associated with the property. Minimum rental commitments as of
Fiscal 1996 year-end, for all noncancelable operating leases, are as follows
(in thousands):
<TABLE>
<S> <C>
Fiscal--
1997............................................................. $ 781
1998............................................................. 646
1999............................................................. 242
2000............................................................. 195
2001............................................................. 32
------
$1,896
======
</TABLE>
Annual rental expense related to operating leases was $255,000, $466,000 and
$568,000 for Fiscal 1994, 1995 and 1996, respectively.
F-13
<PAGE>
HARTFORD COMPUTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. DISCOUNTED LEASE RENTALS
The Company finances the majority of lease transactions by assigning the
noncancelable rentals to various lenders on a nonrecourse basis at fixed
interest rates. In return for future lease payments, the Company receives a
cash payment equal to the present value of the lease payments. In the event of
default by the lessee, the lender has a first lien against the underlying
leased equipment and any related residual value, with no further recourse
against the Company.
At Fiscal 1996 year-end, future maturities of discounted lease rentals are
as follows (in thousands):
<TABLE>
<S> <C>
Fiscal--
1997............................................................ $3,934
1998............................................................ 2,072
1999............................................................ 67
------
6,073
Less--Deferred finance charges.................................... (331)
------
Discounted lease rentals.......................................... 5,742
Less--Current portion............................................. (3,655)
------
Noncurrent discounted lease rentals............................... $2,087
======
</TABLE>
9. INCOME TAXES
As discussed in Note 1, on April 14, 1996, the Company filed an election
with the Internal Revenue Service ("IRS") to change its tax status from a "C"
corporation to an "S" corporation. Accordingly, the net deferred income tax
assets of $497,000 at Fiscal 1995 year-end were charged to the provision for
income taxes in Fiscal 1996. During Fiscal 1996, the Company also provided
$114,000 for Illinois state replacement taxes and state income taxes for those
states which do not recognize S corporation tax status.
Prior to the closing of the initial public offering, the Company will
terminate its S corporation election and become a C corporation. The C
corporation will assume the tax basis of the assets and liabilities of the
terminated S corporation. Accordingly, the Company will record deferred taxes
for the effect of cumulative temporary differences, in accordance with SFAS
No. 109, "Accounting for Income Taxes." This amount is estimated to be a net
deferred tax asset of approximately $1.2 million, and will be recorded as an
income tax benefit in the statement of operations upon the termination of the
Company's S corporation status. The Fiscal 1996 provision for income taxes,
rate reconciliation and deferred tax position are shown pro forma (unaudited)
to negate the effect of changing to an S corporation.
The provision (benefit) for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
PRO FORMA
1994 1995 1996
----- ----- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current--
Federal..................................... $ 369 $(623) $2,819
State....................................... 52 (88) 396
----- ----- ------
Total current............................. 421 (711) 3,215
----- ----- ------
Deferred--
Federal..................................... (503) 430 (599)
State....................................... (71) 60 (70)
----- ----- ------
Total deferred............................ (574) 490 (669)
----- ----- ------
Total provision (benefit) for income tax-
es....................................... $(153) $(221) $2,546
===== ===== ======
</TABLE>
F-14
<PAGE>
HARTFORD COMPUTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The difference between the provision (benefit) for income taxes at the
Company's effective income tax rate and the Federal statutory rate of 34% is
as follows:
<TABLE>
<CAPTION>
PRO FORMA
1994 1995 1996
----- ----- -----------
(UNAUDITED)
<S> <C> <C> <C>
Federal tax percentage...................... (34.0)% (34.0)% 34.0%
State tax percentage, net of Federal bene-
fit........................................ (4.8)% (4.8)% 4.8%
Permanent differences....................... -- -- 0.6%
----- ----- ----
Provision (benefit) for income taxes........ (38.8)% (38.8)% 39.4%
===== ===== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset were as follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
1995 1996
------- -----------
(UNAUDITED)
<S> <C> <C>
Current--
Allowance for doubtful accounts.................... $ 229 $ 274
Inventory.......................................... 394 699
Net investment in sales-type leases................ (1,029) (715)
Accrued compensation............................... 145 202
Capital lease obligation to affiliate.............. 69 79
Other, net......................................... 109 270
======= =======
$ (83) $ 809
======= =======
Long term--
Equipment.......................................... $ 633 $ 1,941
Property under capital leases...................... (177) (132)
Net investment in sales-type leases................ (122) (1,626)
Capital lease obligation to affiliate.............. 246 174
------- -------
$ 580 $ 357
======= =======
</TABLE>
10. RELATED PARTY TRANSACTIONS
Advances to/from stockholders are unsecured, non-interest bearing amounts
due from/to the stockholders of the Company.
As described in Note 6, the Company leases its office facilities from a
trust, whose beneficiaries are the current stockholders of the Company, under
two long-term noncancelable leases which are accounted for as capital leases.
The Company charters a boat from the stockholders. The charter provides for
monthly rent of approximately $16,000. Rent expense from the boat lease was
$139,000 and $174,000 for Fiscal 1995 and 1996, respectively. The Company
plans to terminate the boat lease immediately upon consummation of the
proposed initial public offering.
11. MERGER OF AFFILIATED COMPANIES
On December 31, 1994, the four corporations--Hartford Technical Services;
HCG Leasing, Inc.; HCG Equity Financing and Hartford Computer Holding--wholly-
owned by the Company's parent, Hartford Financial Corp., were merged into the
Company. On January 31, 1995, the Company and the parent were merged with the
Company as the surviving entity. These merger transactions were a combination
of entities under common control. Accordingly, the Company's financial
statements have been restated to include the results of the four corporations
and the parent for all periods presented.
F-15
<PAGE>
HARTFORD COMPUTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of conducting its business, the Company becomes
involved in various lawsuits and administrative proceedings. Some of these
proceedings may result in fines, penalties or judgments being assessed against
the Company which, from time to time, may have an impact on earnings for a
particular period. In late Fiscal 1993, the Company, through an affiliate
which was later merged into the Company, acquired all of the assets of a
computer distributor based in Milwaukee, Wisconsin. The business conducted by
the affiliate thereafter rapidly declined and, in early Fiscal 1994, an
involuntary bankruptcy petition was filed by certain creditors of the
affiliate. A trustee was appointed to supervise the affairs of the affiliate,
and in late Fiscal 1995, the trustee filed suit against the Company to recover
certain amounts alleged to constitute preferential payments and other improper
transfers to the Company by the affiliate. During Fiscal 1994, the Company
provided $190,000 as an estimate of the potential liability resulting from
these proceedings. During Fiscal 1996, a portion of this litigation was
settled, resulting in a $450,000 obligation for the Company. Accordingly, the
Company charged an additional $525,000 to earnings during Fiscal 1996 to cover
the settlement obligation and to provide $265,000 for remaining pending
litigation. Company management believes that adequate provision has been made
for any potential liability resulting from these proceedings.
13. RETIREMENT PLAN
The Company has a profit sharing plan for the benefit of salaried and other
eligible employees. The Company's profit sharing plan includes features under
Section 401(k) of the Internal Revenue Code. The Company may make
discretionary contributions up to 6% of employees' salary. The Company's
contributions to the profit sharing plan were approximately $50,000 each for
Fiscal 1995 and 1996. There were no Company contributions to the profit
sharing plan for Fiscal 1994.
14. SELECTED FINANCIAL DATA FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED)
Following is certain unaudited financial data for the eleven months ended
December 31, 1995 (in thousands):
<TABLE>
<S> <C>
Revenues........................ $120,804
========
Gross profit.................... $ 15,757
========
Income from operations.......... $ 2,804
========
Provision for income taxes...... $ 237
========
Net income...................... $ 373
========
</TABLE>
15. SUBSEQUENT EVENTS
In connection with the proposed initial public offering of 2,625,000 shares
of the Company's common stock, the Company changed its capital structure to
1,000,000 authorized shares of $0.01 par value preferred stock and 20,000,000
authorized shares of $0.01 par value common stock. The Company's Board of
Directors also declared a common stock split of 2,320.88 shares for each
outstanding share as of
January 28, 1997. All share and per share data in the accompanying financial
statements have been adjusted for the change in the Company's capital
structure and the common stock split.
In January 1997, the Company adopted the Hartford Computer Group, Inc. Long-
Term Incentive Plan (the "Long-Term Incentive Plan") pursuant to which a
maximum of 1,000,000 common shares have been authorized for the granting of
stock options. Concurrent with the adoption of the Long-Term Incentive Plan,
the Company granted 595,500 stock options to employees and directors at an
exercise price of $12.00 per share.
F-16
<PAGE>
HARTFORD COMPUTER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
The Company intends to distribute S corporation earnings to its existing
stockholders subsequent to year-end. As of Fiscal 1996 year-end, distributable
S corporation earnings were estimated to be approximately $5.0 million.
16. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENTS (UNAUDITED):
The following pro forma adjustments have been made to the historical results
of operations for Fiscal 1996 to make the presentation more comparable in
relation to future periods:
(a) Elimination of employee compensation expense (including bonuses) in
excess of contractual compensation pursuant to employment agreements
effective for Fiscal 1997 for the stockholders and one other employee.
(b) Elimination of boat lease rentals paid to the stockholders which will
terminate upon consummation of the proposed initial public offering.
(c) Elimination of automobile expenses of the stockholders which will
terminate upon consummation of the proposed initial public offering.
(d) Computation of the provision for income taxes assuming an effective tax
rate of 39.4% which would have been recorded had the Company been a C
corporation and after eliminating the expenses in (a), (b) and (c).
A pro forma adjustment was made to the historical financial position to
reflect the intended distribution of $5.0 million of estimated distributable S
corporation earnings to the existing stockholders from the proceeds of the
proposed initial public offering.
The pro forma weighted average number of common shares outstanding includes
the following:
(a) 9,780,188 common shares issued and outstanding throughout Fiscal 1996.
(b) 119,100 common shares assumed to be outstanding under the treasury
stock method throughout Fiscal 1996 related to the stock options
granted in January, 1997 (see Note 15).
(c) 333,333 common shares necessary to generate proceeds equivalent to the
intended distribution of $5 million of estimated distributable S
corporation earnings to the existing stockholders.
F-17
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THIS OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 12
S Corporation Dividend................................................... 12
Dividend Policy.......................................................... 12
Capitalization........................................................... 13
Dilution................................................................. 14
Selected Financial Data.................................................. 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 24
Management............................................................... 34
Certain Transactions..................................................... 37
Principal and Selling Stockholders....................................... 39
Description of Capital Stock............................................. 40
Shares Eligible for Future Sale.......................................... 42
Underwriting............................................................. 43
Legal Matters............................................................ 44
Experts.................................................................. 44
Additional Information................................................... 45
Index to Financial Statements............................................ F-1
</TABLE>
---------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY WHETHER OR NOT PARTIC-
IPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,500,000 Shares
LOGO
Common Stock
----------
PROSPECTUS
----------
Alex. Brown & Sons
INCORPORATED
Robertson, Stephens & Company
Piper Jaffray inc.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Common Stock being registered hereby. All the amounts
shown are estimated, except the SEC registration fee, the NASD filing fee and
the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 19,515
NASD filing fee.................................................. 6,940
Nasdaq National Market listing fee............................... 15,000
Blue Sky filing fees and expenses................................ 10,000
Printing expenses................................................ 75,000
Legal fees and expenses.......................................... 250,000
Auditors' accounting fees and expenses........................... 150,000
Transfer Agent and Registrar fees and expenses................... 2,500
Officers and directors liability insurance premiums.............. 150,000
Miscellaneous expenses........................................... 21,045
--------
Total........................................................ $700,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 8.75 of the Illinois Business Corporation Act authorizes
indemnification of directors, officers, employees and agents of the Company;
allows the advancement of costs of defending against litigation; and permits
companies incorporated in Illinois to purchase insurance on behalf of
directors, officers, employees and agents against liabilities whether or not
in the circumstances such companies would have the power to indemnify against
such liabilities under the provisions of the statute.
The Company's Amended and Restated Articles of Incorporation (the "Articles
of Incorporation"), incorporated by reference as Exhibit 3.1, and its Amended
and Restated By-laws (the "By-laws"), incorporated by reference as Exhibit
3.2, provide for indemnification of its officers and directors to the full
extent permitted by the Illinois Business Corporation Act. The Articles of
Incorporation eliminate, to the fullest extent permitted by Illinois law,
liability of a director to the Company or its stockholders for monetary
damages for breach of such director's fiduciary duty of care except for
liability where a director (a) breaches his or her duty of loyalty to the
Company or its stockholders, (b) fails to act in good faith or engages in
intentional misconduct or knowing violation of law, (c) authorizes payment of
an illegal dividend or stock repurchase or (d) obtains an improper personal
benefit. While liability for monetary damages has been eliminated, equitable
remedies, such as injunctive relief or rescission remain available. In
addition, a director is not relieved of his responsibilities under any other
law, including the federal securities laws.
The Company's Articles of Incorporation and By-laws contain provisions that
require the Company to indemnify its directors and officers to the fullest
extent permitted by Illinois law.
The Company has entered into indemnification agreements with each of its
executive officers and directors in which the Company agrees to indemnify and
hold harmless the officer or director to the fullest extent permitted by
applicable law against any and all reasonable attorneys' fees and all other
reasonable expense, cost, liability and loss (including a mandatory obligation
by the Company to advance reimbursement of legal fees and expenses) paid or
reasonably incurred by such officer or director or on his or her behalf in
connection with any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation not initiated by the officer or
director that he or she believes in good faith
II-1
<PAGE>
might lead to a proceeding, inquiry or investigation (a "Proceeding"),
relating to the fact that the officer or director is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee, trustee, agent or fiduciary
of another corporation, partnership, joint venture, employee benefit plan,
trust or other enterprise, or by reason of any action or inaction by the
officer or director in such capacity. However, the Company's obligation to
indemnify the officer or director is subject to a determination by: (i) the
Company's Board of Directors, by vote of the majority of disinterested
directors; (ii) under certain circumstances, independent legal counsel
appointed by the Board of Directors in a written opinion; (iii) stockholders
of the Company; or (iv) a court of competent jurisdiction in a final,
nonappealable adjudication, that the officer or director acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the Company and, with respect to any criminal Proceeding,
the officer or director acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Company, and with respect to any criminal Proceeding, the officer or director
had no reasonable cause to believe that his or her conduct was unlawful.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
by the underwriters of the Company and its directors and executive officers in
the offering of the Common Stock registered hereby, and each person, if any,
who controls the Company, for certain liabilities, including liabilities
arising under the Securities Act.
The Company intends to obtain directors' and officers' liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to securities of the Company issued or
sold since January 28, 1995 (which have been adjusted to reflect the Company's
approximate 2,320.88-for-1 stock split effected in January 1997).
On January 31, 1996, the Company issued the following shares of Common Stock
at a purchase price of $1,300 per share, none of which was registered under
the Securities Act: Anthony R. Graffia--86 shares; Anthony R. Graffia II--356
shares; Andrea L. Landwer--135 shares. The Company has not issued any other
shares since January 28, 1994, other than in connection with the 2,320.88 for
1 stock split.
No underwriters were engaged in connection with the foregoing sales of
securities. Such sales were made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act for transactions
not involving a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of the Company*
3.2 Amended and Restated By-laws of the Company*
4.1 Specimen Common Stock certificate*
5.1 Opinion of Sachnoff & Weaver, Ltd.*
10.1 Form of Indemnification Agreement between the Company and each of
its directors and officers*
10.2 Long-Term Incentive Plan*
10.3 Inventory and Working Capital Agreement date as of January 23,
1997 by and between IBM Credit Corporation and the Company*
10.4 Lease dated as of September 5, 1984 between Chicago Title and
Trust Company, as trustee, and the Company*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.5 Lease dated as of October 1, 1985 between Chicago Title and Trust
Company, as trustee, and the Company*
11.1 Statement of computation of per share earnings
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Sachnoff & Weaver, Ltd. (to be included in Exhibit 5.1)
24.1 Power of Attorney (included herein on signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be supplied by amendment.
(B) FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and Qualifying Account
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. If
a claim for indemnification against such liability (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The Company hereby undertakes that:
The undersigned will provide the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it is declared effective.
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE COMPANY HAS
DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE VILLAGE OF INVERNESS, STATE OF
ILLINOIS, ON JANUARY 30, 1997.
Hartford Computer Group, Inc.
/s/ Anthony R. Graffia
By: __________________________________
Anthony R. Graffia Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Anthony R. Graffia and Anthony R. Graffia II,
and each of them singly, as his or her true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities to sign the
Registration Statement filed herewith and any or all amendments to said
Registration Statement (including post-effective amendments and registration
statements filed pursuant to Rule 462(b) under the Securities Act of 1933, and
any or all amendments thereto, as amended and otherwise), and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission granting unto said attorneys-in-fact and
agents the full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the foregoing, as full to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or his or her substitute, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED.
SIGNATURE TITLE DATE
/s/ Anthony R. Graffia Chairman and Chief January 30,
- ------------------------------------- Executive Officer; 1997
ANTHONY R. GRAFFIA Director
/s/ Anthony R. Graffia II President; Director January 30,
- ------------------------------------- 1997
ANTHONY R. GRAFFIA II
/s/ Robert L. Zirk Chief Financial January 30,
- ------------------------------------- Officer; Director 1997
ROBERT L. ZIRK (Principal
Financial and
Accounting
Officer)
II-4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the financial statements of Hartford Computer Group, Inc. included in this
registration statement and have issued our report thereon dated January 29,
1997. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule II--Valuation and
Qualifying Accounts is presented for purposes of complying with the Securities
and Exchange Commissions rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
January 29, 1997
II-5
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
RESERVE FOR RESIDUAL
ALLOWANCE FOR INVENTORY VALUE OF SALES-TYPE
DOUBTFUL ACCOUNTS RESERVE LEASES
----------------- --------- --------------------
<S> <C> <C> <C>
Balance at January 31, 1994... $103 $ 542 $ 8
Provision................... 271 525 3
Deduction for specific
write-offs................. (77) (67) --
---- ----- ---
Balance at January 31, 1995... 297 1,000 11
Provision................... 389 587 24
Deduction for specific
write-offs................. (97) (572) (8)
---- ----- ---
Balance at January 31, 1996... 589 1,015 27
Provision................... 281 487 44
Deduction for specific
write-offs................. (164) (666) --
---- ----- ---
Balance at December 31, 1996.. $706 $ 836 $71
==== ===== ===
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of the Company*
3.2 Amended and Restated By-laws of the Company*
4.1 Specimen Common Stock certificate*
5.1 Opinion of Sachnoff & Weaver, Ltd.*
10.1 Form of Indemnification Agreement between the Company and each of
its directors and officers*
10.2 Long-Term Incentive Plan*
10.3 Inventory and Working Capital Agreement date as of January 23,
1997 by and between IBM Credit Corporation and the Company*
10.4 Lease dated as of September 5, 1984 between Chicago Title and
Trust Company, as trustee, and the Company*
10.5 Lease dated as of October 1, 1985 between Chicago Title and Trust
Company, as trustee, and the Company*
11.1 Statement of Computation of Per Share Earnings
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Sachnoff & Weaver, Ltd. (to be included in Exhibit 5.1)
24.1 Power of Attorney (included herein on signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
*To be supplied by amendment.
<PAGE>
EXHIBIT 1.1
4,025,000 SHARES
HARTFORD COMPUTER GROUP, INC.
COMMON STOCK
($.01 PAR VALUE)
UNDERWRITING AGREEMENT
----------------------
____________, 1997
ALEX. BROWN & SONS INCORPORATED
ROBERTSON, STEPHENS & COMPANY LLC
PIPER JAFFRAY INC.,
as Representatives of the
several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
Hartford Computer Group, Inc., an Illinois corporation (the
"Company"), and a certain shareholder of the Company, Anthony R. Graffia (the
"Selling Shareholder", and, together with Anthony R. Graffia II, collectively,
the "Controlling Shareholders"), propose to sell to the several underwriters
(the "Underwriters") named in Schedule I hereto for whom you are acting as
representatives (the "Representatives") an aggregate of 3,500,000 shares of the
Company's Common Stock, $.01 par value (the "Firm Shares"), of which 2,625,000
shares will be sold by the Company and 875,000 shares will be sold by the
Selling Shareholder. The respective amounts of the Firm Shares to be so
purchased by the several Underwriters are set forth opposite their names in
Schedule I hereto, and the amount to be sold by the Selling Shareholder is set
forth opposite his name in Schedule II hereto. The Company and the Selling
Shareholder are sometimes referred to herein collectively as the "Sellers". The
Company and the Selling Shareholder also propose to sell at the Underwriters'
option an aggregate of up to 525,000 additional shares of the Company's Common
Stock (the "Option Shares") as set forth below.
As the Representatives, you have advised the Company and the Selling
Shareholder (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the numbers of Firm Shares set
forth opposite their respective names in Schedule I hereto, plus their pro rata
portion of the Option Shares if you elect to exercise the over-allotment option
in whole or in part for the accounts of the several Underwriters. The Firm
Shares and the Option Shares (to the extent the aforementioned over-allotment
option is exercised) are herein collectively called the "Shares".
<PAGE>
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company and the Controlling
Shareholders.
(a) The Company and the Controlling Shareholders represent and warrant
to each of the Underwriters as follows:
(i) A registration statement on Form S-1 (File No. 333-_____) with
respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the rules and regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder and
has been filed with the Commission. Copies of such registration statement,
including any amendments thereto, the preliminary prospectuses (meeting the
requirements of the Rules and Regulations) contained therein and the
exhibits, financial statements and schedules, as finally amended and
revised, have heretofore been delivered by the Company to you. Such
registration statement, together with any registration statement filed by
the Company pursuant to Rule 462(b) of the Act, herein referred to as the
"Registration Statement", which shall be deemed to include all information
omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of
the date of this Agreement. "Prospectus" means (A) the form of prospectus
first filed with the Commission pursuant to Rule 424(b) or (B) the last
preliminary prospectus included in the Registration Statement filed prior
to the time it becomes effective or filed pursuant to Rule 424(a) under the
Act that is delivered by the Company to the Underwriters for delivery to
purchasers of the Shares, together with the term sheet or abbreviated term
sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act.
Each preliminary prospectus included in the Registration Statement prior to
the time it becomes effective is herein referred to as a "Preliminary
Prospectus".
(ii) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Illinois with
corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement. Each of the
subsidiaries of the Company as listed in Exhibit 21.1 to Item 16(a) of the
Registration Statement (collectively, the "Subsidiaries") has been duly
organized and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement. The Subsidiaries are the only
subsidiaries, direct or indirect, of the Company. The Company and each of
the Subsidiaries are duly qualified to transact business in all
jurisdictions in which the conduct of their business requires such
qualification. The outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
-2-
<PAGE>
and non-assessable and are owned by the Company or another Subsidiary free
and clear of all liens, encumbrances and equities and claims; and no
options, warrants or other rights to purchase, agreements or other
obligations to issue, or other rights to convert any obligations into,
shares of capital stock of or ownership interests in the Subsidiaries are
outstanding.
(iii) The outstanding shares of Common Stock of the Company, including
all shares to be sold by the Selling Shareholder, have been duly authorized
and validly issued and are fully paid and non-assessable; the portion of
the Shares to be issued and sold by the Company have been duly authorized
and when issued and paid for as contemplated herein will be validly issued,
fully paid and non-assessable; and no preemptive rights of stockholders
exist with respect to any of the Shares or the issue and sale thereof.
Except as disclosed in the Registration Statement, no options, warrants or
other rights to purchase, agreements or other obligations to issue, or
other rights to convert any obligations into, shares of capital stock of
the Company are outstanding. Neither the filing of the Registration
Statement nor the offering or sale of the Shares as contemplated by this
Agreement gives rise to any rights, other than those which have been waived
or satisfied, for or relating to the registration of any shares of the
Company's Common Stock.
(iv) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. All of the Shares conform to the
description thereof contained in the Registration Statement. The form of
certificates for the Shares conforms to the corporate law of the
jurisdiction of the Company's incorporation.
(v) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Shares
nor instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements which are required to be stated therein by, and
will conform, to the requirements of the Act and the Rules and Regulations.
The Registration Statement and any amendment thereto do not contain, and
will not contain, any untrue statement of a material fact and do not omit,
and will not omit, to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. The Prospectus
and any amendments and supplements thereto do not contain, and will not
contain, any untrue statement of material fact; and do not omit, and will
not omit, to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that neither
the Company nor any Controlling Shareholder makes any representations or
warranties as to information contained in or omitted from the Registration
Statement or the Prospectus, or any such amendment or supplement, in
reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of any Underwriter through the Representatives,
specifically for use in the preparation thereof.
-3-
<PAGE>
(vi) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules as set forth in the
Registration Statement, present fairly the financial position and the
results of operations and cash flows of the Company and the consolidated
Subsidiaries, at the indicated dates and for the indicated periods. Such
financial statements and related schedules have been prepared in accordance
with generally accepted principles of accounting, consistently applied
throughout the periods involved, except as disclosed herein, and all
adjustments necessary for a fair presentation of results for such periods
have been made. The summary financial and statistical data included in the
Registration Statement presents fairly the information shown therein and
such data has been compiled on a basis consistent with the financial
statements presented therein and the books and records of the Company. The
pro forma financial statements and other pro forma financial information
included in the Registration Statement and the Prospectus present fairly
the information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements, have been properly compiled on the pro forma bases described
therein, and, in the opinion of the Company, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein.
(vii) Arthur Andersen LLP, who has certified certain of the financial
statements filed with the Commission as part of the Registration Statement,
are independent public accountants as required by the Act and the Rules and
Regulations.
(viii) There is no action, suit, claim or proceeding pending or, to
the knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency or otherwise that if
determined adversely to the Company or any of the Subsidiaries might result
in any material adverse change in the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise)
or prospects of the Company and of the Subsidiaries taken as a whole or to
prevent the consummation of the transactions contemplated hereby, except as
set forth in the Registration Statement.
(ix) The Company and the Subsidiaries have good and marketable title
to all of the properties and assets reflected in the financial statements
(or as described in the Registration Statement) hereinabove described,
subject to no lien, mortgage, pledge, charge or encumbrance of any kind
except those reflected in such financial statements (or as described in the
Registration Statement) or which are not material in amount. The Company
and the Subsidiaries occupy their leased properties under valid and binding
leases conforming in all material respects to the description thereof set
forth in the Registration Statement.
(x) The Company and the Subsidiaries have filed all federal, state,
local and foreign income tax returns which have been required to be filed
and have paid all taxes indicated by said returns and all assessments
received by them or any of them to the extent that such taxes have become
-4-
<PAGE>
due. All tax liabilities have been adequately provided for in the financial
statements of the Company.
(xi) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there has
not been any material adverse change or any development involving a
prospective material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and the Subsidiaries taken as a
whole, whether or not occurring in the ordinary course of business, and
there has not been any material transaction entered into or any material
transaction that is probable of being entered into by the Company or the
Subsidiaries, other than transactions in the ordinary course of business
and changes and transactions described in the Registration Statement, as it
may be amended or supplemented. The Company and the Subsidiaries have no
material contingent obligations which are not disclosed in the Company's
financial statements which are included in the Registration Statement.
(xii) Neither the Company nor any of the Subsidiaries is, or with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its charter or by-laws or under any agreement, lease,
contract, indenture or other instrument or obligation to which it is a
party or by which it, or any of its properties, is bound and which default
is of material significance in respect of the business, management,
properties, assets, rights, operations, condition (financial or otherwise)
or prospects of the Company and the Subsidiaries taken as a whole. Any
agreement, lease, contract, indenture or other instrument to which the
Company or any of the Subsidiaries is a party described in the Prospectus
is valid and enforceable by the Company and the Subsidiaries (as
applicable), except as enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors rights generally, or by equitable principles. The
execution and delivery of this Agreement and the consummation of the
transactions herein contemplated and the fulfillment of the terms hereof
will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed
of trust or other agreement or instrument to which the Company or any
Subsidiary is a party, or of the charter or by-laws of the Company, or any
order, rule or regulation applicable to the Company or any Subsidiary of
any court or of any regulatory body or administrative agency or other
governmental body having jurisdiction.
(xiii) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions
herein contemplated (except such additional steps as may be required by the
Commission, the National Association of Securities Dealers, Inc. (the
"NASD") or such additional steps as may be necessary to qualify the Shares
for public offering by the Underwriters under state securities or Blue Sky
laws) has been obtained or made and is in full force and effect.
-5-
<PAGE>
(xiv) The Company and each of the Subsidiaries holds all licenses,
certificates and permits from governmental authorities which are necessary
to the conduct of their businesses, and the Company and each Subsidiary are
operating in compliance in all material respects with such licenses,
certificates and permits and with all laws, rules and regulations
applicable to the Company or any Subsidiary. The Company and each of the
Subsidiaries holds, or has the right to use, all patents, patent rights,
trade names, trademarks or copyrights necessary to the conduct of their
businesses, and neither the Company nor any of the Subsidiaries has
infringed any patents, patent rights, trade names, trademarks or
copyrights, which infringement is material to the business of the Company
and the Subsidiaries taken as a whole. The Company knows of no material
infringement by others of patents, patent rights, trade names, trademarks
or copyrights owned by or licensed to the Company.
(xv) Neither the Company, nor to the Company's best knowledge, any of
its affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of the Company's Common Stock to facilitate the sale or resale of
the Shares.
(xvi) Neither the Company nor any Subsidiary is an "investment
company" within the meaning of such term under the Investment Company Act
of 1940, as amended (the "1940 Act"), and the rules and regulations of the
Commission thereunder.
(xvii) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (A) transactions are
executed in accordance with management's general or specific authorization,
(B) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets, (C) access to assets
is permitted only in accordance with management's general or specific
authorization and (D) the recorded accountability for assets is compared
with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(xviii) The Company and each of its Subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is adequate for
the conduct of their respective businesses and the value of their
respective properties and as is customary for companies engaged in similar
industries.
(xix) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (A) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension
-6-
<PAGE>
plan" or (B) Sections 412 or 4971 of the Internal Revenue Code of 1986, as
amended, including the regulations and published interpretations thereunder
(the "Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
(xx) There is no labor strike or work stoppage or lockout pending,
imminent or threatened against the Company or any Subsidiary which might
result in any material adverse change in the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and the Subsidiaries taken as a
whole.
(xxi) Except as set forth in the Registration Statement and except as
would not result in a material adverse change in the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and the Subsidiaries taken as a
whole (i) neither the Company nor any Subsidiary is in violation of any
applicable Federal, state or local environmental law or any applicable
order of any governmental authority with respect thereto; (ii) neither the
Company nor any Subsidiary is in violation of or subject to any existing,
or pending or, to the Company's knowledge, threatened action, suit,
investigation, inquiry or proceeding by any governmental authority nor is
the Company or any Subsidiary subject to any remedial obligations under any
applicable Federal, state or local environmental law; (iii) the Company and
the Subsidiaries are in compliance with all permits or similar
authorizations, if any, required to be obtained or filed in connection with
their operations including, without limitation, emissions, discharges,
treatment, storage, disposal or release of a Hazardous Material into the
environment; and (iv) to the knowledge of the Company, after appropriate
inquiry, no Hazardous Materials have been disposed of or released by the
Company or any of the Subsidiaries on, to or from the Company's or the
Subsidiaries' property, except in accordance with applicable environmental
laws. The term "Hazardous Material" means any oil (including petroleum
products, crude oil and any fraction thereof), chemical contaminant,
pollutant, solid or hazardous waste, or Hazardous Substance (as defined in
Section 101(14) of the Comprehensive Environmental Response, Compensation
and Liability Act and regulations thereunder), that is regulated as toxic
or hazardous to human health or the environment under any Federal, state or
local environmental law.
(xxii) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-
198, An Act Relating to Disclosure with Cuba, and the Company further
agrees that if it commences engaging in business with the government of
Cuba or with any person or affiliate located in Cuba after the date the
Registration Statement becomes or has become effective with the Commission
or with the Florida Department of Banking and Finance (the "Department"),
whichever date is later, or if the information reported in the Prospectus,
if any, concerning the Company's business with Cuba or with any person or
-7-
<PAGE>
affiliate located in Cuba changes in any material way, the Company will
provide the Department notice of such business or change, as appropriate,
in a form acceptable to the Department.
(b) The Selling Shareholder represents and warrants as follows:
(i) The Selling Shareholder now has and at the Closing Date and the
Option Closing Date, as the case may be (as such dates are hereinafter
defined), will have good and marketable title to the Firm Shares and the
Option Shares to be sold by the Selling Shareholder, free and clear of any
liens, encumbrances, equities and claims, and full right, power and
authority to effect the sale and delivery of such Firm Shares and Option
Shares; and upon the delivery of, against payment for, such Firm Shares and
Option Shares pursuant to this Agreement, the Underwriters will acquire
good and marketable title thereto, free and clear of any liens,
encumbrances, equities and claims.
(ii) The Selling Shareholder has full right, power and authority to
execute and deliver this Agreement, the Power of Attorney and the Custodian
Agreement referred to below and to perform its obligations under such
Agreements. The execution and delivery of this Agreement and the
consummation by the Selling Shareholder of the transactions herein
contemplated and the fulfillment by the Selling Shareholder of the terms
hereof will not require any consent, approval, authorization or other order
of any court, regulatory body, administrative agency or other governmental
body (except as may be required under the Act, state securities laws or
Blue Sky laws) and will not result in a breach of any of the terms and
provisions of, or constitute a default under, any indenture, mortgage, deed
of trust or other agreement or instrument to which the Selling Shareholder
is a party, or of any order, rule or regulation applicable to the Selling
Shareholder of any court or of any regulatory body or administrative agency
or other governmental body having jurisdiction.
(iii) The Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to, or that has constituted, or
that might reasonably be expected, to cause or result in the stabilization
or manipulation of the price of the Company's Common Stock and, other than
as permitted by the Act, the Selling Shareholder will not distribute any
prospectus or other offering material in connection with the offering of
the Shares.
(iv) The sale of the Firm Shares and the Option Shares by the Selling
Shareholder pursuant hereto is not prompted by any information concerning
the Company or any of the Subsidiaries that is not set forth in the
Registration Statement. The information pertaining to the Selling
Shareholder under the caption "Principal and Selling Stockholders" in the
Prospectus is complete and accurate in all material respects.
-8-
<PAGE>
2. Purchase, Sale and Delivery of the Firm Shares.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the Sellers
agree to sell to the Underwriters and each Underwriter agrees, severally and not
jointly, to purchase, at a price of $_____ per Share, the number of Firm Shares
set forth opposite the name of each Underwriter in Schedule I hereto, subject to
adjustments in accordance with Section 9 hereof. The number of Firm Shares to
be purchased by each Underwriter from each Seller shall be as nearly as
practicable in the same proportion to the total number of Firm Shares being sold
by each Seller as the number of Firm Shares being purchased by each Underwriter
bears to the total number of Firm Shares to be sold hereunder. The obligations
of the Company and the Selling Shareholder shall be several and not joint.
(b) Certificates in negotiable form for the total number of the Shares
to be sold hereunder by the Selling Shareholder have been placed in custody with
___________________, as custodian (the "Custodian"), pursuant to the Custodian
Agreement (the "Custodian Agreement") executed by the Selling Shareholder for
delivery of all Firm Shares and any Option Shares to be sold hereunder by the
Selling Shareholder. The Selling Shareholder specifically agrees that the Firm
Shares and any Option Shares represented by the certificates held in custody for
the Selling Shareholder under the Custodian Agreement are subject to the
interests of the Underwriters hereunder, that the arrangements made by the
Selling Shareholder for such custody are to that extent irrevocable, and that
the obligations of the Selling Shareholder hereunder shall not be terminable by
any act or deed of the Selling Shareholder (or by any other person, firm or
corporation, including the Company, the Custodian or the Underwriters) or by
operation of law (including the death of the Selling Shareholder) or by the
occurrence of any other event or events, except as set forth in the Custodian
Agreement. If any such event should occur prior to the delivery to the
Underwriters of the Firm Shares or the Option Shares hereunder, certificates for
the Firm Shares or the Options Shares, as the case may be, shall be delivered by
the Custodian in accordance with the terms and conditions of this Agreement as
if such event has not occurred. The Custodian is authorized to receive and
acknowledge receipt of the proceeds of sale of the Shares held by it against
delivery of such Shares.
(c) Payment for the Firm Shares to be sold hereunder is to be made in
New York Clearing House funds by certified or bank cashier's checks drawn to the
order of the Company for the Firm Shares to be sold by it and to the order of
______________________, "as Custodian", for the Firm Shares to be sold by the
Selling Shareholder, in each case against delivery of certificates therefor to
the Representatives for the several accounts of the Underwriters. Such payment
and delivery are to be made at the offices of Alex. Brown & Sons Incorporated,
135 East Baltimore Street, Baltimore, Maryland, at 10:00 a.m., Baltimore time,
on the third (3rd) business day after the date of this Agreement or at such
other time and date not later than five (5) business days thereafter as the
Company, and you shall agree upon, such time and date being herein referred to
as the "Closing Date". (As used herein, "business day" means a day on which the
New York Stock Exchange is open for trading and on which banks in New York
-9-
<PAGE>
are open for business and not permitted by law or executive order to be closed.)
The certificates for the Firm Shares will be delivered in such denominations and
in such registrations as the Representatives request in writing not later than
the second (2nd) full business day prior to the Closing Date, and will be made
available for inspection by the Representatives at least one (1) business day
prior to the Closing Date.
(d) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company and the Selling Shareholder hereby grant an option to the several
Underwriters to purchase the Option Shares at the price per Share as set forth
in the first paragraph of this Section 2. The maximum number of Option Shares
to be sold by the Company and the Selling Shareholder is set forth opposite
their respective names on Schedule III hereto. The option granted hereby may be
exercised in whole or in part by giving written notice (i) at any time before
the Closing Date and (ii) only once thereafter within 30 days after the date of
this Agreement, by you, as Representatives of the several Underwriters, to the
Company, setting forth the number of Option Shares as to which the several
Underwriters are exercising the option, the names and denominations in which the
Option Shares are to be registered and the time and date at which such
certificates are to be delivered. If the option granted hereby is exercised in
part, the respective number of Option Shares to be sold by the Company and the
Selling Shareholder shall be determined on a pro rata basis in accordance with
the percentages set forth opposite their names on Schedule III hereto, adjusted
by you in such manner as to avoid fractional shares. The time and date at which
certificates for Option Shares are to be delivered shall be determined by the
Representatives but shall not be earlier than three (3) nor later than 10 full
business days after the exercise of such option, nor in any event prior to the
Closing Date (such time and date being herein referred to as the "Option Closing
Date"). If the date of exercise of the option is three (3) or more days before
the Closing Date, the notice of exercise shall set the Closing Date as the
Option Closing Date. The number of Option Shares to be purchased by each
Underwriter shall be in the same proportion to the total number of Option Shares
being purchased as the number of Firm Shares being purchased by such Underwriter
bears to the total number of Firm Shares, adjusted by you in such manner as to
avoid fractional shares. The option with respect to the Option Shares granted
hereunder may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters. You, as Representatives of the several Underwriters,
may cancel such option at any time prior to its expiration by giving written
notice of such cancellation to the Company. To the extent, if any, that the
option is exercised, payment for the Option Shares shall be made on the Option
Closing Date in New York Clearing House funds by certified or bank cashier's
checks drawn to the order of the Company for the Option Shares to be sold by it
and to the order of _____________________, "as Custodian", for the Option Shares
to be sold by the Selling Shareholder against delivery of certificates therefor
at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street,
Baltimore, Maryland.
-10-
<PAGE>
(e) If on the Closing Date or the Option Closing Date, as the case may
be, the Selling Shareholder fails to sell the Firm Shares or the Option Shares
that the Selling Shareholder has agreed to sell on such date as set forth in
Schedules II and III hereto, the Company agrees that it will sell or arrange for
the sale of that number of Shares to the Underwriters which represents the Firm
Shares or the Option Shares that the Selling Shareholder has failed to so sell,
as set forth in Schedules II and III hereto, or such lesser number as may be
requested by the Representatives.
3. Offering by the Underwriters.
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable to
do so. The Firm Shares are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representatives may from
time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any Option Shares are purchased pursuant
to Section 2 hereof, the Underwriters will offer them to the public on the
foregoing terms.
It is further understood that you will act as the Representatives for
the Underwriters in the offering and sale of the Shares in accordance with a
Master Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. Covenants of the Company and the Controlling Shareholders.
(a) The Company and the Controlling Shareholders covenant and agree
with the several Underwriters that:
(i) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule
430A of the Rules and Regulations is followed, to prepare and timely file
with the Commission under Rule 424(b) of the Rules and Regulations a
Prospectus in a form approved by the Representatives containing information
previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A of the Rules and Regulations and (B) not
file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representatives shall not previously have been
advised and furnished with a copy or to which the Representatives shall
have reasonably objected in writing or which is not in compliance with the
Rules and Regulations.
(ii) The Company will advise the Representatives promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have
become effective, (B) of receipt of any comments from the Commission, (C)
of any request of the Commission for any amendment of the Registration
Statement or for any supplement to the Prospectus or for any additional
information and (D) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of
the Prospectus or of the institution of any proceedings for that purpose.
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The Company will use its best efforts to prevent the issuance of any such
stop order preventing or suspending the use of the Prospectus and to obtain
as soon as possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Representatives may reasonably have designated in
writing and will make such applications, file such documents and furnish
such information as may be reasonably required for that purpose, provided
the Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company
will, from time to time, prepare and file such statements, reports and
other documents, as are or may be required to continue such qualifications
in effect for so long a period as the Representatives may reasonably
request for distribution of the Shares.
(iv) The Company will deliver to the Representatives, from time to
time, as many copies of any Preliminary Prospectus as the Representatives
may reasonably request. The Company will deliver to the Representatives
during the period when delivery of a Prospectus is required under the Act,
as many copies of the Prospectus in final form, or as thereafter amended or
supplemented, as the Representatives may reasonably request. The Company
will deliver to the Representatives at or before the Closing Date, four (4)
signed copies of the Registration Statement and all amendments thereto,
including all exhibits filed therewith, and will deliver to the
Representatives such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that may
reasonably be requested), and of all amendments thereto, as the
Representatives may reasonably request.
(v) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission
thereunder, so as to permit the completion of the distribution of the
Shares as contemplated in this Agreement and the Prospectus. If during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, any event shall occur as a result of which, in the
judgment of the Company or in the reasonable opinion of the Underwriters,
it becomes necessary to amend or supplement the Prospectus in order to make
the statements therein, in the light of the circumstances existing at the
time the Prospectus is delivered to a purchaser, not misleading, or, if it
is necessary at any time to amend or supplement the Prospectus to comply
with any law, the Company promptly will prepare and file with the
Commission an appropriate amendment to the Registration Statement or
supplement to the Prospectus so that the Prospectus as so amended or
supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with the
law.
(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
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than 15 months after the effective date of the Registration Statement, an
earnings statement (which need not be audited) in reasonable detail,
covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earnings statement
shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of
the Rules and Regulations and will advise you in writing when such
statement has been so made available.
(vii) The Company will, for a period of five (5) years from the
Closing Date, deliver to the Representatives copies of annual reports and
copies of all other documents, reports and information furnished by the
Company to its stockholders or filed with any securities exchange pursuant
to the requirements of such exchange or with the Commission pursuant to the
Act or the Exchange Act. The Company will deliver to the Representatives
similar reports with respect to significant subsidiaries, as that term is
defined in the Rules and Regulations, which are not consolidated in the
Company's financial statements.
(viii) No offering, sale, short sale or other disposition of any
shares of the Company's Common Stock or other capital stock of the Company,
or any other securities convertible into or exchangeable or exercisable for
shares of the Company's Common Stock or derivative of the Company's Common
Stock (or agreement for such) will be made for a period of 180 days after
the date of this Agreement, directly or indirectly, by the Company
otherwise than hereunder or with the prior written consent of Alex. Brown &
Sons Incorporated.
(ix) The Company will use its best efforts to list, subject to
official notice of issuance, the Shares on The NASDAQ Stock Market.
(x) The Company has caused the Controlling Shareholders and each other
director and officer of the Company to furnish to you, on or prior to the
date of this Agreement, a letter or letters, in form and substance
satisfactory to the Underwriters, pursuant to which each such person shall
agree not to offer, sell, sell short or otherwise dispose of any shares of
the Company's Common Stock or other capital stock of the Company, or any
other securities convertible into or exchangeable or exercisable for shares
of the Company's Common Stock or derivative of the Company's Common Stock
owned by such person or request the registration for the offer or sale of
any of the foregoing (or as to which such person has the right to direct
the disposition of) for a period of 180 days after the date of this
Agreement, directly or indirectly, except with the prior written consent of
Alex. Brown & Sons Incorporated (the "Lockup Agreements").
(xi) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Shares and the application of
the proceeds therefrom as may be required in accordance with Rule 463 under
the Act.
(xii) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as
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would require the Company or any of the Subsidiaries to register as an
investment company under the 1940 Act.
(xiii) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.
(xiv) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price
of the Company's Common Stock.
(b) The Selling Shareholder covenants and agrees with the several
Underwriters that:
(i) No offering, sale, short sale or other disposition of any
shares of the Company's Common Stock or other capital stock of the
Company or other securities convertible into or exchangeable or
exercisable for the Company's Common Stock or derivative of the
Company's Common Stock owned by the Selling Shareholder or request the
registration for the offer or sale of any of the foregoing (or as to
which the Selling Shareholder has the right to direct the disposition
of) will be made for a period of 180 days after the date of this
Agreement, directly or indirectly, by the Selling Shareholder
otherwise than hereunder or with the prior written consent of Alex.
Brown & Sons Incorporated.
(ii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 and the Interest and Dividend Tax
Compliance Act of 1983 with respect to the transactions herein
contemplated, the Selling Shareholder agrees to deliver to you prior
to or at the Closing Date a properly completed and executed United
States Treasury Department Form W-9 (or other applicable form or
statement specified by Treasury Department regulations in lieu
thereof).
(iii) The Selling Shareholder will not take, directly or
indirectly, any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Company's Common
Stock.
5. Costs and Expenses.
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Sellers under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting
fees of the Company; the fees and disbursements of counsel for the Company and
the Controlling Shareholders; the cost of printing and delivering to the
Underwriters copies of the Registration Statement, the Preliminary Prospectuses,
the Prospectus, this Agreement,
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any Underwriters' Selling Memorandum, the Underwriters' Invitation Letter, the
Listing Application, the Blue Sky Survey and any supplements or amendments
thereto; the filing fees of the Commission; the filing fees and expenses
(including legal fees and disbursements) incident to securing any required
review by the NASD of the terms of the sale of the Shares; the listing fee of
The NASDAQ Stock Market; and the expenses, including the fees and disbursements
of counsel for the Underwriters, incurred in connection with the qualification
of the Shares under state securities or Blue Sky laws. Any transfer taxes
imposed on the sale of the Shares to the several Underwriters will be paid by
the Sellers pro rata. The Company agrees to pay all costs and expenses of the
Underwriters, including the fees and disbursements of counsel for the
Underwriters, incident to the offer and sale of directed shares of the Common
Stock by the Underwriters to employees and persons having business relationships
with the Company and the Subsidiaries. The Sellers shall not, however, be
required to pay for any of the Underwriters' expenses (other than those related
to qualification under NASD regulations and state securities or Blue Sky laws
and as set forth in the preceding sentence) except that, if this Agreement shall
not be consummated because the conditions in Section 6 hereof are not satisfied,
or because this Agreement is terminated by the Representatives pursuant to
Section 11 hereof, or by reason of any failure, refusal or inability on the part
of the Company or the Selling Shareholder to perform any undertaking or satisfy
any condition of this Agreement or to comply with any of the terms hereof on
their part to be performed, unless such failure to satisfy said condition or to
comply with said terms be due to the default or omission of any Underwriter,
then the Company shall reimburse the several Underwriters for reasonable out-of-
pocket expenses, including fees and disbursements of counsel, reasonably
incurred in connection with investigating, marketing and proposing to market the
Shares or in contemplation of performing their obligations hereunder; but the
Company and the Selling Shareholder shall not in any event be liable to any of
the several Underwriters for damages on account of loss of anticipated profits
from the sale by them of the Shares.
6. Conditions of Obligations of the Underwriters.
The several obligations of the Underwriters to purchase the Firm
Shares on the Closing Date and the Option Shares, if any, on the Option Closing
Date are subject to the accuracy, as of the Closing Date or the Option Closing
Date, as the case may be, of the representations and warranties of the Company
and the Controlling Shareholders contained herein, and to the performance by the
Company and the Controlling Shareholders of their covenants and obligations
hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to their reasonable
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satisfaction. No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been
issued and no proceedings for that purpose shall have been taken or, to the
knowledge of the Company or the Controlling Shareholders, shall be
contemplated by the Commission and no injunction, restraining order or
order of any nature by a federal or state court of competent jurisdiction
shall have been issued as of the Closing Date which would prevent the
issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Sachnoff & Weaver,
Ltd., counsel for the Company and the Controlling Shareholders, dated the
Closing Date or the Option Closing Date, as the case may be, addressed to
the Underwriters (and stating that it may be relied upon by counsel to the
Underwriters) to the effect that:
(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of
Illinois, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement; each of the Subsidiaries has been duly organized and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement; the Company and each of the
Subsidiaries are duly qualified to transact business in all
jurisdictions in which the conduct of their business requires such
qualification, or in which the failure to qualify would have a
materially adverse effect upon the business of the Company and the
Subsidiaries taken as a whole; and the outstanding shares of capital
stock of each of the Subsidiaries have been duly authorized and
validly issued and are fully paid and non-assessable and are owned by
the Company or a Subsidiary; and the outstanding shares of capital
stock of each of the Subsidiaries is owned free and clear of all
liens, encumbrances, equities and claims, and no options, warrants or
other rights to purchase, agreements or other obligations to issue, or
other rights to convert any obligations into, any shares of capital
stock of or ownership interests in the Subsidiaries are outstanding.
(ii) The Company has authorized and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus; the
authorized shares of the Company's Common Stock have been duly
authorized; the outstanding shares of the Company's Common Stock,
including the Shares to be sold by the Selling Shareholder, have been
duly authorized and validly issued and are fully paid and non-
assessable; all of the Shares conform to the description thereof
contained in the Prospectus; the certificates for the Shares, assuming
they are in the form filed with the Commission, are in due and proper
form; the Shares, including the Option Shares, if any, to be sold by
the Company pursuant to this Agreement have been duly authorized and
will be validly issued, fully paid and non-assessable
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<PAGE>
when issued and paid for as contemplated by this Agreement; and no
preemptive rights of stockholders exist with respect to any of the
Shares or the issue or sale thereof.
(iii) Except as described in or contemplated by the Prospectus,
to the knowledge of such counsel, there are no outstanding securities
of the Company convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of capital stock of the
Company and there are no outstanding or authorized options, warrants
or rights of any character obligating the Company to issue any shares
of its capital stock or any securities convertible or exchangeable
into or evidencing the right to purchase or subscribe for any shares
of such capital stock; and except as described in the Prospectus, to
the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise,
which has not been satisfied or effectively waived, to cause the
Company to sell or otherwise issue to them, or to permit them to
underwrite the sale of, any of the Shares or the right to have any
shares of Common Stock or other securities of the Company included in
the Registration Statement or the right, as a result of the filing of
the Registration Statement, to require registration under the Act of
any shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the best knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending
or threatened under the Act.
(v) The Registration Statement, the Prospectus and each amendment
or supplement thereto comply as to form in all material respects with
the requirements of the Act and the Rules and Regulations (except that
such counsel need express no opinion as to the financial statements
and related schedules therein).
(vi) The statements under the captions "Description of Capital
Stock" and "Shares Eligible for Future Sale" in the Prospectus,
insofar as such statements constitute a summary of documents referred
to therein or matters of law, fairly summarize in all material
respects the information called for with respect to such documents and
matters.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or
described in the Registration Statement or the Prospectus which are
not so filed or described as required, and such contracts and
documents as are summarized in the Registration Statement or the
Prospectus are fairly summarized in all material respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company,
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any of the Subsidiaries or the Controlling Shareholders, except as set
forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will
not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the charter or by-laws
of the Company or any Subsidiary, or any agreement or instrument known
to such counsel to which the Company, any of the Subsidiaries or any
of the Controlling Shareholders is a party or by which the Company,
any of the Subsidiaries or any of the Controlling Shareholders may be
bound.
(x) This Agreement has been duly authorized, executed and
delivered by the Company and the Controlling Shareholders.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution
and delivery of this Agreement and the consummation of the
transactions herein contemplated (other than as may be required by the
NASD or as required by state securities and Blue Sky laws as to which
such counsel need express no opinion) except such as have been
obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of the
consummation of the transactions herein contemplated by this
Agreement, and application of the net proceeds therefrom as described
in the Prospectus, required to register as an investment company under
the 1940 Act.
(xiii) This Agreement has been duly authorized, executed and
delivered by the Selling Shareholder.
(xiv) The Selling Shareholder has full legal right, power and
authority, and any approval required by law (other than as required by
state securities and Blue Sky laws as to which such counsel need
express no opinion), to sell, assign, transfer and deliver the portion
of the Shares to be sold by the Selling Shareholder.
(xv) The Custodian Agreement and the Power of Attorney executed
and delivered by the Selling Shareholder is valid and binding.
(xvi) The Underwriters (assuming that they are bona fide
purchasers within the meaning of the Uniform Commercial Code) have
acquired good and marketable title to the Shares being sold by the
Selling Shareholder on the Closing Date, and the Option Closing Date,
as the case may be, free and clear of all liens, encumbrances,
equities and claims.
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In rendering such opinion, Sachnoff & Weaver, Ltd. may rely as to
matters governed by the laws of states other than Delaware and Illinois or
federal laws on local counsel in such jurisdictions, provided that in each case
Sachnoff & Weaver, Ltd. shall state that they believe that they and the
Underwriters are justified in relying on such other counsel. In addition to the
matters set forth above, such opinion shall also include a statement to the
effect that nothing has come to the attention of such counsel which leads them
to believe that (i) the Registration Statement, or any amendment thereto, at the
time it became effective under the Act (but after giving effect to any
modifications incorporated therein pursuant to Rule 430A under the Act) and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
and (ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they are made, not
misleading (except that such counsel need express no view as to financial
statements, schedules and statistical information therein). With respect to such
statement, Sachnoff & Weaver, Ltd. may state that their belief is based upon the
procedures set forth therein, but is without independent check and verification.
(c) The Representatives shall have received from Winston & Strawn,
counsel for the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, substantially to the effect specified in
subparagraphs (ii), (iii), (iv), (ix) and (xi) of paragraph (b) of this Section
6, and that the Company is a duly organized and validly existing corporation
under the laws of the State of Illinois. In rendering such opinion Winston &
Strawn may rely as to all matters governed other than by the laws of the states
of Delaware and Illinois or federal laws on the opinion of counsel referred to
in paragraph (b) of this Section 6. In addition to the matters set forth above,
such opinion shall also include a statement to the effect that nothing has come
to the attention of such counsel which leads them to believe that (i) the
Registration Statement, or any amendment thereto, as of the time it became
effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of the Closing
Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading and
(ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they are made, not
misleading (except that such counsel need express no view as to financial
statements, schedules and statistical information therein). With respect to such
statement, Winston
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<PAGE>
& Strawn may state that their belief is based upon the procedures set forth
therein, but is without independent check and verification.
(d) The Representatives shall have received at or prior to the Closing
Date from Winston & Strawn a memorandum or summary, in form and substance
satisfactory to the Representatives, with respect to the qualification for
offering and sale by the Underwriters of the Shares under the state securities
or Blue Sky laws of such jurisdictions as the Representatives may reasonably
have designated to the Company.
(e) You shall have received, on each of the date hereof, the Closing
Date and the Option Closing Date, as the case may be, a letter dated the date
hereof, the Closing Date or the Option Closing Date, as the case may be, in form
and substance satisfactory to you, of Arthur Andersen LLP confirming that they
are independent public accountants within the meaning of the Act and the
applicable Rules and Regulations thereunder and stating that in their opinion
the financial statements and schedules examined by them and included in the
Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related Rules and
Regulations, and containing such other statements and information as is
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial and statistical
information contained in the Registration Statement and the Prospectus.
(f) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer and the Chief Financial Officer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the case may
be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the Act and
no stop order suspending the effectiveness of the Registration Statement
has been issued, and no proceedings for such purpose have been taken or
are, to his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company contained in
Section 1 hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rule 424 or
430A under the Act have been made;
(iv) He has carefully examined the Registration Statement and the
Prospectus and, in his opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration
Statement were true and correct, and such Registration Statement and
Prospectus did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not
misleading, and since the effective date of the Registration Statement, no
event has occurred that should have been set forth in
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a supplement to or an amendment of the Prospectus that has not been so set
forth in such supplement or amendment; and
(v) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there has not been any material
adverse change or any development involving a prospective material adverse
change in or affecting the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects
of the Company and the Subsidiaries taken as a whole, whether or not
arising in the ordinary course of business.
(g) The Company and each Controlling Shareholder shall have furnished
to the Representatives such further certificates and documents confirming the
representations and warranties, covenants and conditions contained herein and
related matters as the Representatives may reasonably have requested.
(h) The Firm Shares and the Option Shares, if any, have been approved
for designation upon notice of issuance on The NASDAQ Stock Market.
(i) The Lockup Agreements described in Section 4(a)(x) hereof are in
full force and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects satisfactory to the Representatives and to Winston & Strawn,
counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representatives by notifying the Company and the Selling Shareholder of such
termination in writing or by telegram at or prior to the Closing Date or the
Option Closing Date, as the case may be.
In such event, the Company, the Selling Shareholder and the
Underwriters shall not be under any obligation to each other (except to the
extent provided in Sections 5 and 8 hereof).
7. Conditions of the Obligations of the Sellers.
The obligations of the Sellers to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
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8. Indemnification.
(a) The Company and the Controlling Shareholders, jointly and
severally, agree to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of the Act,
against any losses, claims, damages or liabilities to which such Underwriter or
any such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter and
each such controlling person upon demand for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in connection
with investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding; provided, however,
that the Company and the Controlling Shareholders will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement, or omission or
alleged omission made in the Registration Statement, any Preliminary Prospectus,
the Prospectus or any amendment or supplement thereto, in reliance upon and in
conformity with written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof. In no event,
however, shall the liability of any Controlling Shareholder for indemnification
under this Section 8(a) exceed the sum of (i) the proceeds received by such
Controlling Shareholder from the Underwriters in the offering, (ii) the amount
of the S-Corporation Dividend (as defined in the Prospectus) paid to such
Controlling Shareholder in connection with the offering and (iii) the bonus paid
by the Company to such Controlling Shareholder for 1996. This indemnity
agreement will be in addition to any liability that the Company or the
Controlling Shareholders may otherwise have.
(b) Each Underwriter, severally and not jointly, will indemnify and
hold harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and the Controlling Shareholders against any
losses, claims, damages or liabilities to which the Company, any such director,
officer or Controlling Shareholder may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto or (ii) the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in the light of the circumstances under
which they were made, and will reimburse any legal or other expenses reasonably
incurred by the Company, any such director, officer or Controlling Shareholder
in connection with investigating or defending any
-22-
<PAGE>
such loss, claim, damage, liability, action or proceeding; provided, however,
that each Underwriter will be liable in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission has been made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or such amendment or supplement, in reliance upon and
in conformity with written information furnished to the Company by or through
the Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a) or (b) hereof shall be available to any party who shall fail to give notice
as provided in this Section 8(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
materially prejudiced by the failure to give such notice, but the failure to
give such notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of the provisions of Section 8(a) or (b). In case any
such proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party and
shall pay as incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel at its own expense. Notwithstanding the foregoing, the
indemnifying party shall pay as incurred (or within 30 days of presentation) the
fees and expenses of the counsel retained by the indemnified party in the event
(i) the indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel, (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them or
(iii) the indemnifying party shall have failed to assume the defense and employ
counsel acceptable to the indemnified party within a reasonable period of time
after notice of commencement of the action. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties. Such
firm shall be designated in writing by you in the case of parties indemnified
pursuant to Section 8(a) and by the Company and the Controlling Shareholders in
the case of parties indemnified pursuant to Section 8(b). The indemnifying party
shall not be liable for any settlement of any proceeding effected without its
written
-23-
<PAGE>
consent but if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party from
and against any loss or liability by reason of such settlement or judgment. In
addition, the indemnifying party will not, without the prior written consent of
the indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) hereof in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company and the
Controlling Shareholders on the one hand and the Underwriters on the other from
the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company and the Controlling
Shareholders on the one hand and the Underwriters on the other in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Controlling Shareholders on the one hand and the Underwriters on
the other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company and the
Selling Shareholder bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Selling Shareholder on the
one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company, the Controlling Shareholders and the Underwriters agree
that it would not be just and equitable if contributions pursuant to this
Section 8(d) were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 8(d). The amount paid or
-24-
<PAGE>
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to above in
this Section 8(d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 8(d), (i) no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter, (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation and (iii) no Controlling Shareholder shall be obligated to
contribute any amount in exess of the sum of (A) the proceeds received by such
Controlling Shareholder from the Underwriters in the offering, (B) the amount of
the S-Corporation Dividend (as defined in the Prospectus) paid to such
Controlling Shareholder in connection with the offering and (C) the bonus paid
by the Company to such Controlling Shareholder for 1996. The Underwriters'
obligations in this Section 8(d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company and the Controlling Shareholders
set forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter or
any person controlling any Underwriter, the Company, its directors or officers
or any Controlling Shareholder, (ii) acceptance of any Shares and payment
therefor hereunder and (iii) any termination of this Agreement. A successor to
any Underwriter, or to the Company, its directors or officers or any Controlling
Shareholder, shall be entitled to the benefits of the indemnity, contribution
and reimbursement agreements contained in this Section 8.
-25-
<PAGE>
9. Default By Underwriters.
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the Shares
that such Underwriter has agreed to purchase and pay for on such date (otherwise
than by reason of any default on the part of the Company or the Selling
Shareholder), you, as Representatives of the Underwriters, shall use your
reasonable efforts to procure within 36 hours thereafter one or more of the
other Underwriters, or any others, to purchase from the Company and the Selling
Shareholder such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or the Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 36
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or the Option Shares,
as the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of Shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or the Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of Firm Shares or Option Shares, as the case may be, with
respect to which such default shall occur exceeds 10% of the Firm Shares or the
Option Shares, as the case may be, covered hereby, the Company and the Selling
Shareholder or you as the Representatives of the Underwriters will have the
right, by written notice given within the next 36-hour period to the parties to
this Agreement, to terminate this Agreement without liability on the part of the
non-defaulting Underwriters or of the Company or of the Selling Shareholder
except to the extent provided in Section 8 hereof. In the event of a default by
any Underwriter or Underwriters, as set forth in this Section 9, the Closing
Date or Option Closing Date, as the case may be, may be postponed for such
period, not exceeding seven (7) days, as you, as Representatives, may determine
in order that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected. The term
"Underwriter" includes any person substituted for a defaulting Underwriter. Any
action taken under this Section 9 shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
10. Notices.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or telegraphed
and confirmed as follows: if to the Underwriters, to Alex. Brown & Sons
Incorporated, 101 California Street, 48th Floor, San Francisco, California
94111, facsimile: 415/477-4255, Attention: Peter B. Breck and Jeffrey S.
Westmont; with a copy to Alex. Brown & Sons Incorporated, 135 East Baltimore
Street, Baltimore, Maryland 21202, facsimile: 410/783-3366, Attention: General
Counsel; if to the Company and/or the Controlling Shareholders, to Hartford
Computer Group, Inc., 1610 Colonial Parkway, Iverness, Illinois 60067,
facsimile: 847/934-3458, Attention: Anthony R. Graffia and Anthony R. Graffia
II.
-26-
<PAGE>
11. Termination.
This Agreement may be terminated by you by notice to the Sellers as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change or any development involving a prospective material adverse change
in or affecting the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of the
Company and its Subsidiaries taken as a whole, whether or not arising in
the ordinary course of business, (ii) any outbreak or escalation of
hostilities or declaration of war or national emergency or other national
or international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, escalation, declaration,
emergency, calamity, crisis or change on the financial markets of the
United States would, in your reasonable judgment, make it impracticable to
market the Shares or to enforce contracts for the sale of the Shares, (iii)
suspension of trading in securities generally on the New York Stock
Exchange or the American Stock Exchange or limitation on prices (other than
limitations on hours or numbers of days of trading) for securities on
either such Exchange, (iv) the enactment, publication, decree or other
promulgation of any statute, regulation, rule or order of any court or
other governmental authority which in your opinion materially and adversely
affects or may materially and adversely affect the business or operations
of the Company, (v) declaration of a banking moratorium by United States or
New York State authorities, (vi) the suspension of trading of the Company's
Common Stock on The NASDAQ Stock Market or (vii) the taking of any action
by any governmental body or agency in respect of its monetary or fiscal
affairs which in your reasonable opinion has a material adverse effect on
the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. Successors.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and the Controlling Shareholders and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person will
have any right or obligation hereunder. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign merely because of such
purchase.
-27-
<PAGE>
13. Information Provided by Underwriters.
The Company, the Controlling Shareholders and the Underwriters
acknowledge and agree that the only information furnished or to be furnished by
any Underwriter to the Company for inclusion in any Prospectus or the
Registration Statement consists of the information set forth in the last
paragraph on the front cover page (insofar as such information relates to the
Underwriters), legends required by Item 502(d) of Regulation S-K under the Act
and the information under the caption "Underwriting" in the Prospectus.
14. Miscellaneous.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company,
its directors or officers or any Controlling Shareholder, and (c) delivery of
and payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Maryland.
-28-
<PAGE>
If the foregoing letter is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company, the Controlling
Shareholders and the several Underwriters in accordance with its terms.
Any person executing and delivering this Agreement as Attorney-in-Fact
for the Selling Shareholder represents by so doing that he has been duly
appointed as Attorney-in-Fact by the Selling Shareholder pursuant to a validly
existing and binding Power of Attorney which authorizes such Attorney-in-Fact to
take such action.
Very truly yours,
HARTFORD COMPUTER GROUP, INC.
By:___________________________
Anthony R. Graffia
President
Selling Shareholder listed on Schedule II
and a Controlling Shareholder
By:___________________________
Anthony R. Graffia
Other Controlling Shareholder
________________________________
Anthony R. Graffia II
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date above written.
ALEX. BROWN & SONS INCORPORATED
ROBERTSON, STEPHENS & COMPANY LLC
PIPER JAFFRAY INC.
As Representatives of the several
Underwriters listed on Schedule I
By: ALEX. BROWN & SONS INCORPORATED
By:_________________________________
Authorized Officer
-29-
<PAGE>
SCHEDULE I
Schedule of Underwriters
Number of Firm Shares
Underwriter to be Purchased
----------- ---------------------
Alex. Brown & Sons Incorporated
Robertson, Stephens & Company LLC
Piper Jaffray Inc.
--------
Total
--------
<PAGE>
SCHEDULE II
Selling Shareholder
Number of Firm Shares
Selling Shareholder to be Sold
- ------------------- ---------------------
Anthony R. Graffia
--------
Total
--------
<PAGE>
SCHEDULE III
Schedule of Option Shares
Maximum Number Percentage of
of Option Shares Total Number of
Name of Seller to be Sold Option Shares
- -------------- ---------------- ---------------
Hartford Computer
Group, Inc.
Anthony R. Graffia
------- -------
Total 100%
------- -------
<PAGE>
EXHIBIT 11.1
HARTFORD COMPUTER GROUP, INC.
COMPUTATION OF WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Pro Forma--
<S> <C>
Weighted average number of common
shares issued and outstanding, actual 9,780,188
Common shares assumed to be outstanding
related to stock options granted in
January, 1997, below the assumed
initial offering price of $15 119,100
Common shares necessary to generate
proceeds to pay the assumed S
Corporation distributions 333,333
----------
Pro forma weighted average number of
common shares outstanding 10,232,621
==========
Supplemental pro forma--
Pro forma weighted average number of
common shares outstanding 10,232,621
Common shares necessary to generate
proceeds to repay certain indebtedness 1,847,044
----------
Supplemental pro forma weighted average
number of common shares outstanding 12,079,665
==========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the inclusion in
this registration statement on Form S-1 of our report, which contained a
captioned opinion dated January 29, 1997, on our audits of the financial
statements of Hartford Computer Group, Inc., and to all references to our firm
included in this registration statement.
AUTHUR ANDERSEN LLP
Chicago, Illinois
January 30, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
Company's Registration Statement on Form S-1 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0001031761
<NAME> Hartford Computer Group, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 11-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> FEB-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 3,346
<SECURITIES> 0
<RECEIVABLES> 33,462
<ALLOWANCES> 706
<INVENTORY> 32,228
<CURRENT-ASSETS> 71,509
<PP&E> 8,107
<DEPRECIATION> 3,926
<TOTAL-ASSETS> 84,624
<CURRENT-LIABILITIES> 72,949
<BONDS> 2,712
<COMMON> 98
0
0
<OTHER-SE> 8,685
<TOTAL-LIABILITY-AND-EQUITY> 84,624
<SALES> 243,177
<TOTAL-REVENUES> 253,146
<CGS> 214,541
<TOTAL-COSTS> 220,996
<OTHER-EXPENSES> 25,272
<LOSS-PROVISION> 281
<INTEREST-EXPENSE> 3,284
<INCOME-PRETAX> 3,069
<INCOME-TAX> 611
<INCOME-CONTINUING> 2,458
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,458
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
